UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

               |X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                             SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2005

                                       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 number: 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.)

               Parkway 109 Office Center,                    07701
                328 Newman Springs Road,
                 Red Bank, New Jersey
        (Address of principal executive offices)           (Zip Code)

                                 (732) 842-4700
              (Registrant's telephone number, including area code)

                                     [None]
              (Former name, former address and former fiscal year,
                          if changed since last report)


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

         Title of each class        Name of each exchange on which registered
      -------------------------  -----------------------------------------------
               None

           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, no par value


     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.                Yes [   ]   No [X]

     Indicate by check mark if the  registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [   ]   No [X]

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).            Yes [   ]    No [X]

     As of June 30, 2005 the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $11,615,584 based on the
closing sale price as reported on the Over the Counter Bulletin Board.

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

               Class                           Outstanding at March 30, 2006
---------------------------------------     -----------------------------------
[Common Stock, no par value per share]                16,009,793 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

<PAGE>

<TABLE>
<S>                  <C>                                                                                       <C>
Table of Contents

                                     PART I
                                                                                                              PAGE

Item 1.             Business                                                                                   3

Item 1A.            Risk Factors                                                                              17

Item 1B.            Unresolved Staff Comments                                                                 18

Item 2.             Properties                                                                                18

Item 3.             Legal Proceedings                                                                         18

Item 4.             Submission of Matters to a Vote of Security Holders                                       19

                                     PART II


Item 5.             Market For the Company's Common Equity and Related Stockholder Matters                    20

Item 6.             Selected Financial Data                                                                   22

Item 7.             Management's Discussion and Analysis of Financial Condition and Results of Operations     24

Item 7A.            Quantitative and Qualitative Disclosures About Market Risk                                35

Item 8.             Financial Statements and Supplemental Data                                                35

Item 9A.            Controls and Procedures                                                                   35

Item 9B             Other Information                                                                         35


                                    PART III


Item 10.            Directors and Executive Officers of the Registrant                                        36

Item 11.            Executive Compensation                                                                    40

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                                                    49

                                     PART IV


Item 15.            Exhibits and Financial Statement Schedules                                                50

</TABLE>

                                       2
<PAGE>


PART I

This Annual Report on Form 10-K contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve certain known and unknown risks,
uncertainties and other factors, many of which are beyond our control, and are
not limited to those discussed in Item 1A, "Risk Factors." All statements that
do not relate to historical or current facts are forward-looking statements.
These statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to present or
anticipated products and markets, future revenues, capital expenditures,
expansion plans, future financing and liquidity, personnel, and other statements
regarding matters that are not historical facts or statements of current
condition. Any or all forward-looking statements contained within this Annual
Report on Form 10-K may turn out to be wrong. They can be affected by inaccurate
assumptions we might make, or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion below will be important in determining
future results. Consequently, we cannot guarantee any forward-looking
statements. Actual future results may vary materially. We undertake no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by
law. You are advised, however, to consult any further disclosures we make on
related subjects in our filings with the U.S. Securities and Exchange Commission
(SEC).

Item 1.   Business

Introduction

         First Montauk Financial Corp. ("the Company") 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. First Montauk
Financial Corp. also sells insurance products through its subsidiary, Montauk
Insurance Services, Inc.

         Montauk Financial Group has approximately 290 registered
representatives and services over 50,000 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 116 other branch office and satellite locations in 27 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 is registered as an International
broker-dealer to conduct business with institutional clients in the province of
Ontario, Canada. Securities transactions are cleared through National Financial
Services, LLC and Penson Financial Services, Inc. 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.

                                       3
<PAGE>
         Our revenues consist primarily of commissions and fee income from
individual and institutional securities transactions, mutual fund and annuity
sales and investment banking activities, 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, 2005:


Equities
Listed and Over-The-Counter Stocks                                    35%
Debt Instruments:
  Municipal, Government and Corporate Bonds and
    Unit Investment Trusts                                             4%
Mutual Funds                                                          11%
Options:  Equity & Index                                               3%
Insurance and Annuities                                                7%
Corporate Finance and Investment Banking                              11%
Investment Advisory Fees                                               6%
Alternative Investments (1)                                            5%
Proprietary trading                                                    4%
Miscellaneous (2)                                                     14%
                                                                      ---
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 2005. 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, 2005

       Commissions from equity securities, options and
       mutual funds, insurance, management fees and
       alternative investments................                             $37,493,733                    65%

       Riskless Principal trades in equity and fixed
       income securities on behalf of customers ..................          $3,572,959                     6%

       Proprietary trading ...................                              $2,005,861                     3%

       Interest and other income ...........                                $8,370,711                    15%

       Investment banking (1) ...............                               $6,640,402                    11%
                                                                           -----------                    ---

       Total Revenues ........................                             $58,083,666                   100%
</TABLE>

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

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.

                                       4
<PAGE>

         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

Principal and Agency Transactions

         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 corporations,
partnerships and limited liability companies, investment advisors, hedge funds,
and pension and profit sharing plans. In executing customer orders to buy or
sell a security in which we make a market, we may sell to, or purchase from,
customers at a price that is substantially equal to the current inter-dealer
market price plus or minus a mark-up or mark-down. We may also act as agent and
execute a customer's purchase or sale order with another broker-dealer
market-maker at the best inter-dealer market price available and charge a
commission. We believe our mark-ups, mark-downs and commissions are competitive
based on the services we provide to our customers. In executing customer orders
to buy or sell listed and over-the-counter securities in which we do not make a
market, we generally act as an agent and charges commissions that we believe are
competitive, based on the services that we provide to our customers.

          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 2005, we earned gross commissions of $4.2 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 all 50 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.

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

                                       5
<PAGE>

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 2005, 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 Agreement

            In May 2000, Montauk Financial Group entered into a 10-year clearing
agreement with Fiserv Securities, Inc. ("Fiserv") under which Fiserv acted as
Montauk Financial Group's primary clearing broker to process and clear customer
and proprietary transactions, and acted 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 were required to repay any unearned
portion of the cash advances in the event we failed 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.

         In December 2004, Fiserv announced that it had been acquired by
National Financial Services, a unit of Fidelity Investments. Subsequently, on
April 21, 2005, Montauk Financial Group entered into a clearing agreement with
NFS to clear our brokerage business and custody customer and firm cash and
securities.

         In connection with this arrangement, on April 21, 2005, we agreed to
the termination of the Clearing Agreement between Montauk Financial Group and
Fiserv and the termination of the Financial Agreement and Security Agreement,
described above. Effective with the termination of these agreements, our
contingent obligation to repay Fiserv any of the cash advances that were
provided by Fiserv under the Financial Agreement and the early termination
penalty were canceled.

         Please see "New Clearing Agreement" in the General Business
Developments during 2005 and Subsequent Events section for more detailed
information about our new clearing arrangement.

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 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.

         Montauk Financial Group competes by recruiting qualified registered
representatives to join our affiliate program. Montauk Financial Group may offer
incentives to qualified registered representatives to join. These incentives can
include transition assistance and cash payments in the form of loans to offset
the costs of moving their business to Montauk, incentive stock options and a
higher payout for a period of time. Through its clearing relationship, Montauk
Financial Group has implemented on-line information systems to service its

                                       6
<PAGE>

affiliates and to attract new brokers. These systems enable brokers from any
office to instantly access customer accounts, view account positions and
histories, buy and sell securities, 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 Securities
and Exchange Commissions (the "SEC" or "Commission") 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 in our case the NASD. 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, which specifies minimum net capital requirements. Although we are not
directly subject to the Net Capital Rule, Montauk Financial Group, as a
registered broker-dealer is. The Net Capital 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 the Net Capital 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, 2005, Montauk
Financial Group has $2,592,441 of net capital and $2,337,751 of excess net
capital.

Employees

         Currently, we have approximately 290 registered representatives of
which 256 are associated with affiliate offices. These affiliated registered
representatives are not employees. In addition, we employ approximately 70
support personnel in the areas of operations, compliance, legal, accounting,
technology, recruiting 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 regulatory 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 $50,000 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. Customer accounts held at our clearing firm also have "Excess
SIPC" net equity protection through CAPCO Insurance Company. The Securities
Investor Protection Corporation is funded through assessments on registered
broker-dealers and charges a flat annual fee of $150.

Securities Broker/Dealer Professional Liability Insurance

         Montauk Financial Group carries a securities Broker/Dealer professional
liability insurance policy covering negligent acts, 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 January 31, 2006 to January 31, 2007, with a $1 million

                                       7
<PAGE>

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.

General Business Developments During 2005 and Subsequent Events

Letter of Intent for Sale of the Company to a Private Investor

         On March 11, 2006 we entered into a letter of intent for the sale of
First Montauk to a private investor. The final terms of the sale are subject to
further negotiation but it is anticipated that the transaction will be all cash
at approximately $1.00 per common share.

         The letter of intent is subject to numerous conditions, including:
satisfactory completion of due diligence, negotiation and finalization of the
terms of the sale and structure of the transaction; negotiation, preparation and
execution of definitive transaction documents, compliance with state and federal
securities laws and regulations, and corporate, shareholder and regulatory
approvals. If a final agreement is reached and the other conditions satisfied,
the transaction is expected to close during the third quarter of 2006. However,
as a result of the foregoing uncertainties, there can be no assurance that a
definitive agreement will be executed or that, if it is, the transaction will be
completed.

 Management Changes

         Effective February 1, 2005 we entered into a Separation Agreement with
William J. Kurinsky, our former C.E.O., which provided for the termination of
Mr. Kurinsky's employment with us effective February 1, 2005. Under the terms of
the Separation Agreement, Mr. Kurinsky relinquished his position as Chief
Executive Officer of the Company and Montauk Financial Group. Please see
"Employment Contracts, Severance and Change in Control" under Item 11 of this
Report for further details regarding Mr. Kurinsky's separation agreement.

         Effective February 1, 2005 the Board approved the appointment of
Mr. Victor K. Kurylak as our Chief Executive Officer and President.  At that
time, Mr. Kurylak was our President and Chief Operating Officer.  Effective
February 1, 2005 the Board also approved a new employment agreement for
Mr. Kurylak and issued him, as a bonus payment for our performance for the
year ended December 31, 2004, and in consideration of his assuming the position
of Chief Executive Officer, 1,000,000 shares of our common stock. In connection
with the foregoing, our prior agreement with Mr. Kurylak entered into effective
January 1, 2004 was terminated. Further, Mr. Kurylak agreed to the cancellation
of 250,000 of his outstanding stock options with an exercise price of $0.75 per
share. The restricted stock award of 1,000,000 shares of common stock vests over
two years commencing on February 1, 2005. In the event of a change of control of
the Company, all unvested shares would vest. Please see "Employment Contracts,
Severance and Change of Control" under Item 11 of this Report for further
details regarding Mr. Kurylak's employment agreement.

         In addition, effective February 1, 2005, the Board also appointed Mindy
Horowitz as acting Chief Financial Officer. Ms. Horowitz was previously senior
vice president of finance. The Board also entered into employment agreements
with Ms. Horowitz and Robert I. Rabinowitz, our Executive Vice President and
General Counsel, effective February 1, 2005. These employment agreements are
discussed in greater detail under Item 11 of this Annual Report.

                                       8
<PAGE>

     Separation Agreement with Herbert Kurinsky

         On February 1, 2006 we entered into a Separation Agreement with Herbert
Kurinsky, the Chairman of our Board of Directors. Under the terms of the
Separation Agreement, the parties agreed to terminate the employment
relationship and the rights and obligations of the parties under the employment
agreement, effective as of February 1, 2006, however, Mr. Kurinsky continues to
serve as our Chairman of the Board of Directors. Please see "Employment
Agreements and Separation Agreements" under Item 11 of this Report for further
details regarding Mr. Kurinsky's separation agreement.

     Termination of Prior Clearing Agreement and Financial Agreement with
     Fiserv Securities, Inc. and New Clearing Agreement with National Financial
     Services, LLC

         On April 21, 2005, we agreed to the termination of the Clearing
Agreement between Montauk Financial Group and Fiserv, dated as of May 8, 2000
and amended as of February 1, 2001. In addition, as of April 21, 2005, we also
agreed to the termination of a certain Financial Agreement, dated May 8, 2000
and amended as of February 1, 2001 and a certain Security Agreement, dated as of
February 1, 2001. In connection with the termination of the Financial Agreement,
our contingent obligation to repay Fiserv any of the cash advances that were
provided by Fiserv under the Financial Agreement and the early termination
penalty were canceled. (See Note 7)

         Contemporaneously, on April 21, 2005, Montauk Financial Group entered
into a clearing agreement with National Financial Services, LLC ("NFS"), a
Fidelity Investments company, to clear its brokerage business and to custody
firm and customer funds and securities. The clearing agreement became effective
on April 21, 2005. The new clearing agreement has an initial term of eight years
and will automatically renew for successive one year terms, unless either party
provides a notice of termination prior to the expiration of the initial or any
renewal term. In the event of an early termination of the clearing agreement,
other than for a change in control of First Montauk, First Montauk Securities
Corp. will pay NFS a termination fee of between $2,000,000 in the first year of
the agreement and declining to $250,000 in the last year of the agreement,
depending on when such early termination occurs.

     Termination of Merger Agreement with Olympic Cascade Financial Corporation

         On October 24, 2005, we jointly announced with Olympic Cascade
Financial Corporation ("Olympic") our agreement to terminate the Amended and
Restated Agreement and Plan of Merger, dated as of June 27, 2005 by and among
the Company, Olympic, and OLY Acquisition Corporation, a wholly owned subsidiary
of the Company. Under the terms of the letter agreement, the parties had no
further obligation to each other arising out of the Merger Agreement, the
Merger, and the transactions contemplated thereby, and each party agreed to bear
its own expenses. We had initially entered into a definitive merger agreement
with Olympic in February 2005, which was amended and restated in June 2005. We
expensed approximately $394,000 in professional fees relating to the proposed
transaction during 2005.

     Election of Class III Director

         On February 24, 2006, the Board of Directors elected Mr. David I.
Portman to our board of directors to serve as an independent Class III director.
Further, as described below, the board established a new substantive committee,
designated as the special committee of the board of directors, and appointed Mr.
Portman to serve as the Chairman of this committee. In addition, the board also
appointed Mr. Portman to its audit committee and compensation committee.

     Formation of Special Committee of the Board of Directors

         On February 24, 2006, our Board of Directors formed a special committee
of the board of directors and appointed each of its independent directors to
serve as members of the special committee. The initial members of this committee
are Messrs. Barry D. Shapiro, Ward R. Jones, Jr. and David I. Portman, with Mr.
Portman serving as its Chairman. The board established the special committee for
the purpose of reviewing all potential strategic transactions or alternatives
which may be presented to us or which it may be appropriate for us to consider.
The special committee will, in addition, review alternatives to any potential
strategic transaction in order to protect shareholder value. Each member of the
special committee will receive an initial cash award of $5,000, plus an annual
fee of $5,000 for each year of service after 2006. In addition, each committee
member will be receiving a cash fee of $10,000 to evaluate the potential
transaction described in the section entitled "Letter of Intent for Sale of the
Company to a Private Investor" above. This fee will be paid to each member
without regard to the committee's position on such transaction or event.

                                       9
<PAGE>

    Debenture Conversions

         Between October 2004 and June 2005 holders of $1,885,000 of convertible
debentures that were sold through private offerings in 2002 and 2003, converted
their debentures into shares of our common stock in accordance with the terms of
the debentures. As a result, we have issued 3,770,000 shares of our common stock
during that time period. As of the date of this Annual Report, there is an
aggregate principal amount of $1,250,000 of convertible debentures outstanding.
The debentures are convertible at $.50 per share.




































