SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
      |X|      ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004
                          -----------------
                                       OR

      |_|      TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934

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             (732) 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 ]


<PAGE>


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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [  ]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined by rule 12b-2 of the Act) Yes __ No X


     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was last sold, or the average bid and asked price of such common  equity,
as of the last business day of the registrant's  most recently  completed second
quarter (June 30, 2004): $2,004,055 (based upon $0.30 per share).

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock,  as of the latest  practicable  date:  15,324,051 as of
March 31, 2005.

                       DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g.,  Part I, Part II,  etc.) into which the document is
incorporated:  (1) Any  annual  report  to  security  holders;  (2) Any proxy or
information  statement;  and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933.

                                 Not Applicable



                            [Cover Page 2 of 2 Pages]


<PAGE>
<TABLE>
<S>                 <C>                                                                                       <C>


Table of Contents

                                                               PART I

                                                                                                              PAGE

Item 1.             Business                                                                                    2

Item 2.             Properties                                                                                 17

Item 3.             Legal Proceedings                                                                          17

Item 4.             Submission of Matters to a Vote of Security Holders                                        18

                                                              PART II


Item 5.             Market For the Company's Common Equity and Related Stockholder Matters                     19

Item 6.             Selected Financial Data                                                                    21

Item 7.             Management's Discussion and Analysis of Financial Condition and Results of Operations      23

Item 7A.            Quantitative and Qualitative Disclosures About Market Risk                                 33

Item 8.             Financial Statements and Supplemental Data                                                 34

Item 9.             Changes in and Disagreements With Accountants on Accounting and Financial Disclosure       34



Item 9A.            Controls and Procedures                                                                    34

Item 9B.            Other Information                                                                          34

                                                            PART III


Item 10.            Directors and Executive Officers of the Registrant                                         35

Item 11.            Executive Compensation                                                                     39

Item 12.            Security Ownership of Certain Beneficial Owners and Management                             46

Item 13.            Certain Relationships and Related Transactions                                             48

Item 14.            Principal Accounting Fees and Services                                                     48

                                                            PART IV


Item 15.             Exhibits and Financial Statement Schedules                                                49


</TABLE>

                                                                     1
<PAGE>


PART I

Item 1.   Business

Introduction

     First Montauk  Financial  Corp. is a New  Jersey-based  financial  services
holding company whose principal subsidiary,  First Montauk Securities Corp., has
operated as a full service retail and  institutional  securities  brokerage firm
since 1987. Since July 2000,  First Montauk  Securities Corp. has operated under
the registered trade name "Montauk  Financial Group".  References in this Annual
Report  on Form  10-K to  Montauk  Financial  Group  shall  refer  solely to our
subsidiary  First Montauk  Securities Corp.  Montauk  Financial Group provides a
broad range of securities  brokerage and investment services to a diverse retail
and institutional clientele, as well as corporate finance and investment banking
services to  corporations  and  businesses.  In 1997,  Montauk  Financial  Group
established Century Discount Investments,  a discount brokerage division.  First
Montauk  Financial Corp. also sells  insurance  products  through its subsidiary
Montauk Insurance Services, Inc.

     Montauk Financial Group has  approximately  370 registered  representatives
and services  over 61,000  retail and  institutional  customer  accounts,  which
comprise over $3.2 billion in customer  assets.  With the exception of a company
leased  branch  office in New York City,  all of Montauk  Financial  Group's 132
other branch office and satellite  locations in 30 states are owned and operated
by affiliates;  independent owners who maintain all applicable  licenses and are
responsible for all office overhead and expenses.  Montauk  Financial Group also
employs registered representatives directly at its corporate headquarters.

     Montauk  Financial  Group  is  registered  as  a  broker-dealer   with  the
Securities  and Exchange  Commission,  the National  Association  of  Securities
Dealers,  the  Municipal  Securities  Rule Making  Board,  the National  Futures
Association,  and the Securities Investor Protection Corporation and is licensed
to conduct its brokerage  activities in all 50 states, the District of Columbia,
the   Commonwealth   of  Puerto  Rico,  and   registered  as  an   International
broker-dealer to conduct business with institutional  clients in the province of
Ontario,   Canada.  All  securities  transactions  are  cleared  through  Fiserv
Securities, Inc. of Philadelphia,  Pennsylvania with various floor brokerage and
specialist firms also providing execution services.  These arrangements  provide
Montauk  Financial  Group  with  back  office  support,  transaction  processing
services on all principal,  national and international securities exchanges, and
access to many other  financial  services  and  products  which  allows  Montauk
Financial  Group to offer products and services  comparable to larger  brokerage
firms.

     Our  revenues  consist   primarily  of  commissions  and  fee  income  from
individual and institutional  securities  transactions,  mutual fund and annuity
sales and investment  banking  services,  such as private and public  securities
offerings and limited market making  activities.  The following table represents
the percentage of revenues generated in each of these activities during the year
ended December 31, 2004:


                                       2
<PAGE>



Equities:
  Listed and Over-The-Counter Stocks                            44%
Debt Instruments:
   Municipal, Government and Corporate Bonds and
   Unit Investment Trusts                                        6%
Mutual Funds                                                    10%
Options: Equity & Index                                          4%
Insurance and Annuities                                          8%
Corporate Finance and Investment Banking                         5%
Investment Advisory Fees                                         4%
Alternative Investments (1)                                      4%
Proprietary trading                                              4%
Miscellaneous (2)                                               11%
                                                                ---
Total                                                          100%
-------------------------------------------------------------------------------
(1)      Alternative Investments include REITs, 1031 Exchanges and promissory
         notes.
(2)      Miscellaneous includes interest income, amortization of deferred
         revenue and operations and marketing fees.

     The  following  table  reflects  our  various  sources of  revenue  and the
percentage  of total  revenues for 2004.  Revenues from agency  transactions  in
securities  for  individual  customers of Montauk  Financial  Group are shown as
commissions. Montauk Financial Group also executes customer orders on a riskless
principal basis,  which are reflected as part of "Riskless  Principal trades" on
the table below.
<TABLE>
       <S>                                                                <C>                              <C>

                                                    Year Ended December 31, 2004
                                                    ----------------------------

       Agency commissions from equity securities,
       options and mutual funds, insurance, management
       fees and alternative investments................                    $42,767,158                      72.26%

       Riskless Principal trades in equity and fixed
       income securities on behalf of customers........                     $6,711,281                      11.34%

       Proprietary trading...................                               $2,346,978                       3.97%

       Interest and other income...........                                 $4,645,782                       7.85%

       Investment banking(1)...............                                 $2,716,042                       4.58%
                                                                            ----------                       -----

       Total Revenues........................                              $59,187,241                     100.00%


   (1) Investment banking revenues consists of commissions, selling concessions,
       consulting fees and other income from underwriting and syndicate
       activities and placement agent fees.

</TABLE>



                                       3
<PAGE>


Affiliated Registered Representative Program

     Montauk  Financial  Group's  primary  method of  operations  is through its
affiliated registered representatives, who operate as independent contractors. A
registered  representative  who becomes  affiliated with Montauk Financial Group
establishes  his/her 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,  market data  services,  and  general  office
supplies.   Under  this  program,  the  affiliated   representative   retains  a
significantly higher percentage of the commissions and fees generated by his/her
sales than a registered  representative in a traditional brokerage  arrangement.
The affiliate program is designed to attract  experienced  brokers with existing
clientele  who  desire  to  operate   their  own  offices,   as  well  as  other
professionals in all facets of the financial services industry.

     Affiliated  representatives  must possess a  sufficient  level of sales and
experience to enable the individual to independently support his/her own office.
Financial professionals such as insurance agents, real estate brokers, financial
planners,  and  accountants,  who already  provide  financial  services to their
clients,   can  become  registered  with  Montauk  Financial  Group  to  provide
securities products and services to their clients.

     Montauk  Financial  Group  provides  full  support  services to each of the
affiliated representatives,  including access to stock and options execution and
over-the-counter stock trading;  products such as insurance,  mutual funds, unit
trusts and investment advisory programs; and compliance, supervision, accounting
and related services.

     Each affiliated  representative  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/she intends to service  customers.  Montauk Financial
Group is ultimately  responsible  for  supervising  each  affiliated  registered
representative.  Montauk  Financial Group can incur  substantial  liability from
improper  actions of any of the affiliated  representatives.  Montauk  Financial
Group maintains a professional  liability errors and omissions  insurance policy
which provides  coverage for certain actions taken and/or  omissions made by its
registered  representatives,  employees and other agents in connection  with the
purchase and sale of securities and other financial products and services.

Revenue Sources

     Through  our  affiliate  program  we derive a  substantial  portion  of our
revenues from customer commissions on brokerage  transactions in equity and debt
securities for retail and institutional  investors such as investment  advisors,
hedge funds,  and pension and profit sharing plans. In addition,  in the regular
course of our business,  we take limited securities  positions as a market maker
to facilitate customer  transactions and for investment purposes. In trading for
our own account, we expose our own capital to the risk of fluctuations in market
value.  Trading  profits (or  losses)  depend  primarily  upon the skills of the
employees  engaged in market making and position  taking,  the amount of capital
allocated  to  positions in  securities  and the general  trend of prices in the
securities markets. We monitor our risk by maintaining our securities  positions
at  or  below  certain  pre-established  levels.  These  levels  reduce  certain
opportunities  to realize profits in the event that the value of such securities
increases. However, they also reduce the risk of loss in the event of a decrease
in such value and minimize interest costs incurred on funds provided to maintain
such positions.

Montauk Insurance Services

     In 1991,  we formed  Montauk  Insurance  Services,  Inc. for the purpose of
offering and selling  variable  annuities,  variable and  traditional  life, and
health insurance products. Currently, Montauk Insurance is licensed to sell life
insurance and annuities in all 50 states. Montauk Insurance derives revenue from
the sale of insurance-related  products and services to the customers of Montauk
Financial  Group's  registered  representatives,  who are also  licensed to sell
certain insurance products. In 2004, we earned gross commissions of $4.7 million
from the sale of insurance and annuity products.

Asset Management Advisory Services

     Montauk  Financial  Group is registered  as an Investment  Adviser with the
SEC. We provide  investment  advisory  services to clients through  independent,
third party sponsored advisory  programs.  Montauk Financial Group is registered
or eligible to conduct  business as an  investment  adviser in 37 states and the
District of Columbia.

     Managed  account  programs  generally  require  the client to pay a fee for
portfolio  advisory  services,  brokerage  execution  and custody  and  periodic
account performance reports. These fees are calculated as a percentage of client
assets under management.  Historically,  we have only derived a relatively small
percentage of our overall  revenues from this business  line.  However in recent
years, this segment of our business has continued to grow.


                                       4
<PAGE>

Investment Banking

     Montauk  Financial Group  participates  in private and public  offerings of
equity and debt securities and provides general  investment  banking  consulting
services  to various  public and  private  corporations.  We  continue to review
investment  banking   opportunities  and  anticipate  that  we  will  engage  in
additional  public and private  offerings  in the future as business  and market
conditions  warrant.  Our investment  banking services include bridge and senior
loan  financing,  private  placements  and public  offerings  of debt and equity
securities, and exclusive banking consultation. Under circumstances where we act
as an underwriter,  we may assume greater risk than would normally be assumed in
our normal trading activity.  Under the federal  securities laws, an underwriter
is subject to  substantial  potential  liability for material  misstatements  or
omissions in prospectuses and other  communications with respect to underwritten
offerings.  Further,  underwriting  commitments  constitute a charge against net
capital and our underwriting  commitments may be limited by the requirement that
we must, at all times, be in compliance with the Uniform Net Capital Rule 15c3-1
of the  Securities  and Exchange  Commission.  During 2004,  we did not serve as
managing  underwriter in any public  offerings,  but  participated  as a selling
group member on numerous  occasions.  Members of selling  groups do not have the
same level of capital  requirements in an underwritten  offering as underwriters
under NASD rules.

Clearing Arrangement

     In May 2000,  Montauk  Financial  Group  entered  into a  10-year  clearing
agreement  with  Fiserv  Securities,  Inc.  under  which  Fiserv acts as Montauk
Financial  Group's  primary  clearing  broker to process and clear  customer and
proprietary transactions,  and acts as custodian for customer and firm funds and
securities.  In connection with the clearing  agreement,  we also entered into a
financial  agreement that was amended and restated in February 2001, under which
Fiserv  provided an aggregate of $7.75  million in cash  advances to us over the
initial  three-year  term of the  agreement.  In November  2003, we received the
final  cash  advance of $1.25  million  from  Fiserv.  In  connection  with this
amendment,  we granted  Fiserv a first  priority lien in all of the  outstanding
shares of Montauk  Financial  Group stock. We are required to repay any unearned
portion of the cash  advances  in the event we fail to achieve  certain  minimum
performance  criteria,  or terminate the agreement  under certain  circumstances
prior to the expiration date, as well as penalties for early termination.  As of
the date of this report, we are current on all performance requirements.

     In  December  2004,  Fiserv  Securities,  Inc.  announced  that it had been
acquired by National Financial Services ("NFS"), a unit of Fidelity Investments.
NFS has initiated  discussions  with us to negotiate the terms of a new clearing
relationship.  The final  terms of a  clearing  relationship  with NFS are still
being  negotiated.   If  these  negotiations  are  successfully   completed,  we
anticipate moving onto the NFS clearing platform in May 2005.

Competition

     We encounter intense competition in all aspects of our business and compete
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 and have substantially  greater resources.
Retail firms such as Merrill  Lynch Pierce  Fenner & Smith Inc.,  Salomon  Smith
Barney, Inc. and Morgan  Stanley/Dean Witter dominate the industry;  however, we
also compete with numerous  regional and local firms.  Montauk  Financial  Group
also competes for  experienced  brokers with other firms offering an independent
affiliate  program such as National  Securities  Corp.,  Raymond James Financial
Services, Inc. and Linsco/Private Ledger Corp.

     In  addition,  a number  of firms  offer  discount  brokerage  services  to
individual  retail customers and generally effect  transactions at substantially
lower  commission  rates on an "execution  only" basis,  without  offering other
services such as investment  recommendations  and research.  Moreover,  there is
substantial commission discounting by full-service  broker-dealers competing for
institutional  and  individual  brokerage  business.  In 1997,  we  entered  the
discount  brokerage  arena through our Century  Discount  Investments  division.
Additionally,  the  emergence  of online  trading  has further  intensified  the
competition for brokerage customers.  Century Discount  Investments  maintains a
limited clientele and has not grown in revenue over the years.

     Other financial  institutions,  notably commercial and savings banks, offer
customers  some  of  the  same  services  and  products  currently  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  that  banks  and other
institutions  ultimately may offer to customers, we may be adversely affected to
the extent those services are offered on a large-scale basis.

                                       5

<PAGE>

     Montauk  Financial  Group competes  through its  advertising and recruiting
programs for  registered  representatives  interested  in joining its  affiliate
program.  Montauk  Financial Group may offer incentives to qualified  registered
representatives   to  join.  These  incentives  can  include  cash  loans,  both
forgivable based on duration of association and/or production levels, as well as
non-forgivable,  incentive  stock  options  and a  higher  payout.  Through  its
clearing   relationship,   Montauk  Financial  Group  has  implemented   on-line
information systems to service its affiliates and to attract new brokers.  These
systems enable brokers from any office to instantly  access  customer  accounts,
determine cash positions,  send and receive electronic mail, and receive product
information and compliance  memoranda via the firm's  intranet  component of its
website.

Government Regulation

     The  securities  industry  in the United  States is  subject  to  extensive
regulation under various federal and state laws and regulations.  The SEC is the
federal agency charged with the administration of most of the federal securities
laws.  Much of the  regulation of the  securities  industry,  however,  has been
assigned to various self-regulatory organizations,  principally the NASD, and in
the case of New York  Stock  Exchange,  Inc.  member  firms,  the New York Stock
Exchange.  The  self-regulatory  organizations,  among other things,  promulgate
regulations and provide oversight in areas of:

        o        sales practices,
        o        trade practices among broker-dealers,
        o        capital requirements,
        o        record keeping, and
        o        conduct of employees and affiliates of member organizations.

     In addition to promulgating  regulations and providing  oversight,  the SEC
and  the   self-regulatory   organizations   have  the   authority   to  conduct
administrative  proceedings which can result in the censure, fine, suspension or
expulsion  of a  broker-dealer,  its  officers or  employees.  Furthermore,  new
legislation, changes in the rules and regulations promulgated by the SEC and the
self-regulatory  organizations,  or changes in the interpretation or enforcement
of existing laws and rules often directly affect the operation and profitability
of   broker-dealers.   The  stated   purpose  of  much  of  the   regulation  of
broker-dealers is the protection of customers and the securities  markets rather
than the protection of creditors and shareholders of broker-dealers.

     Net  Capital  Requirements.   Every  U.S.  registered  broker-dealer  doing
business with the public is subject to the Commission's Uniform Net Capital Rule
(the "Rule"), which specifies minimum net capital requirements.  Although we are
not  directly  subject to the Rule,  Montauk  Financial  Group,  as a registered
broker-dealer is. The Rule provides that a broker-dealer doing business with the
public  shall  not  permit  its  aggregate  indebtedness  to exceed 15 times its
adjusted net capital (the "basic method") or, alternatively,  that it not permit
its  adjusted  net capital to be less than 2% of its  aggregate  debit  balances
(primarily receivables from customers and broker-dealers) computed in accordance
with such Rule (the "alternative  method").  Montauk Financial Group applies the
basic method of calculation.

     Compliance  with  applicable net capital rules could limit our  operations,
such as underwriting and trading activities, that require the use of significant
amounts of capital, and may also restrict loans,  advances,  dividends and other
payments by our subsidiaries to us. As of December 31, 2004,  Montauk  Financial
Group has $1,992,574 of net capital and $1,685,619 of excess net capital.

Employees

     Currently,  we have  approximately 370 registered  representatives of which
288  are  associated  with  affiliate  offices.   These  affiliated   registered
representatives  are not  employees.  In addition,  we employ  approximately  68
support  personnel  in the  areas of  operations,  compliance,  accounting,  and
administration. We believe our relationship with our employees is satisfactory.

Fidelity Bond and SIPC Account Protection

     As required by the NASD and certain other  authorities,  Montauk  Financial
Group carries a fidelity bond covering loss or theft of  securities,  as well as
embezzlement and forgery. The bond provides total coverage of $5,000,000 (with a
$10,000 deductible provision per incident). In addition, the Securities Investor
Protection  Corporation  protects accounts for up to $500,000 for each customer,
subject to a  limitation  of  $100,000  for claims  for cash  balances,  with an
additional  $99,000,000 of aggregate  protection for all of our clearing  firms'
customers  provided by a private  insurance  company.  The  Securities  Investor
Protection   Corporation   is   funded   through   assessments   on   registered
broker-dealers and charges a flat annual fee of $150.


                                       6
<PAGE>

Securities Broker/Dealer Professional Liability Insurance

     Montauk  Financial  Group carries a securities  Broker/Dealer  professional
liability  insurance  policy  underwritten  by National  Union  First  Insurance
Company of Pittsburgh,  PA, a subsidiary of American  International  Group. This
policy provides  coverage for any negligent act, error or omission by an insured
individual acting on behalf of the insured Broker/Dealer in providing securities
transactions,  investment  management services,  financial investment advice and
the  purchase  and/or sale of  securities.  This policy  excludes  coverage  for
certain  types of business  activities,  including  but not  limited to,  claims
involving the sale of penny stocks and limited partnerships, accounts handled on
a  discretionary  basis and  deliberately  fraudulent  and/or criminal acts. The
policy  term is from  February 1, 2005 to January  31,  2006,  with a $1 million
limit of liability for each covered event and a $3 million  aggregate  liability
limit. We are responsible  for a $100,000  deductible  payment per claim. In the
event that the cost of this  coverage  becomes  cost  prohibitive  or  otherwise
unavailable,  the lack of coverage may have an adverse  impact on our  financial
condition in the event of future  material  claims,  which may not be covered by
our existing policy.

Executive and Organization Liability Insurance Policy

     We carry an executive and  organization  liability  insurance  policy (also
known as Directors and Officers liability insurance), which covers our executive
officers,  directors and counsel against any claims for monetary damages arising
from the covered individuals actual or alleged breach of duty,  neglect,  error,
misstatement,  misleading  statement or omission  when acting in the capacity of
his/her position as an executive officer, director and/or counsel on our behalf.
Policy exclusions  include,  but are not limited to, claims made against covered
individuals  attributable  to the  committing  of  any  deliberate  criminal  or
fraudulent  acts,  illegal or improper  payments,  and  others.  Our carrier has
issued an  extension to our current  policy to run through  June 30, 2005.  This
coverage  is  underwritten  by  XL  Specialty  Insurance  Company  of  Stamford,
Connecticut,  and  provides for  coverage  in the amount of $5  million  with a
deductible of $250,000 for all claims.

General Business Developments During the
2004 Year and Subsequent Events

Recent Management Changes

     Effective  January 1, 2004, we restructured  our senior  management.  As of
such date,  Mr.  Victor K. Kurylak  commenced  his service as our  President and
Chief Operating Officer.  Mr. Herbert Kurinsky,  who had served as our Chairman,
President  and Chief  Executive  Officer,  continued to serve as Chairman of the
Board of Directors, but relinquished his other offices. Mr. William J. Kurinsky,
who had  served as our Vice  President,  Chief  Operating  and  Chief  Financial
Officers and Secretary  began  service as our Vice Chairman and Chief  Executive
Officer from  January 1, 2004 through  February 8, 2005.  In January  2005,  Ms.
Mindy Horowitz, our Senior Vice President of Finance, became the Chief Financial
Officer and Financial  Operations  Principal for Montauk Financial Group and our
Acting Chief Financial Officer.

     On February 8, 2005 we entered into a Separation  Agreement with William J.
Kurinsky,  which provided for Mr.  Kurinsky to terminate his employment  with us
effective  on that  date.  Under  the  terms of the  Separation  Agreement,  Mr.
Kurinsky agreed to relinquish his position as Chief  Executive  Officer of First
Montauk and its  subsidiaries,  including  Montauk Financial Group. Mr. Kurinsky
remains on our board of directors. In connection with Mr. Kurinsky's termination
as the Chief  Executive  Officer,  we appointed Mr. Victor K. Kurylak as our new
Chief  Executive  Officer and President.  In 2004, Mr. Kurylak had served as our
President and Chief Operating  Officer.  For more  information on the employment
agreements  for  Mr.  Herbert  Kurinsky  and  Mr.  Victor  K.  Kurylak,  and the
Separation  Agreement  with  Mr.  William  J.  Kurinsky,  please  see  Item  11,
"Executive Compensation".

Proposed Merger with Olympic Cascade Financial Corporation

     On February 10, 2005 we executed a definitive  Agreement and Plan of Merger
with Olympic Cascade Financial Corporation,  ("Olympic"). Under the terms of the
agreement, our shareholders will receive 0.5055 shares of Olympic Cascade Common
Stock  for each  share of First  Montauk  Common  Stock.  As of the date of this
report,  Olympic  Cascade has 4,995,878  shares of common stock  outstanding and
2,078,465 of common stock  issuable  upon  conversion  of its Series A Preferred
stock,  compared to First  Montauk  that has  15,274,051  shares of common stock
outstanding and 2,588,977  issuable upon conversion of its outstanding  Series A
and  Series  B  Preferred  stock.  Additionally,   Olympic  Cascade  will  issue
equivalent  shares of newly created preferred stock to the holders of our Series
A and Series B Preferred  shares,  giving effect to the 0.5055  exchange  ratio.
Assuming  the  merger is  completed,  Olympic  Cascade  will have  approximately
15,800,000  shares  of  common  stock  assuming  conversion  of all  their  then
outstanding preferred shares (and excluding other outstanding options,  warrants
and debentures). Our outstanding options and warrants will be exchanged for like
securities of Olympic, subject to the exchange ratio.


                                       7
<PAGE>

     Pursuant  to the  Merger  Agreement,  the Board of  Directors  of  Olympic,
following the closing,  will be comprised of seven persons. We will each appoint
three representatives to the newly constituted Board of Directors. Mr. Victor K.
Kurylak  and  Mr.  William  J.  Kurinsky  are  expected  to be our  initial  two
representatives  with the third decided on prior to closing.  In connection with
the  merger,  Olympic  and we have  executed  letters of intent  with St.  Cloud
Capital LLC, a Los Angeles based investment firm, to provide  approximately $4.0
million of capital to the  combined  entities.  Mr.  Marshall  Geller,  a Senior
Managing  Director of St. Cloud Capital,  is expected to be named  non-executive
chairman of the seven-person board of directors of Olympic following  completion
of the merger.  The  investment by St. Cloud Capital is subject to due diligence
investigation,   execution  of  definitive   agreements  and  customary  closing
conditions.

     The  terms of the  merger  include  provisions  that Mr.  Mark  Goldwasser,
current  President and CEO of Olympic,  and Mr. Kurylak will comprise the Office
of the Chief  Executive  Officer.  Mr. Kurylak will serve as the Chief Executive
Officer and Mr. Goldwasser will serve as President and Chief Operating  Officer.
Both will report directly to the Board of Directors.  As a condition to closing,
Olympic and Messrs.  Goldwasser and Kurylak will negotiate the definitive  terms
of their new respective employment agreements.

     In addition, under the terms of the Merger Agreement, Mr. Herbert Kurinsky,
the current Chairman of First Montauk, Mr. William J. Kurinsky, the former Chief
Executive  Officer  of First  Montauk,  Mr.  Victor  K.  Kurylak,  the new Chief
Executive  Officer of First  Montauk  and One Clark  LLC,  an  affiliate  of Mr.
Goldwasser,  delivered voting agreements  whereby they have agreed to vote their
respective shares in favor of the merger.

     Completion of the  transaction is subject to several  conditions  which are
usual and  customary  conditions  for  transactions  of this  nature,  including
shareholder approval, completion of the anticipated financing in an amount of at
least $4.0 million in gross  proceeds and  completion of  regulatory  review and
approval of the  proposed  transaction  by the NASD.  There are also  conditions
related to the maintenance and operation of each parties  business and financial
condition  required for a closing.  We expect to file a joint proxy registration
statement with the SEC and to close the transaction  during the third quarter of
2005.

     As a result of the foregoing  conditions,  there can be no assurances  that
the  transaction  will be completed or if  completed,  by such date.  Regulatory
review by the SEC and/or NASD could delay the  anticipated  closing date. If the
transaction  is not  consummated by August 31, 2005, the parties have the option
not to proceed.

                                       8
<PAGE>


Debenture Conversions

     Between  October  2004 and March 2005 we received  notices  that holders of
$1,875,000 of convertible debentures that were sold through private offerings in
2002 and 2003,  have  elected to convert  their  debentures  into  shares of our
common stock in accordance  with the terms of the  debentures.  As a result,  we
have issued 3,750,000 shares of our common stock during that time period.  As of
the date of this  Annual  Report,  there is an  aggregate  principal  amount  of
$1,260,000 of convertible debentures outstanding. The debentures are convertible
at $.50 per share.

Change of Auditing Firms

     On July 9, 2004 we dismissed  Schneider & Associates,  LLP ("Schneider") as
the Company's independent public accountants. The reports issued by Schneider on
the  financial  statements of the Company for each of the past two fiscal years,
the years ended  December  31, 2003 and 2002,  contained  no adverse  opinion or
disclaimer  of opinion and were not  qualified  or  modified as to  uncertainty,
audit scope or accounting principles.

     On July 9, 2004, we engaged Lazar,  Levine & Felix LLP ("Lazar") as our new
independent  registered public accountants to audit our financial statements for
the year ended December 31, 2004. For more information on the change of auditing
firms,  please see Item 9, "Changes in and  Disagreements  with  Accountants  on
Accounting and Financial Disclosure".

New Lease Agreement

     On September 22, 2004, Montauk Financial Group entered into a 4th Amendment
to its Master Lease dated March 1997 for our corporate headquarters in Red Bank,
New Jersey. The amendment provides for a lease term of five (5) years commencing
on  February  1, 2005,  for a reduced  space of 27,255  square  feet.  The lease
provides for monthly rent payments of $50,762.  For more  information  regarding
the new lease terms, please see Item 2, "Properties".

Change of Clearing Firms

     In December 2004, Fiserv  Securities,  Inc., our clearing agent,  announced
that it had been  acquired by National  Financial  Services  ("NFS"),  a unit of
Fidelity  Investments.  The final terms of a new clearing  relationship with NFS
are still being negotiated. If these negotiations are successfully completed, we
anticipate moving onto the NFS clearing platform in May 2005.

                                  Risk Factors

     Our  business,  results  of  operations  and  financial  condition  may  be
materially and adversely  affected due to any of the following  risks. The risks
described  below  are not the  only  ones we face.  Additional  risks we are not
presently  aware of or that we currently  believe are immaterial may also impair
our business operations. The trading price of our common stock could decline due
to any of these risks.  In assessing  these risks,  you should also refer to the
other  information  contained  or  incorporated  by reference in this Form 10-K,
including our financial statements and related notes.

Our business is inherently risky and we have suffered losses in previous years

     For the years ended December 31, 2004, 2003 and 2002, we reported  revenues
of $59,187,000,  $58,227,000 and  $47,967,000,  respectively.  We recognized net
income in 2004 of $730,000 and net losses of $3,518,000  and  $2,960,000 for the
years ended  December 31, 2003 and 2002,  respectively.  The losses for the 2003
and 2002 periods were primarily due to costs associated with litigation expenses
and  settlements.  We may incur  further  losses in the future,  and such losses
would necessarily  affect the nature,  scope and level of our future operations.
Our results of operations to date are not necessarily  indicative of the results
of future operations. The securities business, by its very nature, is subject to
various  risks and  contingencies,  many of which are beyond the  ability of our
management to control. These contingencies include economic conditions generally
and  in  particular  those  affecting   securities   markets,   interest  rates,
discretionary income available for investment; losses which may be incurred from
underwriting and trading  activities;  customer  inability to meet  commitments,
such as margin obligations;  customer fraud; and employee misconduct and errors.
Further,  the nature  and  extent of  underwriting,  trading  and market  making
activities,  and hence the volume and scope of our business is directly affected
by our available net capital.

