<PAGE>
  1


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

     |X|  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1996
                                       OR
     |_|  TRANSITION REPORT  PURSUANT TO SECTION 13 or 15(d) OF THE
          SECURITIES EXCHANGE  ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _____________ to ________________

                           Commission File No. 0-6729

                          FIRST MONTAUK FINANCIAL CORP.
             (Exact name of registrant as specified in its charter)

       New Jersey                                              22-1737915
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

328 Newman Springs Road, Red Bank, NJ                             07701
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code           (908) 842-4700

Securities registered pursuant to Section 12(b) of the Act:

                                                    Name of each exchange on
         Title of each class                            which registered

                 None

Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value
                                (Title of class)
                            [Cover Page 1 of 2 Pages]

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  2



Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(D) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The issuer's revenues for its most recent fiscal year:  $35,089,688.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the price at which the stock was sold,  or the average bid and
asked prices of such stock, as of April 11, 1997 was $18,999,181.

The number of shares of Common Stock outstanding, as of April 11, 1997 was
8,915,179.

DOCUMENTS INCORPORATED BY REFERENCE

Not Applicable





















                            [Cover Page 2 of 2 Pages]
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  3

                                     PART I
Item 1.   Business

Introduction

     First Montauk Financial Corp. ("FMFC") is a holding company, which, through
its  wholly-owned  subsidiary,  First  Montauk  Securities  Corp.  ("FMSC"),  is
primarily  engaged in the  operation  of an  investment  banking and  securities
brokerage  firm.  FMFC also sells  insurance  products  through  its  subsidiary
Montauk Insurance  Services,  Inc. ("MISI") and equipment leases through Montauk
Advisors,  Inc. ("MAI"). FMSC is a broker-dealer  registered with the Securities
and  Exchange  Commission  ("SEC"),  a member  of the  National  Association  of
Securities  Dealers  Regulation,   Inc.  ("NASD"),   the  Municipal   Securities
Rulemaking Board ("MSRB"),  and the Securities Investor  Protection  Corporation
("SIPC").  FMSC's  business  activities  consist  primarily  of retail sales and
trading of listed and  unlisted  equity and  fixed-income  securities;  sales of
government, municipal and corporate securities; options; commissions earned from
individual  and  institutional  securities   transactions;   and  market  making
activities. FMSC also provides investment banking activities such as private and
public securities  offerings.  In fiscal 1995, FMSC become a registered  advisor
under the Investment Advisors Act of 1940 and began offering investment advisory
services.

         FMSC is currently licensed to conduct its broker-dealer  business in 49
states and the District of Columbia.  FMSC  maintains  approximately  117 branch
and/or satellite offices, all of which are maintained by affiliates. The Company
has  approximately  356 registered  representatives  and services  approximately
25,000 retail customer accounts.

         FMSC's  primary  method of operation is through its affiliate  program.
The affiliate program is designed to attract  experienced  brokers with existing
clientele who desire to operate their own office.  It is through this  affiliate
program that FMSC has expanded its customer base and retail activities by adding
brokers with established clientele. In order to become an affiliate of FMSC, the
registered  representative must enter into an affiliate agreement with FMSC. The
Company  believes  that one of the  primary  reasons  its  affiliate  program is
attractive to such individuals is because the affiliate arrangement entitles the
affiliate  representative  to obtain a  significantly  higher  percentage of the
commissions  generated  by his  sales  than a  registered  representative  would
normally receive. Based on the experience of FMSC's management,  and information
derived from professional  associations,  FMSC believes that standard commission
payout rates for  registered  representatives  of retail firms is  approximately
40%-50%,  whereas affiliates receive commissions of approximately  80%-85% if as
an affiliate  representative.  The terms of the affiliate agreement provide that
the  affiliate  establishes  his own  office and is solely  responsible  for the
payment of all expenses  associated  with the  operation  of the branch  office,
including rent, utilities,  furniture,  equipment, stock quotation machines, and
general office supplies. All securities  transactions are cleared through FMSC's
clearing firm on a fully disclosed basis. FMSC receives a percentage  (generally
15%-20% after deduction of clearing costs) of the affiliate's  commissions  with
no operating  expenses directly  attributable to the maintenance of the specific
affiliate office.

     FMSC has also expanded its general securities business by adding registered
representatives  to its main corporate office.  FMSC is continuously  seeking to
establish  additional branch offices at sites and locations to be selected,  the
timing and location of which will be based upon prevailing business and economic
conditions.

     In 1991,  MISI was formed for the purpose of offering and selling  variable
annuity,  variable  life  as well  as  traditional  life  and  health  insurance
products. Currently, MISI is licensed in the states of Alabama, Alaska, Arizona,
California,   Connecticut,   Delaware,   Florida,  Georgia,  Illinois,  Indiana,
Kentucky,  Maine, Maryland, New Jersey, New York, North Carolina,  Pennsylvania,
Rhode Island, South Carolina,  Virginia,  Washington and Wisconsin. MISI derives
revenue from  insurance-related  products and services from the existing base of
FMSC's Registered  Representatives  who are insurance  licensed.  In fiscal year
1996 MISI earned $523,868 in gross commissions from the sale of insurance.

         In 1993,  the  Company  formed  Montauk  Advisors,  Inc.  ("MAI")  as a
wholly-owned subsidiary.  MAI engages in the sale of equipment leasing contracts
as agent for various leasing companies.  The equipment financed to date includes
copiers,  facsimile machines and other business machines.  These leases are sold
to various  customers  from which MAI derives a commission.  In fiscal year 1996
MAI earned $373,216 in commissions from the sale of leases.
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  4

         FMFC and its  subsidiaries  (with the  exception of MISI) each maintain
their  principal  executive  offices at Parkway  109 Office  Center,  328 Newman
Springs  Road,  Red Bank,  New Jersey  07701,  telephone  (908)  842-4700.  MISI
maintains its principal offices at One Mack Centre Drive, Paramus, New Jersey.

         In early 1995, FMSC became  registered with the Securities and Exchange
Commission as an Investment  Advisor under the  Investment  Advisors Act of 1946
for the purpose of providing  investment advisory services and fee-based managed
accounts  to clients  of FMSC.  Currently,  FMSC is  licensed  as an  Investment
Advisor in the  States of Alaska,  Arizona,  California,  Connecticut,  Florida,
Hawaii, Indiana, New Jersey, New York, North Carolina, Pennsylvania,  Texas, and
West  Virginia.  Although to date FMSC has  received  minimal  revenue  from its
advisory  services,   management's  goal  is  to  derive  revenue  by  providing
investment  advisory  services  to  FMSC's  existing  client  base as well as to
additional clientele seeking fee-based managed accounts.

Description of Business

         FMSC is a New Jersey based broker-dealer registered with the Securities
and Exchange Commission,  and a member of the National Association of Securities
Dealers,  Inc.,  the Municipal  Securities  Rule Making Board and the Securities
Investor  Protection  Corporation.  Its business  activities  include  sales and
trading  of  listed  and  OTC  equity  and  fixed-income  securities;  sales  of
government, municipal and corporate securities; options; commissions earned from
individual  and   institutional   securities   transactions  and  market  making
activities.  FMSC is  registered  to conduct  its  business in 49 states and the
District of Columbia.

         As of March 24, 1997, FMSC operated 117 affiliate  branch and satellite
offices in addition to its main office  located in Red Bank,  New Jersey.  There
are approximately 356 registered representatives in these offices, as well as 55
support  staff  employees in the main  office.  Affiliate  branch and  satellite
offices are located in the following 23 states:


                     STATE         AFFILIATE BRANCH/SATELLITE OFFICE
                  Alaska                             1
                  Arizona                            2
                  California                         8
                  Connecticut                        3
                  Florida                            9
                  Georgia                            1
                  Illinois                           2
                  Indiana                            1
                  Minnesota                          1
                  Mississippi                        1
                  New Hampshire                      2
                  North Carolina                     8
                  New Jersey                         21
                  Nevada                             2
                  New York                           24
                  Ohio                               3
                  Pennsylvania                       12
                  Rhode Island                       2
                  South Carolina                     1
                  Texas                              2
                  Virginia                           4
                  Washington                         5
                  West Virginia                      2

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  5



FMSC transacts business in the following areas in:

Equities:
        Listed                              24%
         Over-The-Counter                   45%
Municipal, Government                        2%
Corporate Bonds                              2%
Unit Investment Truss                        1%
Mutual Funds                                18%
Options                                      1%
Insurance*                                   7%


*    A  portion  of the  insurance  commission  is  payable  to  Montau
     Insurance Services, Inc. while variable annuity commission is payable
     through FMSC.

         Approximately  85% of the  customers  accounts are cash  accounts.  The
balance of the  accounts  consists  of margin,  Individual  Retirement  Accounts
("IRA") and KEOGH accounts.

         Approximately 50% of the over-the-counter equities and 90% of the fixed
income  transactions  are  transacted  on a  principal  basis,  with the balance
representing agency transactions.

         The following table reflects FMSC's various sources of revenues and the
percentage  of total  revenues  that  each  source  represents  for the  periods
indicated.  Revenues  from agency  transactions  in  securities  for  individual
customers  of FMSC are  shown as  commissions.  Revenues  from  transactions  in
securities for individual customers where FMSC acted in a principal capacity are
reflected in principal  transactions.  Also reflected in principal  transactions
are trading profits from market making and other trading activities.

                                                         Period
                                               ----------------------------
                                               Year Ended December 31, 1996
                                               ----------------------------
                                               Amount               Percent
                                               ------               -------
Commissions:
Equity Securities,
         Options and Mutual Funds......      $24,855,796              72.9%
Principal Transactions:
         Equity Securities,
         Municipal, Government and
         Corporate Bonds...............      $ 7,660,700              22.4%

Interest and Other Income (1)......          $   951,283               2.8%

Investment Banking (2).............          $   634,329               1.9%

Total Revenues ....................          $34,102,108               100%

--------------------

1.       "Other Income" consists primarily of rental income and dividends.

2.        Investment  banking revenues  consists of selling  concessions and
          other income from syndicate activities and placement agent fees.

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  6


Registered Representative Recruitment and
Registered Representative Affiliate Program

         FMSC derives its  customer  base from its  registered  representatives'
accounts.  FMSC's  goal  is  to  recruit  well-trained,  experienced  registered
representatives  who require  little  training  and who have  proven  production
records with an established customer account base.

         Since all registered  representatives  are paid on a commission  earned
basis,  the costs  associated with the hiring of new registered  representatives
are limited to general expenses consisting of orientation materials,  compliance
manuals and operational information.

     Competition among securities  brokerages and registered  representatives is
keen. Larger, more established securities firms with greater financial resources
possess an  advantage  in competing  with FMSC and  attracting  representatives,
clients and investment dollars. (See "Business - Competition".)

The Affiliate Program

     FMSC's affiliate program is designed to attract professionals in all phases
of the  financial  services  industry  to  affiliate  with  FMSC  as  registered
representatives. Management believes that the affiliate program is attractive to
established  brokers  because  it  combines  the  flexibility  of  operating  an
independent  office  with the  structure  and  support of an  established  firm.
Currently  FMSC  has  117  locations  operated  by  registered   representatives
participating  in the affiliate  program.  It is through this affiliate  program
that FMSC seeks to continue to expand its customer base and retail activities by
adding brokers with established clientele.

     The program's goal is to recruit securities brokers with a sufficient level
of  commission  brokerage  business to enable the  individual  to  independently
support his own office. The program also enables financial professionals such as
insurance  agents,  real estate  brokers,  financial  planners,  tax preparation
experts and  accountants who already provide some type of financial or brokerage
services to their clients, to become a registered representative with FMSC. This
is intended to allow the professional to offer securities  products and services
to their clients and insurance  products  through  MISI.  Affiliates  operate in
their own office or location  which  function as a registered  branch  office or
satellite  location of FMSC. A location is considered a registered  branch if it
contains three or more registered individuals, and indicates the location as one
in which securities business is being offered to the public. A registered branch
is designated as either an Office of Supervisory  Jurisdiction  (OSJ) or non-OSJ
branch office  depending on whether the office  contains a registered  principal
responsible for the supervision of registered  representatives at that location.
A satellite  location is one in which less than three individuals are conducting
business,  does not  contain  a  registered  principal,  and  does not  indicate
publicly that it is a location  where  securities  business is being  conducted.
Registered  representatives  within a satellite  location  are  supervised  by a
registered principal at an OSJ or FMSC's headquarters.

     In each case,  the affiliate is solely  responsible  for the payment of all
expenses  associated with the operation of his office location,  including rent,
utilities,  furniture,  equipment, stock quotation machines, supplies etc. Under
the program,  the affiliate  receives a significantly  higher  percentage of the
commissions  generated  by his  sales  than a  registered  representative  would
normally receive. Based on the experience of FMSC's management,  and information
derived from professional  associations,  FMSC believes that standard commission
payout rates for registered representatives of retail firms is approximately 40%
to 50%,  whereas  FMSC pays  affiliates  approximately  80% to 85%. An affiliate
establishes  his own office  and is solely  responsible  for the  payment of all
expenses associated with the operation of his office, including rent, utilities,
furniture, equipment, stock quotation machines, and general office supplies. All
securities   transactions   are  cleared  through  FMSC's  clearing  firm  on  a
fully-disclosed  basis.  FMSC receives a flat  percentage  (generally 15% to 20%
after  deduction  of  clearing  costs) of the  affiliate's  commissions  with no
operating  expenses  directly  attributable  to the  maintenance of the specific
affiliate office. (See "Administration,  Operations,  Transaction Processing and
Customer Accounts").

     For FMSC's  percentage of commission  obtained,  FMSC provides full support
services to each of the affiliates including listed stock and options execution,
over-the-counter stock trading,  research,  compliance,  supervision and related
services. Currently,  Schroder, Wertheim & Co., Inc. transacts clearing services
for FMSC,  and E.D. & F Man  International  Securities,  Inc. and others provide
execution  services.
<PAGE>
  7


     Each  affiliate  is required to obtain and maintain in good  standing  each
license required by the SEC and NASD to conduct the type of securities  business
in which the  affiliate  will engage and to  register  in the various  states in
which he intends to service  customers.  If the  affiliate  wishes to expand his
operation,  he controls the hiring and immediate  supervision  of any additional
registered representatives subject to FMSC's policies and procedures and overall
approval  and  supervision.  If the  affiliate  office  contains  three  or more
registered  representatives,  the affiliate must obtain a principal's license to
insure  proper  supervision.  The office will then be designated as an Office of
Supervisory Jurisdiction.

     FMSC is ultimately responsible for supervising each and every affiliate and
related  registered  representative.  FMSC can incur substantial  liability from
improper  actions  of  any  of  the  affiliate   representatives.   (See  "Legal
Proceedings"). Effective January 1, 1996, the Company implemented a professional
liability  errors and omissions  insurance  program which provides  coverage for
actions taken by the Company's registered  representatives,  employees and other
agents for actions in connection  with the purchase and sale of  securities  and
the administration of individual retirement plans. The program provides coverage
for each incident up to $1,000,000 with an aggregate policy limit of $5,000,000,
with a  deductible  per  incident of $25,000,  the first  $5,000 of which is the
responsibility of individual representatives.  Each registered representative is
assessed  a  premium  which is  payable  monthly.  The  policy  excludes  claims
involving the sale of low-priced or "penny stocks" or partnerships,  criminal or
deliberate  fraudulent acts,  defamation and company sponsored  employee benefit
plans, as well as other exclusions.

     There are other,  larger  broker-dealers  with greater resources than FMSC,
engaged in similar programs with whom FMSC must compete.  These companies,  some
national in scope,  compete with FMSC to attract  registered  representatives as
well as  clients.  Some of these  companies  are larger,  well-known  firms with
substantially  greater  financial and other  resources than those of FMSC.  (See
"Business-Competition".)

Retail Commission Business

         All of FMSC's revenues are currently, and will in the
future,  be derived  from  commissions,  concessions,  mark-ups  and  mark-downs
(collectively,   "Commissions")   from  retail  (individual)  and  institutional
customers on brokerage  transactions  in  exchange-listed  and  over-the-counter
equity and fixed  income  securities.  Commissions  are  charged to clients  for
executing  buy and sell  orders of  securities.  When a buy or sell  order for a
security  in which  FMSC  makes a  market  or has  inventory,  FMSC may act as a
principal and purchase from, or sell to, its customers the desired security on a
disclosed  basis  at a  price  set  in  accordance  with  applicable  securities
regulations.

