UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 
 ý
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31,
      2007ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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.
      Employerincorporation
      or organization)
              
              Identification
      No.)Parkway
      109 Office Center,
                328
      Newman Springs Road,
                Red
      Bank, New Jersey
              
              07701(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 registeredNone
  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, 2007 the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was  $2,986,879 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 31, 2008[Common
      Stock, no par value per share]
              
              13,257,248
      shares
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 None
   
 
 Table
of Contents
 
 PART
I
 PAGE
 Item
      1.
              
              Business
              4Item
      1A.
              
              Risk
      Factors
              18Item
      1B.
              
              Unresolved
      Staff Comments
              26Item
      2.
              
              Properties
              26Item
      3.
              
              Legal
      Proceedings
              26Item
      4.
              
              Submission
      of Matters on a Vote of Security Holders
              30
 
 PART
II
 
 Item
      5.
              
              Market
      of and Dividends on Our Common Equity and Related Shareholders
      Matters
              30Item
      6.
              
              Selected
      Financial Data
              32Item
      7.
              
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              34Item
      7A.
              
              Quantitative
      and Qualitative Disclosures About Market Risk
              54Item
      8.
              
              Financial
      Statements
              55Item
      9.
              
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              55Item
      9A.
              
              Controls
      and Procedures
              55Item
      9B
              
              Other
      Information
              55
 
 
 PART
III
 
 Item
      10.
              
              Directors
      and Executive Officers
              56Item
      11.
              
              Executive
      Compensation
              60Item
      12.
              
              Security
      Ownership of Certain Beneficial Owners and Management
              71Item
      13.
              
              Certain
      Relationships and Related Transactions
              74Item
      14.
              
              Principal
      Accounting Fees and Services
              74
 
 PART
IV
 
 Item
      15.
              
              Exhibits
      and Financial Statement Schedules
              75
   3
  PART
I
 
 This
Annual Report on Form 10-K, including Item 1 (“Business”) and Item 7
(“Management’s Discussion and Analysis of Financial Condition and Results of
Operation”), contains certain “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of
the Securities Exchange Act of 1934, as amended (“Exchange Act”). 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. (“FMSC”), has operated as a
full service retail and institutional securities brokerage firm since
1987.  Since July 2000, FMSC 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 FMSC.
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 185 registered representatives and services over 45,000 retail and
institutional customer accounts, which comprise over $3 billion in customer
assets. All of Montauk Financial Group’s 88 branch offices and satellite
locations in 24 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.
  4
  Montauk Financial Group is registered
as a broker-dealer with the SEC,  Financial Industry Regulatory
Authority (“FINRA”) (formerly the National Association of Securities Dealers),
the Municipal Securities Rule Making Board, the National Futures Association,
and the Securities Investor Protection Corporation (“SIPC”), 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. Securities transactions are cleared through National Financial
Services, LLC ("NFS"), a Fidelity Investments company and Penson Financial
Services, Inc. (“Penson”) 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, fees from managed accounts and
investment banking activities, such as private and public securities
offerings.  The following table represents the percentage of revenues
generated in each of these activities during the year ended December 31,
2007:
 
 
 Equities:Listed
      and Over-The-Counter Stocks
              30%Debt
      Instruments:Municipal,
      Government and Corporate Bonds and Unit Investment Trusts
              4%Mutual
      Funds
              15%Options:  Equity
      & Index
              2%Insurance
      and Annuities
              11%Corporate
      Finance and Investment Banking
              9%Investment
      Advisory Fees
              11%Alternative
      Investments (1)
              10%Proprietary
      trading
              1%Miscellaneous
      (2)
              7%Total
              100%
  
 (1)    
Alternative Investments include REITs, 1031 Exchanges and medical receivable
notes.
 (2)    
Miscellaneous includes interest income, operations and marketing
fees.
  5
  The
following table reflects our various sources of revenue and the percentage of
total revenues for 2007.  Revenues from agency transactions in
securities for 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.
   Year Ended December 31,
2007Commissions
      from equities, options and mutual funds, insurance, investment advisory
      fees and alternative investments
                
                $
                31,728,518
                
                
                
                80
                %Riskless
      Principal trades in equity and fixed income securities on behalf of
      customers
                
                $
                1,331,525
                
                
                
                3
                %Proprietary
      trading
                
                $
                203,269
                
                
                
                1
                %Interest
      and other income
                
                $
                2,712,648
                
                
                
                7
                %Investment
      banking (1)
                
                $
                3,579,838
                
                
                
                9
                %Total
      Revenues
                
                $
                39,555,798
                
                
                
                100
                %
 (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.
 
 6
 Montauk Financial Group provides full
support services to each of the affiliated representatives, including access to
stock and options execution and over-the-counter stock trading; products such as
insurance, mutual funds, unit trusts and investment advisory programs; and
compliance, supervision, accounting and related services.
 
 Each
affiliated representative is required to obtain and maintain in good standing
each license required by the SEC and FINRA 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, and
therefore it maintains a professional liability errors and omissions insurance
policy which provides coverage for certain actions taken and/or omissions made
by its registered representatives, employees and other agents in connection with
the purchase and sale of securities and other financial products and
services.
 
 Revenue
Sources
 
 Through our affiliate program we derive a substantial portion of our revenues
from customer commissions on brokerage transactions in equity and debt
securities for retail and institutional investors such as 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, basedon 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.
  7
 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 2007, we earned gross commissions of $4.39
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, and is
registered or eligible to conduct business as an investment adviser in all 50
states and the District of Columbia.  As an investment adviser,
Montauk Financial Group operates the Portfolio Advisory Strategies Platform (the
"Platform") through which we are able to offer clients a choice of various
discretionary and non-discretionary investment advisory programs
(“Programs”).  One such Program, the Unified Managed Asset Allocation
and Investment Management Program, is sponsored by Montauk Financial Group and
enables affiliated representatives to provide individualized investment
management services to clients regarding the purchase and sale of
securities.  Other Programs available through the Platform are
sponsored or administered by third-party investment advisers.  Each of
the Programs generally requires the client to pay an asset-based fee for
portfolio advisory services, brokerage execution and custody, and periodic
account performance reporting.  During 2007, investment advisory fees
represented 11% of the Company's overall revenues, compared to 7% for 2006, and
the Company intends to continue to focus efforts on growing this line of
business.
 
 Investment
Banking
 
 Montauk
Financial Group participates in private and public offerings of equity and debt
securities and provides general investment banking consulting services to
various public and private corporations. We continue to review investment
banking opportunities and anticipate that we will engage in additional public
and private offerings in the future as business and market conditions
warrant.  Our investment banking services include bridge and senior
loan financing, private placements and public offerings of debt and equity
securities, and exclusive banking consultation.  Under circumstances
where we act as an underwriter, we may assume greater risk than would normally
be assumed in our normal trading activity.  Under the federal
securities laws, an underwriter is subject to substantial potential liability
for material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings. Further, underwriting commitments
constitute a charge against net capital and our underwriting commitments may be
limited by the requirement that we must, at all times, be in compliance with the
Uniform Net Capital Rule 15c3-1 of the SEC.During 2007, 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 FINRA rules.
  8
  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., Smith Barney,
Inc. and Morgan Stanley 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 Investmentsdivision.
Additionally, the emergence of online trading has further intensified the
competition for brokerage customers.  Century Discount Investments
maintains a limited customer base and has not grown in revenues or customers
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
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 SEC is the
federal agency charged with the administration of most of the federal securities
laws.  Much of the regulation of the securities industry, however, has
been assigned to various self-regulatory organizations, principally in our case
FINRA. The self-regulatory organizations, among other things, promulgate
regulations and provide oversight in areas of:
 
 ·
              sales
      practices,
 ·
              trade
      practices among broker-dealers,
 ·
              capital
      requirements,
 ·
              record
      keeping, and
 ·
              conduct
      of employees and affiliates of member
  organizations.
  9
 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 SEC’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, 2007, Montauk
Financial Group had $849,710 of net capital and $599,710 of excess net
capital.
 
 Employees
 
 Currently,
we have approximately 185 registered representatives of which 178 are associated
with affiliate offices. These affiliated registered representatives are not
employees. In addition, we employ approximately 43 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 FINRA 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, SIPC  protects accounts against brokerage firm liquidations
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. Neither
SIPC nor Excess SIPC protects client accounts against market losses.
SIPC  is funded through assessments on registered broker-dealers and
charges a flat annual fee of $150.
  10
  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, 2008 to January 31, 2009
with a $1 million limit of liability for each covered event and a $3 million
aggregate liability limit. We are responsible for a $100,000 deductible payment
per claim. In the event that the cost of this coverage becomes cost prohibitive
or otherwise unavailable, the lack of coverage may have an adverse impact on our
financial condition in the event of future material claims, which may not be
covered by our existing policy.
 
 Executive
and Organization Liability Insurance Policy
 
 We carry
an executive and organization liability insurance policy (also known as
Directors and Officers liability insurance), which covers our executive
officers, directors and counsel against any claims for monetary damages arising
from the covered individuals actual or alleged breach of duty, neglect, error,
misstatement, misleading statement or omission when acting in the capacity of
his/her position as an executive officer, director and/or counsel on our behalf.
Policy exclusions include, but are not limited to, claims made against covered
individuals attributable to the committing of any deliberate criminal or
fraudulent acts, illegal or improper payments, and others.
 
 General
Business Developments during 2007 and Subsequent Events
 
 Termination
of Merger Agreement; Litigation and Settlement
 
 On May 5,
2006, we entered into a definitive merger agreement with FMFG Ownership, Inc.
and FMFG AcquisitionCo, Inc. (collectively referred to as the "Okun
Purchasers"), which are wholly-owned by Mr. Edward H. Okun, a private
investor.  Mr. Okun is the controlling person of Investment Properties
of America, LLC (“IPofA”), a privately owned, diversified real estate investment
and management company. Pursuant to the merger agreement, the Okun Purchasers
were to purchase all of our outstanding securities for an aggregate purchase
price of $23 million, or $1.00 in cash per common share, $2.00 in cash per share
of Series A Preferred Stock (convertible into two shares of common stock), and
$10.00 in cash per share of Series B Preferred Stock (convertible into ten
shares of common stock).
 
 On
December 29, 2006, we received notification from representatives of the Okun
Purchasers that they were terminating the merger agreement and not proceeding
with the merger. They alleged our failure to satisfy conditions and our alleged
breach of various representations, warranties, covenants and agreement in the
merger agreement.
 
 11
 On January 8, 2007, we filed a lawsuit
against the Okun Purchasers, Mr. Okun, IPofA and several other affiliated
entities which Mr. Okun controls (collectively, the “Okun Defendants”) seeking
to enforce the terms of the merger. Pursuant to the merger agreement,
shareholders of our common stock would have received $1.00 in cash for each
share of common stock.  The lawsuit alleged, among other things, that
the Okun Purchasers breached the merger agreement by terminating the agreement
on December 29, 2006 without cause or justification. Our complaint demanded
specific performance of the merger agreement and completion of the merger. In
the alternative, we sought  compensatory damages for breach of
contract and breach of the covenant of good faith and fair dealing as well as
payment of $2 million held in escrow to secure the performance of the Okun
Purchasers under the merger agreement. The lawsuit also sought  to
void the lease agreement that we entered into with another Okun affiliate to
relocate the Company’s corporate offices to a building purchased by that Okun
affiliate in Red Bank, New Jersey.
 
 On February 12, 2007, we received the
Okun Defendants' to the lawsuit, which contained several counterclaims against
us.  In their counterclaims, the Okun Defendants alleged that we
breached the merger agreement and failed to disclose certain material facts
about us. They also  sought the return of $2 million held in escrow as
well as compensatory damages, interest and costs.  The
Okun Defendants filed two additional actions; one on February 2, 2007 in the
Circuit Court of the State of Florida against our President and Chief Executive
Officer, and the other, a shareholder derivative action in the Federal District
Court for the District of New Jersey against the Company and certain of our
directors and officers, filed on February 16, 2007. We believed these actions
were  based on the same facts and circumstances as the previous action
that we filed against the Okun Defendants for their breach of the merger
agreement, and were  part of their response to the original lawsuit we
filed in the New Jersey Superior Court.
 
 On February 26, 2007, Mr. Okun and
certain of his affiliates filed an amendment to their Schedule 13D with the SEC
disclosing that they beneficially owned 52.8% of our voting
securities.  According to the amended Schedule 13D, additional shares
of our common stock were purchased in privately negotiated transactions for
$1.00 per share and the 197,824 shares of Series B Redeemable Convertible
Preferred Stock (“Series B Preferred Stock”) outstanding were purchased for
$10.00 per share. Each share of Series B Preferred Stock is convertible into 10
shares of common stock. The Series B Preferred Stock and certain of the shares
of common stock were purchased from two of our former officers and
directors.
 
 On May 9,
2007, the Company announced that it had reached an agreement with Mr. Okun and
the Okun Defendants (“May Settlement Agreement”) to settle the three separate
lawsuits arising out of the termination of the merger
agreement.  However, on May 23, 2007 the Company announced that it and
the Okun Defendants had agreed to consent to the entry of a Court Order to
vacate and set aside the May Settlement Agreement.
 
 On June
15, 2007, the Company announced that it had reached a new agreement with Mr.
Okun and the Okun Defendants (“June Settlement Agreement”) to settle the three
separate lawsuits arising out of thetermination
of the merger agreement.  The June Settlement Agreement provided that
Okun’s affiliated entities would surrender all of their First Montauk preferred
stock holdings and 5,272,305 of their common share holdings, such that the
Okun’s affiliates would hold less than 25% of the outstanding common shares of
stock in First Montauk.  These shares have since been surrendered and
cancelled. The Company also obtained an exclusive 60 day option (the “Option
Period”) to purchase the balance of the shares held by the Okun affiliated
entities (the “Option Securities”) for the aggregate purchase price of
$2,500,000 (the “Option”), which expired on August 14, 2007, without the Company
exercising its option. The June Settlement Agreement also provided that the
lease between an Okun affiliated entity and the Company, with respect to
relocating the Company’s corporate offices, shall be deemed void ab initio.
  12
 In
return, the Company agreed to direct the escrow agent, Signature Bank New York,
to pay to an Okun affiliated entity the $2 million on deposit by Mr. Okun and
the Okun Defendants under the Escrow Agreement executed and delivered pursuant
to the May 5, 2006 Merger Agreement.
  The
foregoing description of the June Settlement Agreement is qualified in its
entirety by reference to the full text of the Settlement Agreement, which is
filed as Exhibit 10.1 to the Company’s Report on Form 8-K filed with the SEC on
June 15, 2007.
 
  Shareholder
Rights Plan
   The Board
of Directors of First Montauk declared a dividend of one preferred share
purchase right for each outstanding share of our common stock pursuant to a
Rights Agreement dated as of August 8, 2007, between us and Continental Stock
Transfer & Trust Company, as Rights Agent (the “Rights Agreement”). The
dividend was paid on August 8, 2007 to our shareholders of record on that date
(“Record Date”). In addition, our Board of Directors authorized the issuance of
one preferred share purchase right for each additional share of common stock
that becomes outstanding between August 8, 2007 and the earliest
of:
  ·
                the
      “distribution date”, which is the earlier of: (1) the close of business on
      the tenth (10th)
      business day (unless further extended by a resolution adopted by a
      majority of the Continuing Directors of our Board of Directors as of the
      close of business on August 9, 2007 (the date of our 2007 Annual Meeting))
      after a public announcement that (i) a person has acquired beneficial
      ownership of 10% or more of the outstanding shares of common stock (the
      “Requisite Percentage”) or (ii) in the case of Edward H. Okun, FMFG
      Ownership Inc., FMFG Ownership II, Inc. and any of their respective
      Affiliates and Associates (collective, the “Okun Parties”) and their
      respective successors and assigns acquired additional shares of the common
      stock and beneficially own more than an aggregate of 3,300,308 shares of
      common stock after the Record Date (each person specified in (i) and (ii)
      hereafter referred to as an “Acquiring Person); and (2) a date that the
      Board of Directors designates following the commencement of, or first
      public disclosure of an intent to commence, a tender or exchange offer for
      outstanding shares of common stock that could result in the offeror
      becoming an Acquiring person;
  ·
                the
      date on which the rights expire, which is August 8, 2017;
    and
 
 ·
                the
      date, if any, on which our Board of Directors redeems the preferred share
      purchase rights.
 Each
preferred share purchase right entitles its registered holder to purchase from
the Company one one-hundredth of a share of a new Series C Participating
Cumulative Preferred Stock, at a price of $2.00 per one one-hundredth of a
preferred share, subject to adjustment as described below.
  13
  If an
Acquiring Person acquires beneficial ownership of the Requisite Percentage or
more of the outstanding shares of common stock after August 8, 2007, after the
distribution date the preferred share purchase rights will entitle each right
holder, other than the Acquiring Person or any affiliate or associate of the
Acquiring Person  (whose preferred share purchase rights shall be null
and void and nontransferable), to purchase, for the purchase price, the number
of shares of common stock which at the time of the transaction would have a
market value of twice the purchase price.
  After an
Acquiring Person becomes the beneficial owner of the Requisite Percentage or
more of the outstanding shares of common stock but before the Acquiring Person
becomes the beneficial owner of more than 50% of the common shares, the Board of
Directors may elect to exchange each preferred share purchase right, other than
those that have become null and void and nontransferable as described above, for
shares of common stock, without payment of the purchase price. The exchange rate
in this situation would be one-half of the number of shares of common stock that
would otherwise be issuable at that time upon the exercise of one preferred
share purchase right.
  At any
time prior to an Acquiring Person acquiring beneficial ownership of the
Requisite Percentage or more of the outstanding shares of common stock, our
Board of Directors may redeem the preferred share purchase rights in whole, but
not in part. The redemption price of $0.0001 per preferred share purchase right,
subject to adjustment as provided in the Rights Agreement, may be paid in cash,
shares of common stock or other of our securities deemed by the Board of
Directors to be at least equivalent in value. The Board of Directors may also
supplement or amend any provision of the Rights Agreement, including the date on
which the distribution date or expiration date would occur, the time during
which the preferred share purchase rights may be redeemed and the terms of the
preferred shares. In the case of a redemption, the preferred share purchase
rights are designed to ensure that the Board of Directors has adequate time to
consider any proposed acquisition transaction involving us and to protect us and
our shareholders against any proposed acquisition transaction in which all
shareholders are not treated equitably and do not receive fair value for their
shares of common stock.  The preferred share purchase rights have
certain antitakeover effects and will cause substantial dilution to a person
that attempts to acquire us on terms not approved by our Board of Directors. The
preferred share purchase rights should not affect any prospective offeror
willing to make an all-cash offer at a full and fair price, or willing to
negotiate with the Board of Directors. Similarly, the preferred share purchase
rights will not interfere with any merger or other business combination approved
by our Board of Directors since our Board of Directors may, at its option,
redeem all, but not less than all, of the then outstanding preferred share
purchase rights at the redemption price.
  The
foregoing description of the Shareholder Rights Plan is qualified in its
entirety by reference to the full text of the Rights Agreement, which is filed
as Exhibit 4.1 to the Company’s Report on Form 8-K filed on August 8,
2007.
  Management
Agreements
  In
January 2007, FMSC, the Company’s broker-dealer subsidiary, entered into an
employment agreement with a new Executive Vice President, Secretary and General
Counsel which provided him with a base salary of $200,000 per year through
December 31, 2008 and bonuses of $100,000 per year through December 31, 2008,
provided he is still employed by the Company at the end of each year. He
resigned on August 31, 2007, effective September 28, 2007. As part of the
negotiation of his existing employment contract he received his 2007 bonus of
$100,000.
 
 14
  As of May
9, 2007, we and Victor K. Kurylak, our President and Chief Executive Officer,
executed an Amended and Restated Employment Agreement (“Amended Employment
Agreement”). The Amended Employment Agreement was executed in connection with
the execution of the May Settlement Agreement with the Okun Defendants (see
above-“Termination of Merger Agreement; Litigation and Settlement ). Pursuant to
the Amended Employment Agreement, Mr. Kurylak was to continue his employment
with us as President, but resign from the position as our Chief Executive
Officer upon appointment of his successor and execution by his successor of an
employment agreement with us. However, since the May Settlement Agreement was
vacated and set aside, Mr. Kurylak’s resignation as CEO was not accepted and
thus cancelled. On June 15, 2007, we and Mr. Kurylak executed an Amendment
Number One to the Amended Employment Agreement (“Amendment to Amended Employment
Agreement”) to state that Mr. Kurylak would remain employed in the capacity of
President and Chief Executive Officer for both us and FMSC. Mr.
Kurylak’s employment contract has been subsequently renewed for one year from
January 1, 2008 under the terms of the Amended Employment Agreement previously
filed.
  In the
event of the termination of Mr. Kurylak’s employment by us without “cause” or by
Mr. Kurylak for “good reason” as these terms are defined in the Amended
Employment Agreement, he would be entitled to: (a) all compensation accrued but
not paid as of the termination date; (b) base salary for the remainder of the
term; (c) a severance payment equal to $300,000 payable in a lump sum
payment;  (d) continued participation in our benefit plans (or
comparable plans); and (e) any applicable bonus. If Mr. Kurylak’s employment is
terminated by us for “cause” or by him without “good reason”, he will be
entitled only to accrued compensation. If termination of the Amended Employment
Agreement occurs as a result of the expiration of such agreement without renewal
by the Company at the end of the term, Mr. Kurylak will be entitled to the
accrued compensation, any applicable bonus and the severance
payment.
  In the
event Mr. Kurylak is a member of the board of directors of the Company on the
termination date, the payment of any and all compensation due under the Amended
Employment Agreement, except the accrued compensation, is expressly conditioned
on Mr. Kurylak’s resignation from the board of directors of the Company within
five (5) business of the termination date.
  The
Amended Employment Agreement contains confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the first anniversary of the date of cessation of Mr. Kurylak’s
employment.
 
 15
 Financing
Agreement
 
 On
December 7, 2007 we entered into a note purchase agreement (the "Note Purchase
Agreement") with AEFC-FMFK Investment Corp. ("AEFC-IC") pursuant to which we
issued to AEFC-IC a 10% Convertible Secured Note due on December 31, 2008 for an
aggregate principal amount up to $2,000,000 (the "AEFC-IC Note"). The AEFC-IC
Note will accrue interest on the unpaid principal amount at the rate of 10% per
annum which will be paid monthly in arrears on or before the 10th day of the
month following the interest accrual. The principal of the AEFC-IC Note and all
accrued and unpaid interest thereon will be payable in full on December 31,
2008. The AEFC-IC Note is convertible into shares of Common Stock at $0.35 per
share, as adjusted, beginning July 1, 2008 if the AEFC-IC Note is not prepaid
prior to such date. The AEFC-IC Note is prepayable at any time prior to July 1,
2008 subject to an escalating prepayment penalty based on the date of prepayment
which is payable by us in cash and the issuance of a warrant to purchase shares
of our common stock at an exercise price of $0.35 per share, as adjusted (the
"Prepayment Warrant"). In the event we (i) do not draw the full $2,000,000
principal amount available under the AEFC-IC Note and (ii) the AEFC-IC Note has
not been prepaid by July 1, 2008, we will issue AEFC-IC a warrant to purchase
shares of our common stock at an exercise price of $0.35 per share, as adjusted,
for each one dollar of principal amount available but not drawn upon under the
AEFC-IC Note. The parties also executed a registration rights
agreement.
 
 In
connection with, and concurrent with, the execution of the Note Purchase
Agreement, the AEFC-IC Note and the related documents, we entered into the First
Amendment, dated as of December 7, 2007 ("First Amendment to the Rights
Agreement"), of the Rights Agreement, dated August 1, 2007, between us and
Continental Stock Transfer & Trust Company, as Rights Agent ("Rights
Agreement") as more fully described above. The First Amendment to the Rights
Agreement provides that AEFC-IC will not be deemed to be an "Acquiring Person"
under the Rights Agreement by reason of (i) the execution of the AEFC-IC Note
Purchase Agreement; (ii) the issuance of the AEFC-IC Note; (iii) the issuance of
shares of common stock upon the conversion of the AEFC-IC Note into shares of
our common stock.; (iv) the issuance of any warrants to AEFC-IC pursuant to the
Note Purchase Agreement or any shares of common stock upon exercise of such
warrants; (v) the purchase by AEFC-IC of all or any of the 3,300,308 shares of
common stock owned by Edward H. Okun or any affiliates of Mr. Okun
(collectively, the "Okun Parties"); (vi) the approval, execution or delivery of
any agreement with respect to the purchase by AEFC-IC of all or any of the
3,300,308 shares of common stock owned by the Okun Parties; (vii) the public or
other announcement of the Note Purchase Agreement or any of the
transactions contemplated thereby, or the purchase by AEFC-IC of all or any of
the 3,300,308 shares of common stock owned by the Okun Parties; or (viii) the
consummation of the Note Purchase Agreement and any other transactions
contemplated by the Note Purchase Agreement or any agreement to purchase all or
any of the 3,300,308 shares of common stock owned by the Okun
Parties.
 
 Separation
Agreements
 
 On August
31, 2007, Mr. Phillip P. D'Ambrisi resigned from his positions as our Chief
Operating Officer as well as the Chief Operating Officer of FMSC.  Mr.
D'Ambrisi also resigned as a member of our board of directors and the FMSC Board
effective August 31, 2007. We and Mr. D'Ambrisi entered into a consulting
agreement pursuant to which Mr. D'Ambrisi provided certain services to us during
the term of such Agreement.
 