                                       9
<PAGE>


Fluctuations in securities volume and prices increase the potential for future
losses

     We, and the  securities  industry  in  general,  are  directly  affected by
national and international  economic and political  conditions,  broad trends in
business and finance, the level and volatility of interest rates, changes in and
uncertainty  regarding tax laws and  substantial  fluctuations in the volume and
price  levels of  securities  transactions.  We and the  securities  industry in
general,  are  subject  to  other  risks,  including  risks  of  loss  from  the
underwriting  of  securities,  counter party (a party to which we have credit or
performance  exposure)  failures to meet commitments,  customer fraud,  employee
errors or misconduct and litigation.  In addition,  price fluctuations may cause
losses on securities  positions.  As we expand our investment banking activities
and more  frequently  serve as  manager or  co-manager  of public  offerings  of
securities,   we  can  expect  to  make  increased  commitments  of  capital  to
market-making activities in securities of those issuers. The expected additional
concentration  of capital in the  securities  of those issuers held in inventory
will increase the risk of loss from reductions in the market price.  Low trading
volume or declining  prices generally  result in reduced  revenues.  Under these
conditions,  profitability  is adversely  affected since many costs,  other than
commission  compensation and bonuses, are fixed. Heavy trading volume has caused
serious  operating  problems,  including delays in clearing and processing,  for
many securities firms in the past and may do so in the future.

Principal and brokerage transactions and lending activities expose us to losses

     Our  trading,   market  making  and  underwriting  activities  involve  the
purchase,  sale or short sale of  securities  as a principal  and,  accordingly,
involve  the risk of changes in the market  prices of those  securities  and the
risk of a decrease in the  liquidity of markets which would limit our ability to
resell  securities  purchased  or to  repurchase  securities  sold in  principal
transactions.  Montauk  Financial  Group's  brokerage  activities  and principal
transactions are subject to credit risk. For example, a customer may not respond
to a margin  call,  and since  the  securities  being  held as  collateral  have
diminished in value, there is a risk that we may not recover the funds loaned to
the customer.

There are numerous contingencies and risks associated with our recent entry into
an agreement to merge with Olympic Cascade

     On February 10, 2005, we announced that we had entered into an agreement to
merge  with  Olympic  Cascade  Financial  Corporation  for the merger of the two
companies  in a  transaction  where the  outstanding  shares of our common stock
would  convert  into the right to  receive  shares of  common  stock of  Olympic
Cascade at a ratio of 0.5055  Olympic shares for each share of our common stock.
There are numerous  contingencies  and risks  associated with our having entered
into this agreement, including the following:

     We cannot  assure you that all  conditions  to the merger will be completed
and the merger consummated. The merger is subject to the satisfaction of closing
conditions,  including  the approval of our and Olympic's  stockholders  and the
consummation of a financing arrangement.  Accordingly,  and we cannot assure you
that the merger will be completed.  In the event the merger is not completed, we
may be subject  to many  risks,  including  the costs  related  to the  proposed
merger, such as legal,  accounting and advisory fees, which must be paid even if
the merger is not completed. If the merger is not completed, the market price of
our common stock could decline.

     Completion  of the  merger may result in  dilution  of per share  operating
results.  The  completion  of the merger may not  result in  improved  per share
operating results of the combined company or a financial  condition  superior to
that which would have been achieved by our company on a stand-alone  basis.  The
merger  could fail to produce the  benefits  that we  anticipate,  or could have
other adverse effects that we currently do not foresee. In addition, some of the
assumptions  that we have relied  upon,  such as the  achievement  of  operating
synergies,  may not be  realized.  In this event,  the merger  could result in a
reduction  of  per-share  earnings  of the  combined  company as compared to the
per-share  earnings  that would have been  achieved by our company if the merger
had not occurred.

                                       10
<PAGE>

     If we and Olympic  Cascade fail to  successfully  integrate our operations,
the combined  company may not realize the potential  benefits of the merger.  If
the merger is completed,  the  integration of First Montauk and Olympic  Cascade
will be a time consuming and expensive process and may disrupt our operations if
it is not completed in a timely and efficient manner. If this integration effort
is not successful,  our results of operations  could be harmed,  employee morale
could decline, key employees could leave and we may lose customers. In addition,
we may not  achieve  anticipated  synergies  or other  benefits  of the  merger.
Following  the  merger,  First  Montauk and Olympic  Cascade  must  operate as a
combined  organization  utilizing common information and communication  systems,
operating procedures,  financial controls and human resources practices.  We may
encounter the following  difficulties,  costs and delays involved in integrating
these operations:

       o failure to successfully manage relationships with customers and other
         important relationships;

       o failure of customers to continue using the services of the combined
         company;

       o difficulties in successfully integrating the management teams and
         employees of First Montauk and Olympic Cascade;

       o challenges encountered in managing larger operations;

       o the loss of key employees;

       o diversion of the attention of management from other ongoing business
         concerns;

       o potential incompatibility of technologies and systems; and

       o potential  impairment  charges  incurred to write down the carrying
         amount of intangible  assets  generated as a result of the
         merger; and

       o potential incompatibility of business cultures.

     If the  combined  company's  operations  after  the  merger do not meet the
expectations of existing  customers of First Montauk and Olympic  Cascade,  then
these customers may cease doing business with the combined  company  altogether,
which would harm our results of operations and financial condition.

     Costs  associated with the merger are difficult to estimate,  may be higher
than expected and may harm the  financial  results of the combined  company.  We
will incur substantial  direct transaction costs associated with the merger, and
additional costs associated with consolidation and integration of operations. If
the total costs of the merger exceed  estimates or the benefits of the merger do
not  exceed  the total  costs of the  merger,  our  financial  results  could be
adversely affected.

Competition in the brokerage industry may adversely impact our retail business

     We encounter intense competition in all aspects of our business and compete
directly with many other securities  firms, a significant  number of which offer
their  customers  a broader  range of  financial  services,  have  substantially
greater resources and may have greater operating  efficiencies.  In addition,  a
number of firms offer discount brokerage services to individual retail customers
and generally  effect  transactions at lower  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  our  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 us. Other financial institutions,  notably commercial banks and
savings and loan associations, offer customers some of the services and products
currently 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 that banks
and other  institutions  ultimately may offer to customers,  we may be adversely
affected to the extent those services are offered on a large scale.

                                       11
<PAGE>

We are subject to various risks in the securities industry

     As a securities  broker-dealer,  our subsidiary is subject to uncertainties
that are common in the securities industry. These uncertainties include:

         o      the volatility of capital markets;
         o      governmental regulation;
         o      litigation;
         o      intense competition;
         o      substantial fluctuations in the volume and price level of
                securities; and
         o      dependence on third parties.

     As a result,  revenues and earnings may vary  significantly  from period to
period.  In periods of low volume,  profitability  is impaired  because  certain
expenses  remain  relatively  fixed.  Due to our size, we have less capital than
many competitors in the securities industry.  In the event of a market downturn,
our business could be adversely affected in many ways, including those described
herein.  Our revenues are likely to decline in such circumstances and, if we are
unable to reduce expenses  accordingly,  our financial  condition and results of
operations would be adversely affected.

We have incurred liability due to securities-related litigation

     Many  aspects  of our  business  involve  substantial  risks of  liability,
including  exposure to liability under  applicable  federal and state securities
laws in  connection  with the activity of our  associated  persons,  as well the
underwriting and distribution of securities.  In recent years, there has been an
increasing incidence of litigation involving the securities industry in general,
which  seeks both  rescissionary  and  punitive  damages.  During the year ended
December 31,  2004,  we incurred  $2,715,000  in  litigation  costs and expenses
related to various  legal claims and  settlements.  As of December 31, 2004,  we
have  accrued  for  litigation  costs that are  probable  and can be  reasonably
estimated  based  on a  review  of  existing  claims,  arbitrations  and  unpaid
settlements. Management cannot give assurance that this accrual will be adequate
to cover actual costs that may be subsequently  incurred.  It is not possible to
predict the outcome of other matters pending against  Montauk  Financial  Group.
All such cases are,  and will  continue  to be,  vigorously  defended.  However,
litigation  is  subject to many  uncertainties,  and some of these  actions  and
proceedings  may result in adverse awards or judgments.  After  considering  all
relevant facts,  available  insurance  coverage and consultation with litigation
counsel, it is possible that our consolidated  financial  condition,  results of
operations,  or cash flows could be materially affected by unfavorable  outcomes
or settlements of certain pending litigation.

We remain subject to extensive regulation and the failure to comply with these
regulations could subject us to penalties or sanctions

     The  securities  industry in general  and our  business  in  particular  is
subject to extensive  regulation by the SEC,  state  securities  regulators  and
other governmental regulatory  authorities.  The broker-dealer is also regulated
by industry self-regulatory organizations,  including the NASD and the Municipal
Securities   Rulemaking   Board.   Montauk   Financial  Group  is  a  registered
broker-dealer  with the SEC and a member  firm of the NASD.  Broker-dealers  are
subject to  regulations  which  cover all  aspects of the  securities  business,
including:

         o      sales practices and supervision;
         o      trading practices among broker-dealers;
         o      use and safekeeping of customers' funds and securities;
         o      capital structure of securities firms;
         o      record keeping; and
         o      the conduct of directors, officers, agents and employees.

     Much  of  the   regulation  of   broker-dealers   has  been   delegated  to
self-regulatory organizations,  principally the NASD, which is Montauk Financial
Group's primary  regulator.  NASD adopts rules,  subject to approval by the SEC,
that govern its members and  conducts  periodic  examinations  of member  firms'
operations.

                                       12
<PAGE>


     Compliance with these regulations involves a number of risks,  particularly
where the regulations may be subject to varying interpretation.  If we are found
to have violated an applicable regulation,  an administrative or judicial action
may be  initiated  against us that may result in  penalties  which  could have a
material  adverse  effect on our  operating  results  and  financial  condition,
including but not limited to:

        o   censure;
        o   fine;
        o   civil damage awards, including treble damages for insider trading
            violations;
        o   the issuance of cease-and-desist orders; or
        o   the deregistration or suspension of our broker-dealer activities
            and/or our employees.

We depend upon our registered representatives

     Most  aspects  of  our  business  are  dependent  on  highly   skilled  and
experienced individuals.  We have devoted considerable efforts to recruiting and
compensating  those  individuals  and provide  incentives  to encourage  them to
remain  employed by or associated  with us.  Individuals  associated with us may
leave our company at any time to pursue other opportunities.

We face significant competition for registered representatives

     We are continuously adding new registered representatives to our company to
either grow our operations or to replace  registered  representatives  that have
left our  company.  We compete  with other  financial  services  firms for these
persons and the level of  competition  for  registered  representatives  remains
intense.  The loss of a significant number of registered  representatives  could
materially and adversely affect our operating results.

We depend upon our senior management

     For the foreseeable  future,  we will be  substantially  dependent upon the
personal  efforts and  abilities of our senior  management,  including our Chief
Executive  Officer  and  President,   Mr.  Victor  K.  Kurylak,  Mr.  Robert  I.
Rabinowitz,  our General  Counsel and Executive  Vice President and Ms. Mindy A.
Horowitz,  our acting  Chief  Financial  Officer and Senior Vice  President,  to
coordinate,  implement and manage our business  plans and programs.  The loss or
unavailability  of the  services  of any of them  would  likely  have a material
adverse affect on our business,  operations and prospects.  In addition, loss of
key members of  management  could  require us to invest  capital to search for a
suitable  replacement.  Such  a  search  could  serve  as a  distraction  to the
remaining  members of  management  preventing  them from focusing on the ongoing
development of our business which, in turn, could cause us to lose money.

Montauk Financial Group must comply with Net Capital Requirements

     The business of our broker-dealer,  like that of other securities firms, is
capital intensive.  The SEC and the NASD have stringent  provisions with respect
to net capital  requirements  applicable to the operation of securities firms. A
significant  operating  loss or any charge  against net capital could  adversely
affect our ability to  significantly  expand or, depending upon the magnitude of
the loss or charge, to maintain our present level of business.

We are exposed to risks due to our investment banking activities

     Participation in an underwriting syndicate or a selling group involves both
economic and regulatory  risks.  An underwriter may incur losses if it is unable
to resell the  securities  it is committed  to  purchase,  or if it is forced to
liquidate its  commitment at less than the purchase  price.  In addition,  under
federal  securities  laws,  other  laws and  court  decisions  with  respect  to
underwriters' liabilities and limitations on the indemnification of underwriters
by issuers,  an underwriter is subject to  substantial  potential  liability for
misstatements   or  omissions  of  material  facts  in  prospectuses  and  other
communications with respect to such offerings.  Acting as a managing underwriter
increases these risks.  Underwriting commitments constitute a charge against net
capital and our ability to make  underwriting  commitments may be limited by the
requirement  that it must at all  times be in  compliance  with the Net  Capital
Rule.
                                       13
<PAGE>

We rely on one clearing firm and the termination of the clearing agreement with
this firm could disrupt Montauk Financial Group's business

     Montauk Financial Group uses one clearing broker, Fiserv Securities,  Inc.,
to process its securities  transactions,  maintain customer  accounts,  control,
receive,  custody  and  deliver  securities,  on a fee  basis.  We depend on the
operational  capacity  and  ability  of the  clearing  broker  for  the  orderly
processing of  transactions.  If the clearing  agreement is  terminated  for any
reason,  or if the clearing  broker fails to provide its functions for us in the
normal course of business,  we would be forced to find an  alternative  clearing
broker.  There is no  assurance  that we  would  be able to find an  alternative
clearing broker on acceptable terms to us or at all.

We do not pay dividends on our common stock

     We do not pay dividends on the issued and outstanding  shares of our common
stock.  However,  we pay 6% quarterly dividends on the outstanding shares of our
Series A Preferred  Stock,  pay  interest  at the rate of 6% on our  outstanding
debentures and our Series B Preferred Stock will accrue cumulative  dividends at
the rate of 8% per annum.  Applicable laws, rules and regulations  under the New
Jersey Business Corporation Act and the Securities Act of 1933, as amended, have
affected our ability to declare and pay dividends.

The conversion or exercise of outstanding convertible securities may result in
dilution to our common shareholders

     Dilution of the per share value of our common  shares could result from the
conversion of most or all of the currently outstanding  debentures and shares of
Series A Preferred Stock and Series B Convertible Redeemable Preferred Stock. We
issued an aggregate of  $1,240,000  principal  amount of debentures in a private
offering  completed  in March  2003 and  subsequently  issued  an  aggregate  of
$1,895,000  principal amount of debentures in a private  placement  completed in
December 2003. The debentures are convertible  into a total of 6,270,000  shares
of our common stock at an initial  conversion rate of $0.50. To date, holders of
$1,875,000  principal  amount of debentures have converted into 3,750,000 shares
of our common stock. In 1999, we issued an aggregate of 349,511 shares of Series
A Preferred  Stock in  connection  with an exchange  offer.  Currently,  305,369
Series A Preferred Shares remain outstanding and convertible into 610,738 shares
of common stock at the rate of $2.50 per share.  However, if the last sale price
of the common stock is $3.50 or more a share for 20 consecutive trading days, as
listed  on the  Over-the-Counter  Bulletin  Board,  the  Series  A  Shares  will
automatically  be  converted  into  shares  of common  stock.  In 2005 we issued
197,824  shares of Series B  Convertible  Redeemable  Preferred  Stock  that are
convertible into 1,978,240 shares of our common stock.

         In addition, as of March 31, 2005, there were outstanding:

        o       warrants to purchase 313,500 shares of common stock at an
                exercise price of $0.50 per share;
        o       warrants to purchase  500,000  shares of common stock at an
                exercise  price of $.40 issued in a settlement of certain
                claims; and
        o       options to purchase 2,533,832 shares of common stock, at
                exercise prices ranging from $.20 to $2.50 per share.

     The conversion or exercise of these convertible  securities and the sale of
the  underlying  common  stock,  or even the  potential  of such  conversion  or
exercise  and sale,  may have a  depressive  effect on the  market  price of our
securities and will cause dilution to our shareholders. Moreover, the terms upon
which we will be able to  obtain  additional  equity  capital  may be  adversely
affected,  since the holders of the  outstanding  convertible  securities can be
expected to convert or exercise them at a time when we would, in all likelihood,
be able to obtain any needed  capital  on terms  more  favorable  to us than the
exercise terms provided by the outstanding options and warrants.  Dilution could
create significant downward pressure on the trading price of our common stock if
the conversion or exercise of these securities  encouraged short sales. Even the
mere  perception of eventual  sales of common shares issued on the conversion of
these  securities  could  lead to a decline in the  trading  price of our common
stock.

                                       14
<PAGE>


We have sold restricted shares which may depress the common stock price

     As of March 31, 2005, of the 15,324,051  issued and  outstanding  shares of
our common stock, approximately 9,069,741 shares may be deemed restricted shares
and, in the future, may be sold in compliance with Rule 144 under the securities
Act of 1933,  as amended.  Rule 144 provides  that a person  holding  restricted
securities for a period of one year may sell in brokerage transactions an amount
equal to 1% of our outstanding  common stock every three months. A person who is
not affiliated with us and who has held restricted securities for over two years
is not  subject  to the  aforesaid  volume  limitations  as  long  as the  other
conditions of the Rule are met.  Possible or actual sales of our common stock by
certain of our present  shareholders  under Rule 144 may, in the future,  have a
depressive  effect  on the price of the  common  stock in any  market  which may
develop for such shares. Such sales at that time may have a depressive effect on
the price of the common stock in the open market.

There is a limited public market for our securities

     Our common stock and warrants are traded in the over-the-counter market and
reported by the  National  Daily  Quotation  Service  published  by the National
Quotation Bureau, Inc and the Electronic  Bulletin board maintained by the NASD.
Although we may apply for  inclusion of our common stock in the Nasdaq  Smallcap
Market and/or on the American Stock  Exchange,  we do not currently  satisfy the
minimum  listing  requirements.  Accordingly,  there can be no assurance that we
will be  successful  in  obtaining  listing  on  Nasdaq  or on the  Amex,  or if
obtained, that it will be able to maintain the Nasdaq or Amex listing.

The price of our common stock is volatile

     The price of our common stock has  fluctuated  substantially  (See Part II,
Item 5). This  volatility  may be caused by factors  specific to our company and
the securities  markets in general.  Factors  affecting  volatility may include:
variations  in our  annual  or  quarterly  financial  results  or  those  of our
competitors;  conditions  in the economy in general;  and changes in  applicable
laws  or  regulations,  or  their  judicial  or  administrative  interpretations
affecting us or the securities industry in general.  In addition,  volatility of
the market price of our common stock is affected by the  relatively  low trading
volume it has  experienced  and the fact that it is not listed for  trading on a
national securities exchange.

                                       15
<PAGE>

Our broker-dealer subsidiary faces limitations on trading and market-making
activities in our securities

     Due to regulatory  positions and  requirements of both the SEC and the NASD
relating to the circumstances and extent to which a registered broker-dealer and
NASD member may engage in  market-making  transactions  in the securities of its
parent  company,   Montauk  Financial  Group  does  not  engage  in  trading  or
market-making  activities relating to our common stock or warrants where Montauk
Financial  Group would speculate in, purchase or sell our securities for its own
account.  The purpose and effect of such limitation  restricts Montauk Financial
Group  from  being a factor in the  determination  of the market or price of our
securities.  Montauk Financial Group does, however, execute transactions for its
customers on an "agency  basis" where it does not acquire our securities for its
own proprietary  account. It will,  however,  earn usual and customary brokerage
commissions in connection with the execution of such brokerage transactions. If,
under current or future  regulations of both the SEC and NASD, Montauk Financial
Group is permitted to participate  as a market maker,  it may do so on the basis
of showing a bid and offer for our securities at specified  prices  representing
customer interest.

We have limited the liability of our directors

     We have amended our  certificate  of  incorporation  to include  provisions
eliminating  the  personal  liability of our  directors,  except for breach of a
director's  duty of  loyalty  to the  company  or to our  shareholders,  acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation  of the law,  and in  respect of any  transaction  in which a director
receives an improper personal benefit. These provisions pertain only to breaches
of duty by directors as such, and not in any other corporate capacity,  e.g., as
an officer. As a result of the inclusion of such provisions, neither the company
nor its shareholders  may be able to recover monetary damages against  directors
for  actions  taken by them  which  are  ultimately  found  to have  constituted
negligence or gross  negligence,  or which are ultimately  found to have been in
violation  of their  fiduciary  duties,  although  it may be  possible to obtain
injunctive or other equitable relief with respect to such actions.  If equitable
remedies are found not to be available to shareholders  in any particular  case,
shareholders may not have an effective remedy against the challenged conduct.

     We  believe  that,  based  upon  recent  developments  in  the  market  for
directors' and officers' liability  insurance,  such provisions are necessary to
attract and retain  qualified  individuals  to serve as directors.  In addition,
such  provisions  will allow  directors  to perform  their  duties in good faith
without concern for the application of monetary liability on a retroactive basis
in the event that a court  determines  their  conduct to have been  negligent or
grossly negligent.  On the other hand, such provisions  significantly  limit the
potential remedies available to the company or a shareholder, and it is possible
that  the  protection  afforded  by such  provisions  may  reduce  the  level of
diligence or care demonstrated by such directors.

Our Certificate of Incorporation and By-Laws contain provisions which may have
an anti-takeover effect

     Our amended and restated  certificate of incorporation  and by-laws contain
provisions which may discourage certain  transactions which involve an actual or
threatened  change  in  control  of the  company.  These  provisions  include  a
classified  or  staggered  board of  directors.  As  permitted by the New Jersey
Corporation  Law, our certificate of  incorporation  provides that a director or
officer  of our  company  will not be  personally  liable to the  company or its
stockholders  for monetary damages for breach of the fiduciary duty of care as a
director,   except  under  certain  circumstances  including  a  breach  of  the
director's duty of loyalty to the company or our stockholders or any transaction
from which the director  derived an improper  personal  benefit.  The provisions
referred to above may make the company a less attractive  acquisition candidate.
They may also  discourage  or impede offers to acquire the business not approved
by the board of directors, including offers for some or all of the shares of any
class or series of capital stock at substantial  premiums above the then current
market value of such shares.

                                       16
<PAGE>


Item 2.   Properties
Offices and Facilities

The Corporate Headquarters

     We maintain our corporate headquarters and executive offices at Parkway 109
Office Center,  328 Newman Springs Road, Red Bank, New Jersey. In March 1997, we
entered into a seven-year  lease (the "Master  Lease"),  commencing  February 1,
1998 for 22,762 square feet of gross rentable  space. In March 1998, we signed a
First Amendment to the Master Lease  incorporating all of the other rented space
in the Red Bank facility into the March 1997 Master Lease. On September 22, 2004
we entered  into a 4th  Amendment  to our Master  Lease dated March 1997 for our
corporate  headquarters  in Red Bank, New Jersey.  The amendment  provides for a
lease term of five (5) years commencing on February 1, 2005, for a reduced space
of 27,255 square feet.  The lease provides for monthly rent payments of $50,762.
As additional rent, we are required to pay a proportional share of any increases
in real estate  taxes and  operating  expenses  above the amount paid during the
2005 calendar year, insurance premiums relating to the premises, and all utility
charges related to the premises.  The amendment  contains a five-year  option to
renew at a rental payment equal to the then-current  fair market rate per square
foot applicable to the leased premises.

Leased Branch Offices

     In June 2001 we entered into a sub-lease agreement for 4,269 square feet of
office  space on Wall  Street  in New York  City  that  had  been  sublet  to an
affiliate and operated as a branch office.  This sublease expired on January 30,
2005 and was not renewed.

     In January 2002 we entered into a sub-lease agreement for 4,520 square feet
of office space in Midtown  Manhattan  which is used as a retail branch  office.
The sub-lease term runs until September 29, 2006 and provides for a monthly rent
payment of $18,830  until January 31, 2004 and  thereafter  increases to $19,963
for the balance of the sub-lease term.

Item 3.   Legal Proceedings

     Many aspects of our business  involve  substantial  risks of liability.  In
recent  years,  there  has  been  an  increasing  incidence  of  litigation  and
arbitration involving the securities industry.

     In July  2003 we,  along  with  Montauk  Financial  Group,  entered  into a
settlement   agreement  with  certain  claimants  in  order  to  settle  pending
arbitration  proceedings  that were brought against us. The covered  proceedings
arose out of customer  purchases  of certain  high-yield  corporate  bonds which
declined in market value and subsequently  defaulted.  The settlement  agreement
covers eleven  separate claims that sought an aggregate of  approximately  $12.3
million in damages. In exchange for the consideration we provided, each claimant
granted a general  release of claims in favor of our company and all  individual
respondents, with the exception of the registered representative who had handled
the  claimants'  accounts.  In  consideration  for the  release  granted  by the
claimants, we agreed to pay to the claimants an aggregate of $1,000,000 cash and
to issue to the claimants warrants to purchase an aggregate of 750,000 shares of
our common stock in three separate classes of warrants and 500,000 shares of our
common stock.

     In addition,  the settlement agreement provides that we may be obligated to
make additional payments of up to $600,000, in the event that claimants elect to
exercise the warrants on certain dates.  Specifically,  upon the election of the
majority of then existing warrant holders to exercise up to a maximum of 250,000
warrants, respectively, during the months of June 2004, June 2005 and June 2006,
the claimants,  upon  exercising  their  warrants,  will be required to sell the
shares in the open market.  Thereafter,  we would pay to the  claimants up to an
aggregate  amount of $200,000 less the amount received by the claimants from the
sale of their shares net of  commissions.  In the event that warrant  holders do
not elect to exercise the warrants  during a particular  period,  we will not be
required  to make a  payment  for that  period.  In June  2004 we  redeemed  all
outstanding Class A warrants for an aggregate of $200,000.

     We are currently  defending four additional  claims relating to the sale of
the high-yield  bonds referenced in the preceding  paragraphs.  The claimants in
these matters seek compensatory damages in excess of $2.1 million, plus punitive
damages and the recovery of various costs.  We are vigorously  defending  theses
actions and believe that there are meritorious  defenses in each case.  There is
no insurance  coverage available for the payment of settlements and/or judgments
that may result from these particular claims.

                                      17
<PAGE>

     Montauk  Financial Group is also a respondent or  co-respondent  in various
other legal  proceedings which are related to its securities  business.  Montauk
Financial  Group is contesting  these claims and believes there are  meritorious
defenses in each case. However, litigation is subject to many uncertainties, and
some of these actions and proceedings may result in adverse judgments.  Further,
the availability of insurance coverage in any particular case is determined on a
case by case basis by the  insurance  carrier,  and is  limited to the  coverage
limits within the policy for any individual  claim and in the  aggregate.  After
considering all relevant facts,  available  insurance  coverage and consultation
with litigation counsel, management believes that significant judgments or other
unfavorable  outcomes  from  pending  litigation  could have a material  adverse
impact on our consolidated  financial condition,  results of operations and cash
flows in any particular  quarterly or annual period,  or in the aggregate  could
impair  our  ability  to  meet  the net  capital  requirements  relating  to our
securities business.

     A  shareholder,  BMAC  Corp.,  has  filed a  report  on Form  13d  with the
Securities and Exchange  Commission stating that it holds approximately 13.3% of
our outstanding shares. BMAC Corp. failed to identify any individuals associated
with it. For this and other  reasons,  it is our opinion that the filing by BMAC
Corp. did not satisfy the federal securities  regulations  related to the filing
of Form 13d.  Although no litigation  has been  commenced,  the Company has been
advised that they may undertake certain actions, which may include an attempt to
change or  influence  control  over the  company,  including  recommendation  of
management changes and structure of the board of directors. In addition, certain
former  registered  representatives  of Montauk  Financial  Group have contacted
management of the Company and advised us that they represent BMAC Corp. and seek
management changes in the company.  These former brokers have stated it is their
intention to put themselves in place as management of Montauk  Financial  Group.
We are aware that many of the clients of these former registered representatives
held convertible  debentures that we had issued in a prior private placement and
substantially all of these debenture holders converted their debentures into our
Common Stock at the same time,  including persons  affiliated with BMAC Corp. We
are also aware that a law firm which  represents  these former  brokers has sent
letters to customers and brokers of Montauk Financial Group disparaging  Montauk
Financial  Group's  management and Board of Directors.  Despite the existence of
these  facts,  these  former  brokers  deny that they are a "group"  within  the
meaning of federal securities  regulations.  We have advised the SEC and NASD of
our belief that the persons  involved  have not  complied  with  applicable  law
regarding  Section 13d of the  Securities  and Exchange Act of 1934,  as well as
other provisions of the Securities and Exchange Act of 1934 and SEC regulations.
We fully  intend to seek all  defenses  available  to us in this  matter and are
reviewing all available legal options against these persons.

     As of December 31,  2004,  we have  accrued for  litigation  costs that are
probable and can be reasonably  estimated based on a review of existing  claims,
arbitrations and unpaid settlements.  Management cannot give assurance that this
accrual  will be  adequate  to  cover  actual  costs  that  may be  subsequently
incurred.  It is not  possible to predict the outcome of other  matters  pending
against Montauk  Financial  Group.  All such cases are, and will continue to be,
vigorously defended.

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

     We did not submit any  matters to our  shareholders  for a vote  during the
fourth quarter of the year ended December 31, 2004. We anticipate  that the next
meeting of shareholders  will include a vote upon the proposed  transaction with
Olympic  Cascade,  assuming  that the parties  proceed with the  transaction  as
contemplated.

                                       18
<PAGE>


                                     PART II

Item 5.         Market of and Dividends on our Common Equity and
                Related Stockholder Matters

A.      Principal Market

     Our common stock is traded in the over-the-counter  market.  Trading in the
our common stock is reported on the NASD  Bulletin  Board system and in the pink
sheets  published  by Pink Sheets LLC. We believe  that there is an  established
public trading market for our common stock based on the volume of trading in our
common stock and the existence of market makers who regularly publish quotations
for our  common  stock.  Our  Class A,  Class B and Class C  Warrants  commenced
trading in the  over-the-counter  market upon their  issuance in March 1998. The
Class A Warrants and Class B Warrants  expired on February 17, 2003. The Class C
Warrants expired on February 17, 2005.

