Subject to Completion, dated August 24, 2009

PROSPECTUS

4,583,335 Shares

NATIONAL

HOLDINGS CORPORATION

National Holdings Corporation

Common Stock

This prospectus relates to the resale, from time to time, of up to 4,583,335 shares of our common stock which are held by certain of our stockholders named within. These shares include 1,208,335 shares of common stock issuable upon exercise of warrants held by certain selling stockholders and 3,375,000 shares of common stock issuable upon conversion of 10% convertible promissory notes held by certain selling stockholders.  All of these shares of common stock are being sold by the selling stockholders named in this prospectus, or their transferees, pledgees, donees or successors-in-interest. The selling stockholders will receive all proceeds from the sale of the shares of our common stock being offered in this prospectus. We will receive, however, the exercise price of the warrants upon exercise by certain selling stockholders of their warrants.

The selling stockholders may sell the shares of common stock being offered by them from time to time on the Over-the-Counter Bulletin Board, in market transactions, in negotiated transactions or otherwise, and at prices and at terms that will be determined by the then prevailing market price for the shares of common stock or at negotiated prices directly or through brokers or dealers, who may act as agent or as principal or by a combination of such methods of sale. For additional information on the methods of sale, you should refer to the section entitled “Plan of Distribution” on page 19.

Our common stock trades on the Over-The-Counter Bulletin Board under the symbol “NHLD.OB.”  On August 17, 2009, the closing price of our common stock on the Over-The-Counter Bulletin Board was $0.70.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 3.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is August 24, 2009

 

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TABLE OF CONTENTS

Page No.

TABLE OF CONTENTS								i
	PROSPECTUS SUMMARY							1
	RISK FACTORS							3
	SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS							13
	USE OF PROCEEDS							14
	MARKET PRICE OF OUR COMMON STOCK							14
	SELLING STOCKHOLDERS							16
	PLAN OF DISTRIBUTION							19
	DESCRIPTION OF OUR BUSINESS							21
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS							29
	DIRECTORS AND EXECUTIVE OFFICERS							30
	COMPENSATION DISCUSSION AND ANALYSIS							35
	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT							37
	DESCRIPTION OF OUR COMMON STOCK							40
	LEGAL MATTERS							42
	EXPERTS							42
	WHERE YOU CAN FIND MORE INFORMATION							43
	INCORPORATION BY REFERENCE							43

 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

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Our business could be adversely affected by a breakdown in the financial markets.

As a securities broker-dealer, each of our Broker Dealer Subsidiaries’ business is materially affected by conditions in the financial markets and economic conditions generally, both in the United States and elsewhere around the world.  Many factors or events could lead to a breakdown in the financial markets including war, terrorism, natural catastrophes and other types of disasters.  These types of events could cause people to begin to lose confidence in the financial markets and their ability to function effectively.  If the financial markets are unable to effectively prepare for these types of events and ease public concern over their ability to function, our revenues are likely to decline and our operations are likely to be adversely affected.

Our revenues may decline in adverse market or economic conditions.

Unfavorable financial or economic conditions may reduce the number and size of the transactions in which we provide underwriting services, merger and acquisition consulting and other services. Our investment banking revenues, in the form of financial advisory, placement agent and underwriting fees, are directly related to the number and size of the transactions in which we participate and would therefore be adversely affected by a sustained market downturn. Additionally, a downturn in market conditions could lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in the revenues we receive from commissions and spreads.  We must review customer relationships for impairment whenever events or circumstances indicate that impairment may be present, which may result in a material, non-cash write down of customer relationships. A significant decrease in revenues or cash flows derived from acquired customer relationships could result in a material, non-cash write-down of customer relationships. Such impairment would have a material adverse impact on our results of operations and stockholders' equity.

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Market fluctuations and volatility may reduce our revenues and profitability.

Our revenue and profitability may be adversely affected by declines in the volume of securities transactions and in market liquidity.  Additionally, our profitability may be adversely affected by losses from the trading or underwriting of securities or failure of third parties to meet commitments.  We act as a market maker in publicly traded common stocks.  In market making transactions, we undertake the risk of price changes or being unable to resell the common stock it holds or being unable to purchase the common stock it has sold.  These risks are heightened by the illiquidity of many of the common stocks we trade and/or make a market.  Any losses from our trading activities, including as a result of unauthorized trading by our employees, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Lower securities price levels may also result in a reduced volume of transactions, as well as losses from declines in the market value of common stocks held for trading purposes.  During periods of declining volume and revenue, our profitability would be adversely affected.  Declines in market values of common stocks and the failure of issuers and third parties to perform their obligations can result in illiquid markets.

We generally maintain trading and investment positions in the equity markets. To the extent that we owns assets, i.e., have long positions, a downturn in those markets could result in losses from a decline in the value of such long positions. Conversely, to the extent that we have sold assets that we do not own, i.e., have short positions in any of those markets, an upturn could expose it to potentially unlimited losses as it attempts to cover its short positions by acquiring assets in a rising market.

We may, from time to time, have a trading strategy consisting of holding a long position in one asset and a short position in another from which it expects to earn revenues based on changes in the relative value of the two assets. If, however, the relative value of the two assets changes in a direction or manner that we did not anticipate or against which we have not hedged, we might realize a loss in those paired positions. In addition, we maintain trading positions that can be adversely affected by the level of volatility in the financial markets, i.e., the degree to which trading prices fluctuate over a particular period, in a particular market, regardless of market levels.

Competition with other financial firms may have a negative effect on our business.

We compete directly with national and regional full-service broker-dealers and a broad range of other financial service firms, including banks and insurance companies.  Competition has increased as smaller securities firms have either ceased doing business or have been acquired by or merged into other firms.  Mergers and acquisitions have increased competition from these firms, many of which have significantly greater financial, technical, marketing and other resources than the Company.  Many of these firms offer their customers more products and research than currently offered by us.  These competitors may be able to respond more quickly to new or changing opportunities, technologies and client requirements.  We also face competition from companies offering discount and/or electronic brokerage services, including brokerage services provided over the Internet, which we are currently not offering and do not intend to offer in the foreseeable future.  These competitors may have lower costs or provide more services, and may offer their customers more favorable commissions, fees or other terms than those offered by the Company.  To the extent that issuers and purchasers of securities transact business without our assistance, our operating results could be adversely affected.

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If we do not continue to develop and enhance our services in a timely manner, our business may be harmed.

Our future success will depend on our ability to develop and enhance our services and add new services. We operate in a very competitive industry in which the ability to develop and deliver advanced services through the Internet and other channels is a key competitive factor. There are significant risks in the development of new or enhanced services, including the risks that we will be unable to:

·

effectively use new technologies;

·

adapt its services to emerging industry or regulatory standards; or

·

market new or enhanced services.

If we are unable to develop and introduce new or enhanced services quickly enough to respond to market or customer requirements or to comply with emerging industry standards, or if these services do not achieve market acceptance, our business could be seriously harmed.

We are currently subject to extensive securities regulation and the failure to comply with these regulations could subject us to penalties or sanctions.

The securities industry and our business are subject to extensive regulation by the SEC, state securities regulators and other governmental regulatory authorities.  We are also regulated by industry self-regulatory organizations, including the Financial Industry Regulatory Authority, Inc. (“FINRA”), the Municipal Securities Rulemaking Board ("MSRB") and the National Futures Association (“NFA”).  Our Broker Dealer Subsidiaries are registered broker-dealers with the SEC and member firms of FINRA.  Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods and supervision, trading practices among broker-dealers, use and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping, and the conduct of directors, officers and employees.  Changes in laws or regulations or in governmental policies could cause use to change the way we conducts our business, which could adversely affect the Company.

Compliance with many of the regulations applicable to the Company involves a number of risks, particularly in areas where applicable regulations may be subject to varying interpretation.  These regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements.  If we are found to have violated an applicable regulation, administrative or judicial proceedings may be initiated against us that may result in a censure, fine, civil penalties, issuance of cease-and-desist orders, the deregistration or suspension of our broker-dealer activities, the suspension or disqualification of our officers or employees, or other adverse consequences.  The imposition of any of these or other penalties could have a material adverse effect on our operating results and financial condition.

We rely on clearing brokers and unilateral termination of the agreements with these clearing brokers could disrupt our business.

Our Broker-Dealer Subsidiaries are introducing brokerage firms, using third party clearing brokers to process its securities transactions and maintain customer accounts.  The clearing brokers also provide billing services, extend credit and provide for control and receipt, custody and delivery of securities. We depend on the operational capacity and ability of the clearing brokers for the orderly processing of transactions.  In addition, by engaging the processing services of a clearing firm, we are exempt from some capital reserve requirements and other regulatory requirements imposed by federal and state securities laws.  If the clearing agreements are unilaterally terminated for any reason, we would be forced to find alternative clearing firms without adequate time to negotiate the terms of a new clearing agreement and without adequate time to plan for such change.  There can be no assurance that if there were a unilateral termination of its clearing agreement that we would be able to find an alternative clearing firm on acceptable terms to it or at all.

 

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We permit our clients to purchase securities on a margin basis or sell securities short, which means that the clearing firm extends credit to the client secured by cash and securities in the client's account.  During periods of volatile markets, the value of the collateral held by the clearing brokers could fall below the amount borrowed by the client.  If margin requirements are not sufficient to cover losses, the clearing brokers sell or buy securities at prevailing market prices, and may incur losses to satisfy client obligations.  We have agreed to indemnify the clearing brokers for losses they incur while extending credit to its clients.

Credit risk exposes us to losses caused by financial or other problems experienced by third parties.

We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties include trading counterparts, customers, clearing agents, exchanges, clearing houses, and other financial intermediaries as well as issuers whose securities we hold. These parties may default on their obligations owed to us due to bankruptcy, lack of liquidity, operational failure or other reasons. This risk may arise, for example, from holding securities of third parties, executing securities trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries, and extending credit to clients through bridge or margin loans or other arrangements. Significant failures by third parties to perform their obligations owed to us could adversely affect our revenues and perhaps our ability to borrow in the credit markets.