 Please
see “Employment Contracts, Termination of Employment & Change in
Control Agreements” under Item 11 of this Annual Report for further details
regarding the employment and termination agreements of our executive
officers.
 
 16
 Election
of Directors
 
 On
November 8 and 9, 2006, respectively, Mr. William J. Kurinsky and Mr. Herbert
Kurinsky resigned their respective positions as Class I directors on our Board
of Directors. One of the Class I director vacancies was filled on January 5,
2007 with the election of Mr. Phillip P. D’Ambrisi. The other Class I director
vacancy was filled on February 22, 2007 with the election of Ms. Celeste M.
Leonard. Effective August 31, 2007, Mr. D'Ambrisi resigned his
position as a Class I director of the Company and FMSC,
respectively.
 
 Debenture
Redemptions
 
 On
December 11, 2007, the remaining convertible debenture came due and was redeemed
for $25,000. As of the date of this Annual Report, there are no 6% convertible
debentures outstanding.
 
 17
 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
year ended December 31, 2007 we reported a net loss of  $2,085,000.
For the year ended December 31, 2006 we reported a net loss of $837,000 and for
the year ended December 31, 2005 we reported net income of $2,424,000.
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.
  18
  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.
 
 19
 We
are subject to various risks in the securities industry
  As
a securities broker-dealer, Montauk Financial Group is subject to uncertainties
that are common in the securities industry. These uncertainties
include:
 ·
                the
      volatility of capital markets;
 ·
                governmental
      regulation;
 ·
                litigation;
 ·
                intense
      competition;
 ·
                substantial
      fluctuations in the volume and price level of securities;
    and
 ·
                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, 2007, we incurred $1,673,000 in litigation costs and
expenses related to various legal claims and settlements, including $400,000 in
legal costs (net of insurance reimbursement) associated with the Okun lawsuits,
as well as approximately $520,000 in costs associated with the SEC investigation
and the resolutions of the settlement with both the SEC and FINRA (See Item 3.
Legal Proceedings).As
of December 31, 2007, 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.
 
 20
 
  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 FINRA and the Municipal
Securities Rulemaking Board. Montauk Financial Group is a registered
broker-dealer with the SEC and a member firm of FINRA.  Broker-dealers
are subject to regulations which cover all aspects of the securities business,
including:
 
 ·
                  sales
      practices and supervision;
 ·
                  trading
      practices among broker-dealers;
 ·
                  use
      and safekeeping of customers' funds and
  securities;
 ·
                  capital
      structure of securities firms;
 ·
                  record
      keeping; and
 ·
                  the
      conduct of directors, officers, agents and
  employees.
 
 Much of
the regulation of broker-dealers has been delegated to self-regulatory
organizations, principally FINRA, which is Montauk Financial Group’s primary
regulator. FINRA 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:
 
 ·
                  censure;
 ·
                  fine;
 ·
                  civil
      damage awards, including treble damages for insider trading
      violations;
 ·
                  the
      issuance of cease-and-desist orders;
or
 ·
                  the
      deregistration or suspension of our broker-dealer activities and/or our
      employees.
  21
  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. The continued loss of a significant number of registered
representatives could continue to 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, Ms. Mindy A. Horowitz, our acting Chief Financial Officer and Senior
Vice President, and Ms. Celeste Leonard, our Chief Compliance Officer, 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 continue 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 FINRA 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.
 
 We
rely 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, NFS, as its primary clearing broker, and Penson 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.
 
 22
 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 FINRA relating to the
circumstances and extent to which a registered broker-dealer and FINRA-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 FINRA, 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 a shareholder, or us, and it is possible that the protection
afforded by such provisions may reduce the level of diligence or care
demonstrated by such directors.
 
 23
 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. We previously paid 8% quarterly dividends on the
outstanding shares of our Series B Preferred Stock, but as of June 15, 2007 all
shares of Series B Preferred Stock were cancelled. Since no shares of Series C
Participating Cumulative Preferred Stock (authorized in connection with the
Shareholder Rights Plan (See Item 1-"Business-Shareholder Rights Plan")), are
issued and outstanding, no dividends are paid with respect thereto (See Note 17
to Consolidated Financial Statements-Series C Participating Cumulative Preferred
Stock-Preferred Stock Purchase Rights). Applicable laws, rules and regulations
under the New Jersey Business Corporation Act and the Securities Act , have
affected our ability to declare and pay dividends.
 
 We
have sold restricted shares of our common stock which may depress the common
stock price
 
 As of March 31, 2008, of the 13,257,248
issued and outstanding shares of our common stock, approximately
4,720,308  shares may be deemed restricted shares and, in the future,
may be sold in compliance with Rule 144 under the Securities
Act.  Rule 144 was recently amended to provide, in general, that a
person that is not an affiliate of our Company, that holds restricted securities
for a period of six (6) months,  may sell such shares subject only to
our compliance with the current public information requirement until the end of
a one-year holding period and after one year, these securities may be freely
sold without regard to such requirement. 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 (“OTCBB”) maintained by FINRA. 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 a Nasdaq or Amex listing.
 
 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:
 
 ·
              limited
      release of the market price of our
securities;
 ·
              limited
      interest by investors in our
securities;
 ·
              volatility
      of our stock price due to low trading
volume;
 ·
              increased
      difficulty in selling our securities in certain states due to “blue sky”
      restrictions; and
 ·
              limited
      ability to issue additional securities or to secure additional
      financing.
  24
 
 Our
common stock may be subject to “penny stock” rules, therefore the market for our
common stock may be limited.
 
 Since our
common stock is subject to the SEC’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:
  ·
                must
      make a special written suitability determination for the
      purchaser;
 ·
                receive
      the purchaser’s written agreement to a transaction prior to
      sale;
 ·
                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
 ·
                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.
 
 25
 Shareholder
Rights Plan
 
 Effective August 8, 2007, our Board of Directors adopted a Shareholder Rights
Plan. Under the Rights Agreement, we issued a dividend of one preferred purchase
right for each outstanding share of our common stock. The Rights Agreement
further provides that under certain limited circumstances following the 10th day
after an Acquiring Person announces the acquisition of, or tender offer for, 10%
or more of the outstanding shares of our common stock, each right would instead
enable the registered holder (other than those rights beneficially owned by the
Acquiring Person which would be null and void and nontransferable) to purchase
that number of shares of our common stock, which would have a market value of
twice the purchase price thereby diluting the percentage ownership of the
Acquiring Person. The Shareholder Rights Plan is designed to guard against
partial tender offers and other coercive tactics to gain control of the Company
without offering a fair and adequate price and other terms to all shareholders.
(See above, Item 1-“Business-Shareholder Rights Plan”; Note 17 to Consolidated
Financial Statements - Series C Participating Cumulative Preferred Stock -
Preferred Stock Purchase Rights).
 
 Item
1B. Unresolved Staff Comments.
 
 None
  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 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.
 
 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.
 
 26
 We are 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 our securities
business.
 
 Management
has established a reserve for litigation settlements for the suits related to
the high-yield bonds and other litigation that are probable and can be
reasonably estimated.  The reserve is included in accrued liabilities
at December 31, 2007.  Management cannot give assurance that this
reserve will be adequate to absorb actual costs that may be subsequently
incurred.  Further, it is not possible to predict the outcome of other
matters pending against the Company.
 
 27
 SEC
Investigation
 
 The
Company has entered into a settlement as a result of a regulatory investigation
by the SEC concerning the Company’s and a former employee’s failure to
reasonably supervise the securities trading and research activities of a former
institutional analyst. The investigation covered the time period from March
through December 2003. The Company has executed an Offer of Settlement, which,
if accepted and approved by the  Commissioners of the SEC, will result
in issuance of an Order Instituting Public Administrative and Cease-And-Desist
Proceedings and Impose Remedial Sanctions. The settlement will result in the
imposition of a censure and fine of $100,000 against the Company, and a
six-month supervisory suspension and fine of $50,000 against our former
president and CEO, who is no longer affiliated with us. The settlement should be
concluded in early 2008. The monetary fine has been accrued for in 2007 and has
been placed in an interest bearing attorney escrow account pending finalization
of the settlement by the SEC.
 
 FINRA
Settlement
  In
September 2007 FMSC entered into a Letter of Acceptance, Waiver and Consent
("AWC") with FINRA, the broker-dealer’s primary regulatory authority. The AWC
resolved an investigation by FINRA Staff into sales practice activities of
certain of our former registered representatives, as well as our supervision of
those activities. Without admitting or denying the allegations set forth in the
AWC, FMSC accepted FINRA's findings and consented to a censure, paid a fine of
$175,000 and agreed to an undertaking requiring a written certification by a
senior officer of the firm to review the firm's systems and procedures regarding
its supervisory procedures, and training and monitoring of
supervisors.
 
 Termination of Merger
Agreement, Litigation and Subsequent Purchase of Majority Voting
Interest
 
 On May 5,
2006, we entered into a definitive merger agreement with FMFG Ownership, Inc.
and FMFG AcquisitionCo, Inc. (collectively referred to as the "Okun
Purchasers"), which are wholly-owned by Mr. Edward H. Okun, a private
investor.  Mr. Okun is the controlling person of Investment Properties
of America, LLC (“IPofA”), a privately owned, diversified real estate investment
and management company. Pursuant to the merger agreement, the Okun Purchasers
were to purchase all of our outstanding securities for an aggregate purchase
price of $23 million, or $1.00 in cash per common share, $2.00 in cash per share
of Series A Preferred Stock (convertible into two shares of common stock), and
$10.00 in cash per share of Series B Preferred Stock (convertible into ten
shares of common stock).
 
 On
December 29, 2006, we received notification from representatives of the Okun
Purchasers that they were terminating the merger agreement and not proceeding
with the merger. They alleged our failure to satisfy conditions and our alleged
breach of various representations, warranties, covenants and agreements in the
merger agreement.
 
 28
 On
January 8, 2007, we filed a lawsuit in the Supreme Court of New Jersey, Monmouth
County, Chancery Division against the Okun Purchasers, Mr. Okun, IPofA and
several other affiliated entities which Mr. Okun controls (collectively, the
“Okun Defendants”). The purpose of this lawsuit was to enforce the terms of the
merger pursuant to the merger agreement executed on May 5, 2006. Pursuant to the
merger agreement our common sock shareholders would have received $1.00 in cash
for each share of common stock.  The lawsuit alleged, among other
things, that the Okun Purchasers breached the merger agreement by terminating
the agreement on December 29, 2006 without cause or justification. Our complaint
demanded specific performance of the merger agreement and completion of the
merger. In the alternative, we sought compensatory damages for breach of
contract and breach of the covenant of good faith and fair dealing as well as
payment of $2 million held in escrow to secure the performance of the Okun
Purchasers under the merger agreement. The lawsuit also sought to void the lease
agreement that we entered into with another Okun affiliate to relocate our
corporate offices to a building purchased by that Okun affiliate in Red Bank,
New Jersey. Our complaint claimed that the Okun Defendants fraudulently induced
us to execute this new lease by falsely representing that the Okun Purchasers
would consummate the merger.
 
 On
February 12, 2007 we received the Okun Defendants' answer to the lawsuit, which
contained several counterclaims against us. In their counterclaims, the Okun
Purchasers alleged that we breached the merger agreement and failed to disclose
certain material facts about the Company. They also  sought the return
of $2 million held in escrow as well as compensatory damages, interest and
costs.
 
 The Okun
Defendants filed two additional actions; one on February 2, 2007, in the Circuit
Court of the State of Florida against our President and Chief Executive Officer,
and the other, a shareholder derivative action in the Federal District Court for
the District of New Jersey against us and certain of our directors and officers,
filed on February 16, 2007. Those lawsuits were based on the same facts and
circumstances as the New Jersey state lawsuit that we filed against the Okun
Purchasers, Mr. Okun and the other Okun Defendants for their breach of the
merger agreement, and are part of their response to the original lawsuit we
filed in the New Jersey Superior Court.
 
 On May 9,
2007, we announced a settlement agreement with Mr. Okun and the Okun Defendants
(“May Settlement Agreement”) to resolve the three separate lawsuits arising out
of the termination of the merger agreement.  However, on May 23, 2007
we announced that we and the Okun Defendants had agreed to consent to the entry
of a Court Order to vacate and set aside the May Settlement
Agreement.
 
 On June
15, 2007, we announced a new agreement with Mr. Okun and the Okun Defendants
(“June Settlement Agreement”) to settle the three separate lawsuits arising out
of the termination of the merger agreement.  The June Settlement
Agreement provided that Okun’s affiliated entities would surrender all of their
First Montauk preferred stock holdings and 5,272,305 of their common share
holdings, such that the Okun’s affiliates would hold less than 25% of our
outstanding common shares. These shares have since been surrendered and
cancelled. We also obtained an exclusive 60 day option (the “Option Period”) to
purchase the balance of the shares held by the Okun affiliated entities (the
“Option Securities”) for the aggregate purchase price of $2,500,000 (the
“Option”), which expired on August 14, 2007, without the Company exercising its
option. The June Settlement Agreement also provided that the lease between an
Okun affiliated entity and the Company, with respect to relocating the Company’s
corporate offices, shall be deemed void ab initio.
  29
  In
return, we agreed to direct the escrow agent, Signature Bank New York, to pay to
an Okun affiliated entity the $2 million on deposit by Mr. Okun and the Okun
Defendants under the Escrow Agreement executed and delivered pursuant to the May
5, 2006 Merger Agreement.
  As of
December 31, 2007, the Company has accrued for potential legal liabilities that
are probable and can be reasonably estimated based on a review of existing
claims and arbitrations. Management cannot give assurance that this amount will
be adequate to cover actual costs that may be subsequently incurred. As of
December 31, 2007, it was not possible to predict the outcome of these legal
matters pending against the Company.
 
 
 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, 2007.
  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 FINRA 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 28, 2008, our common stock had bid and offer prices of
$0.15 and $0.20 per share, respectively.   At December 31, 2007
our common stock had a closing price of $0.20 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
      StockCalendar
      Year 2008
              High
      Bid
              Low
      Bid1st
      Quarter
              $.20
              $.11Calendar
      Year 2007
              High
      Bid
              Low
      Bid1st
      Quarter
              $.61
              $.462ndQuarter
              $.70
              $.353rd
      Quarter
              $.40
              $.284th
      Quarter
              $.30
              $.16
  30
  Calendar
      Year 2006
              High
      Bid
              Low
      Bid1st
      Quarter
              $1.22
              $.802ndQuarter
              $1.00
              $.903rd
      Quarter
              $.975
              $.794th
      Quarter
              $.94
              $.40  B. Number of
Record Holders
 
 The
approximate number of record holders of our common stock as of March 31, 2008
was 448. 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 350 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 22,282 shares of Series A
Preferred Stock. We also paid quarterly dividends on our Series B Preferred
Stock at the rate of 8% per annum, subject to the limitations under the New
Jersey Business Corporation Act. As part of the June 15, 2007 settlement
agreement entered into with Mr. Okun and the Okun Defendants, they agreed to
surrender all of their shares of Series A and Series B Preferred Stock, together
with  5,272,305 shares of our common stock. Therefore, there are
currently no outstanding shares of Series B Preferred Stock.
 
 D. Issuance of Unregistered
Securities
 
 There were no issuances of unregistered
securities during 2007.
 
 E. Stock
Repurchases
  There were no repurchases of any securities during 2007.
 
 F. Securities
Authorized For Issuance Under Equity Compensation Plans
 
 See Item
11. “Executive Compensation”.
  31
  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.”
 
 
 Year
      Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Operations
      Results:Revenues:Commissions
              
              $
              31,728,518
              
              
              $
              39,920,168
              
              
              $
              37,493,733
              
              
              $
              42,732,238
              
              
              $
              41,883,669Principal
      transactions
              
              
              1,534,794
              
              
              
              4,079,243
              
              
              
              5,578,820
              
              
              
              9,058,259
              
              
              
              9,466,359Investment
      banking
              
              
              3,579,838
              
              
              
              3,420,685
              
              
              
              6,640,402
              
              
              
              2,716,042
              
              
              
              2,439,144Interest
      and other  income
              
              
              2,712,648
              
              
              
              3,540,324
              
              
              
              8,370,711
              
              
              
              4,680,702
              
              
              
              4,437,510Total
      revenues
              
              
              39,555,798
              
              
              
              50,960,420
              
              
              
              58,083,666
              
              
              
              59,187,241
              
              
              
              58,226,682Expenses:Commissions,
      employee compensation and benefits
              
              
              33,995,993
              
              
              
              43,137,778
              
              
              
              44,398,131
              
              
              
              46,851,474
              
              
              
              46,218,107Executive
      separation
              
              
              --
              
              
              
              1,151,266
              
              
              
              1,432,937
              
              
              
              --
              
              
              
              --Clearing
      and floor brokerage
              
              
              1,477,482
              
              
              
              1,527,675
              
              
              
              1,926,005
              
              
              
              2,466,027
              
              
              
              2,934,164Communications
      and occupancy
              
              
              1,672,992
              
              
              
              1,797,281
              
              
              
              2,483,056
              
              
              
              2,664,256
              
              
              
              2,659,105Legal
      matters and related costs
              
              
              1,672,716
              
              
              
              1,095,064
              
              
              
              1,773,604
              
              
              
              2,714,769
              
              
              
              5,836,960Other
      operating expenses
              
              
              2,778,928
              
              
              
              2,982,665
              
              
              
              3,467,972
              
              
              
              3,489,425
              
              
              
              3,393,335Interest
              
              
              26,420
              
              
              
              78,248
              
              
              
              100,123
              
              
              
              284,093
              
              
              
              204,054Total
      expenses
              
              
              41,624,531
              
              
              
              51,769,977
              
              
              
              55,581,828
              
              
              
              58,470,044
              
              
              
              61,245,725Income
      (loss) before income taxes
              
              
              (2,068,733
              )
              
              
              (809,557
              )
              
              
              2,501,838
              
              
              
              717,197
              
              
              
              (3,019,043
              )Provision
      (benefit) for income taxes
              
              
              16,333
              
              
              
              26,992
              
              
              
              77,544
              
              
              
              (13,305
              )
              
              
              499,000Net
      income (loss)
              
              $
              (2,085,066
              )
              
              $
              (836,549
              )
              
              $
              2,424,294
              
              
              $
              730,502
              
              
              $
              (3,518,043
              )
  32
  
 Year Ended
      December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Operations
      Results:Net
      income (loss) applicable to common stockholders
              
              $
              (2,209,032
              )
              
              $
              (1,005,055
              )
              
              $
              2,138,954
              
              
              $
              639,813
              
              
              $
              (3,542,882
              )Earnings
      (loss) per share:Basic:
              
              $
              (0.14
              )
              
              $
              (0.06
              )
              
              $
              0.15
              
              
              $
              0.07
              
              
              $
              (0.40
              )Diluted:
              
              $
              (0.14
              )
              
              $
              (0.06
              )
              
              $
              0.12
              
              
              $
              0.04
              
              
              $
              (0.40
              )Weighted
      average common shares outstanding-- Basic
              
              
              15,635,136
              
              
              
              17,004,254
              
              
              
              14,032,057
              
              
              
              9,270,350
              
              
              
              8,784,103Weighted
      average common and common share equivalents outstanding –
      Diluted
              
              
              15,635,136
              
              
              
              17,004,254
              
              
              
              20,109,178
              
              
              
              15,629,920
              
              
              
              8,784,103Financial
      condition:Total
      assets
              
              $
              5,250,908
              
              
              $
              7,798,917
              
              
              $
              8,719,930
              
              
              $
              9,834,374
              
              
              $
              12,193,101Total
      liabilities
              
              $
              3,615,876
              
              
              $
              3,985,426
              
              
              $
              5,492,079
              
              
              $
              12,932,991
              
              
              $
              16,280,540Stockholders’
      equity (deficit)
              
              $
              1,635,032
              
              
              $
              3,813,491
              
              
              $
              3,227,851
              
              
              $
              (3,098,617
              )
              
              $
              (4,087,439
              )
  33
  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  and Section 21E of the Exchange
Act,  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
 
 Substantially all of our business
activities consist of the securities brokerage and investment banking activities
of our wholly owned subsidiary, FMSC, a FINRA registered broker-dealer. FMSC
conducts operations in four principal categories, all of which are in the
financial services industry. These categories are:
 
 ·
              securities
      brokerage activities for which FMSC earns commissions or
    fees;
 ·
              corporate
      finance revenues consisting primarily of fees generated from private
      offerings of securities in which we act as placement agent and new issues
      of equity and preferred stock offerings in which we participate as a
      selling group or syndicate member;
 ·
              proprietary
      trading for which FMSC records profit or loss, depending on trading
      results and riskless principal transactions with customers;
      and
 ·
              other
      income, primarily interest earned on customer
  balances.
 
 Because we operate in the financial
services industry, our revenues and earnings are substantially affected by
general financial market conditions. Therefore, the amount of our revenues
depends greatly on levels of market activity requiring the services we
provide.
  34
  Results
of Operations
 
 2007 Compared to
2006
 
 Overview
 
 The
Company’s performance for 2007 resulted in a decrease in revenues of $11
million, to $40 million for 2007, compared to $51 million for 2006. The largest
decrease in revenues was in the area of equity commissions and principal
transactions, from $23.9 million in 2006 to $14.0 million in
2007.  The decrease in revenues is primarily attributable to a decline
in the number of producing registered representatives from 2006 to 2007.
Included in interest and other income for 2006 is an additional $180,000 of
margin interest, a partial allocation of the $1.0 million received from NFS in
June 2006. This was a result of an amendment to Exhibit A of the clearing
agreement signed by our wholly owned subsidiary, FMSC, on June 29,
2006.
 
 Net loss
applicable to common stockholders in 2007 was $2,209,032, or ($0.14) per basic
and diluted share compared to a net loss applicable to common stockholders of
$1,005,055, or ($0.06) per basic and diluted share for 2006.
 
 Revenues
by Source
 
 The
following provides a breakdown of total revenues by source for the years ended
December 31, 2007, 2006 and 2005 (in thousands of dollars).
 
 
 December
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005Amount
              
              
              %
      of Total
                Revenues
              
              
              Amount
              
              
              %
      ofTotal
                Revenues
              
              
              Amount
              
              
              %
      of Total
                RevenuesCommissionsEquities
              
              $
              12,498
              
              
              
              32
              %
              
              
              19,846
              
              
              
              39
              %
              
              $
              20,530
              
              
              
              35
              %Mutual
      Funds
              
              
              6,042
              
              
              
              15
              %
              
              
              6,179
              
              
              
              12
              %
              
              
              6,348
              
              
              
              11
              %Insurance
              
              
              4,386
              
              
              
              11
              %
              
              
              4,951
              
              
              
              10
              %
              
              
              4,230
              
              
              
              7
              %Investment
      Advisory
              
              
              4,314
              
              
              
              11
              %
              
              
              3,879
              
              
              
              7
              %
              
              
              3,235
              
              
              
              5
              %Alternative
      Products
              
              
              4,164
              
              
              
              10
              %
              
              
              4,927
              
              
              
              10
              %
              
              
              3,009
              
              
              
              5
              %Fixed
      Income
              
              
              324
              
              
              
              1
              %
              
              
              138
              
              
              <1%
              
              
              
              142
              
              
              
              1
              %Total
              
              
              31,728
              
              
              
              80
              %
              
              
              39,920
              
              
              
              78
              %
              
              
              37,494
              
              
              
              64
              %Principal
      Transactions
              
              
              1,535
              
              
              
              4
              %
              
              
              4,079
              
              
              
              8
              %
              
              
              5,579
              
              
              
              10
              %Investment
      Banking
              
              
              3,580
              
              
              
              9
              %
              
              
              3,421
              
              
              
              7
              %
              
              
              6,640
              
              
              
              12
              %Interest
      and OtherInterest
              
              
              2,055
              
              
              
              5
              %
              
              
              2,636
              
              
              
              5
              %
              
              
              2,506
              
              
              
              4
              %Deferred
      revenue
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,105
              
              
              
              9
              %Other
              
              
              658
              
              
              
              2
              %
              
              
              904
              
              
              
              2
              %
              
              
              760
              
              
              
              1
              %Total
              
              
              2,713
              
              
              
              7
              %
              
              
              3,540
              
              
              
              7
              %
              
              
              8,371
              
              
              
              14
              %Total
      revenues
              
              $
              39,556
              
              
              
              100
              %
              
              $
              50,960
              
              
              
              100
              %
              
              $
              58,084
              
              
              
              100
              %
  35
  Commission
Revenue
 
 Commissions
are comprised of revenues from the sale of equities, fixed income, mutual funds,
insurance, asset management fees and alternative products.Commission
revenue for 2007 decreased $8.2 million to $31.7 million from $39.9 million in
2006, related to the reduction in the number of registered representatives from
2006 to 2007. The overall decrease was primarily attributable to a reduction in
revenue from agency equity and principal transactions of $9.9 million. While
commissions generated from equity transactions has declined year over year,
revenues from management fees for advisory accounts has been on the rise. In
2007, management fees from advisory accounts accounted for $4.31 million of our
revenues, while in 2006 and 2005 revenues were $3.88 million and $3.23 million,
an increase of 11% and 33%, respectively.
 