B.      Market Information

     Our common stock commenced trading in the over-the-counter  market in 1987.
On March 30, 2005, our common stock had bid and offer prices of $1.02 and $1.03,
respectively. At December 31, 2004 our Common Stock had a closing price of $0.55
per share.

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

Common Stock

Fiscal Year 2005             High Bid                Low Bid

     1st   Quarter             $1.09                   $.47
(through 3/30/05)


Fiscal Year 2004             High Bid                Low Bid

     1st  Quarter               $.42                   $.30
     2nd Quarter                $.39                   $.27
     3rd Quarter                $.42                   $.24
     4th Quarter                $.80                   $.49

Fiscal Year 2003             High Bid                Low Bid

     1st Quarter                $.22                   $.20
     2nd Quarter                $.32                   $.17
     3rd Quarter                $.32                   $.20
     4th Quarter                $.40                   $.24


C.       Number of Record Holders

     The  approximate  number of record  holders of our common stock as of March
28,  2005 was 505.  Such  number  of  record  holders  was  determined  from our
stockholder  records, and does not include beneficial owners of our common stock
whose  shares are held in the names of various  security  holders,  dealers  and
clearing agencies. We believe there are in excess of 3,000 beneficial holders of
our common stock.

D.       Dividend Policy

     We have not paid any dividends  upon our common stock since our  inception,
and do not expect to pay any dividends upon our common stock in the  foreseeable
future and plan to retain  earnings,  if any,  to finance  the  development  and
expansion of our business.  We pay quarterly  dividends on outstanding shares of
our  Series  A  Preferred  Stock  at the rate of 6% per  annum,  subject  to the
limitations  under the New Jersey Business  Corporation Act. There are currently
outstanding  305,369  shares  of  Series  A  Preferred  Stock.  We have not paid
dividends on our outstanding  shares of Series A Preferred Stock since the first
quarter of 2003.  Dividend in arrears,  but not accrued for, is $164,000 at year
end.  There can be no assurance  that we will  continue to pay  dividends in the
future.

E.       Issuance of Unregistered Securities

Restricted Shares Issuance

     In January  2004 and  February  2005 we issued an  aggregate  of  2,300,000
shares of  restricted  common  stock to our top five  executive  officers  and a
senior  employee.  These shares were granted in conjunction  with new employment
agreements for each executive  officer,  and were issued in conjunction with the
provisions  of our 1996 Senior  Management  Stock  Option Plan,  as amended.  In
addition,  in connection with the Severance  Agreement entered into with William
J.  Kurinsky,  we issued to him an aggregate of 197,824  shares of newly created
Series B  Preferred  Stock.  We relied  upon the  exemptions  from  registration
provided upon in Section 4(2) of the Securities  Act of 1933 in connection  with
these issuances.

                                       19
<PAGE>

     During the year ended December 31, 2004, holders of an aggregate  principal
amount of $120,000  of  convertible  debentures  have  elected to convert  their
debentures  into  shares of  common  stock in  accordance  with the terms of the
debentures.  Subsequent  to the year end,  holders  of an  additional  aggregate
principal  amount of $1,755,000  of  convertible  debentures  elected to convert
their  debentures  into shares of our common stock.  The debentures were sold in
private  placements  in 2002 and 2003.  We have  issued an  aggregate  amount of
3,750,000 shares of Common Stock in connection with these conversion events. The
debentures are convertible at $.50 per share. We relied upon the exemptions from
registration  provided upon in Section  3(a)(9) of the Securities Act of 1933 in
connection with these issuances.

     In addition, during the year ended December 31, 2004, we granted options to
purchase  891,000  shares of common stock  pursuant to our stock option plans to
certain of our employees and  registered  representatives,  which plans were not
registered  at the time of grant.  The options were  granted at exercise  prices
between $.25 and $.75 per share. In March 2005, a registration statement on Form
S-8 was filed with the SEC registering all common shares issuable from our stock
option plans.

Stock Repurchases

     During 2004, we repurchased  and canceled 60,217 shares of our common stock
for $21,162.  In the third  quarter of 2004,  we  repurchased  250,000  Series A
Warrants  for an  aggregate  of  $200,000.  There  were  no  repurchases  of any
securities during the fourth quarter of 2004.

F.       Securities Authorized For Issuance Under Equity Compensation Plans

See the discussion and tables at pages 61 to 62 below.


























                                       20
<PAGE>



Item 6.  Selected Financial Data

     The following  selected  financial data should be read in conjunction  with
the  Consolidated  Financial  Statements,   including  the  related  notes,  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."
<TABLE>
<S>                                     <C>              <C>                 <C>                  <C>                 <C>

                                                                   Year Ended December 31,

                                           2004                2003           2002                2001                2000

Operations Results:

Revenues:

  Commissions                          $42,767,158         $41,950,392        $36,513,802         $37,807,870          $46,529,771

  Principal transactions                 9,058,259           9,466,359          6,727,642           8,021,887            7,131,079

  Investment banking                     2,716,042           2,439,144          1,007,700           1,483,210            2,416,711

  Interest and other income              4,645,782           4,370,787          3,717,600           3,907,448            3,252,325
                                         ---------           ---------          ---------           ---------            ---------

Total                                   59,187,241          58,226,682         47,966,744          51,220,415           59,329,886
                                        ----------          ----------         ----------          ----------           ----------
revenues


Expenses:

  Commissions, employee                 46,851,474          46,218,107         39,572,851          42,356,207           46,800,661
  compensation and benefits

  Clearing and floor                     2,466,027           2,934,164          2,666,376           3,247,219            4,003,345
  brokerage

  Communications and                     2,664,256           2,659,105          3,006,017           3,249,389            2,731,681
  occupancy

  Legal matters and related              2,714,769           5,836,960          1,259,502           2,415,374            1,181,115
  costs

  Write-down of note                            --                  --                 --                  --              239,183
  receivable - Global Financial
  Corp.

  Other operating expenses               3,489,425           3,393,335          4,029,515           5,076,806            4,862,158

Interest                                   284,093             204,054             98,918             174,632              160,230
                                           -------             -------             ------             -------              -------

Total expenses                          58,470,044          61,245,725         50,633,179          56,519,627           59,978,373
                                        ----------          ----------         ----------          ----------           ----------

Income (loss) before income                717,197         (3,019,043)        (2,666,435)         (5,299,212)            (648,487)
taxes

Provision for income taxes                (13,305)             499,000            294,000            (90,989)                6,721
(benefit)                                --------             -------            -------            --------                -----

Income (loss) before                      730,502           (3,518,043)        (2,960,435)        (5,208,223)             (655,208)
extraordinary loss






                                                                             21
</TABLE>


<PAGE>

<TABLE>
<S>                                       <C>              <C>               <C>                 <C>                  <C>

                                                                   Year Ended December 31,

                                           2004                2003           2002                2001                2000

Operations Results:

Extraordinary loss -
extinguishment of debt, net
of tax                                                                                                                      34,200
                                                                                                                            ------

Net income (loss)                         $730,502        $(3,518,043)       $(2,960,435)        $(5,208,223)           $(689,408)
                                          ========        ============       ============        ============           ==========

Net income (loss) available
to common stockholders                    $639,813        $(3,542,882)       $(3,059,722)        $(5,306,976)           $(792,136)
                                          ========        ============       ============        ============           ==========
Per share of
Common Stock:

     Basic:                                  $0.07             $(0.40)            $(0.36)             $(0.61)              $(0.08)

     Diluted:                                $0.04             $(0.40)            $(0.36)             $(0.61)              $(0.08)

Weighted average common
shares outstanding-- Basic               9,270,350           8,784,103          8,551,932           8,704,355            9,450,055

Weighted average common and
common share equivalents
outstanding - Diluted                   15,629,920           8,784,103          8,551,932           8,704,355            9,450,055

Financial condition:

Total assets                            $9,834,374         $12,193,101        $11,425,506         $14,227,562          $16,913,063

Total liabilities                      $12,932,991         $16,280,540        $12,203,196         $11,934,884          $ 9,203,672

Temporary Equity-Shares
subject to redemption                                                                                   6,500                6,500

Stockholders' equity (deficit)        $(3,098,617)        $(4,087,439)         $(777,690)          $2,286,181           $7,702,891


</TABLE>







                                                                              22
<PAGE>


 Item 7.          Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

Factors Affecting "Forward Looking Statements"

     From time to time, we 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.  These risks and  uncertainties,  many of which are
beyond our 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 and political 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 us. We do
not undertake any  obligation to publicly  update or revise any  forward-looking
statements.

Overview

     We  are  a  New  Jersey-based  financial  services  holding  company  whose
principal  subsidiary,  First Montauk  Securities  Corp., has operated as a full
service retail and  institutional  securities  brokerage firm since 1987.  Since
July 2000,  First Montauk  Securities  Corp.  has operated  under the trade name
"Montauk Financial Group" and provides a broad range of securities brokerage and
investment services to a diverse retail and institutional  clientele, as well as
corporate   finance  and  investment   banking   services  to  corporations  and
businesses.  In 1997,  Montauk  Financial  Group  established  Century  Discount
Investments,  a discount  brokerage  division.  We also sell insurance  products
through our subsidiary, Montauk Insurance Services, Inc.

     Montauk Financial Group has  approximately  370 registered  representatives
and services over 61,000 retail and institutional customers, which comprise over
$3.2 billion in customer  assets.  With the exception of a company leased branch
office in New York  City,  all of our  other 132  branch  office  and  satellite
locations  in 30 states  are  owned  and  operated  by  affiliates;  independent
representatives  who maintain all  appropriate  licenses and are responsible for
all  office  overhead  and  expenses.   Montauk  Financial  Group  also  employs
registered representatives directly at its corporate headquarters.

     Montauk  Financial  Group  is  registered  as  a  broker-dealer   with  the
Securities  and Exchange  Commission,  the National  Association  of  Securities
Dealers,  the  Municipal  Securities  Rule Making  Board,  the National  Futures
Association,  and the Securities Investor Protection Corporation and is licensed
to conduct its brokerage  activities in all 50 states, the District of Columbia,
and  the  Commonwealth  of  Puerto  Rico,  and  registered  as an  International
broker-dealer to conduct business with institutional  clients in the province of
Ontario,   Canada.  All  securities  transactions  are  cleared  through  Fiserv
Securities, Inc. of Philadelphia,  Pennsylvania with various floor brokerage and
specialist firms also providing execution services.  These arrangements  provide
Montauk  Financial  Group  with  back  office  support,  transaction  processing
services on all principal,  national and international securities exchanges, and
access to many other  financial  services  and  products  which  allows  Montauk
Financial  Group to offer products and services  comparable to larger  brokerage
firms.

     On February 10, 2005 we executed a definitive  Agreement and Plan of Merger
with Olympic Cascade Financial Corporation,  ("Olympic"). Under the terms of the
agreement, our shareholders will receive 0.5055 shares of Olympic Cascade Common
Stock for each share of First Montauk Common Stock.  Our  outstanding  preferred
stock,  options and  warrants  will also be  exchanged  for like  securities  of
Olympic,  subject to the exchange ratio. In connection with the merger,  Olympic
and we have  executed  letters of intent  with an  investment  firm,  to provide
approximately $4.0 million of capital to the combined entity.  Completion of the
transaction is subject to several  conditions  which are usual and customary for
transactions of this nature,  including shareholder approval,  completion of the
anticipated  financing in an amount of at least $4.0  million in gross  proceeds
and completion of regulatory review and approval of the proposed  transaction by
the NASD. We expect to file a joint proxy  registration  statement  with the SEC
and to close the transaction during the third quarter of 2005.


                                       23
<PAGE>

     Our  revenues  consist   primarily  of  commissions  and  fee  income  from
individual and institutional  securities  transactions,  mutual fund and annuity
sales and investment  banking  services,  such as private and public  securities
offerings and limited market making  activities.  The following table represents
the  percentage  of revenues  generated by each of these  activities  during the
years ended December 31, 2004, 2003 and 2002, respectively:


<TABLE>
<S>                                                                    <C>            <C>        <C>

Equities:                                                              2004           2003       2002
                                                                       ----           ----       ----
  Listed and Over-The-Counter Stocks                                    44%            54%        44%
Debt Instruments:
   Municipal, Government and Corporate Bonds and
    Unit Investment Trusts                                               6%             6%         6%
Mutual Funds                                                            10%            10%        12%
Options: Equity and Index                                                4%             5%         6%
Insurance and Annuities                                                  8%             7%        11%
Investment Banking and Corporate Finance                                 5%             2%         1%
Investment Advisory Fees                                                 4%             3%         2%
Alternative Investments (1)                                              4%             2%         4%
Proprietary Trading                                                      4%             3%         3%
Miscellaneous (2)                                                       11%             8%        11%
                                                                       ------------------------------
Total                                                                  100%           100%       100%
                                                                       ==============================


(1)      Alternative Investments include REITs, 1031 Exchanges and promissory notes
(2)      Miscellaneous includes interest income, amortization of deferred revenue and operations and marketing fees.

</TABLE>


     We engage in a highly competitive business.  Therefore,  our earnings, like
those of others in the industry, reflect the activity in the markets and can and
do fluctuate accordingly.









                                       24
<PAGE>

Results of Operations
Three Years Ended December 31, 2004

     The  results of  operations  for 2004  showed an  increase  in  revenues of
$960,000  to   $59,187,000   over  2003.  The  following   discussion   reflects
reclassification of certain categories to conform to the 2004 presentation.
<TABLE>
<S>                                        <C>              <C>                <C>                 <C>            <C>

                                                                   Year Ended December 31,
                                     ------------------------------------------------------------------------------------
                                           2004                                                                    2002
                                                                          2003
                                     ------------------------------------------------------------------------------------
                                     ------------        ------------------------------       ---------------------------
 Revenues:                               (000's)             % Change          (000's)               % Change    (000's)
                                     ------------        ------------------------------       ---------------------------

 Commissions                             $42,767                 2             $41,950               15          $36,514

 Principal Transactions                    9,058               (4)               9,466               41            6,728

 Investment Banking                        2,716                11               2,439              142            1,008

 Interest/Other                            4,646                 6               4,372               18            3,717
                                          ------                                ------                            ------
Total Revenues                           $59,187                 2             $58,227               21          $47,967
                                         =======                               =======                           =======
</TABLE>

     The primary source of our revenue is commissions  generated from securities
transactions,  mutual funds,  syndicate offerings and insurance products.  Total
revenues  from  commissions  increased  $817,000,  or 2%,  from 2003 to 2004 and
$5,436,000,  or  15%,  from  2002 to  2003.  The  components  of the  change  in
commission revenues are as follows:

     Revenues  from  agency  transactions  decreased  $2,010,000,  or  7%,  from
$27,165,000 in 2003, to $25,155,000 in 2004, and increased  $6,393,000,  or 31%,
in 2003 from  $20,772,000  in 2002.  As a percentage of total  revenues,  agency
commissions, which consist primarily of equity and options transactions, was 43%
in 2002,  47% in 2003,  and 43% in 2004.  The  decrease in revenues  from agency
transactions  from 2003 to 2004 was due in part to a reduction  in the number of
producing registered  representatives.  The increased revenues from 2002 to 2003
were primarily attributable to favorable market conditions.

     Mutual fund revenues  increased  from  $5,717,000 in 2003, to $6,131,000 in
2004,  an  increase  of 7%.  This was in large  part due to  increased  investor
interest in mutual fund investments.  In 2003, mutual fund commissions decreased
from $5,756,000 in 2002 to $5,717,000 in 2003.

     Revenues from insurance commissions also increased in 2004, from $4,212,000
in 2003 to $4,750,000 in 2004. The 2003 insurance  commissions declined $889,000
compared  to 2002  revenues of  $5,101,000.  This was due to a shift of investor
focus from insurance related investments toward equity markets.

     Fees generated from managed accounts have  consistently  increased by about
39% each year since 2001. In 2004, revenues increased $734,000,  from $1,880,000
in 2003, to $2,614,000 in 2004. We generated  fees of $1,343,000 in 2002.  These
year-over-year   increases  are  attributable  to  the  continuing  interest  by
investors who prefer to pay a fee based on a percentage  of asset value,  rather
than  commissions  paid on  transactions.  As this  structure  has  increased in
popularity  industry-wide,  we have increased our focus on growing and servicing
this segment of our business.

     Commissions  generated from alternative  investment products,  such as Real
Estate  Investment  Trusts (REITs),  IRS Section 1031 Real Estate  Exchanges and
medical  receivables,  increased  125% from  $1,034,000 in 2003 to $2,325,000 in
2004,  following a decrease of $927,000 when compared to 2002 revenue.  In 2004,
we increased  our  emphasis in these  product  offerings to qualified  investors
seeking tax advantaged and higher yielding investments.

     Total    revenues    from    principal    transactions,    which    include
mark-ups/mark-downs  on transactions  in which we act as principal,  proprietary
trading and the sale of fixed income and equity  securities,  decreased in 2004.
Gross  revenue  from  principal  transactions  fell  by  4%  or  $408,000,  from
$9,466,000 in 2003, to $9,058,000 in 2004, compared to a significant increase in
2003 of $2,738,000 over 2002 revenues of $6,728,000.  This is primarily due to a
$1,203,000  decrease in revenues  generated in riskless  principal  transactions
attributable  to a reduction  in the number of  registered  representatives  who
conducted more of these types of  transactions.  Riskless  principal  trades are
transacted through the firm's proprietary account with a customer order in hand,
resulting  in no market risk to the firm.  Riskless  principal  revenues  nearly
doubled from  $2,103,000  in 2002,  to  $4,094,000  in 2003,  in part because of
favorable  market  conditions.  Revenues  from all fixed income  sources,  which
include  municipal,  government,  and corporate bonds and unit investment trusts
increased in 2004 by $746,000, due to the addition of several new branch offices
whose primary business focus is on fixed income  products.  The 2003 increase of
$1,124,000  over  the  2002  period  was  due  primarily  to  favorable   market
conditions.
                                       25
<PAGE>

     Investment  banking  revenues for 2004 increased  $277,000,  to $2,716,000.
Revenues  from  syndicate  offerings  of closed end mutual  funds  decreased  by
approximately 50%, or $800,000, while revenues from private placements increased
about  100%,  or  approximately  $1  million.  Revenues  for 2003  increased  to
$2,439,000,  an increase of  $1,431,000  over 2002,  as  investment  banking and
syndicate  business  continued its increase  over the prior year.  This category
includes  new  issues  of  equity  and  preferred  stock  offerings  in which we
participated  as a  selling  group  or  syndicate  member,  as well  as  private
placements and other investment banking activities.

     Interest  and other  income for 2004  totaled  $4,646,000,  as  compared to
$4,372,000  for 2003,  a 6% increase  of  $274,000.  The primary  reason for the
increase in other  income in 2004 is  attributable  to an increase in  marketing
fees,  unrealized  investment  income and the  recognition  of deferred  income,
whereas  in 2003  there was a one-time  recovery  of bad  debts.  If not for the
one-time  recovery,  the  increase in interest  and other income would have been
approximately $676,000. Interest and other income for 2003 totaled $4,372,000 as
compared to $3,717,000  for 2002,  an increase of $655,000  primarily due to the
one-time  bad  debt  recovery  previously  mentioned.  For  financial  reporting
purposes,  the cash advances that were received from our clearing  firm,  Fiserv
Securities,  Inc., are deferred and amortized on a straight-line  basis over the
remaining  contract term of six years.  Other income  included  amortization  of
approximately  $875,000,   $726,000,  and  $577,000  in  2004,  2003  and  2002,
respectively.

<TABLE>
<S>                                   <C>        <C>           <C>                   <C>         <C>



                                                           Year Ended December 31,
                                     --------------------------------------------------------------------
                                         2004                       2003                           2002
                                     --------------------------------------------------------------------
                                     -----------  -------------------------    --------------------------
                                        (000's)      % Change      (000's)          % Change     (000's)
                                     -----------  -------------------------    --------------------------
Expenses:

Commissions, employee
compensation and benefits               $46,852            1       $46,218             17        $39,573

Clearing and floor brokerage              2,466         (16)         2,934             10          2,666

Communications and occupancy              2,664            0        2,659            (12)          3,006

Legal matters and related costs
                                          2,715         (53)         5,837            363          1,260

Other operating expenses                  3,489            3         3,394           (16)          4,029

Interest                                    284           39           204            106             99
                                            ---                        ---                            --

Total operating expenses                $58,470          (5)       $61,246             21        $50,633
                                        =======                    =======                       =======

Provision (benefit) for income
taxes
                                           $(13)                      $499                          $294

</TABLE>

     Total expenses decreased by $2,776,000, or 5%, to $58,470,000 in 2004, from
$61,246,000 in 2003.  Expenses in 2003 increased  $10,613,000 from  $50,633,000.
The components of the changes in total expenses follow:

     Compensation and benefits  expense for management,  operations and clerical
personnel  increased in 2004,  from  $6,901,000 (12 % of revenues) to $6,963,000
(12% of  revenues),  an increase of $62,000  over the 2003 year.  A reduction in
force, which was implemented in late 2003, resulted in a decrease in non-officer
compensation,  which was offset by an  increase  in officer  salaries  and stock
compensation due to new employment  agreements and the addition of a new officer
in 2004. When compared with the 2002 year,  compensation and benefits  increased
$35,000.  Commission  expense,  the largest expense category,  which is directly
related to commission  revenues,  increased  $627,000,  from $39,177,000 for the
2003 year to $39,804,000 for the 2004 year. Commissions as a percentage of total
revenues remained relatively constant at about 67% for all three years.

                                       26
<PAGE>

     Clearing and floor brokerage costs,  which are determined by the volume and
type of  transactions,  decreased  $468,000 to $2,466,000 in 2004, and increased
$268,000 in 2003 from $2,666,000 in 2002. The reduction in 2004 is primarily due
to the change in the type and volume of  transactions  as well as an increase in
expense rebates  provided by our clearing firm. The percentage of clearing costs
to gross revenues can fluctuate  depending upon the product mix. As a percent of
revenues,  clearing costs were approximately 4.2% for 2004 as compared with 5.0%
and 5.6% in years 2003 and 2002, respectively.

     Communications  and  occupancy  costs are  relatively  fixed  and  remained
basically  unchanged  for 2004 when  compared  to 2003.  For 2003,  these  costs
decreased from $3,006,000 to $2,659,000,  or $347,000, when compared to 2002 due
to the  elimination of three  corporate-leased  branch offices and their related
costs and equipment rental expenses. As a percentage of revenue,  communications
and occupancy was 4.5% in 2004 compared to 4.6% and 6.3%  respectively,  for the
2003 and 2002 years.

     Legal matters and related  settlement  costs decreased  significantly  from
$5,837,000 in 2003 to $2,715,000 in 2004, a decrease of $3,122,000,  or 54%, due
to a reduction in claims and cost control measures  implemented by management in
2004.  During 2003,  legal fees and  settlement  costs  increased to  $5,837,000
compared to $1,260,000  in 2002.  In 2003, we reached an agreement  with certain
claimants to settle arbitration proceedings that arose out of customer purchases
of certain  high-yield  corporate  bonds,  which  declined  in market  value and
subsequently  defaulted.  In the settlement,  we paid an aggregate of $1,000,000
cash,  issued  500,000  shares of our common  stock and  warrants to purchase an
additional 750,000 shares of our common stock to those claimants.

     In addition,  the settlement agreement provides that we may be obligated to
make additional payments of up to $600,000, in the event that claimants elect to
exercise the warrants on certain dates.  Specifically,  upon the election of the
majority of then existing warrant holders to exercise up to a maximum of 250,000
warrants  each  during  the months of June  2004,  June 2005 and June 2006,  the
claimants,  upon exercising their warrants,  will be required to sell the shares
in the open market. Thereafter, we would pay to the claimants up to an aggregate
amount of $200,000 less the amount  received by the  claimants  from the sale of
their shares net of commissions.  In the event that warrant holders do not elect
to exercise the warrants during a particular  period, we will not be required to
make a payment for that period.  In June 2004, we redeemed all outstanding Class
A warrants for an aggregate of $200,000.

     We are currently  defending four  additional  claims related to the sale of
the high-yield  bonds referenced in the preceding  paragraphs.  The claimants in
these matters seek compensatory damages in excess of $2.1 million, plus punitive
damages and the recovery of various  costs.  We are vigorously  defending  these
actions and believe that there are meritorious  defenses in each case.  There is
no insurance  coverage available for the payment of settlements and/or judgments
that may result from these particular claims.

     We  are  also  a  respondent  or   co-respondent  in  various  other  legal
proceedings  which are related to our  securities  business  and are  contesting
these claims and believe there are meritorious  defenses in each case.  However,
litigation  is  subject to many  uncertainties,  and some of these  actions  and
proceedings  may result in  adverse  judgments.  Further,  the  availability  of
insurance  coverage in any particular case is determined on a case by case basis
by the  insurance  carrier,  and is limited to the  coverage  limits  within the
policy for any individual  claim and in the  aggregate.  After  considering  all
relevant facts,  available  insurance  coverage and consultation with litigation
counsel,  management  believes that significant  judgments or other  unfavorable
outcomes from pending  litigation  could have a material  adverse  impact on our
consolidated  financial  condition,  results of operations and cash flows in any
particular quarterly or annual period, or in the aggregate, and could impair our
ability  to  meet  the  statutory  net  capital  requirements  relating  to  our
securities business.

     As of December 31,  2004,  we have  accrued for  litigation  costs that are
probable and can be reasonably  estimated based on a review of existing  claims,
arbitrations and unpaid settlements.  Management cannot give assurance that this
accrual  will be  adequate  to  cover  actual  costs  that  may be  subsequently
incurred.  It is not  possible to predict the outcome of other  matters  pending
against us. All such cases are, and will continue to be, vigorously defended.

     Other  operating  costs  increased  $95,000,  to $3,489,000  in 2004,  from
$3,394,000  in  2003,  primarily  resulting  from an  increase  in  professional
liability  insurance  of $237,000  offset by a decrease  in office and  printing
costs  and  consulting  fees of  $114,000.  From 2002 to 2003,  other  operating
expenses decreased  $635,000,  from $4,029,000 to $3,394,000.  In 2002, we wrote
off customer and broker bad debts of $1,021,000 compared to $73,000 in 2003.


                                       27
<PAGE>

     Professional liability insurance costs have increased  substantially due to
a hardening in the market for broker-dealer professional liability and directors
and officers insurance coverage.  Many insurance carriers have opted out of this
market,  while  others have  substantially  increased  premiums  and  deductible
limits. Our registered  representatives  have historically paid the full cost of
errors and omission insurance.  However, to stay competitive in the marketplace,
we absorbed a large portion of these  premiums in 2004 and 2003. The net cost to
us for errors and omissions insurance increased by $237,000 in 2004 and $331,000
in 2003.  The amount of our cost for this coverage will continue to be dependent
on the number of registered  representatives  associated  with us throughout the
year.

     Income tax expense  (benefit) for the years ended  December 31, 2004,  2003
and 2002 was $(13,000),  $499,000, and $294,000 respectively.  The effective tax
rate on pre-tax  income (loss) was 2.0%,  16.5% and 11.0% during 2004,  2003 and
2002, respectively.  The difference in the rate between 2004 and 2003 was due to
the impact of the decrease of the valuation  allowance relating to an adjustment
of the  deferred  tax asset  previously  recorded.  The  difference  in the rate
between 2003 and 2002 was due primarily to a reduction in the 2002  provision to
reflect a federal loss carry back refund claim of approximately $212,000. During
the  fourth  quarter  of 2002 and 2003 we  received  the final two  payments  of
$1,250,000  each under the financing  agreement with our clearing firm. The 2002
payment  was taxable in the year of receipt  and the 2003  payment was  deferred
until 2004.  Previously  recorded  deferred tax assets were charged against that
income in both  years.  As of  December  31,  2004 and 2003,  other  future  tax
benefits have been entirely offset by a valuation  allowance  because,  based on
the weight of available  evidence,  it is more likely than not that the recorded
deferred tax assets will not be realized in future periods.

     For 2004,  we reported a net income  applicable to common  stockholders  of
$640,000, or $.07 per basic and .04 per diluted share, as compared to a net loss
applicable to common stockholders reported in 2003 of $3,543,000,  or ($.40) per
basic and diluted share.  For 2002, we reported a net loss  applicable to common
stockholders of $3,060,000, or ($.36) per basic and diluted share.

Liquidity and Capital Resources

     We maintain a highly liquid balance sheet with  approximately 73% of assets
in 2004 and 72% of  assets  in 2003  consisting  of cash  and cash  equivalents,
securities   owned,   and   receivables   from  our  clearing   firm  and  other
broker-dealers.   The   balances  in  these   accounts   can  and  do  fluctuate
significantly  from  day to  day,  depending  on  general  economic  and  market
conditions, volume of activity, and investment opportunities. These accounts are
monitored on a daily basis in order to ensure  compliance  with  regulatory  net
capital requirements and to preserve liquidity.

     Overall,  cash and cash equivalents  decreased for 2004 by $2,407,000.  Net
cash used in operating activities during 2004 was $2,020,000, as a result of net
income of $731,000,  adjusted by non-cash  charges  including  depreciation  and
amortization of property and equipment and deferred  financing costs of $762,000
and the amortization of deferred income of $875,000. Cash was further reduced by
net decreases in  commissions,  accounts  payable,  accrued  expenses and income
taxes payable of $2,227,000,  an increase in our clearing receivable of $597,000
and  securities  owned of $201,000,  offset by a decrease in employee and broker
receivables of $100,000, securities sold, not yet purchased of $105,000.

     We received our fourth and final  advance of  $1,250,000  in November  2003
under the financing agreement with Fiserv.

     Investing  activities  required  cash of $212,000 in 2004 for  additions to
capital  expenditures.  In  2003  investing  activities  consumed  $139,000  for
additions  to capital  expenditures  of  $166,000,  offset by decreases in other
assets of $27,000.

     Financing  activities  in 2004 used $175,000 in cash  primarily  related to
capital  leases  and the  repurchase  of  common  shares.  Financing  activities
provided cash of $1,567,000  during the 2003 year. We received gross proceeds in
2003 of $2,105,000 from private offerings of our 6% convertible debentures. This
was partially offset by notes and capital lease repayments of $269,000, dividend
payments to preferred shareholders of $25,000 and a decrease in the cash portion
of deferred financing costs of $244,000.


