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

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2006

                                       OR

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

           For the transition period from ____________ to ____________

                         Commission file number: 0-6729

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

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

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

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

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


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

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

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


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

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.                    Yes [X]     No [ ]
<PAGE>

     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, 2006 the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $13,342,440 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 April 16, 2007
---------------------------------------     -----------------------------------
[Common Stock, no par value per share]                18,526,553 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

<PAGE>

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


Table of Contents

                                     PART I
                                                                                                              PAGE

Item 1.             Business                                                                                   4

Item 1A.            Risk Factors                                                                              16

Item 1B.            Unresolved Staff Comments                                                                 25

Item 2.             Properties                                                                                25

Item 3.             Legal Proceedings                                                                         26

Item 4.             Submission of Matters to a Vote of Security Holders                                       28

                                     PART II

Item 5.             Market For the Company's Common Equity and Related Stockholder Matters                    29

Item 6.             Selected Financial Data                                                                   32

Item 7.             Management's Discussion and Analysis of Financial Condition and Results of Operations     34

Item 7A.            Quantitative and Qualitative Disclosures About Market Risk                                50

Item 8.             Financial Statements and Supplemental Data                                                51

Item 9A.            Controls and Procedures                                                                   51

Item 9B             Other Information                                                                         51

                                    PART III

Item 10.            Directors and Executive Officers of the Registrant                                        52

Item 11.            Executive Compensation                                                                    58

Item 12.            Security Ownership of Certain Beneficial Owners and Management                            69

Item 13.            Certain Relationships and Related Transactions                                            72

Item 14.            Principal Accounting Fees and Services                                                    72

                                     PART IV

Item 15.            Exhibits and Financial Statement Schedules                                                74

</TABLE>
<PAGE>


PART I

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

Item 1.   Business

Introduction

         First Montauk Financial Corp. (the "Company") is a New Jersey-based
financial services holding company whose principal subsidiary, First Montauk
Securities Corp. ("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 245 registered
representatives and services over 50,000 retail and institutional customer
accounts, which comprise over $3 billion in customer assets. All of Montauk
Financial Group's 106 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.
<PAGE>

         Montauk Financial Group is registered as a broker-dealer with the SEC,
the National Association of Securities Dealers ("NASD"), the Municipal
Securities Rule Making Board, the National Futures Association, and the
Securities Investor Protection Corporation and is licensed to conduct its
brokerage activities in all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, and is registered as an International broker-dealer
to conduct business with institutional clients in the province of Ontario,
Canada. Securities transactions are cleared through National Financial Services,
LLC ("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, 2006:


    Equities:
    Listed and Over-The-Counter Stocks                    34%
    Debt Instruments:
    Municipal, Government and Corporate Bonds and Unit
    Investment Trusts                                      4%
    Mutual Funds                                          12%
    Options:  Equity & Index                               4%
    Insurance and Annuities                               10%
    Corporate Finance and Investment Banking               7%
    Investment Advisory Fees                               8%
    Alternative Investments (1)                           10%
    Proprietary trading                                    4%
    Miscellaneous (2)                                      7%
                                                          ---
    Total                                                100%

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

         The following table reflects our various sources of revenue and the
percentage of total revenues for 2006. 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.


<PAGE>

<TABLE>
       <S>                                                                 <C>                               <C>
                                                                                 Year Ended December 31, 2006

       Commissions from equity securities, options and
       mutual funds, insurance, management fees and
       alternative investments....................................          $39,920,168                       78%

       Riskless Principal trades in equity and fixed
       income securities on behalf of customers ..................           $3,489,801                        7%

       Proprietary trading .......................................             $589,442                        1%

       Interest and other income .................................           $3,540,324                        7%

       Investment banking (1) ....................................           $3,420,685                        7%
                                                                             ----------                      ---
       Total Revenues ............................................          $50,960,420                      100%

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

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.
<PAGE>

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

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

         Each affiliated representative is required to obtain and maintain in
good standing each license required by the SEC and NASD to conduct the type of
securities business in which the affiliate will engage, and to register in the
various states in which he/she intends to service customers. Montauk Financial
Group is ultimately responsible for supervising each affiliated registered
representative. Montauk Financial Group can incur substantial liability from
improper actions of any of the affiliated representatives, 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, based on the services that we provide to our customers.

          In addition, in the regular course of our business, we take limited
securities positions as a market maker to facilitate customer transactions and
for investment purposes. In trading for our own account, we expose our own
capital to the risk of fluctuations in market value. Trading profits (or losses)
depend primarily upon the skills of the employees engaged in market making and
position taking, the amount of capital allocated to positions in securities and
the general trend of prices in the securities markets. We monitor our risk by
maintaining our securities positions at or below certain pre-established levels.
These levels reduce certain opportunities to realize profits in the event that
the value of such securities increases. However, they also reduce the risk of
loss in the event of a decrease in such value and minimize interest costs
incurred on funds provided to maintain such positions.
<PAGE>

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 2006, we earned gross commissions of $4.95
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 require the client to pay an
asset-based fee for portfolio advisory services, brokerage execution and
custody, and periodic account performance reporting. During 2006, investment
advisory fees represented 8% of the Company's overall revenues, compared to 6%
for 2005, 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 2006, we did not serve as managing underwriter in any public
offerings, but participated as a selling group member on numerous occasions.
Members of selling groups do not have the same level of capital requirements in
an underwritten offering as underwriters under NASD rules.
<PAGE>

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 Investments division.
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 the
NASD. The self-regulatory organizations, among other things, promulgate
regulations and provide oversight in areas of:

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

         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, 2006 Montauk
Financial Group has $2,735,223 of net capital and $2,485,223 of excess net
capital.

Employees

         Currently, we have approximately 245 registered representatives of
which 210 are associated with affiliate offices. These affiliated registered
representatives are not employees. In addition, we employ approximately 65
support personnel in the areas of operations, compliance, legal, accounting,
technology, recruiting and administration. We believe our relationship with our
employees is satisfactory.