 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 $2.6 million, from $4.1 million for 2006 to $1.5 for
2007.The decrease is primarily due to the
reduction in the number of registered representatives who engaged in these types
of transactions and the use of our clearing firm to handle more of our fixed
income securities transactions.Revenues from all fixed income sources,
which include municipal, government, and corporate bonds and unit investment
trusts decreased by $1.05 million, from $2.2 million in 2006 to $1.15 million in
2007.  Revenues from riskless principal trades of equity securities
decreased $306,000 from $671,000 in 2006 to $365,000 in 2007. 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
 
 In 2007, investment
banking revenues remained relatively constant, increasing $160,000, from $3.42
million in 2006 to $3.58 million in 2007.Investment banking revenue
includes fees from private offerings of securities for public companies, which
is a function of the number of the Company’s corporate clientele needing
financing for capital expansion. The Company is constantly looking to expand the
number of banking clients. This category also includes new issues of equity and
preferred stock offerings in which we participate as a selling group or
syndicate member.
 
 Interest
and Other Income
 
 Interest and other income
decreased $828,000 in 2007, or 23%, from $3.5 million in 2006 to $2.7 million in
2007. In 2006, an additional $180,000 of margin interest rebate, a partial
allocation of the $1.0 million received from NFS in June 2006, was included in
interest income.Of the $828,000 total decrease, $581,000 was
from the reduction in interest income. Taking into consideration the $180,000
received from NFS in 2006, the actual decrease would have been approximately
$400,000. This decrease was directly related to the amount of margin debit
carried by customers. In addition to the decrease in interest income, revenues
from marketing fees, which are directly related to revenues from alternative
investments, decreased $111,000.
 
 36
  Expenses
  Total expenses decreased by $10.2 million, or 20%, in 2007 to $41.6 million from
$51.8 million in 2006. Included in the expenses for 2007 are severance payments
for terminated employees of $341,000, consulting agreements for two prior
executives of $219,000, litigation costs associated with the Okun affiliates of
$400,000 (see Item 3. “Legal Proceedings”), and costs associated with an SEC
investigation and the resolution of the settlement with both the SEC and FINRA
of approximately $518,000. Included in expenses in 2006 is an $820,000 credit
due to a partial allocation of the $1 million received from NFS in June 2006 and
executive separation costs of $1,151,000.
 
 The following chart provides a breakdown of total expenses for the years ended
December 31, 2007, 2006 and 2005 (in thousands of dollars).
 
 Year
      EndedDecember
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005Amount
              
              
              %
      of Total Expenses
              
              
              Amount
              
              
              %
      of Total Expenses
              
              
              Amount
              
              
              %
      of Total ExpensesCommissions,
      employee compensation and benefits
              
              $
              33,996
              
              
              
              82
              %
              
              $
              43,138
              
              
              
              83
              %
              
              $
              44,398
              
              
              
              80
              %Executive
      separation
              
              
              --
              
              
              
              --
              
              
              
              1,151
              
              
              
              2
              %
              
              
              1,433
              
              
              
              3
              %Clearing
      and floor brokerage
              
              
              1,478
              
              
              
              4
              %
              
              
              1,528
              
              
              
              3
              %
              
              
              1,926
              
              
              
              3
              %Communications
      and occupancy
              
              
              1,673
              
              
              
              4
              %
              
              
              1,797
              
              
              
              4
              %
              
              
              2,483
              
              
              
              5
              %Legal
      matters and related costs
              
              
              1,672
              
              
              
              3
              %
              
              
              1,095
              
              
              
              2
              %
              
              
              1,774
              
              
              
              3
              %Other
      operating expenses
              
              
              2,779
              
              
              
              7
              %
              
              
              2,983
              
              
              
              6
              %
              
              
              3,468
              
              
              
              6
              %Interest
              
              
              26
              
              
              <1%
              
              
              
              78
              
              
              <1%
              
              
              
              100
              
              
              <1%Total
      operating expenses
              
              $
              41,624
              
              
              
              100
              %
              
              $
              51,770
              
              
              
              100
              %
              
              $
              55,582
              
              
              
              100
              %Provision for
      income taxes
              
              $
              16
              
              
              
              
              
              
              $
              27
              
              
              
              
              
              
              $
              78
 
 
 Commissions,
Employee Compensation and Benefits
 
 Commission
expense, consistently the largest expense category and directly related to
commission revenue, decreased 23%, or $8.6 million, from $36.6 million for 2006,
to $28.0 million for 2007.Compensation and benefits expense for
management, operations and clerical personnel, which include salaries, severance
payments, payroll taxes, stock and option compensation, health insurance
premiums, and bonus accruals, decreased for 2007, to $6.0 million from $6.5
million, a decrease of approximately $500,000 over 2006. Included in 2007 was
approximately $257,000 of severance costs for various personnel and bonus
payments associated with employment contracts of $300,000.
 
 Executive
Separation
 
 Executive
separation costs decreased $1,151,00 for 2007 when compared with 2006 with
respect to two separation agreements, one with our former chairman of the Board
of Directors and the other with our former general counsel. In 2007, there were no
separation agreements entered into with any executives.
  37
 Clearing
and Floor Brokerage
 
 Clearing
and floor brokerage costs which are greatly affected by volume and type of
transactions decreased approximately $50,000 from 2006 to 2007. In June 2006, we
allocated approximately $544,000 of the $1 million received in the settlement
from NFS to clearing fees. Excluding the reduction for 2006, clearing and floor
brokerage costs would have decreased by $594,000 or 29%.
 
 Communications
and Occupancy
 
 Communications
and occupancy costs decreased approximately $124,000, from $1.80 million in 2006
to $1.67 million in 2007. In 2006 there was a $135,000 reduction in costs
incurred in prior periods related to data aggregation as part of the $1 million
received from NFS in June 2006. Excluding this reduction, communications and
occupancy costs would have decreased by approximately $259,000. This decrease is
primarily due to the termination of our New York City branch office lease in
September 2006 and costs related to the operations of that office.
 
 Legal
matters and related costs
 
 Legal matters and related settlement costs increased $577,000, from $1.10
million in 2006 to $1.67 million in 2007, most of which was related to legal
fees and regulatory fines. Legal fees for 2007 were $1.26 million compared to
$970,000 in 2006. In 2006, we incurred $271,000 in legal fees in connections
with the anticipated acquisition of the Company by a private investor. In 2007,
we incurred approximately $400,000 (net of insurance reimbursement) related to
various lawsuits involving the termination of the anticipated acquisition in
December 2006 (See Item 3. “Legal Proceedings” -Termination of Merger Agreement;
Litigation and Settlement). Other legal fees in 2007 include costs associated
with the SEC investigation and the resolution of the settlement with both the
SEC and FINRA of approximately $518,000, as well as fees associated with
customer claims. The cost of legal settlements for 2007 decreased approximately
$27,000 when compared to 2006.
 
 As of
December 31, 2007, 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.
 
 SEC
Investigation
 
 The
Company has entered into a settlement as a result of a regulatory investigation
by the SEC concerning the Company’s and a former employee’s failure to
reasonably supervise the securities trading and research activities of a former
institutional analyst. The investigation covered the time period from March
through December 2003. The Company has executed an Offer of Settlement, which,
if accepted and approved by the  commissioners of the SEC, will result
in issuance of an Order Instituting Public Administrative and Cease-And-Desist
Proceedings and Impose Remedial Sanctions. The settlement will result in the
imposition of a censure and fine of $100,000 against the Company, and a
six-month supervisory suspension and fine of $50,000 against our former
president and CEO, who is no longer affiliated with us. The settlement should be
concluded in early 2008. The monetary fine has been accrued for in 2007 and has
been placed in an interest bearing attorney escrow account pending finalization
of the settlement by the SEC.
 
 38
  FINRA
Settlement
  In
September 2007 FMSC entered into a Letter of Acceptance, Waiver and Consent
("AWC") with FINRA, the broker-dealer’s primary regulatory authority. The AWC
resolved an investigation by FINRA Staff into sales practice activities of
certain of our former registered representatives, as well as our supervision of
those activities. Without admitting or denying the allegations set forth in the
AWC, FMSC accepted FINRA's findings and consented to a censure, paid a fine of
$175,000 and agreed to an undertaking requiring a written certification by a
senior officer of the firm to review the firm's systems and procedures regarding
its supervisory procedures, and training and monitoring of
supervisors.
 
 Termination of Merger
Agreement, Litigation and Settlement
 
 On May 5,
2006, we entered into a definitive merger agreement with FMFG Ownership, Inc.
and FMFG AcquisitionCo, Inc. (collectively referred to as the "Okun
Purchasers"), which are wholly owned by Mr. Edward H. Okun, a private
investor.  Mr. Okun is the controlling person of Investment Properties
of America, LLC (“IPofA”), a privately owned, diversified real estate investment
and management company. Pursuant to the merger agreement, the Okun Purchasers
were to purchase all of our outstanding securities for an aggregate purchase
price of $23 million, or $1.00 in cash per common share, $2.00 in cash per share
of Series A Preferred Stock (convertible into two shares of common stock), and
$10.00 in cash per share of Series B Preferred Stock (convertible into ten
shares of common stock).
 
 On
December 29, 2006, we received notification from representatives of the Okun
Purchasers that they were terminating the merger agreement and not proceeding
with the merger. They alleged our failure to satisfy conditions and our alleged
breach of various representations, warranties, covenants and agreements in the
merger agreement.
 
 On
January 8, 2007, we filed a lawsuit in the Supreme Court of New Jersey, Monmouth
County, Chancery Division against the Okun Purchasers, Mr. Okun, IPofA and
several other affiliated entities which Mr. Okun controls (collectively, the
“Okun Defendants”). The purpose of this lawsuit was to enforce the terms of the
merger pursuant to the merger agreement executed on May 5, 2006. Pursuant to the
merger agreement our common sock shareholders would have received $1.00 in cash
for each share of common stock.  The lawsuit alleged, among other
things, that the Okun Purchasers breached the merger agreement by terminating
the agreement on December 29, 2006 without cause or justification. Our complaint
demanded specific performance of the merger agreement and completion of the
merger. In the alternative, we sought compensatory damages for breach of
contract and breach of the covenant of good faith and fair dealing as well as
payment of $2 million held in escrow to secure the performance of the Okun
Purchasers under the merger agreement. The lawsuit also sought to void the lease
agreement that we entered into with another Okun affiliate to relocate our
corporate offices to a building purchased by that Okun affiliate in Red Bank,
New Jersey. Our complaint claimed that the Okun Defendants fraudulently induced
us to execute this new lease by falsely representing that the Okun Purchasers
would consummate the merger.
 
 39
  On
February 12, 2007 we received the Okun Defendants' answer to the lawsuit, which
contained several counterclaims against us. In their counterclaims, the Okun
Purchasers alleged that we breached the merger agreement and failed to disclose
certain material facts about the Company. They also  sought the return
of $2 million held in escrow as well as compensatory damages, interest and
costs.
 
 The Okun
Defendants filed two additional actions; one on February 2, 2007, in the Circuit
Court of the State of Florida against our President and Chief Executive Officer,
and the other, a shareholder derivative action in the Federal District Court for
the District of New Jersey against us and certain of our directors and officers,
filed on February 16, 2007. Those lawsuits were based on the same facts and
circumstances as the New Jersey state lawsuit that we filed against the Okun
Defendants, Mr. Okun and the other Okun Defendants for their breach of the
merger agreement, and are part of their response to the original lawsuit we
filed in the New Jersey Superior Court.
 
 On May 9,
2007, we announced a settlement agreement with Mr. Okun and the Okun Defendants
(“May Settlement Agreement”) to resolve the three separate lawsuits arising out
of the termination of the merger agreement.  However, on May 23, 2007
we announced that we and the Okun Defendants had agreed to consent to the entry
of a Court Order to vacate and set aside the May Settlement
Agreement.
 
 On June
15, 2007, we announced a new agreement with Mr. Okun and the Okun Defendants
(“June Settlement Agreement”) to settle the three separate lawsuits arising out
of the termination of the merger agreement.  The June Settlement
Agreement provided that Okun’s affiliated entities would surrender all of their
First Montauk preferred stock holdings and 5,272,305 of their common share
holdings, such that the Okun’s affiliates would hold less than 25% of our
outstanding common shares. These shares have since been surrendered and
cancelled. We also obtained an exclusive 60 day option (the “Option Period”) to
purchase the balance of the shares held by the Okun affiliated entities (the
“Option Securities”) for the aggregate purchase price of $2,500,000 (the
“Option”), which expired on August 14, 2007, without the Company exercising its
option. The June Settlement Agreement, with respect to relocating the Company’s
corporate offices, also provided that the lease between an Okun affiliated
entity and the Company shall be deemed void ab initio.
 
 In
return, we agreed to direct the escrow agent, Signature Bank New York, to pay to
an Okun affiliated entity the $2 million on deposit by Mr. Okun and the Okun
Defendants under the Escrow Agreement executed and delivered pursuant to the May
5, 2006 Merger Agreement.
 
 Other
Operating Expenses
 
 Other
operating costs decreased by approximately $200,000, to $2.78 million in 2007,
from $2.98 million in 2006. Included in the 2007 operating costs are decreases
in depreciation expense of $135,000, E&O insurance premiums of $120,000,
office expense of $81,000 and travel expenses of $54,000. Increases in operating
expenses for 2007 included consulting fees of $176,000 directly related to
agreements with two former executives.
 
 40
 Income
tax expense for the years ended December 31, 2007, 2006 and 2005 was $16,000,
$27,000 and $78,000, respectively.  The effective tax rate on pre-tax
income (loss) was 0.8%, 3.3% and  3.1%,  during 2007, 2006
and 2005, respectively.    As of December 31, 2007, 2006 and
2005, 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.
 
 2006 Compared to
2005
 
 Overview
 
 The
Company’s performance for 2006 resulted in a decrease in revenues of $7.1
million, to $51 million, compared to $58.1 million for 2005. The decrease in
revenue is primarily due to the 2005 recognition of $4.9 million of the
remaining deferred revenue in connection with the termination of our Financial
Agreement with Fiserv Securities, Inc. (“Fiserv”), our prior clearing firm.
Included in interest and other income for 2006 is an additional $180,000 of
margin interest rebate; a partial allocation of the $1.0 million received from
NFS on June 29, 2006 relating to conversion and transition expenses incurred by
FMSC in prior periods, as a result of its conversion from Fiserv Inc. to NFS in
2005. In addition, investment banking revenues decreased $3.2 million when
compared to 2005. Our 2006 results were also negatively impacted by the loss of
several large producing offices during 2006. Excluding the one-time revenue,
total revenues decreased by approximately $2.2 million, or 4%, compared to
2005.
 
 Commission
Revenue
 
 Commission
revenue increased $2.4 million to $39.9 million from $37.5 million in 2005, due
mainly to the increased revenue from alternative products of $1.9 million.
Alternative products consist mainly of REIT’s, 1031 exchanges and promissory
notes. While commissions generated from equity transactions has declined year
over year, revenues from the sales of insurance and annuities and management
fees from advisory accounts has been on the rise. In 2006, insurance revenues
accounted for $4.95 million of our revenues, while in 2005 revenues were $4.23
million, an increase of 15%. Management fees from advisory accounts increased
$644,000, or 15%, when compared to 2005.
 
 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 $1.5 million, or 27%, from $5.6
million in 2005 to $4.1 million in 2006. Revenues from all fixed income sources,
which include municipal, government, and corporate bonds and unit investment
trusts decreased by $943,000, from $4.0 million in 2005 to $3.1 million in
2006.  Revenues from riskless principal trades of equity securities
decreased $574,000 from $1.2 million in 2005 to $671,000 in 2006. 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. These decreases
are primarily attributable to a decline over the last several years in the
number of registered representatives conducting more of these types of
transactions.
 
 41
  Investment
Banking
 
 In 2006,
investment banking revenues decreased $3.2 million, or 48%, from $6.6 million in
2005, to $3.4 million in 2006. The decrease in the revenue was primarily due to
an overall reduction in the number of private offerings in 2006 when compared to
2005. In 2005, however, we reported the highest annual investment banking
revenues than in any other year in the Company’s history.
  Interest
and Other Income
 
 Interest
and other income decreased $4.83 million in 2006, or 58%, from $8.4 million in
2005 to $3.6 million in 2006. In 2005, other income included the recognition of
the remaining deferred revenue for cash advances received in prior years from
our prior clearing firm, Fiserv.  During 2005, we terminated our
financing agreement with Fiserv and recorded the remaining unamortized balance
of $4.9 million to other income.  Included in interest income for 2006
is an additional $180,000 of margin interest rebate, a partial allocation of the
$1.0 million received from NFS on June 29, 2006. Without the inclusion of the
$4.9 million in 2005 and the $180,000 in 2006, interest and other income would
have remained relatively constant between the two years.
 
 Expenses
 
 Total
expenses decreased by $3.8 million, or 7%, in 2006 to $51.8 million from $55.6
million in 2005. Included in expenses in 2006 is an $820,000 credit due to a
partial allocation of the $1 million received from NFS on June 29, 2006. Taking
into consideration the $820,000 received from NFS, expenses decreased by $3.2
million. In addition, in February 2005, we recorded additional compensation
expense of $1,433,000 in connection with a separation agreement with one of our
senior officers, compared to $1,151,000 in 2006 with respect to two separation
agreements, one with our former chairman of the Board of Directors and the other
with our former general counsel.
 
 Commissions, Employee Compensation
and Benefits
 
 Commission
expense, consistently the largest expense category and which is directly related
to commission revenue, decreased 2%, or $787,000, from $37.4 million for 2005,
to $36.6 million for 2006. Compensation and benefits expense for management,
operations and clerical personnel decreased by $476,000 in 2006, when compared
to 2005. A reduction in the amortization of deferred compensation from $896,000
in 2005 to $272,000 in 2006 accounted for most of the difference.
 
 42
  Executive Separation
 
 During
the 2006 period, we recorded separation costs of $1,151,000 in connection with
the termination of an employment agreement with our former chairman of the Board
of Directors and the non-renewal of an employment agreement with our former
general counsel. This compares to $1,433,000 in connection with a separation
agreement with our former chief executive officer in 2005.
 
 Clearing and Floor
Brokerage
 
 Clearing
and floor brokerage costs decreased $398,000, from $1.9 million in 2005, to $1.5
million in 2006. In June 2006, we allocated approximately $544,000 of the $1
million received in the settlement from NFS to clearing fees. Included in costs
for 2005 is $143,000 of expense rebates provided by Fiserv.  Excluding
these reductions for 2006 and 2005, clearing and floor brokerage costs would
have remained fairly constant.
 
 43
 Communications and
Occupancy
 
 Communications
and occupancy costs decreased $686,000 during 2006, from $2.5 million in 2005 to
$1.8 million in 2006. In addition to a $135,000 reduction in expenses as part of
the $1 million received from NFS, the decrease in expenses is due to reductions
in occupancy and related costs from the elimination of a company leased branch
office in New York City in 2006 and reduction in quote services due to a
reduction in brokers and discounted market data pricing received from our
clearing firm.
 
 Legal matters and related
costs
  Legal matters and related settlement costs decreased 38%, or $679,000, from $1.8
million in 2005 to $1.1 million in 2006. The reduction in 2006 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 Cascade Financial Corporation (“Olympic”) which was
terminated on October 24, 2005, compared to $325,000 of legal fees related to
the proposed merger with the Okun Purchasers.
 
 Liquidity and Capital
Resources
 
 We
maintain a highly liquid balance sheet with approximately 64% for 2007 and 81%
for 2006 and 2005, consisting of cash and cash equivalents, securities owned,
and receivables from our clearing firm and other broker-dealers. The balances in
these accounts can and do fluctuate significantly from day to day, depending on
general economic and market conditions, volume of activity, and investment
opportunities.  These accounts are monitored on a daily basis in order
to ensure compliance with regulatory net capital requirements and to preserve
liquidity.
 
 Overall,
cash and cash equivalents decreased for 2007 by $277,000. Net cash used in
operating activities during 2007 was $1,082,000, as a result of a net loss of
$2,085,000 adjusted by non-cash charges including depreciation and amortization
of $140,000. Cash was further reduced by a net increase in other assets of
$561,000 and decreases in commissions payable, accounts payable and accrued
expenses of $639,000, $57,000 and $639,000, respectively.  These
decreases to cash were partially offset by decreases in the amount due from our
clearing firm, securities owned, prepaid expenses, and employee and broker
receivables of $2,640,000, $39,000, $35,000 and $55,000,
respectively.
 
 Net cash
used in operating activities in 2006 was $668,000, as a result of net loss of
$837,000 adjusted by non-cash charges including depreciation and amortization of
$586,000 and payment of the $200,000 note issued in connection with a separation
agreement. Cash was further reduced by net increases in the amount due from our
clearing firm, employee and broker receivables and other assets of $232,000,
$33,000 and $44,000, respectively, partially offset by a decrease in securities
owned of $105,000. These increases to cash were offset by decreases in accounts
payable, accrued expenses and income taxes payable of $173,000, $178,000 and
$28,000, respectively, partially offset by an increase in commissions’ payable
of $351,000.
 
 44
 Net cash
provided by operating activities in 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 revenues. Cash was increased by a
reduction in the amount due from our clearing firm of $1,059,000.
 
 Additions
to property and equipment of $46,000 accounted for the use of cash from
investing activities for 2007. In 2006 and 2005, investing activities consumed
$34,000 and $43,000, respectively, for additions to capital
expenditures.
 
 Financing
activities in 2007 provided net cash of $851,000 due to the issuance of a
convertible secured note in the amount of $1,000,000, partially offset by
payments of preferred stock dividends of $124,000. Financing activities in 2006
used net cash of $143,000 due to the payment of preferred stock dividends and
capital leases of $169,000 and $7,700, respectively, partially offset by
proceeds from option exercises of $34,000. 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 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 Series A
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 $67,077 during 2007
and $168,506 during 2006. (See Note 17 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 were 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 were issued on the basis of the statutory
exemption provided by Section 4(2) of the Securities Act,  and/or Rule
506 of Regulation D, promulgated thereunder relating to transactions by an
issuer not involving any public offering.
 
 45
 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 were used to satisfy general working capital
needs.  The debentures have not been registered for offer or sale
under the Securities Act; such securities were issued on the basis of the
statutory exemption provided by Section 4(2) of the Securities
Act,  and/or Rule 506 of Regulation D, promulgated there under
relating to transactions by an issuer not involving any public
offering.
 
 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
elected to convert their debentures into shares of our common stock in
accordance with the terms of the debentures.  As a result, we issued
3,770,000 shares of our common stock during that time period.  The
debentures are convertible at $.50 per share.
 
 During
2006, $35,000 of the Company’s convertible debentures was converted into 70,000
shares of common stock.  In June 2006, the Okun Purchasers purchased
$1,190,000 principal amount of debentures, which were acquired from their
holders in privately negotiated transactions. Subsequently, on June 20 and 23,
2006, the Okun Purchasers converted such debentures into 2,380,000 common
shares. As of the date of this report, there are no convertible debentures
outstanding.
 
 During
the second quarter of 2006, FMSC signed a release with NFS for and in
consideration of the payment of $1,000,000 by NFS relating to conversion and
transition expenses incurred by the broker-dealer as a result of its conversion
from Fiserv to NFS in 2005. The payment was received by FMSC on June 29,
2006.
 
 In
connection with the separation agreement we entered into with Mr. William
Kurinsky in 2005, we issued him an aggregate of 197,824 shares of a newly
created class of Series B Preferred Stock. Such shares of Series B Preferred
Stock are 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 along with the common stock 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  and the regulations of the SEC and we relied upon the
exemption from registration under Section 4(2) of the Securities
Act  to issue the shares of Series B Preferred Stock.  (See
Note 18 to the consolidated financial statements). On February 23, 2007, Mr.
Kurinsky sold all 197,824 shares of Series B Preferred Stock to FMFG Ownership
II, Inc., an affiliate of Mr. Okun.On June 15, 2007, as part
of the settlement with Mr. Okun and the Okun Defendants (See Note 12-Termination
of Merger Agreement; Litigation and Settlement) an agreement was reached which
required the Okun Defendants  to surrender all shares of Series B
Preferred Stock previously owned by the Okun Defendants, together with all
shares of Series A Preferred Stock and  5,272,305 shares of our common
stock owned by them. On June 15, 2007, 197,824 shares of Series B Preferred
Stock were surrendered and cancelled.The Company paid $56,889 and
$80,000 in dividends on the Series B Preferred Stock for 2007 and 2006,
respectively. There
are currently no shares of Series B Preferred Stock
outstanding.
 
 46
 On
December 7, 2007 we entered into the Note Purchase Agreement with AEFC-IC
pursuant to which we issued to AEFC-IC the AEFC-IC Note which is due on December
31, 2008. The AEFC-IC Note is for an aggregate principal amount up to
$2,000,000. The AEFC-IC Note will accrue interest on the unpaid principal amount
at the rate of 10% per annum which will be paid monthly in arrears on or before
the 10th day of the month following the interest accrual. The principal of the
AEFC-IC Note and all accrued and unpaid interest thereon will be payable in full
on December 31, 2008. The AEFC-IC Note is convertible into shares of common
stock at $0.35 per share, as adjusted, beginning July 1, 2008 if the AEFC-IC
Note is not prepaid prior to such date. The AEFC-IC Note is prepayable at any
time prior to July 1, 2008 subject to an escalating prepayment penalty based on
the date of prepayment which is payable by us in cash and the issuance of a
warrant to purchase shares of our common stock at an exercise price of $0.35 per
share, as adjusted (the "Prepayment Warrant"). In the event we (i) do not draw
the full $2,000,000 principal amount available under the AEFC-IC Note and (ii)
the AEFC-IC Note has not been prepaid by July 1, 2008, we will issue AEFC-IC a
warrant to purchase shares of our common stock at an exercise price of $0.35 per
share, as adjusted, for each one dollar of principal amount available but not
drawn upon under the AEFC-IC Note. The parties also executed a registration
rights agreement.
 