                                       28
<PAGE>
     In connection  with the settlement  agreement we entered into in July 2003,
regarding the settlement of eleven  pending  arbitration  proceedings  discussed
above, we issued 750,000 five-year warrants in three classes of 250,000 warrants
each.  Class A warrants  have an exercise  price of $.40 per share;  Class B and
Class C  warrants  have  exercise  prices  of $.25  per  share.  The  settlement
agreement  provides that we may be obligated to make additional cash payments of
up to $600,000 in the event that  claimants  elect to exercise  the  warrants on
certain  dates.  Specifically,  if a majority of then  existing  Class A warrant
holders  elect to exercise  the  remaining  warrants in their  particular  class
during the month of June 2004 (the "Required  Exercise  Event"),  the claimants,
upon exercising their warrants,  will be required to sell the shares in the open
market.  If the warrants are  exercised  and the shares sold, we will pay to the
claimants up to an aggregate  amount of $200,000 less the amount received by the
claimants from the sale of their shares,  net of commissions.  This process will
be repeated for remaining  Class B and Class C warrant holders during the months
of June 2005 and June 2006,  respectively.  In June 2004, we redeemed all of the
outstanding Class A warrants by paying the claimants $200,000.

     In the  alternative,  we may elect or be required to redeem the unexercised
warrants  for up to $.80 per  warrant,  or a  maximum  of  $200,000  per  class,
depending upon the then prevailing  market price of our common stock on or about
the date of the Required  Exercise  Event of a particular  class.  We may call a
warrant  class for  redemption  if the average  market  price of the  underlying
common  shares during the ten trading days  immediately  preceding the date upon
which we receive  notice that the  warrant  holders of a  particular  class have
elected to  declare a Required  Exercise  Event is less than  $1.20.  We will be
required  to redeem the  warrants  for $.80 per  warrant in cash if the  average
market  price of the  underlying  common  shares  during  the ten  trading  days
immediately  preceding  the date upon which we receive  notice  that the warrant
holders of a particular class have elected to declare a Required  Exercise Event
is less than or equal to the warrant  exercise  price. In the event that warrant
holders of a particular  class elect not to declare a Required  Exercise  Event,
our guarantee will be canceled with respect to that class.

Financing Activities

     In 1999, we completed a private offering of Series A Convertible  Preferred
Stock in  connection  with the  settlement  with  holders  of  leases  of Global
Financial Corp. Under the terms of the offering,  each Global lease investor who
participated  in the offering  received one share of Preferred Stock in exchange
for every $5 of lease investment value that the investor was entitled to receive
from Global after certain  adjustments.  Each leaseholder was required to assign
their interest in all lease payments to which they were entitled.  Each share of
the Preferred  Stock is  convertible  into two shares of Common Stock and pays a
quarterly  dividend of 6%.  Pursuant to the offering,  we issued an aggregate of
349,511  shares of Series A  Preferred  Stock.  The  offering  was  exempt  from
registration  pursuant to Sections 4(2) and 4(6) of the  Securities Act of 1933,
as amended, and Regulation D, promulgated thereunder. Conversion of the Series A
Preferred  Stock into shares of common stock amounted to 44,142 during the years
2001-2004, with 305,369 preferred shares remaining at December 31, 2004. We have
suspended the  quarterly  payments of our Series A Preferred  Stock  dividend in
accordance  with  applicable  state law.  (See  Footnote 16 to the  consolidated
financial statements).

     In October 2002, we commenced a private  offering of up to $3,000,000 of 6%
convertible debentures to accredited investors. Each debenture is convertible at
an initial conversion price of $0.50 per share,  subject to adjustment for stock
dividends, combinations, splits, recapitalizations, and like events. Interest on
the  debentures  accrues at the rate of 6% per annum and is payable in cash on a
semi-annual  basis on April 1st and October  1st of each year until  maturity or
conversion.  Each  debenture  is due and payable  five (5) years from  issuance,
unless previously converted into shares of Common Stock. The offering expired on
March 1, 2003.  In the  offering,  we sold an aggregate  amount of $1,240,000 of
debentures,  $1,030,000  in 2002 and  $210,000  in  2003.  The  proceeds  of the
financing will be used to satisfy  general  working  capital needs.  Neither the
debentures nor the shares  underlying the  debentures  have been  registered for
offer or sale under the Securities  Act; such securities are being issued on the
basis of the statutory exemption provided by Section 4(2) of the Securities Act,
as amended,  and/or Rule 506 of Regulation D, promulgated thereunder relating to
transactions by an issuer not involving any public offering.

     In September  2003,  we commenced an additional  private  offering of up to
$3,000,000 of 6% convertible debentures to accredited investors.  Each debenture
is convertible  at an initial  conversion  price of $0.50 per share,  subject to
adjustment for stock dividends,  combinations,  splits,  recapitalizations,  and
like events.  Interest on the debentures accrues at the rate of 6% per annum and
is payable in cash on a  semi-annual  basis on April 1st and October 1st of each
year until  maturity or  conversion.  Each debenture is due and payable five (5)
years from issuance,  unless  previously  converted into shares of Common Stock.
The offering was  completed on December 31, 2003.  In the  offering,  we sold an
aggregate  principal  amount of  $1,895,000 of  debentures.  The proceeds of the
financing will be used to satisfy general working capital needs.  The debentures
have not been  registered  for offer or sale  under  the  Securities  Act;  such
securities are being issued on the basis of the statutory  exemption provided by
Section 4(2) of the Securities Act, as amended, and/or Rule 506 of Regulation D,
promulgated  thereunder  relating to transactions by an issuer not involving any
public offering. For more information,  see a discussion of the debentures under
the captions "Item 1. Business -- Debenture Conversions."

                                       29
<PAGE>
     Between  October  2004 and March 2005 we received  notices  that holders of
$1,875,000 of convertible debentures that were sold through private offerings in
2002 and 2003,  have  elected to convert  their  debentures  into  shares of our
common stock in accordance  with the terms of the  debentures.  As a result,  we
have issued 3,750,000 shares of our common stock during that time period.  As of
the date of this  Annual  Report,  there is an  aggregate  principal  amount  of
$1,260,000 of convertible debentures outstanding. The debentures are convertible
at $.50 per share.

     In  connection  with the  Separation  Agreement  we  entered  into with Mr.
William  Kurinsky,  we issued  him an  aggregate  of  197,824  shares of a newly
created class of Series B Preferred Stock, par value $0.10 per share, which will
have a deemed issue price of  $1,000,000,  and will be  convertible  into Common
Stock on the  basis of ten  shares of  Common  Stock for each  share of Series B
Preferred  Stock.  The Series B Stock also  provides that the Series B Preferred
shares have voting  rights  based upon the number of shares of Common Stock into
which it would be  converted.  The  Series B  Preferred  Stock  also  includes a
cumulative  dividend of 8% per year. The shares are restricted  securities under
the Securities Act of 1933 and the regulations of the SEC and we relied upon the
exemption from registration  under Section 4(2) of the Securities Act of 1933 to
issue the shares of Series B Preferred Stock.

Consolidated Contractual Obligations and Lease Commitments

     The table below provides  information about our commitments related to debt
obligations,  leases,  guarantees and  investments as of December 31, 2004. This
table does not include any projected  payment  amounts  related to our potential
exposure to arbitrations and other legal matters.
<TABLE>
<S>                        <C>               <C>               <C>              <C>               <C>          <C>       <C>

As of December 31, 2004
                                                                   Expected Maturity Date
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
                                                                                                               After
Category                              2005              2006             2007             2008           2009      2009        Total
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Debt Obligations(2)                      0                                                                            0
                                                           0         $950,000       $2,065,000              0            $3,015,000
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Capital Lease Obligations
                                   $53,905            $8,555                0                0              0         0     $62,460
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Operating Lease
Obligations                       $955,171          $830,130         $631,790         $609,149       $609,419         0  $3,635,389
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Purchase Obligations                     0                 0                0                0              0         0           0
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Other Long-Term
Obligations Reflected on
Balance Sheet under GAAP         $200,000(1)       $200,000(1)              0                0              0         0  $400,000(1)
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
Total                           $1,209,076        $1,038,685       $1,581,790       $2,674,149       $609,149         0  $7,112,849

-------------------------- ---------------- ----------------- ---------------- ---------------- -------------- --------- -----------
</TABLE>
(1) Maximum expected payment obligations embodied in the warrants subject to put
options. For more detailed information please refer to Footnote No. 10 of the
consolidated financial statements.

(2) Subsequent to the year end, certain debentures were converted.  See footnote
9.

Net Capital

     At  December  31,  2004,   Montauk  Financial  Group  had  net  capital  of
$1,992,574,  which was  $1,685,619  in excess of its  required  net  capital  of
$306,955, and the ratio of aggregate indebtedness to net capital was 2.31 to 1.

Off-Balance Sheet Arrangements

     We execute  securities  transactions on behalf of our customers.  If either
the  customer or a  counter-party  fail to perform,  we, by  agreement  with our
clearing   broker,   may  be  required  to  discharge  the  obligations  of  the
non-performing party. In such circumstances, we may sustain a loss if the market
value of the security is different from the contract  value of the  transaction.
We seek 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,  our clearing firm requires
additional  collateral  or  reduction  of  positions,  when  necessary.  We also
complete credit evaluations where there is thought to be credit risk.

Critical accounting policies

     We  prepare  our  financial   statements  in  accordance   with  accounting
principles  generally  accepted  in the  United  States  of  America.  Preparing
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions  that affect the reported  amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses  during  the  reporting  period.  The  following  paragraphs  include a
discussion of some of the significant accounting policies and methods applied to
the preparation of our consolidated  financial statements.  Review Note 2 to the
financial statements for further discussion of significant accounting policies.

                                       30
<PAGE>

Warrants subject to put options

     We have issued  common  stock  purchase  warrants  that embody  obligations
requiring us to make cash redemption payments under certain  circumstances.  FAS
150 requires us to classify these  financial  instruments as liabilities  and to
record  them at fair  value  initially  and at the end of  subsequent  reporting
periods. The valuation of the warrants involves the use of significant judgments
and  assumptions.  At  December  31,  2004,  we valued  the  warrants  using the
discounted cash flow method, assuming, based on available evidence, that we will
be required to pay the full  redemption  liability.  Actual results could differ
from these estimates as circumstances change.

Use of Estimates

     In presenting  the  consolidated  financial  statements,  management  makes
estimates  regarding the  valuation of certain  securities  owned,  the carrying
value of  investments,  the  realization of deferred tax assets,  the outcome of
litigation, and other matters that affect the reported amounts and disclosure of
contingencies in the financial statements. Estimates, by their nature, are based
on judgment and available  information.  Therefore,  actual results could differ
from  those  estimates  and could  have a  material  impact on the  consolidated
financial  statements  and it is possible  that such changes  could occur in the
near term.

Revenue recognition

     Securities   transactions,   commission  income,   sales  concessions  from
participation  in syndicated  offerings  and related  expenses are recorded on a
trade date basis.  Insurance and mutual fund  commissions  received from outside
vendors are recognized as income when received.  Securities owned and securities
sold, but not yet  repurchased are stated at quoted market value with unrealized
gains and losses included in earnings. Investment account securities not readily
marketable are carried at estimated fair value as determined by management  with
unrealized  gains and losses included in earnings.  Advances  received under our
financial  agreement  with our clearing firm are deferred and amortized over the
remaining term of the agreement on a straight-line basis.

Long-lived Assets

     We evaluate  impairment  losses on  long-lived  assets used in  operations,
primarily fixed assets, when events and circumstances indicate that the carrying
value of the assets,  might not be recoverable in accordance with FASB Statement
No. 144  "Accounting for the Impairment or Disposal of Long-lived  Assets".  For
purposes of evaluating the recoverability of long-lived assets, the undiscounted
cash flows  estimated  to be  generated by those assets would be compared to the
carrying amounts of those assets.  If and when the carrying values of the assets
exceed their fair values, the related assets will be written down to fair value.

Clearing Agreement

     Montauk Financial Group introduces all of its customer transactions,  which
are not reflected in the financial  statements,  to its clearing  broker,  which
maintains the customers'  accounts and clears such  transactions.  Additionally,
the clearing broker provides the clearing and depository  operations for Montauk
Financial  Group's  proprietary  securities  transactions.  These activities may
expose us to  off-balance  sheet risk in the event that customers do not fulfill
their  obligations  with the clearing  broker,  as Montauk  Financial  Group has
agreed to indemnify the clearing broker for any resulting losses. We will record
a  loss  from  a  client  transaction  when  information  becomes  available  to
management that allows it to estimate its impact on our financial statements.

Income taxes

     Due to significant  operating  losses from 2001-2003 we have  established a
valuation  allowance against all of our deferred tax benefits as of December 31,
2004,  and we intend to  maintain it until we  determine  that it is more likely
than not that  deferred  tax assets  will be  realized.  Our income tax  expense
recorded in the future will be reduced to the extent of offsetting  decreases in
our valuation allowance. The realization of our remaining deferred tax assets is
primarily dependent on forecasted future taxable income.

Recent pronouncements of the Financial Accounting Standards Board

     In  November  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No. 151,  "Inventory  Costs - an amendment of ARB No. 43,  Chapter 4"
("SFAS  151"),  effective  for  inventory  costs  incurred  during  fiscal years
beginning after June 15, 2005. This statement  amends the guidance in Accounting
Research  Bulletin (ARB) No. 43, Chapter 4,  "Inventory  Pricing" to clarify the
accounting  for abnormal  amounts of idle facility  expense,  freight,  handling
costs and wasted material  (spoilage).  SFAS No. 151 requires that such items be
recognized as current period charges. In addition,  this Statement requires that
allocation of fixed production  overheads to the costs of conversion be based on
the  normal  capacity  of  the  production  facilities.  This  statement  is not
applicable to the Company's current operations.

                                       31
<PAGE>

     In December 2004, the FASB issued  Statement No. 152,  "Accounting for Real
Estate Time-Sharing Transactions". This statement amends SFAS No. 66 (Accounting
for Sales of Real  Estate)  and SFAS No. 67  (Accounting  for Costs and  Initial
Rental  Operations of Real Estate Projects).  This standard,  which is effective
for financial  statements for fiscal years beginning after June 15, 2005, is not
applicable to the Company's current operations.

     In December  2004,  the FASB issued SFAS No. 153 "Exchange of  Non-monetary
Assets - an  amendment  of APB Opinion No. 29".  Statement  153  eliminates  the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general  exception for exchanges of  nonmonetary  assets that do not have
commercial substance, defined as transactions that are not expected to result in
significant  changes in the cash flows of the reporting  entity.  This standard,
which is effective for exchanges of nonmonetary  assets occurring after June 15,
2005, is not applicable to the Company's current operations.

     In December  2004,  FASB issued SFAS No. 123 (revised  2004),  "Share-Based
Payment"(SFAS 123 (revised  2004)"),  effective as of the beginning of the first
interim  or annual  reporting  period  that  begins  after June 15,  2005.  This
Statement is a revision of FASB  Statement  No. 123,  "Account  for  Stock-Based
Compensation,"  and supersedes APB Opinion No. 25,  "Accounting for Stock Issued
to Employees," and its related implementation  guidance. SFAS 123 (revised 2004)
eliminates the  alternative  to use Opinion No. 25's  intrinsic  value method of
accounting  that was  provided in  Statement  123 as  originally  issued.  Under
Opinion 25, issuing stock options to employees generally resulted in recognition
of no compensation  cost. This Statement requires entities to recognize the cost
of employee services received in exchange for awards of equity instruments based
on the  grant-date  fair  value  of  those  awards  (with  limited  exceptions).
Recognition  of that  compensation  cost helps users of financial  statements to
better  understand  the  economic  transactions  affecting an entity and to make
better resource allocation  decisions.  The Company will adopt SFAS 123 (revised
2004) for the quarter beginning July 1, 2005. The effect of the adoption of this
Statement has not yet been determined.

     In  accordance  with the  provisions  of FAS 150,  "Accounting  for Certain
Financial  Instruments with  Characteristics of both Liabilities and Equity," we
have  classified  our  obligations  under the  warrants  as  liabilities  in the
Statement of Financial Condition.  The fair value of the obligations embodied in
the warrants  remaining were  initially  valued at $269,123 using the discounted
cash flow method,  assuming,  based on available evidence, that the Company will
be required to pay the full redemption liability. The Company measures the value
of the warrant  obligations  as of the end of each  reporting  period  using the
discounted  cash flow method until the  obligations  are  settled.  The recorded
value at December  31, 2004 was  $333,261.  Changes in value are  recognized  in
earnings as interest expense.

Impact of Inflation

     We believe  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  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, or
has other adverse effects on the securities  markets and the value of securities
held in inventory, it may adversely affect our financial position and results of
operations.

Risk Management

     Risk is an inherent  part of our  business  and  activities.  The extent to
which we  properly  and  effectively  identify,  assess,  monitor and manage the
various  types of risk  involved in our  activities is critical to our soundness
and profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in its business activities: market, credit, operational
and legal. Senior management takes an active role in the risk management process
and requires  specific  administrative  and business  functions to assist in the
identification,  assessment  and control of various risks.  Our risk  management
policies and procedures are subject to ongoing review and modification.

     Market Risk.  Certain of our business  activities expose us to market risk.
This market risk represents the potential for loss that may result from a change
in value of a  financial  instrument  as a result of  fluctuations  in  interest
rates,  equity prices or changes in credit rating of issuers of debt securities.
This  risk  relates  to  financial  instruments  we hold as  investment  and for
trading.  Securities  inventories  are  exposed  to risk of loss in the event of
unfavorable  price  movements.  Securities  positions  are marked to market on a
daily basis.  Market-making activities are client-driven,  with the objective of
meeting clients' needs while earning a positive spread. At December 31, 2004 and
December 31, 2003, equity securities positions owned and sold, not yet purchased
were   approximately   $370,720   and   $174,326,   and  $169,534  and  $69,330,
respectively.  In our view,  the  potential  exposure  to market  risk,  trading
volatility and the liquidity of securities held in the firm's inventory accounts
could potentially have a material effect on its financial position.

                                       32
<PAGE>

     Credit  Risk.  Credit  risk  represents  the loss that we would  incur if a
client,  counterparty or issuer of securities or other  instruments that we hold
fails to perform its  contractual  obligations.  Client  activities  involve the
execution,  settlement,  and financial of various  transactions on behalf of its
clients.  Client  activities  are  transacted  on either a cash or margin basis.
Client activities may expose us to off-balance sheet credit risk. We may have to
purchase or sell financial  instruments  at the  prevailing  market price in the
event of the failure of a client to settle a trade on its  original  terms or in
the  event  that cash and  securities  in the  client  margin  accounts  are not
sufficient  to fully  cover the  client  losses.  We seek to  control  the risks
associated with client activities by requiring clients to maintain collateral in
compliance with various regulations and company policies.

     Operational  Risk.  Operational  risk generally  refers to the risk of loss
resulting  from our  operations,  including,  but not  limited  to,  improper or
unauthorized  execution and  processing  of  transactions,  deficiencies  in our
operating  systems,  business  disruptions  and  inadequacies or breaches in our
internal  control  processes.  We  operate in  diverse  markets  and rely on the
ability of our  employees  and systems to process high  numbers of  transactions
often  within  short  time  frames.  In the  event of a  breakdown  or  improper
operation  of systems,  human error or improper  action by  employees,  we could
suffer  financial loss,  regulatory  sanctions or damage to our  reputation.  In
order to mitigate and control  operational  risk, we have developed and continue
to enhance  policies  and  procedures  that are  designed to identify and manage
operational  risk  at  appropriate  levels.  Included  in our  operational  risk
management  practice is disaster recovery for our critical  systems.  We believe
that our disaster recovery program,  including  off-site back-up  technology and
operational facilities,  is adequate to handle a reasonable business disruption.
However,  there can be no  assurances  that a disaster  directly  affecting  our
headquarters  or  operations  center would not have a material  adverse  impact.
Insurance and other safeguards might only partially reimburse us for our losses.

     Legal Risk. Legal risk includes the risk of non-compliance  with applicable
legal and regulatory requirements. We are subject to extensive regulation in the
different  jurisdictions  in which we  conduct  our  business.  We have  various
procedures addressing issues such as regulatory capital requirements,  sales and
trading  practices,  use of and safekeeping of customer funds,  credit granting,
collection activities, anti money-laundering and record keeping.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our activities often involve the purchase, sale or short sale of securities
as principal.  Such  activities  subject our capital to  significant  risks from
markets that may be characterized by relative illiquidity or may be particularly
susceptible to rapid  fluctuation in price or liquidity.  Such market conditions
could limit our ability to resell securities purchased or to purchase securities
sold short. These activities subject our capital to significant risks, including
market,  credit  and  liquidity  risks.  Market  risk  relates  to the  risk  of
fluctuating  values  based on market  prices  without  action  on our part.  Our
primary credit risk is settlement  risk,  which relates to whether  counterparty
will fulfill its  contractual  obligations,  such as delivery of  securities  or
payment of funds. Liquidity risk relates to our inability to liquidate assets or
redirect the deployment of assets contained in illiquid investments.  Additional
information  pertaining  to the  foregoing  risks is included  under the caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Risk Management."

                                       33
<PAGE>


Item 8.    Financial Statements

     See Financial Statements attached hereto at pages F-1 to F-25.

Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure

     On  July  9,  2004,  we  dismissed  Schneider  &  Associates,  LLP  as  our
independent  public  accountants.  The reports of Schneider & Associates  on our
financial statements for each of the past two fiscal years, contained no adverse
opinion or  disclaimer  of opinion  and were not  qualified  or  modified  as to
uncertainty,  audit  scope or  accounting  principles.  The  decision to dismiss
Schneider & Associates was made and approved by the Audit Committee of the Board
of  Directors  on July 9, 2004.  During  our two most  recent  fiscal  years and
through the date of our  dismissal,  we had no  disagreements  with  Schneider &
Associates  on any  matter of  accounting  principles  or  practices,  financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the  satisfaction of Schneider & Associates would have caused the to
make  reference to the subject matter of the  disagreement  in its report on our
financial  statements for such years. During our two most recent fiscal years we
had no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

     On  July  9,  2004,  we  engaged  Lazar,  Levine  &  Felix  LLP as our  new
independent  registered public accountants to audit our financial statements for
the fiscal year ended December 31, 2004.  Prior to the  engagement of Lazar,  we
had not  consulted  with Lazar  during our two most recent  fiscal in any matter
regarding:  (A) either the  application of accounting  principles to a specified
transaction,  either  completed or proposed,  or the type of audit  opinion that
might be rendered on our financial statements,  and neither was a written report
provided  to us nor  was  oral  advice  provided  that  Lazar  concluded  was an
important  factor  considered by us in reaching a decision as to the accounting,
auditing  or  financial  reporting  issue,  or  (B)  the  subject  of  either  a
disagreement  or a reportable  event  defined in Item  304(a)(1)(iv)  and (v) of
Regulation S-K.

Item 9A.    Controls and Procedures

     Our management, including the President and the Chief Executive Officer and
Chief Financial  Officer,  carried out an evaluation of our disclosure  controls
and procedures (as defined in Rule 15d-15(e)  under the Securities  Exchange Act
of 1934, as amended) as of the end of the period  covered by this report.  Based
on that  evaluation,  our  President and our Chief  Executive  Officer and Chief
Financial  Officer  concluded that we had effective  controls and procedures for
(i)  recording,  processing,  summarizing  and  reporting  information  that  is
required to be disclosed  in its reports  under the  Securities  Exchange Act of
1934,  as amended,  within the time  periods  specified  in the  Securities  and
Exchange  Commission's  rules  and  forms  and (ii)  ensuring  that  information
required to be disclosed in such reports is accumulated and  communicated to our
management,  including our President and our Chief  Executive  Officer and Chief
Financial   Officer,   as  appropriate  to  allow  timely  decisions   regarding
disclosure.

     No change in our internal  control over financial  reporting (as defined in
Rules  13a-15(f) and 15d-15(f)  under the Exchange Act) occurred during the year
ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Item 9B.    Other Information

None

                                       34
<PAGE>

<TABLE>
<S>                                    <C>                   <C>

                                    PART III

Item 10. Directors and Executive Officers

     Our directors and executive  officers for the year ending December 31, 2005
are as follows:


Board Of Directors

Name                                     Age                 Position

Herbert Kurinsky                         73                  Class I Director and Chairman of the Board of
                                                             Directors- First Montauk Financial Corp.

William J. Kurinsky                      44                  Class I Director, Vice-Chairman of the Board of
                                                             Directors- First Montauk Financial Corp.

Norma Doxey                              66                  Class II Director, First Montauk Financial Corp., and
                                                             Vice President of Operations, Montauk Financial Group

Ward R. Jones                            73                  Class III Director, First Montauk Financial Corp.

Barry D. Shapiro                         63                  Class II Director, First Montauk Financial Corp.

Executive Officers

Name                                     Age                 Position

Victor K. Kurylak                        48                  President and Chief Executive Officer, First Montauk
                                                             Financial Corp. and Montauk Financial Group

Robert I. Rabinowitz                     47                  Executive Vice President, General Counsel and Secretary
                                                             -First Montauk Financial Corp., Montauk Financial Group

Mindy A. Horowitz                        47                  Acting Chief Financial Officer, Vice President of
                                                             Finance -First Montauk Financial Corp., Chief Financial
                                                             Officer, Treasurer, Fin.Op.- Montauk Financial Group

</TABLE>

     Our 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 our 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 our company (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 company which
is materially  and  demonstrably  injurious to the company,  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.  Family
relationships  exist among the following  officers and  directors:  Mr.  Herbert
Kurinsky is the uncle of Mr.  William J. Kurinsky.  Mr. Robert I.  Rabinowitz is
the brother-in-law of Mr. William J. Kurinsky.


                                       35
<PAGE>
     Herbert  Kurinsky,  our  Chairman,  became a Director and the  President of
First Montauk Financial Corp. on November 16, 1987. Mr. Kurinsky is a co-founder
of Montauk Financial Group. and has been its President, one of its Directors and
its Registered  Options Principal since September of 1986.  Effective January 1,
2004, Mr. Kurinsky  relinquished his duties as our Chief Executive Officer. 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.

     William J. Kurinsky, serves as our Vice Chairman of the Board of Directors.
In 2004, Mr.  Kurinsky  served as our Chief  Executive  Officer,  Vice Chairman,
Chief Financial Officer and Secretary.  Mr. Kurinsky  relinquished these offices
on February 8, 2005. Mr. Kurinsky  previously  served as our Vice  President,  a
Director and Chief Operating Officer,  in addition to serving as Chief Financial
Officer and Secretary,  since November 16, 1987. Mr. Kurinsky  relinquished  the
office of Chief  Operating  Officer and became our Chief  Executive  Officer and
Vice  Chairman,  effective  January  1,  2004.  He is a  co-founder  of  Montauk
Financial  Group 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.

     Norma L. Doxey has been a member of our Board of Directors  since  December
6, 1988.  Ms.  Doxey has been a Vice  President of  Operations  and a Registered
Representative with Montauk Financial Group since September 1986. From September
1986, she was operations 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 member of our Board of Directors  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., but does not engage in any securities business.

     Barry D.  Shapiro,  CPA has been a member of our Board of  Directors  since
December 6, 2000. From October 2000 to the present, Mr. Shapiro is a shareholder
of the  accounting  firm,  Withum,  Smith + Brown  in its Red Bank  office.  Mr.
Shapiro was a partner of Shapiro & Weisman CPAs P.A. from 1976 thru 1996 when he
became a partner of Rudolf, Cinnamon & Calafato, P.A. until joining Withum Smith
+ Brown.  Mr. Shapiro was previously  employed with the Internal Revenue Service
from 1965 thru 1971,  where he was responsible for audit,  review and conference
functions. Mr. Shapiro is a member of the New Jersey Society of Certified Public
Accountants,  where he  currently  participates  on the IRS  Co-Op and State Tax
Committees.  Mr. Shapiro is a past Trustee,  Treasurer and Vice President of the
NJSCPA. He has been involved and is in many civic and community  activities,  as
well as  charitable  organizations,  including  the  Monmouth  County New Jersey
Chapter of the American  Cancer  Society and the Ronald  McDonald  House of Long
Branch,  New  Jersey.  Mr.  Shapiro  received a B.S.  in  accounting  from Rider
University in 1965.

     Victor K. Kurylak became our Chief  Executive  Officer on February 8, 2005,
and retains his position as President. From January 1, 2004, Mr. Kurylak was our
President and Chief  Operating  Officer  through  February 8, 2005. From January
2001 through December 2003, Mr. Kurylak was a self-employed business consultant,
and was retained by us prior to his becoming our President  and Chief  Operating
Officer. From November 1995 through December 2000 he was the owner and Executive
Vice President for Madison  Consulting  Group/Summit  Insurance,  an independent
insurance  brokerage  firm. From February 1990 through October 1995, Mr. Kurylak
was the Chief Information Officer for Rockefeller Financial Services in New York
City. Mr. Kurylak  received his Bachelor of Sciences degree in Engineering  from
Princeton  University in 1979. Mr. Kurylak is registered as a general securities
representative  and registered  principal and is licensed as a life,  health and
property and casualty insurance producer.

     Robert I.  Rabinowitz,  Esq. has been our General  Counsel  since 1987.  In
February  2005 he became our  secretary,  and retained the position of Executive
Vice President and General Counsel.  Previously, he served as General Counsel of
Montauk  Financial  Group from 1986 until 1998 when a new  general  counsel  was
named.  Thereafter,  he  became  the Chief  Administrative  Officer  of  Montauk
Financial  Group as well as a General  Securities  Principal.  From January 1986
until  November  1986,  he was an associate  attorney for Brodsky,  Greenblatt &
Renahan, a private practice law firm in Rockville,  Maryland.  Mr. Rabinowitz is
an attorney at law licensed to practice in New Jersey, Maryland and the District
of  Columbia,  and is a member  of the  Board of  Arbitrators  for the  National
Association of Securities Dealers,  Department of Arbitration.  Mr. Rabinowitz's
wife is a niece of Mr. Herbert Kurinsky and a sister of Mr. William Kurinsky.