Fidelity Bond and SIPC Account Protection

         As required by the NASD and certain other regulatory authorities,
Montauk Financial Group carries a fidelity bond covering loss or theft of
securities, as well as embezzlement and forgery. The bond provides total
coverage of $5,000,000 (with a $50,000 deductible provision per incident). In
addition, the Securities Investor Protection Corporation protects accounts
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. The Securities Investor Protection Corporation
is funded through assessments on registered broker-dealers and charges a flat
annual fee of $150.
<PAGE>

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, 2007 to January 31, 2008 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 2006 and Subsequent Events

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).

         In June 2006, the Okun Purchasers purchased in open market and
privately negotiated transactions, 2,159,348 shares of our 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 our common stock)
and $1,190,000 principal amount of our convertible debentures (convertible into
2,380,000 shares of our 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 our common stock. As a result of these
transactions, the Okun Purchasers beneficially owned 24.6% of our common stock
(assuming none of the shares of Series A Preferred Stock were converted into
common stock).

         On August 17, 2006, our 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 our shares
beneficially owned by them in favor of the merger agreement and the merger.
<PAGE>

         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, 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.

         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 alleges,
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 demands specific performance of the merger agreement and
completion of the merger. In the alternative, we are seeking 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
seeks 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. (See "New Lease Agreement" below).

         On February 12, 2007, we received the Okun Purchasers' answer to the
lawsuit which contained several counterclaims against us. In their
counterclaims, the Okun Purchasers allege that we breached the merger agreement
and failed to disclose certain material facts about us, and seek the return of
$2 million held in escrow as well as compensatory damages, interest and costs.
This lawsuit is currently pending in the Superior Court of New Jersey, Monmouth
County Chancery Division.

         The Okun Purchasers 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 believe these actions are 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 are part of their response to the original lawsuit we
filed in the New Jersey Superior Court (See Item 3. "Legal Proceedings" below).

         On February 26, 2007, Mr. Okun and certain of his affiliates filed an
amendment to their Schedule 13D with the SEC disclosing that they now
beneficially own 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.
<PAGE>

Management Changes

         Effective August 15, 2006, we hired Mr. Phillip D'Ambrisi as the new
Chief Operating Officer of FMSC. On January 5, 2007, the Board of Directors
appointed Mr. D'Ambrisi as a Class I director of the Company and appointed him
as our new Chief Operating Officer. Although Mr. D'Ambrisi and the Company have
not yet executed a formal written employment agreement, the terms of his
employment are through December 31, 2008.

         Effective September 18, 2006, we hired Ms. Celeste Leonard as Executive
Vice President and the new Chief Compliance Officer of FMSC and entered into an
employment agreement with her through December 31, 2008. On February 22, 2007,
the Board appointed Ms. Leonard as a Class I director of the Company.

         Effective March 1, 2007, we hired Jeffrey J. Fahs,  Esq. as our new
General  Counsel and entered into an employment agreement with him through
December 31, 2008.

Separation Agreements

         On February 1, 2006 we entered into a separation agreement with Herbert
Kurinsky, then Chairman of our Board of Directors. Under the terms of the
separation agreement, the parties agreed to terminate the employment
relationship and the rights and obligations of the parties under the employment
agreement, effective as of February 1, 2006, however, Mr. Kurinsky continued to
serve as our Chairman of the Board of Directors until his resignation on
November 9, 2006.

         On November 14, 2006, we entered into a separation agreement with
Robert I. Rabinowitz, Executive Vice President and General Counsel (and formerly
Chief Compliance Officer), effective January 31, 2007. On January 19, 2007 we
entered into a consulting agreement with Mr. Rabinowitz, effective February 1,
2007, pursuant to which he was hired as a consultant for an eleven-month period
to provide assistance to us in the transition of his responsibilities to new
personnel.

         Please see "Employment Contracts, Severance and Change of Control"
under Item 11 of this Report for further details regarding the employment and
separation agreements of all our executive officers.

New Lease Agreement

         On September 22, 2006, we, as tenant, and IPofA Water View, LLC, a
Delaware limited liability company and an affiliate of Mr. Okun, as landlord,
entered into a Deed of Lease Agreement ("Okun Lease") for general office space
consisting of approximately 29,800 useable square feet located at 10 Highway 35,
Red Bank, New Jersey. We originally entered into the Okun Lease in connection
with the merger with the Okun Purchasers for the purpose of using the leased
premises as our corporate headquarters and general office space for our business
operations following the merger. The Okun Lease is for a term of ten years (120
months) with an original commencement date of September 22, 2006. However, since
the landlord was unable to give us possession on that date, the commencement
date would be adjusted to the date we are first given possession of the leased
premises, and the expiration date would be adjusted to reflect the term of the
Okun Lease. Since the leased premises are scheduled to undergo renovations, the
actual commencement date is unknown. Pursuant to the Okun Lease the base rent
will be $61,090 per month plus taxes and other operating expenses for the entire
10-year term. Our lease at our current corporate headquarters provides for
monthly rent payments of $50,762 and is scheduled to expire on January 31, 2010.
<PAGE>

         As of February 23, 2007, Mr. Okun beneficially owns a majority (52.8%)
of the voting securities of the Company. As part of the pending lawsuit we filed
in the New Jersey Superior Court against Mr. Okun and the other Okun Defendants,
we are seeking to void the Okun Lease.

New Clearing Agreement with National Financial Services, LLC

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

         Contemporaneously, on April 21, 2005, Montauk Financial Group entered
into a clearing agreement with National Financial Services, LLC ("NFS") to clear
its brokerage business and to custody firm and customer funds and securities.
The clearing agreement became effective on April 21, 2005. The new clearing
agreement has an initial term of eight years and will automatically renew for
successive one year terms, unless either party provides a notice of termination
prior to the expiration of the initial or any renewal term. In the event of an
early termination of the clearing agreement, other than for a change in control
of the Company, Montauk Financial Group will pay NFS a termination fee of
between $2 million in the first year of the agreement and declining to $250,000
in the last year of the agreement, depending on if and when such early
termination occurs. During the second quarter of 2006, Montauk Financial Group
signed an amendment to the clearing agreement with NFS, adopting, among other
things, a schedule of reduced clearing rates. In addition, Montauk Financial
Group agreed to a change in the termination fee whereby Montauk Financial Group
will pay NFS between $5 million in the first year of the agreement and declining
to $750,000 in the last year of the agreement.