 In
connection with, and concurrent with, the execution of the Note Purchase
Agreement, the AEFC-IC Note and the related documents, we entered into the First
Amendment, dated as of December 7, 2007 ("First Amendment to the Rights
Agreement"), of the Rights Agreement, dated August 1, 2007, between us and
Continental Stock Transfer & Trust Company, as Rights Agent ("Rights
Agreement") as more fully described above. The First Amendment to the Rights
Agreement provides that AEFC-IC will not be deemed to be an "Acquiring Person"
under the Rights Agreement by reason of (i) the execution of the Note Purchase
Agreement; (ii) the issuance of the AEFC-IC Note; (iii) the issuance of shares
of common stock upon the conversion of the AEFC-IC Note into shares of our
common stock; (iv) the issuance of any warrants to AEFC-IC pursuant to the Note
Purchase Agreement or any shares of common stock upon exercise of such warrants;
(v) the purchase by AEFC-IC of all or any of the 3,300,308 shares of common
stock owned by  the Okun Parties; (vi) the approval, execution or
delivery of any agreement with respect to the purchase by AEFC-IC of all or any
of the 3,300,308 shares of common stock owned by the Okun Parties; (vii) the
public or other announcement of the AEFC-IC Note Purchase Agreement or any of
the transactions contemplated thereby, or the purchase by AEFC-IC of all or any
of the 3,300,308 shares of common stock owned by the Okun Parties; or (viii) the
consummation of the Note Purchase Agreement and any other transactions
contemplated by the Note Purchase Agreement or any agreement to purchase all or
any of the 3,300,308 shares of common stock owned by the Okun
Parties.
 
 During
2007, we cut costs by approximately $1.5 million. This was accomplished through
reductions in our work force, subletting a portion of our office space and the
renegotiation of our outsourced mailroom contract. In addition we initially
raised $1 million through the AEFC-IC Note.  We believe that our cash
resources available will be sufficient to meet our minimum planned operating
needs for the next 9 months.  Beyond that period, management has other
plans for increasing cash flow, including pursuing additional financing and
continued reductions in overhead costs.  Although we have plans to
pursue additional financing, there can be no assurance that we will be able to
secure financing when needed or obtain such financing on terms satisfactory to
us, if at all, or that any additional funding we do obtain will be sufficient to
meet our needs in the long term.  If additional funding cannot be obtained,
we will review alternative courses of action to conserve our cash
flow.
 
 47
 Net
Capital
  At
December 31, 2007, Montauk Financial Group had net capital of $849,710, which
was $599,710 in excess of its required net capital of $250,000 and the ratio of
aggregate indebtedness to net capital was 2.91 to 1.
 
 Contractual
Obligations
 
 The
Company has contractual obligations to make future payments in connection with
its short-term debt and non-cancelable lease agreements. The follow table sets
forth these contractual obligations by year. This table does not include any
projected payment amounts related to our potential exposure to arbitrations and
other legal matters.
 
 Maturity
      Date ExpectedCategory
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              TotalOperating
      Leases
              
              
              1,148,504
              
              
              
              843,667
              
              
              
              184,981
              
              
              
              18,627
              
              
              
              2,195,779Short-term
      debt (1)
              
              
              1,000,000
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              1,000,000Total
              
              $
              2,148,504
              
              
              $
              843,667
              
              
              $
              184,981
              
              
              $
              18,627
              
              
              $
              3,195,779
 (1)
Short-term debt includes a 10% convertible secured note in the amount of
$1,000,000 maturing on December 31, 2008.
  48
 Effective
November 2006, the Company entered into a master services agreement with an
outside vendor for development of certain software, data integration and
business processing improvement consulting services.  Under the terms
of the agreement, the Company made payments totaling $400,000 to the vendor for
software development, none of which has been amortized or expensed and has been
included in other assets on the Consolidated Statements of Financial
Condition.
 
 On March
31, 2008, the Company agreed to amend the master services agreement with the
vendor in exchange for a reimbursement of a portion of the system development
costs paid by the Company. In addition, the vendor will provide data integration
and commission collection services to the Company, which will be amortized over
the duration of the amended agreement through December 2009.
  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. (See Note 2 to the
consolidated financial statements for further discussion of significant
accounting policies.)
 
 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.
 
 49
  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 it’s clearing brokers, who 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, 2007, 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.
 
 The Company adopted FIN 48 “Accounting for Uncertainty in Income Taxes” in
January 2007 to measure its tax positions in the consolidated financial
statements. The Company’s
practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. We don’t expect any impact on the Company’s consolidated
financial position, results of operations or cash flows at December 31,
2007 and for the year then ended as a result of implementing FIN
48.
 
 50
 New
Accounting Standards
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007),Business
Combinations, which replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We are currently assessing the potential impact that adoption of SFAS
No 141R will have on our financial statements.
  In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which changes
the accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for annual periods
beginning after December 15, 2008. We are currently assessing the potential
impact that adoption of SFAS No. 160 would have on our financial
statements.
  In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007,
and all interim periods within those fiscal years. In February 2008, the FASB
released FASB Staff Position (FSP FAS 157-2 –Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. We are currently assessing the
potential impact that adoption of this statement would have on our financial
statements.
 
 On March
19, 2008 the Financial Accounting Standards Board (FASB) issued Statement No.
161 (FAS 161), Disclosures
about Derivative Instruments and Hedging Activities. The new standard is
intended to help investors better understand how derivative instruments and
hedging activities affect an entity’s financial position, financial performance
and cash flows through enhanced disclosure requirements. The enhanced
disclosures include, for example:
  51
 ·     A
tabular summary of the fair values of derivative instruments and their gains and
losses
  ·     Disclosure of
derivative features that are credit-risk-related to provide more information
regarding an entity’s liquidity
  ·     Cross-referencing
within footnotes to make it easier for financial statement users to locate
important information about derivative instruments
  The new
standard is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged.
 
 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.
 
 Our
ability to continue as a going concern is dependent on our ability to maintain
and increase operating revenues, reduce operating expenses, and raise additional
capital. During the year, the Company raised $1,000,000 in the form of a short
term secured convertible promissory note andreduced
expenses by approximately $1.5 million. This included a reduction in the
workforce, subletting of office space, and renegotiating of outsourced office
functions. We believe that our cash resources will be sufficient to meet our
minimum planned operating needs for the next 9 months. Beyond that period,
management has other plans for increasing cash flow, including pursuing
additional financing and continued reductions in overhead costs. We cannot make
any assurances that we will be successful in these activities, which would
therefore have a materially adverse affect on our financial
condition.
 
 Our
ability to obtain additional financing from other sources depends on many
factors, some of which are beyond our control, including the state of the
capital markets and the uncertainties that are common in the securities
industry. The necessary additional financing may not be available to us or may
be available only on terms that would result in dilution to the current owners
of our common stock. If additional funding cannot be obtained, we will review
alternative courses of action to conserve our cash flow.
 
 52
 As a securities broker-dealer, we are
subject to uncertainties that are common in the securities industry. These
uncertainties include:
  ●
                the
      volatility of capital markets;
 ●
                governmental
      regulation;
 ●
                litigation;
 ●
                intense
      competition;
 ●
                substantial
      fluctuations in the volume and price level of securities;
    and
 ●
                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. In the event of a substantial change in market conditions or a
loss of a substantial number of registered representatives from whom our
revenues are derived, our financial condition and results of operations would be
adversely affected.
 
 Market Risk. Market risk is
the risk of loss to the Company resulting from changes in interest rates and
equity prices. The Company has exposure to market risk primarily through its
broker-dealer. The Company’s broker-dealer, FMSC , carries debt obligations on
behalf of its customers and acts as a market maker in approximately 15
over-the-counter equity securities. In connection with these activities, the
Company maintains inventories to facilitate client transactions. Occasionally,
the Company invests for its own proprietary equity investment
accounts.
 
 The
following table represents the fair value of trading inventories associated with
the Company’s broker-dealer client facilitation, market-making activities and
proprietary trading activities.
 
 December
      31, 2007
              
              
              December
      31, 2006Securities
                Owned
              
              
              Securities
      Sold
                but
      not yet
                Purchased
              
              
              Securities
                Owned
              
              
              Securities
      Sold
                but
      not yet
                PurchasedDebt
      securities:Government
              
              $
              6,756
              
              
              $
              0
              
              
              $
              2,015
              
              
              $
              0Corporate
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Municipal
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Certificates
      of deposit
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Total
      debt securities
              
              
              6,756
              
              
              
              0
              
              
              
              2,015
              
              
              
              0Equity
      securities
              
              
              58,339
              
              
              
              0
              
              
              
              97,941
              
              
              
              495Mutual
      funds
              
              
              9,463
              
              
              
              201
              
              
              
              6,008
              
              
              
              0Options
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Warrants
              
              
              85,215
              
              
              
              0
              
              
              
              92,483
              
              
              
              0Total
              
              $
              159,773
              
              
              $
              201
              
              
              $
              198,447
              
              
              $
              495
 
 Changes in value of the Company’s
inventory may result from fluctuations in interest rates, credit ratings of the
issuer, equity prices and the correlation among these factors. The Company’s
primary method of controlling risk is through the establishment and monitoring
of limits on the dollar amount of securities positions that can be entered into.
Position limits in inventory accounts are monitored on a daily basis. Management
also monitors inventory levels and trading results, as well as inventory aging,
pricing, concentration and securities ratings.
 
 53
 Since the inventory accounts are used
primarily to facilitate customer transactions the number of positions and
absolute dollar amounts are maintained well within Company limits and therefore
represents minimal market risk to the Company. Our policy is to hold securities
pending customer transactions and therefore we generally do not maintain
positions longer than one year.
 
 Credit Risk. Credit risk
represents the loss that we would incur if a client, counterparty or issuer of
securities or other instruments that we hold fails to perform its contractual
obligations. Client activities involve the execution, settlement, and financial
of various transactions on behalf of its clients.  Client activities
are transacted on either a cash or margin basis. Client activities may expose us
to off-balance sheet credit risk. We may have to purchase or sell financial
instruments at the prevailing market price in the event of the failure of a
client to settle a trade on its original terms or in the event that cash and
securities in the client margin accounts are not sufficient to fully cover the
client losses. We seek to control the risks associated with client activities by
requiring clients to maintain collateral in compliance with various regulations
and company policies.
 
 Operational Risk. Operational
risk generally refers to the risk of loss resulting from our operations,
including, but not limited to, improper or unauthorized execution and processing
of transactions, deficiencies in our operating systems, business disruptions and
inadequacies or breaches in our internal control processes. We operate in
diverse markets and rely on the ability of our employees and systems to process
high numbers of transactions often within short time frames. In the event of a
breakdown or improper operation of systems, human error or improper action by
employees, we could suffer financial loss, regulatory sanctions or damage to our
reputation. In order to mitigate and control operational risk, we have developed
and continue to enhance policies and procedures that are designed to identify
and manage operational risk at appropriate levels. Included in our operational
risk management practice is disaster recovery for our critical systems. We
believe that our disaster recovery program, including off-site back-up
technology and operational facilities, is adequate to handle a reasonable
business disruption. However, there can be no assurances that a disaster
directly affecting our headquarters or operations center would not have a
material adverse impact.  Insurance and other safeguards might only
partially reimburse us for our losses.
 
 Legal Risk. Legal risk
includes the risk of non-compliance with applicable legal and regulatory
requirements. We are subject to extensive regulation in the different
jurisdictions in which we conduct our business. We have various procedures
addressing issues such as regulatory capital requirements, sales and trading
practices, use of and safekeeping of customer funds, credit granting, collection
activities, anti money-laundering and record keeping.
 
 Item
7A. Quantitative and Qualitative Disclosures about Market Risk
 
 Our
activities often involve the purchase, sale or short sale of securities as
principal. Such activities subject our capital to significant risks from markets
that may be characterized by relative illiquidity or may be particularly
susceptible to rapid fluctuation in price or liquidity.  Such market
conditions could limit our ability to resell securities purchased or to purchase
securities sold short.  These activities subject our capital to
significant risks, including market, credit and liquidity
risks.  Market risk relates to the risk of fluctuating values based on
market prices without   action on our part.  Our
primary credit risk is settlement risk, which relates to whether counterparty
will fulfill its contractual obligations, such as delivery of securities or
payment of funds.  Liquidity risk relates to our inability to
liquidate assets or redirect the deployment of assets contained in illiquid
investments. Additional information pertaining to the foregoing risks is
included under the caption “Management's Discussion and Analysis of Financial
Condition and Results of Operations – Risk Management.”
 
 54
 Item
8.    Financial Statements
 
 See
Financial Statements attached hereto at pages F-1 to F-40.
  Item
9.    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
 
 None
 
 Item
9A. Controls and Procedures
  As of
December 31, 2007, an evaluation of the effectiveness of the design and
operation of the Corporation’s disclosure controls and procedures was performed
under the supervision and with the participation of the Corporation’s
management, including the chief executive officer and acting chief financial
officer. Based on that evaluation, the chief executive officer and acting chief
financial officer concluded that the Corporation’s disclosure controls and
procedures were effective as of the evaluation date.
  During
the year ended December 31, 2007, there were no changes in internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Corporation’s internal control over financial
reporting.
 
 Item
9B. Other Information
 
 None
  55
  PART
III
 
 Item
10.  Directors and Executive Officers
  Our
directors and executive officers for the year ended December 31, 2007 are as set
forth below. From January 1, 2007 through August 31, 2007 our Board consisted of
six individuals. Effective August 31, 2007 Mr. Phillip D’Ambrisi resigned from
our Board. His seat currently remains vacant.
 
 Board
of Directors
  Name
              Age
              PositionVictor
      K. Kurylak
              51
              Class
      II Director, Chief Executive Officer and President, First Montauk
      Financial Corp.Ward
      R. Jones, Jr.
              76
              Class
      III Director, First Montauk Financial Corp.Barry
      D. Shapiro
              66
              Class
      II Director, First Montauk Financial Corp.David
      I. Portman
              66
              Class
      III Director, First Montauk Financial Corp.Celeste
      M. Leonard
              52
              Class
      I Director, First Montauk Financial
Corp.
 
 Executive
Officers
 
 Name
              Age
              PositionVictor
      K. Kurylak
              51
              Chief
      Executive Officer and President, First Montauk Financial Corp. and Montauk
      Financial GroupCeleste
      M. Leonard
              52
              Chief
      Compliance Officer, Montauk Financial GroupMindy
      A. Horowitz
              50
              Acting
      Chief Financial Officer -First Montauk Financial Corp., Chief Financial
      Officer, Treasurer, Fin.Op.- Montauk Financial
  Group
 
 56
 Our
Certificate of Incorporation provides for the classification of the Board of
Directors into three classes of Directors, each class as nearly equal in number
as possible but not less than one Director, each Director to serve for a
three-year term, staggered by class.   The Certificate of
Incorporation further provides that a Director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of the holders of
at least 70% of the combined voting power of our voting stock, with vacancies on
the Board being filled only by a majority vote of the remaining Directors then
in office.  "Cause” is defined as the willful failure of a Director to
perform in any substantial respect such Director’s duties to our company (other
than any such failure resulting from incapacity due to physical or mental
illness), willful malfeasance by a Director in the performance of his duties to
the   company which is materially and demonstrably injurious to
the company, the commission by a Director of an act of fraud in the performance
of his duties, the conviction of a Director for a felony punishable
by  confinement  for a period in excess of one year, or the
ineligibility  of a Director for  continuation  in
office  under any  applicable rules, regulations or orders
of any federal or state regulatory authority. All officers serve at the
discretion of the Board of Directors.
 
 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 Officer.
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.
 
 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 through 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.
  57
  David I. Portmanrejoined 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 1988. 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. Montauk Financial Group 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.
 
 Celeste M. Leonardwas
elected to serve as a Class I member of our Board of Directors on February 22,
2007. Since September 2006, Ms. Leonard has been an Executive Vice President and
the Chief Compliance Officer of FMSC. Ms. Leonard has over 28 years of
compliance and supervision experience in the financial services
industry.  Before joining the Company in August 2006, Ms. Leonard had
been the Sales Practice Director for Smith Barney Citigroup in New York City, a
position she had held since November 2004. She previously worked as a Senior
Vice President for Business Control Management for Neuberger Berman, LLC in New
York from March 2004 through November 2004. From February 1996 through March
2004, Ms. Leonard was an Executive Director/ National Director of Branch
Supervision for CIBC Oppenheimer Corp. and oversaw supervision and risk
management for the private client division’s 19 branch locations. From October
1994 through February 1996, he worked as Compliance Director for the Financial
Services Division of Lehman Brothers, and held various other positions at that
firm and its predecessors since 1978.
 
 Mindy A. Horowitz,was
appointed our Acting Chief Financial Officer 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 FMSC. Ms. Horowitz graduated with a MS in accounting from Monmouth
College in 1981.
 
 Significant
Employee
 
 Mark D. Lowe, 48, 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.
 
 58
 Certain
Reports
 
 No person
who, during the year ended December 31, 2007, 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  Exchange
Act ) failed to file on a timely basis, reports required by Section 16 of
the  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  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.
 
 Meetings
of Directors
 
 During
2007, the full Board of Directors met on 19  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
five  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.
 
 For the
year ended December 31, 2007, the members of the committees, and a description
of the duties of the Committees were as follows:
 
 Audit
Committee.  Our Audit Committee acts to:
 
 ·      review
with management our finances, financial condition and interim financial
statements;
 ·      review
with our independent auditors the year-end financial statements;
and
 ·      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, 2007, the Audit Committee met on six
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, Barry D. Shapiro and David I.
Portman.  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.
  59
  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 2006 were Ward R. Jones, Barry D. Shapiro and David
Portman.  Mr. Jones serves as chairman of this
committee.  During the year ended December 31, 2007, the committee met
on two occasions.
 
 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. Mr. David Portman serves as chairman of this
committee. The Special Committee, which consists of our three independent
members of the Board, did not meet as a separate committee in 2007.
 
 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 2007 the Board authorized an
increase in the annual payment from $5,000 to $15,000 payable in advance in
quarterly installments. Members of the Audit Committee are also entitled to an
additional $5,000 payment per annum payable in advance in quarterly
installments.
 
 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 President and Acting Chief Financial Officer. 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, 2007.
 
 Item
11.  Executive Compensation
 
 COMPENSATION
DISCUSSION AND ANALYSIS
 
 This
Compensation Discussion and Analysis (“CD&A”) describes our compensation
philosophy and policies for 2007 as applicable to our named executive officers
(NEOs). This CD&A explains the structure and rationale associated with each
material element of the NEOs’ total compensation, and provides context for the
more detailed disclosure tables and specific compensation amounts provided
following the CD&A.
 
 60
 Compensation
Philosophy and Objectives
 
 Our
executive compensation program is designed to attract, motivate, reward and
retain talented individuals who are essential to our continued success. In
determining the form and amount of compensation payable to our
NEOs,  our Compensation Committee is guided by the following
objectives and principles:
 
 ·
              Encourage
      creation of shareholder value and achievement of strategic corporate
      objectives;
  ·
              Integrate
      compensation with our annual and long-term corporate objectives and
      strategy, and focus executive behavior on the fulfillment of those
      objectives;
  ·
              Provide
      a competitive total compensation package that enables us to attract and
      retain, on a long-term basis, high caliber personnel;
  and
  ·
              Hold
      our NEOs  accountable to achieve corporate objectives and offer
      rewards for successful business results, thereby increasing shareholder
      value.
  Oversight
of Our Executive Compensation Program
 
 The
Compensation Committee of the Board of Directors (the “Committee”) assists the
Board in discharging its responsibilities relating to compensation of the NEOs
and oversees and administers our executive compensation program.  It
evaluates and recommends to the Board appropriate policies and decisions
relative to NEOs  salaries, benefits, bonuses, incentive compensation,
severance, and equity-based or other compensation plans.
 
 Elements of
Compensation.Each element of compensation is designed to
reward different performance goals, yet have the components work together to
satisfy the ultimate goal of enhancing shareholder value. The elements of
principal officer compensation are:
  1.Base
salary.   Compensation levels for each of our NEOs, including
the Chief Executive Officer, are generally set within the range of salaries that
the Compensation Committee believes are paid to executive officers with
comparable qualifications, experience and responsibilities at comparably-sized
companies. In setting compensation levels, the Compensation Committee takes into
account such factors as (i) our past performance and future expectations, (ii)
individual performance and experience and (iii) past salary levels. The
Compensation Committee does not assign relative weights or ranking to these
factors, but instead makes a determination based upon the consideration of all
of these factors as well as the progress made with respect to our long-term
goals and strategies. Base salary, while reviewed annually, is only adjusted as
deemed necessary by the Compensation Committee in determining total compensation
for each NEO.
  2.       
Cash bonuses.Cash bonuses reward the NEOs for overall job performance and are approved
by the Compensation Committee. These bonuses are discretionary and are not
awarded based on a formula or a specific time frame other than the contractual
bonuses that are paid pursuant to the terms of the employment agreements for our
NEOs, Victor K. Kurylak and Celeste M. Leonard and former NEO’s Philip D’Ambrisi
and Jeffrey J. Fahs. (See further discussion below.)
  61
 3.     
 Corporate finance bonus
pool.Pursuant to his employment agreement, our Chief Executive Officer
is eligible to purchase from the Company, at his sole discretion, a portion of
the securities contributed to the “Corporate Finance Bonus Pool” upon the same
price, terms and conditions afforded to Montauk Financial Group.  The
Corporate Finance Bonus Pool consists of up to 20% of all underwriter’s
warrants, placement agent warrants and/or other securities granted to FMSC, in
connection with its service as an underwriter, placement agent or investment
banker; provided however, such amount shall not exceed 50% of the total
securities retained by Montauk Financial Group after any allocations to the
registered representatives and the corporate finance staff in accordance with
the corporate policies in effect from time to time. The amount our Chief
Executive Officer shall be entitled to purchase shall be determined by the
Compensation Commmittee on a transaction-by-transaction basis.
  4.    
  Long-term incentive equity
awards.  The purpose of long term equity awards in the form of
grants of stock options and restricted stock under our 1996 Senior Management
Incentive Plan (described below) is to retain the services of the NEOs and our
key employees, and encourage them to improve our operating results and to become
shareholders of the Company, all of which is intended to result in increased
shareholder value.
  In
addition, the Compensation Committee believes that equity ownership by NEOs and
our other key employees  helps to balance the short-term focus of
annual incentive compensation with a longer-term view and may help to retain
them with the Company.  In making stock option and restricted stock
grants, the Compensation Committee considers general corporate performance,
individual contributions to our financial, operational and strategic objectives,
level of seniority and experience, existing levels of stock ownership, previous
grants of restricted stock or options, vesting schedules of outstanding
restricted stock or options and the current stock price.
  After
consideration of restricted stock and stock options awarded prior to 2007 to the
NEOs and the base salary increases approved in December 2006, no stock options
or restricted stock grants were recommended or approved for award to the NEOs
during, or for, 2007.
  Finally,
our 1996 Senior Management Incentive Plan terminated in June 2006; therefore no
further grants were eligible to be made under this Plan.
  5.      
401(k). We have a
401(k) Profit Sharing Plan, which permits our eligible employees, including
the NEOs, to defer up to 15% of their annual compensation, subject to certain
limitations imposed by the Internal Revenue Code. The employees’ elective
deferrals are immediately vested and nonforfeitable upon contribution to the
401(k) plan. In 2006, we did not make a contribution based on our
discretionary contribution matching policy.
  6.      
Perquisites and other
benefits.We offer various broad-based employee benefit plans. NEOs
participate in these plans on the same terms as eligible, non-executive
employees. These plans consist of health, pharmacy and dental insurance programs
and are intended to provide benefits that support the well-being and overall
health of executives, including our NEOs and employees. In addition we provide
group term insurance with a maximum coverage of $50,000, as well as long-term
disability.
  62
 We also provide NEOs with reimbursement
of automobile and business-related expenses and cellular telephone
usage.
  7.      
Sign-on bonuses.In
addition to the standard elements of compensation, the Compensation Committee
and executive management have the discretionary ability to pay sign-on bonuses
in the form of cash and/or stock to executive officers, including our NEOs, as
well as other key employees. We utilize these bonuses in order to attract
personnel believed to be valuable to the company. The hiring of employees,
particularly the hiring of executives, is highly competitive. In order to
attract and retain talented senior executives, we believe that this tool is
important to the building and retention of a strong qualified
workforce.
  63
  Employment
Contracts, Termination of Employment and Change in Control
Agreements
 
 Victor K.
Kurylak
 
 Effective
February 1, 2005, the Board approved the appointment of 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 expired December 31, 2007,
Mr. Kurylak received 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 was entitled to receive medical and
other benefits that we have in effect for its executives. Mr. Kurylak was
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
was 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.
  As of May
9, 2007, the Company and  Mr. Kurylak executed an Amended and Restated
Employment Agreement (“Amended Employment Agreement”). The Amended Employment
Agreement was executed in connection with the execution of the May Settlement
Agreement with the Okun Defendants (See Item 3. “Legal Proceedings”). Pursuant
to the Amended Employment Agreement, Mr. Kurylak is  to continue his
employment with the Company as President. Mr. Kurylak was to resign, however,
from the position of CEO  of the Company in connection with the May
Settlement Agreement upon appointment of his successor and execution by his
successor of an employment agreement with the Company. However, since the May
Settlement Agreement was vacated and set aside, Mr. Kurylak’s resignation as CEO
was not accepted and thus cancelled. On June 15, 2007, the Company and Mr.
Kurylak executed  Amendment Number One to the Amended and Restated
Employment Agreement (“Amendment to Amended Employment Agreement”) to correctly
state that Mr. Kurylak remains employed in the capacity of President and
CEO  of both the Company and FMSC. Mr. Kurylak’s employment
contract has been renewed for one year under the terms of the Amended Employment
Agreement previously filed.
 