Investment Banking Activities

         The Company's  investment banking revenues are principally derived from
participation in public  offerings of equity  securities and acting as placement
agent in the private placement of securities. For the fiscal year ended December
31, 1996, investment banking activities, including sales concessions,  accounted
for approximately 2% of the Company's revenues.

         To date, the Company has not derived  significant or material  revenues
from its investment banking services.  Through its relationships with investment
banking  clients,  the Company intends to expand this business.  There can be no
assurance  that the Company will be  successful  in these efforts or that future
efforts will result in significant  revenue or increased  profit to the Company.
The  corporate  finance  function  of the  Company  seeks to raise  capital  for
corporations in a variety of businesses. In June, 1994, FMSC completed its first
underwriting of an initial public offering for $5,125,000 of the common stock of
Manhattan  Bagel Company,  Inc. The Manhattan Bagel offering was the only public
offering  to date in which FMSC  acted as the  managing  underwriter.  FMSC also
participates in other  underwritings  of corporate  securities as a syndicate or
selling group member.  FMSC  participated as a syndicate or selling group member
in approximately 78 offerings in fiscal 1996.

         Potential underwriting  opportunities in which FMSC may act as managing
or  co-managing  underwriter  may be  presented by FMSC's  officers,  directors,
employees and professional  advisors. The Company has utilized and will continue
to utilize the services of outside  consultants to assist the officers in making
corporate finance decisions.
<PAGE>
  8

         Participation as a managing underwriter or in an underwriting syndicate
or a selling group involves both economic and regulatory  risks.  An underwriter
may incur  losses if it is unable to resell the  securities  it is  committed to
purchase,  or if it is  forced  to  liquidate  its  commitment  at less than the
purchase price. In addition,  under federal securities law, other laws and court
decisions  with respect to  underwriters'  liabilities  and  limitations  on the
indemnification  of  underwriters  by  issuers,  an  underwriter  is  subject to
substantial potential liability for misstatements or omissions of material facts
in prospectuses and other communications with respect to such offerings.  Acting
as a  managing  underwriter  increases  these  risks.  Underwriting  commitments
constitute a charge against net capital and FMSC's ability to make  underwriting
commitments  may be limited by the  requirement  that it must at all times be in
compliance with the Net Capital Rule. See "Net Capital Requirements".

         FMSC also acted as a placement agent in three private placements during
the  fiscal  year  ended  December  31,  1996.  FMSC is  continuously  reviewing
potential private offerings for future participation. See "Certain Relationships
and Related Transactions".

         Principal Transactions

         Market-Making.  FMSC acts as both  principal and agent in the execution
of its customers' orders in the  over-the-counter  market.  FMSC buys, sells and
maintains  an  inventory  of various  securities  in order to "make a market" in
those securities.  In executing customer orders for over-the-counter  securities
in which it does not make a market, the Company charges a commission and acts as
agent between its customers and another firm which is a  market-maker.  However,
when the buy or sell  order is in a security  in which FMSC makes a market,  the
Company may act as principal and purchase from or sell to its customers  plus or
minus a mark-up or mark-down in accordance with applicable regulations.

         Trading  profits  or losses  depend  upon the  skills of the  employees
engaged in  market-making  activities,  the capital  allocated  to  positions in
securities and the general trend of prices in the securities markets. Trading as
principal  requires the  commitment  of capital and creates an  opportunity  for
profits and risk of loss due to market fluctuations. FMSC may take both long and
short positions in those securities in which it makes a market.

         Investment Activities

         FMSC also seeks to realize  investment or trading gains by  purchasing,
selling and holding  securities for its own account.  FMSC is required to commit
the capital necessary for use in its investment  activities.  The amount of such
capital to be committed at any  particular  time will vary  according to market,
economic  and other  factors,  including  the  other  aspects  of the  Company's
business.  Additionally,  in connection with its investment banking  activities,
FMSC from time to time receives warrants which entitle it to purchase securities
of the  corporate  issuers  for which FMSC raises  capital or provides  advisory
services. These warrants, which are placed in FMSC's investment account, vary in
value based upon the market price,  if any, of the  underlying  security and the
terms of the warrant.

         Research Services

         Securities  research is intended to play a  significant  role in FMSC's
investment banking business as a service to its customers.  Research  activities
include the review and analysis of general  market  conditions,  industries  and
specific companies; the issuance of in-depth written reports on companies,  with
recommendations  of specific  action to buy,  sell or hold;  the  furnishing  of
information to retail and  institutional  customers;  and responses to inquiries
from customers and account executives.  Research services are directed primarily
at identifying attractive investment opportunities in small, medium and emerging
growth companies, and in special situation investments.  FMSC presently conducts
a limited  amount of research  activities  directly  through a research  analyst
employed by it.  These  direct  research  activities  principally  relate to the
preparation   of  specialized   reports  on  selected   securities  for  general
distribution  to FMSC's  retail  customers,  and/or  research  assistance to the
Company's  retail sales force.  The Company  also  obtains  additional  research
reports  and  information   from  various  other  sources,   including   through
subscription  from Solomon  Brothers,  Schroder  Wertheim  and  Deutsche  Morgan
Greenfell/C.J. Lawrence.

         Investment Advisory Services

         During  fiscal  1995,  FMSC  formed a division  to  provide  investment
advisory  services for its client and offers  professionally  managed  accounts,
discretion portfolio management services, private client account management, and
limited financial planning services to its clients on a fee basis.
<PAGE>
  9


     Many of FMSC's  competitors  have  similar  programs  in place.  Management
believes that the ability to offer these additional services will assist FMSC in
effectively  competing for qualified  registered  representatives  who's clients
desire professionally managed accounts.

Competition

         FMSC encounters intense  competition in all aspects of its business and
competes  directly  with many  other  securities  firms for  clients  as well as
registered representatives. A significant number of such competitors offer their
customers a broader  range of financial  services,  have  substantially  greater
resources  and may have  greater  operating  efficiencies.  Retail firms such as
Merrill Lynch Pierce Fenner & Smith  Incorporated,  Smith Barney, Inc. and Paine
Webber Incorporated  dominate the industry;  however,  the Company also competes
with  numerous  regional and local firms.  In addition,  a number of firms offer
discount  brokerage services to individual retail customers and generally effect
transactions  at lower  commission  rates (as low as 50% of standard  commission
rates) on an "execution  only" basis  without  offering  other  services such as
investment  recommendations  and  research.  The further  expansion  of discount
brokerage firms could adversely affect the Company's retail business.  Moreover,
there is  substantial  commission  discounting  by  full-service  broker-dealers
competing for  institutional  and individual  brokerage  business.  The possible
increase of this discounting could adversely affect the Company.

         FMSC also competes for experienced brokers with other firms offering an
independent  affiliate program such as Corporate  Securities Group, Inc., Robert
Thomas Securities, Inc. and Linsco/Private Ledger Corp.

         Other financial institutions,  notably commercial banks and savings and
loan  associations,  offer customers some of the services and products presently
provided by  securities  firms.  In addition,  certain large  corporations  have
entered the securities  industry by acquiring  securities firms. While it is not
possible to predict the type and extent of competitive  services which banks and
other  institutions  ultimately  may offer to  customers,  FMSC may be adversely
affected to the extent those services are offered on a large scale.

         FMSC  competes  through its  advertising  and  recruiting  programs for
registered  representatives interested in joining its affiliate program. FMSC is
further developing customized computer programs to better service its affiliates
and to attract new  brokers.  The system  will  enable  brokers at any office to
instantly access customer accounts,  determine cash positions,  send and receive
electronic mail, and receive research reports and compliance memoranda through a
computer work station.

Administration,  Operations,  Transaction
Processing and Customer Accounts

         FMSC currently  utilizes the services of Schroder  Wertheim & Co., Inc.
as its clearing broker (the "Clearing Broker").  FMSC does not hold any funds or
securities of its customers.

         The  Clearing  Broker,  on  a  fee  basis,   processes  all  securities
transactions  for FMSC's account and the accounts of its customers.  Services of
the Clearing Broker include billing and credit control, and receipt, custody and
delivery  of  securities,  for which FMSC pays a portion of the  commissions  it
receives from customer  transactions.  By engaging the processing  services of a
clearing  broker,  FMSC is exempt from certain reserve  requirements  imposed by
Rule 15c3-3 under the Securities Exchange act of 1934 (the "1934 Act"). See "Net
Capital  Requirements".  The  Clearing  Broker is neither a partner  nor a joint
venturer  with FMSC,  nor does the  Clearing  Broker have any direct or indirect
interest in FMSC,  financial or  otherwise,  or any control of FMSC's  business,
affairs or internal  operations.  The  Clearing  Broker,  however,  does provide
secured  margin  loans to FMSC and its  customers  to finance  the  purchase  of
securities.  Under its clearing  agreement  with the Clearing  Broker,  FMSC has
agreed  to  indemnify  and  hold  the  Clearing  Broker  harmless  from  certain
liabilities or claims.

<PAGE>
  10


         As required by the NASD and certain other  authorities,  FMSC carries a
fidelity bond covering loss or theft of securities,  as well as embezzlement and
forgery.  The amount of the bond  provides  total  coverage of $500,000  (with a
$10,000  deductible  provision per incident).  In addition,  the accounts of its
customers  are  protected  by the  Securities  Investor  Protection  Corporation
("SIPC")  for up to  $500,000  for each  customer,  subject to a  limitation  of
$100,000  for  claims  for  cash  balances  with an  additional  $25,000,000  of
protection  provided  by a private  insurance  company  for the  benefit of each
customer. SIPC is funded through assessments on registered broker-dealers.  SIPC
assessments  were  .00065% of net  operating  revenues (as  defined).  Effective
January 1, 1996,  the Company  implemented a professional  liability  errors and
omissions  insurance  program which  provides  coverage for actions taken by the
Company's registered representatives,  employees and other agents for actions in
connection  with the purchase and sale of securities and the  administration  of
individual  retirement plans. The program provides coverage for each incident up
to $1,000,000  with an aggregate  policy limit of $5,000,000,  with a deductible
per  incident of $25,000,  the first  $5,000 of which is the  responsibility  of
individual representatives. Each registered representative is assessed a premium
which is payable  monthly.  The policy  excludes  claims  involving  the sale of
low-priced or "penny stocks" or partnerships,  criminal or deliberate fraudulent
acts,  defamation and company sponsored employee benefit plans, as well as other
exclusions.

Government Regulation

         The  securities  industry  is  subject  to  extensive   regulation  and
frequently  changing  under federal and state laws and  substantial  regulations
under  such  laws by the SEC and  various  state  agencies  and  self-regulatory
organizations  such  as the  NASD.  The  principal  purpose  of  regulation  and
discipline of  broker-dealers  is the protection of customers and the securities
markets rather than protection of creditors and stockholders of  broker-dealers.
The  SEC is the  federal  agency  charged  with  administration  of the  federal
securities  laws. Much of the regulation of  broker-dealers,  however,  has been
delegated  to  self-regulatory  organizations,  principally  the  NASD  and  the
national securities exchanges.  These self-regulatory  organizations adopt rules
(subject to approval by the SEC) which govern the industry and conduct  periodic
examinations  of member  broker-dealers.  Securities  firms are also  subject to
regulation  by state  securities  commissions  in the  states in which  they are
registered.  FMSC is  registered  with,  and  subject  to, the state  securities
commissions in 49 states and the District of Columbia.

         The regulations to which  broker-dealers  are subject cover all aspects
of the securities  business,  including sales methods,  trading  practices among
broker-dealers,  capital structure of securities  firms,  record keeping and the
conduct of directors, officers and employees. Additional legislation, changes in
rules  promulgated  by the SEC and by  self-regulatory  bodies or changes in the
interpretation  or enforcement of existing laws and rules often affect  directly
the method of operation and  profitability  of brokers and dealers.  The SEC and
the  self-regulatory  bodies may conduct  administrative  proceedings  which can
result in  censure,  fine,  suspension  or  expulsion  of a  broker-dealer,  its
officers, representatives or employees.

Net Capital Requirements

         As a registered  broker-dealer  and member of the NASD, FMSC is subject
to the SEC's Net Capital Rule which is designed to measure the general financial
integrity and liquidity of a broker-dealer.

         Net  capital is defined as the net worth of a broker or dealer  subject
to  certain  adjustments,  and  computed  by  FMSC  pursuant  to the  "aggregate
indebtedness method".  Aggregate  Indebtedness is deemed to mean the total money
liabilities  of a broker or dealer  arising in connection  with any  transaction
whatsoever,  and includes,  among other things,  money  borrowed,  money payable
against  securities loaned and securities  "failed to receive," the market value
of  securities  borrowed to the extent to which no  equivalent  value is paid or
credited.  For  broker-dealers  using this method, the Net Capital Rule requires
that the  ratio of  aggregate  indebtedness,  as  defined,  to net  capital,  as
defined, not exceed 15 to 1, and imposes restrictions on operations as described
below. In computing net capital,  various adjustments to net worth are made with
a view to  excluding  assets  which are not  readily  convertible  into cash and
making a conservative  statement of other assets,  such as a firm's  position in
securities.  Compliance  with the Net Capital  Rule limits those  operations  of
securities  firms which  require the  intensive  use of their  capital,  such as
underwriting  commitments  and  principal  trading  activities,  and  limits the
ability of securities firms to pay dividends.


<PAGE>
  11


         In addition to the above requirements, funds invested as equity capital
may not be  withdrawn,  nor may any  unsecured  advances or loans be made to any
stockholder  of a registered  broker-dealer,  if,  after  giving  effect to such
withdrawal, advance or loan and to any other such withdrawal, advance or loan as
well as to any scheduled  payments of  subordinated  debt which are scheduled to
occur  within six  months,  the net capital of the  broker-dealer  would fail to
equal 120% of the minimum dollar amount of net capital  required or the ratio of
aggregate  indebtedness to net capital would exceed 10 to 1. Finally,  any funds
invested in the form of  subordinated  debt  generally  must be  invested  for a
minimum  term of one year and  repayment  of such debt may be  suspended  if the
broker-dealer fails to maintain certain minimum net capital levels. For example,
scheduled  payments of  subordinated  debt are  suspended  in the event that the
ratio of aggregate indebtedness to net capital of the broker-dealer would exceed
12 to 1 or if its net  capital  would be less  than 120% of the  minimum  dollar
amount of net capital required.

         At December 31, 1996,  FMSC had net capital of  approximately  $651,048
which was $401,048 in excess of required net capital, and its ratio of aggregate
indebtedness to net capital was 5.48 to 1.

         Failure to  maintain  the  required  net  capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory  bodies
and ultimately may require its liquidation.  The net capital rule also prohibits
payments of  dividends,  redemption  of stock and the  prepayment  or payment in
respect of principal of subordinated  indebtedness if net capital,  after giving
effect to the payment,  redemption  or repayment,  would be less than  specified
percentage  (120%) of the minimum net capital  requirement.  Compliance with the
net  capital  rule could  limit  those  operations  of the  Company's  brokerage
subsidiaries that require the intensive use of capital, such as underwriting and
trading  activities,  and also could restrict the Company's  ability to withdraw
capital from its operating subsidiaries, which in turn, could

     limit the  Company's  ability  to pay  dividends,  repay debt and redeem or
purchase shares of its outstanding capital stock.

Employees

         The   Company   currently   utilizes   approximately   356   registered
representatives of which 301 are associated with affiliate offices. In addition,
the Company employs 55 support employees in the areas of operations, compliance,
accounting, administrative and clerical.

     There is an intense  competition among securities firms for executives with
extensive sales experience. To a large degree, FMSC's future success will depend
upon its continuing ability to locate, hire and retain highly skilled investment
executives. FMSC considers its relations with its employees to be good.

Item 2.   Properties

Offices and Facilities

         The Company  presently  occupies  17,804  square feet at its  executive
offices which are located at Parkway 109 Office Center, 328 Newman Springs Road,
Red Bank, New Jersey 07701.  Under a lease  agreement  dated  September 7, 1993,
FMSC leased a total of  approximately  9,716 square feet for a term of 62 months
ending November 30, 1998. The basic rent is $14,978.83 per month and in addition
to the base rent, the Company pays as additional  rent, a proportional  share of
any  increases  in real  estate  taxes  above the  amount  paid  during the 1994
calendar  year,  insurance  premiums  relating to the premises,  and all utility
charges relating to the use of the premises.  In June 1994 the Company leased an

<PAGE>
  12


additional  2,077 square feet for an additional  monthly rent of $3,202.00 which
lease  expires in November  1998.  In August  1995,  the Company  entered into a
sublease agreement with Pilot  Laboratories,  Inc. to sublet an additional 1,961
square feet of space  adjacent to the Company's  current  offices.  The sublease
requires a monthly  payment of $2,860.00  and runs through  October 31, 1997. In
January 1996, all of the Company's various leases were tied to a master lease to
expire in November 1998.