                                       10
<PAGE>

   Item 1A.   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.

                   Risks Related to Our Business and Industry

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

         For the years ended December 31, 2005 and 2004 we recognized net income
of $2,424,000 and $730,000, respectively, and a net loss for 2003 of $3,518,000.
The losses for 2003 were primarily due to costs associated with litigation
expenses and settlements. Since our business is subject to significant risk from
litigation as well as weakness in the securities markets, 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.

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. Our revenue and
profitability may be adversely affected by declines in the volume of securities
transactions and in market liquidity. Additionally, our profitability may be
adversely affected by losses from the trading or underwriting of securities or
failure of third parties to meet commitments.

There are numerous contingencies and risks associated with our recent entry into
a letter of intent with a private investor.

            On March 11, 2006, we entered into a letter of intent to sell our
company to a private investor. There are certain contingencies and risks
associated with our having entered into this agreement which could occur if the
closing of transaction does not occur. In the event it is not completed, we may
be subject to many risks, including the costs we incurred related to the
proposed transaction, such as legal, accounting and advisory fees, which must be
paid even if the transaction is not completed. Further, if the transaction does
not occur due to our decision to accept a superior offer from an unaffiliated
third party to pursue a transaction such as a merger, acquisition,
consolidation, business combination, the sale of our assets or a controlling
interest in our capital stock, we would also be obligated to pay the private
investor a termination fee of $500,000. The transaction is subject to the
satisfaction of closing conditions, including satisfactory completion of due
diligence, negotiation and finalization of the terms of the sale and structure
of the transaction, negotiation, preparation and execution of definitive
transaction documents, compliance with state and federal securities laws and
regulations, and corporate, shareholder and regulatory approvals. Accordingly,
we cannot assure you that the transaction will be completed. If the transaction
is not completed, our financial condition could be harmed and the market price
of our common stock could decline.

                                       11
<PAGE>

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. These parties include trading counterparts, customers, clearing
agents, exchanges, clearing houses, and other financial intermediaries as well
as issuers whose securities we hold. These parties may default on their
obligations owed to us due to a variety of reasons, including without
limitation, bankruptcy, lack of liquidity or operational failure. Significant
failures by third parties to perform their obligations owed to us could
adversely affect our revenues and results of operations.

Our risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.

            The policies and procedures we employ to identify, monitor and
manage risks may not be fully effective. Some methods of risk management are
based on the use of observed historical market behavior. As a result, these
methods may not accurately predict future risk exposures, which could be
significantly greater than the historical measures indicate. Other risk
management methods depend on evaluation of information regarding markets,
clients or other matters that are publicly available or otherwise accessible by
us. This information may not be accurate, complete, up-to-date or properly
evaluated. Management of operational, legal and regulatory risks requires, among
other things, policies and procedures to properly record and verify a large
number of transactions and events. We cannot assure that our policies and
procedures will effectively and accurately record and verify this information.
We seek to monitor and control our risk exposure through a variety of separate
but complementary financial, credit, operational and legal reporting systems. We
believe that we are able to evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, our ability to manage risk exposure
can never be completely or accurately predicted or fully assured. The
consequences of these developments can include losses due to adverse changes in
inventory values, decreases in the liquidity of trading positions, higher
volatility in earnings, increases in our credit risk to customers as well as to
third parties and increases in general systemic risk.

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.

                                       12
<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 seek compensatory, rescissionary and punitive damages. During the year
ended December 31, 2005, we incurred $1,774,000 in litigation costs and expenses
related to various legal claims and settlements. As of December 31, 2005, 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 legal and regulatory 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.

         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.

                                       13
<PAGE>

         The New Jersey Bureau of Securities is conducting an inquiry into First
Montauk Securities Corp.'s sale of certain high-yield bonds to the firm's
clients from 1998 to 2001, and the subsequent resale of those securities to
other customers in 2001. We have recently begun settlement discussions with the
Bureau in an attempt to resolve the matter in order to avoid a protracted legal
proceeding. The final terms of the settlement are still being negotiated but may
include a monetary fine, the disgorgement of markups on the sale of certain
bonds and the retention of a compliance consultant to review the firm's
procedures. The exact amount of civil penalty and disgorgement as well as the
precise language of the proposed consent order are still being negotiated with
the Bureau. We believe that we have adequately reserved for the anticipated
financial impact of this matter in our financial statements.

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.

                                       14
<PAGE>

We rely on primarily 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 two clearing brokers, National Financial
Services, LLC as its primary clearing broker, and Penson Financial Corp., to
which we currently introduce a limited number of customer accounts, 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 agreements are terminated for any reason, or if
the clearing brokers fail 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.

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.

                                       15
<PAGE>

                        Risks Related to Our Common Stock

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 Convertible Preferred Stock, and 8% quarterly dividends on the
outstanding shares of our Series B Convertible Redeemable Preferred Stock.
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

         We have issued a significant amount of convertible securities and the
dilution of the per share value of our common shares could result from the
conversion or exercise of most or all of the currently outstanding convertible
securities. We issued an aggregate of $1,240,000 principal amount of debentures
in a private offering completed in March 2003 and subsequently issued an
additional $1,895,000 principal amount of debentures in a private offering
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 $1,885,000 principal amount of debentures have converted into
3,770,000 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 30, 2006, 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  151,224  shares of common stock at
                     an exercise  price of $.25 issued in a settlement of
                     certain claims; and
            o        options to purchase 2,280,402 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.

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

         As of March 30, 2006, of the 16,009,793 issued and outstanding shares
of our common stock, approximately 5,189,864 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 is 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.

                                       16
<PAGE>

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

        o        limited release of the market price of our securities;
        o        limited interest by investors in our securities;
        o        volatility of our stock price due to low trading volume;
        o        increased difficulty in selling our securities in certain
                 states due to "blue sky" restrictions; and o limited ability
                 to issue additional securities or to secure additional
                 financing.

Because our Common Stock may be subject to "penny stock" rules, the market for
the Common Stock may be limited.

            If our Common Stock becomes subject to the Securities and Exchange
Commission's penny stock rules, broker-dealers may experience difficulty in
completing customer transactions and trading activity in our securities may be
adversely affected. If at any time our Common Stock has a market price per share
of less than $5.00, and we do not have net tangible assets of at least
$2,000,000 or average revenue of at least $6,000,000 for the preceding three
years, transactions in our Common Stock may be subject to the "penny stock"
rules promulgated under the Exchange Act. Under these rules, broker-dealers who
recommend such securities to persons other than institutional accredited
investors:

            o          must make a special written suitability determination
                       for the purchaser;
            o          receive the purchaser's written agreement to a
                       transaction prior to sale;
            o          provide the purchaser with risk disclosure documents
                       which identify certain risks associated with investing in
                       "penny stocks" and which describe the market for these
                       "penny stocks" and a purchaser's legal remedies; and
            o          obtain a signed and dated acknowledgment from the
                       purchaser demonstrating that the purchaser has actually
                       received the required risk disclosure document before a
                       transaction in a "penny stock" can be completed.

            If our Common Stock becomes subject to these rules, broker-dealers
may find it more difficult to effectuate customer transactions and trading
activity in our securities may be adversely affected. As a result, the market
price of our securities may be depressed, and stockholders may find it more
difficult to sell our securities.

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.

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.

Item 1B.   Unresolved Staff Comments.

None

                                       17
<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. 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 which commenced on February 1, 2005, for
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 $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.

         We are a respondent or co-respondent in various 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 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 of its securities business.


                                       18
<PAGE>

         The New Jersey Bureau of Securities is conducting an inquiry into First
Montauk Securities Corp.'s sale of certain high-yield bonds to the firm's
clients from 1998 to 2001, and the subsequent resale of those securities to
other customers in 2001. We have recently begun settlement discussions with the
Bureau in an attempt to resolve the matter in order to avoid a protracted legal
proceeding. The final terms of the settlement are still being negotiated but
will include a monetary fine, the disgorgement of markups on the sale of certain
bonds and the retention of a compliance consultant to review the firm's
procedures. The exact amount of civil penalty and disgorgement as well as the
precise language of the proposed consent order are still being negotiated with
the Bureau. We believe that we have adequately reserved for the anticipated
financial impact of this matter in our financial statements.

         During 2005 we settled four customer arbitrations for an aggregate of
$360,000, involving the sale of high-yield bonds referenced in the Company's
Form 10-K for the year ended December 31, 2004. Management believes that we have
sufficiently accrued for any probable costs related to the one remaining
customer arbitration related to the sale of the high-yield bonds.

         A shareholder, BMAC Corp., has filed a report on Schedule 13D with the
Securities and Exchange Commission stating that it holds approximately 5.3% of
our outstanding shares as of January 13, 2006. In addition, a company named 360
Global Wine Co., Inc., filed a joint Schedule 13D with BMAC Corp. stating that
it intends to acquire the shares of our common stock held by BMAC Corp. as well
as those held by certain other individuals. Based on this filing, 360 Global
Wine stated that it believed it would acquire 2,986,188 shares or 18.7% of our
outstanding shares of common stock. As previously disclosed, we believe that the
original Schedule 13D filed by BMAC Corp. (and as amended up to an including the
January 2006 amendment) did not satisfy the federal securities regulations
related to the filing of Schedule 13D. Although no litigation has been
commenced, we have been advised that BMAC and/or 360 Global Wine intend to
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 our management 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 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, 2005, we have 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 us. All such cases 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, 2005. We anticipate that the next
meeting of shareholders will include a vote upon the proposed transaction with a
private investor as described above to proceed with the transaction as
contemplated.

                                       19
<PAGE>

                                   PART II

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

A.      Principal Market and Market Information

         Our common stock is traded in the over-the-counter market. Trading in
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 common stock commenced trading in the over-the-counter
market in 1987. On March 30, 2006, our common stock had bid and offer prices of
$1.01 and $1.05, respectively. At December 31, 2005 our Common Stock had a
closing price of $0.85 per share. Quotations on the OTCBB reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

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

Common Stock

Calendar Year 2006                       High Bid      Low Bid

1st Quarter (through 3/30/06)            $1.22         $.80

Calendar Year 2005                       High Bid      Low Bid

1st Quarter                              $1.09         $.47
2nd Quarter                              $1.09         $.84
3rd Quarter                              $1.04         $.85
4th Quarter                              $.9450        $.75

Calendar Year 2004                       High Bid      Low Bid

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

B.       Number of Record Holders

         The approximate number of record holders of our common stock as of
March 30, 2006 was 512. 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.

C.       Dividend Policy

         We have not paid any dividends on our common stock since our inception,
and do not expect to pay any dividends on 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 also pay quarterly
dividends on our Series B Convertible Redeemable Preferred Stock at the rate of
8% per annum, subject to the limitations under the New Jersey Business
Corporation Act. There are currently outstanding 197,824 shares of Series B
Convertible Redeemable Preferred Stock. There can be no assurance that we will
continue to pay dividends in the future.

                                       20
<PAGE>

D.       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.

         In 2004 and 2005, holders of an aggregate principal amount of
$1,885,000 of debentures convert into shares of common stock in accordance with
the terms of the debentures. The debentures were sold in private offerings in
2002 and 2003. We have issued an aggregate amount of 3,770,000 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 February 2005 we issued an aggregate of 197,824 shares of a newly
created class of Series B Preferred Convertible Redeemable Stock, par value
$0.10 per share, which had a deemed issue price of $1,000,000, and is
convertible into Common Stock on the basis of ten shares of Common Stock for
each share of Series B Preferred Stock. 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. The Series B Preferred Stock was
authorized by the Board out of, and in accordance with, the Registrants
authorized but undesignated class of preferred stock under its certificate of
incorporation.

         In addition, during the year ended December 31, 2005, we granted
options to purchase 1,105,000 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 $0.75 and $1.25 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.

         During the fourth quarter of 2005, we issued 25,000 restricted shares
of our common stock as part of a legal settlement. The shares were issued
pursuant to an exemption under Section 4(2) of the Securities Act.

E.          Stock Repurchases

     There were no repurchases of any securities during the fourth quarter of
2005.

F.       Securities Authorized For Issuance Under Equity Compensation Plans

     See the discussion and table at page 48.




                                       21

<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,



                                           2005                2004                2003           2002                2001
                                           ----                ----                ----           ----                ----
Operations Results:

Revenues:

  Commissions                          $37,493,733         $42,732,238        $41,883,669         $36,513,802         $37,807,870

  Principal transactions                 5,578,820           9,058,259          9,466,359           6,727,642           8,021,887

  Investment banking                     6,640,402           2,716,042          2,439,144           1,007,700           1,483,210

  Interest and other income              8,370,711           4,680,702          4,437,510           3,717,600           3,907,448
                                         ---------           ---------          ---------           ---------           ---------

Total                                   58,083,666          59,187,241         58,226,682          47,966,744          51,220,415
                                        ----------          ----------         ----------          ----------          ----------
revenues


Expenses:

  Commissions, employee                $44,398,131          46,851,474         46,218,107          39,572,851          42,356,207
compensation and benefits

Executive separation                     1,432,937                  --                 --                  --                  --

  Clearing and floor                     1,926,005           2,466,027          2,934,164           2,666,376           3,247,219
brokerage

  Communications and                     2,483,056           2,664,256          2,659,105           3,006,117           3,249,389
occupancy

  Legal matters and related              1,773,604           2,714,769          5,836,960           1,259,502           2,415,374
costs

  Other operating expenses               3,467,972           3,489,425          3,393,335           4,029,515           5,076,806

Interest                                   100,123             284,093            204,054              98,918             174,632
                                           -------             -------            -------              ------             -------

Total expenses                          55,581,828          58,470,044         61,245,725          50,633,179          56,519,627
                                        ----------          ----------         ----------          ----------          ----------

Income (loss) before income              2,501,838             717,197        (3,019,043)         (2,666,435)         (5,299,212)
taxes

 Provision (benefit) for                    77,544            (13,305)            499,000             294,000            (90,989)
                                            ------            --------            -------             -------            --------
income taxes

Net income (loss)                       $2,424,294            $730,502       $(3,518,043)        $(2,960,435)        $(5,208,223)
                                        ==========            ========       ============        ============        ============

</TABLE>

                                       22
<PAGE>

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

                                                                      Year Ended December 31,



                                           2005                2004                2003           2002                2001
                                           ----                ----                ----           ----                ----
Operations Results:

Net income (loss) applicable
to common stockholders                  $2,138,954            $639,813       $(3,542,882)        $(3,059,722)        $(5,306,976)
                                        ==========            ========       ============        ============        ============
Earnings (loss) per share:

     Basic:                                  $0.15                                                    $(0.36)             $(0.61)
                                                                 $0.07            $(0.40)

                                             $0.12                                                    $(0.36)             $(0.61)
Diluted:                                                         $0.04            $(0.40)

Weighted average common
shares outstanding-- Basic              14,032,057           9,270,350          8,784,103           8,551,932           8,704,355

Weighted average common and
common share equivalents
outstanding - Diluted                   20,109,178          15,629,920          8,784,103           8,551,932           8,704,355

Financial condition:

Total assets                            $8,719,930          $9,834,374        $12,193,101         $11,425,506         $14,227,562

Total liabilities                       $5,492,079         $12,932,991        $16,280,540         $12,203,196         $11,934,884

Temporary Equity-Shares
subject to redemption                                                                                                       6,500

Stockholders' equity (deficit)          $3,227,851        $(3,098,617)       $(4,087,439)          $(777,690)          $2,286,181



</TABLE>

                                       23

<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. We also sell insurance products through our subsidiary, Montauk
Insurance Services, Inc.

         Montauk Financial Group has approximately 290 registered
representatives and services over 50,000 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 116 branch
office and satellite locations in 27 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 National
Financial Services, LLC. ("NFS"), a Fidelity Investments company, 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.