 64
 In the
event of the termination of Mr. Kurylak’s employment by the Company without
“cause” or by Mr. Kurylak for “good reason” (as these terms are defined in the
Amended Employment Agreement), he would be entitled to: (a) all compensation
accrued but not paid as of the termination date; (b) base salary for the
remainder of the term; (c) a severance payment equal to $300,000 payable in a
lump sum payment;  (d) continued participation in the Company’s
benefit plans (or comparable plans); and (e) any applicable bonus. If Mr.
Kurylak’s employment is terminated by the Company for “cause” or by him without
“good reason”, he will be entitled only to accrued compensation. If termination
of the Amended Employment Agreement occurs as a result of the expiration of such
agreement without renewal by the Company at the end of the term, Mr. Kurylak
will be entitled to the accrued compensation, any applicable bonus and the
severance payment.
  In the
event Mr. Kurylak is a member of the Board of Directors of the Company on the
termination date, the payment of any and all compensation due under the Amended
Employment Agreement, except the accrued compensation, is expressly conditioned
on Mr. Kurylak’s resignation from the Board of Directors of the Company within
five (5) business of the termination date.
  The
Amended Employment Agreement contains confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the first anniversary of the date of cessation of Mr. Kurylak’s
employment.
  Phillip
D’Ambrisi
 
 In August
2006, the Company hired  Mr. Phillip P. D’Ambrisi as the Company’s new
Chief Operating Officer with employment terms, which provided him with an annual
base salary of $250,000 and bonuses of $200,000 for 2006 and $100,000 for each
subsequent calendar year through December 31, 2008, provided he is still
employed by the Company at the end of each such year.  The terms of
Mr. D’Ambrisi’s  employment were  reflected in a formal
employment agreement, but the Company's intent was to reduce the terms reflected
in the letter agreement dated August 1, 2006 to a written employment agreement
in similar form and substance to that which was executed by the Company's Chief
Compliance Officer, Ms. Leonard.
 
 On August
31, 2007, however, Mr. D'Ambrisi resigned his position as Chief Operating
Officer of the Company and FMSC.  Mr. D'Ambrisi also resigned
effective August 31, 2007 as a member of the Board of Directors of the
Company.  Effective September 1, 2007, the Company and Mr. D'Ambrisi
entered into a written consulting agreement  pursuant to which Mr.
D'Ambrisi provided certain services to the Company through December 31,
2007.
 
 Celeste M.
Leonard
 
 In August
2006, FMSC entered into an employment agreement with Ms. Celeste M. Leonard with
respect to her new position as a  Chief Compliance Officer of FMSC.
The employment agreement provides her with an annual base salary of $200,000 and
bonuses of $200,000 for 2006 and $100,000 for each subsequent calendar year
through December 31, 2008, provided she is still employed by the Company at the
end of each such year.
 
 Jeffrey J. Fahs,
Esq.
 
 In
January 2007, FMSC entered into an employment agreement with Jeffrey J. Fahs
with respect to his new position as  Executive Vice President,
Secretary and General Counsel.  The employment agreement provided him
with a base salary of $200,000 per year through December 31, 2008 and bonuses of
$100,000 for each subsequent calendar year through December 31, 2008,
provided he is still employed by the Company at the end of each such
year.
 
 65
 Mr. Fahs
resigned on August 31, 2007, effective September 28, 2007. In settlement of his
existing employment contract Mr. Fahs  received his 2007 bonus of
$100,000.
 
 Mindy A.
Horowitz
 
 In 2005, we entered into a new
employment agreement with Mindy Horowitz who serves as our Acting Chief
Financial Officer. The Board also approved a restricted stock award to her of
100,000 shares of common stock as a performance bonus award and as an incentive
to continue her employment with us. The agreement had an initial term of one
year ending February 1, 2006 and is renewable for successive one-year terms
unless we provide 120 days’ prior written notice of our intention not to renew
the agreement. This agreement is currently in effect.
  Under her agreement, Ms.
Horowitz  receives a base salary of $140,000 per year, which was
increased to $160,000 per year in 2007. She 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 her employment without cause, Ms. Horowitz would be entitled to
receive a severance payment equal to the sum of (i) one year’s salary, (ii) her
portion of the bonus pool payments she would otherwise be entitled to following
termination and (iii) payment of the costs of health and other benefits for 12
months following termination.
  Robert I.
Rabinowitz
 
 On
November 14, 2006, the Company entered into a separation agreement with the
Company's then Executive Vice President, Secretary and General Counsel, Mr.
Robert I. Rabinowitz.  Under the terms of the agreement, Mr.
Rabinowitz's employment contract was not renewed and terminated effective
January 31, 2007. Pursuant to the terms of the separation agreement, Mr.
Rabinowitz was  provided with severance pay of $200,000 and benefits
for a period of one year in accordance with the terms of his employment
agreement, which was accrued for in 2006.  Effective February 1, 2007,
we entered into a consulting agreement with Mr. Rabinowitz pursuant to which he
is being hired as a consultant to the Company for an eleven-month period to
provide assistance to the Company in the transition of his responsibilities to
new personnel.
  66
 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, 2007, 2006
and 2005 to each of our NEOs.
 
 Name
      and Principal Position
              Fiscal
                Year
              Salary
      ($)
              Bonus
      ($)
              Stock
                Awards
                ($)
              Option
                Awards
                ($)
              Non-
                Equity
                Incentive
                Plan
                Compensa-tion     ($)
              Nonqualified
                Deferred
                Compensation
                Earnings
      ($)
              All
                Other
                Compen-
                sation
      ($)
              Total
      ($)Victor
      K. Kurylak, President,
              2007
              292,500
              0
              0
              0
              0
              0
              0
              292,500Chief
      Executive Officer, FMFC and Montauk Financial Group
              2006
                2005
              300,000
                275,000
              200,000
                200,000
              0
                570,000
      (1)
              0
                0
              0
                0
              0
                0
              0
                0
              500,000
                1,045,000Phillip
      D’Ambrisi, Chief Operating Officer, FMFC and
                Montauk
      Financial Group(7)
                
                Celeste
      M. Leonard, Chief Compliance Officer, Montauk Financial
    Group
              2007
                2006
                
                
                2007
                2006
              166,667
                250,000
                
                
                200,000
                200,000
              100,000
                200,000
                
                
                100,000
                200,000
              0
                0
                
                
                0
                0
              0
                0
                
                
                0
                0
              0
                0
                
                
                0
                0
              0
                0
                
                
                0
                0
              0
                0
                
                
                0
                0
              266,667
                450,000
                
                
                300,000
                400,000Robert
      I. Rabinowitz
                Former
      General Counsel – FMFC and
                Montauk
      Financial Group(8)
              2007
                2006
                2005
              16,667
                200,000
                190,000
              0
                0
                20,000
              0
                0
                57,000
      (2)
              0
                0
                66,450
      (4)
              0
                0
                0
              0
                0
                0
              0
                200,000(6)
                0
              16,667
                400,000
                333,450Jeffrey
      J. Fahs
                Former
      General Counsel-FMFC and Montauk Financial Group(7)
              2007
              114,488
              100,000
              0
              0
              0
              0
              0
              214,888Mindy
      A. Horowitz
                Acting
      Chief Financial Officer, FMFC, and Chief Financial Officer, Fin.Op Montauk
      Financial Group
              2007
                2006
                2005
              160,000
                152,000
                140,000
              0
                35,000
                20,000
              0
                0
                57,000
      (3)
              0
                0
                33,257
      (5)
              0
                0
                0
              0
                0
                0
              0
                0
                0
              160,000
                187,000
                250,257
  1)
                In
      February 2005, the Company issued Mr. Kurylak 1,000,000 restricted shares
      of common stock, pursuant to the terms of his employment agreement as
      discussed above in greater detail, which shares had a market value of
      $570,000 on the date of issuance.2)
                In
      February 2005, Mr. Rabinowitz was issued an aggregate of 100,000
      restricted shares of common stock. Such shares had a market value of
      $57,000 on the date of issuance. These shares were granted to Mr.
      Rabinowitz pursuant to the terms of his employment
    agreement.3)
                In
      February 2005, Ms. Horowitz was issued an aggregate of 100,000 restricted
      shares of common stock. Such shares had a market value of $57,000 on the
      date of issuance. These shares were granted to Ms. Horowitz pursuant to
      the terms of her employment agreement as discussed above in greater
      detail.4)
                In
      July 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.  These options were initially
      valued at $66,450 based on the Black Scholes method of
      valuation.5)
                In
      July 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.  These options were initially
      valued at $33,257 based on the Black Scholes method of
      valuation.6)
                Pursuant
      to a separation agreement with Mr. Rabinowitz dated November 14, 2006, he
      received a severance payment of $200,000, paid at the rate of $16,667 per
      month beginning February 1, 2007.7)
                Mr.
      D’Ambrisi and Mr. Fahs resigned as NEOs of the Company on August 31,
      2007.8)
                Mr.
      Rabinowitz’s employment as a NEO terminated effective January 31,
      2007.
  67
  2007
GRANTS OF PLAN-BASED AWARDS
 
 There
were no grants made to any NEOs of options or restricted stock during the year
ended December 31, 2007.
 
 OUTSTANDING
EQUITY AWARDS AT 2007 YEAR-END
 
 
 Options
      Awards
              Stock
      AwardsName
              
              Number
      of
                Securities
                Underlying
      Unexercised
                Options
      (#)
                Exercisable
              
              Number
      of
                Securities
                Underlying
      Unexercised
                Options
      (#) Unexercisable
              
              Equity
                Incentive
                Plan
                Awards
                Number
      of
                Securities
                Underlying
                Unexercised
                Unearned
                Options
      (#)
              
              Options
                Exercise
                Price
      ($)
              
              Option
                Expiration
                Date
              
              Number
      of
                Shares
      or Units
                of
      Stock That
                Have
      Not Vested
                (#)
              
              Market
      Value of
                Shares
      or Units
                of
      Stock That
                Have
      Not Vested
                ($)
              
              Equity
                Incentive
      Plan
                Awards:
                Number
      of
                Unearned
                Shares,
      Units,
                or
      Other
                Rights
      That
                Have
      Not
                Vested
      (#)
              
              Equity
                Incentive
                Plan
                Awards:
                Market
      or
                Payout
                Value
      of
                Unearned
                Shares,
                Units
      or
                Other
                Rights
                That
      Have
                Not
      Vested
                ($)Victor
      K.
                Kurylak
              
              250,000(1)
              
              0
              
              -
              
              0.50
              
              12/31/08
              
              -
              
              -
              
              -
              
              -Celeste
      M.
                Leonard
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Mindy
      A.
                Horowitz
              
              100,000(2)
              
              0
              
              -
              
              0.50
              
              12/30/08
              
              -
              
              -
              
              -
              
              -Mindy
      A.
                Horowitz
              
              75,000(3)
              
              0
              
              -
              
              1.25
              
              07/27/10
              
              -
              
              -
              
              -
              
              -
  1)
                Represents
      the number of vested stock options as of December 31, 2007. These options
      vested 33% upon grant in February 2005, and 33% each December 31, 2005 and
      2006. Options expire 5 years from the date of grant.2)
                Represents
      the number of vested stock options as of December 31,
      2007.  These options vested 100% upon grant on December 31,
      2003. Options expire 5 years from the date of grant.3)
                Represents
      the number of vested stock options as of December 31, 2007. These options
      vested 100% upon grant on July 28, 2005. Options expire 5 years from the
      date of grant.
   2007
OPTION EXERCISES AND STOCK VESTED
   Option
      Awards (1)
              
              Stock
      AwardsName
              
              Number
      of
                Shares
      Acquired
                on
      Exercise (#)(1)
              
              Value
      Realized
                on
      Exercise ($)(2)
              
              Number
      of
                Shares
      Acquired
                on
      Vesting (#)(3)
              
              Value
      Realized
                on
      Vesting ($)(4)Victor
      K Kurylak
              
              0
              
              0
              
              0
              
              0Mindy
      A. Horowitz
              
              0
              
              0
              
              33,333
              
              6,667
  (1)
                Information
      relates to stock option exercises during 2007.(2)
                Represents
      the amount equal to the excess of the fair market value of the shares at
      the time of exercise over the exercise price.(3)
                Information
      relates to stock acquired on vesting of restricted stock grants during
      2007.(4)
                Represents
      the market value of the vested restricted stock grants on date of
      vesting.
 68
 
 2007
DIRECTOR’S COMPENSATION TABLE
 
 The
following table shows, for the year ended December 31, 2007, the compensation
paid to each of our non-executive directors:
 
 Name
              
              Fees
      Earned or
                Paid
      in Cash ($)
              
              Option
                Awards
      ($)(2)
              
              Total
      ($)Barry
      Shapiro
              
              27,938(1)
              
              0
              
              27,938Ward
      R Jones Jr.
              
              27,938(1)
              
              0
              
              27,938David
      Portman
              
              27,938(1)
              
              0
              
              27,938
  (1)
                Represents
      payments made to each Mr. Shapiro, Mr. Jones and Mr. Portman for a) annual
      cash payment of $15,000 as a non-executive board member, b) annual cash
      payment of $5,000 as a member of the Audit Committee, c) cash payment of
      $6,250 for attendance at Board and Audit Committee meetings in 2007, and
      d) $1,688 for the 2006 fourth quarter board member
  payment.(2)
                In
      2007, Messrs. Shapiro and Jones each received a grant of 40,000 options
      and Mr. Portman received a grant of 35,000 options under the Non-Executive
      Director Plan.  The exercise price for each grant exceeds the
      fair market value of the underlying stock as of December 31,
      2007.
  Incentive
Stock Option Plan
  In June
2002, we adopted the 2002 Incentive Stock Option Plan (the “2002 Incentive
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 2002 Incentive Plan, options granted there
under may or may not be designated as options which qualify for incentive stock
option treatment under Section 422A of the Code.
 
 The 2002
Incentive 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 2002 Incentive
Plan and to establish and amend rules and regulations relating
thereto.
 
 Under the
2002 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 that are designated as Incentive Stock Options that
become exercisable in any calendar year may not exceed $100,000.
 
 The Board
may, in its sole discretion, grant bonuses or authorize loans to or guarantee
loans obtained by an optionee to enable such optionee to pay any taxes that may
arise in connection with the exercise or cancellation of an option. Unless
sooner terminated, the 2002 Incentive Plan will expire in 2012.
 
 69
 Effective
as of the date of this Annual Report, since the adoption of the 2002 Incentive
Plan, we have issued 721,200 options to registered representatives and
employees, which have not been exercised or cancelled.
  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 1st, 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.
 
 In 2006,
due to the then pending merger agreement with the Okun Purchasers, no options
were issued to Non-Executive Directors. However, in 2007, following termination
of the merger agreement, we issued 55,000 options to the three Non-Executive
Directors with respect to the 2006 year, as well as 60,000 options granted for
2007. To date, a total of 235,000 options are outstanding in our Non-Executive
Director Plan.
 
 Senior
Management Plan
  In
1996, we adopted the 1996 Senior Management Incentive Plan (the "1996 Management
Plan").  The 1996 Management Plan provides for the issuance of up to
2,000,000 shares of common stock either upon issuance of options issued under
the 1996 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 1996 Management Plan to executive management employees, if one
is appointed for this purpose.  The 1996 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 1996 Management Plan can be either incentive stock options or
non-incentive stock options, similar to the options granted under the 2002
Incentive Plan, except that the exercise price of non-incentive stock options
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 a committee of the Board 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.
 
 70
 In June
2000, at our Annual Meeting of Shareholders, a resolution was passed amending
the 1996 Management Plan to increase the number of shares of common stock
reserved for issuance from 2,000,000 to 4,000,000.  Options to
purchase 915,000 shares of our common stock are currently outstanding under the
1996 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.
 
 Awards
granted under the 1996 Management Plan are also entitled to certain acceleration
provisions that cause awards granted under this Plan to immediately vest in the
event of a change of control or sale of our company.  The 1996
Management Plan expired in June 2006 and therefore no additional grants are
available to be made under this Plan.
 
 Item
12.  Security Ownership of Certain Beneficial
Owners and Management
 
 The following table sets forth certain information as of March 31, 2008 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  Exchange Act ), 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.
  Directors,
      Officers
                  and 5% Shareholders (1)
                
                Amount
      and Percentage
                  Of Beneficial Ownership (1)Number of Shares
                
                PercentVictor
      K. Kurylak
                  Parkway
      109 Office Center
                  328
      Newman Springs Road
                  Red
      Bank, NJ 07701
                
                
                1,500,000
                (2)
                
                11.11
                %Celeste
      Leonard
                  Parkway
      109 Office Center
                  328
      Newman Springs Road
                  Red
      Bank, NJ 07701
                
                
                0
                
                
                0
                %
  71
 Mindy
      A. Horowitz
                  Parkway
      109 Office Center
                  328
      Newman Springs Road
                  Red
      Bank, NJ 07701
                
                
                275,000
                (3)
                
                2.05
                %Ward
      R. Jones
                  300
      West Jersey Road
                  Lehigh
      Acres, FL  33936
                
                
                120,000
                (4)
                
                *David
      I. Portman
                  142
      Highway 35
                  Eatontown,
      NJ 07724
                
                
                85,000
                (5)
                
                *Barry
      D. Shapiro, CPA
                  331
      Newman Springs Road
                  Red
      Bank, NJ 07701
                
                
                100,000
                (6)
                
                *Bankruptcy
      Estate for Edward H. Okun
                
                
                3,300,308
                (7)
                
                24.89
                %All
      Directors and Officers as a
                  group
      (6 persons in number)
                
                
                2,080,000
                
                
                14.95
                %
 
 *
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.(2)
                Amounts
      and percentages indicated for Mr. Kurylak include an aggregate of
      1,250,000 shares of common stock and vested options to purchase 250,000
      shares of common stock.(3)
                Includes
      vested and presently exercisable options of Ms. Horowitz to purchase
      175,000 shares of common stock.  Amounts and percentages
      indicated for Ms. Horowitz include an aggregate of 100,000 shares of
      common stock.(4)
                Includes
      vested and presently exercisable options of Mr. Jones to purchase 100,000
      shares of common stock.(5)
                Includes
      vested and presently exercisable options of Mr. Portman to purchase 35,000
      shares of common stock.(6)
                Includes
      vested and presently exercisable options of Mr. Shapiro to purchase
      100,000 shares of common stock.(7)
                As
      a part of a Settlement Agreement entered into on June 15, 2007 between the
      Company and the Okun Defendants,  the Okun Defendants
      surrendered to the Company for cancellation, 283,087 shares of Series A
      Preferred Stock, 197,824 shares of Series B Preferred Stock and an
      aggregate of 5,272,305  shares of common
  stock.
  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, 2007, including the 2002 Incentive  Plan, the Director
Plan, the 1992 Incentive Stock Option Plan, as amended, the 1992 Non-Employee
Director Stock Option Plan, as amended, and the 1996 Management Plan, as
amended.   Information concerning each of the aforementioned
plans is set forth above.  Each of the 1992 Incentive Stock Option
Plan, the 1992 Non-Executive Director Stock Option Plan and 1996 Management 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.
  72
 
 Plan
      Category
              Number
      of Securities
                to
      be Issued upon
                Exercise
      of
                Outstanding
      Options
                and
      Rights
                (a)
              Weighted
      Average
                Exercise
      Price of
                Outstanding
      Options
                (b)
              Number
      of Securities
                Remaining
      Available for
                Future
      Issuance Under
                Equity
      Compensation
                Plans
      Excluding
                Securities
      Reflected in
                Column
      (a)
                (c)Equity
      Compensation
                Plans
      Approved by
                Stockholders
              1,871,2001
              $0.73
              4,048,6022,3Equity
      Compensation
                Plans
      Not Approved by
                Stockholders
              N/A
              N/A
              N/ATotal
              1,871,2001
              $0.73
              4,048,6022,3
  1.
              Includes
      721,200 options issued pursuant to the our 2002 Incentive  Plan,
      235,000 options issued pursuant to our  Director Plan, and
      915,000 options and shares issued pursuant to our 1996 Management
      Plan.2.
              Includes
      3,748,602 options available for issuance under our 2002
      Incentive  Plan.3.
              Includes
      300,000 options assumed available for issuance under
      our  Director Plan.  We expect to have three outside
      directors, each of whom will receive 20,000 options over the ten years of
      the plan.


73
 
 Item
13. Certain Relationships and Related Transactions
 
 For
information concerning the terms of the employment agreements entered into
between us and Mr. Victor K. Kurylak, Ms. Mindy A. Horowitz, and Ms. Celeste M.
Leonard, the employment and separation agreements for Mr. Jeffrey J. Fahs and
the separation agreement entered into with Philip D’Ambrisi, see Item 11.
"Executive Compensation” above.
 
 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 SEC, 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, 2007 and 2006, respectively, and fees
billed for other services rendered by our independent auditors during those
periods.
 
 Year
      Ended
                December
      31, 2007
              
              Year
      Ended
                December
      31, 2006Audit
      Fees (1)
              $184,238
              
              $169,900Audit-Related
      Fees (2)
              $19,000
              
              $  15,325Tax
      Fees (3)
              $42,290
              
              $  29,500All
      Other Fees (4)
              $10,000
              
              $          0Total
              $255,528
              
              $214,725
  (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.
 
 74
 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 above to the Audit
Committee for approval. In addition, management will also provide to the Audit
Committee for its approval a fee proposal for the services proposed to be
rendered by the independent auditor.  Prior to the engagement of the
independent auditor, the Audit Committee will approve both the description of
audit and permissible non-audit services proposed to be rendered by the
independent auditor and the budget for all such services.  The fees
are budgeted and the Audit Committee requires the independent auditor and
management to report actual fees versus the budget periodically throughout the
year by category of service.
 
 During the year, circumstances may
arise when it may become necessary to engage the independent auditor for
additional services not contemplated in the original pre-approval. In those
instances, the Audit Committee requires separate pre-approval before engaging
the independent auditor.  To ensure prompt handling of unexpected
matters, the Audit Committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must report, for
informational purposes only, any pre-approval decisions to the Audit Committee
at its next scheduled meeting.  The four categories of services
provided by the independent auditor are as defined in the footnotes to the fee
table set forth above.
 
 PART
IV
 
 Item
15.  Exhibits and Financial Statement Schedules
 
 1. Financial Statements
 
 See the
Consolidated Financial Statements and Notes thereto, together with the report
thereon of Lazar Levine & Felix, LLP dated March 31, 2008 beginning on page
F-1 of this report.
 
 2.
Valuation and Qualifying Accounts
 Column
      A
              
              Column
      B
              
              Column
      C
              
              Column
      D
              
              Column
      EChargedBalance
      at
              
              (credited)
              
              Charged
      to
              
              
              
              Balance
      atbeginning
              
              to
      costs and
              
              other
              
              
              
              endDescription
              
              of
      period
              
              expenses
              
              accounts
              
              Deductions
              
              of
      periodDeferred
      tax assets:Year
      ended December 31, 2007
              
              $
              3,581,909
              
              
              
              $
              (784,184
              )
              
              
              $
              2,797,725Year
      ended December 31, 2006
              
              $
              3,578,522
              
              
              
              $
              3,387
              
              
              
              $
              3,581,909Year
      ended December 31, 2005
              
              $
              5,120,839
              
              
              
              $
              (1,542,317
              )
              
              
              $
              3,578,522Broker
      loan reserves:Year
      ended December 31, 2007
              
              $
              807,535
              
              
              
              $
              ( 49,020
              )
              
              
              $
              758,515Year
      ended December 31, 2006
              
              $
              1,085,135
              
              
              
              $
              (277,600
              )
              
              
              $
              807,535Year
      ended December 31, 2005
              
              $
              1,402,631
              
              
              
              $
              (317,496
              )
              
              
              $
              1,085,135
  75
  3.
Exhibits
 
 Incorporated
by reference to the Exhibit Index at the end of this Report.
  76
 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.Dated:  March
      31, 2008
                By:
                /s/
      Victor K. KurylakVictor
      K. KurylakChief
      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/
      Victor K. Kurylak
                
                
                March
      31, 2008Victor
      K. Kurylak, Chief Executive Officer,President
      and Director/s/
      Celeste M. Leonard
                
                
                March
      31, 2008Celeste
      M. Leonard, Chief Compliance Officerand
      Director/s/
      Mindy A. Horowitz
                
                
                March
      31, 2008Mindy
      A. Horowitz, Acting Chief Financial Officerand
      Principal Accounting Officer
 /s/
      Ward R. Jones, Jr.
              
              
              March
      31, 2008Ward
      R. Jones, Jr., Director/s/
      Barry D. Shapiro
              
              
              March
      31, 2008Barry
      D. Shapiro, Director/s/
      David I. Portman
              
              
              March
      31, 2008David
      I. Portman, Director
  77
 
 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. §230.411, are incorporated by reference to the document referenced in
brackets following the descriptions of such exhibits.
 
 Exhibit
                No.
              