         In April 1996,  the Company  also leased 1,637 square feet on the first
floor of the same building which houses the corporate headquarters for a monthly
rent of $2,565.00 for a period of two years and five months  commencing on April
1, 1996. This space has been subleased to one of the Company's  affiliates under
the same terms and conditions as the master lease.

     In March 1997, the Company entered into a new seven year lease,  commencing
January  1,  1998,  to  lease a total  of  19,372  square  feet at the Red  Bank
facility.  The rent for the premises  will be $35,850 per month plus  additional
costs for  utilities and taxes.  This new lease will  supersede all of the other
leases of the Red Bank facility. The new lease will expire on December 31, 2004.
The lease also  contains  an option to renew for an  additional  six year period
after the conclusion of the initial lease term.

         In June 1996,  Montauk  Insurance  Services,  the  Company's  insurance
subsidiary,  leased  3,150  square  feet in  Paramus,  New  Jersey  to house its
administrative  offices.  The three year lease provides for monthly base rent of
$5,053 for the first year,  $5,315 for the second year, and $5,578 for the third
year.

     The use of facilities for all branch and/or satellite  offices are provided
for by the individual  registered  representatives  at such facility at no cost,
expense or  obligation to the Company.  Similarly,  all  furnishings,  fixtures,
telephone  systems,  office  equipment and quotation  retrieval  systems are the
responsibility of the affiliated  registered  representative at no cost, expense
or obligation to the Company.

Item 3.   Legal Proceedings

     Many  aspects  of the  Company's  business  involve  substantial  risks  of
liability. In recent years, there has been an increasing incidence of litigation
and arbitration involving the securities industry, including class actions which
generally seek rescission and substantial damages. 

     In fiscal 1996, the firm settled two civil lawsuits and one  arbitration in
the aggregate  amount of  $1,706,455.  Each of these cases  resulted from claims
made by customers of the former Houston branch office registered representatives
in connection with the purchase of certain Mortgage Backed Securities ("MBS").

     The Company is a defendant in one remaining civil law suit filed on May 21,
1996 relating to these  matters which is currently  pending in the United States
District Court for the Northern District of Ohio, Eastern Division,  case number
1:96CV 1063, City of Painesville,  Ohio v. First Montauk Financial Corp.,  First
Montauk Securities Corp. et al. The Plaintiff seeks  compensatory  damages of an
unspecified  amount  estimated by Plaintiff to be not less than  $5,000,000 plus
punitive damages,  attorney's fees, interest and cost. The Company is vigorously
defending  this case as it believes  that it has a  meritorious  defense to this
action.  This belief is derived from,  among other things,  discussions with the
Company's counsel.

     FMSC  recently  submitted  an Offer of  Settlement  to the  Securities  and
Exchange Commission  resulting from an investigation by the SEC into the sale of
certain  derivative  securities by the Company's  former  Houston  brokers.  The

<PAGE>
  13


Settlement  Offer  requires the Company to pay a civil penalty of $50,000.00 and
to disgorge the sum of $175,458.00, plus interest. The Commission also agreed to
provide for a credit on the  disgorgement  amount for the  settlement of certain
civil litigations  related thereto.  The Company also agreed to a censure and to
the entry of a Cease and Desist Order.  The Settlement  Offer also requires FMSC
to engage an  independent  compliance  examiner  to audit the firm's  compliance
procedures and issue a report and  recommendations  which the firm has agreed to
implement.  Brian M.  Cohen,  one of FMSC's  principals,  submitted  a  separate
Settlement Offer which provides for a two month suspension from association with
any  broker/dealer  and an  eighteen  month bar from  acting in any  supervisory
capacity thereafter. Mr. Cohen also agreed to pay a monetary fine of $5,000.

     The Settlement  Offers are currently pending before the full Commission and
the  Company  can make no  assurances  that the  Offer(s)  will be  accepted  as
currently  proposed.  The  Commission  may  reject  or  amend  the  terms of the
Settlement Offers.

     In  connection   with  the   activities  of  the  former   Houston   office
representatives,  FMSC and the  State of  Florida  Division  of  Securities  and
Investor  Protection  entered a  Stipulation  and Consent  Agreement in February
1997.  The Agreement  provides for the payment of a $15,000 fine, the engagement
of an independent compliance examiner, temporary restrictions of the addition of
new branch offices in the State of Florida and  restrictions  on future sales of
CMO securities in the State of Florida.

     In January  1997,  the Company and FMSC settled an  arbitration  proceeding
brought by a customer  which  resulted  from  options  trading  activity  in her
brokerage account. The Company paid to the customer $500,000 in cash, and issued
to her and her counsel a total of 150,000  five-year  warrants  to purchase  the
Company's Common Stock for $1.25 per share.  Two of the Company's  officers have
agreed to guarantee a minimum  selling price of $1.917 per share with respect to
the shares underlying the warrants. Any differential between the minimum selling
price of $1.917 per share and the warrant exercise price of $1.25 per share will
be paid to the warrantholders out of a $100,000 escrow account  established with
personal funds of the officers to secure the guarantee.  The warrantholders will
have 60 days in which to exercise the  warrants and sell the shares,  commencing
from the date the  warrantholders  are notified  that a  registration  statement
filed to register the shares has been declared effective by the SEC. The Company
is  required  to file with the SEC a  registration  statement  to  register  the
underlying  Common  Stock for resale no later than June 10,  1997.  The officers
will not be obligated to pay the  differential  with respect to any  unexercised
warrants  and/or unsold shares at the expiration of the 60 day period unless the
quoted market price for the Company's common stock is below $1.25 for the entire
period.  In such an event,  the  warrantholders  will be  entitled to tender the
warrants to the Company in exchange for the escrowed funds.

     FMSC is also a respondent  and/or defendant in certain pending customer law
suits and arbitrations relating to its securities business.  These claims are in
various stages of progress and are being contested by FMSC. The ultimate outcome
and/or range of loss, if any, from these matters is not presently determinable.

Item 4.   Submission of Matters on a Vote of Security Holders

          Not Applicable.

<PAGE>
  14


                                     PART II

Item 5.  Market of and Dividends on the Company's
         Common Equity and Related Stockholder Matters

A.   Principal Market

     The  Company's  Common  Stock is  traded  in the  over-the-counter  market.
Trading in the  Company's  Common Stock is reported on the NASD  Bulletin  Board
system and by the National  Daily  Quotation  Service  published by the National
Quotation Bureau,  Inc. The Company believes that there is an established public
trading market for the Company's  Common Stock based on the volume of trading in
the  Company's  Common Stock and the  existence of market  makers who  regularly
publish quotations for the Company's Common Stock.

B.       Market Information

        The Company's  Common Stock  commenced  trading in the  over-the-counter
market in 1987. On March 24, 1997, the Company's common stock had a high and low
bid price of $2.84375 and $2.781, respectively.

     The  following is the range of high and low bid prices for such  securities
for the periods indicated below:

Common Stock

Fiscal Year 1996                      High $           Low $

     1st Quarter                      1.0625           .84375
     2nd Quarter                      2.1875           .8125
     3rd Quarter                      1.53           1.03125
     4th Quarter                      1.13              .80

Fiscal Year 1995                      High $           Low $

     1st Quarter                       .56              .22
     2nd Quarter                       .91              .19
     3rd Quarter                      1.06              .50
     4th Quarter                      1.19              .50



<PAGE>
  15



Item 6.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations

Results of Operations

Fiscal 1996 as Compared to Fiscal 1995

     Total  revenues  for  1996  increased  to  $35,089,688,  the  best  revenue
performance  in the  Company's  history,  surpassing  1995's  record  levels  by
$6,747,485, or nearly 24%. The Company benefitted with the rest of the brokerage
industry in 1996 from record gains in the U.S.  equity  markets.  Despite strong
revenue  growth,  the Company's  performance  was  negatively  impacted by costs
totalling $2,731,997 to defend and settle various legal matters during 1996. The
most significant costs arose from the activities of a former affiliate office in
Houston,  Texas.  These costs  essentially  negated  what would have been record
operating profits for the year.

     Commission income from the sale of listed and over-the-counter  securities,
mutual  funds,  leasing,  and  other  agency  transactions  rose 50% to a record
$25,749,690  (73% of total  revenues) as compared to  $17,113,296  (60% of total
revenues) in 1995. The Company's  commission revenues have steadily increased in
absolute  dollars and as a percentage of total revenues due to several  factors,
including  the  addition  of leasing  and  insurance  products,  the  increasing
popularity  of mutual fund  investment  among retail  customers,  the decline in
principal  revenues from the sale of mortgage-backed  securities,  and the trend
towards  executing more  over-the-counter  equity orders on an agency basis. The
largest  revenue  increases  in 1996 once again came from stock and mutual  fund
transactions,  as retail investment volume  maintained  strength  throughout the
year.  Commissions from the insurance products division,  which began operations
in 1995, increased significantly from $121,417 in 1995 to $1,719,102 in 1996. As
the  Company's  operations  shift  towards a greater  reliance on volume  driven
revenues,  significant  swings in market  activity from  quarter-to-quarter  are
expected to have a more dramatic impact on operating profits.

     Revenues from principal  transactions  decreased by 22% from 1995 levels of
$9,763,940  (34% of total  revenues)  to  $7,660,701  (22% of  total  revenues).
Revenues from market-making activities in over-the-counter  equities and trading
profits  reached  record  levels  in the first  half of 1996 as the U.S.  equity
markets continued to reach record levels.  During the third and fourth quarters,
however,  net  revenues  in this  category  trailed off  considerably,  due to a
combination of lower  transaction'  volume,  particularly in the seasonally slow
third quarter,  and losses  sustained in the Company's equity and municipal bond
trading  portfolios.  In addition,  the Company has begun to execute more of its
over-the-counter  equity business on an agency basis,  whereby the Company earns
commissions  for serving as an agent between its customer and another  brokerage
firm making a market in the particular  security being traded.  In so doing, the
Company can reduce its inventory  levels,  the  corresponding  amount of capital
required to maintain those levels,  and its exposure to losses from fluctuations
in market  values.  The Company  also  discontinued  trading in  mortgage-backed
securities  ("MBS") in 1995 and  closed  the  affiliate  office  conducting  MBS
operations. Revenues from MBS transactions totalled $361,158 in 1995.

     Investment  banking  revenues were $634,329 in 1996 as compared to $388,249
in 1995 due to an increase in sales  concessions  from  participation in selling
groups and the  completion of a private  placement  during the current year. The
Company intends to continue  exploring  various  opportunities in the investment
banking area, including securities private placements and underwritings.

     Interest  income  increased  by 14% to $839,369 in 1996,  due  primarily to
higher credit  balances in the  Company's  trading  accounts  during the year as
inventory levels dropped. The increase was slightly more than offset by declines
in clearing rebates and other fees.

     During  1996  the  Company  paid  commissions,  employee  compensation  and
employee  benefits  of  $25,428,184  (72% of  total  revenues)  as  compared  to
$19,542,578  (69% of total revenues) in 1995. This category  includes  salaries,
commission expense, and fringe benefits for salaried employees. Commissions paid
to registered  representatives for 1996 were $21,932,573 (62% of total revenues)
as compared to $16,539,208  (58% of total revenues) in 1995. The dollar increase
in 1996 resulted primarily from a higher volume of agency  transactions,  as was
the case in 1995.  Commission  expense as a percentage  of total  revenues  will
fluctuate in the future depending upon the mix of commission-based  business and
trading profits or losses, as well as the relative contribution to revenues from
the Company's in-house brokers and affiliate  offices.  In-house brokers usually
receive a lower  commission  payout  than  independent  affiliates,  but are not
generally required to pay their own overhead.

<PAGE>
  16


     For 1996 the Company paid salaries of $2,752,482 for management, operations
and clerical personnel, as compared to $2,196,905 in 1995. This increase was due
in part to growth in 1996 revenues, which required additional trading assistants
and  other  personnel  for  transactions  processing.  The  Company  also  added
employees to its computer,  marketing and finance departments in the latter part
of 1995.

     Clearing  costs  increased  from  $3,112,474  (11% of  revenues) in 1995 to
$3,139,142  (9% of revenues)  in 1996 due to higher  transactions'  volume.  The
percentage of clearing costs to total revenue will fluctuate  depending upon the
combination of agency business and proprietary  trading,  as well as the average
revenue per  transaction in a particular  period.  The Company also negotiated a
more favorable fee structure with its clearing firm in 1996.

     Communications  and occupancy costs rose by $402,727 to $1,662,936 in 1996,
an increase of 32% over 1995. The increase is due to higher  telephone  charges,
market data services, and computer consulting costs associated with the addition
of trading personnel and in-house brokers, and higher market volume.  Management
believes  that  growth  in  this  expense  category  will  slow  due  to  recent
negotiations with a long distance carrier establishing lower rates for telephone
service, as well as to planned reductions in the cost of operating the Company's
wide area  network.  One  partial  offsetting  factor is  expected  to be higher
occupancy costs, owing to the further expansion of the Company's headquarters in
January 1998.

     Legal matters and related costs include payments to settle customer claims,
professional   fees  and  other  defense  costs,   and  provisions  for  pending
litigation.  These costs  increased to $2,731,997 in 1996 from $1,542,328 in the
prior  year.  Costs  incurred in 1995  include  expense  provisions  of $204,000
relating to the settlement with plaintiffs in a federal lawsuit, and $900,000 to
settle a lawsuit with Escambia  County,  Florida  stemming from MBS sales by the
former affiliate  office.  In 1996, the Company became the subject of additional
litigation and regulatory investigations relating to its MBS operations.  One of
these  cases was  settled  in January  1997 for  $750,000.  The  Company is also
expected to enter into an Offer of Settlement  with the  Securities and Exchange
Commission,  which will likely  result in a $50,000  fine and  censure.  Another
customer arbitration unrelated to the MBS activities was also settled in January
1997 for $500,000 plus the issuance of common stock purchase warrants. (See Note
11 to the  financial  statements).  Apart  from the  costs of  settling  various
matters and providing for future settlements,  the Company incurred  substantial
fees  for  legal  representation  in 1995 and  1996 in  connection  with the MBS
litigations  as well as  others.  Management  is unable  to derive a  meaningful
estimate of the amount or range of possible loss relating to pending  litigation
(including litigation costs) in any particular quarterly or annual period, or in
the aggregate.  However, it is possible that the financial condition, results of
operations  or cash  flows of the  Company  in  particular  quarterly  or annual
periods could be materially  affected by the ultimate outcome of certain pending
litigation.  The Company is presently  reviewing the extent to which settled and
pending claims may be covered under it insurance policies.  In January 1997, the
Company  negotiated a $650,000 cash settlement with one of its carriers,  and is
continuing  discussions with other carriers.  There can be no assurance that the
Company will be successful in its efforts to recover additional funds from these
insurers.

     Other operating expenses increased from $1,439,926 in 1995 to $2,006,615 in
1996.  The  increase was due  primarily  to an increase in business  development
costs associated with the Company's  affiliate  recruitment  program, as well as
higher insurance and administrative overhead costs.

     While the Company  achieved record revenue and profits' growth in the first
half of 1996,  operating  results  continued to be sensitive to general economic
conditions,  particularly  the  interest  rate  environment,  and the outlook of
retail investors on the financial  markets.  These markets became more uncertain
and volatile in the third and fourth quarters of 1996, and  transactions  volume
in mutual  funds and equity  trading,  the  principal  sources of the  Company's
commission-based  revenues,  declined.  However,  trading losses and legal costs
were the primary causes of the weak operating results in 1996. Accordingly,  the
Company is reviewing its trading  operations  with a view towards  improving the
management of its trading risks,  and is seeking to resolve pending legal claims
and regulatory problems as expeditiously as possible.