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

                                       24
<PAGE>

         Effective February 1, 2005, we entered into a Separation Agreement
("Agreement") with William J. Kurinsky, our former Chief Executive Officer
("CEO"), which provided for the termination of his employment agreement and his
position as CEO of the Company. Pursuant to the terms of the Separation
Agreement, we entered into a two-year consulting agreement, and issued 197,824
shares of FMFC Series B Convertible Redeemable Preferred Stock at a deemed price
of $1,000,000, convertible into 1,978,240 shares of our common stock, with
voting privileges. We also executed a promissory note for $200,000 with interest
of 8% per annum, paid him a lump-sum cash payment of $136,000, 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. In
addition, all restricted common shares not previously vested were automatically
vested upon his termination.

         Contemporaneously with the cessation of Mr. Kurinsky's service as our
CEO, Victor K. Kurylak, our President and Chief Operating Officer at that time
was appointed as our new CEO. Effective February 1, 2005, we entered into an
employment agreement with the new CEO, which superseded his existing agreement,
and issued him 1,000,000 restricted shares of our common stock, with vesting
provisions, as a bonus payment for our performance for the year ended December
31, 2004, and in consideration of him being appointed to CEO.

         On February 10, 2005 we executed a Definitive Agreement and Plan of
Merger with Olympic Cascade Financial Corporation. On May 11, 2005, we and
Olympic agreed to revise the terms of the proposed merger and entered into an
Amended and Restated Agreement and Plan of Merger on June 27, 2005. However, on
October 24, 2005, we and Olympic Cascade Financial Corporation ("Olympic")
jointly announced the agreement to terminate the Amended and Restated Agreement
and Plan of Merger, by and among the Company, Olympic, and OLY Acquisition
Corporation, a wholly owned subsidiary of the Company. Under the terms of the
letter agreement terminating the Amended and Restated Merger Agreement, the
parties shall have no further obligation to each other arising out of the Merger
Agreement, the Merger, and the transactions contemplated thereby, and each party
agreed to bear its own expenses.

         On April 21, 2005, we entered into a new clearing agreement with NFS.
In connection with entering into our new clearing agreement, we terminated our
clearing agreement and related Financial and Security Agreements with Fiserv and
our contingent obligation to repay Fiserv any of the cash advances that were
provided to us under the Financial Agreement and the early termination penalty
have been canceled. Each of the termination agreements was effective as of April
21, 2005.

Results of Operations
Three Years Ended December 31, 2005

Overview

         Revenues decreased $1.1 million for the year ended December 31, 2005,
to $58.1 million, compared to an increase in 2004 of $960,000 from $58.2 million
in 2003. Included in total revenue for 2005 is the recognition of additional
deferred revenue in excess of what would have been reported of $4,230,000 in
connection with the termination of our Financial Agreement with Fiserv, our
prior clearing firm. Excluding this one-time revenue, operating revenues
decreased approximately $5.3 million, or 9%, compared to 2004. Our 2005 results
were negatively impacted by a net reduction of approximately 80 registered
representatives during 2005 and a decrease in the aggregate number of customer
accounts we service from approximately 60,000 to approximately 50,000.

         Excluding our one-time recognition of deferred revenue, the decrease in
revenues was due to a $5.2 million, or 12%, decrease in commission revenue and a
$3.5 million, or 38%, decrease in principal transactions, partially offset by a
$3.9 million, or 144% increase in investment banking. Expenses in 2005 decreased
$2.9 million to $55.6 million, from $58.5 million in 2004 compared to a $2.8
decrease in 2004 from $61.2 million in 2003. The reduction in expense in 2005
was primarily related to lower commission and clearing expenses directly related
to the reduction in commission revenue. In addition, legal matters and related
costs decreased by $941,000 over 2004 due to our continued efforts to control
litigation matters and our overall risk management.

         There were one-time and non-operational items of expense that had an
adverse affect on net income during 2005. In February 2005, we expensed
approximately $1,433,000 in connection with a separation agreement with our
former CEO and $606,000 related to stock grants issued in February 2005 to
several senior executives. In addition, during 2005, we expensed approximately
$394,000 of costs related to the proposed merger with Olympic Cascade Financial
Corporation.

                                       25
<PAGE>

         Net income applicable to common shareholders increased $1.5 million,
from $640,000 in 2004 to $2.1 million in 2005. Our earnings per share also
increased in 2005 from $0.07 and $0.04 per basic and diluted share,
respectively, for the 2004 year to $0.15 and $0.12 per basic and diluted share,
respectively, for the year ending 2005. This compares to a $3.5 million net loss
applicable to common shareholders or $0.40 basic and diluted loss per share in
2003.

Revenues

         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 provides a breakdown of total revenues by source for the years
ended December 31, 2005, 2004 and 2003 (in thousands of dollars).

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

                                                                           Year Ended
                                     ------------------------------------------------------------------------------------------
                                         December 31, 2005             December 31, 2004             December 31, 2003
                                     ----------------------------- ---------------------------- -------------------------------
                                        Amount       % of Total      Amount       % of Total       Amount        % of Total
                                                      Revenues                     Revenues                       Revenues
                                     -------------- -------------- ------------ --------------- -------------- ---------------
Commissions
      Equities                            $ 20,530            35%     $ 26,533             45%       $ 28,646             49%
      Mutual Funds                           6,348            11%        6,131             10%          5,717             10%
      Insurance                              4,230             7%        4,750              8%          4,212              7%
      Investment Advisory                    3,235             5%        2,614              4%          1,880              3%
      Alternative Products
                                             3,009             5%        2,325              4%          1,034              2%
      Fixed Income
                                               142            <1%          379              1%            395              1%
                                     -------------- -------------- ------------ --------------- -------------- ---------------
      Total                                 37,494            64%       42,732             72%         41,884             72%
Principal Transactions                       5,579            10%        9,058             15%          9,466             16%
Investment Banking                           6,640            12%        2,716              5%          2,439              4%
Interest and Other
      Interest                               2,506             4%        2,798              5%          2,640              5%
      Deferred revenue
                                             5,105             9%          875              1%            726              1%
      Other                                    760             1%        1,008              2%          1,072              2%
                                     -------------- -------------- ------------ --------------- -------------- ---------------
      Total                                  8,371            14%        4,681              8%          4,438              8%
                                     -------------- -------------- ------------ --------------- -------------- ---------------
      Total revenues                      $ 58,084           100%     $ 59,187            100%        $58,227            100%
                                     ============== ============== ============ =============== ============== ===============

</TABLE>

Commission Revenue

         Commission revenue decreased 12%, or $5.2 million, primarily due to a
reduction in the number of registered representatives in 2005 whose business mix
was more transactional in nature. Agency commissions on individual and
institutional securities transactions, the largest segment of this category,
decreased $6.0 million, or 23%, to $20.5 million in 2005, from $26.5 million in
2004. This followed a 7% decrease in 2004 agency revenues compared to $28.6
million reported in 2003.

                                       26
<PAGE>

         Mutual fund revenues increased $217,000 from $6.1 million in 2004, to
$6.3 million in 2005, compared to a 7% increase in 2004 from $5.7 million in
2003. This was in large part due to continuing increased investor interest in
mutual fund investments. Insurance revenues decreased by $520,000 in 2005 to
$4.2 million from $4.7 million in 2004. This followed an increase in insurance
commissions from $4.2 in 2003 to $4.7 in 2004. This decrease was due to a shift
of investor focus from insurance related investments toward equity markets.

         Commissions generated from alternative investment products, such as
Real Estate Investment Trusts (REITs), IRS Section 1031 Real Estate Exchanges
and medical receivables, increased 29% from $2.3 million in 2004 to $3.0 million
in 2005 following an increase of 125% from $1.0 million in 2003.

         Fees generated from managed accounts continued to increase through the
2005 year by 24% to $3.2 million compared to a 39% increase in 2004 compared
with 2003. These year-over-year increases are attributable to growth in assets
under management by investors who prefer to pay a fee based on a percentage of
asset value, rather than commissions paid on transactions.


Principal Transactions

         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 $3.5
million, or 38%, from $9.1 million in 2004 to $5.6 million in 2005. This
compares to a decrease in principal transactions of 4% or $408,000, from $9.5
million in 2003. These decreases are primarily due to a reduction in the number
of registered representatives in 2004 who conducted more of these types of
transactions. Revenues from all fixed income sources, which include municipal,
government, and corporate bonds and unit investment trusts decreased in 2005 by
$1.2 million, compared to an increase in 2004 of $746,000. Revenues from
riskless principal trades of equity securities decreased $1.6 million, from $2.9
million in 2004 to $1.2 million in 2005. These decreases are also primarily
attributable to a reduction in the number of registered representatives during
2004 and 2005who 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.

Investment Banking

         Investment banking revenues in 2005 increased $3.9 million, or 144%,
from $2.7 million in 2004, to $6.6 million in 2005, compared to an increase of
$277,000 in 2004 compared to 2003. This category includes private offerings of
securities in which we acted as placement agent and new issues of equity and
preferred stock offerings in which we participated as a selling group or
syndicate member. The increase in investment banking revenues was primarily due
to several larger private offerings of securities than we had during 2004.

Interest and Other Income

         Interest and other income in 2005 totaled $8.4 million, as compared to
$4.7 million in 2004, an increase of $3.7 million. Most of the increase is
attributable to the additional $4.2 million of deferred income, as described
above, recognized during the second quarter of 2005 in connection with the
termination of our Financial Agreement with our prior clearing firm. Interest
income decreased $278,000, when compared to 2004, reflecting a change in account
balances and rebates received from our clearing firm in 2005. For 2005, other
income decreased by $262,000 primarily due to unrealized losses on investments
of $299,000.

         Interest and other income for 2004 totaled $4.7 million, as compared to
$4.4 for 2003, a 5% increase of $243,000. 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. If not for
the impact of a one time recovery of bad debt in 2003, the variance in 2004
would have been approximately $676,000.

                                       27
<PAGE>

Expenses

         Total expenses decreased by approximately $2.9 million, or 5%, in 2005
to $55.6 million from $58.5 million in 2004. In February 2005, we recorded
additional compensation expense of $1,433,000 in connection with a separation
agreement with one of our senior officers. Excluding this one-time expense,
expenses decreased $4.3 million over the 2004 year. Expenses in 2004 decreased
by $2.7 million, or 4%, to $58.5 million in 2004, from $61.2 million in 2003.
The following provides a breakdown of total expenses for the years ended
December 31, 2005, 2004 and 2003 (in thousands of dollars).
<TABLE>
    <S>                                  <C>           <C>           <C>           <C>           <C>        <C>

                                                                              Year Ended
                                        -------------------------------------------------------------------------------
                                            December 31, 2005          December 31, 2004         December 31, 2003
                                       --------------------------- ----------- ------------- ------------ ------------
                                           Amount         % of        Amount     % of Total     Amount     % of Total
                                                          Total
                                                        Expenses                  Expenses                  Expenses
                                        -------------- ------------ ------------ ------------ ------------ ------------
     Commissions, employee                    $44,398          80%      $46,852          80%      $46,218          75%
     compensation and benefits
     Executive separation                       1,433           3%           --                        --
     Clearing and floor brokerage               1,926           3%        2,466           4%        2,934           5%
     Communications and   occupancy             2,483           5%        2,664           5%        2,659           5%
     Legal matters and related costs            1,774           3%        2,715           5%        5,837          10%
     Other operating expenses                   3,468           6%        3,489           6%        3,394           5%
     Interest                                     100          <1%          284          <1%         204           <1%
                                                  ---                       ---                      ----
     Total operating expenses                 $55,582         100%      $58,470         100%      $61,246         100%
     Provision (benefit) for income
     taxes                                        $78                     $(13)                      $499

</TABLE>

Commissions, Employee Compensation and Benefits

         Commission expense, consistently the largest expense category and which
is directly related to commission revenue, decreased 6%, or $2.5 million, from
$39.9 million for the 2004 period, to $37.4 million for the 2005 period.
Commission expense increased $627,000, from $39.2 million for the 2003 year to
$39.8 million in the 2004 year. Compensation and benefits expense for
management, operations and clerical personnel remained relatively constant for
2005 at $7 million. Included in this category are salaries and payroll taxes,
stock and option compensation, health insurance premiums, and bonuses. Salaries
and related payroll taxes decreased by approximately $700,000, from $6.3 million
in 2004 to $5.6 million in 2005. The decrease for the 2005 period was primarily
attributable to reductions in the workforce during 2004 and 2005. Stock and
option compensation costs increased $737,000 during 2005 in connection with
stock grants issued in February 2005 to several senior executives. The net cost
of health insurance premiums in 2005 decreased by $33,000 compared to 2004
mostly due to the reduction in the workforce. Compensation and benefits expense
for management, operations and clerical personnel increased in 2004 by $62,000
when compared to the 2003 period. 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.

Clearing and Floor Brokerage

         Clearing and floor brokerage costs decreased $540,000, from $2.5
million in 2004, to $1.9 million in 2005 following a decrease of $468,000 in
2004, when compared to 2003. As a percentage of transactional revenue, clearing
costs remained fairly constant at 6.1%. Clearing costs, as a percentage of gross
revenues, fluctuate depending upon the product mix.

                                       28

<PAGE>


Communications and Occupancy

         Communications and occupancy costs decreased $181,000 during 2005, from
$2.7 million in 2004 to $2.5 million in 2005. Reductions in occupancy and
related costs, which was due to the elimination of a company leased branch
office in New York City, a reduction in the leased space in our home office and
lower telephone costs, were partially offset by increases in market data
services. Communications and occupancy costs are relatively fixed and remained
basically unchanged for 2004 when compared to 2003.

Legal matters and related costs

         Legal matters and related settlement costs decreased 35% or $941,000,
 from $2.7 million in 2004 to $1.8 million in 2005. The reduction in 2005 is
 attributable to a decline in the number of customer complaints and arbitration
 claims. In addition, legal costs for 2005 include $269,000 of fees related to
 the proposed merger with Olympic which was terminated on October 24, 2005.
 Legal matters and related settlement costs decreased from $5.8 million in 2003
 to $2.7 million in 2004, a decrease of $3.1 million, or 53%, due to a reduction
 in claims and cost control measures implemented by management in 2004.
 Management continues to closely monitor our outstanding claims and control the
 costs associated with defending these matters.

         The New Jersey Bureau of Securities is conducting an inquiry into First
Montauk Securities Corp.'s sale of certain high-yield bonds to the firm's
clients from 1998 to 2001, and the subsequent resale of those securities to
other customers in 2001. We have recently begun settlement discussions with the
Bureau in an attempt to resolve the matter in order to avoid a protracted legal
proceeding. The final terms of the settlement are still being negotiated but may
include a monetary fine, the disgorgement of markups on the sale of certain
bonds and the retention of a compliance consultant to review the firm's
procedures. The exact amount of civil penalty and disgorgement as well as the
precise language of the proposed consent order are still being negotiated with
the Bureau. We believe that we have adequately reserved for the anticipated
financial impact of this matter in our financial statements.

         During 2005 we settled four customer arbitrations for an aggregate of
$360,000, involving the sale of high-yield bonds referenced above. Management
believes that we have sufficiently accrued for any probable costs related to the
one remaining customer arbitration related to the sale of the high-yield bonds.

         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, 2005, 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.

                                       29
<PAGE>

Other Operating Expenses

          Other operating costs in total remained constant for 2005 when
compared to 2004, at approximately $3.5 million. Due to the exercise of the
majority of our outstanding convertible debentures, we accelerated $130,000 of
the amortization of the financing costs related to these debentures during the
second quarter of 2005. Also included in operating costs are accounting and
consulting fees of $123,000 expensed in September 2005 as a result of the
termination of the proposed merger plans with Olympic. These increases in 2005
operating costs are offset by a decrease in depreciation expense as many of our
assets approached the end of their depreciable lives.

