Document:

THIS
      NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
      “ACT”), NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITY MAY NOT BE PLEDGED,
      SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION
      STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE
      STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
      COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION
      ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITY MAY BE PLEDGED,
      SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
      STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES
      LAWS.

     

    10%
      PROMISSORY NOTE

    

    
      	
              $__________

            	 	
              New
                York, New York

            

    

    

    February
      22, 2007

    

    FOR
      VALUE RECEIVED,
      the
      undersigned, National Holdings Corporation, a Delaware corporation having an
      address at 120 Broadway, 27th Floor, New York, New York 10271 (“Maker”),
      promises to pay to the order of ______________________ (“Payee”) at
      __________________________ or at such other place as Payee may from time to
      time
      designate by written notice to Maker, in lawful money of the United States,
      the
      sum of ___________________ Dollars ($_________), plus interest from the date
      of
      this Note on the unpaid balance. All principal and interest is to be paid as
      set
      forth below. All capitalized terms not otherwise defined herein shall have
      the
      respective means ascribed them in that certain Securities Purchase Agreement
      of
      even date hereof between the Maker, Payee and other Purchasers. Maker further
      agrees as follows:

    

    Section
      1.     Interest
      Rate.

    

    (a)   Interest
      shall accrue at a rate equal to ten percent (10%) per annum. 

    

    (b)   Interest
      shall be computed on the basis of a year of 365 days for the actual number
      of
      days elapsed. 

    

    Section
      2.     Payments.

    

    (a)   Principal
      shall be due
      and payable on February 22, 2009 (the “Principal Payment Date”).

    

    (b)   Accrued
      interest shall be
      payable in arrears on a quarterly calendar basis on March 31, June 30, September
      30 and December 31 during the term hereof commencing on March 31, 2007.

     

    (c)   Maker
      shall have the
      right to prepay this Note in full or in part at any time without
      penalty.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    Section
      3.     Default.

    

    It
      shall
      be an event of default (“Event of Default”), and the entire unpaid principal of
      this Note, together with accrued interest, shall become immediately due and
      payable, at the election of Payee, upon the occurrence of any of the following
      events:

    

    (a)   any
      failure on the part of Maker to make any payment when due, whether by
      acceleration or otherwise, and the continuation of such failure for a period
      of
      five (5) business days thereafter;

    

    (b)   any
      failure on the part of Maker to keep or perform any of the material provisions
      (other than payment) of this Note or any amendment thereof, which failure is
      not
      cured within five (5) business days;

    

    (c)  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;

     

    (d)   there
      shall have occurred an acceleration of the stated maturity of any indebtedness
      for borrowed money of the Company (other than Company Notes) 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);

     

    (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 Payee, 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 Payee 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.

    

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

     

    Section
      4.     Ranking.
      

    

    The
      indebtedness evidenced by this Note and the payment of the principal thereof
      shall rank pari passu
      with (i)
      those certain notes held by those certain investors who are parties to that
      certain Securities Purchase Agreement of even date herewith,
      (ii)
      those certain notes, in the aggregate principal amount of One Million
      ($1,000,000) Dollars dated January 11, 2006 issued to each of St. Cloud Capital
      Partners, L.P., Fred N. Tarter and Lois Tarter, as Joint Tenants with Right
      of
      Survivorship, and GKW United holdings, LLC and (iii) those certain notes in
      the
      aggregate principal amount of Five Hundred Thousand ($500,000) Dollars, issued
      pursuant to that certain private placement memorandum, dated January 14,
      2004.

    

    Section
      5.     Jurisdiction. 

     

    Maker
      irrevocably submits to the exclusive jurisdiction of the courts of the State
      of
      New York, and of any federal court located in the State of New York, in
      connection with any action or proceeding arising out of or relating to, or
      a
      breach of, this Note. Maker agrees that such court may award reasonable legal
      fees and expenses to the prevailing party.

    

    Section
      6.     Waivers.

    

    (a)   Maker
      waives demand, presentment, protest, notice of protest, notice of dishonor,
      and
      all other notices or demands of any kind or nature with respect to this
      Note.

    

    (b)   Maker
      agrees that a waiver of rights under this Note shall not be deemed to be made
      by
      Payee unless such waiver shall be in writing, duly signed by Payee, and each
      such waiver, if any, shall apply only with respect to the specific instance
      involved and shall in no way impair the rights of Payee or the obligations
      of
      Maker in any other respect at any other time.

    

    (c)   Maker
      agrees that in the event Payee demands or accepts partial payment of this Note,
      such demand or acceptance shall not be deemed to constitute a waiver of any
      right to demand the entire unpaid balance of this Note at any time in accordance
      with the terms of this Note.

    

    Section
      7.     Assignment
      of Note.
      

    

    Maker
      may
      not assign or transfer this Note or any of its obligations under this Note
      in
      any manner whatsoever (including, without limitation, by the consolidation
      or
      merger of Maker, if a corporation, with or into another corporation) without
      the
      prior written consent of Payee. The Note may be assigned at any time by Payee.
      

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    Section
      8.     Miscellaneous.

    

    (a)   This
      Note may be altered
      only by prior written agreement signed by the party against whom enforcement
      of
      any waiver, change, modification, or discharge is sought. This Note may not
      be
      modified by an oral agreement, even if supported by new
      consideration.

    

    (b)   This
      Note
      shall be governed by, and construed in accordance with, the laws of the State
      of
      New York, without giving effect to such jurisdiction's principles of conflict
      of
      laws.

    

    (c)   Subject
      to Section 7, the covenants, terms, and conditions contained in this Note apply
      to and bind the heirs, successors, executors, administrators and assigns of
      the
      parties.

    

    (d)   This
      Note
      constitute a final written expression of all the terms of the agreement between
      the parties regarding the subject matter hereof, are a complete and exclusive
      statement of those terms, and supersede all prior and contemporaneous
      agreements, understandings, and representations between the parties. If any
      provision or any word, term, clause, or other part of any provision of this
      Note
      shall be invalid for any reason, the same shall be ineffective, but the
      remainder of this Note shall not be affected and shall remain in full force
      and
      effect.