<PAGE>
  17


Liquidity and Capital Resources

     The Company's cash balances  increased by $224,077  during 1996.  Operating
activities  contributed  cash of  $1,082,517  in 1996.  Inventory  positions  of
securities held by the Company decreased by $4,985,072 during the year. The cash
provided by this change in securities owned was offset in part by a reduction of
$3,607,489  in the  Company's net debit  balances  with its clearing  firm.  The
balances  in the  Company's  cash,  clearing  firm and  inventory  accounts  can
fluctuate  significantly from day to day, depending on market conditions,  daily
trading  activity,  and  investment  opportunities.  The Company  monitors these
accounts on a daily basis in order to ensure compliance with regulatory  capital
requirements  and to  preserve  liquidity.  The  Company  also  used cash to pay
approximately  $1,019,000  of  income  taxes  during  the 1996  period.  Accrued
expenses  increased by $419,782  during the year due to higher reserves to cover
costs associated with various pending legal matters.

     Certain  legal  claims  arising in 1996 have been settled by payment of the
Company's  common  stock.  In a number of cases,  the Company  issued  shares to
various claimants, guaranteeing a minimum resale price of $2.00 per share over a
one to two-year  period,  and  agreeing to make up any  shortfall in cash if the
claimants  are unable to sell the shares  for the  guaranteed  price in the open
market. The Company issued 210,500 shares in this manner during 1996 in order to
settle  claims  totalling  $421,500.  The Company also issued a total of 165,000
unregistered shares during the year to settle other claims valued at $178,650.

     Investing activities used cash of $1,128,306 in 1996. The Company purchased
approximately  $668,000 of fixed assets during the year. The investment consists
primarily  of  telecommunications  equipment  and computer  systems,  and office
furnishings.   The  Company   anticipates   an  increase  in   expenditures   of
approximately  $300,000  for  communications  hardware and  software,  and other
equipment during 1997.  Amounts advanced to brokers and affiliates  increased by
$384,078 in 1996.  The  increase  is  attributable  to loans to new  affiliates,
advances to employees,  and amounts  receivable from brokers.  These receivables
are generally due on demand,  except for an $84,000 loan that is due by July 31,
1997, with interest at the rate of 6% per annum.

     Financing activities provided cash of $269,866 in 1996. A total of $230,506
was used for the repurchase of 196,802  shares of the Company's  Common Stock in
the open market  under  buy-back  plans  authorized  by the  Company's  board of
directors. This amount was offset by proceeds from the exercise of stock options
of $68,864  and net  proceeds  from bank loans of  $410,761.  The bank loans are
evidenced by three notes bearing  interest at the prime rate (8-1/4% at December
31,  1996).  The notes are  payable in monthly  installments  of  principal  and
interest  over  periods  ranging from 36-60 months and are secured by office and
computer equipment owned by the parent corporation.

     At December  31,  1996,  the  Company's  broker-dealer  subsidiary  had net
capital of $651,048, which was $401,048 in excess of the net capital required by
applicable securities  regulations,  and the ratio of aggregate  indebtedness to
net capital was 5.48 to 1.

     Management believes the Company's liquidity needs at least through the next
fiscal year will be provided by  increasing  operating  income and margin  loans
secured by trading  inventories under an arrangement with the Company's clearing
broker. Cash flow will be adversely impacted in the first quarter of 1997 by the
payment  of 1996  legal  settlements  approximating  $1.2  million.  These  cash
outflows  will be offset in part by the receipt of proceeds  totalling  $435,000
from the  exercise  of  common  stock  options,  and an  insurance  recovery  of
$650,000.  Discussions  with other  insurance  carriers  regarding  coverage  of
certain  settled  and  pending  legal  claims  are  continuing.  The  extent  of
additional coverage is not presently determinable.

Impact of Inflation and Other Factors

     Management  of the Company  believes  that the impact of  inflation  has an
effect upon the amount of capital  generally  available for investment  purposes
and also may affect the  attitude or  willingness  of  investors to buy and sell
securities. The nature of the business of the Company's broker-dealer subsidiary
and the  securities  industry  in general is directly  affected by national  and
international  economic and political  conditions,  broad trends in business and
finance and volatility of interest rates,  changes in and uncertainty  regarding
tax  laws,  and  substantial  fluctuation  in the  volume  and  price  levels of
securities  transactions  and the securities  markets.  To the extent  inflation
results in higher interest rates and has other adverse effects on the securities
markets and the value of securities held in inventory,  it may adversely  affect
the Company's financial position and results of operations.

<PAGE>
  18


Factors Affecting "Forward-Looking Statements"

     From time to time,  the Company may  publish  "forward-looking  statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute  forward-looking  statements.  These  forward-looking
statements  may relate to such  matters as  anticipated  financial  performance,
future  revenues  or  earnings,  business  prospects,  projected  ventures,  new
products,  anticipated  market  performance,  and similar  matters.  The Private
Securities   Litigation   Reform  Act  of  1995   provides  a  safe  harbor  for
forward-looking  statements.  In order  to  comply  with  the  terms of the safe
harbor,  the Company  cautions readers that a variety of factors could cause the
Company's  actual results to differ  materially from the anticipated  results or
other expectations expressed in the Company's forward-looking statements.  These
risks  and  uncertainties,  many of which  are  beyond  the  Company's  control,
include,  but are not  limited  to:  (i)  transaction  volume in the  securities
markets,  (ii) the volatility of the securities  markets,  (iii) fluctuations in
interest rates, (iv) changes in regulatory  requirements  which could affect the
cost of doing  business,  (v)  fluctuations  in  currency  rates,  (vi)  general
economic conditions, both domestic and international,  (vii) changes in the rate
of inflation and related impact on securities  markets,  (viii) competition from
existing  financial  institutions and other new participants in competition from
existing  financial  institutions  and other new  participants in the securities
markets,  (ix) legal  developments  affecting the  litigation  experience of the
securities  industry,  and (x) changes in federal and state tax laws which could
affect the  popularity  of products  sold by the  Company.  The Company does not
undertake  any  obligation  to  publicly  update or revise  any  forward-looking
statements.

Item 7. Financial Statements

                  See Financial Statements attached hereto.

Item 8.    Disagreements on Accounting and Financial Disclosure

                  Not Applicable.


<PAGE>
  19


                                    PART III

Item 9.   Directors and Executive Officers

     The Directors and  Executive  Officers of the Company and its  subsidiaries
are as follows:

         Name              Age                         Position

Herbert Kurinsky           66           Director, President and Chief Executive
                                        Officer of FMFC and of FMSC and
                                        Registered Options Principal of FMSC

William J. Kurinsky        37           Director, Vice President, Chief
                                        Operating and Chief Financial  Officer
                                        and  Secretary  of FMFC and of FMSC and
                                        Financial/Operations Principal of FMSC

Brian M. Cohen             39           Vice President and General and
                                        Municipal Securities Principal of FMSC

Edward L. Bayarski         46           President, MISI

Norma Doxey                57           Director

Ward R. Jones, Jr.         66           Director

David I. Portman           56           Director

----------------------

         The   Company's   Certificate   of   Incorporation   provides  for  the
classification  of the Board of Directors into three classes of Directors,  each
class as nearly equal in number as possible but not less than one Director, each
director to serve for a three-year term,  staggered by class. The Certificate of
Incorporation  further provides that a Director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of the holders of
at least 70% of the combined  voting power of the Company's  voting stock,  with
vacancies  on the Board being  filled only by a majority  vote of the  remaining
Directors  then in  office.  "Cause"  is  defined  as the  willful  failure of a
director to perform in any  substantial  respect such  Director's  duties to the
Corporation  (other  than any such  failure  resulting  from  incapacity  due to
physical  or  mental  illness),   willful  malfeasance  by  a  Director  in  the
performance  of  his  duties  to  the   Corporation   which  is  materially  and
demonstrably  injurious to the  Corporation,  the commission by a Director of an
act of fraud in the performance of his duties,  the conviction of a Director for
a felony  punishable by  confinement  for a period in excess of one year, or the
ineligibility  of a Director for  continuation  in office  under any  applicable
rules, regulations or orders of any federal or state regulatory authority.

     All officers serve at the  discretion of the Board of Directors.  No family
relationship  exists  between  any officer or  director  except for Mr.  Herbert
Kurinsky who is the uncle of Mr. William J. Kurinsky; and Mr. Brian M. Cohen who
is a cousin of both Messrs.  Kurinsky.

     Herbert Kurinsky became a Director and President of the Company on November
16, 1987. Mr. Kurinsky is a co-founder of First Montauk Securities Corp. and has
been its President,  one of its Directors and its Registered  Options  Principal
since  September of 1986.  From March 1984 to August 1986, Mr.  Kurinsky was the
President of Homestead Securities, Inc., a New Jersey broker-dealer.  From April
1983 to March 1984, Mr. Kurinsky was a branch office manager for Phillips, Appel
& Waldon,  a securities  broker-dealer.  From February  1982 to March 1983,  Mr.
Kurinsky  was a branch  office  manager for  Fittin,  Cunningham  and Lauzon,  a
securities  broker-dealer.  From November 1977 to February 1982, he was a branch
office  manager  for Advest  Inc.,  a  securities  broker-dealer.  Mr.  Kurinsky
received a B.S.  degree in economics  from the  University of Miami,  Florida in
1954.
<PAGE>
  20




     William J.  Kurinsky  became Vice  President,  a Director and Financial and
Operations  Principal of the Company on November 16, 1987. He is a co-founder of
First Montauk Securities and has been one of its Vice Presidents, a Director and
its Financial/Operations  Principal since September of 1986. Prior to that date,
Mr.  Kurinsky  was  Treasurer,  Chief  Financial  Officer and Vice  President of
Operations  of  Homestead  Securities,  Inc., a  securities  broker-dealer.  Mr.
Kurinsky  received a B.S.  from Rutgers  University in 1984. He is the nephew of
Herbert Kurinsky.

     Brian M. Cohen is a General Securities and Municipal Securities  Principal,
of FMSC from August, 1986, to present. He is the manager of the fixed-income and
government securities department of FMSC. From August, 1984, to August, 1986, he
was a vice president and registered  representative  with Homestead  Securities,
Inc. Mr. Cohen is a cousin to Mr. Herbert Kurinsky and Mr. William Kurinsky.

     Edward L. Bayarski is President of Montauk  Insurance  Services,  Inc. from
June, 1995 to the present.  From April, 1993 to June, 1995, he was an investment
planner with New England Securities in Fairfield, New Jersey. From October, 1984
to April,  1993 Mr.  Bayarski was an insurance  specialist with Merrill Lynch in
Paramus,  New Jersey.  Mr. Bayarski  received a B.A. degree in Economics in 1972
from Seton Hall  University,  Newark,  New Jersey and obtained a Chartered  Life
Underwriter designation in 1978.

     Norma L. Doxey has been a Director of the Company  since  December 6, 1988.
Ms. Doxey is the Vice President for  Operations and a Registered  Representative
with First Montauk  Securities Corp. since September,  1986. From August through
September,   1986,   she  was   operation's   manager   and  a   Registered
Representative  with  Homestead  Securities,  Inc. From July 1984 through August
1985 she held the same position with Marvest Securities

     Ward R. Jones,  Jr. has been a director of the  Company  since June,  1991.
From 1955 through 1990, Mr. Jones was employed by Shearson  Lehman Brothers as a
registered representative,  eventually achieving the position of Vice President.
Mr. Jones is currently a registered  representative of First Montauk  Securities
Corp. on a part-time basis.

     David I.  Portman has been a director of the Company  since June 15,  1993.
From 1978 to the present,  Mr. Portman served as the President of Triad Property
Management,  Inc., a private  corporation  which builds,  invests in and manages
real estate properties in the State of New Jersey. Mr. Portman was a Director of
Ultra Med, Inc. from 1986 to 1991, a high tech medical  equipment  manufacturer.
Mr.   Portman  also  serves  as  a  director  and  officer  of  Pacific   Health
Laboratories,  Inc.,  positions  he has held since  August  1995.  See  "Certain
Relationships and Related Transactions."

Certain Reports

         No person who,  during the fiscal year ended  December 31, 1996,  was a
Director,  officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only class of  securities  of the Company  registered
under  Section  12 of  the  Securities  Exchange  Act of  1934  (the  "Act")  (a
"Reporting  Person")  failed  to file on a timely  basis,  reports  required  by
Section 16 of the Act during the most  recent  fiscal year or prior  years.  The
foregoing  is based  solely upon a review by the Company of Forms 3 and 4 during
the most recent  fiscal year as  furnished  to the Company  under Rule  16a-3(d)
under the Act, and Forms 5 and amendments  thereto furnished to the Company with
respect to its most recent fiscal year, and any  representation  received by the
Company from any reporting person that no Form 5 is required.

<PAGE>
  21



Item 10. Executive Compensation

Summary of Cash and Certain Other Compensation

         The following  provides  certain  information  concerning  all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to,  earned by, paid or accrued by the Company  during the years ended  December
31, 1996, 1995 and 1994 to each of the named executive officers of the Company.

                           SUMMARY COMPENSATION TABLE

Annual Compensation                                              Long Term
                                                                    Compensation
                                                                 ------------

                                                            Securities
                                                            Underlying
Name & Principal                              Other Annual  Options/ SARs
Position            Year Salary    Bonus     Compensation   Granted(1)
--------            ---- ------    -----     ------------   ----------

Herbert Kurinsky    1996 $175,000 $40,000.00 $41,069.74(2)          0
Chairman, Chief     1995 $101,000  90,000.00 $ 8,594.28(2)       200,000
Executive Officer(3)1994 $110,000     -      $19,683.80(2)        40,000

William J. Kurinsky 1996 $175,000     0      $ 11,884.27(4)          0
Vice President,     1995 $121,000 $90,000.00 $ 39,409.36(4)      200,000
Chief Operating and 1994 $110,000     -      $ 16,771.87(4)       40,000
Financial Officer
and Secretary (5)

Brian M. Cohen      1996 $100,000      0     $17,385.18(6)           0
Vice President and 1995 $87,115.44$15,000.00 $ 6,365.00(6)         5,000
Gen'l Securities   1994 $75,000.02$ 721.16   $23,824.36(6)        20,000
Principal, FMSC

Edward L. Bayarski 1996 $87,307.74$ 7,255.78 $38,061.02          60,000(7)
President, MISI    1995 $33,653.92$ 9,000.00 $ 8,639.08          40,000

----------------

1)   In 1994 the Board of Directors authorized a grant to purchase 40,000 shares
     of the  Company's  Common  Stock to each of Messrs.  Herbert and William J.
     Kurinsky, at exercise prices of $.75 and $.82, respectively.  These options
     have vested and are exercisable until December 19, 1999. In 1995, the Board
     of Directors  authorized an additional  Grant to purchase 200,000 shares of
     the Company's Common Stock each to Herbert Kurinsky and William J. Kurinsky
     at an exercise price of $.75 and $.8352 respectively. Mr. Cohen was granted
     an option to purchase  5,000 shares at $.75.  These options have vested and
     are  exercisable  until  November 5, 2000 for Messrs.  Kurinsky,  and until
     December 14, 2000 for Mr. Cohen. See "Aggregated  Options/Sar  Exercises in
     Last Fiscal Year and Fy-End Option/Sar Values."

2)   Includes:   (i)  for  1996,  an  automobile   allowance  of  $7,511.88,
     commissions of $10,511.89, dues of $7,440.00 and loan forgiveness of
     $15,605.97; (ii) for 1995, an automobile allowance of $8,594.28, (iii) for
     1994, commissions of $11,089.52 and an automobile allowance of $8,594.28.

3)   Mr.  Herbert  Kurinsky  is the  beneficial  owner of  21,518  shares of the
     Company's  Common Stock as of December 31, 1996,  which shares had a market
     value of  approximately  $20,657 as of that date,  without giving effect to
     the diminution in value attributable to the restriction on said shares.

4)   Includes:  (i) loan  forgiveness  in the  amount  of  $11,884.27;  (ii)
     commissions  of $39,409.36  and $16,771.87 for the years ended
     December 31, 1995 and 1994, respectively. Does not include the value of
     an automobile purchased by the Company for the exclusive use by Mr. William
     Kurinsky, with an annualized lease value of $5,100 as provided by the IRS.

5)   Mr.  William  Kurinsky is the beneficial  owner of 1,073,423  shares of the
     Company's  Common Stock as of December 31, 1996,  which shares had a market
     value of approximately $1,030,486 as of that date, without giving effect to
     the diminution in value attributable to the restriction on said shares.

6)   Includes: (i) commissions of $7,578.18, and automobile allowance of
     $4,650.00 and loan forgiveness of $5,157.00 for 1996; (ii) commissions
     of $2,045.00 and an automobile allowance of $4,320 for 1995; (iii)
     commissions of $19,624.36 and an automobile allowance of $4,200 for 1994.


<PAGE>
  22




7)   Includes: (i) commissions of $38,061.02 for 1996; (ii) includes
     commissions of $8,639.08 for 1995.