Signed Release with NFS

         During the second quarter of 2006, Montauk Financial Group 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 Montauk Financial
Group 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 Montauk
Financial Group among various expense and revenue categories.

Election of Directors

         On February 24, 2006, the Board of Directors elected Mr. David I.
Portman to our Board of Directors to serve as a Class III director. Further, as
described below, the Board established a new substantive committee, designated
as the Special Committee of the Board of Directors, and appointed Mr. Portman to
serve as the Chairman of this committee. In addition, the Board also appointed
Mr. Portman to its Audit Committee and Compensation Committee.
<PAGE>

         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 D'Ambrisi. The other Class I
director vacancy was filled on February 22, 2007 with the election of Ms.
Celeste M. Leonard.

Formation of Special Committee of the Board of Directors

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

Debenture Conversions

         During 2006, $35,000 of the Company's subordinated convertible
debentures were presented to the Company for conversion. The Company issued
70,000 shares and retired $35,000 of the debentures. On June 20 and 23, 2006,
we issued an aggregate of 2,380,000 shares of our common stock to the Okun
Purchasers following their purchases of $1,190,000 principal amount of
convertible debentures that were sold through private offerings in 2002 and
2003. The debentures were converted into shares of our common stock in
accordance with the terms of the debentures. As of the date of this Annual
Report, there is an aggregate principal amount of $25,000 of convertible
debentures outstanding. The debentures are convertible at $.50 per share.



<PAGE>


   Item 1A.   Risk Factors

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

                   Risks Related to Our Business and Industry

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

         For the year ended December 31, 2006 we reported a net loss of
$(837,000) and for the years ended December 31, 2005 and 2004 we recognized net
income of $2,424,000 and $731,000, respectively. 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.
<PAGE>

There are numerous contingencies and risks associated with our terminated merger
agreement with the Okun Purchasers, the litigation with the Okun Defendants, Mr.
Okun's beneficial ownership of a majority of our voting securities, and his
unwillingness at present to complete the merger on the original terms of the
merger agreement.

         As of the date of this report, we and certain of our directors and
officers are involved in litigation in three different courts with Mr. Okun and
the other Okun Defendants concerning the terminated merger agreement. Our
principal claim, as filed in New Jersey Superior Court in Monmouth County, is
that the Okun Defendants breached the merger agreement by terminating the
agreement on December 29, 2006 without cause or justification. Our complaint
demands specific performance of the merger agreement and completion of the
merger which would have paid each remaining holder of our common stock (other
than the Okun Purchasers) $1.00 in cash per share of common stock. In the
alternative, we seek compensatory damages for breach of contract and breach of
the covenant of good faith and fair dealing as well as payment of $2,000,000
held in escrow since May 2006 to secure the Okun Defendants performance under
the merger agreement. We believe that our claims are meritorious although there
can be no assurance as to the ultimate outcome of this lawsuit.

         In response to our commencement of the New Jersey Superior Court
action, Mr. Okun commenced two related actions: one in Florida state court
against our President and Chief Executive Officer, and the other, a
shareholders' derivative action against us and certain directors and officers in
the Federal District Court for the District of New Jersey. These lawsuits arise
from the same set of facts as our lawsuit in the New Jersey Superior Court
action; namely the termination of the merger agreement among us and certain
affiliates of Mr. Okun. We believe that the defendants acted properly on behalf
of our shareholders and have meritorious defenses against all of these claims.
There can be, however, no assurances as to the ultimate outcome of any of these
lawsuits.

         Following the purchase of additional shares of our voting securities on
February 23, 2007, Mr. Okun now beneficially owns a majority of our outstanding
voting securities. He has indicated in an amendment to his Schedule 13D, dated
February 23, 2007, announcing the ownership of 52.8% of our outstanding voting
securities, that he intends to meet with our Board of Directors and management
to effect changes in the composition of the Board, management and operations.
Since December 29, 2006, there have been a number of discussions between
representatives of Mr. Okun and us concerning Mr. Okun's plans with respect to
the Company. Notwithstanding the foregoing, in his amendment to Schedule 13D Mr.
Okun states that he believes "the Company is undervalued and with certain
changes in management and operations, stockholder value can be significantly
enhanced." Neither Mr. Okun nor his representatives have yet to provide any
specific details indicating what changes he intends to effect with respect to
our business operations.

         Mr. Okun has requested our Board to immediately appoint four of his
representatives to the Board.

         As a result of Mr. Okun's purchase of a majority of our voting
securities, we were required to make a 1017 application with the NASD to request
approval of change in control of the Company and its principal subsidiary,
Montauk Financial Group. Mr. Okun has provided information to us which was
previously requested and subsequently sent to the NASD. The NASD is currently
reviewing the application. In the event that the NASD does not approve the
transfer of our broker-dealer registration to Mr. Okun and his affiliates, we
may not be able to continue our business and operations, or may be subject to
restrictions on our scope of business operations.
<PAGE>

Principal and brokerage transactions and lending activities expose us to losses

         Our trading, market making and underwriting activities involve the
purchase, sale or short sale of securities as a principal and, accordingly,
involve the risk of changes in the market prices of those securities and the
risk of a decrease in the liquidity of markets which would limit our ability to
resell securities purchased or to repurchase securities sold in principal
transactions. Montauk Financial Group's brokerage activities and principal
transactions are subject to credit risk. For example, a customer may not respond
to a margin call, and since the securities being held as collateral have
diminished in value, there is a risk that we may not recover the funds loaned to
the customer. These parties include trading counterparts, customers, clearing
agents, exchanges, clearing houses, and other financial intermediaries as well
as issuers whose securities we hold. These parties may default on their
obligations owed to us due to a variety of reasons, including without
limitation, bankruptcy, lack of liquidity or operational failure. Significant
failures by third parties to perform their obligations owed to us could
adversely affect our revenues and results of operations.