Adverse results of current litigation and potential securities law liability would result in financial losses and divert management's attention to business.

Many aspects of our business involve substantial risks of liability.  There is a risk of litigation and arbitration within the securities industry, including class action suits seeking substantial damages.  We are subject to potential claims by dissatisfied customers, including claims alleging they were damaged by improper sales practices such as unauthorized trading, sale of unsuitable securities, use of false or misleading statements in the sale of securities, mismanagement and breach of fiduciary duty.  We may be liable for the unauthorized acts of its retail brokers if it fails to adequately supervise their conduct.  As an underwriter, we may be subject to substantial potential liability under federal and state law and court decisions, including liability for material misstatements and omissions in securities offerings.  We may be required to contribute to a settlement, defense costs or a final judgment in legal proceedings or arbitrations involving a past underwriting and in actions that may arise in the future.  We carry "Errors and Omissions" insurance to protect against arbitrations; however, the policy is limited in items and amounts covered and there can be no assurance that it will cover a particular complaint.  The adverse resolution of any legal proceedings involving us and/or our subsidiaries could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We face significant competition for registered representatives.

We are dependent upon the independent contractor model for our retail brokerage business.  A significant percentage of our retail registered representatives are independent contractors.  We are exposed to the risk that a large group of independent contractors could leave the firm or decide to affiliate with another firm and that we will be unable to recruit suitable replacements.  A loss of a large group of our independent contractors could have a material adverse impact on our ability to generate revenue in the retail brokerage business.

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The precautions we take to prevent and detect employee misconduct may not be effective, and we could be exposed to unknown and unmanaged risks or losses.

We run the risk that employee misconduct could occur. Misconduct by employees could include:

·

employees binding us to transactions that exceed authorized limits or present unacceptable risks to us;

·

employees hiding unauthorized or unsuccessful activities from us; or

·

the improper use of confidential information.

These types of misconduct could result in unknown and unmanaged risks or losses to us including regulatory sanctions and serious harm to our reputation. The precautions we take to prevent and detect these activities may not be effective. If employee misconduct does occur, our business operations could be materially adversely affected.

Internet and internal computer system failures or compromises of our systems or security could damage our reputation and harm our business.

Although a significant portion of our business is conducted using traditional methods of contact and communications such as face-to-face meetings, a portion of our business is conducted through the Internet. We could experience system failures and degradations in the future. We cannot assure you that we will be able to prevent an extended system failure if any of the following events occur:

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human error;

·

subsystem, component, or software failure;

·

a power or telecommunications failure;

·

an earthquake, fire, or other natural disaster or act of God;

·

hacker attacks or other intentional acts of vandalism; or

·

terrorist's acts or war.

Failure to adequately protect the integrity of our computer systems and safeguard the transmission of confidential information could harm our business.

The secure transmission of confidential information over public networks is a critical element of our operations. We rely on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information over the Internet. We do not believe that we have experienced any security breaches in the transmission of confidential information.  We cannot assure you that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise of the technology or other algorithms used by our vendors and us to protect client transaction and other data. Any compromise of our systems or security could harm our business.

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Our success and ability to compete may depend in part on vFinance's intellectual property.

vFinance relies on copyright and trademark law, as well as confidentiality arrangements, to protect its intellectual property. vFinance owns the following federally registered marks: vFinance, Inc.®, vFinance.com, Inc.®, AngelSearch®, Direct2Desk® and Hedge Fund Accelerator®. vFinance currently does not have any patents. The concepts and technologies vFinance uses may not be patentable. vFinance's competitors or others may adopt product or service names similar to "vFinance.com," thereby impeding vFinance's ability to build brand identity and possibly leading to client confusion. vFinance's inability to adequately protect the name "vFinance.com" would seriously harm its business. Policing unauthorized use of vFinance's intellectual property is made especially difficult by the global nature of the Internet and the inherent difficulty in controlling the ultimate destination or security of software or other data transmitted on it.

The laws of other countries may afford vFinance little or no effective protection for its intellectual property. vFinance cannot assure you that the steps it takes will prevent misappropriation of its intellectual property or that agreements entered into for that purpose will be enforceable. In addition, litigation may be necessary in the future to:

●

enforce vFinance's intellectual property rights;

·

determine the validity and scope of the proprietary rights of others; or

·

defend against claims of infringement or invalidity.

Such litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could seriously harm vFinance's business. ]

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enforce vFinance's intellectual property rights;

·

determine the validity and scope of the proprietary rights of others; or

·

defend against claims of infringement or invalidity.

Such litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources, either of which could seriously harm vFinance's business.

The "National" brand may not achieve the broad recognition necessary to succeed.

We believe that broader recognition and positive perception of the "National" brand is essential to our future success. Accordingly, we intend to continue to pursue an aggressive brand enhancement strategy, which will include multimedia advertising, promotional programs and public relations activities. These initiatives will require significant expenditures. If our brand enhancement strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future revenues. Successful positioning of our brand will depend in a large part on:

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the success of our advertising and promotional efforts;

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an increase in the number of users and page views of our subsidiaries’ website; and

·

the ability to continue to provide a website and services useful to our clients.

 

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Risks Related to our Common Stock

Our common stock has low trading volume and any sale of a significant number of shares is likely to depress the trading price.

Our common stock is quoted on the OTC Bulletin Board. Traditionally, the trading volume of the common stock has been limited. For example, for the 30 trading days ending on August 17, 2009, the average daily trading volume was approximately 3,650 shares per day and on certain days there was no trading activity. During such 30-day period the closing price of the National common stock ranged from a high of $0.70 to a low of $0.51.  Because of this limited trading volume, purchasers of the securities being offered hereby may not be able to sell quickly any significant number of such shares, and any attempted sale of a large number of our shares will likely have a material adverse impact on the price of our common stock. Because of the limited number of shares being traded, the per share price is subject to volatility and may continue to be subject to rapid price swings in the future.

 

The conversion or exercise of our outstanding convertible securities stock may result in dilution to our common stockholders.

Dilution of the per share value of the our common shares could result from the conversion of most or all of the currently outstanding shares of our preferred stock and from the exercise of the currently outstanding convertible securities.

 

Preferred Stock - We currently have 42,957 shares of Series A preferred stock outstanding, which are convertible, in total, into 3,436,560 shares of common stock.

 

Warrants and Options - We currently have outstanding: warrants to purchase 1,977,973 shares of common stock at exercise prices ranging from $0.79 to $4.65 per share and options to purchase 6,469,965 shares of common stock at exercise prices ranging from $0.64 to $2.57 per share.

 

Convertible Notes - We currently have outstanding $6,000,000 principal amount of convertible promissory notes which are convertible into an aggregate of 3,375,000 shares of common stock at conversion prices of between $1.60 and $2.00 per share.

 

 

The price of our common stock is volatile.

The price of our common stock has fluctuated substantially.  The market price of its common stock may be highly volatile as a result of factors specific to us and the securities markets in general.  Factors affecting volatility may include: variations in our annual or quarterly financial results or those of its competitors; economic conditions in general; and changes in applicable laws or regulations, or their judicial or administrative interpretations affecting us or our subsidiaries or the securities industry.  In addition, volatility of the market price of our common stock is further affected by its thinly traded nature.

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We have restricted shares outstanding that may depress the price of our common stock.

As of August 17, 2009, of the 17,150,704 outstanding shares of our common stock, approximately 3,994,000 shares may be deemed restricted shares and, in the future, may be sold in compliance with Rule 144 under the Securities Act.  Rule 144, as amended, provides that a person who is not affiliated with the Company holding restricted securities for six months may sell such shares without restriction.  A person who is affiliated with us and who has held restricted securities for six months may sell such shares in brokerage transactions, subject to limitations based on the number of shares outstanding and trading volume.  Such sales may have a depressive effect on the price of our common stock in the open market.

 

Our principal stockholders including its directors and officers control a large percentage of shares of our common stock and can significantly influence our corporate actions.

As of August 17, 2009, our executive officers, directors and/or entities that these individuals are affiliated with, owned approximately 20% of our outstanding common stock, including shares of common stock issuable upon conversion of our Series A preferred stock, and excluding stock options, warrants and convertible notes, or approximately 46% on a fully-diluted basis.  Accordingly, these individuals and entities will be able to significantly influence most, if not all, of our corporate actions, including the election of directors, the appointment of officers, and potential merger or acquisition transactions

 

There are risks associated with our common stock trading on the OTC Bulletin Board rather than on a national exchange.

 

There may be significant consequences associated with our common stock trading on the OTC Bulletin Board rather than a national exchange.  The effects of not being able to list our common stock securities on a national exchange include:

 

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limited release of the market price of our securities;

·

limited news coverage;

·

limited interest by investors in our securities;

·

volatility of our common stock price due to low trading volume;

·

increased difficulty in selling our securities in certain states due to "blue sky" restrictions; and

·

limited ability to issue additional securities or to secure additional financing.

Our board of directors can issue shares of "blank check" preferred stock without further action by our stockholders.

Our board of directors has the authority, without further action by our stockholders, to issue up to 200,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions in each series of the preferred stock, including:

·

dividend rights;

·

conversion rights;

·

voting rights, which may be greater or lesser than the voting rights of our common stock;

·

rights and terms of redemption;

·

liquidation preferences; and

·

sinking fund terms.

There are currently 50,000 shares of Series A preferred stock authorized, with 42,957 of such shares issued and outstanding.  The issuance of additional shares of preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that these holders will receive dividends and payments upon our liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. Other than the issuance of additional shares of our Series A preferred stock as in-kind dividends, we have no current plans to issue any additional preferred stock in the next twelve months. Although the issuance of preferred stock may be necessary in order to raise additional capital.

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We are subject to new requirements that we evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act and other corporate governance initiatives that may expose certain risks.