         In 2004 other operating costs increased $95,000, to $3.5 million, from
$3.4 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.

Interest Expense

          For 2005, interest expense decreased by $184,000 when compared to
2004. This reduction is primarily attributable to the conversion of $1,765,000
of our 6% convertible debentures on which interest is no longer paid.

Tax Expense

         Income tax expense (benefit) for the years ended December 31, 2005,
2004 and 2003 was $78,000, $(13,000), and $499,000 respectively. The effective
tax rate on pre-tax income (loss) was 3.0%, (2.0)%, and 16.5% during 2005, 2004
and 2003, respectively. The difference in the rate between 2005 and 2004 was due
to the state loss carryback claims in 2004. 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. As of
December 31, 2005, 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.

Liquidity and Capital Resources

         We maintain a highly liquid balance sheet with approximately 81%, 73%
and 72% of assets in 2005, 2004 and 2003, respectively, 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 increased for 2005 by $956,000. Net
cash provided by operating activities during 2005 was $995,000, as a result of
net income of $2,424,000 adjusted by non-cash charges including depreciation and
amortization of $1,449,000 and $1,200,000 from the issuance of stock and a note
payable in connection with a separation agreement, offset by non-cash income of
$5,105,000 from the amortization of deferred revenue. Cash was further reduced
by net decreases in commissions' payable, accounts payable, other liabilities
and securities sold of $472,000, $128,000, $70,000 and $171,000, respectively,
partially offset by increases in accrued expenses of $295,000. Cash was
increased due to reductions in due from clearing firm, employee and broker
receivables, securities owned, prepaid expenses and other assets totaling
$1,561,000.

         Cash used in operating activities in 2004 was $2,020,000, primarily
attributable to decreases in commissions' payable of $1,180,000, and accrued
expenses of $726,000. Cash of $626,000 used in 2003 operating activities was due
to net operating losses.

         The New Jersey Bureau of Securities is conducting an inquiry into First
Montauk Securities Corp.'s sale of certain high-yield bonds to the firm's
clients from 1998 to 2001, and the subsequent resale of those securities to
other customers in 2001. Since the Bureau has not commenced any formal
proceedings or made any formal demands in this matter, our management is unable
at this time to determine whether the outcome of this inquiry will have a
material adverse affect on the Company's financial condition. We believe that we
have adequately reserved for the anticipated financial impact of this matter in
our financial statements.

                                       30
<PAGE>

         As of December 31, 2005, we have 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 us. We will continue to vigorously defend against these matters.

         Investing activities required cash of $43,000 in 2005 for additions to
capital expenditures. In 2004 and 2003, investing activities consumed $212,000
and $167,000 respectively for additions to capital expenditures.

         Financing activities in 2005 provided $4,000 in cash due to the receipt
of $343,000 in proceeds from the exercise of stock options, offset by payments
of preferred stock dividends and capital leases of $285,000 and $54,000,
respectively. Financing activities in 2004 used $175,000 in cash primarily
related to capital leases and the repurchase of common shares. In 2003,
financing activities contributed $1,567,000 in cash primarily due to proceeds
from the issuance of convertible debentures.

         In connection with a settlement agreement entered into in July 2003, we
issued 750,000 five-year warrants in three classes of 250,000 warrants each,
with varying exercise prices. The Class A warrants were redeemed for $200,000
during the third quarter of 2004. During 2005, 174,388 each of Class B and Class
C warrants were exercised at $.25 per share. In addition, our obligation for
cash payments on the remaining Class B warrants expired on June 30, 2005 without
any cash payment having been required. The settlement agreement provides that we
may be obligated to make additional cash payments of up to $60,490 for the
outstanding Class C warrants during the month of June 2006.


Financing Activities

         In 1999, we issued 349,511 shares of Series A Preferred Stock in an
exchange offering related to a settlement with holders of certain leases. Each
share of the Preferred Stock is convertible into two shares of Common Stock and
pays a quarterly dividend of 6%. Quarterly dividends were paid through the first
quarter of 2003, at which time we suspended the dividend payments in accordance
with applicable state law. In the second quarter of 2005, the board of directors
declared the dividend on the preferred stock in arrears. The Company paid
dividends on the Series A Preferred Stock in the amount of $233,784 during 2005,
including $210,879 dividends in arrears. (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 there under 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 there under 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."

         Between October 2004 and December 2005 we received notices that holders
of $1,885,000 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 3,770,000 shares of our common stock during that time period. As of
the date of this Annual Report, there is an aggregate principal amount of
$1,250,000 of convertible debentures outstanding. The debentures are convertible
at $.50 per share.

                                       31
<PAGE>

         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 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.
During 2005, the Company paid $51,556 dividends on the Series B shares (See
Footnote 16 to the consolidated financial statements).

Net Capital

         At December 31, 2005, Montauk Financial Group had net capital of
$2,592,441, which was $2,337,751 in excess of its required net capital of
$254,690 and the ratio of aggregate indebtedness to net capital was 1.47 to 1.

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, 2005.
This table does not include any projected payment amounts related to our
potential exposure to arbitrations and other legal matters.
<TABLE>
<C>                               <C>               <C>             <C>                <C>            <C>          <C>           <C>

As of December 31, 2005                                       Expected Maturity Date
                                                                                                                After
Category                              2006              2007             2008             2009           2010   2010     Total
                                      ----              ----             ----             ----           ----   ----     -----

Debt Obligations                         0          $480,000         $770,000                0              0     0   $1,250,000
Capital Lease Obligations
                                    $8,555                 0                0                0              0     0       $8,555
Operating Lease
Obligations                     $1,113,314          $817,515         $616,349         $611,549       $101,525     0   $3,260,252

Note Payable                      $200,000                 0                0                0              0     0     $200,000

Other Long-Term
Obligations Reflected on
Balance Sheet under GAAP           $60,490(1)              0                0                0              0     0      $60,490(1)
                                 ---------         ---------        ---------         --------        -------    --    ----------

Total                           $1,382,359        $1,297,515       $1,386,349         $611,549       $101,525    0    $4,779,297

</TABLE>

(1) Maximum expected payment obligations embodied in the warrants subject to put
options.


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.

                                       32
<PAGE>

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 earned. 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.

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 brokers,
which maintain the customers' accounts and clears such transactions.
Additionally, the clearing brokers provide 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 brokers, as Montauk
Financial Group has agreed to indemnify the clearing brokers 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, 2005, 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.

New Accounting Standards

         In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)") which replaces SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No.25, "Accounting for Stock Issued to
Employees". Among other items, SFAS 123(R) eliminates the use of APB Opinion No.
25 and the intrinsic method of accounting, and requires all share-based
payments, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. SFAS No. 123(R) is not
effective for public entities which are small business filers until the first

                                       33
<PAGE>

interim or annual reporting period of the first fiscal year that begins after
December 15, 2005. The Company expects to adopt SFAS 123 (R) in the first
quarter of 2006 and will recognize compensation expense for all share-based
payments and employee stock options based on the grant-date fair value of those
awards. The Company is currently evaluating the impact of the statement on its
financial statements. As the Company currently accounts for share-based payments
using the intrinsic value method as allowed by APB Opinion No. 25, the adoption
of the fair value method under SFAS 123(R) will have an impact on its results of
operations. However, the extent of the impact cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
Had the Company adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described under Stock
Based Compensation in the Notes to the Consolidated Financial Statements.

         In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" - a replacement of APB Opinion No. 20 (Accounting Changes)
and FASB No. 3 (Reporting Accounting Changes in Interim Financial Statements),
which changed the requirements for the accounting for and reporting of a change
in accounting principle. This statement requires retrospective application to
prior periods' financial statements of changes in accounting principle unless it
is impracticable to determine either the period-specific effects of the
cumulative effect of the change or the cumulative effect of applying a change.
When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
statement requires that the new accounting principle be applied to the balance
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this statement requires the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. Statement No. 154 is effective for accounting changes
and error corrections made in fiscal years beginning after December 15, 2005.
The Company will comply with the provisions of FAS 154 although the impact of
such adoption is not determinable at this time.

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, 2005 and
December 31, 2004, equity securities positions owned and sold, not yet purchased
were approximately $303,612 and $3,564 and $370,720 and $174,326 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.

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

                                       34
<PAGE>

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."

Item 8.    Financial Statements

         See Financial Statements attached hereto at pages F-1 to F-33.

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

         None

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 disclosure 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
quarter ended December 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

Item 9B.        Other Information

         None

                                       35
PAGE>


                                    PART III

Item 10. Directors and Executive Officers

     Our directors and executive officers for the year ended December 31, 2005
are as set forth below. During 2005, our Board consisted of five individuals,
however, on February 24, 2006, Mr. David I. Portman was elected to our Board.
<TABLE>
<S>                                      <C>                 <C>

Board Of Directors

Name                                     Age                 Position

Herbert Kurinsky                         74                  Class I Director and Chairman of the Board of
                                                             Directors- First Montauk Financial Corp.

William J. Kurinsky                      45                  Class I Director, Vice-Chairman of the Board of
                                                             Directors- First Montauk Financial Corp.

Victor K. Kurylak                        49                  Class II Director, Chief Executive Officer & President

Ward R. Jones, Jr.                       74                  Class III Director, First Montauk Financial Corp.

Barry D. Shapiro                         64                  Class II Director, First Montauk Financial Corp.

David I. Portman                         64                  Class III Director, First Montauk Financial Corp.

Executive Officers

Name                                     Age                 Position

Victor K. Kurylak                        49                  Chief Executive Officer and President, First Montauk
                                                             Financial Corp. and Montauk Financial Group

Robert I. Rabinowitz                     48                  Executive Vice President, General Counsel and Secretary
                                                             -First Montauk Financial Corp., Montauk Financial Group
Mindy A. Horowitz                        48                  Acting Chief Financial Officer, Vice President of
                                                             Finance -First Montauk Financial Corp., Chief Financial
                                                             Officer, Treasurer, Fin.Op.- Montauk Financial Group
</TABLE>


         On May 4, 2005, Norma Doxey, who served as a Class II director since
1988, resigned. On that date Victor K. Kurylak, our CEO, was elected to our
board to fill the vacancy created by Ms. Doxey's resignation.

         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.

                                       36
<PAGE>

         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.

         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 1, 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.

         Ward R. Jones,  Jr. has been a member of our Board of Directors  since
June 1991.  From 1955 through  1990, he was employed by Shearson  Lehman
Brothers as a  registered  representative,  eventually  achieving the position
of Vice  President.  Mr. Jones was a registered  representative  of Montauk
Financial Group from 1991 to 2005 but did not engage in any securities business.
Mr. Jones is now retired from the 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.

          David I. Portman rejoined our Board of Directors on February 24, 2006,
and had previously served on our Board from 1993 until December 31, 2002. Mr.
Portman is the president of TRIAD Development, a real estate company that has
numerous commercial and rental properties in New Jersey, a position that he has
held since 1978. In addition, Mr. Portman currently serves as a director of
Pacifichealth Laboratories, Inc., a publicly held nutrition technology company,
a position he has held since August 1995. The Registrant's broker-dealer
subsidiary underwrote the initial public offering of the common stock of
Pacifichealth Laboratories. Mr. Portman has a BS in Pharmacy and an MBA. He
worked as a sales representative and marketing manager for Eli Lilly,
Beecham-Massengill, Winthrop Laboratories and Sandoz Pharmaceuticals before
co-founding M.E.D. Communications in 1974. In 1988, Mr. Portman sold his
interest in M.E.D. Communications and became President of TRIAD Development.

         Victor K. Kurylak became our Chief Executive Officer on February 1,
2005, and continues to serve as President, a position he has held since January
1, 2004. Mr. Kurylak was elected to our board on May 4, 2005. From January 1,
2004 through January 31, 2005, Mr. Kurylak was our President and Chief Operating
Office. 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.

                                       37
<PAGE>

         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
graduated from the American University with a BA in 1979 and from The Antioch
School of Law with a JD in 1982. Mr. Rabinowitz's wife is a niece of Mr. Herbert
Kurinsky and a sister of Mr. William Kurinsky.

         Mindy A. Horowitz, CPA, was appointed acting Chief Financial Officer of
First Montauk Financial Corp. effective February 1, 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 graduated with a MS in accounting from Monmouth College in 1981.
Ms. Horowitz is a Certified Public Accountant.

Significant Employee

         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 year ended December 31, 2005, 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.

Meetings of Directors

         During 2005, the Board of Directors met on six 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.

Committees of the Board of Directors

         The Board of Directors has three  committees:  Audit Committee,
Compensation  Committee and Special  Committee.  Our Board of Directors
currently  consists of six individuals,  three of whom are independent
directors as defined in the Marketplace Rules of the Nasdaq Stock Market. Our
independent directors are Ward R. Jones, Jr., Barry D. Shapiro and David I.
Portman.

                                       38
<PAGE>

         For the year ended December 31, 2005, 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 year ended December 31, 2005, the audit committee met on
four occasions. The audit committee adopted a written charter governing its
actions effective June 23, 2000. During the year, the members of the audit
committee were Ward R. Jones and Barry D. Shapiro. Both of the members of our
audit committee were "independent" within the definition of that term as
provided in the Marketplace Rules of the Nasdaq Stock market. 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.
Shapiro serves as chairman of this committee. Mr. Portman was appointed to serve
on this committee at the time of his election to our Board in February 2006.

         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 and
separation agreements with our executive officers. The compensation committee's
members, during 2005, were Ward R. Jones and Barry D. Shapiro. Mr. Jones serves
as chairman of this committee. During the year ended December 31, 2005, the
committee met on two occasions. Mr. Portman was appointed to serve on this
committee at the time of his election to our Board in February 2006.

         Special Committee. The Special Committee of the Board was formed on
February 24, 2006 for the purpose of reviewing and evaluating any transactions
that may be presented to the Board for the benefit of the shareholders. The
special committee, which consists of our three independent members of the Board,
have engaged an investment banking firm to provide an opinion on the fairness to
the shareholders of the proposed sale of our company to a private investor, and
if warranted will have the authority to engage independent counsel.

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.

 Compensation 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.

         In addition, members of the Special Committee received an initial cash
award of $5,000 and will receive an annual cash award of $5,000 per year after
2006, as well as an additional cash payment of $10,000 each to evaluate the
potential transaction elsewhere described in the report. This fee will be paid
to each member without regard to the committee's position on such transaction or
event.

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, 2005.

                                       39
<PAGE>



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,
2005, 2004 and 2003 to each of our named executive officers.

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

                                                                                Long Term
                                                                                Compensation Awards

                                                                            Restricted          No. of Securities
                                      Fiscal                                 Stock              Underlying             All Other
Name and Principal Position            Year      Salary       Bonus          Awards             Options/SARs           Compensation

Herbert Kurinsky                      2005      $200,000     $100,000        $ 0                0
Chairman of the Board of              2004      $200,000     $  42,570       $131,250(1)        0
Directors - FMFC                      2003      $206,218     $200,000        $ 0                0


William J. Kurinsky                   2005      $  34,231    $ 0             $ 0                200,000(3)
                                                                                                                         $3,942(3)
Former Chief Executive and Chief      2004      $300,000     $ 31,590        $131,250(2)        0
Financial Officer and  Secretary -    2003      $206,218     $ 50,000        $ 0                0
FMFC and             Montauk
Financial Group

Victor K. Kurylak, President,         2005      $275,000     $200,000        $570,000(4)
Chief Executive Officer and Chief     2004      $250,000     $  63,181       $  87,500(5)       250,000 (6)
Operating Officer, FMFC and Montauk
Financial Group

Robert I. Rabinowitz                  2005      $190,000     $ 20,000        $ 57,000(7)        150,000 (8)
General Counsel - FMFC and            2004      $180,000     $ 25,000        $ 0                100,000 (8)
Montauk Financial                     2003      $150,000     $ 10,000        $ 0                0
Group

Mindy A. Horowitz                     2005      $140,000     $ 20,000        $ 57,000(9)        75,000 (10)
Acting Chief Financial Officer,       2004      $125,000     $ 20,000        0                  0
FMFC, and Chief Financial             2003      $125,000     $ 15,000        0                  100,000(10)
Officer, Fin. Op. Montauk
Financial Group
</TABLE>

1)       In January 2004, Mr. Herbert Kurinsky was issued 375,000 shares of
         restricted common stock in conjunction with his employment agreement,
         which said shares had a market value of $131,250 at date of issuance.