                                       36
<PAGE>

     Mindy A. Horowitz,  CPA, was appointed  acting Chief  Financial  Officer of
First Montauk Financial Corp.  effective  February 8, 2005. In January 2005, she
became the Chief  Financial  Officer and Financial and  Operations  Principal of
Montauk  Financial  Group. She had previously been Vice President of Finance for
Montauk  Financial Group since September 1995. Prior to that, Ms. Horowitz was a
tax partner with and held other positions at the accounting firm of Broza, Block
& Rubino from 1981 through 1995 when she joined First Montauk  Securities  Corp.
Ms. Horowitz is a Certified Public Accountant.

Significant Employees

     Mark D. Lowe, 46, has been President of Montauk  Insurance  Services,  Inc.
since  October  1998.  From 1982 to 1998 Mr. Lowe was a Senior  Consultant  with
Congilose & Associates,  a financial services firm specializing in insurance and
estate  planning.  Mr. Lowe became a Certified  Financial  Planner (CFP) in July
1991,  a  Chartered  Financial  Planner  (Chfc)  in 2001  and a  Chartered  Life
Underwriter  (CLU) in 2003.  Mr. Lowe  graduated  Ocean  County  College in Toms
River,  NJ. Mr. Lowe is the past President of the Estate and Financial  Planning
Council of Central New Jersey.

Certain Reports

     No person  who,  during the fiscal  year ended  December  31,  2004,  was a
Director,  officer or  beneficial  owner of more than ten  percent of our common
stock (which is the only class of our securities  registered under Section 12 of
the  Securities  Exchange Act of 1934 failed to file on a timely basis,  reports
required  by Section 16 of the  Securities  Exchange  Act during the most recent
fiscal year or prior  years.  The  foregoing  is based solely upon our review of
Forms 3 and 4 during the most  recent  fiscal  year as  furnished  us under Rule
16a-3(d) under the Securities  Exchange Act, and Forms 5 and amendments  thereto
furnished  to  us  with  respect  to  its  most  recent  fiscal  year,  and  any
representation  received  by us  from  any  reporting  person  that no Form 5 is
required.

     We believe that certain  shareholders,  including BMAC Corp. have failed to
comply with their reporting  requirements  under the Securities and Exchange Act
of 1934,  including the  requirement to file Forms 3 and 4 with respect to their
holdings and sale and  purchases of our Common  Stock.  However,  as a result of
these failures,  we cannot  ascertain with certainty the extent of any potential
failure to comply with the rules regarding these filings.

Compensation of Directors; Meetings of Directors

     We pay our  directors who are not also our employees 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.  In 2004 the board authorized  additional payments to our directors who
are not our  employees,  to  include  an annual  payment  of $5,000  payable  in
quarterly installments.  Members of the audit committee are also entitled to any
additional $750 per annum payment. Directors that are also our employees are not
entitled to any additional  compensation  as such.  During fiscal year 2004, the
Board of Directors met on seven occasions and voted by unanimous written consent
on two occasions.  No member of the Board of Directors attended less than 75% of
the  aggregate  number  of (i) the  total  number  of  meetings  of the Board of
Directors or (ii) the total  number of meetings  held by all  Committees  of the
Board of Directors.

                                       37
<PAGE>

Committees of the Board of Directors

     The Board of Directors  has two  committees:  Audit and  Compensation.  Our
Board of  Directors  currently  consists  of five  individuals,  two of whom are
independent  directors as defined in Rule  4200(a)(154) of the listing standards
of the National Association of Securities Dealers. Our independent directors are
Ward R. Jones, Jr. and Barry D. Shapiro.

     For the year ended December 31, 2004, the members of the committees,  and a
description of the duties of the Committees were as follows:

Audit Committee.  Our audit Committee acts to:

        o       review with management our finances, financial condition and
                interim financial statements;
        o       review with our independent auditors the year-end financial
                statements; and
        o       review implementation with the independent auditors and
                management any action recommended by the independent auditors
                and the retention and termination of our independent auditors.

     During the fiscal year ended December 31, 2004, the audit  committee met on
two  occasions.  One of those  meeting was to approve the  appointment  of Lazar
Levine & Felix,  LLP as our new  auditing  firm for fiscal year 2004.  The audit
committee  adopted a written  charter  governing its actions  effective June 23,
2000.  During the fiscal year,  the members of the audit  committee were Ward R.
Jones  and Barry  Shapiro.  Both of the  members  of our  audit  committee  were
"independent"   within  the   definition  of  that  term  as  provided  by  Rule
4200(a)(154) of the listing standards of the National  Association of Securities
Dealers.  The Board has  determined  that Mr. Barry D. Shapiro  qualified as the
audit  committee  financial  expert as defined under  applicable  Securities and
Exchange  Commission  rules.  Mr.  Barry  Shapiro  serves  as  chairman  of this
committee.

     Compensation  Committee.   The  compensation  committee  functions  include
administration  of  our  2002  Incentive  Stock  Option  Plan  and  1996  Senior
Management  Option  Plan  and  the  negotiation  and  review  of all  employment
agreements with our executive officers. The compensation committees' members are
Ward R. Jones and Barry  Shapiro.  Mr.  Ward Jones  serves as  chairman  of this
committee.  During the year ended  December 31, 2004,  the  committee met on two
occasions.

Compensation Committee Interlocks and Insider Participation

     There are no compensation  committee  interlocks between the members of our
compensation  committee and any other entity. None of the members of the Board's
compensation  committee  are executive  officers of our company.  Mr. Jones is a
registered  representative  of  our  broker-dealer  subsidiary,   First  Montauk
Securities Corp., but does not engage in any securities business.

                                       38
<PAGE>


         Code of Ethics

     On March 29, 2004,  our Board of Directors  approved the Code of Ethics and
Business Conduct for our company.  Our Code of Ethics and Conduct covers all our
employees  and  Directors,  including  our  Chief  Executive  Officer  and Chief
Financial  Officer and our  President.  A copy of our Code of Ethics and Conduct
was filed as Exhibit 14 to our annual  report on Form 10-K for 2003.  We did not
amend or waive any provisions of the Code of Ethics and Business  Conduct during
the year ended December 31, 2004.

Item 11.  Executive Compensation

Summary of Cash and Certain Other Compensation

     The following table provides  certain  information  concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-K) compensation awarded
to,  earned by, paid or accrued by us during the years ended  December 31, 2004,
2003 and 2002 to each of our named executive officers.

<TABLE>
<S>                                  <C>         <C>             <C>           <C>                    <C>               <C>

                                                                                                      Long Term
                                                                                                      Compensation Awards


                                                                                                                       No. of
                                                                                                    Restricted Stock   Securities
                                      Fiscal                                   Other Annual         Award(s)           Underlying
    Name and Principal Position       Year       Salary           Bonus        Compensation                            Options/ SARs

Herbert Kurinsky                      2004       $200,000         $  42,570    $93,748 (2)          375,000 (1)         0
Chairman of the Board of Directors    2003       $231,218         $ 200,000    $  2,500 (2)         0                   0
- FMFC (1)                            2002       $181,218         $ 0          $  2,500 (2)         0                   0

William J. Kurinsky                   2004       $300,000         $31,590      $97,269 (4)          375,000 (3)         0
Chief Executive and Chief Financial   2003       $231,218         $50,000      $    0  (4)          0                   0
Officer and Secretary - FMFC and      2002       $181,218         $ 0          $ 2,000 (4)          0                   0
Montauk Financial Group (3)

Victor K. Kurylak, President and      2004       $250,000         $63,181      $65,356 (6)          250,000 (5)         500,000 (7)
Chief Opearting Officer, FMFC and
Montauk Financial Group (5)

Robert I. Rabinowitz                  2004       $180,000         $25,000      $ 3,663 (9)          0                   100,000 (10)
General Counsel - FMFC and Montauk    2003       $150,000         $10,000      $ 2,500 (9)          0                   0
Financial Group (8)                   2002       $150,000         $ 0          $ 2,500 (9)          0                   0

Mindy A. Horowitz                     2004       $125,000         $20,000      $ 3,663 (12)         0                   0
Acting Chief Financial Officer,       2003       $125,000         $15,000      $ 2,500 (12)         0                   100,000 (11)
FMFC, and Chief Financial Officer,    2002       $125,000         $ 0          $ 2,500 (12)         0                   0
Fin. Op. Montauk Financial Group
(13)

</TABLE>

1)   Mr.  Herbert  Kurinsky  is the  beneficial  owner of 461,518  shares of the
     Company's  Common Stock as of December 31, 2004,  which shares had a market
     value of $253,835 as of that date,  without giving effect to the diminution
     in value  attributable to the restriction on said shares.  In January 2004,
     Mr. Herbert  Kurinsky was issued 375,000 shares of restricted  common stock
     in conjunction with his employment agreement.  The shares vest equally over
     a three-year  period on December  31,  2004,  December 3, 2005 and December
     2006.

2)   Includes:  (i) for 2004 stock  compensation  of $90,562  and an  automobile
     allowance of $3,186 (ii) for 2003, an automobile  allowance of $2,500;  and
     (iii) for 2002, an automobile allowance of $2,500.

                                       39
<PAGE>

3)   Effective February 8, 2005, Mr. William Kurinsky relinquished the office of
     Chief Executive Officer.  He is the beneficial owner of 1,780,823 shares of
     the  Company's  Common Stock as of December  31,  2004,  which shares had a
     market  value of $979,453  as of that date,  without  giving  effect to the
     diminution in value  attributable  to the  restriction  on said shares.  In
     January  2004,  Mr.  William  J.  Kurinsky  was  issued  375,000  shares of
     restricted common stock in conjunction with his employment  agreement.  The
     shares vest equally over a three-year period on December 31, 2004, December
     3, 2005 and December  2006. In February  2005, we issued  197,824 shares of
     newly created Series B Preferred  Stock valued at $1,000,000 to Mr. William
     Kurinsky pursuant to the terms of a Separation Agreement as discussed below
     in greater detail.  Mr. Kurinsky's  previously  granted options to purchase
     325,000  shares of our common stock with exercise  prices of $0.83 to $2.00
     per  share  have been  cancelled.  Mr.  Kurinsky,  in  connection  with his
     services as a consultant, will receive new options to purchase an aggregate
     of  200,000  shares of Common  Stock  with an  exercise  price of $0.83 per
     share. The new options will have a three-year exercise term. Mr. Kurinsky's
     existing   restricted  stock  grant  of  250,000  common  shares  are  also
     immediately vested.

4)   Includes: (i) for 2004 stock compensation of $90,526,  commission of $2,142
     and an automobile allowance of $4,565 (ii) for 2003 no automobile allowance
     was paid, (iii) for 2002, an automobile allowance of $2,000.

5)   Mr.  Victor K.  Kurylak is the  beneficial  owner of 250,000  shares of the
     Company's  Common Stock as of December 31, 2004,  which shares had a market
     value of $137,500 as of that date,  without giving effect to the diminution
     in value  attributable to the restriction on said shares.  In February 2005
     we issued 1,000,000 restricted shares of common stock pursuant to the terms
     of his new employment  agreement.  These shares were granted to Mr. Kurylak
     pursuant to the terms of his new employment agreement as discussed below in
     greater detail.

6)   Includes:  for  2004  stock  compensation  of  $60,375  and  an  automobile
     allowance of $4,981.

7)   In 2004 the Compensation Committee authorized an option grant to Mr. Victor
     K. Kurylak to purchase  250,000 shares of Common Stock at an exercise price
     of $.75 per share  for 5 years,  and an option  grant to  purchase  250,000
     shares of Common Stock at an exercise  price of $.50 per share for 5 years.
     Mr. Kurylak returned the option grant  exercisable at $.75 in February 2005
     in  conjunction  with a new employment  agreement,  as discussed in greater
     detail below.

8)   Mr. Robert I.  Rabinowitz is the  beneficial  owner of 29,500 shares of the
     Company's  Common Stock as of December 31, 2004,  which shares had a market
     value of $16,225 as of that date,  without  giving effect to the diminution
     in value attributable to the restriction on said shares.  Subsequent to the
     fiscal year ended December 31, 2004, we granted the named executive officer
     the right to receive an  aggregate of 100,000  restricted  shares of common
     stock, which vest in equal amounts of 33.3%, on February 1, 2005,  February
     1, 2006 and February 1, 2007.  These shares were granted to Mr.  Rabinowitz
     pursuant to the terms of his new employment agreement as discussed below in
     greater detail.

9)   Includes: (i) for 2004, an automobile allowance of $3,663 (ii) for 2003, an
     automobile  allowance of $2,500; and (ii) for 2002, an automobile allowance
     of $2,500.

10)  In 2004 the Compensation Committee authorized an option grant to Mr. Robert
     Rabinowitz to purchase  100,000 shares of common stock at an exercise price
     of $.50 for five years.  In 2001, the Committee  authorized an option grant
     to Mr.  Rabinowitz to purchase 43,750 shares of Common Stock at an exercise
     price of $1.50 per share for 5 years.

11)  In 2003 the Compensation  Committee authorized an option grant to Ms. Mindy
     Horowitz to purchase 100,000 shares of common stock at an exercise price of
     $.50 for five years.

12)  Includes: (i) for 2004, an automobile allowance of $3,663 (ii) for 2003, an
     automobile  allowance of $2,500; and (ii) for 2002, an automobile allowance
     of $2,500.

13)  Subsequent to the fiscal year ended December 31, 2004, we granted the named
     executive  officer the right to receive an aggregate of 100,000  restricted
     shares of common stock,  which vest in equal amounts of 33.3%,  on February
     1, 2005,  February 1, 2006 and February 1, 2007.  These shares were granted
     to Ms.  Horowitz  pursuant to the terms of her new employment  agreement as
     discussed below in greater detail.


                                       40
<PAGE>

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

     The  following  table  contains  information  with  respect  to  the  named
executive officers concerning options granted during the year ended December 31,
2004.
<TABLE>
<S>                    <C>               <C>              <C>            <C>            <C>           <C>

                                            INDIVIDUAL GRANTS



                                                                                       Potential Realizable Value
                                                                                       At Assumed Annual Rates of
                                                                                                  Stock
                                                                                         Price Appreciation For
                                                                                                 Option
                                                                                                  Term
                                          Percent of
                         Number of           Total
                         Securities         Option/
                         Underlying      SARs Granted     Exercise of
                        Option/SARs      To Employees     Base Price     Expiration
        Name            Granted (#)     In Fiscal Year      (S/Sh)           Date
        (a)                 (b)             (c) (1)           (d)            (c)


                                                                                          5% ($)        10% ($)
                                                                                           (f)            (g)

Victor K. Kurylak              250,000        28%            $0.50           12/31/08       $19,375        $26,250


Victor K. Kurylak              250,000        28%            $0.75           12/31/08       $0            $0
(2)


Robert I. Rabinowitz           100,000        11%            $0.50            2/16/09        $7,750        $10,500

</TABLE>

(1)     Includes options granted to non-employee registered representatives
        under the 2002 Incentive Stock Option Plan, as amended.

(2)     In February 2005 Mr. Kurylak surrendered these options pursuant to a new
        employment agreement.






                                       41
<PAGE>
<TABLE>
     <S>                       <C>            <C>           <C>                            <C>



                                              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, 2004               December 31, 2004 (1)
              ----               --------    --------        -----------------               ---------------------

                                                         Exercisable/Unexercisable         Exercisable/Unexercisable
     Herbert Kurinsky            --           $0                  325,000/0                       $0/$0
     William J. Kurinsky (2)     --           $0                  200,000/0                       $0/$0
     Victor K. Kurylak (3)       --           $0                  500,000/0                       $12,500/$0
     Robert I. Rabinowitz        --           $0                  203,750/0                       $5,000/$0
     Mindy A. Horowitz           --           $0                  100,000/0                       $5,000/$0
----------------------

 (1)     Based upon the closing bid price of our common  stock on December  31,  2004 ($.55 per  share),  less the  exercise
         price for the aggregate number of shares subject to the options.
 (2)     In February 2005, Mr. William J. Kurinsky  surrendered  325,000 options and was awarded a new option grant for 200,000
         options exercisable at $.83 per share for five years.
 (3)     In February 2005 Mr. Kurylak surrendered 250,000 options to purchase common stock at $.75 per share.


</TABLE>

Employment Agreements and Separation Agreement

     In January  2004,  we  entered  into  employment  agreements  with  Herbert
Kurinsky,  William J.  Kurinsky  and Victor K.  Kurylak,  as our Chairman of the
Board,  Chief  Executive  Officer and  President  and Chief  Operating  Officer,
respectively. In February 2005 Mr. William J. Kurinsky stepped down as our Chief
Executive  Officer and Victor K. Kurylak was appointed Chief  Executive  Officer
pursuant to a new three-year employment agreement, as described below.

Herbert Kurinsky

Pursuant to his employment  agreement,  Mr. Herbert  Kurinsky  resigned as Chief
Executive  Officer and  remained as our  Chairman.  This  agreement,  which will
expire on December  31,  2006,  provides  for a base salary of $200,000 for each
year of the  agreement.  The  agreement  automatically  renews for an additional
one-year  term,  unless  we elect  not to renew it.  Mr.  Kurinsky  will also be
entitled to receive a portion of a bonus pool  consisting  of 15% of our pre-tax
profits,  to be determined by our compensation  committee.  The bonus pool would
require  a  minimum  of  $500,000  pretax  profit  per year in  order to  become
effective.  He is also entitled to receive  commissions at the same rate as paid
to our other  non-affiliate  registered  representatives.  Mr.  Kurinsky is also
entitled  to a  portion  of the  finance  pool as  defined  as, up to 20% of all
underwriters  and/or  placement  agent  warrants or options  that are granted to
Montauk  Financial Group upon the same price,  terms and conditions  afforded to
Montauk Financial Group as the underwriter or placement agent, but not to exceed
50% of what is  retained  by  Montauk  Financial  Group  after  issuance  to the
registered representatives who participated in the placements. Mr. Kurinsky also
receives  health  insurance  benefits  and  life  insurance  as  generally  made
available to our regular  full-time  employees,  and  reimbursement for expenses
incurred on our behalf and the use of an automobile,  or in the alternative,  an
automobile  allowance.  The contracts  also provide for a severance of one years
salary in the event Mr. Kurinsky's employment is terminated without cause or the
contract is not renewed  and a severance  benefit  equal to three times the five
year average  compensation  paid to him in the event Mr.  Kurinsky is terminated
after a change  in our  control  as  defined  in the  agreement.  As  additional
compensation  under the agreement,  we granted Mr. Kurinsky the right to receive
an aggregate of 375,000  restricted shares of common stock,  which vest in equal
amounts of 33.3%, on December 31, 2004, December 31, 2005 and December 31, 2006.

William J. Kurinsky

Pursuant to his 2004 employment agreement, Mr. William J. Kurinsky was appointed
as our Chief Executive  Officer,  remained as our Chief Financial  Officer and a
director and  relinquished  his positions as Executive  Vice President and Chief
Operating  Officer.  This  agreement  provided for a base salary of $300,000 for
each year of the  agreement.  On February 8, 2005 we entered  into a  Separation
Agreement with William J. Kurinsky, which provides for Mr. Kurinsky to terminate
his employment with us effective on that date. Under the terms of the Separation
Agreement,  Mr.  Kurinsky has  relinquished  his position as our Chief Executive
Officer and that of our  subsidiaries,  including our broker  dealer  subsidiary
First Montauk Securities Corp. Mr. Kurinsky will remain as a member of our board
of directors.

     The Separation Agreement includes the following provisions:

     o Mr.  Kurinsky's  employment  agreement dated January 1, 2004, which had a
term set to expire in December 2008, was terminated in full.

                                       42
<PAGE>

     o Mr. Kurinsky was retained as a consultant to the Registrant for a term of
two years with consulting fee of approximately $12,600 per month.

     o Mr. Kurinsky was issued an aggregate of 197,824 shares of a newly created
class of Series B Preferred Stock, par value $0.10 per share,  which will have a
deemed issue price of $1,000,000,  and will be convertible  into Common Stock on
the basis of ten  shares of Common  Stock for each  share of Series B  Preferred
Stock.  The Series B Stock also provides that the Series B Preferred shares have
voting  rights  based  upon the  number of shares of Common  Stock into which it
would be  converted.  The Series B Preferred  Stock also  includes a  cumulative
dividend of 8% per year.

     o We will issue to Mr. Kurinsky a promissory  note in the principal  amount
of $200,000 payable in one year and bearing interest at 8% per annum.

     o We will make a lump sum cash  payment  to Mr.  Kurinsky  in the amount of
$136,000.

     o Mr. Kurinsky's  existing options to purchase 325,000 shares of our common
stock with exercise prices of $0.83 to $2.00 per share have been cancelled.  Mr.
Kurinsky,  in  connection  with his services as a  consultant,  will receive new
options to  purchase  an  aggregate  of 200,000  shares of Common  Stock with an
exercise  price of $0.83 per  share.  The new  options  will  have a  three-year
exercise term. Mr. Kurinsky's  existing restricted stock grant of 250,000 common
shares also immediately vested.

     o We will continue to pay for the benefits such as health and medical plans
that Mr. Kurinsky was otherwise entitled to under his employment agreement for a
period of 24 months.

     o Mr.  Kurinsky  will be entitled to receive his portion of the  securities
that he would have been entitled to under our  corporate  finance bonus pool and
also his pro rata  bonus  which he had been  entitled  to under  his  employment
agreement through his date of termination.

Victor K. Kurylak

Pursuant to his 2004  employment  agreement,  Mr. Victor K. Kurylak was hired as
our President and Chief Operating  Officer.  In connection  with Mr.  Kurinsky's
termination as the Chief Executive  Officer,  the Board approved the appointment
of Mr.  Victor K.  Kurylak as the our Chief  Executive  Officer.  The Board also
approved a new employment agreement for Mr. Kurylak and the issuance, as a bonus
payment  for our  performance  for the year  ended  December  31,  2004,  and in
consideration of Mr. Kurylak  assuming the position of Chief Executive  Officer,
1,000,000 shares of our common stock. His prior agreement entered into effective
January  1, 2004 was  terminated.  Mr.  Kurylak  agreed to the  cancellation  of
250,000 of his  outstanding  stock  options with an exercise  price of $0.75 per
share. The 1,000,000 shares vest in annual increments of one third commencing on
February  1,  2005.  In the event of a change of  control  of the  Company,  all
unvested shares would vest.

Under the terms of Mr. Kurylak's employment agreement, which has a term of three
years  expiring  December 31, 2007 and is effective as of February 8, 2005,  Mr.
Kurylak receives a base salary of $275,000 per year, subject to annual increases
of 10% provided the  Registrant  has net profits of at least $500,000 per annum.
In addition,  Mr. Kurylak is entitled to receive medical and other benefits that
we have is effect for its  executives,  as well as other benefits and automobile
expenses.  Mr. Kurylak is entitled to participate in the Registrant's  executive
bonus pool which has been  established by the Board to constitute 15% of our net
pre tax profit and would  receive a bonus  from such pool as  determined  by the
Compensation  Committee.  Further,  Mr. Kurylak is also entitled to a portion of
the finance pool as defined as, up to 20% of all  underwriters  and/or placement
agent warrants or options that are granted to Montauk  Financial  Group upon the
same price,  terms and  conditions  afforded to Montauk  Financial  Group as the
underwriter  or  placement  agent,  but not to exceed 50% of what is retained by
Montauk  Financial  Group after issuance to the registered  representatives  who
participated in the placements.  In the event of termination  without cause, Mr.
Kurylak  would  be  entitled  to  a  severance  payment  consisting  of  accrued
compensation,  continuation of his benefits and payment of his base salary for a
period of the greater of three months or the unexpired term.



                                       43
<PAGE>

Other Executive Officers

In 2005 we also  entered  into  new  employment  agreements  with  three  senior
executive officers,  namely, Robert Rabinowitz,  Mindy Horowitz and Brian Cohen.
Mr.  Rabinowitz  serves  as  Executive  Vice  President,   General  Counsel  and
Secretary;  Ms. Horowitz serves as Chief Financial  Officer and Mr. Cohen serves
as Senior Vice President-Information Systems. The Board also approved restricted
stock awards to each of these persons,  of 100,000 shares as a performance bonus
award and as an incentive to continue their  employment  with us. The agreements
are for one-year terms ending  February 8, 2006 and are renewable for successive
one year terms unless we provide 120 prior notice of our  intention not to renew
the agreements.

Mr.  Rabinowitz  will receive a base salary of $190,000 per year and is eligible
to  participate in our bonus and option plans,  receives  health and benefits as
provided to our executives  and is entitled to a car allowance.  In the event of
termination of his employment without cause, Mr. Rabinowitz would be entitled to
receive a severance  payment  equal to the sum of (i) one year's salary and (ii)
his  portion of the bonus pool  payments he would  otherwise  be entitled to and
(iii) payment of the costs of health and other benefits for 12 months.

The  agreements  with Ms.  Horowitz and Mr. Cohen have similar terms except that
Ms.  Horowitz  receives a base salary of $140,000 and Mr. Cohen  receives a base
salary of $130,000.

Incentive Stock Option Plan

     In June 2002,  we adopted  the 2002  Incentive  Stock  Option  Plan,  which
provides  for the grant of options to  purchase  up to  5,000,000  shares of our
common stock by our employees, registered representatives and consultants. Under
the terms of the Incentive Plan, options granted thereunder may be designated as
options which qualify for incentive stock option treatment under Section 422A of
the Code, or options which do not so qualify.

     The Plan is administered by our Board of Directors which 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 Incentive  Stock
Options or  Non-Incentive  Stock  Options;  the periods during which each option
will be exercisable;  and the number of shares subject to each option. The Board
has full  authority to interpret the  Incentive  Plan and to establish and amend
rules and regulations relating thereto.

     Under the Incentive Plan, the exercise price of an option  designated as an
Incentive  Stock  Option  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 Incentive Stock Option is granted to a ten percent  stockholder
such exercise  price shall be at least 110% of such fair market value.  Exercise
prices of  Non-Incentive  Stock 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  Incentive  Stock  Options  which  become
exercisable in any calendar year may not exceed $100,000.

     The Board 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 Incentive Plan will expire in 2012.

     Effective as of the date of this Annual  Report,  since the adoption of the
2002   Incentive   Plan,  we  have  issued   1,135,600   options  to  registered
representatives and employees which have not been exercised or cancelled.  There
remain 425,732  options  outstanding  from our 1992 Incentive Stock Option Plan,
resulting in a total of 1,561,332 options outstanding.

Director Plan

     In June 2002, we adopted the Non-Executive  Director Stock Option Plan (the
"Director Plan").  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. A  Non-Executive  Director who has not served as a
director for an entire year prior to September  1st of each year shall receive a
pro rata number of options determined as follows:

Date of Membership                              Options Granted
------------------                              ---------------
September 1 through November 30                      20,000
December 1 through February 28                       15,000
March 1 through May 30                               10,000
June 1 through August 31                              5,000


                                       44
<PAGE>
     Options are granted  under the  Director  Plan until 2012 to  non-executive
directors who are not our full time employees.

     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 Director 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 our common  stock or a  combination  of both.  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 two  persons  who are our  officers  (the  "Committee").  The
Committee  has no  discretion  to determine  which  non-executive  director 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 120,000 options have been granted to our Non-Executive  members
of the Board of Directors  under the 2002 Plan.  An  additional  40,000  options
remain outstanding from grants made pursuant to the 1992 Non-Executive  Director
Stock Option Plan,  which terminated in June 2002, and which was replaced by the
2002 Non-Executive Director Stock Option Plan.

Senior Management Plan

     In 1996,  we  adopted  the  1996  Senior  Management  Incentive  Plan  (the
"Management  Plan").  The  Management  Plan  provides  for the issuance of up to
2,000,000  shares of common stock either upon  issuance of options  issued under
the Management Plan or grants of restricted stock or incentive stock rights. The
Board of  Directors  or a  committee  of the board may  grant  awards  under the
Management Plan to executive management employees,  if one is appointed for this
purpose.  The Management Plan provides for four types of awards:  stock options,
incentive stock rights, stock appreciation rights, and restricted stock purchase
agreements.  The stock options  granted under the Management  Plan can be either
incentive stock options or non-incentive  stock options,  similar to the options
granted  under  the  Incentive   Plan,   except  that  the  exercise   price  of
non-Incentive  Stock  Option shall not be less than 85% of the fair market value
of the common  stock on the date of grant.  Incentive  stock  rights  consist of
incentive stock units  equivalent to one share of common stock in  consideration
for services  performed for us. If services of the holder terminate prior to the
incentive period,  the rights become null and void unless  termination is caused
by death or disability.  Stock appreciation rights allow a grantee to receive an
amount in cash equal to the  difference  between  the fair  market  value of the
stock and the exercise  price,  payable in cash or shares of common  stock.  The
Board or committee  may grant limited stock  appreciation  rights,  which become
exercisable  upon a "change  of  control"  of our  company.  A change of control
includes  the  purchase by any person of 25% or more of the voting  power of our
outstanding securities, or a change in the majority of the Board of Directors.

     Awards  granted  under the  Management  Plan are also  entitled  to certain
acceleration  provisions that cause awards granted under the Plan to immediately
vest in the event of a change of control or sale of our  company.  Awards  under
the Management Plan may be made until 2006.

     In June 2000,  at our Annual  Meeting of  Shareholders,  a  resolution  was
passed amending the Senior  Management  Stock Option Plan to increase the number
of shares reserved for issuance from 2,000,000 to 4,000,000. Options to purchase
812,500  shares of our common stock are currently  outstanding  under the Senior
Management Plan. In January 2004 we granted an aggregate of 1,000,000 restricted
shares of common stock to Mr. Herbert Kurinsky,  Mr. William J. Kurinsky and Mr.
Victor K. Kurylak,  pursuant to their employment agreements. In February 2005 we
granted an  aggregate  of  1,300,000  restricted  shares of common  stock to Mr.
Victor K. Kurylak, Mr. Robert I. Rabinowitz, Ms. Mindy A. Horowitz and Mr. Brian
M. Cohen, pursuant to their employment agreements.