 

We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act and the SEC rules and regulations that require an annual management report on its internal controls over financial reporting, including, among other matters, management's assessment of the effectiveness of its internal control over financial reporting.  For the year ending September 30, 2010, an attestation report by our independent registered public accounting firm regarding our internal controls will also be required.

 

We cannot be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact of the same on our operations.  If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the SEC.  Moreover, if we are unable to assert that our internal control over financial reporting is effective in any future period (or if its auditors are unable to express an opinion on the effectiveness of its internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an a material adverse effect on our business.

Our compliance with the Sarbanes-Oxley Act may require significant expenses and management resources that would need to be diverted from our other operations and could require a restructuring of our internal controls over financial reporting.  Any such expenses, time reallocations or restructuring could have a material adverse effect on its operations.  The applicability of the Sarbanes-Oxley Act could make it more difficult and more expensive for us to obtain director and officer liability insurance, and also make it more difficult for us to attract and retain qualified individuals to serve on our boards of directors, or to serve as executive officers.

We do not expect to pay any dividends on our common stock in the foreseeable future.

We do not anticipate that it will pay any dividends to holders of our common stock in the foreseeable future. Other than dividends paid on its Series A preferred stock, we expect to retain all future earnings, if any, for investment in its business. In addition, our Certificates of Designation setting forth the relative rights and preferences of its Series A preferred stock, as well as our outstanding convertible notes may limit our ability to pay dividends to the holders of our common stock.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements deal with our current plans, intentions, beliefs and expectations and statements of future economic performance.  Statements containing terms such as “believes,” “does not believe,” “plans,” “expects,” “intends,” “estimates,” “anticipates” and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from what is currently anticipated.  We make cautionary statements in certain sections of this prospectus, including under “Risk Factors” beginning on page 3.  You should read these cautionary statements as being applicable to all related forward-looking statements wherever they appear in this prospectus, in the materials referred to in this prospectus, in the materials incorporated by reference into this prospectus, or in our press releases.

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No forward-looking statement is a guarantee of future performance, and you should not place undue reliance on any forward-looking statement.

Unless otherwise set forth below, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the selling stockholder’s name, subject to community property laws, where applicable.

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The applicable percentages of ownership are based on an aggregate of 17,150,704 shares of common stock issued and outstanding as of the date of this prospectus. This number does not include shares of common stock issuable upon conversion of the shares of Series A Preferred Stock, shares of common stock issuable upon conversion of 10% convertible promissory notes or shares of common stock issuable upon exercise of outstanding warrants and options held by the selling stockholders.

Name	Shares Owned	Shares Which May Be Acquired Upon Exercise Of Warrants	Shares Which May Be Acquired Upon Conversion of Convertible Notes(1)	Percentage of Shares Owned Before Offering (2)	Shares Offered	Shares Owned After Offering (3)	Percentage of Shares Owned After Offering (4)
St. Cloud Capital Partners, L.P.	2,004,083 (5)	317,500(5)	0	13.29%	317,500 (5)	2,004,083	11.5%
St. Cloud Capital Partners, II, L.P.	0 (6)	843,750(6)	3,375,000(6)	19.74%	4,158,,335 (6)	60,415	*
Fred B. Tarter & Lois Tarter JTWROS	117,888	15,000	0	*	15,000	117,888	*
GKW Unified Holdings, LLC	235,775	30,000	0	1.55%	30,000	235,775	1.4%
Bedford Oak Capital, L.P.	1,092,011(7)	62,500	0	6.71%	62,500(8)	1,092,011(7)	6.3%
TOTAL	3,449,757	1,268,750	3,375,000	-	4,583,335	3,510,172	-

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* Less than 1%

(1)	Does not include shares of common stock which may be issued to the holders of our Convertible Notes upon conversion of accrued interest on such notes.

(2)

Calculated based on Rule 13d-3(d)(i). In calculating this amount for each selling stockholder, we treated as outstanding the number of shares of common stock issuable upon exercise of that selling stockholder’s warrants, the number of shares of common stock issuable upon conversion of that selling stockholder’s 10% convertible promissory notes, the number of shares of common stock issuable upon conversion of that selling stockholder’s Series A Preferred Stock but we did not assume exercise of any other selling stockholder’s warrants or conversion of any other selling stockholder’s 10% convertible promissory notes or Series A Preferred Stock.

(3)	Assumes sale of all shares offered by the selling stockholder.

(4)	Calculated based on Rule 13d-3(d)(i).

(5)	Marshall S. Geller, a director of the Company, is the Senior Managing Member of SCGP, LLC, the General Partner of St. Cloud Capital Partners, L.P. , and has voting control over the shares.

(6)	Marshall S. Geller, a director of the Company, is the Senior Managing Member of SCGP II, LLC, the General Partner of St. Cloud Capital Partners II, L.P., and has voting control over the shares.

(7)	Includes shares owned directly and indirectly as provided in information filed with the SEC in a Schedule 13G on February 15, 2008.

(8)	Includes 62,500 shares issuable upon exercise of warrants.

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PLAN OF DISTRIBUTION

The selling stockholders, which as used herein includes donees, pledgees, assignees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.  These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

The selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:

·      ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·      block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

·      purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·      an exchange distribution in accordance with the rules of the applicable exchange;

·      privately negotiated transactions;

·      short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC;

·      through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

·      broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

·      a combination of any such methods of sale; and

·      any other method permitted pursuant to applicable law.

The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.  The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume.  The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities.  The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

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The aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any.  Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents.  We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants.

The selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act rather than under this prospectus, provided that they meet the criteria and conform to the requirements of that rule.

The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act.  Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act.  Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of the shares of common stock will be paid by the selling stockholder and/or the purchasers. Each selling stockholder has represented and warranted to us that it acquired the securities subject to this registration statement in the ordinary course of such selling stockholder’s business and, at the time of its purchase of such securities such selling stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.  Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers.  In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates.  In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act.  The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

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We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold without restrictions pursuant to Rule 144 of the Securities Act.

DESCRIPTION OF OUR BUSINESS

Statements made in this report that relate to future plans, events, financial results or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are based upon current information and expectations. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties. For details concerning these and other risks and uncertainties, see Part I, Item 1A, “Risk Factors” of this report, as well as the Company’s other reports on Forms 10-K, 10-Q and 8-K subsequently filed with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

National is a Delaware financial services corporation organized in 1996 operating principally through its wholly owned subsidiaries, National Securities Corporation, vFinance Investments, Inc. and EquityStation, Inc. (collectively, the “Broker Dealer Subsidiaries”).  Through our Broker Dealer Subsidiaries, we conduct a national securities brokerage business through our main offices in New York, New York, Boca Raton, Florida, and Seattle, Washington, as well as 94 other locations throughout the country and four offices outside the country. Our business includes securities brokerage for individual and institutional clients, market-making trading activities, asset management and corporate finance services.

The Broker Dealer Subsidiaries provide a broad range of securities brokerage and investment services to a diverse retail and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses.  Our brokers operate primarily as independent contractors.  An independent contractor registered representative who becomes an affiliate of a Broker Dealer Subsidiary establishes his own office and is responsible for the payment of expenses associated with the operation of such office, including rent, utilities, furniture, equipment, stock quotation machines and general office supplies.  The independent contractor registered representative is entitled to retain a higher percentage of the commissions generated by his sales than an employee registered representative at a traditional employee-based brokerage firm.  This arrangement allows us to operate with a reduced amount of fixed costs and lowers the risk of operational losses for non-production.

In July 1994, National Securities formed a wholly owned subsidiary, National Asset Management, Inc., a Washington corporation ("NAM").  NAM is a federally-registered investment adviser providing asset management advisory services to high net worth clients for a fee based upon a percentage of assets managed.  In March 2008, all of the issued and outstanding stock of NAM was transferred from National Securities to National.

 

In the third quarter of fiscal year 2006, we formed a wholly owned subsidiary, National Insurance Corporation, a Washington corporation ("National Insurance").  National Insurance provides fixed insurance products to its clients, including life insurance, disability insurance, long term care insurance and fixed annuities.  National Insurance finalized certain requisite state registrations during the second quarter of fiscal year 2007 and commenced business operations that have to date been de minimus.

 

vFinance Lending Services, Inc, originally formed as a wholly owned subsidiary of vFinance, Inc., was established in May 2002.  It is a mortgage lender focused primarily on the commercial sector, providing bridge loans and commercial mortgages through its nationwide network of lenders. Its operations to date have been de minimus.

 

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Clearing Relationships

The Broker Dealer Subsidiaries have clearing arrangements with National Financial Services LLC (“NFS”), Penson Financial Services, Inc. (“Penson”), Legent Clearing LLC (“Legent”), Fortis Securities, LLC and Rosentahl Collins Group, LLC.  We believe that the overall effect of our clearing relationships has been beneficial to our cost structure, liquidity and capital resources.

 

Financial Information about Industry Segments

The Company realized approximately 84% of its total revenues in fiscal year 2008 from brokerage services, principal and agency transactions, and investment banking.  During fiscal year 2008, brokerage services that consist of retail brokerage commissions represent 61% of total revenues, principal and agency transactions that consist of net dealer inventory gains represent 20% of total revenues, and investment banking, that consist of corporate finance commissions and fees, represent 2% of total revenues.

 

Brokerage Services

Our Broker Dealer Subsidiaries are each registered as a broker-dealer with the SEC and are licensed in all 50 states, the District of Columbia and Puerto Rico.  The Broker Dealer Subsidiaries are also members of the FINRA, MSRB and the Securities Investor Protection Corporation ("SIPC") and vFinance Investments is also a member of NFA.  Brokerage services to retail clients are provided through our sales force of investment executives at the Broker Dealer Subsidiaries.