              Description2.1
              
              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).2.4
              
              Agreement
      and Plan of Merger dated as of May 5, 2006 by and among FMFG Ownership,
      Inc., FMFG Acquisition Co. Inc. and First Montauk Financial Corp.
      (Previously filed as Exhibit 10.1 to our Current Report on Form 8-K dated
      May 9, 2006.2.5
              
              Settlement
      Agreement, dated as of May 8, 2007, among First Montauk Financial Corp.,
      Edward H. Okun, Investment Properties of America, LLC, IPofA Waterview,
      LLC, FMFC Acquisition Co., FMFG Ownership I Co., FMFG Ownership II, Co.,
      Victor K. Kurylak, Ward R. Jones, Jr., Barry Shapiro, David Portman and
      Mindy Horowitz (Previously filed as Exhibit 10.1 to our Current Report on
      Form 8-K dated May 11, 1007.2.6
              
              Settlement
      Agreement dated as of June 15, 2007 among First Montauk Financial Corp.,
      Edward H. Okun, Investment Properties of America, LLC, IPofA Waterview,
      LLC, FMFG Acquisition Co., FMFG Ownership II, Co., Victor K. Kurylak, Ward
      R. Jones, Jr., Barry Shapiro, David Portman and Mindy Horowitz (Previously
      filed as Exhibit 10.1 to our Current Report on Form 8-K dated June 15,
      2007.3.1
              
              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).
  78
  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).4.7
              
              Rights
      Agreement, dated as of August 8, 2004, between First Montauk Financial
      Corp. and Continental Stock Transfer & Trust Company, as Rights Agent
      (Previously filed as Exhibit 4.1 to our Current Report on Form 8-K dated
      August 8, 2007).4.8
              
              Note
      Purchase Agreement, dated as of December 7, 2007, by and between First
      Montauk Financial Corp. and AEFC FMFK Investment Corp. (Previously filed
      as Exhibit 10.1 to our Current Report on Form 8-K dated December 13,
      2007.4.8.1
      *
              
              Amendment
      to Note Purchase Agreement, dated as of December 17, 2007, by and between
      First Montauk Financial Corp. and AEFC FMFK Investment
    Corp.4.9
              
              First
      Amendment to the Rights Agreement, dated as of December 7, 2007, by and
      between First Montauk Financial Corp. and Continental Stock Transfer &
      Trust Company, as Rights Agent (Previously filed as Exhibit 10.2 to our
      Current Report on Form 8-K dated December 13,
  2007).
  79
  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-K 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).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).
  80
  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).
  81
  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).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).10.29‡
              
              Employment
      Agreement between First Montauk Securities Corp. and Celeste Leonard dated
      August 7, 2006 (Previously filed as Exhibit 10.1 to Current Report on Form
      8-K dated February 26, 2007).
  82
  10.30‡
              
              Agreement
      and Release between First Montauk Financial Corp. and Robert I. Rabinowitz
      dated November 14, 2006 (Previously filed on November 14, 2006 as Exhibit
      10.1 to Quarterly Report on Form 10-Q for the quarterly period ended
      September 30, 2006).10.31‡*
              
              Consulting
      Agreement between First Montauk Financial Corp. and Robert I. Rabinowitz
      dated as of January 19, 2007.10.32‡*
              
              Employment
      Agreement between First Montauk Securities Corp. and Jeffrey J. Fahs dated
      as of January 24, 2007.10.33‡
              
              Amended
      and Restated Employment Agreement between First Montauk Financial Corp.
      and Victor K. Kurylak, dated as of May 9, 2007 (Previously filed as
      Exhibit 10.2 to our Current Report on Form 8-K filed on May 11,
      2007.)10.34‡
              
              Amendment
      Number One, dated as of June 15, 2007, to the Amended and Restated
      Employment Agreement, dated as of May 9, 2007, between Victor K. Kurylak
      and First Montauk Financial Corp. (Previously filed as Exhibit 10.3 to
      Form 10-Q for the Quarter Ended June 30, 2007, dated August 14,
      2007.)10.35‡
              
              Consulting
      Agreement between First Montauk Financial Corp. and Phillip P. D’Ambrisi,
      dated September 1, 2007 (Previously filed as Exhibit 10.1 to our Current
      Report on Form 8-K filed on September 6, 2007.)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
      Companies23.1*
              
              Consent
      of Lazar, Levine & Felix.31.1*
              
              Certification
      of Chief Executive Officer and President pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
              
              Certification
      of Acting Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
      *
              
              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.
 
 ‡Denotesmanagement contracts or
compensation plans or arrangements in which directors or executive officers are
eligible to participate.
   83


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, 2007 and 2006, and the related
consolidated statements of operations, shareholders’ equity, cash flows and the
schedule listed in the accompanying index for each of the three years in the
period ended December 31, 2007. 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, 2007 and 2006, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 2007, 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.
  
  Lazar,
Levine and Felix LLP
  New York,
New
York
  March 27,
2008
 F-1




FIRST
      MONTAUK FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITIONDecember
      31,
              
              
              December
      31,2007
              
              
              2006ASSETSCash
      and cash equivalents
              
              $
              868,836
              
              
              $
              1,145,751Due
      from clearing firm
              
              
              2,347,946
              
              
              
              4,988,747Securities
      owned, at market value
              
              
              159,773
              
              
              
              198,447Prepaid
      expenses
              
              
              250,948
              
              
              
              285,480Employee
      and broker receivables - net of reserve for bad debtof
      $758,515 and $807,535 respectively
              
              
              288,049
              
              
              
              343,491Property
      and equipment - net
              
              
              175,463
              
              
              
              239,033Other
      assets
              
              
              1,159,893
              
              
              
              597,968Total
      assets
              
              $
              5,250,908
              
              
              $
              7,798,917LIABILITIES6%
      convertible debenture
              
              $
              -
              
              
              $
              25,00010%
      convertible note
              
              
              1,000,000
              
              
              
              -Securities
      sold, not yet purchased, at market value
              
              
              201
              
              
              
              495Commissions
      payable
              
              
              1,739,713
              
              
              
              2,378,935Accounts
      payable
              
              
              256,549
              
              
              
              313,427Accrued
      expenses
              
              
              556,527
              
              
              
              1,195,426Income
      taxes payable
              
              
              11,358
              
              
              
              4,167Capital
      leases payable
              
              
              -
              
              
              
              820Other
      liabilities
              
              
              51,528
              
              
              
              67,156Total
      liabilities
              
              
              3,615,876
              
              
              
              3,985,426Commitments
      and contingenciesSeries
      B convertible redeemable preferred stock, 445,102 shares
      authorized,$.10
      par value, 0 and 197,824 shares issued and outstanding,
      respectivelyliquidation
      preference:  $0 and $1,000,000, respectively
              
              
              -
              
              
              
              1,000,000STOCKHOLDERS'
      EQUITYPreferred
      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
      value22,282
      and 305,369 shares issued and outstanding, respectively;liquidation
      preference: $111,410 and $1,526,845, respectively
              
              
              2,228
              
              
              
              30,537Series
      C participating cumulative preferred stock, 200,000 shares
      authorized,$.10
      par value, no shares issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, no par value, 60,000,000 shares authorized,13,257,248
      and 18,526,553 shares issued and outstanding, respectively
              
              
              9,621,030
              
              
              
              11,646,620Additional
      paid-in capital
              
              
              4,035,064
              
              
              
              950,592Accumulated
      deficit
              
              
              (12,023,290
              )
              
              
              (9,814,258
              )Total
      stockholders' equity
              
              
              1,635,032
              
              
              
              2,813,491Total
      liabilities and stockholders' equity
              
              $
              5,250,908
              
              
              $
              7,798,917See
      notes to consolidated financial
statements.




F-2




FIRST
      MONTAUK FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONSFor
      the years ended December 31,2007
              
              
              2006
              
              
              2005Revenues:Commissions
              
              $
              31,728,518
              
              
              $
              39,920,168
              
              
              $
              37,493,733Principal
      transactions
              
              
              1,534,794
              
              
              
              4,079,243
              
              
              
              5,578,820Investment
      banking
              
              
              3,579,838
              
              
              
              3,420,685
              
              
              
              6,640,402Interest
      and other income
              
              
              2,712,648
              
              
              
              3,540,324
              
              
              
              8,370,711Total
      revenue
              
              
              39,555,798
              
              
              
              50,960,420
              
              
              
              58,083,666Expenses:Commissions,
      employee compensation and benefits
              
              
              33,995,993
              
              
              
              43,137,778
              
              
              
              44,398,131Executive
      separation
              
              
              -
              
              
              
              1,151,266
              
              
              
              1,432,937Clearing
      and floor brokerage
              
              
              1,477,482
              
              
              
              1,527,675
              
              
              
              1,926,005Communications
      and occupancy
              
              
              1,672,992
              
              
              
              1,797,281
              
              
              
              2,483,056Legal
      matters and related costs
              
              
              1,672,716
              
              
              
              1,095,064
              
              
              
              1,773,604Other
      operating expenses
              
              
              2,778,928
              
              
              
              2,982,665
              
              
              
              3,467,972Interest
              
              
              26,420
              
              
              
              78,248
              
              
              
              100,123Total
      expenses
              
              
              41,624,531
              
              
              
              51,769,977
              
              
              
              55,581,828Income
      (loss) before provision for income taxes
              
              
              (2,068,733
              )
              
              
              (809,557
              )
              
              
              2,501,838Provision
      for income taxes
              
              
              16,333
              
              
              
              26,992
              
              
              
              77,544Net
      income (loss)
              
              $
              (2,085,066
              )
              
              $
              (836,549
              )
              
              $
              2,424,294Preferred
      stock dividends
              
              
              (123,966
              )
              
              
              (168,506
              )
              
              
              (285,340
              )Net
      income (loss) applicable to common stockholders
              
              $
              (2,209,032
              )
              
              $
              (1,005,055
              )
              
              $
              2,138,954Earnings
      (loss) per share:Basic
              
              $
              (0.14
              )
              
              $
              (0.06
              )
              
              $
              0.15Diluted
              
              $
              (0.14
              )
              
              $
              (0.06
              )
              
              $
              0.12Weighted
      average number of shares of stock outstanding:Basic
              
              
              15,635,136
              
              
              
              17,004,254
              
              
              
              14,032,057Diluted
              
              
              15,635,136
              
              
              
              17,004,254
              
              
              
              20,109,178See
      notes to consolidated financial
statements.




F-3




FIRST
      MONTAUK FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)FOR
      THE PERIOD FROM JANUARY 1, 2005 TO DECEMBER 31, 2007Series
      A Convertible
              
              
              Series
      B ConvertiblePreferred
      Stock
              
              
              Preferred
      Stock
              
              
              Common
      Stock
              
              
              AdditionalShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Paid-in
      CapitalBalances
      at January 1, 2005
              
              
              305,369
              
              
              $
              30,537
              
              
              
              -
              
              
              $
              -
              
              
              
              10,258,509
              
              
              $
              7,257,292
              
              
              $
              950,592Increase
      in deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              154,464
              
              
              
              -Amortization
      of deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Common
      stock issued in connectionwith
      legal settlements
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25,000
              
              
              
              25,000
              
              
              
              -Issuance
      of restricted stock in connectionwith
      employment agreements
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,300,000
              
              
              
              741,000
              
              
              
              -Issuance
      of preferred stock in connectionwith
      separation agreement
              
              
              -
              
              
              
              -
              
              
              
              197,824
              
              
              
              19,782
              
              
              
              -
              
              
              
              -
              
              
              
              980,218Conversion
      of preferred stock intocommon
      stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              560,998
              
              
              
              343,071
              
              
              
              -Cashless
      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
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balances
      at December 31, 2005
              
              
              305,369
              
              
              
              30,537
              
              
              
              197,824
              
              
              
              19,782
              
              
              
              15,937,407
              
              
              
              10,444,110
              
              
              
              1,930,810Balances
      at January 1, 2006, as previously reported
              
              
              305,369
              
              
              
              30,537
              
              
              
              197,824
              
              
              
              19,782
              
              
              
              15,937,407
              
              
              
              10,444,110
              
              
              
              1,930,810Reclassification
      of Series  B stockas
      temporary equity
              
              
              -
              
              
              
              -
              
              
              
              (197,824
              )
              
              
              (19,782
              )
              
              
              -
              
              
              
              -
              
              
              
              (980,218
              )Balances
      at January 1, 2006, as restated
              
              
              305,369
              
              
              
              30,537
              
              
              
              -
              
              
              
              -
              
              
              
              15,937,407
              
              
              
              10,444,110
              
              
              
              950,592Increase
      in deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (76,266
              )
              
              
              -Amortization
      of deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Reclass
      to common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (39,546
              )
              
              
              -Exercise
      of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              68,800
              
              
              
              33,504
              
              
              
              -Cashless
      exercise of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              27,586
              
              
              
              -
              
              
              
              -Cashless
      exercise of warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,760
              
              
              
              22,211
              
              
              
              -Expired
      warrant obligation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              37,607
              
              
              
              -Conversion
      of bonds into common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,450,000
              
              
              
              1,225,000
              
              
              
              -Payment
      of preferred stock dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balances
      at December 31, 2006
              
              
              305,369
              
              
              
              30,537
              
              
              
              -
              
              
              
              -
              
              
              
              18,526,553
              
              
              
              11,646,620
              
              
              
              950,592Amortization
      of deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              29,823
              
              
              
              -Payment
      of preferred stock dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,000
              
              
              
              750
              
              
              
              -Redemption
      of preferred A stock
              
              
              
              
              
              
              (1,629,549
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,629,549Cancellation
      of preferred A stock
              
              
              (283,087
              )
              
              
              1,601,240
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,601,240
              )Cancellation
      of preferred B stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,000,000Cancellation
      of common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,272,305
              )
              
              
              (2,056,163
              )
              
              
              2,056,163Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balances
      at December 31, 2007
              
              
              22,282
              
              
              $
              2,228
              
              
              
              -
              
              
              $
              -
              
              
              
              13,257,248
              
              
              $
              9,621,030
              
              
              $
              4,035,064See
      notes to consolidated financial
statements.




F-4




FIRST
      MONTAUK FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)FOR
      THE PERIOD FROM JANUARY 1, 2005 TO DECEMBER 31, 2007Stockholders'Accumulated
              
              
              Deferred
              
              
              EquityDeficit
              
              
              Compensation
              
              
              (Deficit)Balances
      at January 1, 2005
              
              $
              (10,948,157
              )
              
              $
              (388,881
              )
              
              $
              (3,098,617
              )Increase
      in deferred compensation
              
              
              -
              
              
              
              (154,464
              )
              
              
              -Amortization
      of deferred compensation
              
              
              -
              
              
              
              896,160
              
              
              
              896,160Common
      stock issued in connectionwith
      legal settlements
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted stock in connectionwith
      employment agreements
              
              
              -
              
              
              
              (741,000
              )
              
              
              25,000Issuance
      of preferred stock in connectionwith
      separation agreement
              
              
              -
              
              
              
              -
              
              
              
              1,000,000Conversion
      of preferred stock intocommon
      stock
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              343,071Exercise
      of warrants
              
              
              -
              
              
              
              -
              
              
              
              158,283Conversion
      of bonds into common stock
              
              
              -
              
              
              
              -
              
              
              
              1,765,000Payment
      of preferred stock dividends
              
              
              (285,340
              )
              
              
              -
              
              
              
              (285,340
              )Net
      income for the period
              
              
              2,424,294
              
              
              
              -
              
              
              
              2,424,294Balances
      at December 31, 2005
              
              
              (8,809,203
              )
              
              
              (388,185
              )
              
              
              3,227,851Balances
      at January 1, 2006, as previously reported
              
              
              (8,809,203
              )
              
              
              (388,185
              )
              
              
              3,227,851Reclassification
      of Series  B stockas
      temporary equity
              
              
              -
              
              
              
              -
              
              
              
              (1,000,000
              )Balances
      at January 1, 2006, as restated
              
              
              (8,809,203
              )
              
              
              (388,185
              )
              
              
              2,227,851Increase
      in deferred compensation
              
              
              -
              
              
              
              76,266
              
              
              
              -Amortization
      of deferred compensation
              
              
              -
              
              
              
              272,373
              
              
              
              272,373Reclass
      to common stock
              
              
              -
              
              
              
              39,546
              
              
              
              -Exercise
      of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              33,504Cashless
      exercise of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              -Cashless
      exercise of warrants
              
              
              -
              
              
              
              -
              
              
              
              22,211Expired
      warrant obligation
              
              
              -
              
              
              
              -
              
              
              
              37,607Conversion
      of bonds into common stock
              
              
              -
              
              
              
              -
              
              
              
              1,225,000Payment
      of preferred stock dividends
              
              
              (168,506
              )
              
              
              -
              
              
              
              (168,506
              )Net
      loss
              
              
              (836,549
              )
              
              
              -
              
              
              
              (836,549
              )Balances
      at December 31, 2006
              
              
              (9,814,258
              )
              
              
              -
              
              
              
              2,813,491Amortization
      of deferred compensation
              
              
              -
              
              
              
              -
              
              
              
              29,823Payment
      of preferred stock dividends
              
              
              (123,966
              )
              
              
              -
              
              
              
              (123,966
              )Exercise
      of incentive stock options
              
              
              -
              
              
              
              -
              
              
              
              750Redemption
      of preferred A stock
              
              
              -
              
              
              
              -
              
              
              
              -Cancellation
      of preferred A stock
              
              
              -
              
              
              
              -
              
              
              
              -Cancellation
      of preferred B stock
              
              
              -
              
              
              
              -
              
              
              
              1,000,000Cancellation
      of common stock
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              (2,085,066
              )
              
              
              -
              
              
              
              (2,085,066
              )Balances
      at December 31, 2007
              
              $
              (12,023,290
              )
              
              $
              -
              
              
              $
              1,635,032See
      notes to consolidated financial
statements.




F-5




FIRST
      MONTAUK FINANCIAL CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFor
      the years ended December 31,2007
              
              
              2006
              
              
              2005INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTSCASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
              
              $
              (2,085,066
              )
              
              $
              (836,549
              )
              
              $
              2,424,294Adjustments
      to reconcile net income (loss) to net cash (used in)provided
      by operating activities:Depreciation
      and amortization of property and equipment
              
              
              109,163
              
              
              
              244,500
              
              
              
              384,169Amortization
      of stock compensation and deferred costs
              
              
              29,823
              
              
              
              341,228
              
              
              
              1,064,619Amortization
      of deferred income
              
              
              -
              
              
              
              -
              
              
              
              (5,105,116
              )Common
      stock issued in legal settlement
              
              
              -
              
              
              
              -
              
              
              
              25,000Preferred
      shares issued in connection with separation agreement
              
              
              -
              
              
              
              -
              
              
              
              1,000,000Note
      payable issued in connection with separation agreement
              
              
              -
              
              
              
              (200,000
              )
              
              
              200,000Increase
      (decrease) in cash attributable to changes in assetsand
      liabilities:Due
      from clearing firm
              
              
              2,640,801
              
              
              
              (232,100
              )
              
              
              1,059,173Securities
      owned
              
              
              38,674
              
              
              
              105,165
              
              
              
              67,108Prepaid
      expenses
              
              
              34,532
              
              
              
              1,914
              
              
              
              53,427Employee
      and broker receivables
              
              
              55,442
              
              
              
              (33,202
              )
              
              
              239,041Income
      taxes receivable
              
              
              -
              
              
              
              -
              
              
              
              40,525Other
      assets
              
              
              (561,925
              )
              
              
              (44,020
              )
              
              
              101,395Securities
      sold, not yet purchased
              
              
              (294
              )
              
              
              (3,069
              )
              
              
              (170,762
              )Commissions
      payable
              
              
              (639,222
              )
              
              
              351,556
              
              
              
              (472,414
              )Accounts
      payable
              
              
              (56,878
              )
              
              
              (173,249
              )
              
              
              (128,108
              )Accrued
      expenses
              
              
              (638,899
              )
              
              
              (177,928
              )
              
              
              295,169Income
      taxes payable
              
              
              7,191
              
              
              
              (28,000
              )
              
              
              (12,379
              )Other
      liabilities
              
              
              (15,628
              )
              
              
              15,500
              
              
              
              (70,113
              )NET
      CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
              
              
              (1,082,286
              )
              
              
              (668,254
              )
              
              
              995,028CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      to property and equipment
              
              
              (45,593
              )
              
              
              (34,073
              )
              
              
              (42,720
              )NET
      CASH USED IN INVESTING ACTIVITIES
              
              
              (45,593
              )
              
              
              (34,073
              )
              
              
              (42,720
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payment
      of capital lease
              
              
              (820
              )
              
              
              (7,735
              )
              
              
              (53,905
              )Proceeds
      from exercise of incentive stock option
              
              
              750
              
              
              
              33,504
              
              
              
              343,071Payment
      of preferred stock dividends
              
              
              (123,966
              )
              
              
              (168,506
              )
              
              
              (285,340
              )Proceeds
      from issuance of convertible note
              
              
              1,000,000
              
              
              
              -
              
              
              
              -Payment
      of convertible debenture
              
              
              (25,000
              )
              
              
              -
              
              
              
              -NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
              
              
              850,964
              
              
              
              (142,737
              )
              
              
              3,826Net
      increase (decrease) in cash and cash equivalents
              
              
              (276,915
              )
              
              
              (845,064
              )
              
              
              956,134Cash
      and cash equivalents at beginning of period
              
              
              1,145,751
              
              
              
              1,990,815
              
              
              
              1,034,681CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              868,836
              
              
              $
              1,145,751
              
              
              $
              1,990,815Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
              
              $
              19,844
              
              
              $
              106,739
              
              
              $
              133,967Income
      taxes
              
              $
              11,343
              
              
              $
              128,020
              
              
              $
              92,473Noncash
      financing activity:Proceeds
      from exercise of warrants
              
              $
              -
              
              
              $
              22,211
              
              
              $
              158,2836%
      convertible debentures converted into common stock
              
              $
              -
              
              
              $
              1,225,000
              
              
              $
              1,765,000Cancellation
      and Redemption of Preferred A stock
              
              $
              28,309Cancellation
      of Preferred B stock
              
              $
              1,000,000Cancellation
      of Common stock
              
              $
              2,056,199See
      notes to consolidated financial
statements.




F-6
 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”).  Since July 2000, FMSC has operated under the
registered trade name “Montauk Financial Group”. Through FMSC, the Company
executes principal and agency transactions primarily for retail customers,
performs investment banking services, and trades securities on a proprietary
basis.  FMSC’s registered representatives offer and sell a variety of
investment related, insurance based products through Montauk Insurance Services,
Inc. (“MISI”), another  subsidiary of the Company.  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 Financial Industry Regulatory
Authority ("FINRA") 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
two subsidiaries, both of which are wholly owned. All intercompany accounts and
transactions have been eliminated in consolidation.
 
 Revenue
Recognition Policies
 
 Commissions.All
customer securities transactions and insurance and mutual fund commissions are
reported on the Consolidate Statements of Operations on a trade-date basis.
Revenues from alternative products received from outside vendors are recognized
as income when earned. Asset management fees include revenues we receive from
management fees from third-party managed funds and management and administrative
fees we receive for assets managed by our registered representatives who are
Series 65 licensed. These fees are based on the value of assets under management
and are generally recognized over the period that the related service is
provided based upon the beginning or ending Net Asset Value of the relevant
period. Our accounting for commissions includes the guidance contained in
Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenues Gross versus Net,and because we are the primary obligor of any such arrangement,
accordingly, we do not net expense against the commission revenues.
  F-7
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Principal Transactions.Financial instruments owned and financial instruments sold, but not yet
purchased (all of which are recorded on a trade-date basis) are valued at quoted
market value, with unrealized gains and losses reflected in Principal
transactions in the Consolidated Statements of Operations on a trade-date basis.
Market value generally is determined based on listed prices or broker quotes.
Securities not readily marketable are carried at fair value based on our
management’s best estimate, giving appropriate consideration to reported prices,
the extent of public trading in similar securities and the discount from the
listed price associated with the cost at the date of acquisition, among other
factors.
 
 The
Company’s principal transaction revenues, by reporting categories at December
31, 2007, 2006 and 2005 are as follows:
 
 2007
              2006
              2005Amount
              %
              Amount
              %
              Amount
              %Equities
              386,361
              25.17%
              972,397
              23.84%
              1,555,270
              27.88%Fixed
      Income
              1,148,433
              74.83%
              3,106,846
              76.16%
              4,023,550
              72.12%Total
              1,534,794
              100.00%
              4,079,243
              100.00
              5,578,820
              100.00%
 
 Investment
Banking.Investment banking revenues are recorded at the time
a transaction is completed and the related income is reasonably determined.
Investment banking revenues include management fees, net of reimbursable
expenses, earned in connection with private placement fees.  Revenues
from sales concessions from participation in syndicated offerings are recorded
on a trade-date basis.
 
 Interest Income.We
recognized interest earned from clearing firm rebates when received. Interest on
broker loans is recorded on the accrual basis.
  Advertising
 
 Advertising
costs are expensed as incurred and totaled $86,944, $52,259 and $68,924 in 2007,
2006 and 2005, respectively.
 
 F-8
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Property and Equipment
 
 Furniture,
equipment and leasehold improvements are stated at cost. Betterments are
capitalized, while all other items are expensed.  Depreciation on
furniture and equipment is computed over the estimated useful lives of the
assets, ranging from three to ten years.  Capitalized leased equipment
is amortized over the lease term.  Leasehold improvements are
amortized over the shorter of either the asset’s useful life or the related
lease term.  Depreciation is computed using the straight-line method
for financial reporting purposes and on an accelerated basis for income tax
purposes.
 
 Cash
Equivalents
 
 For
purposes of the Consolidated Statement of Cash Flows, the Company considers all
highly liquid investments with a maturity when purchased of three months or less
to be cash equivalents.  Cash equivalents consisted of money market
funds at December 31, 2007 and 2006.
 