Compensation of Directors

     The  Company  pays  directors,  who are not  employees  of the  Company,  a
retainer of $250 per  meeting of the Board of  Directors  attended  and for each
meeting of a committee of the Board of Directors not held in conjunction  with a
Board of Directors  meeting.  Directors employed by the Company are not entitled
to any additional  compensation  as such.  During fiscal year 1996, the Board of
Directors met on 3 occasions and acted by written consent on 2 occasions.

Committees of the Board of Directors

     The Board of Directors  has  established  an Audit  Committee  comprised of
William J. Kurinsky,  Ward R. Jones, Jr., and David Portman. The Audit Committee
met on 1 occasion during fiscal year 1996. The Audit  Committee  reviews (i) the
Company's  audit  functions,  (ii)  with  management,  the  finances,  financial
condition,  and interim financial  statements of the Company, and (iii) with the
Company's  independent  auditors,  the  year  end  financial  statements  of the
Company.  Members of the Audit Committee do not receive additional  compensation
for such service.


                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

     The  following  table  contains  information  with  respect  to  the  named
executive  officers  concerning  options held as of the year ended  December 31,
1996.
                                INDIVIDUAL GRANTS

                    Number of       % of Total
                    Underlying      Granted to     Exercise
                    Options/SARs    Employees in   or Base
     Name           Granted(#)      Fiscal Year    Price ($Sh)   Expiration Date
     ----           ------------    -----------    -----------   ---------------

Edward L. Bayarski  60,000          50%            $1.02         10/29/01


               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES

                                                                        Value of
                    Shares               Number of           Unexercised
                    Acquired             Unexercised         In-the-money
                    on        Value      Options as of       Options at
     Name           Exercise  Realized   December 31,1996    December 31,1996(1)
     ----           --------  --------   ----------------    -------------------
                                         Exercisable/Unexer. Exercisable/Unexer.
Herbert Kurinsky       -         -          440,000/0           $130,400/$0
William J. Kurinsky    -         -          440,00 /0          $  98,560/$0
Brian M. Cohen         -         -          100,000/0          $  34,000/$0
Edward L. Bayarski     -         -           28,000/72,000     $   7,360/$11,040

(1)          Based upon the closing bid price of the  Company's  Common Stock on
             December 31, 1996 ($.96 per share), less the exercise price for the
             aggregate number of shares subject to the options.


<PAGE>
  23


Employment Agreements

         In January 1996,  the Company  entered into new  three-year  employment
contracts  with Herbert  Kurinsky,  as  President  and William J.  Kurinsky,  as
Executive Vice  President.  The contracts  provide for base salaries of $175,000
for the first year of the  agreement  for each,  increasing  in each case at the
rate of 10% per year.  Each  would  also be  entitled  to receive a portion of a
bonus  pool  consisting  of 10% of the  pre-tax  profits of the  Company,  to be
determined by the executive  management  (e.g.  Herbert  Kurinsky and William J.
Kurinsky).  The bonus pool would require a minimum of $500,000 pretax profit per
year in order to become effective.  Each is also entitled to receive commissions
at the same rate as paid to other  non-affiliate  registered  representatives of
the Company.  They are also  entitled to purchase up to 20% of all  underwriters
and/or  placement  agent  warrants or options which are granted to First Montauk
Securities Corp. from FMSC upon the same price, terms and conditions afforded to
FMSC as the  underwriter  or placement  agent.  Each is further to be furnished,
during  the term of his  agreement,  with  health  insurance  benefits  and life
insurance as generally  made  available  to regular  full-time  employees of the
Company,  and  reimbursement  for expenses incurred on behalf of the Company and
the use of an automobile or in the  alternative  an  automobile  allowance.  The
contracts also provide for severance  benefits equal to three times the previous
year's salary in the event either of the employees is terminated or their duties
significantly  changed after a change in management of the Company as defined in
the agreement.

Incentive Stock Option Plan

         In September  1992, the Company adopted the 1992 Incentive Stock Option
Plan (the  "1992  Plan").  The 1992 Plan  provided  for the grant of  options to
purchase up to 2,000,000  shares of the  Company's  Common Stock and is intended
for  employees  of the  Company  and  consultants.  In June  1996 the  Company's
shareholders  approved an  amendment  to the 1992 Plan (the  "Amended  Plan") to
increase the number of shares reserved for issuance from 2,000,000 to 3,500,000.
Under  the  terms  of  the  Amended  Plan,  options  granted  thereunder  may be
designated  as options  which  qualify  for  incentive  stock  option  treatment
("ISOs")  under  Section  422A of the Code,  or options  which do not so qualify
("Non-ISOs").

         The Amended  Plan is  administered  by the Board of  Directors  or by a
Stock Option  Committee  designated by the Board of Directors.  The Board or the
Stock Option Committee,  as the case may be, has the discretion to determine the
eligible  employees to whom, and the times and the price at which,  options will
be granted;  whether such options shall be ISOs or Non-ISOs;  the periods during
which each option will be exercisable;  and the number of shares subject to each
option.  The Board or Committee has full authority to interpret the Amended Plan
and to establish and amend rules and regulations relating thereto.

         Under the Amended Plan, the exercise  price of an option  designated as
an ISO shall not be less than the fair market  value of the Common  Stock on the
date the option is granted. However, in the event an option designated as an ISO
is granted to a ten percent  stockholder  (as defined in the Amended  Plan) such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO options may be less than such fair market value.

     The aggregate fair market value of shares  subject to options  granted to a
participant  which  are  designated  as ISOs  which  become  exercisable  in any
calendar year may not exceed $100,000.

     The Board or the Stock  Option  Committee,  as the case may be, may, in its
sole discretion, grant bonuses or authorize loans to or guarantee loans obtained
by an  optionee  to enable  such  optionee  to pay any  taxes  that may arise in
connection  with the  exercise  or  cancellation  of an  option.  Unless  sooner
terminated, the Amended Plan will expire in 2006. To date, options to purchase a
total of 2,331,500  shares of the Company's  Common Stock have been issued under
the 1992 Plan and the Amended Plan.


<PAGE>
  24



Director Plan

         In September 1992, the Company adopted the Non-Executive Director Stock
Option Plan (the "Director Plan").  The Director Plan provides for issuance of a
maximum of 1,000,000  shares of Common Stock upon the exercise of stock  options
granted  under the Director  Plan.  Options are granted  under the Director Plan
until 2002 to (i)  non-executive  directors  as defined and (ii)  members of any
advisory board established by the Company who are not full time employees of the
Company  or any of its  subsidiaries.  The  Director  Plan  provides  that  each
non-executive  director  will  automatically  be granted  an option to  purchase
20,000  shares each  September 1,  provided such person has served as a director
for the 12 months immediately prior to such September 1st.

         In June 1996, the Company's  shareholders  approved an amendment to the
Non-Executive  Director  Stock  Option  Plan to provide for the  elimination  of
non-discretionary  stock grants to members of any advisory board  established by
the Company.  An eligible  member of an advisory  board may receive an option to
purchase  shares  of the  Company's  Common  Stock  under the  Director  Plan as
provided for in the discretion of the Company's Board of Directors.

     The exercise  price for options  granted  under the Director  Plan shall be
100% of the fair market  value of the Common  Stock on the date of grant.  Until
otherwise  provided  in the Stock  Option  Plan the  exercise  price of  options
granted under the Director Plan must be paid at the time of exercise,  either in
cash,  by delivery of shares of Common Stock of the Company or by a  combination
of each. The term of each option  commenced on the date it is granted and unless
terminated sooner as provided in the Director Plan,  expires five years from the
date of grant.  The Director Plan is administered by a committee of the board of
directors  composed  of not fewer than three  persons  who are  officers  of the
Company (the  "Committee").  The Committee has no discretion to determine  which
non-executive  director or advisory  board  member will  receive  options or the
number  of  shares  subject  to  the  option,  the  term  of the  option  or the
exercisability   of  the  option.   However,   the   Committee   will  make  all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for  incentive  stock option  treatment.  To
date,  a  total  of  220,000   options  have  been  granted  to  the   Company's
Non-Executive  members of the Board of  Directors,  and 2,500  options have been
granted to each of eight members of the Company's  Advisory  Board.  1996 Senior
Management Incentive Stock Option Plan

Senior Management Plan

         In 1996 the Board of  Directors  and  shareholders  of the  Corporation
adopted an  equity-based  incentive plan for its senior manager  employees,  the
1996 Senior Management  Incentive Plan (the "1996 Senior Management Plan"). Only
senior  managers of the  Corporation  are  eligible to  participate  in the 1996
Senior  Management  Plan.  The Board of  Directors  believes  that  equity-based
incentive  compensation  plays a  critical  role  in  retaining  and  attracting
motivated  senior  managers.  The 1996 Senior  Management  Plan provides for the
issuance  of up to  2,000,000  shares  of  the  Corporation's  Common  Stock  in
connection with the issuance of stock options and other stock purchase rights to
senior managers  rendering  services to the  Corporation.  The Plan provides for
four types of awards: stock options,  incentive stock rights, stock appreciation
rights and restricted stock purchase  agreements  (collectively,  the "Awards"),
all as described below.

         The 1996 Senior  Management  Plan is intended to attract and retain key
personnel  whose  performance  is  expected  to have a  positive  effect  on the
Corporation's  profits and growth  potential by encouraging  and assisting those
persons to acquire  equity in the  Corporation.  Directors who are not otherwise
employed by the  Corporation and non-senior  manager  employees are not eligible

<PAGE>
  25



for participation in the 1996 Senior Management Plan. Unless sooner  terminated,
the 1996 Senior  Management  Plan will expire on June 28, 2006 and Awards may be
granted at any time or from time to time through such date.

     The  1996  Senior  Management  Plan  is  administered  by the  Compensation
Committee  of  the  Board  of  Directors  (the  "1996  Senior   Management  Plan
Administrator").   The  1996  Senior  Management  Plan   Administrator  has  the
discretion  to  determine  the eligible  senior  managers to whom Awards will be
granted;  the type and the prices at which  Awards will be granted;  the periods
during  which each Award will be  granted;  and the number of shares  subject to
each Award. The 1996 Senior Management Plan  Administrator has full authority to
interpret  the plan and to establish  and amend rules and  regulations  relating
thereto.

         Except  as   described   below,   the  1996  Senior   Management   Plan
Administrator  may from time to time amend the 1996 Senior Management Plan as it
deems  proper  and in the best  interests  of the  Corporation  without  further
approval of the shareholders.

         The  Board  of   Directors   and  the  1996  Senior   Management   Plan
Administrator  may not amend certain features of the 1996 Senior Management Plan
without  the  approval  of the  Corporation's  shareholders  to the extent  such
approval is required for compliance with Section 422 of the Code with respect to
ISO's,  Section  162(m) of the Code with  respect  to  Non-ISO's  or Rule  16b-3
promulgated  under Section 16 of the Exchange Act with respect to Awards made to
individuals  subject to Section 16 of the Exchange  Act. Such  amendments  would
include: (a) increasing the maximum number of shares of Common Stock that may be
issued under the 1996 Senior  Management Plan; (b) extending the duration of the
1996 Senior  Management  Plan; (c) modifying the  requirements as to eligibility
for  participation  in  the  1996  Senior  Management  Plan;  or  (d)  otherwise
increasing  the  benefits  accruing  to  participants   under  the  1996  Senior
Management Plan.

     Each of the  types of Awards  that may be  granted  under  the 1996  Senior
Management Plan is discussed below.

Stock Options.

     Under  the  terms of the  1996  Senior  Management  Plan,  options  granted
thereunder  will be designated  as options  which  qualify for  incentive  stock
option  treatment  ("ISO's")  under Section 422 of the Internal  Revenue Code of
1986, as amended (the "Code"), or options which do not so qualify ("Non-ISO's").

         Under the 1996 Senior  Management Plan, the exercise price of an option
designated  as an ISO shall not be less than the fair market value of the Common
Stock on the  date the  option  is  granted.  However,  in the  event an  option
designated as an ISO is granted to a ten percent Shareholder such exercise price
shall be at least 110% of such fair  market  value.  Exercise  prices of Non-ISO
options may not be less than 85% of such fair market value.  The aggregate  fair
market value of shares  subject to an option  designated as an ISO for which any
participant may be granted such an option in any calendar year, shall not exceed
$100,000 plus any unused carryovers (as defined in Section 422 of the Code) from
a prior year.  The "fair  market  value" will be the price of the  Corporation's
Common Stock, the low bid as reported by the National Quotation Bureau, Inc., or
a market make of the  Corporation's  Common Stock, or if the Common Stock is not
quoted by any of the above, by the Board of Directors acting in good faith.

         Options may be granted under the 1996 Senior  Management  Plan for such
periods as determined by the 1996 Senior Management Plan Administrator; provided
however  that no option  designated  as an ISO  granted  under  the 1996  Senior
Management Plan shall be exercisable over a period in excess of ten years, or in
the case of a ten percent  Shareholder,  five years. Options may be exercised in

<PAGE>
  26




     whole  at  any  time  or in  part  from  time  to  time.  Options  are  not
transferable except to the estate of an option holder; provided, however, in the
case of a Non-ISO, and subject to Rule 16b-3 promulgated under Section 16 of the
Exchange  Act and  prevailing  interpretations  thereunder  by the  Staff of the
Securities  and Exchange  Commission,  a recipient  of a Non-ISO  may,  with the
consent of the 1996  Senior  Management  Plan  Administrator,  designate a named
beneficiary  of the  Non-ISO  in the  event of the death of such  recipient,  or
assign such Non-ISO.

     Incentive Stock Rights.

     Incentive  stock rights  consists of  incentive  stock units which give the
holder  the  right  to  receive,  without  payment  of cash or  property  to the
Corporation,  shares of Common  Stock.  Each unit is  equivalent to one share of
Common Stock and will be issued in consideration for services  performed for the
Corporation.  If the  services  of  the  senior  manager  with  the  Corporation
terminate  prior  to the  end of the  incentive  period  relating  to the  units
awarded, the rights shall thereupon be null and void, except that if termination
is caused by death or permanent disability, the senior manager or his/her heirs,
as the case may be,  shall be  entitled  to  receive a pro rata  portion  of the
shares represented by the units, based upon that portion of the incentive period
which shall have elapsed prior to the death or disability.

     Stock Appreciation  Rights ("SARs").

     SARs may be  granted  to  recipients  of  options  under  the  1996  Senior
Management Plan. SARs may be granted  simultaneously with, or subsequent to, the
grant of a related  option and may be  exercised  to the extent that the related
option is exercisable,  except that no general SAR (as hereinafter  defined) may
be exercised  within a period of six months of the date of grant of such SAR and
no SAR granted with  respect to an ISO may be  exercised  unless the fair market
value of the Common Stock on the date of exercise  exceeds the exercise price of
the ISO. A holder may be granted  general SARs ("general  SARs") or limited SARs
("limited SARs"), or both.  General SARs permit the holder thereof to receive an
amount (in cash,  shares of Common Stock or a combination  of both) equal to the
number of SARs  exercised  multiplied  by the excess of the fair market value of
the Common  Stock on the exercise  date over the  exercise  price of the related
option.  Limited  SARs are  similar to general  SARs,  except  that,  unless the
Administrator  (as  defined  in the  Plan)  determines  otherwise,  they  may be
exercised  only during a prescribed  period  following the  occurrence of one or
more of the  following  events:  (i) the  approval  of the  shareholders  of the
Corporation  of a  consolidation  or merger in which the  Corporation is not the
surviving  corporation,  the sale of all or substantially  all the assets of the
Corporation,  or the  liquidation or dissolution  of the  Corporation;  (ii) the
commencement  of a tender or exchange offer for the  Corporation's  Common Stock
(or securities  convertible  into Common Stock) without the prior consent of the
Board;  (iii) the  acquisition  of  beneficial  ownership by any person or other
entity (other than the Corporation or any employee benefit plan sponsored by the
Corporation)  of securities of the Corporation  representing  25% or more of the
voting power of the Corporation's  outstanding securities; or (iv) if during any
period of two years or less,  individuals  who at the  beginning  of such period
constitute the entire Board cease to constitute a majority of the Board,  unless
the election,  or the nomination for election,  of each new director is approved
by at least a majority of the directors then still in office.

         The exercise of any portion of either the related  option or the tandem
SARs will cause a  corresponding  reduction  in the  number of shares  remaining
subject to the option or the tandem SARs,  thus  maintaining  a balance  between
outstanding options and SARs.