Our goal is to meet the needs of our investment executives and their clients.  To foster individual service, flexibility and efficiency and to reduce fixed costs, our investment executives primarily act as independent contractors responsible for providing their own office facilities, sales assistants, telephone and quote service, supplies and other items of overhead.  Investment executives are given broad discretion to structure their own practices and to specialize in different areas of the securities market subject to supervisory procedures.  In addition, investment executives have direct access to research materials, management, traders, and all levels of support personnel.

The brokerage services provided by our investment executives include execution of purchases and sales of stocks, bonds, mutual funds, annuities and various other securities for individual and institutional customers.  In fiscal year 2008, stocks and options represented approximately 85% of our business, bonds represented approximately 9% of our business, and mutual funds and annuities made up the remaining 6% of our business.  The percentage of each type of business varies over time as the investment preferences of our customers change based on market conditions.

Typically, our Broker Dealer Subsidiaries do not recommend particular securities to customers. Rather, recommendations to customers are determined by individual investment executives based upon their own research and analysis, subject to applicable FINRA customer suitability standards. Most investment executives perform fundamental (as opposed to technical) analysis.  Solicitations may be by telephone, seminars or newsletters.

We generally act as an agent in executing customer orders to buy or sell listed and over-the-counter securities in which it does not make a market, and charges commissions based on the services we provides to our customers.  In executing customer orders to buy or sell a security in which we make a market, we may sell to, or purchase from, customers at a price that is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down.  We may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer market price available and charge a commission.  We believe our mark-ups, mark-downs and commissions are competitive based on the services we provide to our customers.  In each instance the commission charges, mark-ups or mark-downs, are in compliance with guidelines established by the FINRA.  In order to increase revenues generated from these activities, we continuously seek to hire additional registered representatives, and work with our current registered representatives to increase their productivity.

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Our registered representatives are primarily independent contractors, not salaried employees.  As such, payments to these persons are based on commissions generated, and represent a variable cost rather than a fixed cost of operating our business.  Commission expense represents a significant majority of our total expenses.  We work to control its fixed costs in order to achieve profitability based upon our expectation of market conditions and the related level of revenues.  Additionally, we require most of our registered representatives to absorb their own overhead and expenses, thereby reducing our share of the fixed costs.

Investment executives in the brokerage industry are traditionally compensated on the basis of set percentages of total commissions and mark-ups generated.  Most brokerage firms bear substantially all of the costs of maintaining their sales forces, including providing office space, sales assistants, telephone service and supplies.  The average commission paid to investment executives in the brokerage industry generally ranges from 30% to 50% of total commissions generated.

Since we require most of our investment executives to absorb their own overhead and expenses, we pay a higher percentage of the net commissions and mark-ups generated by our investment executives, as compared to traditional investment executives in the brokerage industry.  This arrangement also reduces fixed costs and lowers the risk of operational losses for non-production.  Our operations include execution of orders, processing of transactions, internal financial controls and compliance with regulatory and legal requirements.

As of June 30, 2009, we had 165 employees and 753 independent contractors.  Of these totals, 645 were registered representatives.  Persons who have entered into independent contractor agreements are not considered employees for purposes of determining our obligations for federal and state withholding, unemployment and social security taxes.  Our independent contractor arrangements conform to accepted industry practice, and therefore, we do not believe there is a material risk of an adverse determination from the tax authorities that would have a significant effect on our ability to recruit and retain investment executives or on our current operations and financial results of operations.  No employees are covered by collective bargaining agreements, and we believe our relations are good with both our employees and independent contractors.

Our business plan includes the growth of its retail and institutional brokerage business, while recognizing the volatility of the financial markets.  In response to historical market fluctuations, we have periodically adjusted certain business activities, including, proprietary trading and market-making trading.  We believe that consolidation within the industry is inevitable.  Concerns attributable to the volatile market, and increased competition, result in a number of acquisition opportunities being introduced to us.  We are focused on maximizing the profitability of its existing operations, while it continues to seek selective strategic acquisitions.

Periodic reviews of controls are conducted and administrative and operations personnel meet frequently with management to review operating conditions.  Compliance and operations personnel monitor compliance with applicable laws, rules and regulations.

Principal and Agency Transactions

We buy and maintain inventories in equity securities as a "market-maker" for sale of those securities to other dealers and to our customers.  We may also maintain inventories in corporate, government and municipal debt securities for sale to customers.  The level of our market-making trading activities will increase or decrease depending on the relative strength or weakness of the broader markets.  We make markets in over 3,500 micro and small-cap stocks.  We anticipate that we will continue market-making trading activity in the future, which may include companies for which we managed or co-managed a public offering.

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Our trading departments require a commitment of capital.  Most principal transactions place our capital at risk.  Profits and losses are dependent upon the skill of the traders, price movements, trading activity and the size of inventories.  Since our trading activities occasionally may involve speculative and thinly capitalized stocks, including stabilizing the market for securities which we have underwritten, we impose position limits to reduce our potential for loss.

In executing customer orders to buy or sell a security in which we make a market, we may sell to, or purchase from, customers at a price that is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down.  We may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer market price available and charge a commission.  We believe our mark-ups, mark-downs and commissions are competitive based on the services we provide to our customers.

 

In executing customer orders to buy or sell listed and over-the-counter securities in which we do not make a market, we generally act as an agent and charge commissions that we believe are competitive, based on the services we provide to our customers.

Investment Banking

We provide corporate finance and investment banking services, including underwriting the sale of securities to the public and arranging for the private placement of securities with investors.  Our corporate finance operations provide a broad range of financial and corporate advisory services, including mergers and acquisitions, project financing, capital structure and specific financing opportunities.  We also act as an underwriter of equity securities in both initial and secondary public offerings.  Corporate finance revenues will vary depending on the number of private and public offerings completed by us during a particular fiscal year.

Institutional Services

xxxxx

A critical element of our business strategy is to identify institutional quality investments  that  offer  above  market  returns.  We  support  that  mission by providing  institutional  investment managers,  primarily hedge fund managers, a complete  array of services  designed to enhance  portfolio  performance.  Hedge funds represent the fastest growing segment of the money  management  market and by  definition  are focused on achieving  positive  returns for their  investors while  controlling risk. We offer fund managers access to advanced direct market access trading  platforms,  investment  opportunities  and independent  research products that boost return on investment.  Additionally,  we offer fund managers the ability to reduce  their  transaction  costs by offering  them access to our trading desk for illiquid  securities  and automated  trading  systems for their liquid  transactions.  We  have a  mutually  beneficial  relationship  with  our Investment  Banking  Division  ("IBD") as fund managers  looking for  investment opportunities  fund IBD's corporate clients and having  relationships  with fund managers  creates  opportunities  to  increase  the  number  and  quality of IBD clients.

As of  June 30, 2009,  we  employed  or had  contractual  relationships  with approximately 20 people providing  institutional  services,  approximately ten of which provide hedge fund related services.  We service  approximately 200 institutional  customers, of which approximately 85 are hedge funds. For the calendar year ended December 31, 2008, hedge fund related services accounted for approximately $5 million in revenue.

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Internet Strategy

Our www.vfinance.com website  is  available to an audience of  entrepreneurs, corporate  executives  and  private  and  institutional  investors  in over  150 countries with an estimated 35,000 unique visitors monthly. The website provides sales leads to our  investment  banking,  brokerage and  institutional  services divisions, giving visitors convenient access to a variety of financial services, proprietary business development tools, searchable databases and daily news. The website has over 60,000 "opted in"  subscribers  that receive a  newsletter  on private  funding  several  times a week.  The website  features  our database of venture capital firms and angel investors accessible with vSearch, a proprietary web-based data mining tool that allows entrepreneurs to search potential funding sources by different criteria,  including  geography,  amount of funds required, industry,  stage of corporate development or keyword. Much of the information on the website is provided free of charge,  however, we charge nominal fees for the use of  proprietary  search  engines and premium  services  such as our business planning services.

Administration, Operations, Securities Transactions Processing and Customer Accounts

Our Broker Dealer Subsidiaries do not hold any funds or securities for customers.  Instead, they use the services of clearing agents on a fully-disclosed basis.  These clearing agents process all securities  transactions and maintain customer accounts. Customer accounts are protected through the SIPC for up to $500,000, of which coverage for cash balances is limited to $100,000. In addition, all customer accounts carried at NFS are fully protected by an Excess Securities Bond providing  protection for the account's entire net equity (both cash and securities).  The services of our subsidiaries' clearing agents include billing and credit control as well as receipt, custody and delivery of securities.  The clearing agents provide the operational support necessary to process, record and maintain securities transactions for our subsidiary's brokerage activities.  They provide these services to our subsidiary's customers at a total cost that we believe is less than it would cost us to process such transactions on our own.  The clearing agents also lend funds to our subsidiaries' customers through the use of margin credit.  These loans are made to customers on a secured basis, with the clearing agents maintaining collateral in the form of saleable securities, cash or cash equivalents.  Our Broker Dealer Subsidiaries have agreed to indemnify the clearing brokers for losses they incur on these credit arrangements.

Competition

The Company is engaged in a highly competitive business.  With respect to one or more aspects of its business, its competitors include member organizations of the New York Stock Exchange and other registered securities exchanges in the United States and Canada, and members of the FINRA.  Many of these organizations have substantially greater personnel and financial resources and more sales offices than the Company. Discount brokerage firms affiliated with commercial banks provide additional competition, as well as companies that provide electronic on-line trading. In many instances, the Company is also competing directly for customer funds with investment opportunities offered by real estate, insurance, banking, and savings and loans industries.

 

The securities industry has become considerably more concentrated and more competitive since we were founded, as numerous securities firms have either ceased operations or have been acquired by or merged into other firms.  In addition, companies not engaged primarily in the securities business, but with substantial financial resources, have acquired leading securities firms.  These developments have increased competition from firms with greater capital resources than ours.

 

Since the adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift institutions have been able to engage in traditional brokerage and investment banking services, thus increasing competition in the securities industry and potentially increasing the rate of consolidation in the securities industry.