2)       In January 2004, Mr. William J. Kurinsky was issued 375,000 shares of
         restricted common stock in conjunction with his employment agreement,
         which said shares had a market value of $131,250 at date of issuance.

                                       40
<PAGE>

3)       In February 2005, the Company issued 197,824 shares of newly created
         Series B Preferred Stock valued at $1,000,000, made a severance payment
         of $136,000, and issued a note for $200,000 to Mr. William Kurinsky
         pursuant to the terms of a Separation Agreement as discussed below in
         greater detail. Mr. Kurinsky received $3,942 in commission income
         during 2005. 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 received new options
         to purchase an aggregate of 200,000 shares of Common Stock with an
         exercise price of $0.83 per share, in connection with his services as a
         consultant. The new options will have a three-year exercise term. Mr.
         Kurinsky also earned $3,942 in commissions for 2005.

4)       In February 2005, the Company issued Mr. Kurylak 1,000,000 restricted
         shares of common stock, pursuant to the terms of his new employment
         agreement as discussed below in greater detail, which said shares had a
         market value of $570,000 at date of issuance.

5)       In January 2004,  Mr.  Kurylak was issued  250,000  shares of
         restricted  common stock which said shares had a market value of
         $87,500 at date of issuance.

6)       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.

7)       In February 2005, Mr. Rabinowitz was issued an aggregate of 100,000
         restricted shares of common stock. Said shares had a market value of
         $57,000 at date of issuance. These shares were granted to Mr.
         Rabinowitz pursuant to the terms of his new employment agreement as
         discussed below in greater detail.

8)       In 2005, the Compensation Committee authorized an option grant to Mr.
         Rabinowitz to purchase 150,000 shares of common stock at an exercise
         price of $1.25 per share for five years. 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.

9)       In February 2005, Ms. Horowitz was issued an aggregate of 100,000
         restricted shares of common stock. Said shares had a market value of
         $57,000 at date of issuance. These shares were granted to Ms. Horowitz
         pursuant to the terms of her new employment agreement as discussed
         below in greater detail.

10)      In 2005, the Compensation Committee authorized an option grant to Ms.
         Horowitz to purchase 75,000 shares of common stock at an exercise price
         of $1.25 per share for five years. 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.



                                       41

<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,
2005.
<TABLE>
<S>                      <C>            <C>               <C>            <C>           <C>

                                                               INDIVIDUAL GRANTS


                                                                                           Potential Realizable Value
                                                                                             At Assumed Annual Rates
                                             Percent of                                              of Stock
                              Number of        Total                                         Price Appreciation For
                             Securities       Option/                                                Option
                             Underlying     SARS Granted    Exercise of                               Term
                             Option/SARs    To Employees    Base Price      Expiration
        Name                 Granted (#)   In Fiscal Year    (S/Sh)            Date             5% ($)     10% ($)
        (a)                     (b)         (c) (1)           (d)               (c)              (f)         (g)

Mindy A. Horowitz               75,000        12%            $1.25            7/27/10          $4,500        $24,750


Robert I. Rabinowitz           150,000        24%            $1.25            7/27/10          $9,000        $49,500

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

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

</TABLE>


<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, 2005            December 31, 2005 (1)
              ----           --------  --------             -----------------            ---------------------

                                                      Exercisable/Unexercisable     Exercisable/Unexercisable
     Herbert Kurinsky            --        $0               200,000/0                          $20,000/$0
     William J. Kurinsky         --        $0               200,000/0                          $ 2,000 /$0
     Victor K. Kurylak           --        $0               166,667/83,333                     $58,333/$29,167
     Robert I. Rabinowitz        --        $0               293,750/0                          $35,000/$0
     Mindy A. Horowitz           --        $0               175,000/0                          $35,000/$0

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

 (1)     Based upon the closing bid price of our common  stock on
December 31, 2005 ($.85 per share),  less the exercise  price for the aggregate
number of shares subject to the options.

</TABLE>

                                       42
<PAGE>
Employment Contracts, Termination of Employment and Change in Control Agreements

Herbert Kurinsky

         On February 1, 2006, we entered into a Separation Agreement with
Herbert Kurinsky, the Chairman of our Board of Directors. Under the terms of the
Separation Agreement, the parties agreed to terminate the employment
relationship and the rights and obligations of the parties under the employment
agreement, effective as of February 1, 2006. However, Mr. Kurinsky continues to
serve as Chairman of our Board of Directors. In addition, the Separation
Agreement provides for the following:

        o        Mr. Kurinsky was paid a lump sum severance amount of $300,000.

        o        We issued to Mr. Kurinsky a promissory note in the principal
                 amount of $550,217.41, payable in monthly installments of
                 $12,500 over a period of 48 months and bearing interest at the
                 rate of 4.5% per annum.

        o        We will continue to provide medical and dental benefits to
                 Mr. Kurinsky and his wife for a period of 48 months.

        o        Pursuant to his employment agreement, all unvested restricted
                 stock made to Mr. Kurinsky has vested in full.

        o        In the event of a change of control in the ownership of the
                 Company,  as defined in the  Separation  Agreement,  (i) the
                 total remaining  principal of the promissory note, and any
                 accrued but unpaid interest thereon,  shall become immediately
                 due and payable;  (ii) Mr.  Kurinsky shall have the option to
                 require us to pay him an amount in cash equal to the costs of
                 providing  health and insurance  benefits for the period of
                 time between the effective  date of his election to receive
                 the cash payment and the balance of the 48 month period during
                 which we are obligated to pay these benefits;  and (iii)
                 the total  remaining  automobile  allowance  payments  required
                 by the  Separation  Agreement  shall  accelerate and be
                 immediately due and payable.  We and Mr. Kurinsky have also
                 exchanged  mutual  releases except to the extent each has
                 reserved their rights as provided in the Separation Agreement.

William J. Kurinsky

         Mr. William J. Kurinsky stepped down as our Chief Executive Officer
effective February 1, 2005, at which time we entered into a Separation Agreement
with William J. Kurinsky, which provides for Mr. Kurinsky to terminate his
employment with us. Under the terms of the Separation Agreement, Mr. Kurinsky
relinquished his position as our Chief Executive Officer and that of our
subsidiaries, including our broker dealer subsidiary First Montauk Securities
Corp. Mr. Kurinsky remains 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.

        o        Mr. Kurinsky was retained as a consultant for a term of two
                 years with a consulting fee of $12,645 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 has 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 issued a promissory  note in the principal  amount of
                 $200,000  bearing  interest at 8% per annum which was paid in
                 full in February 2006.

        o        We made a lump sum cash payment in the amount of $136,000.

        o        Mr. Kurinsky's options to purchase 325,000 shares of our common
                 stock with exercise prices of $0.83 to $2.00 per share were
                 cancelled, and a new option grant for an aggregate of 200,000
                 shares of Common Stock with an exercise price of $0.83 per
                 share were granted to Mr. Kurinsky in connection with his
                 services as a consultant. The new options will have a
                 three-year exercise term.  Pursuant to his employment
                 agreement, all outstanding restricted stock grants 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.

                                       43
<PAGE>

Victor K. Kurylak

         Effective February 1, 2005, the Board approved the appointment of Mr.
Victor K. Kurylak as our Chief Executive Officer and entered into a new
employment agreement. Mr. Kurylak was granted 1,000,000 shares of our common
stock as a bonus for our performance for the year ended December 31, 2004, and
in consideration of his assuming the position of Chief Executive Officer, which
shares vest in increments of one third commencing on February 1, 2005, December
31, 2005 and December 31, 2006. In the event of a change of control of the
Company, all unvested shares would vest. Mr. Kurylak agreed to the cancellation
of 250,000 of his outstanding stock options with an exercise price of $0.75 per
share. His prior agreement entered into effective January 1, 2004 was
terminated.

         Under the terms of Mr. Kurylak's employment agreement, which expires
December 31, 2007, Mr. Kurylak receives a base salary of $275,000 per year;
subject to annual increases of 10% provided we have profits of at least $500,000
per annum. In addition, Mr. Kurylak is entitled to receive medical and other
benefits that we have in effect for its executives. Mr. Kurylak is entitled to
participate in our executive bonus pool which has been established by the Board
to constitute 15% of our net pre tax profit. Further, Mr. Kurylak is also
entitled to a portion of the corporate finance bonus pool defined as 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.

Other Executive Officers

         In 2005, we entered into new employment agreements with two executive
officers and a member of our senior management team; 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 have an initial term of one year ending February 1, 2006
and are renewable for successive one year terms unless we provide 120 prior
notice of our intention not to renew the agreements. These agreements are
currently in effect.

         Under his agreement, 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, (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 or may not be
designated as options which qualify for incentive stock option treatment under
Section 422A of the Code.

         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.

                                       44
<PAGE>

         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 979,802 options to registered
representatives and employees which have not been exercised or cancelled. There
remain 85,600 options outstanding from our 1992 Incentive Stock Option Plan,
resulting in a total of 1,065,402 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. 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 160,000 options have been granted to our
non-Executive directors under the 2002 Plan. An additional 20,000 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 June 2006.

                                       45
<PAGE>

         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
1,035,000 shares of our common stock are currently outstanding under the Senior
Management Plan and to date we have issued an aggregate of 2,300,000 shares of
our common stock as restricted stock awards to senior management under this
Plan.

Item 12.    Security Ownership of Certain
            Beneficial Owners and Management

         The following table sets forth certain information as of March 30, 2006
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                                      339,104                 2.1%

           William J. Kurinsky
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                    3,409,063(2)             18.8%

           Victor K. Kurylak
           Parkway 109 Office Center
           328 Newman Springs Road                               1,500,000(3)              9.2%
           Red Bank, NJ 07701

           Robert I. Rabinowitz, Esq.
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                      404,500(4)              2.5%

           Mindy A. Horowitz
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701                                      275,000(5)              1.7%

           Ward R. Jones
           300 West Jersey Road
           Lehigh Acres, FL  33936                                 110,000(6)                *

           David I. Portman
           142 Highway 35
           Eatontown, NJ 07724                                      50,000                   *

           Barry D. Shapiro, CPA
           331 Newman Springs Road
           Red Bank, NJ 07701                                       80,000(7)                *

           BMAC Corp.
           502 E. John Street
           Carson City, NV 89706                                   837,643(8)              5.2%

           Amnon Kawa
           10501 Wilshire Blvd. #1809
           Los Angeles, CA  90024                                  798,800 (9)             5.0%

           All  Directors  and  Officers  as  a
           group (8 persons in number)                           6,167,667                32.4%
------------------------------------------
</TABLE>

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

                                       46
<PAGE>

 (2)     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.
(3)      Amounts and percentages indicated for Mr. Kurylak include an aggregate
         of 1,250,000 restricted shares of 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, December 31,
         2005 and December 31, 2006 with respect to 1,000,000 shares of common
         stock.
(4)      Includes vested and presently exercisable options of Mr. Robert
         Rabinowitz to purchase 250,000 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.
(5)      Includes vested and presently exercisable options of Ms. Mindy Horowitz
         to purchase 175,000 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.
(6)      Includes vested and presently exercisable options of Mr. Ward Jones to
         purchase 100,000 shares of common stock. (7) Includes vested and
         presently exercisable options of Mr. Barry Shapiro to purchase 80,000
         shares of common stock. (8) As reported under Schedule 13D/A filing
         made by BMAC Corp. dated June 10, 2005 and subsequently amended on
         January 19, 2006. (9) As reported under Schedule 13D filing made by Mr.
         Kawa dated February 15, 2006.

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, 2005, 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.


                                       47
<PAGE>
<TABLE>
<S>                               <C>                            <C>                <C>

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

Equity Compensation Plans              2,707,3021                    $0.85                     4,155,9002,3
Approved by Stockholders
------------------------------ --------------------------- --------------------------- ------------------------------

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

Total                                  2,707,3021                    $0.85                     4,155,9002,3
------------------------------ --------------------------- --------------------------- ------------------------------

</TABLE>

1.       Includes 1,023,002 options issued pursuant to the our 2002 Incentive
         Stock Option Plan, 206,800 options issued pursuant to our 1992
         Incentive Stock Option Plan, as amended, 180,000 options issued
         pursuant to our 2002 Director Stock Option Plan, 20,000 options issued
         pursuant to our 1992 Director Stock Option Plan, as amended, and
         1,297,500 options and shares issued pursuant to our 1996 Senior
         Management Stock Option Plan, as amended.
2.       Includes 3,468,400 options available for issuance under our 2002
         Incentive Stock Option Plan and an aggregate of 307,500 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 380,000 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.  Victor K. Kurylak, Robert I.  Rabinowitz
and Ms. Mindy A.  Horowitz,  and the  Separation  Agreements  entered into
with William J.  Kurinsky and Herbert Kurinsky, see Item 11, "Executive
Compensation".









                                       48
<PAGE>

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.
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, 2005, and fees billed for other services rendered by our
independent auditors during those periods.
<TABLE>
<S>                                       <C>                                    <C>

---------------------------------------- ------------------------------------- -------------------------------------
                                          Fiscal Year Ended December 31, 2005                     Fiscal Year Ended
                                                                                                  December 31, 2004
---------------------------------------- ------------------------------------- -------------------------------------

Audit Fees (1)                                                       $169,400                              $185,035
---------------------------------------- ------------------------------------- -------------------------------------

Audit-Related Fees (2)                                                $46,325                                    $0
---------------------------------------- ------------------------------------- -------------------------------------

Tax Fees (3)                                                          $44,728                               $11,600
---------------------------------------- ------------------------------------- -------------------------------------

All Other Fees (4)                                                         $0                               $24,960
---------------------------------------- ------------------------------------- -------------------------------------

Total                                                                $260,453                              $221,595
---------------------------------------- ------------------------------------- -------------------------------------
</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.

         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.

                                       49
<PAGE>

         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

         1.       Financial Statements

         See the Consolidated Financial Statements and Notes thereto, together
with the reports thereon of Lazar Levine & Felix, LLP dated March 10, 2006
beginning on page F-1 of this report.

2.       Schedules

         Valuation and Qualifying Accounts
<TABLE>
<S>                                                <C>            <C>             <C>              <C>             <C>

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

                                                                     Charged
                                                                   (credited)
                                                    Balance at         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, 2005            $ 5,120,839                   $(1,542,317)                      $ 3,578,522
   Year ended December 31, 2004                   $ 5,381,000                   $  (260,161)                      $ 5,120,839
   Year ended December 31, 2003                   $ 3,723,131                   $ 1,657,869                       $ 5,381,000


Broker loan reserves:
          Year ended December 31, 2005            $ 1,402,631                    $  (317,496)                     $ 1,085,135
   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


         3.       Exhibits

         Incorporated by reference to the Exhibit Index at the end of this
report.
</TABLE>









                                       50
<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, 2006                    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, 2006
-------------------------------------
Herbert Kurinsky,
Chairman


/s/ Victor K. Kurylak                                           March 31, 2006
------------------------------------
Victor K. Kurylak, Chief Executive
 Officer, President and Director


/s/ William J. Kurinsky                                         March 31, 2006
------------------------------------
William J. Kurinsky,
Vice Chairman, Director

/s/ Mindy A. Horowitz                                           March 31, 2006
------------------------------------
Mindy A. Horowitz, Acting Chief
Financial Officer and Principal
Accounting Officer


/s/ Ward R. Jones, Jr.                                          March 31, 2006
------------------------------------
Ward R. Jones, Jr., Director


/s/ Barry D. Shapiro                                            March 31, 2006
------------------------------------
Barry D. Shapiro, Director


/s/ David I. Portman                                            March 31, 2006
------------------------------------
David I. Portman, Director


                                       51
<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).