    

    (e)   The
      singular includes the plural. If more than one Maker executes this Note, the
      term “Maker” shall be deemed to refer to each of the undersigned Makers as well
      as to all of them, and their obligations and agreements under this Note shall
      be
      joint and several. If any of the undersigned is a married person, recourse
      may
      be had against his or her separate property for all of his or her obligations
      under this Note. The term “Obligor” shall be deemed to refer to each Maker,
      endorser, guarantor, or surety of this Note as well as to all of them. The
      term
“Payee” shall include the initial party to whom payment is designated to be made
      and, in the event of an assignment of this Note, the successor assignee or
      assignees, and, as to each successive additional assignment, such successor
      assignee or assignees.

    

    (f)   All
      notices, consents, or other communications provided for in this Note or
      otherwise required by law shall be in writing and may be given to or made upon
      the respective parties at the addresses set forth in the preamble hereof. Such
      addresses may be changed by notice given as provided in this subsection. Notices
      shall be effective upon the date of receipt; provided, however, that a notice
      (other than a notice of a changed address) sent by certified or registered
      U.S.
      mail, with postage prepaid, shall be presumed received not later than three
      (3)
      business days following the date of sending.

    

    (g)   Time
      is of the essence
      under this Note.

    

    (f)   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.

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF,
      Maker
      has executed this Note effective as of the date first set forth
      above.

    

    
      	 	 	 
	 	NATIONAL
              HOLDINGS CORPORATION
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Mark
              Goldwasser
	 	Chief
              Executive Officer

      
        
           

        

        
          5NATIONAL
      HOLDINGS CORPORATION 

     

    SECURITIES
      PURCHASE AGREEMENT

     

    DATED
      AS OF

     

    FEBRUARY
      22, 2007

     

    WITH
      RESPECT TO

     

    10%
      NOTES AND WARRANTS 

     

     

    

     

    

     

    

     

    
      

      

    

    
      
        
        

      

      
        
        

        
        

      

      
        
        

      

    

    SECURITIES
      PURCHASE AGREEMENT

     

    This
      SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of February 22, 2007
      by and among NATIONAL HOLDINGS CORPORATION, a Delaware corporation (the
“Company”) and the individuals listed on Exhibit
      A
      hereto
      under the heading “Purchasers” (the “Purchasers”) who become parties to this
      Agreement by executing and delivering a financing signature page in the form
      attached hereto as Exhibit
      B
      (the
“Financing Signature Page”).

     

    WHEREAS,
      the Company desires to sell to the Purchasers, and the Purchasers desire to
      purchase from the Company,
      an
      aggregate of up to (a) $1,000,000 principal
      amount of the Company’s 10% Promissory Notes (the “Notes”) and (b) warrants (the
“Warrants”) to purchase up to 250,000 shares of the Company’s common stock,
      $0.02 par value per share (the “Warrant Shares”),
      at an
      initial exercise price of $1.40 per share, pursuant to the provisions of this
      Agreement.

    

    NOW,
      THEREFORE, in consideration of the mutual covenants and agreements set forth
      in
      this Agreement, and for other good and valuable consideration, the receipt
      and
      sufficiency of which are hereby acknowledged, the parties do hereby agree as
      follows:

     

     

    1.     Authorization;
      Sale of Notes and Warrants.

     

    1.1     Authorization.
      The
      Company has duly authorized the sale and issuance, pursuant to the terms of
      this
      Agreement, of (i) the Notes and Warrants and (ii) the Warrant Shares
issuable
      upon exercise of the Warrants. 

     

    1.2     Sale
      of Notes and Warrants.
      Subject
      to the terms and conditions of this Agreement, at the Closing (as defined ion
      Section 2.1), the Company will
      sell
      and each of the Purchasers will purchase (a) the Notes in the principal amounts
      set forth on Exhibit
      A
      hereto
      and (b) the Warrants. The
      terms
      and
      provisions of the Notes and Warrants are more fully set forth in the form of
      10%
      Promissory Note, a true and correct copy of which is attached hereto as
Exhibit
      C,
      and in
      the form of Warrant, a true and correct copy of which is attached hereto as
      Exhibit
      D,
      respectively. This Agreement, the Notes, the Warrants and the Registration
      Rights Agreement (as defined herein) are sometimes collectively referred to
      as
      the “Transaction Documents”.

     

    2.     Purchase
      Price; Closing.

     

    2.1    Purchase
      Price.
      The
aggregate
      purchase price (the "Purchase Price") to be paid by the Purchasers to the
      Company to acquire the Notes and Warrants shall be up to
      $1,000,000.

    

    2.2     The
      Closing.
      Subject
      to the terms and conditions of this Agreement, the closing (the “Closing”) of
      the sale and purchase of Notes and Warrants under this Agreement shall take
      place at the offices of Littman Krooks LLP, 655 Third Avenue, New York NY 10017
      (or remotely via the exchange of documents and signatures) on the date of this
      Agreement (the “Closing Date”). At the Closing: 

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    (a)     the
      Company shall deliver to each of the Purchasers, a Note in the amount set forth
      opposite such Purchaser’s name on Exhibit
      A
      attached
      hereto, and a Warrant exercisable for the number of Warrant Shares set forth
      opposite such Purchaser’s name on Exhibit
      A
      attached
      hereto, registered in the name of such Purchaser; 

     

    (b)     the
      Company shall execute and deliver the Registration Rights Agreement in the
      form
      attached hereto as Exhibit E
      (the
“Registration Rights Agreement”);

     

    (c)     each
      Purchaser shall pay directly to the Company, by wire transfer of immediately
      available funds, the Purchase Price for the Notes and Warrants being purchased;
      and

     

    (d)     in
      the
      event of an Additional Closing as described in Section 2.3 below, the Company
      shall have delivered to the Purchaser(s) at such Additional Closing a
      certificate of the Company, executed by the Chief Executive Officer of the
      Company, dated the Closing Date, and certifying to, among other things, the
      fulfillment of the conditions specified in Sections 5.1, 5.2 and 5.3 of
      this Agreement.

     

    2.3     Additional
      Closings.
      Additional sales of Notes and Warrants not sold at the initial Closing may
      be
      made by the Company at one or more closings (each, an “Additional Closing”).
      Each Additional Closing and the initial Closing are collectively referred to
      as
      the “Closings” and the date of each Additional Closing and the initial Closing
      are collectively referred to as the “Closing Dates.” Each Additional Closing
      shall take place at the offices of Littman Krooks LLP, 655 Third Avenue, New
      York, NY 10017 (or remotely via the exchange of documents and signatures).
      The
      Purchasers agree that any additional persons or entities that acquire Notes
      and
      Warrants at any “Additional Closing” shall become “Purchasers” under this
      Agreement with all the rights and obligations attendant thereto, upon their
      execution of this Agreement without further action by any other Purchaser.
      For
      purposes of this Agreement, the terms “Closing” and “Closing Date”, unless
      otherwise indicated, refer to the applicable closing and closing date of the
      Initial Closing or the Additional Closing(s), as the case may be.