 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 and Series B Convertible Redeemable Preferred Stock
are added (deducted) to the net income (loss).  No dividends were paid
on the Series C Participating Cumulative Preferred Stock. For 2007 and 2006, the
basic and diluted calculation is the same due to the net
losses.  Accordingly, the result of including potentially dilutive
securities would be anti-dilutive.
  F-9
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  In
accordance with SFAS 128, the following table reconciles basic shares
outstanding to fully diluted shares outstanding:
 
 For the years ended December
      31,2007
              
              
              2006
              
              
              2005Numerator
      – basic:Net
      income (loss)
              
              $
              (2,085,066
              )
              
              $
              (836,549
              )
              
              $
              2,424,294Deduct:
      dividends paid during the year
              
              
              (123,966
              )
              
              
              (168,506
              )
              
              
              (285,340
              )Numerator
      for basic earnings (loss) per share
              
              $
              (2,209,032
              )
              
              $
              (1,005,055
              )
              
              $
              2,138,954Numerator
      – diluted:Numerator
      for basic earnings (loss) per share
              
              $
              (2,209,032
              )
              
              $
              (1,005,055
              )
              
              $
              2,138,954Add:
      Preferred stock dividends
              
              
              --
              
              
              
              --
              
              
              
              285,340Add:
      Convertible debenture interest
              
              
              --
              
              
              
              --
              
              
              
              86,582Numerator
      for diluted earnings (loss) per share
              
              $
              (2,209,032
              )
              
              $
              (1,005,055
              )
              
              $
              2,510,876Denominator:Weighted
      average common shares outstanding
              
              
              15,635,136
              
              
              
              17,004,254
              
              
              
              14,032,057Effect
      of dilutive securities:Stock
      options and warrants
              
              
              --
              
              
              
              --
              
              
              
              1,160,173Restricted
      shares
              
              
              --
              
              
              
              --
              
              
              
              438,708Convertible
      preferred stock Series B
              
              
              --
              
              
              
              --
              
              
              
              1,978,240Convertible
      debentures
              
              
              --
              
              
              
              --
              
              
              
              2,500,000Denominator
      for diluted earnings (loss) per share
              
              
              15,635,136
              
              
              
              17,004,254
              
              
              
              20,109,178
 
 The
      following securities, presented on a common share equivalent basis, have
      been excluded from the per share computations because they are
      antidilutive:
 
 Year
      ended December 31,2007
              
              
              2006
              
              
              2005Stock
      Options
              
              
              1,871,200
              
              
              
              2,137,402
              
              
              
              1,934,844Warrants
              
              
              304,518
              
              
              
              407,518
              
              
              
              82,409Convertible
      debt
              
              
              --
              
              
              
              25,000
              
              
              
              --Restricted
      Shares
              
              
              --
              
              
              
              100,000
              
              
              
              --Convertible
      note
              
              
              2,857,143
              
              
              
              --
              
              
              
              --Convertible
      preferred stock
              
              
              44,564
              
              
              
              2,283,609
              
              
              
              610,738TOTAL
              
              
              5,077,425
              
              
              
              4,953,529
              
              
              
              2,627,991
  F-10
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  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. The Company has determined that there
was no impairment for the years ended December 31, 2007 and 2006.
 
 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.  The Company files a consolidated tax
return for federal purposes and separate state tax returns for the parent and
each of its subsidiaries.The adoption of FIN 48 did
not have a material effect on the Company’s financial condition or results of
operations.
 
 Stock-based Compensation
 
 The
Company periodically issues stock options to employees, non-employee consultants
and non-employee independent registered representatives in accordance with the
provisions of its stock option plans (the “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.
 
 F-11
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Accounting
for Employee Awards:
 
 Effective
January 1, 2006, the Plans are accounted for in accordance with the recognition
and measurement provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment (“FAS 123(R)”), which replaces SFAS No.
123, Accounting for Stock-Based Compensation (“FAS 123”), and supersedes
Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock
Issued to Employees, and related interpretations. FAS 123(R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth within Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, which provides
the Staff’s views regarding the interaction between FAS 123(R) and certain SEC
rules and regulations and provides interpretations with respect to the valuation
of share-based payments for public companies.
 
 In
adopting FAS 123(R), the Company applied the modified prospective approach to
the transition. Under the modified prospective approach, the provisions of FAS
123(R) are to be applied to new employee awards and to employee awards modified,
repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the portion of employee awards for which the requisite
service has not been rendered that are outstanding as of the required effective
date shall be recognized as the requisite service is rendered on or after the
required effective date. The compensation cost for that portion of employee
awards shall be based on the grant-date fair value of those awards as calculated
for either recognition or pro-forma disclosures under FAS 123.
 
 As a
result of the adoption of FAS 123(R), the Company’s results for the years ended
December 31, 2007 and 2006 include share-based compensation expense for the
employee options and shares totaling approximately $5,375 and $31,000,
respectively, and is included in the Consolidated Statements of Operations
within commissions, employee compensation and benefits. No income tax benefit
has been recognized in the Consolidated Statements of Operation  for
share-based compensation arrangements as the Company has provided for 100%
valuation allowance on net deferred tax assets.
 
 Employee
stock options compensation expense in 2006 and 2007 is the estimated fair value
of options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the awards. The Company has not adjusted the
expense by estimated forfeitures, as requited by FAS 123(R) for employee
options, since the forfeiture rate based upon historical data was determined to
be immaterial.
 
 F-12
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Accounting
for Non-Employee Awards:
 
 The
Company accounts for options granted to its non-employee consultants and
non-employee registered representatives using the fair value in accordance with
FAS 123 and EITF Issue No. 96-18 “Accounting for Equity Instruments That Are
Issued to Other Than Employees” (“EITF 96-18”). The adoption of FAS 123(R) and
SAB 107 (defined below) as of January 1, 2006, had no material impact on the
accounting for non-employee awards. The Company continues to consider the
additional guidance set forth in EITF 96-18.
 
 Stock
compensation expense related to non-employee options was $24,447 for the year
ended December 31, 2007 compared to $36,000 and $129,000 for the years ended
December 31, 2006 and 2005, respectively. These amounts are included in
Consolidated Statements of Operations within commissions, employee compensation
and benefits.
 
 The
weighted average estimated fair value of all stock options granted during the
years ended December 31, 2007, 2006 and 2005 was $0.54, $0.56 and $0.41,
respectively. The fair value of options at the date of grant was estimated using
the Black-Scholes option pricing model.  The expected volatility is
based upon historical volatility of our common stock and other contributing
factors. The expected term is based upon observation of actual time elapsed
between date of grant and exercise of options for all employees.
 
 F-13
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 The
assumptions made in calculating the fair values of all options are as
follows:
 
 2007
              
              
              2006
              
              
              2005Expected
      volatility
              
              
              64
              %
              
              
              72
              %
              
              
              68
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Risk-free
      interest rate
              
              
              3.45%-4.47
              %
              
              
              3.71%-4.82
              %
              
              
              3.71%-4.35
              %Expected
      term (in years)
              
              1-4
      years
              
              
              1-4
      years
              
              
              1-5
      years
 
 Pro
Forma Information under SFAS No. 123 for Periods Prior to Adoption of FAS
123(R):
 
 The
following table illustrates the effect on the net income and earnings per share
as if the fair value recognition provisions of FAS 123 had been applied to all
outstanding and unvested employee awards in the 2005 comparable
period:
 
 
 Year endedDecember 31, 2005Net
      income applicable to common stockholders, as reported
              
              $
              2,138,954Deduct:
      total stock based employee compensation expense determined under the fair
      value based method for all awards, net of tax
              
              
              (298,682
              )Pro
      forma net income - basic
              
              
              1,840,272Add:
      preferred stock dividends
              
              
              285,340Add:
      convertible debenture interest
              
              
              86,582Pro
      forma net income - diluted
              
              $
              2,212,194Net
      income per share:Basic
      – as reported
              
              $
              0.15Diluted
      – as reported
              
              $
              0.12Basic
      – pro forma
              
              $
              0.13Diluted
      – pro forma
              
              $
              0.11
  F-14
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Recent
Accounting Pronouncements Affecting the Company
 
 In March
2008, the FASB issued Statement No. 161 (FAS 161), Disclosures about Derivative
Instruments and Hedging Activities. The new standard is intended to help
investors better understand how derivative instruments and hedging activities
affect an entity’s financial position, financial performance and cash flows
through enhanced disclosure requirements. The enhanced disclosures include, for
example:
  ·      A
tabular summary of the fair values of derivative instruments and their gains and
losses
   ·      Disclosure
of derivative features that are credit-risk-related to provide more information
regarding an entity’s liquidity
   ·      Cross-referencing
within footnotes to make it easier for financial statement users to locate
important information about derivative instruments
  The new
standard is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged.
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007),Business
Combinations, which replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We are currently assessing the potential impact that adoption of SFAS
No 141R will have on our consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which changes
the accounting and reporting for minority interests. Minority interests will be
recharacterized as noncontrolling interests and will be reported as a component
of equity separate from the parent’s equity, and purchases or sales of equity
interests that do not result in a change in control will be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement and, upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for annual periods
beginning after December 15, 2008. We are currently assessing the potential
impact that adoption of SFAS No. 160 would have on our consolidated
financial statements.
  F-15
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007,
and all interim periods within those fiscal years. In February 2008, the FASB
released FASB Staff Position (FSP FAS 157-2 –Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. We are currently assessing the
potential impact that adoption of this statement would have on our consolidated
financial statements.
 
 Reclassification
 
 A
reclassification was made to the 2006 consolidated financial statements to
reclass the Series B Redeemable Preferred Stock of $1,000,000 from Stockholders’
Equity to Temporary Equity.
 
 NOTE
      3 -
              SECURITIES
      OWNED and SECURITIES SOLD, NOT YET
PURCHASED
 
  December
      31,2007
              
              
              2006Owned
              
              
              Sold
      not yet purchased
              
              
              Owned
              
              
              Sold
      not yet purchasedCorporate
      stocks
              
              $
              152,816
              
              
              $
              201
              
              
              $
              97,941
              
              
              $
              495U.S.
      government agency and municipal obligations
              
              
              6,756
              
              
              
              --
              
              
              
              6,621
              
              
              
              --Other
              
              
              201
              
              
              
              --
              
              
              
              93,885
              
              
              
              --$
              159,773
              
              
              $
              201
              
              
              $
              198,447
              
              
              $
              495
  F-16
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Securities
owned and securities sold, not yet purchased consist of trading securities at
quoted market values.  Included in corporate stocks are warrants in
various companies, 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, as amended (“Securities Act”). At December 31, 2007 and
2006, the estimated fair values of these warrants were $85,215 and $92,483,
respectively.
  NOTE
      4 -
                EMPLOYEE
      AND BROKER RECEIVABLES
   December
      31,2007
              
              
              2006Commission
      advances
              
              $
              291,364
              
              
              $
              320,329Forgivable
      loans
              
              
              167,083
              
              
              
              220,425Other
      loans
              
              
              588,117
              
              
              
              610,2721,046,564
              
              
              
              1,151,026Less:
      reserve for bad debt
              
              
              (758,515
              )
              
              
              (807,535
              )$
              288,049
              
              
              $
              343,491
 
 From time
to time, the Company provides forgivable loans to  certain registered
representatives primarily for recruiting and retention purposes. These loans are
recorded at face value at the time the loan is made. If the registered
representative does not meet specific requirements or terminates his or her
registration with the Company prior to the forgiveness of the loan, management
will evaluate the collectability of the remaining loan amount. .  The
loans are amortized to commission expense for financial reporting purposes over
the term of the loan.  Loan amortization charged to compensation was
$53,343, $187,109 and $122,155 in 2007, 2006, and 2005,
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.
 
 The
Company establishes a reserve based on identification on a loan by loan basis
and records a bad debt expense at the time a reserve is made. Each loan is
evaluated separately; not on a percentage of total loans impaired.
  F-17
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 5
      -
                  PROPERTY
      AND EQUIPMENT
 
 December
      31,Estimated2007
              
              
              2006
              
              Useful LifeComputer
      and office equipment
              
              $
              2,947,268
              
              
              $
              2,903,760
              
              3
      to 7 yearsFurniture
      and fixtures
              
              
              1,699,715
              
              
              
              1,697,630
              
              7
      to 10 yearsLeasehold
      improvements
              
              
              807,227
              
              
              
              807,227
              
              Term
      of lease5,454,210
              
              
              
              5,408,617Less:
      accumulated depreciation and amortization expense
              
              
              (5,278,747
              )
              
              
              (5,169,584
              )$
              175,463
              
              
              $
              239,033
 
 Depreciation
and amortization expense was $109,163, $244,500 and $384,169 in 2007, 2006 and
2005, respectively.
 
 NOTE
      6 -
              OTHER
      ASSETS
 
 December
      31,2007
              
              
              2006Other
      assets consist of the following:Commissions
      and concessions receivable
              
              $
              531,460
              
              
              $
              425,592Security
      deposits
              
              
              473,092
              
              
              
              153,592Insurance
      recovery receivable
              
              
              124,999
              
              
              
              --Deferred
      financing costs
              
              
              30,000
              
              
              
              810Other
              
              
              342
              
              
              
              17,974$
              1,159,893
              
              
              $
              597,968
 
 Commissions
and concessions receivable include amounts earned on mutual fund, insurance
transactions and concessions on syndicate offerings. (See Note 13 for
explanation of security deposits.)
 
 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 advances of $4,886,000 were  recognized
as income. Amortization of approximately $5,105,000 in 2005 was included in
Interest and Other Income in the Consolidated Statements of
Operations.  Advances were subject to income taxes in the year of
receipt.
  F-18
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  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 debentures were convertible into shares of common stock at $.50
per share, subject to adjustment for stock dividends and stock splits, and
matured five years from the date of issuance unless previously
converted.  Interest was  payable in cash on a semi-annual
basis until maturity or conversion.
 
 In
      2004 and 2005, certain holders of the subordinated convertible debentures
      presented their debentures to the Company for conversion.  The
      Company issued 3,770,000 shares of common stock and retired $1,885,000 of
      the debentures.
 
 During
2006, $35,000 of the Company’s subordinated convertible debentures was presented
to the Company for conversion. The Company issued 70,000 shares and retired
$35,000 of the debentures. In addition, during the second quarter of 2006, FMFG
Ownership, Inc., an affiliate of Mr. Edward H. Okun ("Okun"), a private
investor, purchased $1,190,000 of the subordinated convertible debentures from
holders in privately negotiated transactions and presented them to the Company
for conversion. On June 20 and 23, 2006, the Company issued to the Okun
affiliate an aggregate of 2,380,000 shares of common stock and retired
$1,190,000 of the debentures.
 
 The sole
debenture outstanding as of December 31, 2006 of $25,000 was redeemed at
maturity on December 11, 2007. In 2007, the Company paid $1,500 in interest to
the holder of the remaining outstanding convertible debenture. In 2006 and 2005,
the Company paid $35,811 and $111,567, respectively, in interest to holders of
the convertible debentures.
  NOTE 9
      -
                NOTE
      PURCHASE AGREEMENT
 On
December 7, 2007 the Company entered into a note purchase agreement (the "Note
Purchase Agreement") with AEFC-FMFK Investment Corp. ("AEFC-IC") pursuant to
which AEFC-IC was issued a 10% Convertible Secured Note due on December 31, 2008
for an aggregate principal amount up to $2,000,000 (the "AEFC-IC Note"). The
AEFC-IC Note accrues interest on the unpaid principal amount at the rate of 10%
per annum, which will be paid monthly in arrears on or before the 10th day of
the month following the interest accrual. The principal of the AEFC-IC Note and
all accrued and unpaid interest thereon will be payable in full on December 31,
2008. The AEFC-IC Note is convertible into shares of common stock at $0.35 per
share, as adjusted, beginning July 1, 2008 if the AEFC-IC Note is not prepaid
prior to such date. The AEFC-IC Note is prepayable at any time prior to July 1,
2008 subject to an escalating prepayment penalty based on the date of prepayment
which is payable by us in cash and the issuance of a warrant to purchase shares
of common stock at an exercise price of $0.35 per share, as
adjusted.  In the event the Company  (i) does not draw the
full $2,000,000 principal amount available under the AEFC-IC Note and (ii) the
AEFC-IC Note has not been prepaid by July 1, 2008, the Company  will
issue AEFC-IC a warrant to purchase shares of  common stock at an
exercise price of $0.35 per share, as adjusted, for each one dollar of principal
amount available but not drawn upon under the AEFC-IC Note.  The
parties also executed a registration rights agreement.
 
 F-19
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 In
connection with, and concurrent with, the execution of the Note Purchase
Agreement, the AEFC-IC Note and the related documents, the Company entered into
the First Amendment, dated as of December 7, 2007 ("First Amendment to the
Rights Agreement"), of the Rights Agreement, dated August 1, 2007, between us
and Continental Stock Transfer & Trust Company, as Rights Agent ("Rights
Agreement") as more fully described above. The First Amendment to the Rights
Agreement provides that AEFC-IC will not be deemed to be an "Acquiring Person"
under the Rights Agreement by reason of (i) the execution of the AEFC-IC Note
Purchase Agreement; (ii) the issuance of the AEFC-IC Note; (iii) the issuance of
shares of common stock upon the conversion of the AEFC-IC Note into shares of
our common stock. ; (iv) the issuance of any warrants to AEFC-IC pursuant to the
Note Purchase Agreement or any shares of common stock upon exercise of such
warrants; (v) the purchase by AEFC-IC of all or any of the 3,300,308 shares of
common stock owned by  Mr. Okun or any affiliates of Mr. Okun
(collectively, the "Okun Parties"); (vi) the approval, execution or delivery of
any agreement with respect to the purchase by AEFC-IC of all or any of the
3,300,308 shares of common stock owned by the Okun Parties; (vii) the public or
other announcement of the Note Purchase Agreement or any of the transactions
contemplated thereby, or the purchase by AEFC-IC of all or any of the 3,300,308
shares of common stock owned by the Okun Parties; or (viii) the consummation of
the Note Purchase Agreement and any other transactions contemplated by the Note
Purchase Agreement or any agreement to purchase all or any of the 3,300,308
shares of common stock owned by the Okun Parties (See below Note 17-Series C
Participating Cumulative Preferred Stock-Preferred Stock Purchase
Rights).
 
 F-20
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 10
      -
                  ACCRUED
      EXPENSES
   December
      31,Accrued
      expenses consist of the following:
              
              2007
              
              
              2006Accrued
      litigation costs
              
              $
              227,000
              
              
              $
              237,000Accrued
      payroll
              
              
              100,000
              
              
              
              484,941Accrued
      separation costs
              
              
              40,801
              
              
              
              200,000Accrued
      professional fees
              
              
              151,210
              
              
              
              167,500Other
      accrued expenses
              
              
              37,516
              
              
              
              105,985$
              556,527
              
              
              $
              1,195,426
  NOTE 11
      -
                    INCOME
      TAXES
 The
provision for income taxes consists of the following:
 
 Year
      ended December 31,2007
              
              
              2006
              
              
              2005Currently
      payable:Federal
              
              $
              -
              
              
              $
              -
              
              
              $
              -State
              
              
              16,000
              
              
              
              27,000
              
              
              
              78,00016,000
              
              
              
              27,000
              
              
              
              78,000Deferred:Federal
              
              
              -
              
              
              
              -
              
              
              
              -State
              
              
              -
              
              
              
              -
              
              
              
              -$
              16,000
              
              
              $
              27,000
              
              
              $
              78,000
  F-21
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Following
is a reconciliation of the income tax provision with income taxes based on the
federal statutory rate:
 
 Years
      ended December 31,2007
              
              
              2006
              
              
              2005Expected
      federal tax   benefit at statutory rate
              
              $
              (704,000
              )
              
              $
              (275,000
              )
              
              $
              851,000State
      taxes, net of federal tax rate
              
              
              11,000
              
              
              
              18,000
              
              
              
              51,000Non-deductible
      expenses
              
              
              149,000
              
              
              
              43,000
              
              
              
              408,000Increase
      (decrease) in valuation allowance
              
              
              543,000
              
              
              
              3,000
              
              
              
              (1,542,000
              )Other
      reserves not deductible
              
              
              17,000
              
              
              
              238,000
              
              
              
              310,000Provision
      for income taxes
              
              $
              16,000
              
              
              $
              27,000
              
              
              $
              78,000
 
 The tax
effects of the temporary differences that give rise to significant portions of
the deferred tax assets and liabilities as of December 31, 2007 and 2006
are:
 
 Years
      ended December 31,2007
              
              
              2006Deferred
      tax assets:Reserves
      and allowances
              
              $
              286,000
              
              
              $
              351,000Federal
      tax loss carryforwards
              
              
              1,611,000
              
              
              
              1,050,000State
      tax loss carryforwards
              
              
              427,000
              
              
              
              372,000Accrued
      and stock-based compensation
              
              
              442,000
              
              
              
              418,000Other
              
              
              20,000
              
              
              
              52,000Subtotal
              
              
              2,786,000
              
              
              
              2,243,000Valuation
      allowance
              
              
              (2,786,000
              )
              
              
              (2,243,000
              )Net
      deferred tax assets
              
              $
              --
              
              
              $
              --
 
 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 100% valuation allowance has been
provided against deferred tax assets as of December 31, 2007 and
2006.
  On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the consolidated financial statements tax positions taken or
expected to be taken on a tax return, including a decision whether to file or
not to file in a particular jurisdiction. There was no impact on the
Company’s consolidated financial position, results of operations or cash flows
at December 31, 2007 and for the year then ended as a result of
implementing FIN 48.  At the adoption date of January 1, 2007 and
at December 31, 2007, the Company did not have any unrecognized tax
benefits. The Company’s practice is to recognize interest and/or penalties
related to income tax matters in income tax expense.
 
 F-22
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 The
Company and its subsidiaries file a consolidated federal tax return and separate
state returns.  At December 31, 2007, the Company has approximately
$4,738,000 and $7,117,000 of federal and state operating loss carryforwards,
respectively, available to offset future taxable income.  These losses
expire at various dates through 2027.
 NOTE 12
      -
                      TERMINATION
      OF MERGER AGREEMENT; LITIGATION AND
  SETTLEMENT
 On May 5,
2006, the Company entered into a definitive merger agreement with FMFG
Ownership, Inc. and FMFG AcquisitionCo, Inc. (collectively referred to as the
"Okun Purchasers") which are wholly owned by Mr.  Okun. Mr. Okun is
the controlling person of Investment Properties of America, LLC (“IPofA”), a
privately owned, diversified real estate investment and management company.
Pursuant to the merger agreement, the Okun Purchasers were to purchase all of
the Company’s outstanding securities for an aggregate purchase price of $23
million, or $1.00 in cash per common share, $2.00 in cash per Series A Preferred
Stock (convertible into two shares of common stock), and $10.00 in cash per
share of Series B Preferred Stock (convertible into ten shares of common
stock).
 
 In June
2006, the Okun Purchasers purchased in the open market and privately negotiated
transactions, 2,159,348 shares of the Company’s common stock, and in privately
negotiated transactions, 283,087 shares of Series A Preferred Stock at a price
of $4.00 per share (convertible into 566,174 shares of the Company’s common
stock) and $1,190,000 principal amount of the Company’s convertible debentures
(convertible into 2,380,000 shares of the Company’s common stock).
 
 On June
20 and 23, 2006, the Okun Purchasers converted the $1,190,000 principal amount
of the convertible debentures into 2,380,000 shares of the Company’s common
stock. As a result of these purchases and conversions, the Okun Purchasers
beneficially owned 24.6% of the Company’s common stock (assuming none of the
shares of Series A Preferred Stock were converted into common
stock).
 
 On August
17, 2006, the Company’s shareholders (including the Okun Purchasers) voted at a
special meeting of shareholders to approve the merger agreement and the merger.
At the meeting, the Okun Purchasers voted all of the Company’s shares
beneficially owned by them in favor of the merger agreement and the
merger.
 
 F-23
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Subsequently,
the deadline for completing the merger was extended from October 31, 2006 to
December 31, 2006 in order to allow the parties to fulfill certain conditions to
the merger, including obtaining the necessary consent of the NASD.
 
 On
December 29, 2006, the Company received notification from representatives of the
Okun Purchasers that they were terminating the merger agreement and not
proceeding with the merger. They alleged the Company’s failure to satisfy
conditions and the Company’s alleged breach of various representations,
warranties, covenants and agreements in the merger agreement
 
 On
January 8, 2007, the Company filed a lawsuit in the Supreme Court of New Jersey,
Monmouth County, Chancery Division against the Okun Purchasers, Mr. Okun, IPofA
and several other affiliated entities which Mr. Okun controls (collectively, the
“Okun Defendants”). The purpose of this lawsuit was to enforce the terms of the
merger pursuant to the merger agreement executed on May 5, 2006. Pursuant to the
merger agreement shareholders of the Company’s common stock would have received
$1.00 in cash for each share of common stock.  The lawsuit alleged,
among other things, that the Okun Purchasers breached the merger agreement by
terminating the agreement on December 29, 2006 without cause or justification.
The Company’s complaint demanded specific performance of the merger agreement
and completion of the merger. In the alternative, the Company sought
compensatory damages for breach of contract and breach of the covenant of good
faith and fair dealing as well as payment of $2 million held in escrow to secure
the performance of the Okun Purchasers under the merger agreement. The lawsuit
also sought to void the lease agreement that the Company entered into with
another Okun affiliate to relocate the Company’s corporate offices to a building
purchased by that Okun affiliate in Red Bank, NJ.
 