2.2              Amended and  Restated  Agreement  and Plan of Merger dated as of June 27, 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 June 28, 2005).

2.3              Letter Agreement dated as of October 24, 2005 terminating the Amended and Restated Agreement
                 and Plan of Merger, dated June 27, 2005, by and among Olympic Cascade Financial Corporation,
                 OLY Acquisition Corporation and First Montauk Financial Corp. (Previously filed as Exhibit 10.2
                 to our Current Report on Form 8-K dated October 25, 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).

3.5              Amendment to Amended and Restated  Certificate of  Incorporation  adopted at Annual Meeting
                 of Shareholders  held on June 23, 2005  (Previously  filed as Exhibit A to Definitive Proxy
                 Statement dated May 19, 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).

4.6++            Promissory Note issued to Herbert Kurinsky dated February 1, 2006 (Previously filed as
                 Exhibit 4.1 to Current Report on Form 8-K dated February 1, 2006

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             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).

10.5++           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).

                                       52
<PAGE>


10.6++           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).

10.7++           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).

10.8++           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).

10.9++           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).

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

10.11++          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).

10.12++         1996 Senior Management Incentive Stock Option Plan (Previously filed with the Commission as an
                exhibit to our Proxy Statement dated May 30, 1996).

10.13++         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).

10.14++         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).

10.15++         2002 Incentive Stock Option Plan.  (Previously filed with the Commission as an Exhibit A to
                our Proxy Statement dated May 20, 2002).

10.16++         2002  Non-Executive  Director Stock Option Plan.  (Previously  filed with the Commission as
                Exhibit B to our Proxy Statement dated May 20, 2002).

10.17++         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).

10.18++         Form of Stock Option Award pursuant to Incentive  Stock Option Plan.  (Previously  filed as
                Exhibit 10.26 to our Annual Report on Form 10-K for the year ended December 31, 2004).

10.19++         Form of Stock Option Award pursuant to 1996 Senior Management Stock Option Plan.
                (Previously filed as Exhibit 10.27 to our Annual Report on Form 10-K for the year ended
                December 31, 2004).

10.20           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).

10.21++         Separation  Agreement  between  First  Montauk  Financial  Corp.  and William J.  Kurinsky,
                effective as of February 1, 2005.  (Previously  filed as Exhibit 10.29 to our Annual Report
                on Form 10-K for the year ended December 31, 2004).

10.22++         Consulting  Agreement  between  First  Montauk  Financial  Corp.  and William J.  Kurinsky,
                effective as of February 1, 2005.  (Previously  filed as Exhibit 10.30 to our Annual Report
                on Form 10-K for the year ended December 31, 2004).

10.23++         Employment  Agreement  dated as of February  1, 2005  between  Victor K.  Kurylak and First
                Montauk  Financial  Corp.  (Previously  filed as Exhibit 10.31 to our Annual Report on Form
                10-K for the year ended December 31, 2004).

10.24++         Employment  Agreement  dated as of February 8, 2005 between Robert I.  Rabinowitz and First
                Montauk  Financial  Corp.  (Previously  filed as Exhibit 10.32 to our Annual Report on Form
                10-K for the year ended December 31, 2004).

10.25++         Employment  Agreement  dated as of February 8, 2005  between  Mindy A.  Horowitz  and First
                Montauk  Financial  Corp.  (Previously  filed as Exhibit 10.33 to our Annual Report on Form
                10-K for the year ended December 31, 2004).

                                       53
<PAGE>

10.26           Termination  of Clearing  Agreement  between  First  Montauk  Securities  Corp.  and Fiserv
                Securities,  Inc. dated April 21, 2005 (Previously  filed as Exhibit 10.1 to Current Report
                on Form 8-K filed on April 27, 2005).

10.27           Termination of Financial and Security  Agreement among First Montauk Financial Corp., First
                Montauk  Securities  Corp. and Fiserv  Securities,  Inc.  dated April 21, 2005  (Previously
                filed as Exhibit 10.2 to Current Report on Form 8-K filed on April 27, 2005).

10.28++         Separation  Agreement  between First Montauk  Financial  Corp.  and Herbert  Kurinsky dated
                February  1, 2006  (Previously  filed as Exhibit  10.1 to Current  Report on Form 8-K dated
                February 1, 2006).

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.
--------------------------------------------------------------------------------------------------------------


++ Denotes management contracts or compensation plans or arrangements in which
directors or executive officers are eligible to participate.
</TABLE>













                                       54

<PAGE>



             Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders
First Montauk Financial Corp
Red Bank, New Jersey

     We have  audited  the  accompanying  consolidated  balance  sheets of First
Montauk  Financial Corp. and  subsidiaries as of December 31, 2005 and 2004, and
the related consolidated  statements of operations,  shareholders'  equity, cash
flows  and the  schedule  listed in the  accompanying  index for each of the two
years in the period  ended  December  31,  2005.  These  consolidated  financial
statements and the schedules are the responsibility of the Company's management.
Our  responsibility  is to express an  opinion on these  consolidated  financial
statements and the schedule based on our audits

     We  conducted  our audits 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  and the schedule are free of material  misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal controls over financial reporting. Our audits 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
includes examining, on a test basis, evidence supporting amounts and disclosures
in the financial  statements and the schedule.  An audit also includes assessing
the accounting principles used and significant estimates made by management,  as
well as evaluating the overall  presentation of the financial statements and the
schedule. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  based on our audits, 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, 2005
and 2004, and the results of their operations and their cash flows for the three
years in the period then ended December 31, 2005 in conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion, the schedule presents fairly, in all material respects, the information
set forth therein.





New York, New York                    /s/ Lazar, Levine and Felix LLP
March 10, 2006                        ---------------------------------------
                                      LAZAR LEVINE AND FELIX LLP




                                      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 the year then ended. 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
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. 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 audit provides 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 the year 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>


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

<S>                                                                                       <C>                  <C>

                                                                                            December 31,         December 31,
                                                                                                2005                 2004
                                                                                          -----------------    -----------------



ASSETS
Cash and cash equivalents                                                                      $ 1,990,815          $ 1,034,681
Due from clearing firm                                                                           4,756,646            5,815,819
Securities owned, at market value                                                                  303,612              370,720
Prepaid expenses                                                                                   287,394              340,821
Employee and broker receivables - net of reserve for bad debt
      of $1,085,135 and $1,402,631 respectively                                                    309,199              548,240
Property and equipment - net                                                                       449,460              790,909
Income taxes receivable                                                                              --                  40,525
Other assets                                                                                       622,804              892,659

                                                                                          -----------------    -----------------
      Total assets                                                                             $ 8,719,930          $ 9,834,374
                                                                                          =================    =================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES
Deferred income                                                                                        $ -          $ 5,105,116
6% convertible debentures                                                                        1,250,000            3,015,000
Securities sold, not yet purchased, at market value                                                  3,564              174,326
Commissions payable                                                                              2,027,379            2,499,793
Accounts payable                                                                                   486,676              614,784
Accrued expenses                                                                                 1,373,354            1,078,185
Income taxes payable                                                                                32,167               44,546
Capital leases payable                                                                               8,555               62,460
Other liabilities                                                                                  310,384              338,781
                                                                                          -----------------    -----------------

      Total liabilities                                                                          5,492,079           12,932,991
                                                                                          -----------------    -----------------

Commitments and contingencies (See notes)

STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, 3,929,898 shares authorized, $.10 par
   value, no shares issued and outstanding                                                           --                   --
Series A convertible preferred stock, 625,000 shares authorized, $.10 par value,
   305,369 shares issued and outstanding;
   liquidation preference:  $1,526,845                                                              30,537               30,537
Series B convertible redeemable preferred stock, 445,102 shares authorized,
   $.10 par value, 197,824 and 0 shares issued and outstanding
   respectively; liquidation preference:  $1,000,000                                                19,782                --
Common stock, no par value, 60,000,000 and 30,000,000 shares
   authorized and 15,937,407 and 10,258,509 shares issued and
   outstanding, respectively                                                                    10,444,110            7,257,292
Additional paid-in capital                                                                       1,930,810              950,592
Accumulated deficit                                                                             (8,809,203)         (10,948,157)
   Less:  deferred compensation                                                                   (388,185)            (388,881)
                                                                                          -----------------    -----------------

      Total stockholders' equity (deficit)                                                       3,227,851           (3,098,617)
                                                                                          -----------------    -----------------

      Total liabilities and stockholders' equity (deficit)                                     $ 8,719,930          $ 9,834,374
                                                                                          =================    =================


                                             See notes to consolidated financial statements.

                                                                    F-3
</TABLE>

<PAGE>
<TABLE>

                                             FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                                   CONSOLIDATED STATEMENTS OF OPERATIONS
<S>                                                              <C>                    <C>                    <C>



                                                                                 Twelve months ended December 31
                                                                --------------------   ------------------     ------------------
                                                                        2005                  2004                   2003
                                                                 --------------------   ------------------     ------------------


Revenues:

Commissions                                                             $ 37,493,733         $ 42,732,238           $ 41,883,669
Principal transactions                                                     5,578,820            9,058,259              9,466,359
Investment banking                                                         6,640,402            2,716,042              2,439,144
Interest and other income                                                  8,370,711            4,680,702              4,437,510
                                                                 --------------------   ------------------     ------------------

     Total revenue                                                        58,083,666           59,187,241             58,226,682
                                                                 --------------------   ------------------     ------------------

Expenses:

Commissions, employee compensation and benefits                           44,398,131           46,851,474             46,218,107
Executive separation                                                       1,432,937            --                     --
Clearing and floor brokerage                                               1,926,005            2,466,027              2,934,164
Communications and occupancy                                               2,483,056            2,664,256              2,659,105
Legal matters and related costs                                            1,773,604            2,714,769              5,836,960
Other operating expenses                                                   3,467,972            3,489,425              3,393,335
Interest                                                                     100,123              284,093                204,054
                                                                 --------------------   ------------------     ------------------

     Total expenses                                                       55,581,828           58,470,044             61,245,725
                                                                 --------------------   ------------------     ------------------

Income (loss) before income taxes                                          2,501,838              717,197             (3,019,043)
Provision (benefit) for income taxes                                          77,544              (13,305)               499,000
                                                                 --------------------   ------------------     ------------------
  Net income (loss)                                                      $ 2,424,294            $ 730,502           $ (3,518,043)
   Preferred stock dividends                                                (285,340)             (90,689)               (24,839)
                                                                 --------------------   ------------------     ------------------
   Net income (loss) applicable to common stockholders                   $ 2,138,954            $ 639,813           $ (3,542,882)
                                                                 ====================   ==================     ==================

Earnings (loss) per share:
  Basic                                                                       $ 0.15               $ 0.07                $ (0.40)
  Diluted                                                                     $ 0.12               $ 0.04                $ (0.40)

Weighted average number of shares of stock outstanding:
  Basic                                                                   14,032,057            9,270,350              8,784,103
  Diluted                                                                 20,109,178           15,629,920              8,784,103




                                             See notes to consolidated financial statements.

                                                                    F-4
</TABLE>


<PAGE>
<TABLE>

                                      FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                 FOR THE PERIOD FROM JANUARY 1, 2003 TO DECEMBER 31, 2005


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

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

Balances at January 1, 2003                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

Increase in deferred compensation                                                                    154,464
Amortization of deferred compensation
Common stock issued in connection
   with legal settlements                                                                 25,000      25,000
Issuance of restricted stock in connection
   with employment agreements                                                          1,300,000     741,000
Issuance of preferred stock in connection
   with separation agreement                                     197,824   $19,782                                 980,218
Exercise of incentive stock options                                                      560,998     343,071
Exercise of warrants                                                                     262,900     158,283
Conversion of bonds into common stock                                                  3,530,000   1,765,000
Payment of preferred stock dividends
Net income for the period
                                        --------------------- ---------------------  ------------------------  ------------
Balances at December 31, 2005              305,369   $30,537     197,824   $19,782    15,937,407 $10,444,110   $ 1,930,810
                                        ===================== =====================  ========================  ============



                                     See notes to consolidated financial statements.

                                                            F-5
</TABLE>

<PAGE>
<TABLE>

                                      FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                 FOR THE PERIOD FROM JANUARY 1, 2003 TO DECEMBER 31, 2005
<S>                                            <C>               <C>             <C>                          <C>


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

Balances at January 1, 2003                   $ (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)

Increase in deferred compensation                                  (154,464)                                             -
Amortization of deferred compensation                               896,160                                        896,160
Common stock issued in connection
   with legal settlements                                                                                           25,000
Issuance of restricted stock in connection                                                                               -
   with employment agreements                                      (741,000)                                             -
Issuance of preferred stock in connection
   with separation agreement                                                                                     1,000,000
Exercise of incentive stock options                                                                                343,071
Exercise of warrants                                                                                               158,283
Conversion of bonds into common stock                                                                            1,765,000
Payment of preferred stock dividends              (285,340)                                                       (285,340)
Net income for the period                        2,424,294                                                       2,424,294
                                           ----------------   --------------  ----------------------------   --------------
Balances at December 31, 2005                 $ (8,809,203)      $ (388,185)      --                --         $ 3,227,851
                                           ================   ==============  ============================   ==============




                                           See notes to consolidated financial statements.