<PAGE>
  27


         Restricted  Stock  Purchase   Agreements.   Restricted  stock  purchase
agreements  provide for the sale by the Corporation of shares of Common Stock at
prices  to be  determined  by the  Board,  which  shares  shall  be  subject  to
restrictions  on disposition  for a stated period during which time the purchase
must continue employment with the Corporation to retain the shares.

         Upon   expiration  of  the   applicable   restricted   period  and  the
satisfaction of any other applicable  conditions,  all or part of the restricted
shares and any dividends or other  distributions  not  distributed to the holder
(the "retained distributions") thereon will become vested. Any restricted shares
and any retained distributions thereon which do not so vest will be forfeited to
the Corporation. If prior to the expiration of the restricted period a holder is
terminated  without  cause or  because  of a total  disability  (in each case as
defined  in the  Plan),  or  dies,  then,  unless  otherwise  determined  by the
Administrator at the time of the grant, the restricted period applicable to each
award of restricted shares will thereupon be deemed to have expired.  Unless the
Administrator determines otherwise, if a holder's employment terminates prior to
the expiration of the applicable  restricted period for any reason other than as
set forth above, all restricted  shares and any retained  distributions  thereon
will be forfeited.


<PAGE>
  28




Item 11. Security Ownership of Certain
         Beneficial Owners and Management
         --------------------------------

         The  following  table sets forth,  as of April 8, 1997,  the number and
percentage  of  outstanding  shares of Common Stock  beneficially  owned by each
person known by the Company to own  beneficially  more than 5% of the  Company's
outstanding shares of Common Stock, by each director of the Company,  and by all
directors and officers of the Company as a group.

Directors, Officers                               Amount and Percentage
and 5% Shareholders (1)                           of Beneficial Ownership (1)
-----------------------                           --------------------------
                                                  Number of Shares  Percent
                                                  ----------------  -------

Herbert Kurinsky                                    361,518(2)        3.9%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

William J. Kurinsky                               1,368,423(3)       14.5%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

Brian M. Cohen                                        76,000(4)        *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

Edward L. Bayarski                                    72,000(5)        *
One Mack Centre Drive
Paramus, NJ 07652

Ward R. Jones                                         80,000(6)        *
7 Leda Lane
Guilderland, NY 12084

Norma Doxey                                           35,000(7)         *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

David I. Portman                                     100,000(8)        1.1%
19 Pal Drive
Wayside, NJ 07712

All Directors and                                  2,092,941(2-8)     21.2%
Officers as a group
(7 persons in number)

* Less than 1%.

     (1)  Unless  otherwise  indicated  below,  each  director,  officer  and 5%
shareholder has sole voting and sole investment power with respect to all shares
that he beneficially owns.

     (2)  Includes  vested and  presently  exercisable  options  of Mr.  Herbert
Kurinsky, to purchase 360,000 shares of Common Stock.


<PAGE>
  29




     (3) Includes  vested and presently  exercisable  options of Mr.  William J.
Kurinsky to purchase 515,000 shares of Common Stock.

     (4) Includes  75,000 shares of Common Stock  reserved for issuance upon the
exercise of vested and presently exercisable stock options.

     (5) Includes  72,000 shares of Common Stock  reserved for issuance upon the
exercise  of 8,000  vested and  presently  exersiable  stock  options and 64,000
shares non-vested stock option.

     (6) Includes  80,000 shares of Common Stock  reserved for issuance upon the
exercise of vested and presently exercisable stock options.

     (7) Includes  35,000 shares of Common Stock  reserved for issuance upon the
exercise of vested and presently exercisable stock options.

     (8) Includes  60,000 shares of Common Stock  reserved for issuance upon the
exercise of vested and presently exercisable stock options.


Item 12.   Certain Relationships and Related Transactions

     For information  concerning the terms of the employment  agreements entered
into between the Company and Messrs.  Herbert  Kurinsky and William J. Kurinsky,
see "Executive Compensation".

         Advances and loans to the Company's three Executive  Officers,  Herbert
Kurinsky,  William J.  Kurinsky  and Brian M. Cohen and  Director  Norma  Doxey,
totaling  $142,519 are unsecured  and currently  bear interest at the rate of 6%
per annum.  These loans are due on demand.  An additional loan of $13,005 to Mr.
Cohen is non-interest bearing and payable at the rate of $400 per month plus 10%
of any commissions earned.

         The Company served as placement agent in a private  placement  offering
by Pacific Health  Laboratories which commenced in August 1995 and was completed
in April 1996.  Pacific Health sold 250,000 shares of 10% Convertible  Preferred
Stock in the  private  placement  at $10.00  per  share.  The  Company  received
commissions of approximately  $250,000 from the private placement offering.  Mr.
David Portman, a director of the Company, also serves as an officer and director
of Pacific Health, and is a significant stockholder of Pacific Health.

         Additionally,  in June  1996 the  Company  conducted  a second  private
placement on behalf of Pacific Health and received  commissions  and expenses of
approximately  $116,000.  The second  offering  consisted of the sale of 287,750
shares of Common Stock of Pacific Health.

     In July  1995,  the  Company  commenced  a private  placement  on behalf of
Environmental  Coupon  Marketing,   Inc.  ("ECM")  a  closely-held  marketer  of
recycling  programs to retailers  featuring store coupons and cash incentives to
consumers. In anticipation of the offering, in August 1995, the Company loaned a
total of  $282,000  to ECM.  The first loan,  in the amount of  $100,000,  bears
interest at the rate of 6% per annum and was  scheduled to mature on the earlier
of a proposed private placement of ECM securities,  or August 5, 1996. In August
1996,  the Company  extended  repayment of the loan to July 15, 1997. The second
loan, in the original  amount of $182,000,  is  non-interest  bearing and may be
converted  into up to 350,000 shares of ECM common stock at the rate of $.52 per
share.  The  Company  sold  $52,000  of  principal  amount  of this loan to four
unaffiliated investors for face value in 1996. This loan was scheduled to mature
on October  5,  1996,  at which  time the  Company  extended  it for one year to
October 5, 1997. Both loans are partially  secured by certain equipment owned by
ECM.


<PAGE>
  30




     The Company also purchased  150,000 shares of ECM common stock for $.40 per
share, or $60,000 in 1995, and an additional 150,000 shares for $60,000 in 1996.
Subsequent  to the 1996  purchase,  the Company  sold 37,500 and 52,500  shares,
respectively,  to an officer  of the  Company  and a  consultant,  for cost,  or
$36,000.  The Company  believes that the selling price  represented a fair value
for the shares.  

<PAGE>
  31

                                     PART IV


Item 13.          Exhibits, Financial Statements
                  and Reports on Form 8-K
                  ------------------------------

(A) 1.   Financial Statements
         --------------------

         See Financial Statements Attached Hereto.

    2.   Exhibits
         --------

         Incorporated  by  reference  to the  Exhibit  Index  at the end of this
report.

(B)      Reports on Form 8-K
         -------------------

         During the last  quarter of the period  covered by this  Report,  there
were no reports filed on Form 8-K.


<PAGE>
  32



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                              FIRST MONTAUK FINANCIAL CORP.



                                              By /s/ Herbert Kurinsky
                                                 --------------------
                                                 Herbert Kurinsky, President
Dated:   April 14, 1997

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Company and in the capacities and on the dates indicated.


-------------------------                                     April 14, 1997
Herbert Kurinsky
President, Chief Executive
Officer and Director


-------------------------                                     April 14, 1997
William J. Kurinsky
Vice-President, Chief Operating
and Chief Financial Officer, and
Principal Accounting Officer,
Secretary and Director


-------------------------                                     April 14, 1997
Norma Doxey, Director


-------------------------                                     April 14, 1997
Ward R. Jones, Jr., Director


-------------------------                                     April 14, 1997
David I. Portman, Director


<PAGE>
  33



                                 EXHIBITS INDEX


         The exhibits designated with an asterisk (*) have previously been filed
with the Commission in connection with the Company's  Registration  Statement on
Form S-l,  File No.  33-24696,  those  designated  (**) have been filed with the
Company's  Form  10-KSB  for the fiscal  year ended  December  31,  1993,  those
designated  (***) have been  previously  filed with the  Company's  Registration
Statement on Form S-3,  File No.  33-65770,  and pursuant to 17 C.F.R.  Sections
201.24 and 240.12b-32,  are incorporated by reference to the document referenced
in brackets following the description of such exhibits.  Those designated (****)
denotes  exhibits  which have been filed with the Company's  Form 10-KSB for the
fiscal  year ended  December  31,  1994,  and  (*****)  denotes  exhibits  filed
herewith.  Those designated (******) denotes exhibits which have been filed with
the Company's Proxy Statement dated May 30, 1996.


Exhibit No.                                 Description

3.1*           Amended and Restated Certificate of Incorporation adopted at 1989
               Special Meeting in lieu of Annual Meeting of Shareholders.

3.2*           Amended and Restated By-Laws.

4.1*           Form of Common Stock Certificate.

4.4*           Form of Underwriter's Warrant.

10.7*          Sublease between Prime Asset Management Corp. and the Registrant
               dated December 6, 1989.

10.8*          Clearing Agreement between the Registrant and Wertheim Schroder &
               Co., Incorporated dated January 21, 1991.

10.10*         Lease Agreement between the Registrant and Hovchild dated
               May 25, 1990.

10.11***       Employment  Agreement  between First Montauk  Financial Corp.
               and Herbert Kurinsky dated January 1, 1993.

10.12***       Employment  Agreement  between First Montauk  Financial Corp.
               and William  Kurinsky dated January 1, 1993.

10.13***       Lease Agreement between First Montauk Securities Corp.
               and River Office Equities dated September 7, 1993.

10.14****      Lease Addendum  Agreement between First Montauk  Securities
               Corp. and River Office Equities dated June 21, 1994.

10.15*****     Sublease Agreement between First Montauk Securities Corp. and
               Pilot Laboratories, Inc. dated September  19,  1995,  and
               Master  Lease  Agreement  between  River  Office  Equities
               and Pilot Laboratories, Inc. dated  August 31, 1987.

10.16*****     Office Lease  Agreement  between First Montauk  Securities
               Corp. and River Office Equities dated January 31, 1996.

10.17          Office Lease Agreement between First Montauk Securities Corp.
               and River Office Equities dated March 5, 1997.

11             Computation of Income Per Share

27             Financial Data Schedule


<PAGE>
  34





28.1*          1992 Incentive Stock Option Plan.

28.2*          1992 Non-Executive Director Stock Option Plan.

28.3******     Amended  and  Restated  1992  Incentive   Stock  Option  Plan.

28.4******     Non-Executive  Director Stock Option Plan- Amended and Restated
               June 28, 1996

28.5******     1996 Senior Management Incentive Stock Option Plan.

28.6           Employment  Agreement  between First Montauk  Financial Corp.
               and Herbert Kurinsky dated January 1, 1996.

28.7           Employment  Agreement  between First Montauk  Financial Corp.
               and William  Kurinsky dated January 1, 1996.








<PAGE>
  35





                         REPORT OF INDEPENDENT AUDITORS




The Board of Directors and Stockholders
First Montauk Financial Corp.
Red Bank, New Jersey

     We have  audited the  accompanying  consolidated  statements  of  financial
condition of First Montauk  Financial Corp. and  subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations, changes in
stockholders'  equity,  and cash  flows  for each of the  years in the  two-year
period ended December 31, 1996. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position of First
Montauk  Financial Corp. and  subsidiaries as of December 31, 1996 and 1995, and
the  results of its  operations  and its cash flows for each of the years in the
two-year  period ended December 31, 1996 in conformity  with generally  accepted
accounting principles.




                                   Schneider Ehrlich & Wengrover LLP
                                   (successor to Schneider Ehrlich Sosinsky
                                   Rodis & Wengrover LLP)
Woodbury, New York
March 10, 1997

<PAGE>
  36



                  FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>


                                                     December 31,
                                               1996                  1995
                                               ----                  ----

ASSETS

<S>                                        <C>                  <C>
Cash ...................................   $ 1,069,548          $   845,471
Securities owned, at market ............     2,129,435            7,114,507
Due from clearing firm .................     1,301,457                   --
Commissions receivable .................       720,381              383,868
Employee and broker receivables ........       741,603              357,525
Furniture, equipment and leasehold
 improvements - net ....................     1,200,933              804,668
Notes receivable - ECM .................       230,000              282,000
Due from officers ......................       171,978              155,524
Other assets ...........................       624,536              174,231
Deferred tax asset .....................       552,168              369,173
                                             ---------            ---------
     Total assets ......................   $ 8,742,039          $10,486,967
                                             ---------           ----------
                                             ---------           ----------

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Due to clearing firm ...................   $      --            $ 2,306,032
Securities sold, but not yet
 purchased, at market ..................       127,627              166,382
Notes payable - bank ...................       458,305               47,544
Commissions payable ....................     1,552,218            1,467,190
Accounts payable .......................       494,697              389,312
Accrued expenses .......................     1,811,897            1,392,115
Income taxes payable ...................          --                621,690
Other liabilities ......................       180,516              495,756
                                             ---------            ---------

     Total liabilities .................     4,625,260            6,886,021
                                             ---------            ---------

Common stock issued with guaranteed  selling price no par value,  210,500 shares
 issued
 and outstanding .......................       421,500                   --
                                             ---------             --------

Commitments and contingent liabilities
 (See Notes)

STOCKHOLDERS' EQUITY

Preferred Stock, 5,000,000 shares
 authorized, $.10 par value, no shares
 issued and outstanding ................          --                      --
Common Stock, no par value, 15,000,000
 shares authorized, 8,222,481 and
 7,920,106 shares issued and
 outstanding, respectively .............     3,588,273            3,320,012
Additional paid-in capital .............       243,961              220,172
Retained earnings ......................        93,551               60,762
                                             ---------            ---------
                                             3,925,785            3,600,946
Less: 196,802 common shares in treasury,
 at cost ...............................      (230,506)                  --
                                             ---------            ---------
 Total stockholders' equity ............     3,695,279            3,600,946
                                             ---------            ---------

 Total liabilities and stockholders'
  equity ...............................   $ 8,742,039          $10,486,967
                                             ---------           ----------
                                             ---------           ----------


                See notes to consolidated financial statements.
</TABLE>
<PAGE>
  37


                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             Years ended December 31,
                                              1996            1995
                                              ----            ----

Revenues:

<S>                                       <C>                 <C>
Principal transactions                    $ 7,660,700         $ 9,763,940
Commissions                                25,749,690          17,113,296
Investment banking                            634,329             388,249
Interest and other income                   1,044,969           1,076,718
                                            ---------           ---------

Total revenues                             35,089,688          28,342,203
                                           ----------          ----------
                                           ----------          ----------

Expenses:

Commissions, employee compensation
 and benefits                              25,428,184          19,542,578
Clearing and floor brokerage                3,139,142           3,112,474
Communications and occupancy                1,662,936           1,260,209
Legal matters and related costs             2,731,997           1,542,328
Other operating expenses                    2,006,615           1,439,926
Interest                                      105,772             192,752
                                           ----------          ----------

                                           35,074,646          27,090,267
                                           ----------          ----------

Income before income taxes                     15,042           1,251,936

Provision (benefit) for income taxes          (17,747)            483,848
                                            ---------          ----------

Net income                               $     32,789         $   768,088
                                            ---------          ----------
                                            ---------          ----------


Per share of Common Stock:

Primary:

         Net income                      $        .01         $       .09
                                            ---------          ----------
                                            ---------          ----------

         Number of shares                   8,623,538           8,422,365
                                            ---------          ----------
                                            ---------          ----------

Fully diluted:

         Net income                                           $       .09
                                                               ----------
                                                               ----------

         Number of shares                                       8,901,331
                                                               ----------
                                                               ----------


                 See notes to consolidated financial statements.
</TABLE>

<PAGE>
  38



                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                             Years ended December 31,
                                              1996            1995
                                              ----            ----