     

    3.     Representations
      of the Company.
      The
      Company hereby represents and warrants to each Purchaser that the statements
      contained in this section 3 are complete and accurate as of the date of this
      agreement. Such representations and warranties are supplemented by the Company's
      filings under the pursuant to the Securities Act of 1933, as amended (the
“Securities Act”) and the Securities Exchange Act of 1934, as
      amended,
      made
      prior to the date of this agreement (collectively, the "SEC Reports"), copies
      of
      which have been provided to the purchasers):

     

    3.1     Organization
      and Standing.
      The
      Company and each of its subsidiaries (as defined below) is a corporation or
      other legal entity duly organized, validly existing and in good standing under
      the laws of its jurisdiction of existence, has all requisite corporate power
      and
      authority, and has been duly authorized by all necessary approvals and orders,
      to own, lease and operate its assets and properties to the extent owned, leased
      and operated and to carry on its business as it is now being conducted and
      is
      duly qualified and in good standing to do business in each jurisdiction in
      which
      the nature of its business or the ownership or leasing of its assets and
      properties makes such qualification necessary, other than in such jurisdictions
      where the failure to be so qualified and in good standing would not, when taken
      together with all other such failures, reasonably be expected to have a material
      adverse effect on the business, properties, condition (financial or otherwise),
      prospects (other than effects that are the result of general economic changes
      or
      industry-specific risks) or results of operations of the Company and its
      subsidiaries taken as a whole (any such material adverse effect being hereafter
      referred to as a "Material Adverse Effect"). As used in this Agreement, the
      term
      "subsidiary" of a person shall mean any corporation or other entity (including
      partnerships and other business associations) of which a majority of the
      outstanding capital stock or other voting securities having voting power under
      ordinary circumstances to elect directors or similar members of the governing
      body of such corporation or entity shall at the time be held, directly or
      indirectly, by such person. 

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    3.2     Subsidiaries.
      Except
      as disclosed in the SEC Reports,
      the
      Company has no subsidiaries and does not currently own or control, directly
      or
      indirectly, any equity interest, nor has any commitment to purchase or otherwise
      acquire any equity interest, in any other corporation, partnership, limited
      liability company, association, or other business entity. Except as set forth
      in
      the SEC Reports, the Company is not a participant in any joint venture,
      partnership, or similar arrangement. 

     

    3.3     Capitalization. The
      authorized and outstanding capital stock of the Company consists of the
      following: (i) a total of Thirty Million (30,000,000) shares of Common Stock,
      of
      which 5,358,611 shares
      are issued and outstanding; and (ii) a total of Two Hundred Thousand (200,000)
      shares of preferred stock, $0.01 par value per share, of which 50,000 shares
      are
      designated as Series A 9% Cumulative Convertible Preferred Stock,
      35,316
      of which
      are issued and outstanding, and 20,000 are designated as
      Series B
      10% Cumulative Convertible Preferred Stock, 10,000 of which are issued and
      outstanding.

     

    3.4     Issuance
      of Notes and Warrants.
      The
      issuance, sale and delivery of the Notes and Warrants in accordance with this
      Agreement, and the issuance and delivery of the Warrant Shares underlying the
      Warrants have been duly authorized
      by all necessary corporate action on the part of the Company, and all such
      shares have been duly reserved for issuance. The Warrant Shares when so issued,
      sold and delivered against payment therefor in accordance with the provisions
      of
      this Agreement and the Warrants, when issued upon such conversion, will be
      duly
      and validly issued, fully paid and nonassessable.

     

    3.5     Corporate
      Power; Authority for Agreement; No Conflict.
      The
      Company has all requisite legal and corporate power to execute and deliver
      this
      Agreement, to sell and issue the Notes and Warrants hereunder, to issue the
      Warrant Shares (upon due exercise of the Warrants), to consummate the other
      transactions contemplated by the terms of this Agreement and carry out and
      perform its obligations under the terms of this Agreement. The execution,
      delivery and performance by the Company of this Agreement, and the consummation
      by the Company of the transactions contemplated hereby and thereby, have been
      duly authorized by all necessary corporate action. This Agreement, and the
      consummation of the transactions contemplated hereunder, has been duly executed
      and delivered by the Company and constitute valid and binding obligations of
      the
      Company enforceable in accordance with their respective terms, subject as to
      enforcement of remedies to applicable bankruptcy, insolvency, reorganization,
      moratorium or similar laws affecting generally the enforcement of creditors’
rights and subject to a court’s discretionary authority with respect to the
      granting of a decree ordering specific performance or other equitable remedies.
      The execution
      and delivery of this Agreement, the consummation of the transactions
      contemplated hereby and thereby and the compliance with their respective
      provisions by the Company will not (a)
      conflict with or violate any provision of the Certificate of Incorporation
      or
      By-laws of the Company, (b) require on the part of the Company any filing with,
      or any permit, order, authorization, consent or approval of, any court,
      arbitrational tribunal, administrative agency or commission or other
      governmental or regulatory authority or agency, other than notice filings
      pursuant to applicable federal and state securities laws (each of the foregoing
      is hereafter referred to as a “Governmental Entity”), (c) conflict with, result
      in a breach of, constitute (with or without due notice or lapse of time or
      both)
      a default under, result in the acceleration of obligations under, create in
      any
      party the right to accelerate, terminate, modify or cancel, or require any
      notice, consent or waiver under,
      any contract, lease, sublease, license, sublicense, franchise, permit,
      indenture, agreement or mortgage for borrowed money, instrument of
      indebtedness, Security
      Interest (as defined below) or other arrangement to which the Company is a
      party
      or by which the Company is bound or to which its assets are subject, other
      than
      any of the foregoing events listed in this clause (c) which do not and will
      not,
      individually or in the aggregate, have a Company Material Adverse Effect, (d)
      result in the imposition of any Security Interest upon any assets of the Company
      or (e) violate any order, writ, injunction, decree, statute, rule or
      regulation applicable
      to the Company or any of its properties or assets. For purposes of this
      Agreement, “Security Interest” means any mortgage, pledge, security interest,
      encumbrance, charge, or other lien (whether arising by contract or by operation
      of law).