                                       45
<PAGE>
Item 12.         Security Ownership of Certain
                 Beneficial Owners and Management

     The  following  table sets forth certain  information  as of March 31, 2005
with respect to (i) each director and each executive officer, (ii) all directors
and officers as a group,  and (iii) the persons  (including  any "group" as that
term is used in Section l3(d)(3) of the Securities  Exchange Act of l934), known
by us to be the  beneficial  owner of more than five (5%)  percent of our common
stock. Shares of common stock subject to options exercisable within 60 days from
the date of this table are deemed to be outstanding and  beneficially  owned for
purposes  of  computing  the  percentage  ownership  of such  person but are not
treated as  outstanding  for purposes of computing the  percentage  ownership of
others.
<TABLE>
           <S>                                              <C>                         <C>

           Directors, Officers                                     Amount and Percentage
           and 5% Shareholders (1)                                Of Beneficial Ownership (1)
           -----------------------                              ---------------------------

                                                               Number of Shares          Percent
           Herbert Kurinsky
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                      661,518(2)              4.3%

           William J. Kurinsky
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                    3,959,063(3)             21.5%

           Victor K. Kurylak
           Parkway 109 Office Center
           328 Newman Springs Road                               1,500,000(4)              8.2%
           Red Bank, NJ 07701

           Robert I. Rabinowitz, Esq.
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                      273,250(5)              1.8%

           Mindy A. Horowitz
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                      200,000(6)              1.1%

           Ward R. Jones
           300 West Jersey Road
           Lehigh Acres, FL  33936                                 110,000(7)                 *

           Norma Doxey
           Parkway 109 Office Center
           328 Newman Springs Road                                 124,900(8)                 *
           Red Bank, NJ 07701

           Barry Shapiro, CPA
           Parkway 109 Office Center
           328 Newman Springs Road                                  60,000(9)                 *
           Red Bank, NJ 07701

           BMAC Corp.
           502 E. John Street
           Carson City, NV 89706                                1,965,500(10)             10.7%


           All Directors and Officers
           as a group (8 persons in
           number) (2, 3, 4, 5, 6, 7,
           8 and 9)                                             7,073,731                 38.5%
</TABLE>
------------------------------------------
* Indicates less than 1%


                                       46
<PAGE>

(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  200,000  shares  of common  stock.  Amounts  and  percentages
     indicated  for Mr.  Kurinsky  include an  aggregate  of  375,000  shares of
     restricted  common stock,  which shares vest in equal amounts of 33.3%,  on
     December 31, 2004, December 31, 2005 and December 31, 2006.
(3)  Includes  vested  and  presently  exercisable  options  of Mr.  William  J.
     Kurinsky  to  purchase   200,000  shares  of  common  stock.   Amounts  and
     percentages  indicated for Mr. Kurinsky also include an aggregate 1,978,240
     shares of common stock issuable upon conversion of 197,824 shares of Series
     B Convertible Redeemable Preferred Stock.
(4)  Amounts and  percentages  indicated for Mr. Kurylak include an aggregate of
     1,250,000  restricted  shares of  restricted  common  stock and  options to
     purchase  250,000 shares of common stock,  all of which  securities vest in
     equal amounts over a three-year period commencing: a) on December 31, 2004,
     December  31, 2005 and  December  31, 2006 with  respect to 250,000  common
     shares and 250,000  options,  and b) on February 1, 2005,  February 1, 2006
     and February 1, 2007 with respect to 1,000,000 shares of common stock.
(5)  Includes vested and presently  exercisable options of Mr. Robert Rabinowitz
     to  purchase  143,750  shares  of common  stock.  Amounts  and  percentages
     indicated  for Mr.  Rabinowitz  include an aggregate  of 100,000  shares of
     restricted  common stock,  which shares vest in equal amounts of 33.3%,  on
     February 1, 2005,  February 1, 2006 and February 1, 2007. Mr.  Rabinowitz's
     children own 2,000 shares of common stock.
(6)  Includes vested and presently  exercisable options of Ms. Mindy Horowitz to
     purchase 100,000 shares of common stock. Amounts and percentages  indicated
     for Ms.  Horowitz  include an  aggregate  of 100,000  shares of  restricted
     common stock,  which shares vest in equal amounts of 33.3%,  on February 1,
     2005, February 1, 2006 and February 1, 2007.
(7)  Includes  vested and  presently  exercisable  options of Mr.  Ward Jones to
     purchase  100,000 shares of common stock. (8) Includes vested and presently
     exercisable options of Ms. Norma Doxey to purchase 112,500 shares of common
     stock. (9) Includes vested and presently  exercisable  options of Mr. Barry
     Shapiro to purchase  60,000 shares of common stock.  10) As reported  under
     Schedule 13D filing made by BMAC Corp.  dated October 1, 2004 as amended on
     March 4, 2005.

Equity Compensation Plan Information

     The following table provides information about our common stock that may be
issued upon the exercise of options and rights under all of our existing  equity
compensation  plans as of December 31, 2004,  including the 2002 Incentive Stock
Option  Plan,  the 2002  Non-Executive  Director  Stock  Option  Plan,  the 1992
Incentive Stock Option Plan, as amended,  the 1992  Non-Employee  Director Stock
Option Plan,  as amended and the 1996 Senior  Management  Stock Option Plan,  as
amended.  Information  concerning each of the aforementioned  plans is set forth
below  following the caption  "Shareholder  Approved  Option Plans." Each of the
1992 Incentive  Stock Option Plan and 1992  Non-Executive  Director Stock Option
Plan has expired  and no  additional  options  may be granted  under such plans.
Unexpired  options  granted  pursuant to such plans  prior to their  expiration,
however, remain exercisable (when vested) until the expiration of the individual
option grant.

<TABLE>
<S>                             <C>                         <C>                        <C>

============================== =========================== =========================== ==============================
                                                                                           Number of Securities
                                                                                         Remaining Available for
                                                                                          Future Issuance Under
                                 Number of Securities to                                   Equity Compensation
                                 be Issued upon Exercise         Weighted Average            Plans Excluding
                                 of Outstanding Options          Exercise Price of       Securities reflected in
                                      and Rights                 Outstanding Options            Column (a)
        Plan Category                     (a)                           (b)                        (c)
============================== =========================== =========================== ==============================
------------------------------ --------------------------- --------------------------- ------------------------------

Equity Compensation Plans              2,924,498(1)                 $1.01                     4,707,700(2)(3)
Approved by Stockholders
------------------------------ --------------------------- --------------------------- ------------------------------

Equity Compensation Plans                 N/A                         N/A                           N/A
Not Approved by Stockholders
------------------------------ --------------------------- --------------------------- ------------------------------

Total                                  2,924,498(1)                 $1.01                     4,707,700(2)(3)
------------------------------ --------------------------- --------------------------- ------------------------------
</TABLE>




                                                       47
<PAGE>

1.   Includes  1,168,600 options issued pursuant to the our 2002 Incentive Stock
     Option Plan,  473,398  options issued  pursuant to our 1992 Incentive Stock
     Option  Plan,  as  amended,  120,000  options  issued  pursuant to our 2002
     Director  Stock Option Plan,  40,000  options  issued  pursuant to our 1992
     Director  Stock Option Plan, as amended,  and 1,122,500  options and shares
     issued  pursuant  to our 1996  Senior  Management  Stock  Option  Plan,  as
     amended.
2.   Includes  3,690,200 options available for issuance under our 2002 Incentive
     Stock Option Plan and an aggregate of 577,500 shares  reserved for issuance
     as options, incentive stock rights or pursuant to restricted stock purchase
     agreements under our 1996 Senior Management Stock Option Plan, as amended.
3.   Includes  440,000  options  assumed  available for issuance  under our 2002
     Directors  Stock Option Plan.  We expect to have three  outside  directors,
     each of whom will receive 20,000 options over the ten years of the plan.


Item 13.   Certain Relationships and Related Transactions

     For information  concerning the terms of the employment  agreements entered
into between us and Messrs.  Herbert  Kurinsky,  William J. Kurinsky,  Victor K.
Kurylak,  Robert I.  Rabinowitz  and Ms. Mindy A.  Horowitz,  and the Separation
Agreement entered into with William J. Kurinsky, see "Executive Compensation".

Item 14.  Principal Accountant Fees and Service.

     Our Audit Committee has selected Lazar Levine & Felix LLP, Certified Public
Accountants,  as its  independent  accountants  for the current fiscal year. The
audit  services  provided by Lazar Levine & Felix LLP consist of  examination of
financial  statements,  services  relative to filings  with the  Securities  and
Exchange  Commission,  and consultation in regard to various accounting matters.
Our former accountants,  Schneider & Associates, LLP, audited our 2003 financial
statements.  The following  table presents the total fees paid for  professional
audit and non-audit services rendered by our independent  auditors for the audit
of our  annual  financial  statements  to Lazar  Levine & Felix LLP for the year
ended  December 31, 2004 and to Schneider &  Associates,  LLP for the year ended
December  31,  2003,  and  fees  billed  for  other  services  rendered  by  our
independent auditors during those periods.

<TABLE>
<S>                                       <C>                                                     <C>

---------------------------------------- ------------------------------------- -------------------------------------
                                          Fiscal Year Ended December 31, 2004                     Fiscal Year Ended
                                                                                                  December 31, 2003
---------------------------------------- ------------------------------------- -------------------------------------

Audit Fees (1)                                                       $185,035                              $149,000
---------------------------------------- ------------------------------------- -------------------------------------

Audit-Related Fees (2)                                                     $0                                $5,025
---------------------------------------- ------------------------------------- -------------------------------------

Tax Fees (3)                                                          $11,600                               $29,300
---------------------------------------- ------------------------------------- -------------------------------------

All Other Fees (4)                                                    $24,960                               $12,000
---------------------------------------- ------------------------------------- -------------------------------------

Total                                                                $221,595                              $195,325
---------------------------------------- ------------------------------------- -------------------------------------
-------------------------

</TABLE>

(1)  Audit  services  consist  of audit work  performed  in the  preparation  of
     financial  statements  for the fiscal year and for the review of  financial
     statements  included  in  Quarterly  Reports on Form 10-Q during the fiscal
     year,  as well as work that  generally  only the  independent  auditor  can
     reasonably  be expected to provide,  including  consents  for  registration
     statement  flings  and  responding  to SEC  comment  letters  on annual and
     quarterly filings.
(2)  Audit-related  services  consist of assurance and related services that are
     traditionally performed by the independent auditor, including due diligence
     related to mergers  and  acquisitions,  agreed upon  procedures  report and
     accounting and regulatory consultations.
(3)  Tax services consist of all services performed by the independent auditor's
     tax personnel,  except those services  specifically related to the audit of
     the financial statements, and includes fees in the areas of tax compliance,
     tax planning, and tax advice.
(4)  Other  services  consist  of  those  service  not  captured  in  the  other
     categories.



                                       48
<PAGE>


     Our Audit  Committee  has  determined  that the  services  provided  by our
independent  auditors  and the  fees  paid to them  for  such  services  has not
compromised the independence of our independent auditors.

     Consistent  with SEC policies  regarding  auditor  independence,  the Audit
Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility,  the
Audit   Committee  has  established  a  policy  to  pre-approve  all  audit  and
permissible  non-audit  services provided by the independent  auditor.  Prior to
engagement of the independent auditor for the next year's audit, management will
submit a detailed  description of the audit and permissible  non-audit  services
expected to be rendered during that year for each of four categories of services
described  below to the Audit  Committee for approval.  In addition,  management
will also provide to the Audit Committee for its approval a fee proposal for the
services  proposed  to be  rendered  by the  independent  auditor.  Prior to the
engagement of the independent auditor, the Audit Committee will approve both the
description of audit and permissible  non-audit services proposed to be rendered
by the  independent  auditor and the budget for all such services.  The fees are
budgeted and the Audit Committee requires the independent auditor and management
to report  actual fees  versus the budget  periodically  throughout  the year by
category of service.

     During the year,  circumstances  may arise when it may become  necessary to
engage the independent  auditor for additional  services not contemplated in the
original pre-approval. In those instances, the Audit Committee requires separate
pre-approval before engaging the independent  auditor. To ensure prompt handling
of unexpected matters, the Audit Committee may delegate  pre-approval  authority
to one or more of its  members.  The member to whom such  authority is delegated
must report, for informational  purposes only, any pre-approval decisions to the
Audit Committee at its next scheduled  meeting.  The four categories of services
provided by the  independent  auditor are as defined in the footnotes to the fee
table set forth above.


                                     PART IV

Item 15.          Exhibits and Financial Statement Schedules


(a) 1. Financial Statements

     See the Consolidated Financial Statements and Notes thereto,  together with
the reports thereon of Lazar Levine & Felix,  LLP dated March 18, 2005 beginning
on page F-1 of this report.

2.       Schedules
<TABLE>
<S>                                                <C>              <C>            <C>             <C>              <C>

                  Valuation and Qualifying Accounts

--------------------------------------------------------------------------------------------------------------------------------
               Column A                              Column B               Column C               Column D         Column E
--------------------------------------------------------------------------------------------------------------------------------

                                                                      Charged
                                                    Balance at     (credited) to   Charged to                      Balance at
                                                     beginning     to costs and       other                            end
Description                                          of period       expenses       accounts      Deductions        of period
---------------------------------------          -------------------------------------------------------------------------------

Deferred tax assets:
   Year ended December 31, 2004                   $ 5,381,000     $   (260,000)                                   $5,121,000
   Year ended December 31, 2003                      3,723,131       1,657,869                                      5,381,000
   Year ended December 31, 2002                      2,393,456       1,329,675                                      3,723,131


Broker loan reserves:
   Year ended December 31, 2004                   $ 1,805,322          (402,691)                                  $1,402,631
   Year ended December 31, 2003                      1,699,395          105,927                                     1,805,322
   Year ended December 31, 2002                        826,809          872,586                                     1,699,395

</TABLE>

         3.       Exhibits

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


                                       49
<PAGE>



                                   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/ Victor K. Kurylak
                                          --------------------------------------
Dated:  March 31, 2005                    Victor K. Kurylak
                                          Chief Executive Officer and President


     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.


/s/ Herbert Kurinsky                                             March 31, 2005
---------------------------------
Herbert Kurinsky,
Chairman


/s/ William J. Kurinsky                                          March 31, 2005
---------------------------------
William J. Kurinsky,
Vice Chairman, Director



/s/ Mindy A. Horowitz                                            March 31, 2005
---------------------------------
Mindy A. Horowitz, Acting Chief
Financial Officer and Principal
Accounting Officer

/s/ Norma Doxey                                                  March 31, 2005
---------------------------------
Norma Doxey, Director


/s/ Ward R. Jones, Jr.                                           March 31, 2005
---------------------------------
Ward R. Jones, Jr., Director


/s/ Barry Shapiro                                                March 31, 2005
---------------------------------
Barry Shapiro, Director







                                       50
<PAGE>


                                  EXHIBIT INDEX

The  exhibits  designated  with an asterisk  (*) are filed  herewith.  All other
exhibits have been  previously  filed with the  Commission  and,  pursuant to 17
C.F.R.  ss.230.411,  are incorporated by reference to the document referenced in
brackets following the descriptions of such exhibits.

<TABLE>
<S>                  <C>

-------------------- ----------------------------------------------------------------------------------------
Exhibit No.                                                Description

2.1                  Agreement  and  Plan of  Merger  dated  as of  February  10,  2005 by and  among  First
                     Montauk  Financial  Corp.,   Olympic  Cascade  Financial  Corp.  and  FMFC  Acquisition
                     Corporation  (Previously  filed as Exhibit 10.1 to our Current Report on Form 8-K dated
                     February 11, 2005).

3.1                  Amended and Restated  Certificate of  Incorporation  adopted at 1989 Special Meeting in
                     lieu of Annual  Meeting of  Shareholders  (Previously  filed with the  Commission as an
                     exhibit to our Registration Statement on Form S-l, File No. 33-24696).

3.2                  Amended and Restated  By-Laws  (Previously  filed with the  Commission as an exhibit to
                     our Registration Statement on Form S-l, File No. 33-24696).

3.3                  Certificate of Designations  of Series A Preferred  Stock.  (Previously  filed with the
                     Commission  as an exhibit to our Annual  Report on Form 10-K for the fiscal  year ended
                     December 31, 2002).

3.4                  Form  of  Certificate  of  Amendment  of  Certificate  of  Designation  of  Rights  and
                     Preferences  of  Series B  Preferred  Stock  (Previously  filed as  Exhibit  3.1 to our
                     Current Report on Form 8-K dated February 9, 2005).

4.1                  Form of Common  Stock.  (Previously  filed  with the  Commission  as an  exhibit to our
                     Registration Statement on Form S-l, File No. 33-24696).

4.2                  Form of Debenture Sold in Private  Placement.  (Previously filed with the Commission as
                     Exhibit 4.1 to Report on Form 8-K dated March 27, 2003).

4.3                  Form of Placement  Agent Warrant  (Previously  filed with the Commission as Exhibit 4.2
                     to Report on Form 8-K dated March 27, 2003).

4.4                  Form of Debenture Sold in Private  Placement.  (Previously filed with the Commission as
                     Exhibit 4.1 to Report on Form 8-K dated January 5, 2004).

4.5                  Form of Placement  Agent Warrant  (Previously  filed with the Commission as Exhibit 4.2
                     to Report on Form 8-K dated January 5, 2004).

10.1                 Office Lease Agreement between First Montauk Securities Corp. and River Office Equities
                     dated March 5, 1997 (Previously filed with the Commission as an exhibit to  our  Annual
                     Report on Form 10-KSB for the fiscal year ended December 31, 1997).

10.2                 First  Amendment to Office Lease  Agreement  dated March 5, 1997 between  First Montauk
                     Securities Corp. and River Office Equities dated March 3, 1998  (Previously  filed with
                     the  Commission  as Exhibit  28.8 to Form 10-K for the fiscal year ended  December  31,
                     1998).

10.3                 Employment  Agreement  between  First  Montauk  Securities  Corp.  and Mark Lowe  dated
                     October  15, 1998  (Previously  filed with the  Commission  as an exhibit to our Annual
                     Report on Form 10-K for the fiscal year ended December 31, 1998).

10.4                 Employment  Agreement  between  First  Montauk  Securities  Corp.  and Seth Rosen dated
                     January  25, 1999  (Previously  filed with the  Commission  as an exhibit to our Annual
                     Report Form 10-K for the fiscal year ended December 31, 1998).

10.5                 Clearing Agreement dated May 8, 2000 between Fiserv Securities,  Inc. and First Montauk
                     Securities  Corp.  (Previously  filed with the  Commission  as an exhibit to our Annual
                     Report on Form 10-K for the fiscal year ended December 31, 2000).

10.6                 Financial  Agreement  dated May 8,  2000  between  Fiserv  Securities,  Inc.  and First
                     Montauk  Securities  Corp.  (Previously  filed with the Commission as an exhibit to our
                     Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.7                 Amended  and  Restated  Financial  Agreement  dated  February  1, 2001  between  Fiserv
                     Securities,  Inc.,  First Montauk  Financial Corp. and First Montauk  Securities  Corp.
                     (Previously  filed with the  Commission as an exhibit to our Annual Report on Form 10-K
                     for the fiscal year ended December 31, 2000).

                                                                       51
<PAGE>

10.8                 Security  Agreement  dated February 1, 2001 between Fiserv  Securities,  Inc. and First
                     Montauk  Financial  Corp.  (Previously  filed with the  Commission as an exhibit to our
                     Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.9                 Sublease  Agreement between Eloquent,  Inc. and First Montauk Financial Corp. dated May
                     31, 2001  (Previously  filed with the  Commission as an exhibit to our Annual Report on
                     Form 10-K for the fiscal year ended December 31, 2001).

10.10                Sublease  Agreement  between Aim net Solutions,  Inc. and First Montauk Financial Corp.
                     dated  January  15, 2002  (Previously  filed with the  Commission  as an exhibit to our
                     Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

10.11                Employment  Agreement dated August 21, 2002 between Herbert  Kurinsky and First Montauk
                     Financial  Corp.  (Previously  filed with the Commission as an exhibit to our Quarterly
                     Report on Form 10-Q for the Quarter ended September 20, 2002).

10.12                 Employment  Agreement  dated  August 21, 2002  between  William J.  Kurinsky  and First
                      Montauk  Financial  Corp.  (Previously  filed with the  Commission as an exhibit to our
                      Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).

10.13                 Employment  Agreement  dated as of January 1, 2004 between  Herbert  Kurinsky and First
                      Montauk  Financial  Corp.  (Previously  filed as Exhibit  10.13 to our Annual Report on
                      Form 10-K for the fiscal year ended December 31, 2004).

10.14                 Employment  Agreement dated as of January 1, 2004 between William J. Kurinsky and First
                      Montauk  Financial  Corp.  (Previously  filed as Exhibit  10.14 to our Annual Report on
                      Form 10-K for the fiscal year ended December 31, 2004).

10.15                 Employment  Agreement  dated as of January 1, 2004 between  Victor K. Kurylak and First
                      Montauk  Financial  Corp.  (Previously  filed as Exhibit  10.15 to our Annual Report on
                      Form 10-K for the fiscal year ended December 31, 2004).

10.16                 1992 Incentive  Stock Option Plan  (Previously  filed with the Commission as an exhibit
                      to our Registration Statement on Form S-l, File No. 33-24696).

10.17                 1992 Non-Executive  Director Stock Option Plan (Previously filed with the Commission as
                      an exhibit to our Registration Statement on Form S-l, File No. 33-24696).

10.18                 Amended and Restated  1992  Incentive  Stock Option  Plan.  (Previously  filed with the
                      Commission as an exhibit to our Proxy Statement dated May 30, 1996).

10.19                 Non-Executive  Director  Stock  Option  Plan -  Amended  and  Restated  June  28,  1996
                      (Previously  filed with the Commission as an exhibit to our Proxy  Statement  dated May
                      30, 1996).

10.20                 1996  Senior  Management  Incentive  Stock  Option  Plan  (Previously  filed  with  the
                      Commission as an exhibit to our Proxy Statement dated May 30, 1996).

10.21                 Second Amended and Restated 1992 Incentive Stock Option Plan (Previously filed with the
                      Commission as an exhibit to our Proxy Statement dated May 23, 2000).

10.22                 1996 Senior Management Incentive Plan Amended as of June 23, 2000 (Previously filed with
                      the Commission as an exhibit to our Proxy Statement dated May 23, 2000).

10.23                 2002 Incentive Stock Option Plan.  (Previously  filed with the Commission as an Exhibit
                      A to our Proxy Statement dated May 20, 2002).

10.24                 2002  Non-Executive  Director Stock Option Plan.  (Previously filed with the Commission
                      as Exhibit B to our Proxy Statement dated May 20, 2002).

10.25                 Form of Non-Executive  Director Stock Option Award.  (Previously  filed as Exhibit 10.1
                      to our Report on Form 8-K dated September 2, 2004).

10.26*                Form of Stock Option Award pursuant to Incentive Stock Option Plan.

10.27*                Form of Stock Option Award pursuant to 1996 Senior Management Stock Option Plan.

10.28                 Fourth  Amendment  to  Office Lease  Agreement  dated  September 22, 2004  between  First
                      Montauk Securities Corp. and River Office Equities (Previously filed with  the Commission
                      as Exhibit 10.1 to Form 8-K dated September 28, 2004).



                                                                      52
<PAGE>
10.29*                Separation  Agreement  between First Montauk  Financial  Corp. and William J. Kurinsky,
                      dated February 8, 2005.

10.30*                Consulting  Agreement  between First Montauk  Financial  Corp. and William J. Kurinsky,
                      dated February 8, 2005.

10.31*                Employment  Agreement  dated as of February 1, 2005 between Victor K. Kurylak and First
                      Montauk Financial Corp.

10.32*                Employment  Agreement  dated as of February 8, 2005 between  Robert I.  Rabinowitz  and
                      First Montauk Financial Corp.

10.33*                Employment  Agreement  dated as of February 8, 2005 between Mindy A. Horowitz and First
                      Montauk Financial Corp.

14                    Code of Ethics  (Filed as  Exhibit  14 to our  Annual  Report on Form 10-K for the year
                      ended December 31, 2003.

21*                   Subsidiary Companies

23.1*                 Consent of Lazar, Levine & Felix.

31.1*                 Certification of Chief Executive Officer and President

31.2*                 Certification of Acting Chief Financial Officer

32.1 *                Certification  of Victor K.  Kurylak  pursuant to 18 U.S.C.  Section  1350,  as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 *                Certification  of Mindy A.  Horowitz  pursuant to 18 U.S.C.  Section  1350,  as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
--------------------- ----------------------------------------------------------------------------------------














</TABLE>
                                                                      53
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




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




We have audited the accompanying  consolidated  statement of financial condition
of First Montauk Financial Corp. and Subsidiaries (the "Company") as of December
31,  2004  and  the  related  consolidated  statements  of  income,  changes  in
stockholders'  equity (deficit),  and cash flows for the year ended December 31,
2004. Our audit also included the financial  statement  schedule  listed in Part
IV, Item 15 of this Form 10-K. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  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 at December 31, 2004 and the results of their
operations  and their  cash  flows for the year  ended  December  31,  2004,  in
conformity with accounting principles generally accepted in the United States of
America.  Also, in our opinion, the related financial statement schedule for the
year  ended  December  31,  2004,  when  considered  in  relation  to the  basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.


                                        /s/ Lazar Levine & Felix LLP
                                        --------------------------------------
                                        LAZAR LEVINE & FELIX LLP

Morristown, New Jersey
March 18, 2005

                                       F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


     We have  audited  the  accompanying  consolidated  statement  of  financial
condition of First Montauk  Financial Corp. and  subsidiaries as of December 31,
2003, and the related statements of operations,  stockholders' deficit, and cash
flows for each of the two years in the period ended  December  31,  2003.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted our audits in accordance  with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  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 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,  2003,  and the  results of their
operations  and their cash  flows for each of the two years in the period  ended
December  31, 2003,  in  conformity  with U. S.  generally  accepted  accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.


                                                /s/ Schneider & Associates LLP
                                                -------------------------------
                                                Schneider & Associates LLP

Jericho, New York
March 18, 2004





                                      F-2

<PAGE>


<TABLE>
         <S>                                                                <C>                  <C>

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


                                                                             December 31,         December 31,
                                                                                2004                  2003

         ASSETS
         Cash and cash equivalents                                              $ 1,034,681          $ 3,441,743
         Due from clearing firm                                                   5,815,819            5,219,267
         Securities owned, at market value                                          370,720              169,534
         Employee and broker receivables                                            548,240              648,642
         Property and equipment - net                                               790,909            1,052,564
         Income taxes receivable                                                     40,525                2,625
         Other assets                                                             1,233,480            1,658,726

                                                                          ------------------    -----------------
              Total assets                                                      $ 9,834,374         $ 12,193,101
                                                                          ==================    =================

         LIABILITIES AND STOCKHOLDERS' DEFICIT

         LIABILITIES
         Deferred income                                                        $ 5,105,116          $ 5,980,124
         6% convertible debentures                                                3,015,000            3,135,000
         Warrants subject to put options                                            333,261              479,066
         Securities sold, not yet purchased, at market value                        174,326               69,330
         Commissions payable                                                      2,499,793            3,679,696
         Accounts payable                                                           614,784              872,572
         Accrued expenses                                                         1,078,185            1,803,973
         Income taxes payable                                                        44,546              107,911
         Capital leases payable                                                      62,460              146,836
         Other liabilities                                                            5,520                6,032
                                                                          ------------------    -----------------

              Total liabilities                                                  12,932,991           16,280,540
                                                                          ------------------    -----------------

         Commitments and contingencies (See notes)

         STOCKHOLDERS' DEFICIT
         Preferred stock, 4,375,000 shares authorized, $.10 par
            value, no shares issued and outstanding
         Series A convertible preferred stock, 625,000 shares authorized,
            $.10 par value, 305,369 and 311,089 shares issued and
            outstanding, respectively; liquidation preference:  $1,526,845           30,537               31,109
         Common stock, no par value, 30,000,000 shares authorized,
            10,258,509 and 9,065,486 shares issued and outstanding,
            respectively                                                          7,257,292            6,724,853
         Additional paid-in capital                                                 950,592              950,592
         Accumulated deficit                                                    (10,948,157)         (11,678,659)
            Less deferred compensation                                             (388,881)            (115,334)
                                                                          ------------------    -----------------

              Total stockholders' deficit                                        (3,098,617)          (4,087,439)
                                                                          ------------------    -----------------

              Total liabilities and stockholders' deficit                       $ 9,834,374         $ 12,193,101
                                                                          ==================    =================





                                           See notes to financial statements.

                                                         F-3

</TABLE>
<PAGE>
<TABLE>
<S>                                                             <C>                         <C>                   <C>

                                        FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF INCOME (LOSS)


                                                                                 Years ended ended December 31,
                                                                        2004                    2003                 2002


Revenues:

Commissions                                                             $ 42,767,158           $41,950,392          $36,513,802
Principal transactions                                                     9,058,259             9,466,359            6,727,642
Investment banking                                                         2,716,042             2,439,144            1,007,700
Interest and other income                                                  4,645,782             4,370,787            3,717,600

                                                                 --------------------     -----------------     ----------------
     Total revenue                                                        59,187,241            58,226,682           47,966,744
                                                                 --------------------     -----------------     ----------------

Expenses:

Commissions, employee compensation and benefits                           46,851,474            46,218,107           39,572,851
Clearing and floor brokerage                                               2,466,027             2,934,164            2,666,376
Communications and occupancy                                               2,664,256             2,659,105            3,006,017
Legal matters and related costs                                            2,714,769             5,836,960            1,259,502
Other operating expenses                                                   3,489,425             3,393,335            4,029,515
Interest                                                                     284,093               204,054               98,918
                                                                 --------------------     -----------------     ----------------

     Total expenses                                                       58,470,044            61,245,725           50,633,179
                                                                 --------------------     -----------------     ----------------

Income (loss) before income taxes                                            717,197            (3,019,043)          (2,666,435)
Provision (benefit) for income taxes                                         (13,305)              499,000              294,000
                                                                 --------------------     -----------------     ----------------
   Net income (loss)                                                       $ 730,502          $ (3,518,043)        $ (2,960,435)
                                                                 ====================     =================     ================
   Net income (loss) applicable to common stockholders                     $ 639,813          $ (3,542,882)        $ (3,059,722)
                                                                 ====================     =================     ================

Earnings (loss) per share:
  Basic                                                                       $ 0.07               $ (0.40)             $ (0.36)
  Diluted                                                                     $ 0.04               $ (0.40)             $ (0.36)

Weighted average number of shares of stock outstanding:
  Basic                                                                    9,270,350             8,784,103            8,551,932
  Diluted                                                                 15,629,920             8,784,103            8,551,932





                                              See notes to financial statements.