We also compete with other securities firms for successful sales representatives, securities traders and investment bankers.  Competition for qualified employees in the financial services industry is intense. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.  For a further discussion of risks facing the Company, please see “Risk Factors.”

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Government Regulation and Supervision

The securities industry and our Broker Dealer Subsidiaries businesses are subject to extensive regulation by the SEC, FINRA, NFA and state securities regulators and other governmental regulatory authorities.  The principal purpose of these regulations is the protection of customers and the securities markets.  The SEC is the federal agency charged with the administration of the federal securities laws.  Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, such as the FINRA, that adopt rules, subject to approval by the SEC, which govern their members and conduct periodic examinations of member firms' operations. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered.  All of our Broker Dealer Subsidiaries are registered broker-dealers with the SEC and members of the FINRA and are licensed to conduct activities as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico, with National Securities and vFinance Investments also registered in the U.S. Virgin Islands.

In addition, as registered broker-dealers and members of the FINRA, our Broker Dealer Subsidiaries are subject to the SEC's Uniform Net Capital Rule 15c3-1, which is designed to measure the general financial integrity and liquidity of a broker-dealer and requires the maintenance of minimum net capital.  Net capital is defined as the net worth of a broker-dealer subject to certain adjustments.  In computing net capital, various adjustments are made to net worth that exclude assets not readily convertible into cash. Additionally, the regulations require that certain assets, such as a broker-dealer's position in securities, be valued in a conservative manner so as to avoid over-inflation of the broker-dealer's net capital.  National Securities has elected to use the alternative standard method permitted by the rule. This requires that National Securities maintain minimum net capital equal to the greater of $250,000 or a specified amount per security based on the bid price of each security for which National Securities is a market maker.  The alternative method precludes National Securities from having to maintain a ratio of aggregate indebtedness to net capital.  At June 30, 2009, National Securities had net capital of approximately $511,000 which exceeded its requirement by approximately $261,000.

Due to its market maker status, vFinance Investments is required to maintain a minimum net capital of $1,000,000 and EquityStation is required to maintain $100,000.  In addition to the net capital requirements, each of vFinance Investments and EquityStation are required to maintain a ratio of aggregate indebtedness to net capital, as defined, of not more than 15 to 1 (and the rule of the “applicable” exchange also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1).  At June 30, 2009, vFinance Investments had net capital of approximately $1,421,000 which was approximately $421,000 in excess of its required net capital of $1,000,000 and its percentage of aggregate indebtedness to net capital was 471%.  At June 30, 2009, EquityStation had net capital of approximately $211,000 which was approximately $111,000 in excess of its required net capital of $100,000 and its percentage of aggregate indebtedness to net capital was 251%.  Each of the Broker Dealer subsidiaries qualifies under the exemptive provisions of Rule 15c3-3 under Section (k)(2)(ii) of the Rule, as none of them carry the accounts of their customers on their books nor perform custodial functions related to customer securities.

The Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the FINRA Conduct Rules require us to supervise the activities of our investment executives.  As part of providing such supervision, we maintain Written Supervisory Procedures and a Compliance Manual.  Compliance personnel and outside auditors conduct inspections of branch offices periodically to review compliance with the Company's procedures.  A registered principal provides onsite supervision at each of the Company's larger offices.  The other offices (averaging two investment executives per office) are not required by FINRA rules to have a registered principal on site and are therefore supervised by registered principals of the Company.  Designated principals review customer trades to ensure compliance with the FINRA Conduct Rules including mark-up guidelines.

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Application of Laws and Rules to Internet Business and Other Online Services

Due to the  increasing  popularity  and use of the  Internet  and  other  online services, various regulatory authorities are considering laws and/or regulations with respect to the Internet or other online  services  covering  issues such as user privacy,  pricing, content copyrights and quality of services. In addition, the growth and  development  of the market for online  commerce  may prompt more stringent  consumer  protection laws that may impose additional burdens on those companies conducting business online. When the Securities Act, which governs the offer and sale of securities,  and the Exchange Act, which governs,  among other things,  the  operation  of the  securities  markets  and  broker-dealers,  were enacted,  such acts did not  contemplate  the conduct of a  securities  business through the  Internet  and other  online  services.  The recent  increase in the number of complaints by online traders could lead to more stringent  regulations of  online  trading  firms  and  their  practices  by the SEC,  FINRA  and other regulatory agencies.

Although the SEC, in releases and no-action  letters,  has provided  guidance on various  issues related to the offer and sale of securities and the conduct of a securities  business  through the Internet,  the  application of the laws to the conduct of a  securities  business  through the  Internet  continues  to evolve.  Furthermore,  the  applicability to the Internet  and other online  services of existing  laws in  various  jurisdictions  governing  issues  such  as  property ownership,  sales and other taxes and personal privacy is uncertain and may take years to resolve.  Uncertainty regarding these issues may adversely affect the viability and profitability of our business.

As our services are available over the Internet in multiple jurisdictions, and as we have numerous clients residing in these jurisdictions, these jurisdictions may claim that our subsidiaries are required to qualify to do business as a foreign corporation in each such jurisdiction.  While our Broker Dealer Subsidiaries are currently registered as broker-dealers in the jurisdictions described herein, they and our non-broker dealer subsidiaries are qualified to do business as corporations in only a few jurisdictions.  Failure to qualify as an out-of-state or foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify.

Intellectual Property

We  own  the  following   federally   registered   marks:   vFinance,   Inc.(R), vFinance.com,   Inc.(R),   AngelSearch(R),   Direct2Desk(R)   and   Hedge   Fund Accelerator(R).

Employees

At June 30, 2009, we employed the following personnel:

 

		(Employees)				(Independent)
Position		Salaried				Contract				TOTAL
Officers			16				0				16
Administration			83				174				257
Brokers			29				573				602
Traders			25				1				26
Investment Bankers			12				3				15
Lenders			0				2				2
TOTALS			165				753				918

 

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None of our  personnel  are covered by a  collective  bargaining  agreement.  We consider our relationships with our employees to be good. Any future increase in the  number of  employees  will  depend  upon the  growth of our  business.  Our registered  representatives  are required to take  examinations  administered by FINRA and state  authorities  in order to qualify to transact  business  and are required to enter into agreements with us obligating  them,  among other things, to adhere to industry rules and regulations,  our supervisory procedures and not to solicit customers, other employees or brokers in the event of termination.

Seasonality and Backlog

Our business is not subject to significant seasonal fluctuations, and there are no material backlogs in our business.

Research and Development and Environmental Matters

We did not incur any research and development expenses during the last three fiscal years.  We  do  not  incur  any  significant  costs  or  experience  any significant  effects as a result of  compliance  with  federal,  state and local environmental laws.

Description of Properties

The Company owns no real property.  Its corporate headquarters are shared with National Securities and vFinance Investments in leased space in New York, New York and Boca Raton, Florida.  The Company leases office space in Boca Raton, Florida, and through its subsidiaries, the Company leases office space in Chicago, New York, Seattle, Washington and Tinton Falls and Mt. Laurel, New Jersey. Independent contractors individually lease the branch offices that are operated by those independent contractors.

Leases expire at various times through August 2015.  The Company believes the rent at each of its locations is reasonable based on current market rates and conditions.

The Company leases office space in the following locations.  The following chart provides information related to these lease obligations:

 

Office Location		Approximate Square Footage				Approximate Annual Lease Rental			Expiration Date
120 Broadway, New York, NY			30,699			$	1,326,197		8/31/2013
875 N. Michigan Ave., Chicago, IL			1,868				63,512		12/31/2011
1001 Fourth Ave, Seattle, WA			16,421				511,308		6/30/2012
2424 N. Federal Highway, Boca Raton, FL			10,177				173,004		12/31/2013
4000 Rt. 66, Tinton Falls, NJ			3,798				96,852		9/30/2012
3010 N. Military Trail, Boca Raton, FL			2,634				78,540		2/28/2011
131 Gaither Drive, Mount Laurel, NJ			1,400				19,600		9/30/2009
1200 N. Federal Highway, Boca Raton FL			17,089				564,300		8/31/2015
300 Madison Ave, New York, NY			6,484				310,050		4/29/2011

 

We consider the facilities of our company and those of our subsidiaries to be reasonably insured and adequate for the foreseeable needs of our company and its subsidiaries.

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Legal Proceedings 

On March 4, 2008, vFinance received a customer arbitration (FINRA Case No.08-00472) from Donald and Patricia Halfmann, alleging that Jeff Lafferty, a former registered representative of vFinance, misappropriated approximately $110,000 of the Halfmanns' funds via alteration, and that vFinance ought to be liable for an additional $150,000 for other fraudulent and dishonest acts committed after by such representative after he left vFinance.  On August 6, 2009, the arbitrators’ ruled that vFinance Investments must pay for losses, interest, attorneys costs and punitive damages totaling approximately $780,000.  The firm has already made a claim against its fidelity bond carrier, and is completing its analysis as to whether to seek to have the entire arbitration award, or any part of that award, vacated.  

In October, 2008, vFinance and others were named as defendants in a civil action (Case No. 09-CV-9008 United Stated District Court, Southern District of New York), wherein The Pinnacle Fund, L.P. and others alleged securities law violations and other causes of action stemming from a private placement transaction into a public company which vFinance acted as placement agent.  Plaintiffs alleged damages in excess of $12,000,000 in compensatory damages.  vFinance asserted its indemnification rights against a one of the co-defendants, and has thus far received reimbursement of most of the attorneys fees and costs incurred.  The parties have reached a settlement and the action was dismissed with prejudice and vFinance Investments, Inc. was indemnified as to all costs in this matter.