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

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

Competition in the brokerage industry may adversely impact our retail business

         We encounter intense competition in all aspects of our business and
compete directly with many other securities firms, a significant number of which
offer their customers a broader range of financial services, have substantially
greater resources and may have greater operating efficiencies. In addition, a
number of firms offer discount brokerage services to individual retail customers
and generally effect transactions at lower commission rates on an "execution
only" basis without offering other services such as investment recommendations
and research. The further expansion of discount brokerage firms could adversely
affect our retail business. Moreover, there is substantial commission
discounting by full-service broker-dealers competing for institutional and
individual brokerage business. The possible increase of this discounting could
adversely affect us. Other financial institutions, notably commercial banks and
savings and loan associations, offer customers some of the services and products
currently provided by securities firms. In addition, certain large corporations
have entered the securities industry by acquiring securities firms. While it is
not possible to predict the type and extent of competitive services that banks
and other institutions ultimately may offer to customers, we may be adversely
affected to the extent those services are offered on a large scale.
<PAGE>

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:

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

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

We have incurred liability due to securities-related litigation

         Many aspects of our business involve substantial risks of liability,
including exposure to liability under applicable federal and state securities
laws in connection with the activity of our associated persons, as well the
underwriting and distribution of securities. In recent years, there has been an
increasing incidence of litigation involving the securities industry in general,
which seek compensatory, rescissionary and punitive damages. During the year
ended December 31, 2006, we incurred $693,412 in litigation costs and expenses
related to various legal claims and settlements. As of December 31, 2006, we
have accrued for litigation costs that are probable and can be reasonably
estimated based on a review of existing claims, arbitrations and unpaid
settlements. Management cannot give assurance that this accrual will be adequate
to cover actual costs that may be subsequently incurred. It is not possible to
predict the outcome of legal and regulatory matters pending against Montauk
Financial Group. All such cases are, and will continue to be, vigorously
defended. However, litigation is subject to many uncertainties, and some of
these actions and proceedings may result in adverse awards or judgments. After
considering all relevant facts, available insurance coverage and consultation
with litigation counsel, it is possible that our consolidated financial
condition, results of operations, or cash flows could be materially affected by
unfavorable outcomes or settlements of certain pending litigation.

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

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

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

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

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

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

         FMSC has received a Wells notice from the SEC advising that the SEC
staff would be recommending bringing an administrative action against the firm
and a former principal charging that we failed to supervise reasonably a former
research analysis. The notice provides an opportunity for us to make a
submission to the staff detailing the reasons why the SEC should not bring
charges. We have recently begun settlement discussions with the SEC in an
attempt to resolve the matter in order to avoid an administrative proceeding.
The terms of the settlement will be negotiated but will likely include a
monetary fine. We believe that the amount of the fine will not have a materially
adverse affect on our financial condition or results of operation.

         The NASD Department of Enforcement is conducting an investigation of
the sales practice activities of certain individuals who were formerly
registered representatives of FMSC, as well as the supervision of those
activities by FMSC. On April 9, 2007, NASD notified FMSC through a "Wells call"
that it intends to file an administrative action against it in connection with
an alleged failure to reasonably supervise the activities of three former
registered representatives of FMSC. NASD has not indicated what penalties it
would seek in such an action, monetary or otherwise. FMSC is entitled to make a
Wells submission to the NASD Staff and currently intends to make such a
submission or otherwise attempt to negotiate a resolution with NASD. It is
believed that any resolution will include a monetary penalty which will not have
a materially adverse effect on our financial statements.

We depend upon our registered representatives

         Most aspects of our business are dependent on highly skilled and
experienced individuals. We have devoted considerable efforts to recruiting and
compensating those individuals and provide incentives to encourage them to
remain employed by or associated with us. Individuals associated with us may
leave our company at any time to pursue other opportunities. The loss of a
significant number of registered representatives could materially and adversely
affect our operating results.

We face significant competition for registered representatives

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

We depend upon our senior management

         For the foreseeable future, we will be substantially dependent upon the
personal efforts and abilities of our senior management, including our Chief
Executive Officer and President, Mr. Victor K. Kurylak, Mr. Philip D'Ambrisi,
our Chief Operating Officer, 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

<PAGE>

material adverse affect on our business, operations and prospects. In addition,
loss of key members of management could require us to invest capital to search
for a suitable replacement. Such a search could serve as a distraction to the
remaining members of management preventing them from focusing on the ongoing
development of our business which, in turn, could cause us to lose money. As
stated above, as of the date of this Report, the new majority beneficial owner
of the Company's voting power has not made clear his plans for the future of our
senior management except that he and certain affiliates have commenced
litigation against our Chief Executive Officer and President and Acting Chief
Financial Officer.

Montauk Financial Group must comply with Net Capital Requirements

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

We are exposed to risks due to our investment banking activities

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

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.

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

         Due to regulatory positions and requirements of both the SEC and the
NASD relating to the circumstances and extent to which a registered
broker-dealer and NASD member may engage in market-making transactions in the
securities of its parent company, Montauk Financial Group does not engage in
trading or market-making activities relating to our common stock or warrants
where Montauk Financial Group would speculate in, purchase or sell our
securities for its own account. The purpose and effect of such limitation
restricts Montauk Financial Group from being a factor in the determination of
the market or price of our securities. Montauk Financial Group does, however,
execute transactions for its customers on an "agency basis" where it does not

<PAGE>

acquire our securities for its own proprietary account. It will, however, earn
usual and customary brokerage commissions in connection with the execution of
such brokerage transactions. If, under current or future regulations of both the
SEC and NASD, Montauk Financial Group is permitted to participate as a market
maker, it may do so on the basis of showing a bid and offer for our securities
at specified prices representing customer interest.

We have limited the liability of our directors

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

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

         The new majority beneficial owner of the Company's voting power has
commenced litigation against certain officers and directors of the Company.
These lawsuits derive from the same set of facts as the Company's lawsuit in the
New Jersey Superior Court against the new majority beneficial owner and certain
of his affiliates: namely the termination of the merger agreement and their
unwillingness to purchase or otherwise acquire the remaining 47% of our shares
of common stockholders not beneficially owned for $1.00 per share in cash.