                                                            F-4
</TABLE>

<PAGE>

<TABLE>
<S>                                            <C>               <C>                <C>            <C>               <C>


                                          FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                     FOR THE PERIOD FROM JANUARY 1, 2002 TO DECEMBER 31, 2004



                                                    Series A Convertible
                                                       Preferred Stock                    Common Stock
                                                -----------------------------    -------------------------------
                                                                                                                       Additional
                                                    Shares         Amount            Shares          Amount          Paid-in Capital
                                                -----------------------------    -------------------------------    ----------------

Balances at Janaury 1, 2002                            331,190      $ 33,119          8,622,284     $ 6,434,592         $   950,592

Transfer of common shares from
   temporary equity to permanent
   capital                                                                                3,000           6,500
Reversal of deferred compensation                                                                       (42,994)
Amortization of deferred compensation
Repurchase of common stock
Cancellation of treasury shares                                                        (100,000)        (25,016)
Issuance of common stock purchase
   warrants for services                                                                                 11,382
Conversion of preferred stock into
   common stock                                           (940)          (94)             1,880              94
Payment of dividends
Net loss for the year
                                                -----------------------------    -------------------------------    ----------------
Balances at December 31, 2002                          330,250        33,025          8,527,164       6,384,558             950,592

Increase in deferred compensation                                                                       142,402
Amortization of deferred compensation
Common stock issued in connection
   with legal settlements                                                               500,000         160,000
Issuance of common stock purchase
   warrants for services                                                                                 35,977
Conversion of preferred stock into
   common stock                                        (19,161)       (1,916)            38,322           1,916
Payment of dividends
Net loss for the year
                                                -----------------------------    -------------------------------    ----------------
Balances at December 31, 2003                          311,089        31,109          9,065,486       6,724,853             950,592

Increase in deferred compensation                                                                        82,471
Amortization of deferred compensation
Repurchase of common stock
Cancellation of treasury shares                                                         (60,217)        (21,162)
Issuance of restricted stock in connection
   with employment agreements                                                         1,000,000         350,000
Conversion of preferred stock into
   common stock                                         (5,720)         (572)            11,440             572
Exercise of incentive stock options                                                       1,800             558
Conversion of bonds into common stock                                                   240,000         120,000
Net income for the year
                                                -----------------------------    -------------------------------    ----------------
Balances at December 31, 2004                          305,369      $ 30,537         10,258,509     $ 7,257,292         $   950,592
                                                =============================    ===============================    ================






                                                                See notes to financial statements.

                                                                                F-5
</TABLE>
<PAGE>

<TABLE>
<S>                                         <C>                 <C>                <C>           <C>             <C>

                                        FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                   FOR THE PERIOD FROM JANUARY 1, 2002 TO DECEMBER 31, 2004



                                              Retained
                                              Earnings                                 Treasury Stock            Stockholders'
                                            (Accumulated          Deferred     ------------------------------       Equity
                                              Deficit)           Compensation       Shares         Amount          (Deficit)
                                          -----------------   ------------------------------------------------  ----------------

Balances at Janaury 1, 2002                  $  (5,076,055)         $ (56,067)                                      $ 2,286,181

Transfer of common shares from
   temporary equity to permanent
   capital                                                                                                                6,500
Reversal of deferred compensation                                      42,994
Amortization of deferred compensation                                   2,985                                             2,985
Repurchase of common stock                                                            (100,000)     $ (25,016)          (25,016)
Cancellation of treasury shares                                                        100,000         25,016
Issuance of common stock purchase
   warrants for services                                                                                                 11,382
Conversion of preferred stock into
   common stock
Payment of dividends                               (99,287)                                                             (99,287)
Net loss for the year                           (2,960,435)                                                          (2,960,435)
                                          -----------------   ----------------  ------------------------------  ----------------
Balances at December 31, 2002                   (8,135,777)           (10,088)                                         (777,690)

Increase in deferred compensation                                    (142,402)
Amortization of deferred compensation                                  37,156                                            37,156
Common stock issued in connection
   with legal settlements                                                                                               160,000
Issuance of common stock purchase
   warrants for services                                                                                                 35,977
Conversion of preferred stock into
   common stock
Payment of dividends                               (24,839)                                                             (24,839)
Net loss for the year                           (3,518,043)                                                          (3,518,043)
                                          -----------------   ----------------  ------------------------------  ----------------
Balances at December 31, 2003                  (11,678,659)          (115,334)                                       (4,087,439)

Increase in deferred compensation                                    (432,471)                                         (350,000)
Amortization of deferred compensation                                 158,924                                           158,924
Repurchase of common stock                                                             (60,217)       (21,162)          (21,162)
Cancellation of treasury shares                                                         60,217         21,162
Issuance of restricted stock in connection
   with employment agreements                                                                                           350,000
Conversion of preferred stock into
   common stock
Exercise of incentive stock options                                                                                         558
Conversion of bonds into common stock                                                                                   120,000
Net income for the year                            730,502                                                              730,502
                                          -----------------   ----------------  ------------------------------  ----------------
Balances at December 31, 2004                $ (10,948,157)        $ (388,881)                                     $ (3,098,617)
                                          =================   ================  ==============================  ================




                                                              See notes to financial statements.

                                                                             F-6
</TABLE>
<PAGE>
<TABLE>
<S>                                                                             <C>             <C>               <C>

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


                                                                                     Years ended ended December 31,
                                                                               2004                2003               2002


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH FLOWS FROM OPERATING ACTIVITIES
 Net income (loss)                                                              $ 730,502        $ (3,518,043)     $ (2,960,435)

Adjustments to reconcile net income (loss) to net cash
 provided by (used in) operating activities:
 Depreciation and amortization of property and equipment                          538,549             509,968           526,816
 Amortization of deferred costs                                                   223,708              57,932             6,837
 Amortization of deferred income                                                 (875,008)           (726,199)         (577,010)
 Deferred income taxes - net                                                                          460,000           470,000
 Common stock issued in legal settlement                                                              160,000
 Loss on disposition of property and equipment                                      4,692                                 5,964
 Loss on investment                                                                                                      23,147
 Increase (decrease) in cash attributable to changes in assets
 and liabilities:
 Due from clearing firm                                                          (596,552)           (627,566)         (445,291)
 Securities owned                                                                (201,186)             14,410           992,011
 Loans receivable - officers                                                                          178,936            24,028
 Employee and broker receivables                                                  100,402             415,877         1,035,533
 Other assets                                                                     360,461            (736,366)          482,103
 Income tax refund receivable                                                     (37,900)            212,300           857,142
 Deferred income                                                                                    1,250,000         1,250,000
 Warrants subject to put options                                                 (145,804)            479,066
 Securities sold, not yet purchased                                               104,996              69,330          (245,078)
 Commissions payable                                                           (1,179,903)            998,568          (966,042)
 Accounts payable                                                                (257,789)            350,429            38,412
 Income taxes payable                                                             (63,365)             52,829            47,971
 Accrued expenses                                                                (725,788)           (183,898)          552,986
 Other liabilities                                                                   (512)            (43,207)         (466,094)
                                                                         -----------------    ----------------    --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                            (2,020,497)           (625,634)          653,000
                                                                         -----------------    ----------------    --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property and equipment                                             (212,000)           (165,640)         (266,854)
 Other assets                                                                                          26,873            31,821
                                                                         -----------------    ----------------    --------------
NET CASH USED IN INVESTING ACTIVITIES                                            (212,000)           (138,767)         (235,033)
                                                                         -----------------    ----------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Payment of notes payable                                                                             (48,057)         (233,171)
 Payments of capital leases                                                      (153,961)           (220,949)         (198,528)
 Repurchase of common shares                                                      (21,162)                              (25,016)
 Proceeds from issuance of 6% convertible debentures                                                2,105,000         1,030,000
 Proceeds from exercise of incentive stock option                                     558
 Payments of preferred stock dividends                                                                (24,839)          (99,287)
 Other assets                                                                                        (243,830)          (32,700)
                                                                         -----------------    ----------------    --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                              (174,565)          1,567,325           441,298
                                                                         -----------------    ----------------    --------------

Net increase (decrease) in cash and cash equivalents                           (2,407,062)            802,924           859,265
Cash and cash equivalents at beginning of period                                3,441,743           2,638,819         1,779,554
                                                                         -----------------    ----------------    --------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    $ 1,034,681         $ 3,441,743      $  2,638,819
                                                                         =================    ================    ==============

Supplemental disclosures of cash flow information:
 Cash paid (received) during the period for:
 Interest                                                                       $ 212,080         $   134,055      $     95,522
                                                                         =================    ================    ==============
 Income taxes                                                                    $ 67,960         $  (187,707)     $ (1,113,636)
                                                                         =================    ================    ==============

Noncash financing activity:
 Equipment acquired through capital lease financing                              $ 69,585
 Equipment acquired through vendor financing                                                                       $     31,017

 Warrants charged to deferred financing costs in
 connection with debenture offering                                                               $    35,987      $     11,382


                                                             See notes to financial statements.

                                                                             F-7
</TABLE>

<PAGE>




                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 -          NATURE OF BUSINESS

                  First Montauk Financial Corp. (the Company) is a holding
                  company whose principal subsidiary, First Montauk Securities
                  Corp. (FMSC), operates a securities broker-dealer registered
                  with the Securities and Exchange Commission (SEC). Through
                  FMSC, the Company executes principal and agency transactions
                  primarily for retail customers, performs investment banking
                  services, and trades securities on a proprietary basis.
                  Montauk Insurance Services, Inc. (MISI) sells a variety of
                  insurance products. The Company operates in one business
                  segment. Customers are located primarily throughout the United
                  States.

                  FMSC clears all customer transactions on a fully disclosed
                  basis through an independent clearing firm. Accordingly, FMSC
                  does not carry securities accounts for customers nor does it
                  perform custodial functions related to those securities. FMSC
                  is a member of the National Association of Securities Dealers,
                  Inc. (NASD).

NOTE 2 -          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Basis of Presentation

                  The consolidated financial statements include the accounts of
                  the Company and its subsidiaries, all of which are
                  wholly-owned. All intercompany accounts and transactions have
                  been eliminated in consolidation.

                  Revenue Recognition

                  Securities transactions, commission income, sales concessions
                  from participation in syndicated offerings and related
                  expenses are recorded on a trade date basis. Insurance and
                  mutual fund commissions received from outside vendors are
                  recognized as income when received.

                  Securities owned and securities sold, not yet purchased are
                  stated at quoted market value with unrealized gains and losses
                  included in earnings. Securities not readily marketable are
                  carried at estimated fair value as determined by management.

                  Advances received under the Company's financial agreement with
                  its clearing firm are deferred and amortized to income over
                  the remaining term of the agreement on a straight-line basis
                  (see Note 7).

                  Advertising

                  Advertising costs are expensed as incurred and totaled
                  $114,829, $246,357 and $221,576 in 2004, 2003 and 2002,
                  respectively.

                  Property and Equipment

                  Furniture, equipment and leasehold improvements are stated at
                  cost. Depreciation of furniture and equipment is computed over
                  the estimated useful lives of the assets, ranging from three
                  to ten years. Capitalized lease equipment is amortized over
                  the lease term. Leasehold improvements are amortized over the
                  shorter of either the asset's useful life or the related lease
                  term. Depreciation is computed on the straight-line method for
                  financial reporting purposes and on an accelerated basis for
                  income tax purposes.

                  Cash Equivalents

                  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. Cash equivalents consisted of money market funds
                  at December 31, 2004 and 2003.




                                      F-8


<PAGE>


                  Earnings (Loss) per Share

                  Basic earnings (loss) per share is computed by dividing net
                  income (loss) attributable to common stockholders by the
                  weighted-average number of common shares outstanding for the
                  period. In determining basic earnings (loss) per share for the
                  periods presented, dividends paid on Series A Convertible
                  Preferred Stock are added (deducted) to the net income (loss).
                  Diluted earnings (loss) per share reflects the potential
                  dilution from the exercise or conversion of other securities
                  into common stock, but only if dilutive. Diluted loss per
                  share for 2003 and 2002 is the same as basic loss per share,
                  since the effects of the calculation for these years were
                  anti-dilutive.


                  The following table sets forth the weighted average number of
                  shares of common stock and dilutive securities outstanding
                  used in the computation of basic and diluted earnings per
                  share:

<TABLE>
<S>               <C>                      <C>                <C>                  <C>

                                                                           Twelve months ended
                                                                               December 31,

                                                        2004                      2003                  2002
                                                        ----                      ----                  ----
Numerator - basic:

Net income                                           $730,502                 $(3,518,043)          $(2,960,435)
Deduct:  dividends earned/paid during the quarter     (90,689)                    (24,839)              (99,287)
                                                      --------                  ---------               -------

Numerator for basic earnings per share               $639,813                 $(3,542,882)          $(3,059,722)
                                                      =======                   =========             ==========

Numerator - diluted:

Numerator for basic earnings per share               $639,813                 $(3,542,882)          $(3,059,722)
Add: convertible debenture interest, net of tax        45,735
                                                      --------                  ---------             ----------

Numerator for diluted earnings per share            $ 685,548                 $(3,542,882)          $(3,059,722)
                                                      =======                   =========             ==========

Denominator:
Weighted average common shares outstanding          9,270,350                   8,784,103             8,551,932
Effect of dilutive securities:
     Stock options and warrants                       235,820
     Restricted shares                                 93,750
     Convertible debentures                         6,030,000
                                                    ---------                   ---------             ----------
Denominator for diluted earnings per share         15,629,920                   8,784,103             8,551,932
                                                   ==========                   =========             ==========


                  The following securities, presented on a common share
                  equivalent basis, have been excluded from the per share
                  computations:

                                                                               Year ended December 31,
                                                                       2004             2003            2002
                                                                       ----             ----            ----

                  Stock options                                     3,514,998         3,556,498      4,072,498
                  Warrants                                          3,385,946         4,160,946      9,345,338
                  Convertible debt                                          -         6,270,000      2,084,028
                  Convertible preferred stock                         610,738           622,178        660,500
</TABLE>


                  In January 2004, the Company issued a total of 1,000,000
                  restricted common shares and 500,000 stock options to various
                  executive officers pursuant to employment agreements (see Note
                  12). In February 2005, the Company issued a total of 1,300,000
                  restricted common shares to various executive officers
                  pursuant to new employment agreements (see Note 21).





                                      F-9

<PAGE>


                  Use of Estimates

                  The consolidated financial statements are prepared in
                  conformity with accounting principles generally accepted in
                  the United States of America, which require management to make
                  estimates and assumptions that affect the amounts reported in
                  the financial statements and accompanying notes. Management
                  periodically evaluates estimates used in the preparation of
                  financial statements for continued reasonableness. Appropriate
                  adjustments, if necessary, to the estimates used are made
                  prospectively based upon such periodic evaluation. Actual
                  results could differ from those estimates.

                  Long-lived Assets

                  The Company evaluates impairment losses on long-lived assets
                  used in operations, primarily property and equipment, when
                  events and circumstances indicate that the carrying value of
                  the assets might not be recoverable in accordance with FAS No.
                  144 "Accounting for the Impairment or Disposal of Long-lived
                  Assets". For purposes of evaluating the recoverability of
                  long-lived assets, the undiscounted cash flows estimated to be
                  generated by those assets would be compared to the carrying
                  amounts of those assets. If and when the carrying values of
                  the assets exceed their fair values, the related assets will
                  be written down to fair value.

                  Income Taxes

                  The Company uses the liability method to determine its income
                  tax expense as required under Statement of Financial
                  Accounting Standards No. 109 (FAS 109). Under FAS 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.

                  Stock-based Compensation

                  The Company periodically grants stock options to employees in
                  accordance with the provisions of its stock option plans, with
                  the exercise price of the stock options being set at the
                  greater of $ .50 or 120% of the closing market price of the
                  common stock on the date of grant. The Company accounts for
                  stock-based compensation plans under Accounting Principles
                  Board Opinion No. 25, "Accounting for Stock Issued to
                  Employees", and accordingly accounts for employee stock-based
                  compensation utilizing the intrinsic value method. FAS No.
                  123, "Accounting for Stock-Based Compensation", establishes a
                  fair value based method of accounting for stock-based
                  compensation plans. The Company has adopted the disclosure
                  only alternative under FAS No. 123, which requires disclosure
                  of the pro forma effects on earnings and earnings per share as
                  if FAS No. 123 had been adopted as well as certain other
                  information.

                  Stock options granted to non-employees are recorded at their
                  fair value, as determined in accordance with FAS No. 123 and
                  Emerging Issues Task Force Consensus No. 96-18, and recognized
                  over the related service period. Deferred charges for options
                  granted to non-employees are periodically re-measured until
                  the options vest.

                  In December 2002, the Financial Accounting Standards Board
                  ("FASB") issued Statement of Financial Accounting Standards
                  No. 148, "Accounting for Stock-Based Compensation--Transition
                  and Disclosure" ("FAS 148"), which (i) amends FAS Statement
                  No. 123, "Accounting for Stock-Based Compensation," to provide
                  alternative methods of transition for an entity that
                  voluntarily changes to the fair value based method of
                  accounting for stock-based employee compensation (ii) amends
                  the disclosure provisions of FAS 123 to require prominent
                  disclosure about the effects on reported net income of an
                  entity's accounting policy decisions with respect to
                  stock-based employee compensation and (iii) amends APB opinion
                  No. 28, "Interim Financial Reporting," to require disclosure
                  about those effects in interim financial information. The
                  additional disclosures required by FAS 148 are as follows:

                                      F-10
<PAGE>
<TABLE>
                  <S>                                               <C>             <C>              <C>


                                                                            Years ended December 31,
                                                                     2004             2003              2002
                                                                     ----             ----              ----

                  Net income (loss) applicable to
                  common stockholders, as reported                 $639,813         $(3,542,882)     $(3,059,722)
                  Deduct: total stock based
                  employee compensation expense
                  determined under the fair value
                  based method for all awards, net
                  of tax                                           (160,457)           (105,862)        (178,642)
                                                                  ---------           ---------        ---------
                  Pro forma net income (loss)                      $479,356         $(3,648,744)     $(3,238,364)
                  applicable to common stockholders                ========           ==========       ==========

                  Net income (loss) per share:

                  Basic - as reported                              $.07                $(0.40)           $(0.36)
                  Diluted - as reported                            $.04                $(0.40)           $(0.36)
                  Basic - pro forma                                $.05                $(0.42)           $(0.38)
                  Diluted - pro forma                              $.03                $(0.42)           $(0.38)

                  Pro forma net income (loss) and income (loss) per share
                  information, as required by FAS No. 123, have been determined
                  as if the Company had accounted for employee stock options
                  under the fair value method. The fair value of these options
                  was estimated at grant date using a Black-Scholes
                  option-pricing model with the following weighted-average
                  assumptions for 2004, 2003 and 2002:

                                                                         2004              2003         2002
                                                                         ----              ----         ----

                  Risk free interest rates                                 3.41%            3.14%        1.97%
                  Expected option lives                                  4 years          4 years    2.4 years
                  Expected volatilities                                  104.19%         105.11%        87.64%
                  Expected dividend yields                                    0%               0%           0%

</TABLE>


                  Recent Pronouncements of the Financial Accounting Standards
                  Board

                  In November 2004, the FASB issued Statement of Financial
                  Accounting Standards No. 151, "Inventory Costs - an amendment
                  of ARB No. 43, Chapter 4" ("SFAS 151"), effective for
                  inventory costs incurred during fiscal years beginning after
                  June 15, 2005. This statement amends the guidance in
                  Accounting Research Bulletin (ARB) No. 43, Chapter 4,
                  "Inventory Pricing" to clarify the accounting for abnormal
                  amounts of idle facility expense, freight, handling costs and
                  wasted material (spoilage). SFAS No. 151 requires that such
                  items be recognized as current period charges. In addition,
                  this Statement requires that allocation of fixed production
                  overheads to the costs of conversion be based on the normal
                  capacity of the production facilities. This statement is not
                  applicable to the Company's current operations.

                  In December 2004, the FASB issued Statement No. 152,
                  "Accounting for Real Estate Time-Sharing Transactions". This
                  statement amends SFAS No. 66 (Accounting for Sales of Real
                  Estate) and SFAS No. 67 (Accounting for Costs and Initial
                  Rental Operations of Real Estate Projects). This standard,
                  which is effective for financial statements for fiscal years
                  beginning after June 15, 2005, is not applicable to the
                  Company's current operations.


                                      F-11

<PAGE>


                  In December 2004, the FASB issued SFAS No. 153 "Exchange of
                  Non-monetary Assets - an amendment of APB Opinion No. 29".
                  Statement 153 eliminates the exception for nonmonetary
                  exchanges of similar productive assets and replaces it with a
                  general exception for exchanges of nonmonetary assets that do
                  not have commercial substance, defined as transactions that
                  are not expected to result in significant changes in the cash
                  flows of the reporting entity. This standard, which is
                  effective for exchanges of nonmonetary assets occurring after
                  June 15, 2005, is not applicable to the Company's current
                  operations.

                  In December 2004, FASB issued SFAS No. 123 (revised 2004),
                  "Share-Based Payment"(SFAS 123 (revised 2004)"), effective as
                  of the beginning of the first interim or annual reporting
                  period that begins after June 15, 2005. This Statement is a
                  revision of FASB Statement No. 123, "Account for Stock-Based
                  Compensation," and supersedes APB Opinion No. 25, "Accounting
                  for Stock Issued to Employees," and its related implementation
                  guidance. SFAS 123 (revised 2004) eliminates the alternative
                  to use Opinion No. 25's intrinsic value method of accounting
                  that was provided in Statement 123 as originally issued. Under
                  Opinion 25, issuing stock options to employees generally
                  resulted in recognition of no compensation cost. This
                  Statement requires entities to recognize the cost of employee
                  services received in exchange for awards of equity instruments
                  based on the grant-date fair value of those awards (with
                  limited exceptions). Recognition of that compensation cost
                  helps users of financial statements to better understand the
                  economic transactions affecting an entity and to make better
                  resource allocation decisions. The Company will adopt SFAS 123
                  (revised 2004) for the quarter beginning July 1, 2005. The
                  effect of the adoption of this Statement has not yet been
                  determined.

                  Reclassifications

                  Certain reclassifications have been made to 2003 and 2002
                  financial statements to conform to 2004 presentation.





NOTE 3 -          SECURITIES OWNED and SOLD, NOT YET PURCHASED
<TABLE>
                 <S>                                        <C>              <C>             <C>        <C>

                                                                                December 31,
                                                                     2004                          2003
                                                                     ----                          ----

                                                                              Sold                        Sold
                                                                             not yet                     not yet
                                                              Owned         Purchased        Owned      Purchased

                  Corporate stocks                          $ 133,475       $173,826        $80,710     $ 69,330
                  U. S. government agency and
                   municipal obligations                        2,320                        73,875
                  Corporate bonds                              14,805                        10,016
                  Other                                         6,550            500          4,933
                                                               ------           -----        ------
                                                             $157,150       $174,326       $169,534     $ 69,330
                                                              =======        =======        =======      =======
</TABLE>

                  Securities owned and securities sold, not yet purchased
                  consist of trading securities at quoted market values. The
                  Company also owns investment securities, consisting of shares
                  of common stock and common stock purchase warrants, some of
                  which are publicly offered and can be sold and some of which
                  cannot be publicly offered or sold until registered under the
                  Securities Act of 1933. At December 31, 2004, these securities
                  at estimated fair values consist of the following:

                  Corporate Stocks           $123,830
                  Warrants                     89,740
                                              -------
                                             $213,570
                                              =======


                                      F-12

<PAGE>



NOTE 4 -          EMPLOYEE AND BROKER RECEIVABLES
<TABLE>
                 <S>                                                        <C>                    <C>

                                                                                        December 31,
                                                                                2004                  2003
                                                                                ----                  ----

                  Commission advances                                       $    431,362           $ 759,872
                  Forgivable loans                                               247,649             380,170
                  Other loans                                                  1,271,860           1,313,922
                                                                              ----------          ----------
                                                                               1,950,871           2,453,964
                  Less reserve for bad debts                                  (1,402,631)         (1,805,322)
                                                                              -----------         -----------
                                                                                $548,240            $648,642
                                                                                ========            ========
</TABLE>

                  The Company has arrangements with certain registered
                  representatives to forgive their loans if they remain licensed
                  with the Company for an agreed upon period of time, generally
                  one to five years, or meet specified performance goals. The
                  loans are being amortized to commission expense for financial
                  reporting purposes over the term of the loan. Loan
                  amortization charged to compensation was $112,171, $230,578
                  and $235,528 in 2004, 2003, and 2002, respectively. Other
                  loans to employees and registered representatives are payable
                  in installments generally over periods of one to five years
                  with interest rates ranging up to 8% per annum.


NOTE 5 -          PROPERTY AND EQUIPMENT
<TABLE>
                  <S>                                            <C>               <C>                 <C>

                                                                       December 31,                   Estimated
                                                                   2004             2003             Useful Life
                                                                   ----             ----             -----------

                  Computer and office equipment                  $2,834,811       $ 2,960,830        3 to 7 years
                  Furniture and fixtures                          1,689,787         1,299,343        7 to 10 years
                  Leasehold improvements                            807,227           804,654        Term of lease
                                                                  ---------         ---------
                                                                  5,331,825         5,064,827
                  Less accumulated depreciation
                    and amortization expense                     (4,540,916)       (4,012,263)
                                                                 ----------        ----------
                                                                  $ 790,909       $ 1,052,564
                                                                   ========        ==========

</TABLE>

                  Depreciation and amortization expense was $538,549, $509,968,
                  and $526,816 in 2004, 2003 and 2002, respectively.







                                      F-13

<PAGE>



NOTE 6 -          OTHER ASSETS
<TABLE>
                  <S>                                                                 <C>             <C>

                                                                                           December 31,
                  Other assets consist of the following:                                2004            2003
                                                                                        ----            ----

                  Commissions and concessions receivable                              $ 374,182      $ 306,442
                  Deferred financing costs-net                                          238,328        303,113
                  Insurance claim receivable                                                           245,000
                  Security deposits                                                     244,764        285,129
                  Prepaid expenses and other                                            376,206        519,042
                                                                                        -------       --------
                                                                                     $1,233,480     $1,658,726
                                                                                      =========      =========
</TABLE>

                  Commissions and concessions receivable include amounts earned
                  on mutual fund, insurance transactions and concessions on
                  syndicate offerings.


NOTE 7 -          DEFERRED INCOME

                  In May 2000, FMSC entered into a ten-year clearing agreement
                  with Fiserv Securities, Inc. ("Fiserv"). In connection with
                  the clearing agreement, FMSC and Fiserv also entered into a
                  financial agreement under which Fiserv was to provide cash
                  advances to FMSC under certain terms and conditions. Upon the
                  conversion of FMSC's accounts to Fiserv in November 2000, FMSC
                  received an initial cash advance of $4,000,000. As of February
                  1, 2001, the Company and FMSC amended and restated the
                  financial agreement with Fiserv. Under the restated terms, the
                  Company, rather than FMSC, will be the recipient of any
                  additional cash advances payable under the financial
                  agreement. The Company has further assumed FMSC's obligation
                  with respect to the initial payment received in November 2000,
                  and will be solely responsible for any performance and early
                  termination penalties without recourse to FMSC. In
                  consideration of FMSC's release from its obligations under the
                  financial agreement and to secure Fiserv's interest, the
                  Company has granted to Fiserv a first priority lien on all the
                  Company's ownership interest in First Montauk Securities Corp.

                  The Company received additional cash advances of $1,250,000 in
                  each of November 2001, 2002 and 2003, respectively. All
                  advances have been recorded as deferred income and are being
                  amortized to earnings over the term of the agreement.
                  Amortization of approximately $875,000, $726,000 and $577,000
                  in 2004, 2003 and 2002, respectively, is included in Other
                  Income. Advances were subject to income taxes in the year of
                  receipt with the exception of the advance received in 2003,
                  which the Company elected to include in taxable income in
                  2004.

NOTE 8 -          ACCRUED EXPENSES
<TABLE>
                  <S>                                                                <C>              <C>

                                                                                            December 31,
                  Accrued expenses consist of the following:                            2004            2003
                                                                                        ----            ----

                  Accrued litigation costs                                           $  666,013     $1,364,169
                  Accrued penalty bid                                                    84,750
                  Accrued payroll                                                       137,341        123,886
                  Accrued professional fees                                             109,679         97,254
                  Other accrued expenses                                                 80,402        218,664
                                                                                     ----------     ----------
                                                                                     $1,078,185     $1,803,973
                                                                                      =========      =========
</TABLE>



                                      F-14

<PAGE>

NOTE 9 -          6% CONVERTIBLE DEBENTURES

                  In 2002 and 2003, the Company raised gross proceeds of
                  $1,030,000 and $2,105,000, respectively, in private placements
                  of 6% convertible debentures to accredited investors. The
                  offerings were made in reliance upon the exemption under
                  Sections 4(2) of the Securities Act of 1933 and the provisions
                  of Regulation D. The debentures are convertible into shares of
                  common stock at $.50 per share, subject to adjustment for
                  stock dividends and stock splits, and mature five years from
                  the date of issuance unless previously converted. Interest is
                  payable in cash on a semi-annual basis until maturity or
                  conversion.