The Company’s subsidiaries are defendants in various arbitrations and administrative proceedings, lawsuits and claims together alleging damages in excess of $11,100,000.   The Company estimates, to the extent that it can, that based on discussions with legal counsel and prior experience, its aggregate liability from these pending actions may be less than $450,000 (exclusive of fees, costs and unspecified punitive damages related to certain claims and inclusive of expected insurance coverage).  These matters arise in the normal course of business.  The Company intends to vigorously defend itself in these actions, and based on discussions with counsel believes that the eventual outcome of these matters will not have a material adverse effect on the Company.  However, the ultimate outcome of these matters cannot be determined at this time.  The amounts related to such matters that are reasonably estimable and which have been accrued at June 30, 2009 and 2008, is $290,000 and $40,000 (inclusive of legal fees and estimated claims), respectively, and have been included in "Accounts Payable, Accrued Expenses and Other Liabilities" in the consolidated statements of financial condition contained in our Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2009 and incorporated herein by reference.  . The Company has included in "Professional fees" litigation and FINRA related expenses of $176,000 and $170,000 for the third quarter of fiscal year 2009 and 2008, respectively, and $460,000 and $660,000 for the first nine months of fiscal year 2009 and 2008, respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For a discussion of our management's analysis of our results of operations and financial condition as of and for each of the years ended September 30, 2006, 2007 and 2008, respectively, and the three months ended December 31 2007 and 2008, please see our Annual report on Form 10-K for the year ended September 30, 2008, as filed with the SEC on December 29, 2008, and our Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, as filed with the SEC on February 17, 2009. The discussion should be read in conjunction with our Audited and Unaudited Condensed Consolidated Financial Statements and the notes related thereto which appear in such filings.

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DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names, ages and positions of our executive officers and directors as of August 17, 2009. Our board of directors is divided into three classes of directors, each class as nearly equal in number as possible but not less than one director. Each director serves for a three-year term, staggered by class so only one class of directors stands for reelection each year. Under our bylaws, each director holds office until the election and qualification of his successor or until his earlier resignation or removal ..

Name	Title	Age	Class	Term  Expires
Mark Goldwasser(1)	Chairman, Chief Executive Officer and Director	51	Class III	2010
Leonard J. Sokolow(2)	Vice Chairman, President and Director	52	Class III	2010
Christopher C. Dewey(3)	Vice Chairman and Director	65	Class I	2011
Marshall S. Geller(1)(3)	Director	70	Class I	2011
Charles R. Modica(2)(3)	Director	62	Class II	2012
Robert W. Lautz, Jr.(2)	Director	61	Class III	2010
Jorge A. Ortega(1)	Director	46	Class II	2012
Non- director executive officers
Alan B. Levin	Chief Financial Officer	45
Brian Friedman	Executive Vice President	38
Jonathan C. Rich	Executive Vice President	40
William L. Groeneveld	President of vFinance Investments and Equity Station and Head Trader at vFinance Investments	44

(1)	Member of Governance Committee

(2)	Member of Audit Committee

(3)	Member of Compensation Committee

All officers serve at the discretion of the board of directors. No family relationships exist among the officers and directors.

Mark Goldwasser has served as a director of National since December 28, 2001.  Mr. Goldwasser joined National in June 2000.  Mr. Goldwasser was named President in August 2000, Chief Executive Officer in December 2001 and Chairman in April 2005.  Prior to joining National, Mr. Goldwasser was the Global High Yield Sales Manager at ING Barings from 1997 to 2000.  From 1995 to 1997, Mr. Goldwasser was the Managing Director of High Yield Sales at Schroders & Co., and from 1991 to 1995, the Vice President of Institutional High Yield Sales at Lazard Freres & Co.  From 1984 to 1991, Mr. Goldwasser served as the Associate Director of Institutional Convertible Sales and Institutional High Yield Sales at Bear Stearns & Co., Inc.  From 1982 to 1984, Mr. Goldwasser was a Floor member of the New York Mercantile Exchange (NYMEX) and the Commodity Center (COMEX).  Mr. Goldwasser received his B.A. with Honors from the University of Capetown in 1979.

 

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Leonard J. Sokolow has been the chairman of the board of directors of vFinance since January 1, 2007, one of its directors since November 8, 1997 and its Chief Executive Officer since November 8, 1999.  Since July 1, 2008, Mr. Sokolow has been a director, Vice Chairman and President of National.  From January 5, 2001 through December 31, 2006, Mr. Sokolow was President of vFinance.  From November 8, 1999 through January 4, 2001, Mr. Sokolow was Vice Chairman of vFinance's board of directors.  Since September 1996, Mr. Sokolow has been President of Union Atlantic LC, a merchant banking and strategic consulting firm specializing domestically and internationally in technology industries that is a wholly owned subsidiary of vFinance.  Union Atlantic LC has been inactive since September 16, 2005.  Since August 1993, Mr. Sokolow has been President of Genesis Partners, Inc., a private financial business-consulting firm. Genesis Partners, Inc. has been inactive since December 31, 2002.  From August 1994 through December 1998, Mr. Sokolow was the Chairman and Chief Executive Officer of the Americas Growth Fund, Inc., a public closed-end management investment company (AGRO.PK).  Mr. Sokolow received his B.A. degree in Economics from the University of Florida in 1977, a J.D. degree from the University of Florida Levin College of Law in 1980 and an LL.M. degree in Taxation from the New York University Graduate School of Law in 1982. Mr. Sokolow is a member of the Florida Bar and a Certified Public Accountant.  He is also a director of Consolidated Water Co. Ltd. (NasdaqGS: CWCO) and Chairman of its audit committee, a position he has held since May 2006.

Marshall S. Geller has served as a director of National since January 11, 2006.  Mr. Geller is Founder and Senior Managing Director of St. Cloud Capital, a Los Angeles based private equity fund formed in December 2001.    Mr. Geller has spent more than 40 years in corporate finance and investment banking, including 21 years as Senior Managing Director for Bear, Stearns & Co., with oversight of all operations in Los Angeles, San Francisco, Chicago, Hong Kong and the Far East.  Currently he serves as a director on the boards of 1st Century Bank N.A. (NasdaqCM:FCTY), California Pizza Kitchen (NasdaqGS: CPKI), GP Strategies Corporation (NYSE.GPX) and Guidance Software, Inc. (NasdaqGM:GUID).  Mr. Geller is also on the Board of Governors of Cedars Sinai Medical Center, Los Angeles and serves on the Dean’s Advisory Council for the College of Business & Economics at California State University, Los Angeles and has been appointed as Commissioner to the Little Hoover Commission, an independent California state oversight agency.  Mr. Geller graduated from California State University, Los Angeles, with a BS in Business Administration.

Christopher C. Dewey has served as a director of National since December 27, 2006.  From 1993 to prior to joining National, Mr. Dewey served as Executive Vice President of Jefferies & Company, Inc.  Prior to joining Jefferies & Company, Inc., Mr. Dewey was a partner of Merrion Group (1990-1993) and Bear Stearns (1979-1990).  Mr. Dewey currently serves as a director of Mako Surgical Corp. (NasdaqGM: MAKO).  Mr. Dewey earned an M.B.A. from the Wharton School in 1987.

 

Charles R. Modica has served as a director of National since July 1, 2008.  He had been a director of vFinance since January 3, 2007.  Mr. Modica has served as Chairman of the Board of Trustees and Chancellor of St. George's University located in Grenada, West Indies, since founding the university as a School of Medicine in 1976. He has served on the Board of Trustees of Barry University, Miami, Florida, since 1983, and as Chairman of such Board of Trustees from 1997 - 2001.  Additionally, he served on the Board of Trustees of Rosarian Academy, West Palm Beach, Florida, from 1995 to 2001, and as Chairman of such Board of Trustees from 1998 to 2001. Mr. Modica also has served on the Board of Trustees of WXEL Public Radio and Television of Florida since 1998. Mr. Modica received his B.S. degree in Biology from Bethany College in 1970 and his J.D. degree from the Delaware Law School in 1975.

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Jorge A. Ortega has served as a director of national since July 1, 2008.  He had been a director of vFinance since June 6, 2007.  Mr. Ortega has served as President of The Jeffrey Group, Inc., a marketing, communications and public relations consulting firm since February 2005.  From October 1991 to January 2005, Mr. Ortega was Managing Director of Burson-Marsteller, LLC, a global public relations and public affairs firm. Mr. Ortega received his B.A. degree in Business Administration from The American University in 1985.

Robert W. Lautz, Jr. has served as a director of National since July 1, 2008.  Mr. Lautz has served as a Managing Director of St. Cloud Capital, a Los Angeles based private equity fund formed, since December 2001.   Mr. Lautz was formerly the Chairman of REO.com, the nations leading Internet-based sales mechanism for bank foreclosed properties. Prior to that he served as the CEO of ListingLink, the original Internet-based residential property multiple listing service. Mr. Lautz formed and was Chairman and CEO of Indenet, Inc., a Nasdaq listed private satellite-based network that delivered digital advertisements and programming to the 3000+ national broadcast and cable television networks. From 1994 to 1997, he built Indenet from a public shell with $4 million in cash to a company with over $50 million in revenue, $120 million in market value and 650 employees in 19 facilities around the world. Mr. Lautz also owned and operated Peerless Capital, a venture capital business which invested in various management led leveraged buyouts and private equity transactions. Mr. Lautz began his career within Citibank's Operating Group where he rose to become the Senior Financial Officer, responsible for all financial functions and strategic planning for his division. He currently serves on the board of directors of Compact Power, Inc., Security Contractor Services, Inc., MEDirect Latino, Inc. (MLTO.PK), and SecureOne Data Solutions, LLC, and as a board observer for XLNT Veterinary Care, Inc. Mr. Lautz earned a Master's degree from the American Graduate School of International Management (Thunderbird), and a BS in Business Administration from Miami University in Oxford, Ohio.