                        Risks Related to Our Common Stock


We do not pay dividends on our common stock

         We do not pay dividends on the issued and outstanding shares of our
common stock. However, we pay 6% quarterly dividends on the outstanding shares
of our Series A Convertible Preferred Stock, and 8% quarterly dividends on the
outstanding shares of our Series B Convertible Redeemable Preferred Stock.
Applicable laws, rules and regulations under the New Jersey Business Corporation
Act and the Securities Act of 1933, as amended, have affected our ability to
declare and pay dividends. The new majority owner of the Company owns all of the
Series B Preferred Stock and substantially all of the Series A Preferred Stock.
<PAGE>

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

         In 1999, we issued an aggregate of 349,511 shares of Series A Preferred
Stock in connection with an exchange offer. Currently, 305,369 Series A
Preferred shares remain outstanding and convertible into 610,738 shares of
common stock at the rate of $2.50 per share. However, if the last sale price of
the common stock is $3.50 or more a share for 20 consecutive trading days, as
listed on the Over-the-Counter Bulletin Board, the Series A Stock will
automatically be converted into shares of common stock. None of the 305,369
shares of Series A Preferred Stock have been converted. The new majority owner
of the Company beneficially owns 283,087 shares of Series A Preferred Stock.

         In 2005 we issued 197,824 shares of Series B Preferred Stock that are
convertible into 1,978,240 shares of our common stock. The new majority owner of
the Company beneficially owns all shares of Series B Preferred Stock which were
purchased in a private transaction on February 23, 2007 at a price of $10.00 per
share of Series B Preferred Stock.

         In addition, as of April 16, 2007, there were outstanding:

        o        warrants to purchase 313,500 shares of common stock at an
                 exercise price of $0.50 per share;
        o        warrants to purchase 94,018 shares of common stock at an
                 exercise price of $.25 issued in a settlement of certain
                 claims; and
        o        options to purchase 2,137,402 shares of common stock, at
                 exercise prices ranging from $.20 to $2.00 per share.


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

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

         As of April 16, 2007, of the 18,526,553 issued and outstanding shares
of our common stock, approximately 9,992,613 shares may be deemed restricted
shares and, in the future, may be sold in compliance with Rule 144 under the
Securities Act of 1933, as amended. Rule 144 provides that a person holding
restricted securities for a period of one year may sell in brokerage
transactions an amount equal to 1% of our outstanding common stock every three
months. A person who is not affiliated with us and who has held restricted
securities for over two years is not subject to the aforesaid volume limitations
as long as the other conditions of the Rule are met. Possible or actual sales of
our common stock by certain of our present shareholders under Rule 144 may, in
the future, have a depressive effect on the price of the common stock in any
market which may develop for such shares. Such sales at that time may have a
depressive effect on the price of the common stock in the open market.
<PAGE>

There is a limited public market for our securities

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

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

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


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

         If our common stock becomes subject to the 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:

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

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

The price of our common stock is volatile

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

         The price of our common stock may also be affected by the ownership of
a majority of our voting securities by the new majority beneficial owner who
owns 52.8% of our voting securities and who has publicly announced that he
currently does not intend to purchase or otherwise acquire the remaining 47.2%
of the shares of our common stock that he does not own. Prior to termination of
the merger agreement on December 29, 2006, certain affiliates of the new
majority beneficial owner had agreed to acquire all of the outstanding shares of
our common stock for $1.00 per share in cash.

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.

         On February 26, 2007, the new majority beneficial owner and certain of
his affiliates filed with the SEC an amendment to their Schedule 13D disclosing
that they now own 52.8% of our voting securities.

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.

New Lease Agreement - On September 22, 2006, we, as tenant, and IPofA Water
View, LLC, a Delaware limited liability company and an affiliate of Mr. Okun,
as landlord, entered into a Deed of Lease Agreement ("Okun Lease") for general
office space consisting of approximately 29,800 useable square feet located at
10 Highway 35, Red Bank, New Jersey. We originally entered into the Okun Lease
in connection with the merger agreement with the Okun Purchasers for the purpose
of using the leased premises as our corporate headquarters and general office
space for our business operations following the merger. The Okun Lease is for a
term of ten years (120 months) with an original commencement date of
September 22, 2006.  However since the landlord was unable to give us possession
on that date, the commencement date would be adjusted to the date we are first
given possession of the leased premises, and the expiration date would be
adjusted to reflect the term of the Okun Lease. Since the leased premises are
scheduled to undergo renovations, the actual commencement date is unknown.
Pursuant to the Okun Lease the base rent will be $61,090 per month plus taxes
and operating expenses for the entire 10 year term. Our lease at our current
corporate headquarters provides for monthly rent payments of $50,762 and is
scheduled to expire on January 31, 2010.
<PAGE>

         As a result of the lawsuit filed on January 8, 2007 in the New Jersey
Superior Court against Mr. Okun and certain of his affiliates, including the
landlord (discussed in Item 3. "Legal Proceedings" below), it is uncertain as to
whether we will take possession of the leased premises subject to the Okun
Lease. Among other things, the lawsuit seeks to void the lease agreement that we
entered into with the Landlord.

Item 3.   Legal Proceedings

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

         We are a respondent or co-respondent in various legal proceedings,
which are related to 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.

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 ($400,000 of which was accounted
for in 2005) which was paid in September 2006. 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.

SEC Investigation

         The SEC is investigating whether we, and/or certain former employees
reasonably failed to supervise the securities trading and research activities of
a former analyst. The investigation covered the time period from approximately
March 2000 until January 2004 when the analyst resigned. The SEC has recently
advised us that it intends to recommend bringing an enforcement proceeding
against FMSC, one of its former principals and another former employee for
failing to supervise reasonably. The SEC will be seeking a monetary penalty and
an order suspending the former principal from acting in a supervisory capacity
for a period of time. FMSC is entitled to make a Wells submission to the SEC
staff. We intend to make such a submission or otherwise attempt to negotiate a
resolution with the SEC. It is believed that any resolution will include a
monetary penalty which we believe will not have a materially adverse effect on
our financial statements.
<PAGE>

NASD Enforcement Sales Practice Investigation

         The NASD Department of Enforcement is conducting an investigation of
the sales practice activities of certain individuals who were formerly
registered representatives of FMSC, as well as the supervision of those
activities by FMSC. On April 9, 2007, NASD notified FMSC through a "Wells call"
that it intends to file an administrative action against it in connection with
an alleged failure to reasonably supervise the activities of three former
registered representatives of FMSC. NASD has not indicated what penalties it
would seek in such an action, monetary or otherwise. FMSC is entitled to make a
Wells submission to the NASD Staff and currently intends to make such a
submission or otherwise attempt to negotiate a resolution with NASD. It is
believed that any resolution will include a monetary penalty which we believe
will not have a materially adverse effect on our financial statements.