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Cash flows from operating activities:
<S>                                       <C>                 <C> 
         Net income                       $   32,789          $   768,088
Adjustments to reconcile net income        ---------           ----------
 to net cash
         provided by operating activities:
         Shares issued to settle legal
           claims                            178,650                   --
         Common stock issued with
           guaranteed selling price          421,500                   --
         Tax benefit related to exercise
           of stock options                   23,789                   --
         Depreciation and amortization       272,050              184,818
         Commissions receivable             (336,513)            (250,901)
         Securities owned - at market      4,985,072           (2,197,289)
         Other assets                       (338,846)             (34,863)
         Due from/to clearing firm        (3,607,489)              26,781
         Securities sold but not yet
           purchased                         (38,755)            (288,600)
         Commissions payable                  85,028              714,994
         Accounts payable                    105,385               63,363
         Accrued expenses                    419,782            1,372,891
         Income taxes payable              (621,690)              615,636
         Other liabilities                 (315,240)              334,345
         Deferred income taxes             (182,995)             (309,778)
                                          ---------             ---------
             Total adjustments            1,049,728               231,397
                                          ---------             ---------
Net cash provided by operating activities 1,082,517               999,485
                                          ---------             ---------
Cash flows from investing activities:
         Due from officers                  (16,454)               (4,370)
         Employee and broker receivables   (384,078)              156,742
         Capital expenditures              (668,314)             (435,539)
         Proceeds from the sale of notes
           receivable - ECM                  52,000              (276,000)
         Purchase of stock in ECM           (60,000)                   --
         Sale of stock in ECM                36,000                    --
         Other assets                       (87,460)              (60,000)
                                          ---------             ---------
Net cash used in investing activities    (1,128,306)             (619,167)
                                          ---------             ---------
Cash flows from financing activities:
         Proceeds from notes payable
           - bank                           479,625                    --
         Payment of notes payable - bank    (68,864)              (25,934)
         Stock registration costs                --                (2,814)
         Proceeds from exercise of
           stock options                     89,611                13,985
         Repurchase of common stock        (230,506)             (194,035)
Net cash provided by (used in) financing  ---------             ---------
 activities                                 269,866              (208,798)
                                          ---------             ---------
Net increase in cash and cash equivalents   224,077               171,520
Cash at beginning of year                   845,471               673,951
                                          ---------             ---------
Cash at end of year                     $ 1,069,548             $ 845,471
                                          ---------              --------
                                          ---------              --------

                 See notes to consolidated financial statements.
</TABLE>


<PAGE>
  39


                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (continued)
<TABLE>
<CAPTION>
                                             Years ended December 31,
                                              1996            1995
                                              ----            ----
<S>                                       <C>                   <C> 
Supplemental disclosures of cash flow information:
         Cash paid during the period for:
          Interest                        $  105,772            $  192,752
          Income taxes                    $1,019,242            $  149,722

Supplemental schedule of non-cash financing activities:
     Shares  issued to settle  legal  claims $ 178,650  Common stock issued with
     guaranteed
      selling price                       $  421,500
     Tax benefit related to exercise of
      stock options                       $   23,789



                 See notes to consolidated financial statements.

</TABLE>




<PAGE>
<TABLE>
<CAPTION>

                                            FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                       FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 31, 1996

                                                   Additional
                                 Common Stock      Paid-in     Retained    Treasury Stock         Stockholders'
                              Shares     Amount    Capital     Earnings   Shares      Amount           Equity

<S>                         <C>       <C>        <C>         <C>                                           
Balances at January 1, 1995 8,112,406 $3,306,027 $ 417,021   $(707,326)       --          --         $3,015,722

Exercise of stock options      23,500     13,985        --          --        --           --            13,985
Stock registration costs           --         --    (2,814)         --        --           --            (2,814)
Repurchase of common stock   (215,800)        --  (194,035)         --        --           --          (194,035)
Net income for the year            --         --        --     768,088        --           --           768,088
                              -------     ------  ---------    -------     -----     --------         ---------
Balances at December 31,
 1995                       7,920,106  3,320,012   220,172      60,762        --           --         3,600,946

Exercise of stock options     137,375     89,611        --          --        --           --            89,611
Tax benefit related to
    exercise of stock options      --         --    23,789          --        --           --            23,789
Repurchase of common stock         --         --        --          -- (196,802)   $(230,506)          (230,506)
Shares issued to settle legal
    claims                    165,000    178,650        --          --        --           --           178,650
Net income for the year            --         --        --      32,789        --           --            32,789
                              -------    -------  ---------     ------ ---------   ----------           --------
Balances at December 31,
 1996                       8,222,481 $3,588,273  $243,961   $  93,551 (196,802)   $(230,506)        $3,695,279
                            ---------  ---------   -------     -------  -------     --------          ---------
                            ---------  ---------   -------     -------  -------     --------          ---------

                See notes to consolidated financial statements.
</TABLE>

<PAGE>
  40



 


NOTE 1 - NATURE OF BUSINESS

     First  Montauk   Financial  Corp.  and  subsidiaries  (the  "Company")  are
primarily engaged in securities  brokerage,  investment banking and trading. The
Company's principal  subsidiary,  First Montauk Securities Corp. ("FMSC"),  is a
broker-dealer  registered with the Securities and Exchange  Commission.  Through
FMSC, the Company executes principal and agency  transactions,  makes markets in
over-the-counter  securities,  and performs  underwriting and investment banking
services. Customers are located throughout the United States.

     The Company clears all customer  transactions  on a fully  disclosed  basis
through an independent  clearing firm.  Accordingly,  the Company does not carry
securities  accounts  for  customers  nor does it  perform  custodial  functions
related to those securities.

     The Company  also sells  insurance  products and  investments  in equipment
leases,  respectively,   through  two  other  subsidiaries,   Montauk  Insurance
Services, Inc. and Montauk Advisors, Inc.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation

     The consolidated  financial  statements include the accounts of the Company
and its subsidiaries.  All intercompany accounts and transactions are eliminated
in consolidation.

     Certain reclassifications have been made to prior year financial statements
to conform to the 1996 presentation.

     Revenue Recognition

     Securities transactions, investment banking revenues, and commission income
and related  expenses are recorded on a trade date basis.  Securities  owned and
securities  sold but not yet repurchased are stated at quoted market values with
unrealized gains and losses reflected in the Statement of Operations.


     Commissions  earned from the sale of insurance products are recognized upon
approval of the customer application by the insurance carrier.

     Depreciation and Amortization

     Furniture  and equipment  and  leasehold  improvements  are stated at cost.
Depreciation is computed  generally on a straight-line  basis over the estimated
useful  lives of the  assets,  ranging  from  three to  seven  years.  Leasehold
improvements are amortized over the shorter of either the asset's useful life or
the related  lease term.  Depreciation  is computed on the modified  accelerated
cost recovery system (MACRS) for income tax purposes.

     Income Taxes

     The Company uses the  liability  method to determine its income tax expense
as required under the Statement of Financial  Accounting Standards No. 109 (SFAS
109). Under SFAS 109,  deferred tax assets and liabilities are computed based on
differences between financial reporting and tax basis of assets and liabilities,
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the differences are expected to reverse.

     Deferred tax assets are reduced by a valuation  allowance  if, based on the
weight of the  available  evidence,  it is more likely than not that all or some
portion  of  the  deferred  tax  assets  will  not  be  realized.  The  ultimate
realization  of the  deferred  tax asset  depends  on the  Company's  ability to
generate sufficient taxable income in the future.

     The Company and its  subsidiaries  file a  consolidated  federal income tax
return and separate state returns.

     Statement of Cash Flows

     For purposes of the  Statement  of Cash Flows,  the Company  considers  all
highly  liquid debt  instruments  purchased  with an original  maturity of three
months or less to be cash equivalents.


<PAGE>
  41


     Earnings per Share

     The  computations  of earnings per share were  computed  using the weighted
average  number of  shares  outstanding,  adjusted  for the  incremental  shares
attributable  to  outstanding  options to purchase  common stock,  as determined
under the  treasury  stock  method.  The  difference  between  primary and fully
diluted earnings per share in 1996 is not material.

     Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.

     Long-lived assets

     In  accordance  with  SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  of",  the Company
records  impairment losses on long-lived assets used in operations,  when events
and   circumstances   indicate  that  the  assets  might  be  impaired  and  the
undiscounted  cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.

     Recent Accounting Pronouncement

     In October 1995, the Financial  Accounting  Standards Board issued SFAS No.
123,  "Accounting for Stock-based  Compensation".  SFAS No. 123 is effective for
fiscal years  beginning  after  December 15, 1995, and requires that the Company
either  recognize  in its  financial  statements  costs  related to its employee
stock-based  compensation  plans, such as stock option and stock purchase plans,
or make pro forma  disclosures  of such  costs in a  footnote  to the  financial
statements. The Company has elected to continue to use the intrinsic value-based
method of APB Opinion  no. 25, as allowed  under SFAS 123, to account for all of
its employee  stock-based  compensation  plans. The adoption of SFAS No. 123 did
not have a material  effect on the  Company's  financial  position or results of
operations.

NOTE 3 - SECURITIES OWNED and SECURITIES SOLD, BUT NOT YET PURCHASED


     Marketable  securities  owned  and sold but not yet  purchased  consist  of
trading securities stated at quoted market values, as indicated below:


                                               December 31,
                                 1996                            1995
                                 ----                            ----
                                         Sold but                      Sold but
                                          not yet                       not yet
                           Owned        Purchased       Owned          Purchased
                           -----        ---------       -----          ---------
Obligations of U. S.
 government and its
 agencies            $    29,647      $       --       $   163,444      $ 18,467
State and municipal
 obligations             203,428          20,735         3,574,616        44,854
Corporate stocks and
 bonds                 1,896,360         105,736         3,242,516       103,061
Options and warrants          --           1,156           133,931            --
                       ---------         -------         ---------       -------
                      $2,129,435        $127,627        $7,114,507      $166,382
                       ---------         -------         ---------       -------
                       ---------         -------         ---------       -------



<PAGE>
  42


 EMPLOYEE AND BROKER RECEIVABLES

                This account consists of the following:

                                                          December 31,
                                                   1996               1995
                                                   ----               ----

                Commission advances             $ 99,172           $ 74,388
                Loans to brokers and
                 non-executive employees         642,431            283,137
                                                 -------            -------
                                                $741,603           $357,525
                                                 -------            -------
                                                 -------            -------

     Receivables are generally  non-interest  bearing and due on demand,  except
for an $84,000  loan which is due by July 31, 1997 with  interest at the rate of
6% per annum.  Loans  totalling  approximately  $65,000 at December 31, 1996 are
secured by collateral; the balance is unsecured.

NOTE 5 -        FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Furniture, equipment and leasehold improvements consist of the following:

                                                          December 31,
                                                   1996              1995
                                                   ----              ----

                Furniture and fixtures          $  615,683         $  365,864
                Computer and office equipment    1,030,521            646,033
                Leasehold improvements             163,368            129,360
                                                 ---------          ---------
                                                 1,809,572          1,141,257
                Less:  Accumulated depreciation
                 and amortization                 (608,639)          (336,589)
                                                 ---------          ---------
                                                $1,200,933         $  804,668
                                                 ---------          ---------
                                                 ---------          ---------


               Depreciation  expense was $272,050 and $184,818 in 1996 and 1995,
               respectively.

NOTE 6 -        NOTES RECEIVABLE - ECM

     In 1995,  the Company  loaned a total of $282,000 to  Environmental  Coupon
Marketing,  Inc.  ("ECM"),  a  closely-held  marketer of  recycling  programs to
retailers  featuring store coupons and cash  incentives to consumers.  The first
loan, in the amount of $100,000,  bears interest at the rate of 6% per annum and
was  scheduled to mature on the earlier of a proposed  private  placement of ECM
securities, or August 5, 1996. In August 1996, the Company extended repayment of
the loan to July 15, 1997. The second loan, in the original  amount of $182,000,
is  non-interest  bearing and may be converted  into up to 350,000 shares of ECM
common  stock  at the  rate of $.52 per  share.  The  Company  sold  $52,000  of
principal amount of this loan to four  unaffiliated  investors for face value in
1996.  This loan was  scheduled to mature on October 5, 1996,  at which time the
Company  extended it for one year to October 5, 1997.  Both loans are  partially
secured by certain equipment owned by ECM.


     The Company also purchased  150,000 shares of ECM common stock for $.40 per
share, or $60,000 in 1995, and an additional 150,000 shares for $60,000 in 1996.
Subsequent  to the 1996  purchase,  the Company  sold 37,500 and 52,500  shares,
respectively,  to an officer  of the  Company  and a  consultant,  for cost,  or
$36,000.  The Company  believes that the selling price  represented a fair value
for the shares.  The net  investment in ECM stock of $84,000 and $60,000 in 1996
and  1995,  respectively,  is  included  in  Other  Assets  in the  accompanying
Consolidated Statement of Financial Condition.

NOTE 7 -        DUE FROM OFFICERS

     Advances to officers are unsecured and currently  bear interest at the rate
of 6% per annum. These loans are due on demand. Interest on these loans totalled
$9,428 and $6,127 in 1996 and 1995, respectively.

NOTE 8 -        NOTES PAYABLE - BANK

     This account represents  borrowings due under secured bank loan agreements.
The  financings are evidenced by three term loans:  the first loan,  obtained in
1994 in the  original  amount of  $77,800,  is payable  in 36 monthly  principal
installments  of $2,161 plus  interest at the prime rate (8-1/4% at December 31,
1996). The other two loans, obtained in 1996 in the original amounts of $179,625
and $300,000,  are each payable in 60 monthly  principal  installments of $2,994
and  $5,000,  respectively,  plus  interest  at the  prime  rate.  The loans are
collateralized  by  equipment  with  a  book  value  at  December  31,  1996  of
approximately  $460,000.  Principal maturities are scheduled as follows:  1997 -
$117,536, 1998 - $95,925, 1999 - $95,925, 2000 - $95,925, and 2001 - $52,994.

NOTE 9 -        ACCRUED EXPENSES
<TABLE>
<CAPTION>

                Accrued expenses consist of the following:


<S>                                             <C>                <C>
                                                          December 31,
                                                   1996               1995
                                                   ----               ----

                Reserves for legal matters      $1,573,000         $1,223,225
                Other                              238,897            168,890
                                                 ---------          ---------
                                                $1,811,897         $1,392,115
                                                 ---------          ---------
                                                 ---------          ---------
</TABLE>

<PAGE>
  43



NOTE 10 -       INCOME TAXES
<TABLE>
<CAPTION>

               The  provision   (benefit)  for  income  taxes  consists  of  the
               following:

<S>                                             <C>                <C>
                                                          December 31,
                                                   1996               1995
                                                   ----               ----

                Currently payable:
                     Federal                    $132,069           $620,196
                      State                       31,750            181,315
                                                 -------            -------
                                                 163,819            801,511
                                                 -------            -------
                                                 -------            -------

                Deferred:
                     Federal                    (198,875)          (213,867)
                      State                       (6,480)           (75,147)
                Tax expense resulting from
                     allocation directly to
                     permanent capital of tax
                     benefit from exercise of
                     stock option                 23,789                 --
                Tax benefit of net operating loss
                     carry forward                    --            (28,649)
                                                 -------            -------
                                                (181,566)          (317,663)
                                                 -------            -------
                                               $ (17,747)         $ 483,848
                                                 -------            -------
                                                 -------            -------

               Following  is  a  reconciliation  of  the  income  tax  provision
               (benefit) with income taxes based on federal statutory rates:

                                                          December 31,
                                                   1996               1995
                                                   ----               ----
                <S>                            <C>                <C> 
                Expected statutory federal
                  income tax rate              $  2,256           $425,658
                Non-taxable income               (5,457)                --
                Non-deductible expenses           4,576             10,200
                State taxes, net of federal tax
                 benefit                         21,489             76,639
                Tax benefit of deferred tax
                 assets                         (40,611)                --
                Tax benefit of net operating
                 loss carryforward                   --            (28,649)
                                                -------            -------
                                               $(17,747)          $483,848
                                                -------            -------
                                                -------            -------

               The tax effects of the  temporary  differences  that give rise to
               significant  portions of the deferred tax assets and  liabilities
               as of December 31, 1996 and 1995 are:

                                                      December 31,
                                                1996               1995
                                                ----               ----
                <S>                            <C>                <C> 
                Deferred tax assets:
                      Accrued reserves         $576,705           $342,881
                      Net operating loss         34,511             71,987
                      Other                      19,529             17,200
                                                -------            -------
                                                630,745            432,068
                                                -------            -------

                Deferred tax liabilities:
                      Depreciation               56,563             36,652
                      Other                      22,014             26,243
                                                -------            -------
                                                 78,577             62,895
                                                -------            -------
                Net deferred tax asset         $552,168           $369,173
                                                -------            -------
</TABLE>


<PAGE>
  44



     Management has determined  that the Company will be able to realize the tax
benefits of the net deferred asset based on the expected  future reversal of the
taxable temporary differences.