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    3.6     Governmental
      Consents.
      No
      consent, approval, order or authorization of, or registration, qualification,
      designation, declaration or filing with, any Governmental Entity is required
      on
      the part of the Company in connection with the offer, issuance, sale and
      delivery of the Notes and Warrants, the issuance and delivery of the Warrant
      Shares or the other transactions to be consummated at the Closing, as
      contemplated by this Agreement, except such filings required to be made after
      the Closing under applicable federal and state securities laws. Based on the
      representations made by each of the Purchasers in Section 4 of this
      Agreement, the offer and sale of the Notes and Warrants to each of the
      Purchasers will be in material compliance with applicable federal and state
      securities laws.

     

    3.7     Financial
      Statements.
      Each
      Purchaser has
      had
      the opportunity to review the audited financial statements of the Company for
      the fiscal year ended September 30, 2006 and the unaudited financial statements
      of the Company for the quarter ended December 31, 2006, (all such financial
      statements being collectively referred to herein as the “Financial Statements”).

    The
      Financial Statements 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 notes 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, 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

        
          

        

      

      
        
        

      

    

     3.8    Use
      of
      Proceeds.
      The net
      proceeds of the sale of the Notes and the Warrants hereunder shall be used
      by
      the Company for (i) retirement of the following outstanding indebtedness:
Barcombe
      Investments Limited ($250,000), Branscombe Investments Limited ($250,000),
      Shampan Lamport Financial Holdings LLC ($300,000) and Jeffrey C. Fernyhough
      ($50,000) and
      (ii)
      working capital and general corporate purposes.

    

    3.9     No
      Material Adverse Change.
      Since
      December 31, 2006, except as identified and described in the SEC Reports, 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 Company’s December 31, 2006 Quarterly
      Report on Form 10-Q, 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.

    

    3.10     SEC
      Reports.
      At the
      time of filing thereof, the SEC Reports 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.

    

    3.11     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 Purchasers 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.

    

    3.12     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. 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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    3.13     Title
      to Properties.
      Except
      as disclosed in the SEC Reports, the Company and each of its subsidiaries 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 Reports, the Company
      and each of its subsidiaries 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.

    

    3.14     Certificates,
      Authorities and Permits.
      Except
      as disclosed in the SEC Filings, the Company and each of its subsidiaries
      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.

    

    3.15     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.

     

    3.16     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.

    
      
        
        

      

      
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    3.17      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.

    

    3.18     Litigation.
      Except
      as described in the SEC Reports or on Schedule
      3.18,
      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.

    

    3.19     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.

    

    3.20     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 an Investor for any commission, fee or other
      compensation pursuant to any agreement, arrangement or understanding entered
      into by or on behalf of the Company, other than the Closing Fee described in
      Section 5.5 hereof.

    

    3.21     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 offered
      hereby.

    

    3.22     Private
      Placement.
      Subject
      to the accuracy of the Purchasers’ representations in Section 4 of this
      Agreement, the offer and sale of the Securities to the Purchasers as
      contemplated hereby is exempt from the registration requirements of the 1933
      Act.

    
      
        
        

      

      
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    3.23     Small
      Business Matters.

    

    (a)     The
      Company acknowledges that St. Cloud Capital Partners, L.P., one of the
      Purchasers of the securities being offered hereby (“St. Cloud”) is a federally
      licensed Small Business Investment Company (“SBIC”) under the Small Business
      Investment Act of 1958, as amended. Company, together with its “affiliates” (as
      that term is defined in 13 C.F.R. Section 121.103), is a “small business
      concern” within the meaning of the SBIC Regulations, including 13 C.F.R. Section
      121.103. After giving effect to the transactions contemplated by the Transaction
      Documents, Company will have 500 or fewer full-time equivalent employees. The
      information regarding Company and its affiliates set forth in the SBA forms
      Nos.
      480, 652 and 1031 delivered at the Closing is accurate and complete. Copies
      of
      such forms have been completed and executed by Company and delivered to St.
      Cloud at the Closing together with a written statement of Company regarding
      its
      planned use of the proceeds from the transactions contemplated by the
      Transaction Documents. The Company does not presently engage in, and it shall
      not hereafter engage in, any activities, nor shall it use directly or indirectly
      the proceeds of the transactions contemplated by the Transaction Documents
      for
      any purpose, for which an SBIC is prohibited from providing funds by the SBIC
      Regulations (including 13 C.F.R. Section 107.720).

    

    (b)     The
      primary business activity of Company does not involve, directly or indirectly,
      providing funds to others, purchasing or discounting debt obligations, factoring
      or long-term leasing of equipment with no provision for maintenance or repair,
      and Company is not classified under Section 53 (Real Estate) of the North
      American Industry Classification System manual. The assets of the business
      of
      Company (the “Business”) will not be reduced or consumed, generally without
      replacement, as the life of the Business progresses, and the nature of the
      Business does not require that a stream of cash payments be made to the
      Business’s financing sources, on a basis associated with the continuing sale of
      assets.  

    

    3.24     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.

    

    3.25     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 Purchasers, and the Purchasers are not
      relying on, any information constituting a forecast or projection.

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    4.     Representations
      of the Purchasers.
      Each of
      the Purchasers severally, and not jointly, represents and warrants to the
      Company as follows:

    

    4.1     Existence
      and Power.
      Such
      Purchaser, if not an individual, is a corporation, partnership, limited duration
      company or limited liability company, as the case may be, duly organized,
      validly existing and in good standing under the laws of its jurisdiction of
      organization. Each non-individual Purchaser has the corporate, partnership,
      limited duration company or limited liability company, as the case may be,
      power
      and authority to own and operate its properties and assets, to execute and
      deliver this Agreement to purchase the Notes, the Warrants and, upon exercise
      of
      the Warrants, the Warrant Shares, and to carry out the provisions of this
      Agreement. Each non-individual Purchaser is duly qualified and is authorized
      to
      do business and is in good standing as a foreign corporation, partnership,
      limited duration company or limited liability company, as the case may be,
      in
      such Purchaser’s jurisdictions of organization.

     

    4.2     Authorization;
      No
      Contravention.
      The
      execution, delivery and performance by each Purchaser of this Agreement and
      the
      transactions contemplated hereby, (a) have been duly authorized by all necessary
      action, (b) do not contravene the terms of such Purchaser’s organizational
      documents, or any amendment thereof, if any, and (c) do not violate, conflict
      with or result in any breach or contravention of, or the creation of any lien
      under, any material contractual obligation of such Purchaser or any requirement
      of law applicable to such Purchaser, and (d) do not violate any orders of any
      Governmental Entity against, or binding upon, such Purchaser.