Termination of Merger Agreement, Litigation and Subsequent Purchase of Majority
Voting Interest

         On May 5, 2006, we entered into a definitive merger agreement with the
Okun Purchasers. 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).

         In June 2006, the Okun Purchasers purchased in open market and
privately negotiated transactions, 2,159,348 shares of our 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 our common stock)
and $1,190,000 principal amount of our convertible debentures (convertible into
2,380,000 shares of our 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 our common stock. As a result of these
transactions, the Okun Purchasers beneficially owned 24.6% of our common stock
(assuming none of the shares of Series A Preferred Stock were converted into
common stock).

         On August 17, 2006, our 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 our shares
beneficially owned by them in favor of the merger agreement and the merger.

         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, 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 against 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 alleges, 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 demands specific
performance of the merger agreement and completion of the merger. In the
alternative, we are seeking compensatory damages for breach of contract and
breach of the covenant of good faith and fair dealings 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 seeks 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.
<PAGE>

         On February 12, 2007, we received the Okun Purchasers' answer to the
lawsuit which contained several counterclaims against us. In their
counterclaims, the Okun Purchasers allege that we breached the merger agreement
and failed to disclose certain material facts about us, and to seek the return
of $2 million held in escrow as well as compensatory damages, interest and
costs.  This lawsuit is currently pending in the Superior Court of New Jersey,
Monmouth County Chancery Division.

         The Okun Purchasers filed two additional actions; one filed February 2,
2007, in the Circuit Court of the State of Florida against our President and
Chief Executive Officer, and the other filed February 16, 2007, 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. We believe these
actions are 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 are 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 now
beneficially own 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
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. The amendment also
stated that the purpose of the purchases is to acquire a controlling interest in
the Company.

         As of December 31, 2006, we have accrued litigation costs that are
probable and can be reasonably estimated based on a review of existing claims,
arbitrations and unpaid settlements. Management cannot give assurance that this
amount will be adequate to cover actual costs that may be subsequently incurred.
Further, it is not possible to predict the outcome of other matters pending
against us. All such cases will continue to be vigorously defended.

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

         Following execution of the merger agreement on May 5, 2006 between the
Company and the Okun Purchasers, we postponed the annual meeting of shareholders
because we scheduled a special meeting of shareholders of the Company for August
17, 2006 to consider and vote upon the merger agreement and the merger. At the
special meeting, the shareholders of the Company (including the Okun Purchasers)
overwhelming approved the merger agreement and the merger. On December 29, 2006,
the Okun Purchasers terminated the merger agreement. (See Item 3. "Legal
Proceedings" above). We did not submit any matters to our shareholders for a
vote during the fourth quarter of the year ended December 31, 2006.


<PAGE>

                                     PART II

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

A.      Principal Market and Market Information

         Our common stock is traded in the over-the-counter market. Trading in
our common stock is reported on the NASD Bulletin Board system and in the pink
sheets published by Pink Sheets LLC. We believe that there is an established
public trading market for our common stock based on the volume of trading in our
common stock and the existence of market makers who regularly publish quotations
for our common stock. Our common stock commenced trading in the over-the-counter
market in 1987. On April 13, 2007, our common stock had bid and offer prices of
$0.47 and $0.53 per share respectively.  At December 31, 2006 our common stock
had a closing price of $0.46 per share. Quotations on the OTCBB reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

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

   Common Stock

   Calendar Year 2007              High Bid        Low Bid

   1st Quarter                     $.61            $.46

   Calendar Year 2006              High Bid        Low Bid

   1st Quarter                     $1.22           $.80
   2nd Quarter                     $1.00           $.90
   3rd Quarter                     $.975           $.79
   4th Quarter                     $.94            $.40

   Calendar Year 2005              High Bid        Low Bid

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


B.       Number of Record Holders

         The approximate number of record holders of our common stock as of
April 16, 2007 was 503. 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 320 beneficial holders of
our common stock.
<PAGE>

C.       Dividend Policy

         We have not paid any dividends on our common stock since our inception,
and do not expect to pay any dividends on our common stock in the foreseeable
future and plan to retain earnings, if any, to finance the development and
expansion of our business. We pay quarterly dividends on outstanding shares of
our Series A Preferred Stock at the rate of 6% per annum, subject to the
limitations under the New Jersey Business Corporation Act. There are currently
outstanding 305,369 shares of Series A Preferred Stock, of which 283,087 shares
are beneficially owned by Mr. Okun since June 25, 2006. We also pay 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. There are
currently outstanding 197,824 shares of Series B Preferred Stock, all of which
are beneficially owned by Mr. Okun since February 23, 2007. There can be no
assurance that we will continue to pay dividends in the future.

D.       Issuance of Unregistered Securities

Restricted Shares Issuance

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

         During 2006, $35,000 of the Company's subordinated convertible
debentures were presented to the Company for conversion. The Company issued
70,000 shares and retired $35,000 of the debentures. We relied upon the
exemptions from registration provided upon in Section 3(a)(9) of the Securities
Act of 1933 in connection with these issuances.

         On June 20 and 23, 2006, FMFG Ownership, Inc., an affiliate of
Mr. Okun, which had previously purchased an aggregate principal amount of
$1,190,000 of the Company's convertible debentures in privately negotiated
transactions, converted such debentures into 2,380,000 shares of common stock in
accordance with the terms of the debentures. We relied upon the exemptions from
registration provided upon in Section 3(a)(9) of the Securities Act of 1933 in
connection with these issuances.

         In February 2005 we issued to William J. Kurinsky an aggregate of
197,824 shares of a newly created class of Series B Preferred Stock, which had a
deemed issue price of $1,000,000, and is convertible into common stock on the
basis of ten shares of common stock for each share of Series B Preferred Stock.
The Series B Preferred shares have voting rights based upon the number of shares
of common stock into which it would be converted. The Series B Preferred Stock
also includes a cumulative dividend of 8% per year. The shares are restricted
securities under the Securities Act of 1933 and the regulations of the SEC and
we relied upon the exemption from registration under Section 4(2) of the
Securities Act of 1933 to issue the shares of Series B Preferred Stock. The
Series B Preferred Stock was authorized by the Board out of, and in accordance
with, the Company's authorized but undesignated class of preferred stock under
its certificate of incorporation. 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.
<PAGE>

         In addition, during the year ended December 31, 2006, we granted
options to purchase 3,000 shares of common stock pursuant to our stock option
plans to one of our registered representatives, which plans
were not registered at the time of grant. The options were granted at an
exercise price of $1.18 per share. In March 2005, a registration statement on
Form S-8 was filed with the SEC registering all common shares issuable from our
stock option plans.