                  In the event that the closing bid price of the Company's
                  common stock is 200% of the conversion price for the twenty
                  (20) consecutive trading days prior to the date of notice of
                  conversion or prepayment, the Company may, at its option and
                  only if the underlying shares have been registered, upon
                  thirty (30) days written notice to the holders, demand the
                  conversion of some or all of the debentures, or prepay some or
                  all of the debentures at 120% of the principal amount. The
                  debentures contain certain covenants that, among other things,
                  prevent the sale of all or substantially all of the Company's
                  assets without provision for the payment of the debentures
                  from such sales proceeds, and making loans to any executive
                  officers or 5% stockholders. The debentures provide for
                  piggy-back registration rights relating to the underlying
                  shares.

                  FMSC was the Placement Agent for the offerings. Offering costs
                  of approximately $324,000, consisting of the value of warrants
                  issued to selling brokers, commissions and other cash
                  expenses, have been capitalized and are being amortized on a
                  straight-line basis over the respective terms of the
                  debentures.

                  In October 2004, holders of $120,000 of the subordinated
                  convertible debentures presented their debentures to the
                  Company for conversion. The Company issued 240,000 shares of
                  common stock and retired $120,000 of the debentures.
                  Subsequent to December 31, 2004, holders of $1,755,000 of
                  subordinated convertible debentures presented their debentures
                  to the Company for conversion. The Company issued an
                  additional 3,510,000 shares of common stock and retired
                  $1,755,000 of the debentures.

                  The debentures outstanding as of December 31, 2004 are
                  $3,015,000 and are due to mature in 2007 and 2008, as follows:
                  2007 - $950,000; 2008 - $2,065,000.

NOTE 10 -         WARRANTS SUBJECT TO PUT OPTIONS

                  In July 2003, the Company issued 750,000 five-year warrants to
                  various plaintiffs as part of a legal settlement (See Note
                  12). The warrants were issued in three classes of 250,000
                  warrants each. The Class A warrants which had an exercise
                  price of $.40 per share, were redeemed for $200,000 during the
                  third quarter of 2004. Class B and Class C warrants have
                  exercise prices of $.25 per share. The settlement agreement
                  provides that the Company may be obligated to make additional
                  cash payments of up to $400,000 in the event that claimants
                  elect to exercise the warrants on certain dates. Specifically,
                  if a majority of then existing Class B warrant holders elect
                  to exercise the outstanding warrants in their particular class
                  during the month of June 2005 (the "Required Exercise Event"),
                  the claimants, upon exercising their warrants, will be
                  required to sell the shares in the open market. If the
                  warrants are exercised and the shares sold, the Company will
                  pay to the claimants up to an aggregate amount of $200,000
                  less the amount received by the claimants from the sale of
                  their shares, net of commissions. This process will be
                  repeated for outstanding Class C warrant holders during the
                  month of June 2006.




                                      F-15
<PAGE>

                  In the alternative, the Company may elect or be required to
                  redeem the unexercised warrants for up to $.80 per warrant, or
                  a maximum of $200,000 per class, depending upon the then
                  prevailing market price of the Company's common stock on or
                  about the date of the Required Exercise Event of a particular
                  class. The Company may call a warrant class for redemption if
                  the average market price of the underlying common shares
                  during the ten trading days immediately preceding the date
                  upon which the Company receives notice that the warrant
                  holders of a particular class have elected to declare a
                  Required Exercise Event is less than $1.20. The Company will
                  be required to redeem the warrants for $.80 per warrant in
                  cash if the average market price of the underlying common
                  shares during the ten trading days immediately preceding the
                  date upon which the Company receives notice that the warrant
                  holders of a particular class have elected to declare a
                  Required Exercise Event is less than or equal to the warrant
                  exercise price. In the event that warrant holders of a
                  particular class elect not to declare a Required Exercise
                  Event, the Company's guarantee will be canceled with respect
                  to that class.

                  In accordance with the provisions of FAS 150, "Accounting for
                  Certain Financial Instruments with Characteristics of both
                  Liabilities and Equity," the Company has classified its
                  obligations under the warrants as liabilities in the Statement
                  of Financial Condition. The fair value of the obligations
                  embodied in the warrants remaining were initially valued at $
                  269,123 using the discounted cash flow method, assuming, based
                  on available evidence, that the Company will be required to
                  pay the full redemption liability. The Company measures the
                  value of the warrant obligations as of the end of each
                  reporting period using the discounted cash flow method until
                  the obligations are settled. The recorded value at December
                  31, 2004 was $333,261. Changes in value are recognized in
                  earnings as interest expense.


NOTE 11 -         INCOME TAXES

                  The provision (benefit) for income taxes consists of the
following:
<TABLE>
                  <S>                                                <C>                <C>           <C>


                                                                               Year ended December 31,
                                                                       2004             2003            2002
                                                                       ----             ----            ----

                  Currently payable (refundable):
                    Federal                                                                          $(212,300)
                    State                                             (13,000)           39,000         36,300
                                                                     ---------          -------        -------
                                                                      (13,000)           39,000       (176,000)
                                                                     ---------          -------       --------
                  Deferred:
                    Federal                                                             425,000        425,000
                    State                                                                35,000         45,000
                                                                     --------           -------        -------
                                                                                        460,000        470,000
                                                                     --------          --------       --------
                  Provision (benefit) for income taxes              $ (13,000)        $ 499,000     $  294,000
                                                                     =========         ========      =========
</TABLE>






                                      F-16
<PAGE>



                  Following is a reconciliation of the income tax provision
                  (benefit) with income taxes based on the federal statutory
                  rate:
<TABLE>
                  <S>                                              <C>           <C>                  <C>

                                                                               Year ended December 31,
                                                                       2004             2003            2002
                                                                       ----             ----            ----

                  Expected federal tax benefit at
                    statutory rate                               $   244,000        $(1,043,000)       $(926,000)
                  State taxes, net of federal tax effect              (7,000)          (145,000)        (145,000)
                  Non-deductible expenses                             10,000             29,000           35,000
                  Increase (decrease) in valuation allowance        (260,000)         1,658,000        1,330,000
                                                                  ------------        ---------        ---------
                  Provision (benefit) for income taxes           $   (13,000)       $   499,000        $ 294,000
                                                                 =============         ========         ========


                  The tax effects of the temporary differences that give rise to
                  significant portions of the deferred tax assets and
                  liabilities as of December 31, 2004 and 2003 are:

                                                                               Year ended December 31,
                                                                                2004                  2003
                                                                                ----                  ----
                  Deferred tax assets:
                    Deferred income                                         $2,042,000           $ 2,392,000
                    Reserves and allowances                                    986,000             1,356,000
                    Federal tax loss carryforwards                           1,152,000               909,000
                     State tax loss carryforwards                              389,000               207,000
                    Stock-based compensation                                   454,000               447,000
                  Other                                                         98,000                70,000
                                                                            ----------            ----------
                  Subtotal                                                   5,121,000             5,381,000
                  Valuation allowance                                       (5,121,000)           (5,381,000)
                                                                            ----------            ----------
                   Net deferred tax assets
                                                                            ==========            ==========
</TABLE>


                                      F-17
<PAGE>

                  The Company has determined that, based upon available
                  information, the probability of utilizing its deferred tax
                  assets does not meet the "more likely than not" test under
                  SFAS 109. As such, a valuation allowance has been provided
                  against all deferred tax assets as of December 31, 2004 and
                  2003.


                  The Company and its subsidiaries file a consolidated federal
                  tax return and separate state returns. At December 31, 2004,
                  the Company has approximately $3,400,000 and $6,470,000 of
                  federal and state operating loss carryforwards, respectively,
                  available to offset future taxable income. These losses expire
                  at various dates through 2024.

                  During 2003, the Company recovered approximately $212,000 of
                  federal income taxes and during 2004 $38,000 of state income
                  taxes through loss carryback refund claims.

NOTE 12 -         COMMITMENTS AND CONTINGENT LIABILITIES

                  Operating Leases

                  The Company leases office facilities and equipment under
                  operating leases expiring at various dates through 2006. The
                  lease for the Company's headquarters has a six-year renewal
                  option through 2011. Certain leases require the Company to pay
                  increases in real estate taxes, operating costs and repairs
                  over certain base year amounts. Operating lease expense for
                  the years ended December 31, 2004, 2003 and 2002 was
                  approximately $1,154,000, $1,192,000, and $1,393,000,
                  respectively.

                  Future minimum rental commitments under all non-cancelable
                  leases with terms greater than one year are as follows:

                        Year ending December 31,

                               2005                              $955,171
                               2006                               830,130
                               2007                               631,790
                               2008                               609,149
                               2009 and beyond                    609,149
                                                                  -------
                                                               $3,635,389
                                                                =========

                  Employment agreements

                  In January 2004, the Company entered into employment
                  agreements with its three top executive officers. The
                  agreements provide for annual base salary, customary fringe
                  benefits, severance and participation in an executive bonus
                  pool and a corporate finance bonus pool. The agreements have
                  terms ranging from two to five years with a one-year extension
                  provision. The agreements also provide for stock and option
                  grants vesting over three year periods. Two of these three
                  agreements were superceded by new agreements approved by
                  FMFC's board in February 2005 (see Note 21).


                  Mutual fund breakpoints

                  The NASD has directed member firms to assess mutual fund
                  transactions executed during the five-year period from 1999 to
                  2003 for the purpose of determining potential breakpoint
                  commission refunds to customers. At December 31, 2004, the
                  Company has paid out $4,483 in customer claims and has a
                  remaining reserve of $5,517. Management believes, but cannot
                  give assurance, that this amount will be sufficient to cover
                  eventual payouts.


                                      F-18
<PAGE>


                  Legal matters

                  On July 17, 2003, the Company and FMSC entered into an
                  agreement with certain claimants in order to settle pending
                  arbitration proceedings. The litigation arose out of customer
                  purchases of certain high-yield corporate bonds that declined
                  in market value or defaulted. The settlement agreement covers
                  eleven separate claims, which sought an aggregate of
                  approximately $12.3 million in damages. In exchange for the
                  consideration provided by the Company, each claimant granted a
                  general release of claims in favor of the Company and all
                  individual respondents, with the exception of the former
                  registered representative who had handled the claimants'
                  accounts. The Company paid an aggregate of $1,000,000 cash,
                  and issued to the claimants 500,000 shares of the Company's
                  common stock valued at $160,000 based on the stock's quoted
                  market price. The Company also issued to the claimants
                  five-year warrants to purchase an aggregate of 750,000 common
                  shares. The first class of 250,000 warrants was redeemed in
                  the third quarter of 2004. (see Note 10).

                  The Company is currently defending four additional claims
                  relating to the sale of the high-yield bonds. The claimants
                  seek compensatory damages in excess of $2.1 million plus
                  punitive damages and the recovery of various costs. The
                  Company is vigorously defending these actions and believes
                  that there are meritorious defenses in each case. There is no
                  insurance coverage available for the payment of settlements
                  and/or judgments that may result from these particular claims.

                  The Company is a respondent or co-respondent in various other
                  legal proceedings, which are related to its securities
                  business. Management is contesting these claims and believes
                  that there are meritorious defenses in each case. However,
                  litigation is subject to many uncertainties, and some of these
                  actions and proceedings may result in adverse judgments.
                  Further, the availability of insurance coverage is determined
                  on a case-by-case basis by the insurance carrier, and is
                  limited to the coverage limits within the policy for any
                  individual claim and in the aggregate. After considering all
                  relevant facts, available insurance coverage and consultation
                  with litigation counsel, management believes that significant
                  judgments or other unfavorable outcomes from pending
                  litigation could have a material adverse impact on the
                  Company's consolidated financial condition, results of
                  operations, and cash flows in any particular quarterly or
                  annual period, or in the aggregate, and could impair the
                  Company's ability to meet the statutory net capital
                  requirements of its securities business.

                  As of December 31, 2004, the Company has accrued litigation
                  costs that are probable and can be reasonably estimated based
                  on a review of existing claims, arbitrations and unpaid
                  settlements. Management cannot give assurance that this amount
                  will be adequate to cover actual costs that may be
                  subsequently incurred. Further, it is not possible to predict
                  the outcome of other matters pending against the Company. All
                  such cases will continue to be vigorously defended.

NOTE 13-          CAPITAL LEASE OBLIGATIONS

                  The Company leases certain equipment under non-cancelable
                  lease agreements, which meet the criteria for capitalization.
                  The cost, accumulated depreciation and net book value of
                  equipment under the capital leases as of December 31, 2004
                  were $66,062, $11,010 and $55,052, respectively.

                  Future minimum lease payments under capital lease obligations
                  at December 31, 2004 are as follows:

                       Year ending December 31,
                                2005                          $56,772
                                2006                            9,110
                                                               ------
                  Total minimum payments                       65,882
                  Less amount representing interest            (3,422)
                                                               ------
                  Total principal                             $62,460
                                                               ======



                                      F-19

<PAGE>



NOTE 14 -         FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
                  CONCENTRATION OF CREDIT 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.

                  The Company 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, the Company's
                  clearing firm requires additional collateral or reduction of
                  positions, when necessary. The Company also completes credit
                  evaluations where there is thought to be credit risk.

                  The Company has sold securities that it does not currently own
                  and will therefore be required to purchase such securities at
                  a future date. The Company has recorded these obligations in
                  the financial statements at market values of the related
                  securities of $174,326 and $69,330 at December 31, 2004 and
                  2003, respectively, and will incur a loss if the market value
                  of the securities increases subsequent to year-end.

                  Financial instruments that potentially subject the Company to
                  significant concentrations of credit risk consist principally
                  of cash and securities inventories. The Company maintains all
                  inventory positions and a significant portion of its cash
                  balances at its clearing firm. Cash balances held at
                  commercial banks may periodically exceed federal insurance
                  limits.

NOTE 15 -         PENSION PLAN

                  The Company sponsors a defined contribution 401(k) pension
                  plan covering substantially all employees who meet minimum age
                  and service requirements. The Company may elect to contribute
                  up to 100% of each participant's annual contribution to the
                  plan. There were no employer contributions in 2004, 2003 or
                  2002.


NOTE 16 -         STOCKHOLDERS' EQUITY (DEFICIT)

                  Preferred Stock - Series A

                  In 1999, the Company's board of directors designated a Series
                  A Convertible Preferred Stock with the following features:

                  Shares authorized:  625,000
                  Par value:  $.10 per share
                  Dividends: 6% per annum, payable quarterly at the rate of
                  $.075 per share until conversion
                  Voting rights:  None
                  Liquidation preference:   $5.00 per share
                  Conversion:  Convertible  at the option of the holder  anytime
                  into two shares of Common Stock at $2.50 per share;  automatic
                  conversion  once the closing  price for the Common Stock is
                  $3.50 or above for 20 consecutive trading days, and the shares
                  are registered for public sale.

                  The Company issued 349,511 Series A shares in a private
                  exchange offering in 1999. As of December 31, 2004, a total of
                  44,142 preferred shares have been converted into 88,284 shares
                  of common stock.




                                      F-20

<PAGE>


                  During the quarter ended June 30, 2003, the Company suspended
                  the payment of cash dividends on its Series A Preferred stock.
                  New Jersey Business Corporation Act prohibits the payment of
                  any distribution by a corporation to, or for the benefit of
                  its shareholders, if the corporation's total assets would be
                  less than its total liabilities. Unpaid preferred dividends
                  will continue to accumulate at 6% per annum. Arrearages must
                  be fully paid before any distribution can be declared or paid
                  on the Company's common stock. Cumulative dividends in
                  arrears, and not accrued, at December 31, 2004 were
                  approximately $164,000.

                  Preferred Stock - Series B

                  In February 2005, the Company's board of directors designated
                  a Series B Convertible Redeemable Preferred Stock with the
                  following features:

                  Shares authorized:  445,102
                  Par value:  $.10 per share
                  Dividends: 8% per annum, payable quarterly at the rate of $.10
                  per share until conversion or redemption. Voting rights:
                  Holders of Series B Preferred Stock are entitled to vote
                  together with common stockholders on all matters in which they
                  are entitled to vote. The number of votes to which holders of
                  Series B Preferred are entitled to cast are ten per each share
                  of Series B Preferred Stock subject to certain adjustments.
                  Liquidation preference:   $5.055 per share
                  Conversion: Convertible at the option of the holder anytime
                  into ten shares of Common Stock; automatic
                  conversion once the closing price for the Common Stock is
                  $1.01 for more than 60 trading days if the average daily
                  trading volume exceeds 20,000 shares, or $1.26 for more than
                  60 trading days if the average daily trading volume exceeds
                  10,000 shares, or $1.51 for more than 60 trading days.
                  Redemption: Optional redemption, the holder may require the
                  Company to redeem all or a portion of Series B Preferred Stock
                  by paying cash equal to the issue price plus all accrued and
                  unpaid dividends within 180 days after a Redemption Event, as
                  defined.

                  In February 2005 the Company issued 197,824 Series B Preferred
                  Shares in connection with a separation agreement entered into
                  with its former Chief Executive Officer.

                  The Company's charter authorizes the issuance of up to
                  5,000,000 shares of Preferred Stock. After the issuance of the
                  Series A and Series B Preferred Shares described above, the
                  Company is authorized to issue an additional 3,929,898 of
                  Preferred Stock. The rights and preferences, if any, to be
                  given to these preferred shares would be designated by the
                  board of directors at the time of issuance.

                  Common Stock

                  In connection with a legal settlement in 2003, the Company
                  issued 500,000 shares of common stock to various litigants.
                  The shares were valued at $160,000 based on the quoted market
                  price of the shares on the issuance date. The Company has
                  provided demand registration rights with respect to 250,000
                  shares and piggy-back registration rights with respect to the
                  remaining 250,000 shares.

                  Warrants

                  During 2003 and 2002, the Company issued 210,500 and 103,000
                  common stock purchase warrants, respectively, to FMSC
                  registered representatives as compensation in connection with
                  the sale of convertible debentures. The Company valued the
                  warrants at $35,977 and $11,382 respectively, using the
                  Black-Scholes option pricing method. The warrants are
                  exercisable at $.50 per share for five years from the date of
                  issuance.

                  At December 31, 2004, the Company had outstanding 3,072,446
                  Class C Redeemable Common Stock Purchase Warrants, which
                  expired in February 2005.

                  During 1999, the Company issued 25,000 common stock purchase
                  warrants in connection with a legal settlement. The warrants
                  expired in the third quarter of 2004.



                                      F-21
<PAGE>


NOTE 17 -         STOCK OPTION PLANS

                  2002 Stock Incentive Plan

                  In June 2002, the Company adopted and its stockholders
                  approved the 2002 Incentive Stock Option Plan (the "2002
                  Plan"), replacing the 1992 Incentive Stock Option Plan (the
                  "1992 Plan"), which expired in September 2002. The 1992 Plan
                  provided for the granting of options to employees, consultants
                  and registered representatives of the Company, but only
                  options issued to employees qualify for incentive stock option
                  treatment ("ISOs"). Option exercise periods were fixed by the
                  Board of Directors on the grant date but no exercise period
                  could be less than one year nor more than ten years from the
                  date of grant. As of December 31, 2004, a total of 761,698
                  options issued under this plan remain outstanding.

                  The Company has reserved up to 5,000,000 shares of common
                  stock for issuance under the 2002 Plan. The 2002 Plan provides
                  for the grant of options, including ISOs to employees;
                  non-qualified stock options (NQSOs) to employees, consultants
                  and independent registered representatives; and stock
                  appreciation rights or any combination thereof (collectively,
                  "Awards"). The Board of Directors determines the terms and
                  provisions of each award granted under the 2002 Plan,
                  including the exercise price, term and vesting schedule. In
                  the case of ISO's, the per share exercise price must be equal
                  to at least 100% of the fair market value of a share of common
                  stock on the date of grant, and no individual will be granted
                  ISOs corresponding to shares with an aggregate fair value in
                  excess of $100,000 in any calendar year. The 2002 Plan will
                  terminate in 2012. As of December 31, 2004, options to
                  purchase a total of 1,017,000 shares were outstanding and
                  3,983,000 shares remained available for future issuance under
                  the 2002 Plan.

                  2002 Non-Executive Director Stock Option Plan

                  In June 2002, the Company adopted and its stockholders
                  approved the 2002 Non-Executive Director Stock Option Plan
                  (the "2002 Director Plan"), replacing the Non-Executive
                  Director Stock Option Plan, which expired in September 2002.
                  Under the 2002 Director Plan, each non-executive director will
                  automatically be granted an option to purchase 20,000 shares,
                  pro rata, on September 1st of each year or partial year of
                  service. The Plan will be administered by the Board of
                  Directors or a committee of the Board, which shall at all
                  times consist of not less than two officer/directors of the
                  Company who are ineligible to participate in the 2002 Director
                  Plan. The 2002 Director Plan does not contain a reserve for a
                  specific number of shares available for grant. Each option
                  issued under the 2002 Director Plan will be immediately vested
                  NQSOs, and will have a five-year term and an exercise price
                  equal to the 100% of the fair market value of the shares
                  subject to such option on the date of grant. The 2002 Director
                  Plan will terminate in 2012. As of December 31, 2004, 40,000
                  options were outstanding under the 1992 Non-Executive Director
                  Stock Plan and 120,000 options were outstanding under the 2002
                  Non-Executive Director Stock Plan.

                  1996 Senior Management Plan

                  In June 2000, the Company's stockholders approved an amendment
                  to the 1996 Senior Management Plan (the "1996 Plan") to
                  increase the number of shares reserved for issuance to key
                  management employees from 2,000,000 to 4,000,000 shares.
                  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
                  may 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. The 1996 Plan will terminate in
                  June 2006. As of December 31, 2004, options to purchase
                  1,717,500 shares and 1,000,000 shares of restricted common
                  stock were outstanding. Subsequent to year end an additional
                  1,300,000 restricted common shares were issued under the Plan
                  with 577,500 shares available for future issuance under the
                  Plan.



                                      F-22


<PAGE>



                  A summary of the activity in the Company's stock option plans
                  for the three-year period ended December 31, 2004 is presented
                  below:
<TABLE>
                  <S>                                                               <C>               <C>
                                                                                                      Weighted
                                                                                                       Average
                                                                                                      Exercise
                                                                                      Shares            Prices


                  Options outstanding, December 31, 2001                            5,243,998            1.73
                           Granted                                                    573,000             .55
                           Canceled                                                (1,744,500)           1.84
                                                                                   ----------


                  Options outstanding, December 31, 2002                            4,072,498            1.52
                           Granted                                                    873,000             .54
                           Canceled                                                (1,389,000)           1.75
                                                                                   ----------

                  Options outstanding, December 31, 2003                            3,556,498           $1.19

                           Granted                                                    891,000             .57
                           Exercised                                                   (1,800)            .31
                           Canceled                                                  (789,500)           1.17
                                                                                  -----------
                  Options outstanding, December 31, 2004                            3,656,198
                                                                                   ==========
</TABLE>

                  Shares of common stock available for future grant under
                  Company plans totaled 5,170,500 as of December 31, 2004. This
                  number does not include options that are expected to be issued
                  during the remaining term of the 2002 Director's Plan, but for
                  which no specific reserve has been established.

                  The Company has elected to use the intrinsic value-based
                  method of APB Opinion No. 25 to account for all of its
                  employee stock-based compensation plans. Accordingly, no
                  compensation cost has been recognized in the accompanying
                  financial statements for stock options issued to employees
                  because the exercise price of each option equals or exceeds
                  the fair value of the underlying common stock as of the grant
                  date for each stock option. Accordingly, compensation is
                  recognized in the consolidated financial statements only for
                  the fair value of options issued to consultants and
                  independent registered representatives. Such compensation is
                  amortized to expense over the related options' vesting
                  periods. Compensation expense recognized in 2004, 2003 and
                  2002 totaled $42,256, $37,156 and $2,985, respectively. The
                  weighted-average grant date fair value of options granted
                  during 2004, 2003 and 2002 was $.28, $.22, and $.08,
                  respectively.

                  Additional information as of December 31, 2004 with respect to
                  all outstanding options is as follows:
<TABLE>
         <S>                      <C>              <C>              <C>               <C>                <C>

                                              Options Outstanding                       Options Exercisable
                                                   Weighted
                                                    Average          Weighted                           Weighted
                                                   Remaining         Average                             Average
                                   Number         Contractual        Exercise          Number           Exercise
         Range of prices         Outstanding         Life             Prices         Exercisable         Prices

         $0.20 - $0.30             127,000            3.16              $.25              105,800       $.25
         $0.30 - $0.49              76,200            2.61               .40               62,720        .40
         $0.50 - $0.75           2,014,000            3.34               .60            1,152,460        .60
         $.83 - $1.09              283,000            1.48               .89              259,735        .88
         $1.44 - $2.16           1,087,998             .45              1.85            1,081,498       1.85
         $2.38 - $2.50              68,000            1.55              2.56               66,000       2.56

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

         $0.20 - $2.50           3,656,198            2.28             $1.01            2,728,213         $1.15

-------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-23
<PAGE>


NOTE 18 -         FAIR VALUE OF FINANCIAL INSTRUMENTS

                  Financial instruments reported in the Company's consolidated
                  statement of financial condition consist of cash, securities
                  owned and sold, not yet purchased, loans receivable, warrants
                  subject to put options, 6% convertible debentures, accounts
                  payable and accrued expenses, and capital leases payable, the
                  carrying value of which approximated fair value at December
                  31, 2004 and 2003. The fair value of the financial instruments
                  disclosed is not necessarily representative of the amount that
                  could be realized or settled nor does the fair value amount
                  consider the tax consequences of realization or settlement.


NOTE 19 -         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,
                  2004, FMSC had net capital of $1,992,574, which was $1,685,619
                  in excess of its required net capital of $306,955. FMSC's
                  ratio of aggregate indebtedness to net capital was 2.31 to 1.


NOTE 20 -         UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
                  <S>                      <C>                   <C>            <C>                 <C>

                                            March 31,            June 30,       September 30,       December 31,
                                               2004                2004             2004                2004
                                               ----                ----             ----                ----

                  Revenues                  $18,821,406         $14,241,684       $11,747,309        $14,376,842
                  Expenses                   18,583,432          14,216,838        11,707,408         13,962,366
                  Net income                    237,974              24,846            39,901            427,781
                  Net income
                  applicable to
                  common stockholders           215,071               2,251            17,306            405,185

                  Income per common share:
                  Net income applicable
                  to common stockholders -
                  basic                            .02               -0-                .03                 .04
                  diluted                          .02               -0-                .02                 .03



                                            March 31,            June 30,       September 30,       December 31,
                                               2003                2003             2003                2003
                                               ----                ----             ----                ----

                  Revenues                  $10,956,167         $15,902,470       $15,171,548        $16,196,497
                  Expenses                   11,427,511          17,241,938        15,460,089         17,116,187
                  Net loss                     (471,344)         (1,339,468)         (288,541)        (1,418,690)
                  Net loss applicable
                   to common
                   stockholders                (496,183)         (1,339,468)         (288,541)        (1,418,690)

                  Loss per common share:
                  Net loss applicable
                   to common
                   stockholders - basic
                   and diluted                     (.06)               (.16)             (.03)              (.16)
</TABLE>


                  For the quarter ended December 31, 2004, the Company revised
                  its vesting period for restricted stock issued to two of its
                  executive officers on January 1, 2004, resulting in additional
                  income of $175,000 in the fourth quarter.

                  Net income (loss) per share is computed independently for each
                  of the quarters presented. Therefore, the sum of the quarterly
                  net income (loss) per share figures in 2004 and 2003 does not
                  necessarily equal the total computed for the entire year.



                                      F-24


<PAGE>
NOTE 21 -         SUBSEQUENT EVENTS

                  Separation Agreement:

                  On February 8, 2005, the Company entered into a Separation
                  Agreement ("Agreement") with its Chief Executive Officer
                  ("CEO"), which provides for the CEO to terminate his
                  employment and his positions as CEO of both the Company and
                  FMSC as of that date. The Agreement provides for the CEO to
                  remain as a director of the Company. The Agreement also
                  terminated the CEO's employment agreement dated January 1,
                  2004.

                  Pursuant to the terms of the Agreement, the Company entered
                  into a two year consulting agreement, issued 197,824 shares of
                  FMFC Series B Convertible Redeemable Preferred Stock
                  convertible into 1,978,240 shares of the Company's common
                  stock, with voting privileges and will execute a promissory
                  note for $200,000 with interest of 8% per annum. The Company
                  is also responsible for a one time payment of $136,000 that
                  will be payable in early 2005. The Company also issued 200,000
                  options to purchase common stock at $0.83 per share for three
                  years, vesting over two years, and cancelled 325,000 options
                  with various exercise prices. All restricted common shares not
                  previously vested were automatically vested upon his
                  termination.

                  Employment Agreements:

                  In February 2005, the Chief Operating Officer ("COO") was
                  appointed the role of CEO of FMFC and FMSC. The Company
                  entered into an employment agreement with the new CEO, which
                  superseded his existing agreement, and allowed for issuance,
                  as a bonus payment for our performance for the year ended
                  December 31, 2004, and in consideration of the CEO assuming
                  the position of Chief Executive Officer, 1,000,000 shares of
                  our common stock. The 1,000,000 shares vest in annual
                  increments of one third commencing on February 1, 2005. In
                  addition, the new CEO agreed to the cancellation of 250,000 of
                  his outstanding stock options with an exercise price of $0.75
                  per share. In the event of a change of control of the Company,
                  all unvested shares would vest. In the event of termination
                  without cause, the new CEO is entitled to a severance payment
                  consisting of accrued compensation, benefit continuation and
                  payment of base salary for the greater of three months or the
                  unexpired term. Three other executive officers received
                  100,000 shares of restricted stock, each with the same vesting
                  schedule as the new CEO.

                  Merger Agreement:

                  The Company executed a definitive Agreement and Plan of Merger
                  ("Merger Agreement") dated February 10, 2005 with Olympic
                  Cascade Financial Corporation ("Olympic"). Under the terms of
                  the Merger Agreement, the stockholders of FMFC will receive
                  0.5055 shares of Olympic common stock for each share of FMFC
                  stock. Under the merger plan currently contemplated, the
                  Company will become a 100% owned subsidiary of Olympic. The
                  completion of the merger is subject to stockholder and
                  regulatory approval and the finalization of financing
                  arrangements.















                                      F-25