 

Alan B. Levin has been Chief Financial Officer of National since the merger with vFinance, Inc, on July 1, 2008.  Prior to that, he served as Chief Financial Officer of vFinance since January 2007.  Prior to that date, he served as its Interim Chief Financial Officer since July 2006 and its Controller since June 2005.  Prior to joining vFinance, Mr. Levin served as Chief Financial Officer for United Capital Markets, Inc. from September 2000 to January 2005. Mr. Levin has over thirteen years experience in the brokerage industry serving as a Financial and Operations Principal and 23 years experience serving in accounting management roles in various industries.  He received a B.S. degree in Economics with a concentration in Accounting from Southern Connecticut State University in New Haven, Connecticut in 1986.

Brian Friedman has served as an Executive Vice President of National since March 2006.    Mr. Friedman joined National Securities in 1997 as a member of the Corporate Finance Department.  From 1997 until 2001, Mr. Friedman worked primarily in the areas of corporate finance and business development.  From 2001 until present, Mr. Friedman was instrumental in implementing business changes to improve the profitability and business of National.  Mr. Friedman continues to serve as National Securities' Managing Director and Head of Investment Banking.  Prior to joining National, he worked as an associate at Liberty Hampshire, LLC, a boutique investment bank.  Mr. Friedman earned his J.D./M.B.A. in finance at Illinois Institute of Technology's Chicago Kent College of Law and his BA in finance from the University of Iowa.

 

Jonathan C. Rich has been the Executive Vice President and Director of Investment Banking of vFinance Investments since July 1, 2005.   Since the Merger, Mr. Rich is serving as an Executive Vice President of vFinance Investments and National Securities.  From January 15, 2001 through December 30, 2005, Mr. Rich was a Senior Vice President in the Investment Banking division of vFinance Investments.  From April 1, 1997 through January 15, 2001, Mr. Rich was a Vice President and Senior Vice President in the Investment Banking division of First Colonial Securities Group, Inc., a 13 office investment banking and brokerage firm based out of Marlton, New Jersey.  Mr. Rich received his B.A. degree in Political Economy from Tulane University and a J.D./M.B.A. from Fordham University.

William L. Groeneveld was promoted to President of vFinance Investments in September 2008 and has been Head Trader of vFinance Investments since October 2002. Mr. Groeneveld had been vFinance Investments' Trading Manager from October of 2001 to October 2002.  In addition to his Head Trader duties, Mr. Groeneveld also has been President of Equity Station since March 2006.  Prior to joining vFinance, Mr. Groeneveld was a partner of Program Trading Corp., a registered broker-dealer specializing in algorithmic and "black box" trading, where he was Executive Vice President and Head Trader from 1994 until 2001.  Mr. Groeneveld attended West Virginia University majoring in Aerospace Engineering.

 

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Corporate Governance

 

The Company’s business affairs are conducted under the direction of the Board of Directors in accordance with the Delaware Business Corporation Law and the Company’s Certificate of Incorporation and Bylaws. Members of the Board of Directors are informed of the Company’s business through discussions with management, by reviewing materials provided to them and by participating in meetings of the Board of Directors and its committees. Certain corporate governance practices that the Company follows are summarized below.

 

Code of Ethics and Business Conduct

 

We have adopted the National Holdings Corporation Code of Ethics and Business Conduct (the “Code of Conduct”), a code of conduct that applies to our directors, officers and employees. The Code of Conduct was filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and is publicly available on the SEC’s website at www.sec.gov. If we make any substantive amendments to the Code of Conduct or grant any waiver, including any implicit waiver from a provision of the Code of Conduct to our directors or executive officers, we will disclose the nature of such amendment or waiver in a report on Form 8-K.

 

Committees of the Board of Directors

The Board of Directors has an Audit Committee, a Compensation Committee, and a Corporate Governance Committee.

Director Qualifications.  The Board of Directors does not currently have a nominating committee, as the Company believes that having the full Board deliberate the nomination process is in the Company’s best interest.  Board of Director nominations are recommended by the directors.  In making its nominations, the Board of Director identifies candidates who meet the current challenges and needs of the Board of Directors.  In determining whether it is appropriate to add or remove individuals, the Board of Directors will consider issues of judgment, diversity, age, skills, background and experience.  In making such decisions, the Board of Directors considers, among other things, an individual’s business experience, industry experience, financial background and experiences.  The Board of Directors also considers the independence, financial literacy and financial expertise standards required by our Board of Directors committees’ charters and applicable laws, rules and regulations, and the ability of the candidate to devote the time and attention necessary to serve as a director and a committee member.

Identifying and Evaluating Nominees for Director.   In the event that vacancies are anticipated or otherwise arise, the Board of Directors considers various potential candidates for director.  Candidates may come to the attention of the Board through current directors, professional search firms engaged by us, shareholders or other persons. Candidates are evaluated at regular or special meetings of the Board of Directors and may be considered at any point during the year.

 

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The Board of Directors will evaluate recommendations for director nominees submitted by directors, management or qualifying shareholders in the same manner, using the criteria stated above.   All directors and director nominees will submit a completed form of directors’ and officers’ questionnaire as part of the nominating process. The process may also include interviews and additional background and reference checks for non-incumbent nominees, at the discretion of the Board of Directors.

Audit Committee

The Audit Committee consists of Leonard J. Sokolow (Chairman), Robert W. Lautz, Jr. and Charles Modica. Messrs. Lautz and Modica are “independent” as defined in SEC Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 4200 of the Nasdaq Market Place Rules.

On January 22, 2003, the Board adopted a charter for the Audit Committee, as amended and restated on January 27, 2009.  The Audit Committee oversees the Company's financial reporting process on behalf of the Board of Directors. Management is responsible for the Company's internal controls, financial reporting process and compliance with laws and regulations and ethical business standards. The independent public accountants are responsible for performing an independent audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The Audit Committee has the power and authority to engage the independent public accountants, reviews the preparations for and the scope of the audit of the Company’s annual financial statements, reviews drafts of the statements and monitors the functioning of the Company’s accounting and internal control systems through discussions with representatives of management and the independent public accountants.

Under SEC rules, companies are required to disclose whether their audit committees have an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934 and whether that expert is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.  The Board of Directors has determined that Mr. Sokolow is a “financial expert”.  Mr. Sokolow is not considered to “independent.” The Audit Committee meets quarterly and on an on-needed basis.

Compensation Committee

The Company’s Compensation Committee consists of  Charles Modica (Chairman), Marshall S. Geller and Christopher C. Dewey.  Messrs. Modica and Geller are considered to be “independent.”  Mr. Dewey is not considered to be “independent” under SEC rules.  On January 27, 2009, the Compensation Committee adopted an amended and restated Compensation Committee Charter, which contains a detailed description of the committee's duties and responsibilities.  The Compensation Committee meets annually and on an on-needed basis.

Governance Committee

The Governance Committee consists of Marshall S. Geller (Chairman), Mark Goldwasser and Jorge Ortega.  Messrs. Geller and Ortega are “independent” as defined in SEC Rule 10A-3 under the Exchange Act and Rule 4200 of the Nasdaq Market Place rules.  The Governance Committee was created with certain duties and responsibilities, including setting the Company’s trading policy, monitoring Sarbanes-Oxley matters, resolving Board conflicts and/or such other duties and responsibilities as set forth in the Corporate Governance Committee charter. The Governance Committee meets on an on-needed basis.

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COMPENSATION DISCUSSION AND ANALYSIS

For a discussion of our compensation policies and executive compensation paid to our executive officers for the years ended September 30, 2007 and 2008, respectively, please see our Proxy Statement, as filed with the SEC on January 28, 2009, which is hereby incorporated herein by reference. The discussion should be read in conjunction with our Audited Condensed Consolidated Financial Statements and the notes related thereto which appear in our Annual Report on Form 10-K, as filed with the SEC on December 29, 2008, which is hereby incorporated herein by reference.

In connection with the merger with vFinance in July 2008, Messrs. Sokolow, Levin, Rich and Groeneveld became executive officers or key employees of the Company.  The follow is a brief description of the employment terms of such individuals:

Employment Agreements with Mark Goldwasser and Leonard J. Sokolow

In connection with the merger with vFinance, each of Mark Goldwasser and Leonard J. Sokolow entered into a five-year employment agreement with the Company, pursuant to which Mr. Goldwasser is employed by the Company as Chairman of the board of directors and Chief Executive Officer and Mr. Sokolow is employed by the Company as Vice Chairman and President.  Under the terms of the employment agreement, Messrs. Goldwasser and Sokolow each receive an annual base salary of $450,000, which will increase 5% per year, and a non-accountable automobile expense allowance of $1,000 per month.  In addition, they will each be entitled to receive on a fiscal year basis a cash bonus determined in the discretion of the Compensation Committee of the board of directors of the Company of not less than: (i) $225,000, (ii) 5% of the Company’s fiscal year consolidated net income in excess of $4.5 million, up to 100% of the difference between their then current base salaries and $225,000 and (iii) such additional bonuses as the board of directors of the Company may determine based upon the Board’s assessment of their performance in the following areas:  revenue growth of the Company, new business development, investor relations, communications with the board of directors and special projects as assigned by the board of directors.

The employment agreements terminate upon the earliest to occur of: (i) the death of the employee; (ii) a termination by the Company by reason of the disability of the employee; (iii) a termination by the Company with or without cause; (iv) a termination by the employee with or without good reason, (v) upon a Change of Control or (vi) the non-renewal of the agreement.  Upon the termination due to the death or disability of the employee, by the Company without cause, by the employee with good reason, upon a Change of Control or upon the expiration of the employment agreement if the Company or the employee refuses to extend the term of the employment agreement, Messrs. Goldwasser and Sokolow will each be entitled to: (i) any accrued but unpaid salary or bonus or unreimbursed expenses; (ii) any bonus payable for the portion of the fiscal year during which the termination occurs; (iii) 100% of the employee’s base salary (150% in the event of termination by the Company without cause or by the employee with good reason); (iv) the continuation of health benefits until the earlier of (a) 18 months after termination and (b) the date the employee accepts other employment; and (v) all unvested options granted pursuant to the employment agreements will become immediately vested and be exercisable for a period of nine months.