     

    4.3     Binding
      Effect.
      This
      Agreement and the other documents to which each Purchaser is a party have been
      duly executed and delivered by each Purchaser and constitute the legal, valid
      and binding obligations of such Purchaser, enforceable against it in accordance
      with its terms, except as enforceability may be limited by applicable
      bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
      generally the enforcement of creditors’ rights and subject to a court’s
      discretionary authority with respect to granting a decree ordering specific
      performance or other equitable remedies.

     

    4.4     Purchase
      for Own Account.
      The
      Notes and Warrants hereby acquired by each Purchaser pursuant to this Agreement
      are being acquired for such Purchaser’s own account, not as nominee or agent,
      and with no intention of distributing or reselling such securities in any
      transaction that would be in violation of the securities laws of the United
      States of America or any state, without prejudice. If such Purchaser should
      in
      the future decide to dispose of any of such Notes or Warrants or Warrant Shares,
      such Purchaser understands and agrees that it may do so only in compliance
      with
      the Securities Act and applicable state securities laws, as then in effect.
      Each
      Purchaser agrees to the imprinting, so long as required by law, of legends
      on
      certificates representing all of its Notes, Warrants and Warrant Shares to
      the
      following effect:

    
      
        
        

      

      
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    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY
      STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
      REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
      OR
      PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
      OF
      SUCH ACT AND SUCH LAWS.

     

    4.5     Restricted
      Securities.
      The
      Purchaser understands that the Notes and Warrants 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. The Purchaser understands that the Notes and Warrants are being
      offered and sold to it in reliance upon specific exemptions from the
      registration requirements of United States and state securities laws and that
      the Company is relying upon the truth and accuracy of, and the Purchaser’s
      compliance with, the representations, warranties, agreements, acknowledgments
      and understandings of the Purchaser set forth herein in order to determine
      the
      availability of such exemption and the eligibility of the Purchaser to acquire
      the Notes and Warrants.

     

    4.6     Brokers,
      Finder’s or Similar Fees.
      The
      Company has not incurred, and will not incur, directly or indirectly, as a
      result of any action taken by such
      Purchaser, any liability for brokerage or finders’ fees or agents’ commissions
      or any similar charges in connection with this Agreement.

     

    4.7     Accredited
      Investor.
      Each
      Purchaser is an “accredited investor” within the meaning of Rule 501 of
      Regulation D under the Securities Act, as presently in effect.
      The
      Purchaser understands that no United States federal or state agency or any
      other
      government or governmental agency has passed upon or made any recommendation
      or
      endorsement of the Notes or the Warrants.

     

    4.8     Investment
      Experience; Acknowledgment of Risk.
      Each
      Purchaser 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. The
      Purchaser understands that its investment in the Notes and the Warrants involves
      a significant degree of risk.

     

    4.9     Disclosure
      of Information.
      The
      Purchaser has conducted its own due diligence examination of the Company’s
      business, financial condition, results of operations, and prospects, and has
      had
      an opportunity to receive all information related to the Company and the Notes
      and Warrants requested by it and to ask questions of and receive answers from
      the Company regarding the Company, its business, finances and operations and
      the
      terms and conditions of the offering of the Securities. Neither such inquiries
      nor any other due diligence investigation conducted by such Purchaser shall
      modify, amend or affect the Purchaser’s right to rely on the Company’s
      representations and warranties contained in this Agreement. 

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    4.10     SEC
      Reports.
      Each
      Purchaser acknowledges that it has had the opportunity to review the SEC Reports
      filed with the SEC, including the information contained in the Company’s most
      recently filed Annual Report on Form 10-K, Quarterly Report on Form 10-Q and
      Proxy Statement on Schedule 14A. Each Purchaser acknowledges that it has read
      the information in such reports, including the information under the caption
      “Risk Factors” contained in the SEC Reports.

     

    4.11     No
      General Solicitation.
      Each
      Purchaser did not learn of the investment in the Notes and Warrants as a result
      of any public advertising or general solicitation.

    

    5.     Conditions
      of Closing of the Purchasers.
      The
      obligations of the Purchasers to purchase their respective Notes and Warrants
      and transfer the Purchase Price for the Notes and Warrants being purchased
      at
      the Closing are subject to the fulfillment at or before the Closing, as
      applicable, of the following conditions precedent, any one or more of which
      may
      be waived in whole or in part by the Purchasers, which waiver shall be at the
      sole discretion of such Purchasers:

    

    5.1     Representations
      and Warranties.
      The
      representations and warranties made by the Company in this Agreement are true
      and correct in all respects as of the date hereof, except for the
      representations and warranties that are expressly made as of a particular
      date
      (which
      shall remain true and correct as of such date).

     

    5.2     Agreements.
      All
      agreements, and conditions contained in this Agreement to be performed or
      complied with by the Company prior to Closing shall have been performed or
      complied with by the Company prior to or at the Closing.

     

    5.3     Registration
      Rights Agreement.
      The
      Company shall have executed and delivered to the Purchasers the Registration
      Rights Agreement. 

     

    5.4     Proceedings
      and Documents.
      All
      corporate and other proceedings in connection with the transactions contemplated
      by this Agreement and all documents and instruments incident to such
      transactions shall be in a form and substance reasonably satisfactory to the
      Purchasers and their counsel, and the Purchasers and their counsel shall have
      received all such counterpart originals or certified or other copies of such
      documents as the Purchasers or their counsel may reasonably
      request.

     

    5.5     Closing
      Fee.
      The
      Company shall have paid a closing fee equal to $5,000 to St. Cloud Capital
      Partners, L.P. and $5,000 to Bedford Oaks Partners, L.P.

     

    6.      Conditions
      of Closing of the Company.
      The
      Company’s obligations to sell and issue the Notes and Warrants at the Closing
      are subject to the fulfillment at or before the Closing of the following
      conditions, which conditions may be waived in whole or in part by the Company,
      and which waiver shall be at the sole discretion of the
      Company:

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    6.1     Representations
      and Warranties.
      The
      representations and warranties made by the Purchasers in this Agreement shall
      have been true and correct in all respects as of the date when made and as
      of
      the Closing Date, except for the representations and warranties that are
      expressly made as of a particular date (which shall remain true and correct
      as
      of such date).