NOTE 11 -       COMMITMENTS AND CONTINGENT LIABILITIES

Leases

     The Company leases office  facilities and equipment under operating  leases
expiring  at various  dates  through  2005.  Following  is a schedule  of future
minimum  payments  due under  non-cancelable  leases with terms in excess of one
year:
<TABLE>

           <S>                                            <C> 
           1997                                           $  330,759
           1998                                              432,970
           1999                                              434,222
           2000                                              433,844
           2001                                              433,844
           Thereafter                                      1,735,376
                                                           ---------
                                                          $3,801,015
                                                           ---------
                                                           ---------
</TABLE>

     Rent  expense  for the years  ended  December  31,  1996 and 1995  totalled
$245,208 and $225,683, respectively.

Employment agreements

     Effective  January 1, 1996, FMFC approved new employment  contracts for two
of its officers who are also officers of the Company. The contracts will run for
three  years,  and provide for annual  salaries of $175,000  for the first year,
with a provision  for a 10% annual  increase in the second and third years.  The
agreement  also  provides  for a  bonus  pool  of up to 10% of the  consolidated
pre-tax  profits of FMFC.  The bonus pool becomes  effective each year only upon
the achievement of pre-tax profits exceeding $500,000.

Legal matters

     In 1995,  FMSC was named as a defendant in a civil suit brought by Escambia
County,  Florida ("Escambia") for alleged losses sustained on certain securities
purchased from a former affiliate office of the Company.  In March 1996, without
admitting  liability or  wrongdoing,  FMSC reached an agreement with Escambia to
settle the Escambia  claims for  $900,000 in cash.  The  settlement  was paid in
1996.

     FMSC has been the  subject of other legal  actions  relating to the sale of
securities by the former affiliate  office. In January 1997, the Company entered
into an  agreement  to settle a  customer  lawsuit  for a total of  $750,000.  A
payment  of  $500,000  was made upon  settlement;  FMSC is  expected  to issue a
five-year note for the $250,000 balance,  payable in installments of $50,000 per
year plus  interest at the rate of 8% per annum.  FMSC is also expected to enter
into an Offer of Settlement with the Securities and Exchange Commission over the
activities of the  affiliate  office.  The  settlement  will likely  involve the
payment of a $50,000 fine,  the  disgorgement  of profits  amounting to $175,000
plus  interest,  and  the  censure  and  suspension  of  one  of  the  Company's
principals.  The SEC has informally  agreed to credit the  disgorgement  against

<PAGE>
  45


amounts  already due in settlement of related civil  litigation.  The Offer also
requires FMSC to engage an independent  compliance  examiner to audit the firm's
compliance procedures. FMSC has agreed to implement recommendations contained in
the  examiner's   report.   The  Company  has  been   cooperating  with  ongoing
investigations of the registered  representatives of the affiliate office by the
SEC and other regulatory authorities.

     In  January  1997,  the  Company  and  FMSC  settled  a  pending   customer
arbitration  for $500,000 in cash.  The Company  further  agreed to issue to the
customer and her counsel a total of 150,000  five-year  warrants to purchase the
Company's Common Stock for $1.25 per share.  Two of the Company's  officers have
agreed to guarantee a minimum  selling price of $1.917 per share with respect to
the shares underlying the warrants. Any differential between the minimum selling
price of $1.917 per share and the warrant exercise price of $1.25 per share will
be paid to the warrantholders out of a $100,000 escrow account  established with
personal funds of the officers to secure the guarantee.  The warrantholders will
have 60 days in which to exercise the  warrants and sell the shares,  commencing
from the date the  warrantholders  are notified  that a  registration  statement
filed to register the shares has been declared effective by the SEC. The Company
is required to file the registration  statement no later than June 10, 1997. The
officers  will not be  obligated  to pay the  differential  with  respect to any
unexercised warrants and/or unsold shares at the expiration of the 60 day period
unless the quoted market price for the Company's common stock is below $1.25 for
the entire  period.  In such an event,  the  warrantholders  will be entitled to
tender the warrants to the Company in exchange for the escrowed funds.

     The Company is also a respondent in certain pending  customer  arbitrations
and other  matters  relating to its  securities  business.  These  claims are in
various  stages of progress and are being  vigorously  contested by the Company.
Management  is unable to derive a meaningful  estimate of the amount or range of
possible loss relating to pending litigation (including litigation costs) in any
particular  quarterly  or annual  period  or in the  aggregate.  However,  it is
possible  that the financial  condition,  results of operations or cash flows of
the  Company in  particular  quarterly  or annual  periods  could be  materially
affected by the ultimate outcome of certain pending litigation.

     The Company is presently  reviewing the extent to which settled and pending
claims may be covered under its insurance policies. In January 1997, the Company
negotiated  a  $650,000  settlement  with  one  of  its  insurance  carriers  in
consideration of a general release from coverage on various matters. Discussions
with other carriers are  continuing.  There can be no assurance that the Company
will be successful in its efforts to recover  additional funds from its insurers
on claims filed to date.

NOTE 12 -       CONCENTRATION OF CREDIT RISK and OFF-BALANCE SHEET RISK

     The Company executes securities transactions on behalf of its customers. If
either the customer or a counter-party fail to perform, the Company by agreement
with its clearing  broker may be required to discharge  the  obligations  of the
non-performing  party. In such circumstances,  the Company may sustain a loss if
the market  value of the security is  different  from the contract  value of the
transaction. As part of its normal brokerage activities, FMSC also assumes short
positions in its inventory. The establishment of short positions exposes FMSC to
off-balance-sheet risk in the event prices increase, as FMSC may be obligated to
acquire the securities at prevailing market prices.

     FMSC seeks to control off-balance-sheet risk by monitoring the market value
of securities  held or given as collateral in  compliance  with  regulatory  and
internal guidelines.  Pursuant to such guidelines, FMSC's clearing firm requires
additional  collateral  or reduction of  positions,  when  necessary.  FMSC also
completes credit evaluations where there is thought to be credit risk.


<PAGE>
  46


     Financial  instruments that potentially  subject the Company to significant
concentrations  of  credit  risk  consist  principally  of cash  and  securities
inventories.  The  Company  places its cash  primarily  in  commercial  checking
accounts.  Balances may from time to time exceed federally insured limits.  Cash
and inventory balances maintained at FMSC's clearing firm are uninsured.

NOTE 13 -       DEFINED CONTRIBUTION PLAN

     The Company sponsors a defined  contribution pension plan [401(k)] covering
all participating  employees.  The Company may elect to contribute up to 100% of
each participant's  annual contribution to the plan. Employer  contributions for
the years  ended  December  31, 1996 and 1995  amounted to $44,400 and  $36,122,
respectively.

NOTE 14 -       COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE

     During fiscal 1996,  the Company issued  421,500  restricted  shares of its
Common Stock in  settlement  of various  customer  claims and invoices for legal
services.  With respect to these shares, the Company has provided a guarantee to
pay to the selling  stockholder  the difference  between $2.00 per share and the
selling price of the shares upon expiration of the statutory holding period. The
stockholders may elect to retain the shares once the holding period lapses. Such
an election will release the Company from any further obligation.

     The  Company  has  established  a  temporary  equity  account to record its
maximum  liability  with  respect  to  the  shares  ($421,500).  Payment  of any
shortfall will be charged to this account.  Any balance  remaining at the end of
the  respective  holding  periods  will be credited to  permanent  capital.  The
Company has placed a total of $70,000 into escrow accounts to secure some of the
guarantees.

NOTE 15 -      STOCK OPTION PLANS

     The Company  currently has three option plans in place:  The 1992 Incentive
Stock  Option Plan (the "1992  Plan"),  the 1992  Non-Executive  Director  Stock
Option Plan (the "Director Plan"), and the 1996 Senior Management Incentive Plan
(the "1996 Plan").

     In June 1996, the Company's  stockholders approved an amendment to the 1992
Plan to increase the number of shares  reserved for issuance  from  2,000,000 to
3,500,000  shares.  Under the 1992 Plan,  options  may be granted to  employees,
consultants  and  registered  representatives  of the Company,  but only options
issued to employees will qualify for incentive  stock option  treatment  (ISOs).
The exercise price of an option  designated as an ISO shall not be less than the
fair  market  value of the  Common  Stock on the date of  grant.  However,  ISOs
granted to a ten percent  stockholder  shall have an exercise  price of at least
110% of such fair market value.  At the time an option is granted,  the Board of
Directors  shall fix the period within which it may be exercised.  Such exercise
period  shall not be less than one year nor more than ten years from the date of
grant. The 1992 plan will expire in May 2002.

     The Company has reserved  1,000,000 shares of its Common Stock for issuance
under the Director Plan.  Options to purchase  20,000 shares of Common Stock are
granted to each Non-Executive  Director on August 1 of each year,  provided such
individual  has  continually   served  as  a  Non-Executive   Director  for  the
twelve-month  period  immediately  preceding the date of grant. The options will
expire in five years from the date of grant.  The exercise price of such options

<PAGE>
  47


shall be equal to the fair market  value of the  Company's  Common  Stock on the
date of grant.  The Director  Plan will  terminate in May 2002. In June 1996 the
Company's  stockholders  approved an amendment to the Director Plan to eliminate
non-discretionary  grants to members of advisory boards established by the board
of directors.

     In 1996,  the  Company's  stockholders  also  ratified  the 1996 Plan.  The
Company has reserved 2,000,000 shares for issuance to key management  employees.
Awards can be granted  through the issuance of  incentive  stock  rights,  stock
options,  stock  appreciation  rights,  limited stock  appreciation  rights, and
shares of restricted Common Stock. The exercise price of an option designated as
an ISO shall in no event be less than 100% of the then fair market  price of the
stock (110% with respect to ten percent stockholders),  and not less than 85% of
the fair market price in the case of other  options.  No awards have been issued
under this plan as of December  31, 1996.  The 1996 Plan will  terminate in June
2006.

     A summary  of the  status of the  Company's  two stock  option  plans as of
December 31, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>

                          1992 Incentive Stock          1992 Non-Executive
                              Option Plan                  Director Plan
                              -----------                  -------------

                                     Weighted                       Weighted
                                     Average                        Average
                                     Exercise                       Exercise
                            Shares    Price              Shares      Price
                            ------    -----              ------      -----
<S>                       <C>         <C>               <C>           <C>
Options outstanding, 
 January 1, 1995          1,191,500   $0.72             140,000       $0.94
     Granted                823,500    0.82              40,000        0.88
     Canceled               (54,000)   2.49                  --
     Exercised              (23,500)   0.60                  --
                          ---------                     -------
Options outstanding,
 December 31, 1995        1,937,500    0.72             180,000        0.92
     Granted                239,000    0.88              40,000        1.33
     Canceled              (123,000)   0.87                  --
     Exercised             (117,375)   0.68             (20,000)       0.50
                          ---------                     -------
Options outstanding,
 December 31, 1996        1,936,125    0.73             200,000        1.05
                          ---------    ----             -------        ----
                          ---------    ----             -------        ----
<PAGE>
  48




     Additional information for 1996 with respect to options under the 1992 Plan
and the Director Plan is as follows:

                                           1992                       Director
                                           Plan                         Plan
                                           ----                         ----

Option price range at end of year       $.56-1.69                   $.50-1.75
Options exercisable at end of year      1,280,625                     112,000
Shares of common stock available
     for future grant                   1,623,000                     780,000
Weighted-average grant date fair value
     of options granted during year under
     the Black-Scholes option pricing model
          1995                               $.52                        $.58
          1996                               $.55                        $.84
Weighted-average exercise price of
     options exercisable at end of year      $.68                       $1.03
Weighted-average remaining
     contractual life of outstanding
     options at end of year             2.7 years                   3.2 years

</TABLE>

     On January 1, 1996,  the  Company  adopted  SFAS No. 123,  "Accounting  for
Stock-Based  Compensation".  The  statement  encourages  but  does  not  require
companies  to use the fair  value-based  method of  accounting  for  stock-based
employee compensation plans. Under this method, compensation expense is measured
as of the date the awards are granted based on the  estimated  fair value of the
awards,  and the expense  generally  recognized  over the vesting  period.  If a
company  elects to continue  using the  intrinsic  value-based  method under APB
Opinion No. 25, pro forma  disclosures  of net income and earnings per share are
required as if the fair value-based method had been applied. Under the intrinsic
method,  compensation  expense is the excess,  if any, of the market price as of
the grant  date  over the  exercise  price of the  option.  Under the  Company's
current  compensation  plans,  there is no such  excess on the date of grant and
therefore, no compensation expense is recorded.

     The Company has elected to continue to apply APB Opinion No. 25 and related
interpretations  in  accounting  for its stock  option  plans.  Accordingly,  no
compensation  expense has been  recognized  in the  Consolidated  Statements  of
Operations  related to the stock option  plans.  Had  compensation  expense been
determined  based on the estimated fair value of the awards at grant dates,  the
Company's  net income and  earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>

Net income (loss)

                                              1996                1995
                                              ----                ----

<S>                                         <C>                 <C> 
As reported                                 $ 32,789            $768,088
Proforma                                    $(26,597)           $677,124

Primary earnings (loss) per share
     As reported                            $ .01                   $.09
     Proforma                               $(.01)                  $.08

Fully diluted earnings (loss) per share
     As reported                            $ .01                   $.09
     Proforma                               $(.01)                  $.08

</TABLE>

<PAGE>
  49


     In computing  pro forma net income,  only options  granted in 1996 and 1995
are  considered.  Additionally,  the full  impact  of  calculating  compensation
expense for stock  options  under SFAS No. 123 is not reflected in pro forma net
income,  since such  expense is  apportioned  over the  vesting  period of those
options as they vest.

     For options  granted,  fair value was  determined  using the  Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
                                                    1996               1995
                                                    ----               ----

<S>                                                 <C>                <C>  
                Expected volatility                 76.5%              70.4%
                Risk-free interest rate             6.05%              5.73%
                Expected option lives             5 years            5 years
                Dividend yield                         0%                 0%
</TABLE>

NOTE 16 -       STOCKHOLDERS' EQUITY

                Preferred Stock

     The Company is presently  authorized to issue 5,000,000 shares of Preferred
Stock,  none of which have been issued at December 31, 1996. The preference,  if
any, to be given to preferred shares is determinable at the time of issuance.

                Stock Repurchases

     In May 1995, the Company's Board of Directors  authorized the repurchase of
up to $100,000 of the  Company's  Common  Stock.  The Board  authorized a second
buy-back plan in September 1995 for the  repurchase of up to 500,000  additional
shares.  During the buy-back  periods,  the Company purchased a total of 215,800
shares for a total cost of $194,035.  Both plans  expired in 1995, at which time
the repurchased shares were cancelled by the Company.

     During fiscal 1996, the Company's board approved the repurchase of up to an
additional  500,000 shares.  As of December 31, 1996, when the program  expired,
the  Company  had  repurchased  a total of  196,802  shares  for a total cost of
$230,506.

                Issuance of Common Stock

     During  fiscal 1996,  the Company  issued a total of 165,000  shares of its
Common Stock to settle various customer claims. The Company recorded a charge to
earnings of $178,650 in connection with the issuance of the shares.

NOTE 17 -       FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting  Standards  No.  107,  Disclosures  About  Fair  Value  of  Financial
Instruments,  which  requires  that all  entities  disclose  the  fair  value of
financial  instruments,  as defined, for both assets and liabilities  recognized
and not recognized in the statement of financial condition. Substantially all of
the Company's financial instruments, consisting primarily of marketable debt and
equity securities,  amounts due from clearing firm and notes payable - bank, are
carried at, or  approximate,  fair value because of their  short-term  nature or
because they carry market rates of interest.

NOTE 18 -       NET CAPITAL REQUIREMENTS

     FMSC is subject to the  Securities  and  Exchange  Commission  Uniform  Net
Capital Rule (Rule 15c3-1), which requires FMSC to maintain minimum net capital,
as defined.  At December 31, 1996,  FMSC had net capital and minimum net capital
requirements of $651,048 and $250,000,  respectively.  FMSC's ratio of aggregate
indebtedness to net capital was 5.48 to 1.

     NOTE 19 - RELATED PARTY  TRANSACTION

     During  1996,  FMSC  served as  placement  agent in two  private  placement
offerings by Pacific Health  Laboratories  ("PHL").  One of the directors of the
Company is also a director,  officer and major  stockholder  of PHL. FMSC earned
commissions  of  approximately  $366,000 on the private  placements.  Management
believes these fees represent arms-length compensation for the services rendered
to PHL.



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