E.       Stock Repurchases

         There were no repurchases of any securities during 2006.

F.       Securities Authorized For Issuance Under Equity Compensation Plans

         See Item 11. "Executive Compensation".

<PAGE>


Item 6.  Selected Financial Data
         The following selected financial data should be read in conjunction
with the Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>

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

                                                                Year Ended December 31,

                                       2006             2005               2004               2003        2002
                             ---------------- ----------------- ------------------- ---------------- ----------------
Operations Results:

Revenues:

  Commissions                    $39,920,168       $37,493,733         $42,732,238      $41,883,669      $36,513,802

  Principal transactions           4,079,243         5,578,820           9,058,259                         6,727,642
                                                                                          9,466,359

  Investment banking               3,420,685         6,640,402           2,716,042                         1,007,700
                                                                                          2,439,144

  Interest and other income
                                   3,540,324         8,370,711           4,680,702        4,437,510        3,717,600
                              ---------------- ----------------- ------------------- ---------------- ----------------

Total
revenues                          50,960,420        58,083,666          59,187,241       58,226,682       47,966,744
                             ================ ================= =================== ================ ================

Expenses:

  Commissions, employee
compensation and benefits         43,137,778        44,398,131          46,851,474       46,218,107       39,572,851

Executive separation               1,151,266         1,432,937                  --               --               --

  Clearing and floor
brokerage                          1,527,675         1,926,005           2,466,027        2,934,164        2,666,376

  Communications and
occupancy                          1,797,281         2,483,056           2,664,256        2,659,105  3,006,017

  Legal matters and
related costs                      1,095,064         1,773,604           2,714,769        5,836,960  1,259,502

  Other operating expenses         2,982,665         3,467,972           3,489,425        3,393,335        4,029,515

Interest                              78,248           100,123             284,093          204,054           98,918
                             ---------------- ----------------- ------------------- ---------------- ----------------

Total expenses                    51,769,977        55,581,828          58,470,044       61,245,725       50,633,179
                             ================ ================= =================== ================ ================

Income (loss) before
income taxes                       (809,557)         2,501,838             717,197      (3,019,043)      (2,666,435)

 Provision (benefit) for
income taxes                          26,992            77,544            (13,305)          499,000          294,000
                             ---------------- ----------------- ------------------- ---------------- ----------------

Net income (loss)                 $(836,549)        $2,424,294            $730,502     $(3,518,043)     $(2,960,435)
                             ================ ================= =================== ================ ================

</TABLE>

<PAGE>

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

                                                                  Year Ended December 31,

                                       2006             2005               2004               2003        2002
                             ---------------- ----------------- ------------------- ---------------- ----------------

Operations Results:

Net income (loss)
applicable to common
stockholders                    $(1,005,055)        $2,138,954            $639,813     $(3,542,882)     $(3,059,722)
                             ================ ================= =================== ================ ================
Earnings (loss) per share:

     Basic:                          $(0.06)             $0.15               $0.07          $(0.40)          $(0.36)

     Diluted:                        $(0.06)             $0.12               $0.04          $(0.40)          $(0.36)

Weighted average common
shares outstanding-- Basic        17,004,254        14,032,057           9,270,350        8,784,103        8,551,932

Weighted average common
and common share
equivalents outstanding -
Diluted                           17,004,254        20,109,178          15,629,920        8,784,103        8,551,932

Financial condition:

Total assets                      $7,798,917        $8,719,930          $9,834,374      $12,193,101      $11,425,506

Total liabilities                 $3,985,426        $5,492,079         $12,932,991      $16,280,540      $12,203,196

Stockholders' equity
(deficit)                         $3,813,491        $3,227,851        $(3,098,617)     $(4,087,439)       $(777,690)

</TABLE>


<PAGE>


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

Factors Affecting "Forward Looking Statements"

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

Overview

         Substantially all of our business activities consist of the securities
brokerage and investment banking activities of our wholly owned subsidiary,
FMSC, an NASD registered broker-dealer. FMSC conducts operations in four
principal categories, all of which are in the financial services industry. These
categories are:

        o        securities brokerage activities for which FMSC earns
                 commissions or fees;
        o        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;
        o        proprietary trading for which FMSC records profit or loss,
                 depending on trading results and riskless principal
                 transactions with customers; and
        o        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.


<PAGE>



Results of Operations

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.
<PAGE>

Revenues by Source

The following provides a breakdown of total revenues by source for the years
ended December 31, 2006, 2005 and 2004 (in thousands of dollars).


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

                                                                     Year Ended
                               -------------------------------------------------------- ----------------------------
                                     December 31, 2006           December 31, 2005           December 31, 2004
                               ------------------------------ ------------------------- ----------------------------
                                  Amount        % of Total      Amount     % of Total     Amount       % of Total
                                                 Revenues                   Revenues                    Revenues
                               -------------- --------------- ------------ ------------ ------------ ---------------
 Commissions
      Equities                       $19,846             39%     $ 20,530          35%     $ 26,533             45%

      Mutual Funds                     6,179             12%        6,348          11%        6,131             10%
      Insurance
                                       4,951             10%        4,230           7%        4,750              8%

      Investment Advisory              3,879              7%        3,235           5%        2,614              4%
      Alternative Products
                                       4,927             10%        3,009           5%        2,325              4%
      Fixed Income
                                         138             <1%          142          <1%          379              1%
                               -------------- --------------- ------------ ------------ ------------ ---------------
      Total                           39,920             78%       37,494          64%       42,732             72%
Principal Transactions                 4,079              8%        5,579          10%        9,058             15%

Investment Banking                     3,421              7%        6,640          12%        2,716              5%
Interest and Other
      Interest
                                       2,636              5%        2,506           4%        2,798              5%
      Deferred revenue
                                          --              --        5,105           9%          875              1%
      Other
                                         904              2%          760           1%        1,008              2%
                               -------------- --------------- ------------ ------------ ------------ ---------------
      Total                            3,540              7%                                  4,681              8%
                                                                    8,371          14%

      Total revenues                 $50,960            100%     $ 58,084         100%     $ 59,187            100%
                               ============== =============== ============ ============ ============ ===============
</TABLE>
<PAGE>

Revenues

         Commission and fee 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.