                                                                 F-6
</TABLE>


<PAGE>
<TABLE>

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

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

                                                                Twelve months ended December 31
                                                          -------------   -------------    -----------
                                                              2005            2004            2003
                                                          -------------   -------------    -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH FLOWS FROM OPERATING ACTIVITIES
 Net income (loss)                                          $2,424,294       $ 730,502    $(3,518,043)

Adjustments to reconcile net income (loss) to net cash
 provided by (used in) operating
    activities:
 Depreciation and amortization of property and equipment       384,169         538,549        509,968
 Amortization of deferred costs                              1,064,619         223,708         57,932
 Amortization of deferred income                            (5,105,116)       (875,008)      (726,199)
 Deferred income taxes - net                                       --              --         460,000
 Common stock issued in legal settlement                        25,000             --         160,000
 Preferred shares and note payable issued in connection
    with separation agreement                                1,200,000             --              --
 Loss on disposition of property and equipment                     --            4,692             --
 Increase (decrease) in cash attributable to changes
 in assets and liabilities:
 Due from clearing firm                                      1,059,173        (596,552)      (627,566)
 Securities owned                                               67,108        (201,186)        14,410
 Prepaid expenses                                               53,427         113,520        198,125
 Employee and broker receivables                               239,041         100,402        415,877
 Income taxes receivable                                        40,525         (37,900)       212,300
 Other assets                                                  101,395         360,461       (557,430)
 Deferred income                                                   --              --       1,250,000
 Securities sold, not yet purchased                           (170,762)        104,996         69,330
 Commissions payable                                          (472,414)     (1,179,903)       998,568
 Accounts payable                                             (128,108)       (257,789)       350,429
 Accrued expenses                                              295,169        (725,788)      (183,898)
 Income taxes payable                                          (12,379)        (63,365)        52,829
 Other liabilities                                             (70,113)       (259,836)       237,734
                                                          -------------   -------------    -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES            995,028      (2,020,497)      (625,634)
                                                          -------------   -------------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property and equipment                           (42,720)       (212,000)      (165,640)
 Other assets                                                      --              --          26,873
                                                          -------------   -------------    -----------
NET CASH USED IN INVESTING ACTIVITIES                          (42,720)       (212,000)      (138,767)
                                                          -------------   -------------    -----------


CASH FLOWS FROM FINANCING ACTIVITIES:
 Payment of notes payable                                          --              --         (48,057)
 Payments of capital leases                                    (53,905)       (153,961)      (220,949)
 Repurchase of common shares                                       --          (21,162)            --
 Proceeds from issuance of 6% convertible debentures               --              --       2,105,000
 Proceeds from exercise of incentive stock option              343,071             558             --
 Payments of preferred stock dividends                        (285,340)            --         (24,839)
 Other assets                                                      --              --        (243,830)
                                                          -------------   -------------    -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES              3,826        (174,565)     1,567,325
                                                          -------------   -------------    -----------

Net increase (decrease) in cash and cash equivalents           956,134      (2,407,062)       802,924
Cash and cash equivalents at beginning of year               1,034,681       3,441,743      2,638,819
                                                          -------------   -------------    -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                    $1,990,815      $1,034,681     $ 3,441,743
                                                          =============   =============    ===========


                                                           F-7
</TABLE>

<PAGE>

                             FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             (continued)
<TABLE>

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

                                                                Twelve months ended December 31
                                                          -------------   -------------    -----------
                                                              2005            2004            2003
                                                          -------------   -------------    -----------

Supplemental disclosures of cash flow information:
 Cash paid during the period
 for:
 Interest                                                    $ 133,967       $ 212,080      $ 134,055
                                                          =============   =============    ===========
 Income taxes                                                 $ 92,473        $ 67,960      $(187,707)
                                                          =============   =============    ===========

Noncash financing activity:
 Equipment acquired through capital lease financing                --         $ 69,585             --
 Exercise of warrants for common stock                       $ 158,283             --              --
 6% convertible debentures converted into common stock      $1,765,000       $ 120,000             --
 Warrants charged to deferred financing costs in
      connection with debenture offering                           --              --        $ 35,987





























                           See notes to consolidated financial statements.

                                                  F-8
</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 as a securities broker-dealer and
                  investment adviser 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),
                  the other subsidiary, 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 independent clearing firms. 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) and the National Futures Association (NFA).

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 earned.

                  Securities owned and securities sold, not yet purchased are
                  stated at quoted market value. All resulting unrealized gains
                  and losses are 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 former clearing firm, Fiserv, were deferred and amortized
                  to income over the term of the agreement on a straight-line
                  basis. Upon termination of the agreement in 2005, the
                  remaining unamortized balance of $4,886,000 was recorded as
                  income (see Note 7).

                  Advertising

                  Advertising costs are expensed as incurred and totaled
                  $68,924, $114,829 and $246,357 in 2005, 2004 and 2003,
                  respectively.

                  Property and Equipment

                  Furniture, equipment and leasehold improvements are stated at
                  cost. Depreciation on 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


                                      F-9

<PAGE>

                  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, 2005 and 2004.

                  Earnings (Loss) per Share

                  Basic earnings (loss) per share is calculated by dividing net
                  income (loss) attributable to common stockholders by the
                  weighted-average number of common shares outstanding during
                  the period. Diluted earnings (loss) per share is calculated by
                  dividing net income (loss) available to common shareholders by
                  the weighted average number of common shares outstanding for
                  the period adjusted to reflect potentially dilutive
                  securities. 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).
                  For 2003, the basic and diluted calculation is the same due to
                  losses incurred and accordingly the result of including
                  potentially dilutive securities is anti-dilutive.

                  In accordance with SFAS 128, the following table reconciles
                  basic shares outstanding to fully diluted shares outstanding:

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

                                                                        Twelve months ended December 31,

                                                            2005                      2004                      2003
                                                            ----                      ----                      ----
     Numerator - basic:

     Net income (loss)                                $2,424,294                  $730,502              $(3,518,043)
     Deduct:  dividends  earned/paid  during
     the year                                          (285,340)                  (90,689)                  (24,839)
                                                       ---------                  --------                  --------

     Numerator  for  basic  earnings  (loss)
     per share                                        $2,138,954                  $639,813              $(3,542,882)
                                                       =========                   =======               ===========
     Numerator - diluted:

     Numerator  for  basic  earnings  (loss)
     per share                                        $2,138,954                  $639,813              $(3,542,882)
     Add: Preferred stock dividends                      285,340                        --                        --
     Add: convertible debenture interest                  86,582                    45,735                        --
                                                          ------                    ------                        --

     Numerator for diluted  earnings  (loss)
     per share                                        $2,510,876                  $685,548              $(3,542,882)
                                                       =========                   =======               ===========
     Denominator:
     Weighted    average    common    shares
     outstanding                                      14,032,057                 9,270,350                 8,784,103
     Effect of dilutive securities:
       Stock options and warrants                      1,160,173                   235,820                        --
       Restricted shares                                 438,708                    93,750                        --
       Convertible preferred stock Series B            1,978,240                        --                        --
       Convertible debentures                          2,500,000                 6,030,000                        --
                                                       ---------                 ---------                 ---------
     Denominator  for diluted  earnings  per
     share                                            20,109,178                15,629,920                 8,784,103
                                                      ==========                ==========                 =========
</TABLE>
                                            F-10

<PAGE>


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

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

                                                                               Year ended December 31,

                                                             2005                          2004                 2003
                                                             ----                          ----                 ----

                 Stock Options                          1,934,844                     3,514,998            3,556,498
                 Warrants                                  82,409                     3,385,946            4,160,946
                 Convertible debt                              --                            --            6,270,000
                 Convertible preferred                    610,738                       610,738              622,178
                 stock
</TABLE>


                  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.

                                      F-11


<PAGE>

                  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:

<TABLE>

                                                                                Years ended December 31,
<S>                                                        <C>                       <C>                 <C>
                                                                  2005                    2004                   2003
                                                                  ----                    ----                   ----

Net income (loss) applicable to common
stockholders, as reported                                   $2,138,954                $639,813           $(3,542,882)
Deduct: total stock based employee compensation
expense determined under the fair value based
method for all awards, net of tax                            (298,682)               (160,457)              (105,862)
                                                             ---------               ---------              ---------

Pro forma net income (loss) - basic                         $1,840,272                $479,356           $(3,648,744)

Add: preferred stock dividends                                 285,340                      --                     --
Add: convertible debenture interest                             86,582                  45,735                     --
                                                                ------                  ------                     --

Pro forma net income (loss) - diluted                       $2,212,194                $525,091           $(3,648,744)
                                                             =========                 =======            ===========
Net income (loss) per share:

Basic - as reported                                              $0.15                    $.07                $(0.40)
Diluted - as reported                                            $0.12                    $.04                $(0.40)
Basic - pro forma                                                $0.13                    $.05                $(0.42)
Diluted - pro forma                                              $0.11                    $.03                $(0.42)

</TABLE>


                  Pro forma net income (loss) and net 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 2005, 2004 and 2003:

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

                                                              2005                     2004                     2003
                                                              ----                     ----                     ----

                 Risk free interest rates                    4.35%                    3.41%                    3.14%
                 Expected option lives                     5 years                  5 years                  5 years
                 Expected volatilities                      68.49%                  102.30%                  105.11%
                 Expected dividend yields                       0%                       0%                       0%
</TABLE>

                                      F-12

<PAGE>


                  In 2005, the Company changed the basis for estimating the
                  volatility component of the Black Scholes model. In 2004 and
                  2003 the Company used historical daily price observations of
                  its stock as a basis for determining expected volatility. In
                  2005, the Company determined that monthly price observations
                  provide a more reliable measure of its stock trading activity
                  and resulting volatility estimate. This change is considered a
                  change in estimate.

                  Recent Pronouncements of the Financial Accounting Standards
                  Board

                  In December 2004, the FASB issued SFAS 123 (revised 2004),
                  "Share-Based Payment" ("SFAS 123(R)") which replaces SFAS 123,
                  "Accounting for Stock-Based Compensation," and supersedes APB
                  Opinion No.25, "Accounting for Stock Issued to Employees".
                  Among other items, SFAS 123(R) eliminates the use of APB
                  Opinion No. 25 and the intrinsic method of accounting, and
                  requires all share-based payments, including grants of
                  employee stock options, to be recognized in the financial
                  statements based on their fair values. SFAS No. 123(R) is not
                  effective for public entities which are small business filers
                  until the first interim or annual reporting period of the
                  first fiscal year that begins after December 15, 2005. The
                  Company expects to adopt SFAS 123 (R) in the first quarter of
                  2006 and will recognize compensation expense for all
                  share-based payments and employee stock options based on the
                  grant-date fair value of those awards. The Company is
                  currently evaluating the impact of the statement on its
                  financial statements. As the Company currently accounts for
                  share-based payments using the instrinsic value method as
                  allowed by APB Opinion No. 25, the adoption of the fair value
                  method under SFAS 123(R) will have an impact on its results of
                  operations. However, the extent of the impact cannot be
                  predicted at this time because it will depend on levels of
                  share-based payments granted in the future. Had the Company
                  adopted SFAS 123(R) in prior periods, the impact of that
                  standard would have approximated the impact of SFAS 123 as
                  described under Stock Based Compensation in the Notes to the
                  Consolidated Financial Statements.

                  In June 2005, the FASB issued SFAS No. 154, "Accounting
                  Changes and Error Corrections" - a replacement of APB Opinion
                  No. 20 (Accounting Changes) and FASB No. 3 (Reporting
                  Accounting Changes in Interim Financial Statements), which
                  changed the requirements for the accounting for and reporting
                  of a change in accounting principle. This statement requires
                  retrospective application to prior periods' financial
                  statements of changes in accounting principle unless it is
                  impracticable to determine either the period-specific effects
                  of the cumulative effect of the change or the cumulative
                  effect of applying a change. When it is impracticable to
                  determine the period-specific effects of an accounting change
                  on one or more individual prior periods presented, this
                  statement requires that the new accounting principle be
                  applied to the balance of assets and liabilities as of the
                  beginning of the earliest period for which retrospective
                  application is practicable and that a corresponding adjustment
                  be made to the opening balance of retained earnings (or other
                  appropriate components of equity or net assets in the
                  statement of financial position) for that period rather than
                  being reported in an income statement. When it is
                  impracticable to determine the cumulative effect of applying a


                                      F-13
<PAGE>

                  change in accounting principle to all prior periods, this
                  statement requires the new accounting principle be applied as
                  if it were adopted prospectively from the earliest date
                  practicable. Statement No. 154 is effective for accounting
                  changes and error corrections made in fiscal years beginning
                  after December 15, 2005. The Company will comply with the
                  provisions of FAS 154 although the impact of such adoption is
                  not determinable at this time.

                  Reclassifications

                  Certain reclassifications have been made to 2004 and 2003
                  financial statements to conform to 2005 presentation.

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

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

                                                                       December 31,

                                                    2005                                    2004
                                                    ----                                    ----

                                             Owned           Sold not yet           Owned            Sold not yet
                                             -----            purchased             -----             purchased
                                                              ---------                               ---------

       Corporate stocks                          $48,661                                $133,475            $173,826
       U.S. government agency and
       municipal obligations                       2,677                                   2,320
       Corporate bonds                           130,083              $1,964              14,805
       Other                                     122,191               1,600             220,120                 500
                                                 -------               -----             -------                 ---
                                                $303,612              $3,564            $370,720            $174,326
                                               =========              ======            ========             =======

</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, 2005 and 2004,
                  investment securities consist of stock purchase warrants and
                  stock at an estimated total fair value of $121,991 and
                  $213,750 respectively.


NOTE 4 -          EMPLOYEE AND BROKER RECEIVABLES


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

                                                                                      December 31,

                                                                              2005                       2004

                 Commission advances                                        $293,043                  $431,362
                 Forgivable loans                                            151,651                   247,649
                 Other loans                                                 949,640                 1,271,860
                                                                             -------                 ---------
                                                                           1,394,334                 1,950,871
                 Less reserve for bad debts                                (1,085,135)               (1,402,631)
                                                                           -----------               -----------
                                                                           $309,199                   $548,240
                                                                            ========                   =======
</TABLE>

                                      F-14

<PAGE>

                  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 $122,155, $112,171
                  and $230,578 in 2005, 2004, and 2003, 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
                                                               2005                    2004            Useful Life
                                                               ----                    ----            -----------

       Computer and office equipment                     $2,873,705              $2,834,811             3 to 7 years
       Furniture and fixtures                             1,693,612               1,689,787            7 to 10 years
       Leasehold improvements                               807,227                 807,227            Term of lease
                                                            -------                 -------
                                                          5,374,544               5,331,825
       Less accumulated depreciation and
       amortization expense                              (4,925,084)             (4,540,916)
                                                         -----------             -----------
                                                           $449,460                $790,909
                                                         ===========             ===========
</TABLE>

                  Depreciation and amortization expense was $384,169, $538,549,
                  and $509,968 in 2005, 2004 and 2003, respectively.


NOTE 6 -          OTHER ASSETS

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

                                                                                                 December 31,

                Other assets consist of the following:                                     2005                 2004
                                                                                           ----                 ----

                Commissions and concessions receivable                                 $374,185             $374,182
                Deferred financing costs-net                                             69,868              238,328
                Security deposits                                                       144,406              244,764
                Other                                                                    34,345               35,385
                                                                                         ------               ------
                                                                                       $622,804             $892,659
                                                                                        =======              =======
</TABLE>


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


                                      F-15
<PAGE>

NOTE 7 -          DEFERRED INCOME

                  The Company received cash advances totaling $7,750,000 over
                  the four year period between 2000 and 2004 in accordance with
                  an agreement with its former clearing firm, Fiserv. All
                  advances were recorded as deferred income and were being
                  amortized to earnings over the term of the 10 year agreement.
                  In April 2005 the agreement with Fiserv was terminated and the
                  remaining unamortized cash advance of $4,886,000 was
                  recognized as income. Amortization of approximately
                  $5,105,000, $875,000, and $726,000 in 2005, 2004, and 2003,
                  respectively, is included in Interest and Other Income in the
                  Consolidated Statements of Operations. 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 -          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 with 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. During
                  2005, holders of $1,765,000 of the 6% subordinated convertible
                  debentures presented their debentures to the Company for
                  conversion. The Company issued 3,530,000 shares of common
                  stock and retired $1,765,000 of the debentures.

                  The debentures outstanding as of December 31, 2005 are
                  $1,250,000 and are due to mature in 2007 and 2008, as follows:
                  2007 - $480,000; 2008 - $770,000.