Pursuant to the employment agreements, Messrs. Goldwasser and Sokolow were each granted non-qualified stock options to purchase 1,000,000 shares of the Company’s common stock at a purchase price of $1.64 (equal to the average of the 10-day closing market price of the Company’s Common Stock prior to the Effective Date of the Merger).  The options vest and become exercisable as to 25% of the shares underlying the options on the Effective Date and 25% thereafter on the second, third and fourth anniversaries of the date of grant.  The options expire seven years from the Effective Date.

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Employment Agreement with Alan B. Levin

In connection with the merger with vFinance, Alan B. Levin, the Chief Financial Officer of vFinance, entered into a one-year employment agreement with the Company, pursuant to which he is employed as the Chief Financial Officer.  Such agreement automatically renewed for an additional one-year term in July 2009.  Under the terms of the agreement, Mr. Levin receives an annual base salary of $180,000.  In addition, he will be entitled to receive an annual cash bonus determined in the discretion of the Compensation Committee of the board of directors of the Company based upon its assessment of Mr. Levin’s performance in the following areas:  revenue, net income and revenue growth of the Company, new business development, investor relations, communications with the board of directors and other factors including, without limitation, special projects as assigned by the President or the board of directors of the Company.

Employment of Messrs. Groeneveld and Rich

William L. Groeneveld currently serves as Chief Executive Officer and President and Head Trader of vFinance Investments and President of EquityStation. Jonathan C. Rich currently serves as Executive Vice President and Director of Investment Banking of vFinance Investments and National Securities.  Neither of Messrs. Groeneveld or Rich have an employment agreement with the Company.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of August 17, 2009 with respect to each director, each of the named executive officers as defined in Item 402(a) (3) of Regulation S-K and all directors and executive officers of the Company as a group, and to the persons known by us to be the beneficial owner of more than five percent of any class of our voting securities.

NAME OF OFFICER, DIRECTOR, STOCKHOLDER AND ADDRESS	NUMBER OF SHARES OWNED	PERCENTAGE OF SHARES OUTSTANDING (1)
Marshall S. Geller 10866 Wilshire Boulevard, Suite, 1450 Los Angeles, CA 90024	6,651,383 (2)	30.6%
Mark Goldwasser 120 Broadway, 27th Floor New York, NY  10271	1,999,358 (3)	10.5%
Leonard J. Sokolow 3010 North Military Trail, Suite 300 Boca Raton, FL  33431	1,629,123 (4)	9.1%
Christopher C. Dewey 120 Broadway, 27th Floor New York, NY  10271	725,674 (5)	4.2%
Charles R. Modica 3010 North Military Trail, Suite 300 Boca Raton, FL  33431	48,000 (6)	*
Jorge A. Ortega 3010 North Military Trail, Suite 300 Boca Raton, FL  33431	48,000 (6)	*
Robert W. Lautz, Jr. 10866 Wilshire Boulevard, Suite 1450 Los Angeles, CA 90024	20,000 (7)	*
Alan B. Levin 3010 North Military Trail, Suite 300 Boca Raton, FL  33431	183,150 (8)	1.1%
Brian Friedman 875 N. Michigan Avenue, Suite 1560 Chicago, IL  60611	183,750 (9)	1.1%
Jonathan Rich 3010 North Military Trail, Suite 300 Boca Raton, FL  33431	113,400 (10)	*

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NAME OF OFFICER, DIRECTOR, STOCKHOLDER AND ADDRESS	NUMBER OF SHARES OWNED	PERCENTAGE OF SHARES OUTSTANDING (1)
William Groeneveld 3010 North Military Trail Suite 300 Boca Raton, FL  33431	91,525 (11)	*
Triage Partners LLC 90 Park Avenue, 39th Floor New York, NY  10016	1,178,894 (12)	6.5%
Strategic Turnaround Equity Partners, LP c/o Galloway Capital Management, LLC 720 Fifth Avenue, 10th FL New York, NY 10019	880,625 (13)	5.1%
Bedford Oak Advisors, LLC 100 South Bedford Road Mt. Kisco, NY  10549	1,154,511 (14)	6.7%
DellaCamera Capital 200 Park Avenue Suite 3300 New York, NY  10166	988,142 (15)	5.7%
Timothy E. Mahoney 68 Cayman Place Palm Beach Gardens, FL	963,201 (16)	5.5%
All Officers and Directors as a group (11) persons	11,693,363 (17)	46.0%

_____________________

* Indicates less than 1%

(1)

The information regarding beneficial ownership of our common stock has been presented in accordance with the rules of the SEC.  Under these rules, a person may be deemed to beneficially own any shares as to which such person, directly or indirectly, has or shares voting power or investment power and also any shares of common stock as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right.  The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (a) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (b) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire within 60 days.  For purposes of calculating the beneficial ownership percentages set forth above, the total number of shares of our common stock deemed to be outstanding as of August 17, 2009 was 17,150,704.  As used in this prospectus, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares.  Except as noted, each stockholder listed has sole voting and investment power with respect to the shares shown as being beneficially owned by such stockholder.

(2)

Includes (i) 317,500 shares issuable upon exercise of warrants owned indirectly through St. Cloud Capital Partners, L.P., (ii) 843,750 shares issuable upon exercise of warrants and 3,375,000 shares issuable upon conversion of notes owned indirectly through St. Cloud Capital Partners II, L.P. and (ii) 50,000 shares issuable upon exercise of vested stock options.  Mr. Geller disclaims beneficial ownership of the securities owned by St. Cloud Capital Partners, L.P. and St. Cloud Capital Partners II, L.P.

 

 

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(3)	Includes 979,840 shares issuable upon conversion of 12,248 shares of Series A preferred stock owned indirectly through One Clark LLC, 20,425 shares owned by direct family members and 947,625 shares issuable upon exercise of vested stock options.

(4)	Includes (i) 31,110 shares held by or on behalf of Mr. Sokolow’s sons, (ii) 1,763 shares held by Mr. Sokolow and his wife as joint tenants and (iii) 797,500 shares issuable upon exercise of vested stock options.  Mr. Sokolow disclaims beneficial ownership of the shares held by his sons.

(5)	Includes 25,000 shares owned by Mr. Dewey's daughters, 125,000 shares issuable upon exercise of warrants and 202,500 shares issuable upon exercise of vested stock options.  Mr. Dewey disclaims beneficial ownership of the securities owned by his daughters.

(6)	Includes 48,000 shares issuable upon exercise of vested stock options.

(7)	Includes 20,000 shares issuable upon exercise of vested stock options.

(8)	Includes 167,650 shares issuable upon exercise of vested stock options.

(9)	Includes 173,750 shares issuable upon exercise of vested stock options.

(10)	Includes 113,400 shares issuable upon exercise of vested stock options.

(11)	Includes 84,525 shares issuable upon exercise of vested stock options.

(12)	Includes 979,920 shares issuable upon conversion of 12,249 shares of Series A preferred stock.

(13)	Includes shares owned directly and indirectly as provided in information filed with the SEC in a Schedule 13D/A dated September 12, 2007.

(14)	Includes shares owned directly and indirectly as provided in information filed with the SEC in a Schedule 13G filed February 15, 2008, and includes 62,500 shares issuable upon exercise of warrants.

(15)	Includes shares owned directly and indirectly as provided in information filed with the SEC in a Schedule 13G filed on February 17, 2009, which includes 225,920 shares issuable upon conversion of 2,469 shares of Series A preferred stock.

(16)	Includes 210,000 shares issuable upon exercise of vested stock options and 304,500 shares of common stock issued in the name of Highland Group Holdings, Inc.

(17)	Includes 979,840 shares issuable upon conversion of 12,248 shares of Series A Preferred Stock, 2,652,950 shares issuable upon exercise of vested stock options, 3,375,000 shares issuable upon conversion of convertible notes and 1,286,250 shares issuable upon exercise of warrants.

 

39

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Item 13. Other Expenses of Issuance and Distribution.

Set forth below are the expenses expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the exception of the Securities and Exchange Commission registration fee, the amounts set forth below are estimates.

 

		Amount
SEC Registration Fee		$   479
Printing Expenses		2,500
Accounting Fees and Expenses		5,000
Legal Fees and Expenses		15,000
Miscellaneous		2,021
Total		$25,000

All of the above fees are estimates.  All of the above expenses will be borne by the Registrant.

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on this 24th day of August, 2009.

NATIONAL HOLDINGS CORPORATION

 

By: /s/ Mark Goldwasser

Mark Goldwasser

Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons on National's behalf and in the capacities and on the dates indicated.

 

Name		Title		Date
/s/ Mark Goldwasser Mark Goldwasser		Chairman, Chief Executive Officer and  Director (principal executive officer)		August 24, 2009
/s/ Leonard J. Sokolow  * Leonard J. Sokolow		Vice Chairman of the Board, President and Director		August 24, 2009
/s/ Christopher C. Dewey * Christopher Dewey		Vice Chairman of the Board and Director		August 24, 2009
/s/ Marshall S. Geller  * Marshall S. Geller		Director		August 24, 2009
/s/ Robert W. Lautz, Jr. * Robert W. Lautz, Jr.		Director		August 24, 2009
/s/ Jorge A. Ortega * Jorge A. Ortega		Director		August 24, 2009
Charles R. Modica		Director		August 24, 2009
/s/ Alan B. Levin Alan B. Levin		Chief Financial Officer (principal accounting and financial officer)		August 24, 2009
* By: /s/ Mark Goldwasser       Mark Goldwasser, Attorney-in-fact ** ** By authority of the power of attorney filed as Exhibit 24.1 hereto.

II-8

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EXHIBIT INDEX

23.1*

Consent of Sherb & Co., LLP

23.2*

Consent of Littman Krooks LLP, included in the opinion filed as Exhibit 5.1.

24.1**

Power of Attorney, included in the signature page of this Registration Statement.

*     Filed herewith

**   Previously Filed