     

    6.2     Agreements.
      All
      agreements, and conditions contained in this Agreement to be performed or
      complied with by the Purchasers prior to the Closing shall have been performed
      or complied with by the Company prior to or at the Closing.

     

    6.3     Payment
      of Purchase Price.
      The
      Purchasers shall have tendered the aggregate Purchase Price in exchange for
      the
      Notes and Warrants being issued hereunder in accordance with Section
      2.1.

    

    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
      exercise of the Warrants, 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
      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 Purchasers under the Transaction
      Documents.

    

    7.3     Insurance.
      The
      Company shall not materially reduce the insurance coverages described in Section
      3.19.

    

    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     Certain
      Negative Covenants.
      From
      and after the date of this Agreement and for so long as any Notes remain
      outstanding, the Company shall not without first obtaining the approval (by
      vote
      or written consent, as provided by law) of the holders of at least 50% of the
      outstanding principal face amount of the Notes, which consent shall not be
      unreasonably withheld or delayed, take any of the following actions:

     

    (a)     Incur
      additional indebtedness, provided however that the Company may incur additional
      indebtedness so long as the total indebtedness of the Company after taking
      into
      account such additional indebtedness does not exceed the sum of (i) the total
      existing indebtedness of the Company as of the date hereof (inclusive of the
      indebtedness represented by the Notes) and (ii) $500,000. In addition, the
      foregoing restriction shall not preclude (i) additional debt that is expressly
      subordinated to the Note, as evidenced by a subordination agreement reasonably
      acceptable to the holder of the Notes and (ii) indebtedness under purchase
      money
      security interests incurred in the ordinary course of business;

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    (b)     Pay
      or
      authorize any dividend or make or authorize any distribution or payment upon
      any
      of its common stock equity securities;

     

    (c)     Make
      loans, advances to, guarantees for the benefit of, or investments in, any person
      except investments made in the ordinary course of business in (A) obligations
      of
      the United States government or any agency thereof or obligations guaranteed
      by
      the United States government, (B) certificates of deposit of commercial banks
      insured by the Federal Deposit Insurance Corporation, or (C) commercial paper
      with a rating of at least Prime-l according to Moody’s Investors Service, Inc.,
      in each case having a maturity not in excess of one (1) year;

     

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

     

    (e)     Enter
      into
      any transaction with any shareholder, officer, or employee of Company other
      than
      in the ordinary course of business which shall in the aggregate exceed
      twenty-five thousand dollars ($25,000) outstanding at any one time, except
      that
      Company may enter into "at-will" employment arrangements;

     

    (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); 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; 

     

    (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 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; 

     

    
      
        
        

      

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

     

    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 each Purchaser and their respective directors, officers, employees,
      affiliates 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.

    

    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.

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    
      	 	
              9.

            	
              SBIC
                Regulatory Provisions.
                

            

    

    

    (a)     Use
      of
      Proceeds-Statements and Access.
      At such
      times as St. Cloud reasonably requests, Company shall deliver to St. Cloud
      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. In addition to any other rights granted
      hereunder, Company shall grant St. Cloud and the SBA access to Company’s books
      and records for the purpose of verifying the use of such proceeds and verifying
      the certifications made by Company in SBA forms Nos. 480, 652 and 1031,
      delivered pursuant to Section 3.1.6 and for the purpose of determining whether
      the principal business activity of Company and its Subsidiaries continues to
      constitute an eligible business activity (within the meaning of the SBIC
      Regulations).

    

    (b)     Use
      of
      Proceeds - Foreign Operations.
      The
      Company shall not, and shall not permit its subsidiaries to, use any proceeds
      from the transactions contemplated by the Transaction Documents substantially
      for a foreign operation, and no more than forty-nine percent (49%) of the
      employees or tangible assets of Company and its subsidiaries will be outside
      the
      United States (unless Company can show to the SBA’s satisfaction, that proceeds
      from the transactions contemplated by the Transaction Documents will be used
      for
      a specific domestic purpose).

    

    (c)     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

    

    (d)     Regulatory
      Violation.
      Upon
      the occurrence of a Regulatory Violation or in the event that St. Cloud
      determines in its good faith judgment that a Regulatory Violation has occurred,
      in addition to any other rights and remedies to which it may be entitled as
      a
      holder of the Securities under any of the Transaction Documents, St. Cloud
      shall
      have the right to the extent required under the SBIC Regulations to demand
      the
      immediate repayment of the principal balance of the Note, plus all accrued
      interest on the applicable Note, by delivering written notice of such demand
      to
      the Company. The Company shall make such payment by a cashier’s or certified
      check or by wire transfer of immediately available funds to St. Cloud within
      thirty (30) days after the Company’s receipt of the demand notice.

    

    (e)     Regulatory
      Violation Cooperation.
      In the
      event that a Purchaser believes that it has a regulatory problem with the SBIC,
      such Purchaser shall have the right to transfer its Notes and Warrants without
      regard to any restrictions on transfer set forth in this Agreement or any of
      the
      Transaction Documents other than the restrictions under applicable securities
      law, and the Company shall take all such actions as are reasonably requested
      by
      such Purchaser in order to effectuate and facilitate any transfer by such
      Purchaser of the Notes and Warrants then held by such Purchaser to any person
      designated by such Purchaser.

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    (f)     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 St. Cloud a written assessment
      of
      the economic impact of St. Cloud’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.

    

    (g)     Business
      Activity.
      For
      a
      period of one (1) year following the date hereof, neither the Company nor any
      of
      its subsidiaries will change its business activity if such change would render
      the Company ineligible to receive financial assistance from St. Cloud (within
      the meanings of 13 C.F.R. Sections 107.720 and 107.760(b)).  

    

    (h)     Compliance
      with Non-Discrimination Requirements.
      The
      Company shall comply at all times with the non-discrimination requirements
      of 13
      C.F.R. Parts 112, 113 and 117.  