 On
February 12, 2007, the Company received the Okun Defendants' answer to the
lawsuit, which contained several counterclaims against it. In their
counterclaims, the Okun Defendants alleged that the Company breached the merger
agreement and failed to disclose certain material facts about the Company, and
sought the return of $2 million held in escrow as well as compensatory damages,
interest and costs.  The Okun Defendants filed two additional actions;
one on February 2, 2007, in the Circuit Court of the State of Florida against
the Company’s President and Chief Executive Officer, and the other, a
shareholder derivative action in the Federal District Court for the District of
New Jersey against the Company and certain of its directors and officers, filed
on February 16, 2007.
 
 F-24
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 On
February 26, 2007, Mr. Okun and certain of his affiliates filed an amendment to
their Schedule 13D with the SEC disclosing that they beneficially owned 52.8% of
the Company’s voting securities.  According to the amended Schedule
13D, additional shares of the Company’s common stock were purchased in privately
negotiated transactions for $1.00 per share and the 197,824 shares of Series
B  outstanding were purchased for $10.00 per share. Each share of
Series B  was  convertible into 10 shares of common stock.
The Series B  and certain of the shares of common stock were purchased
from two of the Company’s former officers and directors.
 
 On May 9,
2007, the Company announced that it had reached an agreement with Mr. Okun and
the Okun Defendants (“May Settlement Agreement”) to settle the three separate
lawsuits arising out of the termination of the merger
agreement.  However, on May 23, 2007 the Company announced that it and
the Okun Defendants had agreed to consent to the entry of a Court Order to
vacate and set aside the May Settlement Agreement.
 
 On June
15, 2007, the Company announced that it had reached a new agreement with Mr.
Okun and the Okun Defendants (“June Settlement Agreement”) to settle the three
separate lawsuits arising out of the termination of the merger
agreement.  The June Settlement Agreement provided that Okun’s
affiliated entities would surrender all of their First Montauk preferred stock
holdings and 5,272,305 of their common share holdings, such that the Okun’s
affiliates would hold less than 25% of the outstanding common shares of stock in
First Montauk.  These shares have since been surrendered and
cancelled. The Company also obtained an exclusive 60 day option (the “Option
Period”) to purchase the balance of the shares held by the Okun affiliated
entities (the “Option Securities”) for the aggregate purchase price of
$2,500,000 (the “Option”), which expired on August 14, 2007, without the Company
exercising its option. The June Settlement Agreement also provided that the
lease between an Okun affiliated entity and the Company shall be deemed void
ab initio with respect
to relocating the Company’s corporate offices.
 
 In
return, the Company agreed to direct the escrow agent, Signature Bank New York,
to pay to an Okun affiliated entity the $2 million on deposit by Mr. Okun and
the Okun Defendants under the Escrow Agreement executed and delivered pursuant
to the May 5, 2006 Merger Agreement.
 NOTE 13
      -
                        COMMITMENTS
      AND CONTINGENT
LIABILITIES
 Operating
Leases:
 
 The
Company leases office facilities and equipment under operating leases expiring
at various dates through 2011.  Certain leases require the Company to
pay increases in real estate taxes, operating costs and repairs over certain
base year amounts. Operating lease expense for the years ended December 31,
2007, 2006 and 2005 was approximately $734,482, $886,880 and $989,000,
respectively.
 
 F-25
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Future
minimum rental commitments under all non-cancelable leases with terms greater
than one year are as follows:
  Year
      ending December 31,2008
                
                $
                1,148,5042009
                
                
                843,6672010
                
                
                184,9812011
                
                
                18,627$
                2,195,779
 Master Services Agreement:
 
 Effective
      November 2006, the Company entered into a master services agreement with
      an outside vendor for development of certain software, data integration
      and business processing improvement consulting services.  Under
      the terms of the agreement, the Company made payments totaling $400,000 to
      the vendor for software development, none of which has been amortized or
      expensed and has been included as security deposits in other assets on the
      Consolidated Statements of Financial Condition. (See also Note
      23-“Subsequent Event”).
  Employment
Agreements:
 
 As of May
9, 2007, the Company and Mr. Victor K. Kurylak, its President and Chief
Executive Officer (“CEO”) of the Company, executed an Amended and Restated
Employment Agreement (“Amended Employment Agreement”). The Amended Employment
Agreement was executed in connection with the execution of the May Settlement
Agreement (See Note 12-Termination of Merger Agreement; Litigation and
Settlement). Pursuant to the Amended Employment Agreement,  Mr.
Kurylak was to continue his employment with the Company as President, However he
was to resign from the position of CEO of the Company in connection with the May
Settlement Agreement upon appointment of his successor and execution by his
successor of an employment agreement with the Company. However, since the May
Settlement Agreement was vacated and set aside, his resignation as CEO was not
accepted and thus cancelled. On June 15, 2007, the Company and  Mr.
Kurylak executed Amendment Number One to the Amended  Employment
Agreement (“Amendment to Amended Employment Agreement”) to correctly state that
he remains employed in the capacity of President and CEO of both the Company and
FMSC.
  F-26
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  The CEO’s
employment contract has been renewed for one year, through December 31, 2008,
under the terms of the Amended Employment Agreement previously
filed.
 
 In the
event of the termination of the CEO’s employment by the Company without “cause”
or by the CEO for “good reason” as these terms are defined in the Amended
Employment Agreement, he would be entitled to: (a) all compensation accrued but
not paid as of the termination date; (b) base salary for the remainder of the
term; (c) a severance payment equal to $300,000 payable in a lump sum
payment;  (d) continued participation in the Company’s benefit plans
(or comparable plans); and (e) any applicable bonus. If the CEO’s employment is
terminated by the Company for “cause” or by him without “good reason”, he will
be entitled only to accrued compensation. If termination of the Amended
Employment Agreement occurs as a result of the expiration of such agreement
without renewal by the Company at the end of the term, the CEO will be entitled
to the accrued compensation, any applicable bonus and the severance
payment.
  In the
event the CEO is a member of the Board of Directors of the Company on the
termination date, the payment of any and all compensation due under the Amended
Employment Agreement, except the accrued compensation, is expressly conditioned
on  his resignation from the Board of Directors of the Company within
five (5) business of the termination date.
  The
Amended Employment Agreement contains confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the first anniversary of the date of cessation of the CEO’s
employment.
  Termination Agreements:
  On August
31, 2007, Mr. Phillip P. D’Ambrisi, the Chief Operating Officer (“COO”) resigned
his positions with the Company and FMSC.  The COO also resigned
effective August 31, 2007 as a member of the Board of Directors of the Company
and FMSC, respectively.  Effective September 1, 2007, the Company and
the COO entered into a consulting agreement ("Consulting Agreement") pursuant to
which he would provide certain services to the Company through December 31,
2007.
 
 In
January 2007, the Company entered into an employment agreement with a new
General Counsel, which provided him with a base salary of $200,000 per year and
bonuses of $100,000 per year provided he was still employed by the Company at
the end of each year through December 31, 2008. He resigned on August 31, 2007,
effective September 28, 2007. In settlement of his employment contract he
received his 2007 bonus of $100,000.
 
 F-27
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 On
February 1, 2006, the Company entered into a separation agreement with Mr.
Herbert Kurinsky, its Chairman of the Board, which provided for the termination
of his employment as of that date.  Mr. Kurinsky continued to serve as
Chairman of the Board of the Company until he resigned effective November 9,
2006.
 
 Pursuant
      to the terms of the separation agreement, the Company paid Mr. Kurinsky 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 continued to provide him and his
      wife with medical insurance coverage through January 31, 2010 and an
      automobile allowance of $600 through January 31, 2009.   In
      addition, pursuant to his employment agreement all stock grants were
      immediately vested.
 
 Due to
the change in control provisions in the separation agreement and promissory
note, on July 17, 2006, the Company paid the remaining balances, including
accrued interest on the note payable and automobile allowance of $486,000 and
$19,000, respectively.
 
 On
November 14, 2006 the Company entered into a separation agreement with Mr.
Robert I. Rabinowitz, the Company's Executive Vice President, Secretary and
General Counsel.  Under the terms of the agreement, the General
Counsel’s employment contract was not renewed and terminated effective January
31, 2007.  Pursuant to the terms of the separation agreement, the
General Counsel was provided with severance pay of $200,000, and benefits
through January 31, 2008  in accordance with the terms of his
employment agreement, which was accrued for in 2006.   Mr.
Rabinowitz and the Company also entered into an eleven month consulting
agreement, effective February 1, 2007.
 
 Legal
Matters:
 
 FMSC is 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.
 
 F-28
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 As of
December 31, 2007, 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 us. All such cases will continue to be vigorously
defended.
 
 SEC
Investigation
 
 The
Company has entered into a settlement as a result of a regulatory
investigation by the SEC concerning the Company’s and a former employee’s
failure to reasonably supervise the securities trading and research activities
of a former institutional analyst. The investigation covered the time period
from March through December 2003. The Company has entered into an Offer of
Settlement, which, if accepted and approved by the  Commissioners of
the SEC, will result in issuance of an Order Instituting Public Administrative
and Cease-And-Desist Proceedings and Impose Remedial Sanctions. The settlement
will result in the imposition of a censure and fine of $100,000 against the
Company, and a six-month supervisory suspension and fine of $50,000 against the
Company’s former president and CEO. The settlement should be concluded in early
2008. The Company’s monetary fine has been accrued for in 2007 and has been
placed in an interest bearing attorney escrow account pending finalization of
the settlement by the SEC.
  FINRA
Settlement
  In
September 2007, the Company entered into a Letter of Acceptance, Waiver and
Consent ("AWC") with FINRA, formerly the National Association of Securities
Dealers ("NASD"). The AWC resolved an investigation by the FINRA Staff into
sales practice activities of certain individuals who were formerly registered
representatives of the Company, as well as the supervision of those activities
by the Company. Without admitting or denying the allegations set forth in the
AWC, the Company accepted FINRA's findings and consented to a censure, paid a
$175,000 fine and agreed to an undertaking requiring a written certification by
a senior officer of the firm, reviewing the firm's systems and procedures
regarding its supervisory procedures, and training and monitoring of
supervisors.
 
 F-29
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 New Jersey Bureau of
Securities Consent Order
  On
September 29, 2006, FMSC entered into a Consent Order with the New Jersey Bureau
of Securities in connection with an inquiry into FMSC’s sale of certain
high-yield bonds to FMSC's clients from 1998 to 2001, and the subsequent resale
of those securities to other customers in 2001. The Consent Order required
payment of a civil penalty of $475,000, which was paid in September 2006,
$400,000 of which was accrued in 2005. The Consent Order also required the
retention of an independent consultant to review our business practices and
procedures for branch office supervision, suitability standards, and monitoring
of agent sales activities.
 
 Merger Agreement,
Termination and Subsequent Litigation
 
 See Note
12 for a complete description of the merger agreement, its termination,
subsequent litigation and settlement thereof.
  NOTE 14
      -
                        CLEARING
      AGREEMENT
 FMSC has
a clearing agreement with National Financial Services, LLC (“NFS”) to act as its
primary clearing firm.  The clearing agreement includes a termination
fee should FMSC terminate the agreement, which reduces each year during the
eight-year term of the agreement, through May 2014.
 
 During
the second quarter of 2006, FMSC signed a release with NFS for and in
consideration of the payment of $1 million by NFS relating to conversion and
transition expenses incurred by FMSC in prior periods, as a result of its
conversion from Fiserv to NFS in 2005. The payment was received on June 29, 2006
and was recorded by FMSC among various expense and revenue
categories.
 NOTE 15
      -
                        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 fails 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.
 
 F-30
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 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 $201 and $495 at December 31, 2007 and 2006,
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, securities inventories and employee
and broker receivables.  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 16
      -
                        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
2007, 2006 or 2005.
 NOTE 17
      -
                        STOCKHOLDERS'
      EQUITY
 
 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
  F-31
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 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.
 
 In 1999,
the Company issued 349,511 shares of Series A Convertible 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%.
 
 In June
2006, an affiliate of Mr. Okun purchased 283,087 shares of the Company’s then
305,369 outstanding shares of Series A Preferred Stock in privately negotiated
transactions.
 
 On June
15, 2007, as part of the settlement with Mr. Okun and the Okun Defendants (See
Note 12-Termination of Merger Agreement; Litigation and Settlement) an agreement
was reached which required the Okun Defendants  to surrender for
cancellation effective June 15, 2007, all shares of Series A Preferred Stock
(283,087 shares), all shares of Series B Preferred Stock (197,824 shares) and
5,272,305 shares of common stock previously owned by the Okun
Defendants.
 
 As of
December 31, 2007, a total of 44,142 Series A preferred shares have been
converted into 88,284 shares of common stock. The Company has 22,282 Series A
preferred shares issued and outstanding with respect to
which  dividends were paid  in the amount of $67,077 and
$88,505 during 2007 and 2006, respectively.  During 2005, the Company
paid dividends of $233,784, including $210,879 dividends in
arrears.
 
 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.
  On June
15, 2007, the Company reached an agreement with  the Okun
Defendants  to settle the three separate lawsuits arising out of the
termination of the merger agreement between the Company and the Okun
Purchasers.  On June 15, 2007, the Okun
Defendants  surrendered for cancellation by the Company 5,272,305 of
their common share holdings, together with all shares of Series A Preferred
Stock (283,287 shares) and all shares of Series B Preferred Stock (197,824
shares constituting all Series B Preferred Shares) owned by them. (See Note 12
–Termination of Merger Agreement; Litigation and Settlement).
 
 F-32
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  SERIES C
PARTICIPATING CUMULATIVE PREFERRED STOCK-PREFERRED STOCK PURCHASE
RIGHTS
 
 The Board
of Directors of the Company adopted a shareholder-rights plan in August 2008 and
in connection therewith designated a Series C Participating Cumulative Preferred
Stock, $.10 par value per share (“Series C Stock”). The rights were declared as
a dividend of one preferred share purchase right for each outstanding share of
the common stock of the Company. The dividend distribution was payable on August
8, 2007 to shareholders of record on that date. When exercisable, each right
will entitle its holder to purchase from the Company one one-hundredth of a
share of the Company’s new Series C Stock, at a price of $2.00 per one
one-hundredth of a share of Series C, subject to adjustment. The Company has
created a series of 200,000 shares of authorized but not issued preferred stock
for the Series C Stock authorized in this shareholder-rights plan. No shares of
Series C Stock are currently issued and outstanding.
 
 The
rights will become exercisable on the tenth business day (unless further
extended by a resolution adopted by a majority of the “continuing directors” of
our Board of Directors as of the close of business on August 9, 2007 (the date
of our 2007 Annual Meeting) following public announcement that a person or group
of affiliated or associated persons has acquired or obtained the right to
acquire beneficial ownership of 10% or more of the common stock without approval
of a majority of the Board of Directors of the Company. The rights expire on
August 8, 2017 unless earlier redeemed or exchanged by the Company.
 
 In the
event the Company is acquired in a merger or other business combination
transaction after the rights become exercisable, each holder of a right would be
entitled to receive that number of shares of the acquiring company’s common
stock equal to the result obtained by multiplying the then current purchase
price by the number one one-hundredths of a share of Series C Stock for which a
right is then exercisable and dividing that product by 50% of the then current
market price per share of the acquiring company.
  F-33
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 18
      -
                        TEMPORARY
      EQUITY-SERIES B CONVERTIBLE REDEEMABLE PREFERRED
      STOCK
 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. A
redemption event occurs: if the Company ceases to be a reporting entity under
the Securities Act; if the Company’s common stock ceases to be publicly traded
for any reason; or, upon liquidation of the Company.
 
 In
connection with a Separation Agreement entered into with Mr. William J. Kurinsky
in 2005, 197,824 shares of a newly created class of Series B Convertible
Redeemable Preferred Stock (“Series B”), par value $0.10 per share were issued,
which had a deemed issue price of $1,000,000, and was convertible into common
stock on the basis of ten shares of common stock for each share of Series
B.  The Series B also provided that the preferred shares have voting
rights based upon the number of shares of common stock into which it would be
converted. The Series B also included a cumulative dividend of 8% per year. The
shares are restricted securities under the Securities Act  and the
regulations of the SEC and we relied upon the exemption from registration under
Section 4(2) of the Securities Act  to issue the shares of Series
B.
 
 F-34
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 On
February 23, 2007, Mr. Okun purchased all the shares of Series B in a private
transaction at a price of $10.00 per share of Series B.  On June 15,
2007, as part of the settlement with Mr. Okun and the Okun Defendants (See Note
12-Termination of Merger Agreement; Litigation and Settlement) an agreement was
reached which required the parties to surrender all shares of Series B
previously owned by the Okun Defendants. On June 15, 2007, 197,824 shares of
Series B were surrendered and cancelled. There are currently no shares of Series
B outstanding.
 
 The
Company paid $56,889, $80,000 and $51,556 of dividends on the shares of Series B
preferred stock during 2007, 2006 and 2005, respectively.
  NOTE 19
      -
                        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. As of December 31,
2007, there were no options remaining under the 1992 Plan.
 
 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
incentive stock options (“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, 2007,
options to purchase a total of 721,200 shares were outstanding and 3,748,602
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, 2007, 235,000 options were outstanding under
the 2002 Non-Executive Director Stock Plan.
 
 F-35
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 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. As
of December 31, 2007, options to purchase 915,000 shares of restricted common
stock were issued and outstanding. The 1996 Plan terminated in June
2006.
  F-36
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  A summary
of the activity in the Company’s stock option plans (excluding restricted common
shares) for the three-year period ended December 31, 2007 is presented
below:
 WeightedAverageExerciseShares
                
                
                PricesOptions
      outstanding, December 31, 2004
                
                
                3,656,198
                
                
                $
                1.01Granted
                
                
                1,105,000
                
                
                
                1.07Exercised
                
                
                (566,398
                )
                
                
                .61Canceled
                
                
                (1,487,498
                )
                
                
                .84Options
      outstanding, December 31, 2005
                
                
                2,707,302
                
                
                $
                .85Granted
                
                
                3,000
                
                
                
                1.18Exercised
                
                
                (263,400
                )
                
                
                .69Canceled
                
                
                (309,500
                )
                
                
                1.34Options
      outstanding, December 31, 2006
                
                
                2,137,402
                
                
                $
                .79Granted
                
                
                456,000
                
                
                
                .54Exercised
                
                
                (3,000
                )
                
                
                .25Canceled
                
                
                (719,202
                )
                
                
                .79Options
      outstanding, December 31, 2007
                
                
                1,871,200
                
                
                $
                .73
 Shares of
common stock available for future grant under Company plans totaled 3,748,602 as
of December 31, 2007.  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
weighted-average grant date fair value per option granted during the twelve
months ended December 31, 2007 and 2006 was $0.54 and $0.56, respectively. The
intrinsic value of all stock options exercised during the twelve months of 2007
and 2006 was $0.00 and $54,000, respectively. Cash received from the exercise of
all stock options for the twelve months ended December 31, 2007, 2006 and 2005
was $750, $33,504 and $343,071, respectively.
 
 F-37
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 The
Company has issued nonvested shares (as the term is defined in FAS 123(R)) to
its senior officers. The following table summarizes the activity during the
twelve months ended December 31, 2007:
 
 Nonvested
      Shares
              Shares
              Weighted-Average
      Grant -
                Date
      Fair ValueNonvested
      January 1, 2007
              100,000
              $0.57Granted
              --
              --Vested
              (100,000)
              $0.57Forfeited
              --
              --Nonvested
      December 31, 2007
              --
              --
 
 The total
fair value of shares vested during the twelve months ended December 31, 2007 and
2006 was $57,000 and $391,000, respectively.
 
 Additional
      information as of December 31, 2007 with respect to all outstanding
      options is as follows:
 
 Options
      Outstanding
                
                
                
                Options
      ExercisableWeightedAverage
                
                Weighted
                
                
                
                WeightedRemaining
                
                Average
                
                
                
                AverageNumber
                
                Contractual
                
                Exercise
                
                Number
                
                ExerciseRange of prices
                
                Outstanding
                
                Life
                
                Prices
                
                Exercisable
                
                Prices$0.20
      - $0.30
                
                84,200
                
                1.19
                
                $0.26
                
                83,360
                
                $0.26$0.31
      - $0.50
                
                818,800
                
                1.74
                
                $0.49
                
                665,120
                
                $0.49$0.51
      - $0.75
                
                349,200
                
                3.11
                
                $0.65
                
                216,560
                
                $0.67$0.76
      - $1.25
                
                619,000
                
                2.44
                
                $1.17
                
                543,400
                
                $1.18$0.20
      - $1.25
                
                1,871,200
                
                2.20
                
                $.73
                
                1,508,440
                
                $0.75
 
 As
      of December 31, 2007, there was $12,000 of total unrecognized compensation
      cost, net of estimated forfeitures, related to all unvested stock options
      and shares, which is expected to be recognized over a weighted average
      period of approximately 1.9 years.
  NOTE 20
      -
                        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, 10% convertible notes, accounts
payable and accrued expenses, and capital leases payable, the carrying value of
which approximated fair value at December 31, 2007 and 2006.  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.
  F-38
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 21
      -
                        NET
      CAPITAL
REQUIREMENTS
 FMSC is
subject to the SEC Uniform Net Capital Rule (Rule 15c3-1), which requires FMSC
to maintain minimum net capital, as defined.  At December 31, 2007,
FMSC had net capital of $849,710, which was $599,710 in excess of its required
net capital of $250,000. FMSC's ratio of aggregate indebtedness to net capital
was 2.91 to 1.
 NOTE 22
      -
                        UNAUDITED
      QUARTERLY RESULTS OF
  OPERATIONS
 March
      31,
              
              
              June
      30,
              
              
              September
      30,
              
              
              December
      31,2007
              
              
              2007
              
              
              2007
              
              
              2007Revenues
              
              $
              12,244,617
              
              
              $
              9,945,065
              
              
              $
              9,521,793
              
              
              $
              7,844,323Expenses
              
              
              12,751,544
              
              
              
              10,529,743
              
              
              
              10,317,435
              
              
              
              8,025,809Net
      loss before
                income
      taxes
              
              
              (506,927
              )
              
              
              (584,678
              )
              
              
              (795,642
              )
              
              
              (181,486
              )Provision
      for income taxes
              
              
              10,621
              
              
              
              4,978
              
              
              
              600
              
              
              
              134Net
      loss
              
              
              (517,548
              )
              
              
              (589,656
              )
              
              
              (796,242
              )
              
              
              (181,620
              )Preferred
      stock dividends
              
              
              (42,903
              )
              
              
              (42,900
              )
              
              
              (36,490
              )
              
              
              (1,673
              )Net
      loss
                applicable
      to common
                stockholders
              
              $
              (560,451
              )
              
              $
              (632,556
              )
              
              $
              (832,732
              )
              
              $
              (183,293
              )(1)Loss
      per common share:Basic
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              (0.06
              )
              
              $
              (0.01
              )Diluted
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              (0.06
              )
              
              $
              (0.01
              )
  (1)
                The
      net loss in the fourth quarter was down due to reductions in personnel and
      legal costs.
  F-39
 FIRST
MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 March
      31,
              
              
              June
      30,
              
              
              September
      30,
              
              
              December
      31,2006
              
              
              2006
              
              
              2006
              
              
              2006Revenues
              
              $
              13,312,022
              
              
              $
              13,605,708
              (2)
              
              $
              11,274,175
              
              
              $
              12,768,515Expenses
              
              
              14,334,955
              (1)
              
              
              12,529,761
              (2)
              
              
              11,424,899
              
              
              
              13,480,362
              (3)Net
      income (loss)
                before
      income taxes
              
              
              (1,022,933
              )
              
              
              1,075,947
              
              
              
              (150,724
              )
              
              
              (711,847
              )Provision
      (benefit) for income taxes
              
              
              20,861
              
              
              
              24,200
              
              
              
              (30,730
              )
              
              
              12,661Net
      income (loss)
              
              
              (1,043,794
              )
              
              
              1,051,747
              
              
              
              (119,994
              )
              
              
              (724,508
              )Preferred
      stock dividends
              
              
              (42,776
              )
              
              
              (42,866
              )
              
              
              (42,866
              )
              
              
              (39,998
              )Net
      income (loss)
                applicable
      to common stockholders
              
              $
              (1,086,570
              )
              
              $
              1,008,881
              
              
              $
              (162,860
              )
              
              $
              (764,506
              )Income
      (loss) per common share:Basic
              
              $
              (0.07
              )
              
              $
              0.06
              
              
              $
              (0.01
              )
              
              $
              (0.04
              )Diluted
              
              $
              (0.07
              )
              
              $
              0.05
              
              
              $
              (0.01
              )
              
              $
              (0.04
              )
 
 (1)
              Includes
      $951,366 of charges related to a separation agreement entered into with
      the Company’s chairman of the Board of
  Directors.
 (2)
              Includes
      $820,000 of credits to expenses and $180,000 of income resulting from the
      payment received from the Company’s clearing agent relating to previously
      incurred conversion and transition expenses and lost
    revenue.
 (3)
              Included
      in the expenses for the fourth quarter of 2006 is the accrual of $200,000
      related to the separation agreement for the former general counsel and
      additional legal accruals of
$77,000.
 
 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  2007 and 2006 does not necessarily equal the total
computed for the entire year.
 NOTE 23-
                        SUBSEQUENT
      EVENT
 On
      March 31, 2008, the Company agreed to amend the master services agreement
      (See Note 13 “Master Services Agreement”) with the vendor in exchange for
      a reimbursement of a portion of the system development costs paid by the
      Company. In addition, the vendor will provide data integration and
      commission collection services to the Company, which will be amortized
      over the duration of the amended agreement, through December
      2009.
 
 
 F-40