                                      F-16
<PAGE>

NOTE 9 -          ACCRUED EXPENSES
<TABLE>
         <S>                                                         <C>                    <C>

                                                                                 December 31,
         Accrued expenses consist of the following:                      2005                    2004
                                                                         ----                    ----

         Accrued litigation costs                                    $751,331                $666,013
         Accrued penalties and fines                                   50,000                  84,750
         Accrued payroll                                              340,977                 137,341
         Accrued professional fees                                    154,250                 109,679
         Other accrued expenses                                        76,796                  80,402
                                                                       ------                  ------
                                                                   $1,373,354              $1,078,185
                                                                    =========               =========
</TABLE>

NOTE 10 -         OTHER LIABILITIES

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

                                                                                                 December 31,

                Other liabilities consist of the following:                                2005                 2004
                                                                                           ----                 ----

                Warrants subject to put options                                         $55,320             $333,261
                Note payable                                                            200,000                    0
                Other                                                                    55,064                5,520
                                                                                         ------                -----
                                                                                       $310,384             $338,781
                                                                                        =======              =======
</TABLE>

                  The Company issued warrants subject to put options as part of
                  a legal settlement in 2003. The Company has classified its
                  obligations under the warrants as liabilities in the Statement
                  of Financial Condition in accordance with the provisions of
                  FAS 150, "Accounting for Certain Financial Instruments with
                  Characteristics of both Liabilities and Equity". The Company
                  may be obligated to make cash payments of up to $60,490 if
                  certain redemption conditions exist. The obligations embodied
                  in the remaining warrants, due to expire in June 2006, were
                  initially valued at $ 40,830 using the discounted cash flow
                  method and are re-measured at of the end of each reporting
                  period until the obligation is settled. The recorded value at
                  December 31, 2005 was $55,320. Changes in value are recognized
                  in earnings as interest expense.

                  The Company's note payable was executed as part of a
                  Separation Agreement entered into in February 2005 with the
                  former CEO was paid in full, including interest at 8% per
                  annum, in February 2006. (see Note 17).

NOTE 11 -         INCOME TAXES

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

                                                                               Year ended December 31,

                                                               2005                     2004                    2003
                                                               ----                     ----                    ----
                 Currently payable
                 (refundable):
                   Federal                                    $   -                   $    -                  $    -
                   State                                     78,000                 (13,000)                  39,000
                                                             ------                 --------                  ------
                                                             78,000                 (13,000)                  39,000
                                                             ------                 --------                  ------

                 Deferred:
                   Federal                                        -                        -                 425,000
                   State                                          -                        -                  35,000
                                                                                                             -------
                                                                  -                        -                 460,000
                                                             ------                 --------                 -------
                 Provision (benefit) for
                 income taxes                               $78,000                $(13,000)                $499,000
                                                             ======                  ======                 ========

</TABLE>
                                      F-17

<PAGE>

Note 11 -         (Continued)

                  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,

                                                                            2005             2004            2003
                                                                            ----             ----            ----

                  Expected federal tax benefit at
                    statutory rate                                      $   851,000     $ 244,000      $(1,043,000)
                  State taxes, net of federal tax effect                     51,000        (7,000)        (145,000)
                  Non-deductible expenses                                   408,000        10,000           29,000
                  Increase (decrease) in valuation allowance             (1,542,000)     (260,000)       1,658,000
                  Other reserves not deductible                             310,000         --               --
                                                                        ------------    ---------        ---------
                  Provision (benefit) for income taxes                  $    78,000     $ (13,000)     $   499,000
                                                                        ============    ==========       =========



                  The tax effects of the temporary differences that give rise to
                  significant portions of the deferred tax assets and
                  liabilities as of December 31, 2005 and 2004 are:

                                                                                Year ended December 31,

                                                                                  2005                  2004
                                                                                  ----                  ----
                  Deferred tax assets:
                    Deferred income                                        $    --               $ 2,042,000
                    Reserves and allowances                                    723,000               986,000
                    Federal tax loss carryforwards                           1,741,000             1,152,000
                     State tax loss carryforwards                              508,000               389,000
                     Accrued and stock-based compensation                      387,000               454,000
                     Other                                                     220,000                98,000
                                                                               -------            ----------
                  Subtotal                                                   3,579,000             5,121,000
                  Valuation allowance                                       (3,579,000)           (5,121,000)
                                                                            ----------            ----------
                   Net deferred tax assets                                 $    --               $       --
                                                                            ===========           ==========
</TABLE>


                  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, 2005 and
                  2004.

                  The Company and its subsidiaries file a consolidated federal
                  tax return and separate state returns. At December 31, 2005,
                  the Company has approximately $5,121,000 and $4,062,000 of
                  federal and state operating loss carryforwards, respectively,
                  available to offset future taxable income. These losses expire
                  at various dates through 2024.

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


                                      F-18
<PAGE>

NOTE 12 -         COMMITMENTS AND CONTINGENT LIABILITIES

                  Operating Leases

                  The Company leases office facilities and equipment under
                  operating leases expiring at various dates through 2010.
                  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, 2005, 2004 and 2003 was approximately $989,000,
                  $1,154,000, and $1,192,000, respectively.

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


                                Year ending December 31,

                                          2006                                                      $1,382,359
                                          2007                                                       1,297,515
                                          2008                                                       1,386,349
                                          2009                                                         611,549
                                          2010 and beyond                                              101,525
                                                                                                       -------
                                                                                                    $4,779,297
                                                                                                     =========
</TABLE>
                  Employment agreements

                  Effective February 1, 2005, the President and Chief Operating
                  Officer ("COO") was appointed the CEO of the Company and FMSC.
                  FMFC entered into a new employment agreement with the new CEO
                  which superseded his existing agreement. 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 and the accelerated vesting
                  of restricted stock grants.

                  Legal matters

                  The Company is a respondent or co-respondent in various legal
                  proceedings, which are related to our 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 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 of its securities business.

                  The New Jersey Bureau of Securities is conducting an inquiry
                  into FMSC's sale of certain high-yield bonds to the firm's
                  clients from 1998 to 2001, and the subsequent resale of those
                  securities to other customers in 2001. The Company has
                  recently begun settlement discussions with the Bureau in an
                  attempt to resolve the matter in order to avoid a protracted
                  legal proceeding. The final terms of the settlement are still
                  being negotiated but may include a monetary fine, the
                  disgorgement of markups on the sale of certain bonds and the
                  retention of a compliance consultant to review the firm's
                  procedures. The exact amount of civil penalty and disgorgement
                  as well as the precise language of the proposed consent order
                  are still being negotiated with the Bureau. The Company
                  believes that it has adequately reserved for the anticipated
                  financial impact of this matter in the financial statements.

                  During 2005 the Company settled four customer arbitrations for
                  an aggregate of $360,000, involving the sale of high-yield
                  bonds referenced above.  Management believes that we have
                  sufficiently accrued for any probable costs related to the one
                  remaining customer arbitration related to the sale of the
                  high-yield bonds.

                                      F-19
<PAGE>

                  As of December 31, 2005, 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.

                  Clearing Agreement:

                  In April 2005, FMSC entered into a clearing agreement with
                  National Financial Services, LLC ("NFS"). The initial term of
                  the agreement is for eight years. Should the Company decide to
                  terminate the agreement prior to the end of the initial term,
                  it would have to make a payment to NFS of $2,000,000 in year
                  one of the agreement and, in decreasing amounts, down to
                  $250,000 in year eight. The Company has no intention of
                  terminating this agreement.

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, 2005
                  were $44,434, $21,578, and 21,856, respectively.


                  Future minimum lease payments under capital lease obligations
                  at December 31, 2005 are as follows:

                 Year ending December 31, 2006:
                 Total minimum payments                               $9,110
                 Less amount representing interest                      (555)
                                                                       ------
                 Total principal                                      $8,555
                                                                       =====


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 $3,564 and $174,326 at December 31, 2005 and
                  2004, 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 2005, 2004 or
                  2003.

                                      F-20
<PAGE>

NOTE 16 -         STOCKHOLDERS' EQUITY (DEFICIT)

                  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 below, 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.

                  SERIES A CONVERTIBLE PREFERRED STOCK

                  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, 2005, a total of
                  44,142 preferred shares have been converted into 88,284 shares
                  of common stock.

                  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. During the
                  quarter ending June 2005, the board of directors declared the
                  dividend on the preferred stock in arrears, based upon the
                  board's expectation that in the second quarter of 2005 the
                  Company's total assets would exceed its total liabilities, and
                  therefore, the payment of dividends would be permitted under
                  New Jersey law. The Company paid dividends on the Series A
                  Preferred Stock in the amount of $233,784 during 2005,
                  including $210,879 dividends in arrears.

                  SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK

                  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 with 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. During
                  2005, the Company paid $51,556 dividends on the Series B
                  preferred shares.


                                      F-21
<PAGE>

                  Common Stock

                  During the second quarter of 2005, the Board of Directors
                  adopted and the shareholders approved an amendment to the
                  Company's Restated Certificate of Incorporation, to
                  increase the authorized number of shares of common stock from
                  30,000,000 to 60,000,000.

                  In connection with a legal settlement in 2005, the Company
                  issued 25,000 shares of common stock. The shares were valued
                  at $25,000 based on the quoted market price of the shares on
                  the issuance date.

                  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.

                  The Company had outstanding 3,072,446 Class C Redeemable
                  Common Stock Purchase Warrants, which expired in February 2005
                  unexercised.

NOTE 17 -         SEPARATION AGREEMENT

                  Effective February 1, 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 February 1, 2005. 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 executed a promissory note
                  in the amount of $200,000 with interest of 8% per annum. The
                  Company also made a one time cash payment of $136,000. The
                  Company also issued 200,000 options valued under the Black
                  Scholes model at $68,110 and expensed over a one year vesting
                  period, to purchase common stock at $0.83 per share for three
                  years, and cancelled 325,000 options with various exercise
                  prices.  Pursuant to the employment agreement restricted
                  common shares not previously vested were automatically vested
                  upon his termination. The promissory note was paid in full in
                  February 2006.

NOTE 18 -         EMPLOYMENT AGREEMENTS

                  Effective February 1, 2005, the President and 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 increments of one third commencing on February 1,
                  2005, one third on December 31, 2005 and the final one third
                  on December 31, 2006. 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 each of
                  restricted stock, each with annual vesting provisions.

                                      F-22

<PAGE>

NOTE 19 -         TERMINATION OF MERGER

                  On October 24, 2005, the Company and Olympic Cascade Financial
                  Corporation ("Olympic") jointly announced that they had agreed
                  to terminate the Amended and Restated Agreement and Plan of
                  Merger, dated as of June 27, 2005 (the "Amended and Restated
                  Merger Agreement") by and among the Company, Olympic, and OLY
                  Acquisition Corporation, a wholly owned subsidiary of the
                  Company.

                  Under the terms of the letter agreement terminating the
                  Amended and Restated Merger Agreement, the parties had no
                  further obligation to each other arising out of the Merger
                  Agreement, the Merger, and the transactions contemplated
                  thereby, and each party agreed to bear its own expenses.

                  As a result of the termination of the merger plans, the
                  Company has expensed $392,000 of merger costs. Such costs are
                  included in the Legal Matters and Related Costs line item in
                  the Consolidated Statements of Operations.

NOTE 20 -         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, 2005, a total of 206,800
                  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, 2005, options to
                  purchase a total of 1,023,002 shares were outstanding and
                  3,468,400 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 1992 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, 2005, 20,000
                  options were outstanding under the 1992 Non-Executive Director
                  Stock Plan and 160,000 options were outstanding under the 2002
                  Non-Executive Director Stock Plan.


                                      F-23

<PAGE>

                  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, 2005, options to purchase
                  1,297,500 shares and 2,300,000 shares of restricted common
                  stock were issued and outstanding.

                  A summary of the activity in the Company's stock option plans
                  (excluding restricted common shares) for the three-year period
                  ended December 31, 2005 is presented below:

<TABLE>
                  <S>                                                               <C>               <C>
                                                                                                      Weighted
                                                                                                       Average
                                                                                                      Exercise
                                                                                      Shares            Prices


                  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            1.01

                      Granted                                                       1,105,000            1.07
                           Exercised                                                 (566,398)            .61
                           Canceled                                                (1,487,498)            .84
                                                                                   -----------
                  Options outstanding, December 31, 2005                            2,707,302           $ .85
                                                                                   ===========

</TABLE>
                  Shares of common stock available for future grant under
                  Company plans totaled 4,155,900 as of December 31, 2005. 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 2005, 2004 and
                  2003 totaled $129,499, 42,256 and $37,156, respectively. The
                  weighted-average grant date fair value of options granted
                  during 2005, 2004 and 2003 was $.41, $.28, and $.22,
                  respectively.


                                      F-24

<PAGE>

                  Additional information as of December 31, 2005 with respect to
                  all outstanding options is as follows:
<TABLE>
         <S>                        <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             119,200            2.79              $.25              109,920          $.26
         $0.30 - $0.49              58,800            1.65               .40               55,080           .40
         $0.50 - $0.75           1,253,802            2.57               .57            1,052,121           .58
         $.83 -  $1.09             442,000            3.25               .92              306,800           .90
         $1.10 - $1.25             626,000            4.58              1.22              525,200          1.24
         $1.50 - $2.50             207,500             .18              1.67              205,500          1.67

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

         $0.20 - $2.50           2,707,302            2.95              $.85            2,254,621          $.86

---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 21 -         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, 2005 and 2004. 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 22 -         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,
                  2005, FMSC had net capital of $2,592,441, which was $2,337,751
                  in excess of its required net capital of $254,690. FMSC's
                  ratio of aggregate indebtedness to net capital was 1.47 to 1.

NOTE 23 -         UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
                  <S>                       <C>                  <C>            <C>                 <C>

                                            March 31,            June 30,       September 30,       December 31,
                                               2005                2005             2005                2005
                                               ----                ----             ----                ----
                                           (as restated)       (as restated)

                  Revenues                  $15,565,645         $16,580,501       $12,524,366        $13,413,154
                  Expenses                  $16,453,061         $12,160,116       $13,178,128        $13,790,523
                  Net income (loss)         $  (710,685)        $ 4,224,134       $  (656,857)       $  (432,298)
                  Net income (loss)
                  applicable to
                  common stockholders       $  (745,143)        $ 4,016,158       $  (699,763)       $  (432,298)

                  Income (loss) per common share:
                  Net income (loss) applicable
                  to common stockholders -
                  basic                     $  (.06)            $   .28           $     .05          $     (.03)
                  diluted                   $  (.06)            $   .20           $     .04          $     (.03)

</TABLE>
                  The Company restated its financial statements for the quarters
                  ending March 31, 2005 and June 30, 2005 to correctly account
                  for the amortization of deferred compensation and its affect
                  on the provision for income taxes.

                                      F-25
<PAGE>

<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
</TABLE>

                  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 2005 and 2004 does not
                  necessarily equal the total computed for the entire year.

NOTE 24 -         SUBSEQUENT EVENTS

                  Separation Agreement:

                  On February 1, 2006, the Company entered into a Separation
                  Agreement ("Agreement") with its Chairman of the Board which
                  provides for the termination of his employment as of that
                  date. The Agreement provides for the Chairman to remain as a
                  director of FMFC.

                  Pursuant to the terms of the Agreement, the company paid the
                  Chairman a cash payment of $300,000 and issued a promissory
                  note in the amount of $550,217 plus interest at the rate of
                  4.5% per annum for 48 months. Further, the Company will
                  continue to provide the Chairman and his wife with medical
                  insurance coverage for 48 months and an automobile allowance
                  of $600 for 36 months. In addition, pursuant to his employment
                  agreement all stock grants will immediately vest.


                  Letter of Intent:

                  On March 11, 2006, the Company entered into a letter of intent
                  for the sale of the Company to a private investor. The final
                  terms of the sale are subject to further negotiation but it is
                  anticipated that the transaction will be all cash at
                  approximately $1.00 per common share.

                  The letter of intent is subject to numerous conditions,
                  including: satisfactory completion of due diligence,
                  negotiation and finalization of the terms of the sale and
                  structure of the transaction, negotiation, preparation and
                  execution of definitive transaction documents, compliance with
                  state and federal securities laws and regulations, and
                  corporate, and shareholder and regulatory approvals. If a
                  final agreement is reached and the other conditions satisfied,
                  the transaction is expected to close during the third quarter
                  of 2006. However, as a result of the foregoing uncertainties,
                  there can be no assurance that a definitive agreement will be
                  executed or that, if it is, the transaction will be completed.





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