    

    10.    Miscellaneous.

    

    10.1     Successors
      and Assigns.
      This
      Agreement, and the rights and obligations of each Purchaser hereunder, may
      be
      assigned by such Purchaser to (a) any person or entity to which Notes and
      Warrants are transferred by such Purchaser, or (b) to any Affiliated Party
      (as hereinafter defined), and, in each case, such transferee shall be deemed
      a
“Purchaser” for purposes of this Agreement; provided that such assignment of
      rights shall be contingent upon the transferee providing a written instrument
      to
      the Company notifying the Company of such transfer and assignment and agreeing
      in writing to be bound by the terms of this Agreement. The Company may not
      assign its rights under this Agreement.
      For
      purposes of this Agreement, “Affiliated Party” shall mean, with respect to any
      Purchaser, any person or entity which, directly or indirectly, controls, is
      controlled by or is under common control with such Purchaser, including, without
      limitation, any general partner, officer or director of such Purchaser and
      any
      venture capital fund now or hereafter existing which is controlled by one or
      more general partners of, or shares the same management company as, such
      Purchaser.

     

    10.2     Expenses.
      Each
      party hereto shall pay its or his own expenses relating to the transactions
      contemplated by this Agreement, including, without limitation, the fees and
      expenses of their respective counsel, financial advisors and
      accountants.

     

    10.3     Severability.
      The
      invalidity or unenforceability of any provision of this Agreement shall not
      affect the validity or enforceability of any other provision of this
      Agreement.

     

    10.4     Specific
      Performance.
      In
      addition to any and all other remedies that may be available at law in the
      event
      of any breach of this Agreement, each Purchaser shall be entitled to specific
      performance of the agreements and obligations of the Company hereunder and
      to
      such other injunctive or other equitable relief as may be granted by a court
      of
      competent jurisdiction.

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    10.5     Governing
      Law.
      This
      Agreement shall be governed by and construed in accordance with the internal
      laws of the State of New York (without reference to the conflicts of law
      provisions thereof).

     

    10.6     Notices.
      All
      notices, requests, consents, and other communications under this Agreement
      shall
      be in writing and shall be deemed delivered (i) three business days after
      being sent by registered or certified mail, return receipt requested, postage
      prepaid or (ii) one business
      day after being sent via a reputable nationwide overnight courier service
      guaranteeing next business day delivery, in each case to the intended recipient
      as set forth below:

     

    If
      to the
      Company, to National Holdings Corporation, 120 Broadway, 27th
      Floor,
      New York, NY 10271, Attention: Chief Executive Officer, or at such other address
      as may have been furnished in writing by the Company to the other parties
      hereto, with a copy to Littman Krooks LLP, 655 Third Avenue, New York, NY 10017,
      Attention: Mitchell C. Littman, Esq.; or

     

    If
      to a
      Purchaser, at its address set forth on Exhibit A,
      or at
      such other address as may have been furnished in writing by such Purchaser
      to
      the other parties hereto.

     

    Any
      party
      may give any notice, request, consent or other communication under this
      Agreement using any other means (including, without limitation, personal
      delivery, messenger service, telecopy, first class mail or electronic mail),
      but
      no such notice, request, consent or other communication shall be deemed to
      have
      been duly given unless and until it is actually received by the party for whom
      it is intended. Any party may change the address to which notices, requests,
      consents or other communications hereunder are to be delivered by giving the
      other parties notice in the manner set forth in this Section.

     

    10.8     Complete
      Agreement.
      This
      Agreement (including its exhibits) constitutes the entire agreement and
      understanding of the parties hereto with
      respect to the subject matter hereof and supersedes all prior agreements and
      understandings relating to such subject matter.

     

    10.9     Amendments
      and Waivers.
      This
      Agreement may not be amended or terminated without the prior written consent
      of
      the Company.

     

    10.10     Pronouns.
      Whenever the context may require, any pronouns used in this Agreement shall
      include the corresponding masculine, feminine or neuter forms, and the singular
      form of nouns and pronouns shall include the plural, and vice
      versa.

     

    10.11     Counterparts;
      Signatures.
      This
      Agreement may be executed in any number of counterparts (including, in the
      case
      of the Purchasers, Financing Signature Pages), 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. 

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    10.12     Section
      Headings and References.
      The
      section headings are for the convenience of the parties and in no way alter,
      modify, amend, limit or restrict the contractual obligations
      of the parties. Any reference in this agreement to a particular section or
      subsection shall refer to a section or subsection of this Agreement, unless
      specified otherwise.

     

    10.13     Confidentiality.
      Each
      Purchaser acknowledges and agrees not to use the Confidential Information (as
      hereafter defined) disclosed to him by the Company for any purpose except as
      set
      forth in this Agreement. Each Purchaser will not disclose any Confidential
      Information to any third party except those directors, officers, employees,
      consultants and agents who are required to have the information in order to
      carry out the purpose of this Agreement. Each Purchaser also
      understands that certain of the Confidential Information may constitute material
      non-public information and that trading in the Company’s securities while in
      possession of Confidential Information, recommending trading in the Company’s
      securities based upon Confidential Information or providing Confidential
      Information to others who may trade in the Company’s securities could constitute
      a violation of federal securities laws and expose the Purchaser to civil and
      criminal liability. Each Purchaser specifically acknowledges that the
      Confidential Information is subject to the public disclosure requirements of
      Regulation FD promulgated under the Securities Exchange Act of 1934, as amended,
      and that the Company is specifically relying on each Purchaser’s execution of,
      and performance under, this Agreement in providing each Purchaser with the
      Confidential Information in compliance with Regulation FD.“Confidential
      Information” means any the information herein and any information, financial
      data, research, technical data, or know-how disclosed to the Purchaser by the
      Company, including, but not limited to, that which relates to services,
      products, plans for future products and services, clients, markets, operational
      methods, plans for future development, research, software, inventions,
      processes, designs, drawings, engineering, hardware configuration information,
      marketing, financial information, know-how and other trade secrets. Confidential
      Information does not include information, technical data or know-how that the
      Purchaser can show: (i) was rightfully in the possession of the Purchaser at
      the
      time of disclosure; (ii) becomes a matter of public knowledge, not as a result
      of any inaction or action of the Purchaser; or (iii) was received from a third
      party without a duty or confidentiality. 

    

    Executed
      as of the date first written above.

     

    
      	 	 	 
	 	COMPANY
              NAME CORPORATION
	 	 
	 	NATIONAL HOLDINGS CORPORATION
	 
 	 
 	 
 
	 	By:  	/s/ MARK
              GOLDWASSER
	 	
              
Mark
              Goldwasser
	 	Chief
              Executive Officer 

    

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

     

    
      	
              LIST
                OF PURCHASERS AND NOTES AND WARRANTS PURCHASED

            	 
	 	 	 	 	 	 
	
              Name
                and Address

              of
                Purchasers

            	 	
               

              Principal
                Amount of Notes

            	 	
              No.
                of Shares of Common 
Stock into which 

              Warrants
                are Exercisable

            	 
	 	 	 	 	 	 
	
              Christopher
                C. Dewey

              PO
                Box 23

              Oldwick,
                NJ 08858

            	 	
              $

            	
              500,000

            	 	 	
              125,000

            	 
	 	 	 	 	 	 	 	 
	
              St.
                Cloud Capital Partners, L.P.

              10866
                Wilshire Blvd.

              Suite
                1450

              Los
                Angeles, CA 90024

            	 	
              $

            	
              250,000

            	 	 	
              62,500

            	 
	 	 	 	 	 	 	 	 
	
              Bedford
                Oaks Partners, L.P.

              100
                South Bedford Road

              Mt.
                Kisco, NY 10549

            	 	
              $

            	
              250,000

            	 	 	
              62,500

            	 

    

    
      
        
        

      

      
        A-1

        
          

        

      

      
        
        

      

    

    EXHIBIT
      B

     

    FINANCING
      SIGNATURE PAGE

     

    By
      execution and delivery of this signature page, the undersigned hereby agrees
      to
      become a Purchaser, as defined in that certain Securities Purchase Agreement
      (the “Purchase Agreement”) by and among National Holdings Corporation, a
      Delaware corporation (the “Company”), and the Purchasers (as defined in the
      Purchase Agreement), dated as of the Closing Date (as defined in the Purchase
      Agreement), acknowledges having read the representations in the Purchase
      Agreement section entitled “Representations of the Purchasers,” and hereby
      represents that the statements contained therein are complete and accurate
      with
      respect to the undersigned as a Purchaser. The undersigned further hereby agrees
      to be bound by the terms and conditions of the Purchase Agreement as a
“Purchaser” thereunder and authorizes this signature page to be attached to the
      Purchase Agreement.

     

    Executed,
      in counterpart, as of the date set forth below.

    
       

      
        	 	PURCHASER:	 
	 	 	 	 
	 	By: 	/s/ CHRISTOPHER
                C. DEWEY	 
	 	 	Name of Purchaser	 
	 	 	 	 
	 	 	 	 
	 	By:	Christopher
                C. Dewey	 
	 	 	 	 
	 	Title:  	           
                	 
	 	 	 	 
	 	Date:	February
                22, 2007	 
	 	 	 	 
	 	Contact
                Person:          
                	               
                	 
	 	 	 	 
	 	Telephone
                No.:	               
                	 
	 	 	 	 
	 	Fax
                No.:	                
                	 
	 

      

    

    

      
        
          
          

        

        
          B-1

          
            

          

        

        
          
          

        

      

    

    EXHIBIT
      B

     

    FINANCING
      SIGNATURE PAGE

     

    By
      execution and delivery of this signature page, the undersigned hereby agrees
      to
      become a Purchaser, as defined in that certain Securities Purchase Agreement
      (the “Purchase Agreement”) by and among National Holdings Corporation, a
      Delaware corporation (the “Company”), and the Purchasers (as defined in the
      Purchase Agreement), dated as of the Closing Date (as defined in the Purchase
      Agreement), acknowledges having read the representations in the Purchase
      Agreement section entitled “Representations of the Purchasers,” and hereby
      represents that the statements contained therein are complete and accurate
      with
      respect to the undersigned as a Purchaser. The undersigned further hereby agrees
      to be bound by the terms and conditions of the Purchase Agreement as a
“Purchaser” thereunder and authorizes this signature page to be attached to the
      Purchase Agreement.

     

    Executed,
      in counterpart, as of the date set forth below.

    
       

      
        	 	PURCHASER:	 
	 	 	 	 
	 	By: 	St.
                Cloud Capital Partners, L.P.	 
	 	 	Name of Purchaser	 
	 	 	 	 
	 	 	 	 
	 	By: 	SCGP, LLC, its General
                Partner	 
	 	 	 	 
	 	By:	/s/
                MARSHALL S. GELLER 	 
	 	 	 	 
	 	Title:  	Senior
                Managing Member	 
	 	 	 	 
	 	Date:	February
                22, 2007	 
	 	 	 	 
	 	Contact
                Person:	Benjamin
                Hom	 
	 	 	 	 
	 	Telephone
                No.: 	(310)
                475-2700, Ext. 106 	 
	 	 	 	 
	 	Fax
                No.:	(310)
                475-0550	 
	 	 	 	 
	 	E-mail
                Address:        
                	bhom@stcloudcapital.com         
                	 

      

    

    
      
        
        

      

      
        B-1

        
          

        

      

      
        
        

      

    

    EXHIBIT
      B

     

    FINANCING
      SIGNATURE PAGE

     

    By
      execution and delivery of this signature page, the undersigned hereby agrees
      to
      become a Purchaser, as defined in that certain Securities Purchase Agreement
      (the “Purchase Agreement”) by and among National Holdings Corporation, a
      Delaware corporation (the “Company”), and the Purchasers (as defined in the
      Purchase Agreement), dated as of the Closing Date (as defined in the Purchase
      Agreement), acknowledges having read the representations in the Purchase
      Agreement section entitled “Representations of the Purchasers,” and hereby
      represents that the statements contained therein are complete and accurate
      with
      respect to the undersigned as a Purchaser. The undersigned further hereby agrees
      to be bound by the terms and conditions of the Purchase Agreement as a
“Purchaser” thereunder and authorizes this signature page to be attached to the
      Purchase Agreement.

     

    Executed,
      in counterpart, as of the date set forth below.

    
       

      
        	 	PURCHASER:	 
	 	 	 	 
	 	By:	Bedford
                Oaks Partners	 
	 	 	Name of Purchaser	 
	 	 	 	 
	 	 	 	 
	 	By:	/s/
                Harvey P. Eisen 	 
	 	 	 	 
	 	Title:  	Chairman
                and Managing Partner 	 
	 	 	 	 
	 	Date:	February
                22, 2007	 
	 	 	 	 
	 	Contact
                Person:               
                	
              	 
	 	 	 	 
	 	Telephone
                No.:	(914)
                242-5700	 
	 	 	 	 
	 	Fax
                No.:	(914)
                242-5798	 
	 	 	 	 
	 	E-mail
                Address:	heisen@bedfordoak.com	 
	 

      

    

    
      
        
        

      

      
        B-1

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