         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.

         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 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.

<PAGE>


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 and the other with our
former general counsel. The following chart provides a breakdown of total
expenses for the years ended December 31, 2006, 2005 and 2004 (in thousands of
dollars).
<TABLE>
<S>                                <C>          <C>             <C>          <C>          <C>          <C>

                                                                      Year Ended
                                   --------------------------- ------------------------- --------------------------
                                       December 31, 2006          December 31, 2005          December 31, 2004
                                   --------------------------- ------------------------- --------------------------
                                     Amount      % of Total      Amount     % of Total      Amount     % of Total
                                                  Expenses                   Expenses                   Expenses
                                   ------------ -------------- ------------ ------------ ------------- ------------
Commissions, employee                  $43,138            83%      $44,398          80%       $46,852          80%
compensation and benefits
Executive separation                     1,151             2%        1,433           3%            --
Clearing and floor brokerage             1,528             3%        1,926           3%         2,466           4%
Communications and   occupancy           1,797             4%        2,483           5%         2,664           5%
Legal matters and related costs          1,095             2%        1,774           3%         2,715           5%
Other operating expenses                 2,983             6%        3,468           6%         3,489           6%
Interest                                    78            <1%          100          <1%           284          <1%
                                   ------------ -------------- ------------ ------------ ------------- ------------
Total operating expenses               $51,770           100%      $55,582         100%       $58,470         100%
                                   ============ ============== ============ ============ ============= ============
Provision (benefit) for income             $27                         $78                      $(13)
taxes
                                   ============ ============== ============ ============ ============= ============
</TABLE>
<PAGE>

         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.

         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 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 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.

         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 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.

         As of December 31, 2006, 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.
<PAGE>

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 ($400,000 of which was
accounted for in 2005), which was paid in September 2006. 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.

SEC Investigation

         The SEC is investigating whether we, and/or certain former employees
reasonably failed to supervise the securities trading and research activities of
a former analyst. The investigation covered the time period from approximately
March 2000 until January 2004 when the analyst resigned. The SEC has recently
advised us that it intends to recommend bringing an enforcement proceeding
against FMSC, one of its former principals and another former employee for
failing to reasonably supervise. The SEC will be seeking a monetary penalty and
an order suspending the former principal from acting in a supervisory capacity
for a period of time. FMSC is entitled to make a Wells submission to the SEC
staff, and currently intends to make such a submission or otherwise attempt to
negotiate a resolution with the SEC. It is believed that any resolution will
include a monetary penalty which we believe will not have a materially adverse
effect on our financial statements.

NASD Enforcement Sales Practice Investigation

         The NASD Department of Enforcement is conducting an investigation of
the sales practice activities of certain individuals who were formerly
registered representatives of FMSC, as well as the supervision of those
activities by FMSC. On April 9, 2007, NASD notified FMSC through a "Wells call"
that it intends to file an administrative action against it in connection with
an alleged failure to reasonably supervise the activities of three former
registered representatives of FMSC. NASD has not indicated what penalties it
would seek in such an action, monetary or otherwise. FMSC is entitled to make a
Wells submission to the NASD Staff and currently intends to make such a
submission or otherwise attempt to negotiate a resolution with NASD. It is
believed that any resolution will include a monetary penalty which we believe
will not have a materially adverse effect on our financial statements.

Termination of Merger Agreement, Litigation and Subsequent Purchase of Majority
Voting Interest

         On May 5, 2006, we entered into a definitive merger agreement with the
Okun Purchasers. 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).
<PAGE>

         In June 2006, the Okun Purchasers purchased in open market and
privately negotiated transactions, 2,159,348 shares of our 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 our common stock)
and $1,190,000 principal amount of our convertible debentures (convertible into
2,380,000 shares of our 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 our common stock. As a result of these
transactions, the Okun Purchasers beneficially owned 24.6% of our common stock
(assuming none of the shares of Series A Preferred Stock were converted into
common stock).

         On August 17, 2006, our 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 our shares
beneficially owned by them in favor of the merger agreement and the merger.

         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, 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.

         On January 8, 2007, we filed a lawsuit against 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 alleges, 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 demands specific
performance of the merger agreement and completion of the merger. In the
alternative, we are seeking 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 seeks 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.

         We also sought a temporary restraining order to prevent the Okun
Defendants from selling, converting or otherwise disposing of any of our
securities or acquiring any additional securities of ours. Mr. Okun and his
affiliates voluntarily agreed to such standstill until February 22, 2007.

         On February 12, 2007, we received the Okun Purchasers' answer to the
lawsuit which contained several counterclaims against us. In their
counterclaims, the Okun Purchasers allege that we breached the merger agreement
and failed to disclose certain material facts about us, and seek the return of
$2 million held in escrow as well as compensatory damages, interest and costs.
This lawsuit is currently pending in the Superior Court of New Jersey, Monmouth
County Chancery Division.

         The Okun Purchasers filed two additional actions; one filed February 2,
2007, in the Circuit Court of the State of Florida against our President and
Chief Executive Officer, and the other filed February 16, 2007, 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. We believe these
actions are 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 are part of their response to the original lawsuit we filed in
the New Jersey Superior Court.  (See Item 3. "Legal Proceedings" above).
<PAGE>

         On February 26, 2007, Mr. Okun and certain of his affiliates filed an
amendment to their Schedule 13D with the SEC disclosing that they now
beneficially own 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
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.

          Other operating costs decreased by approximately $485,000, to $2.98
million in 2006, from $3.47 million in 2005. Included in operating costs for
2005 are accounting and consulting fees of $123,000 expensed in September 2005
as a result of the termination of the proposed merger plans with Olympic. In
2006, reductions in advertising, consulting fees, depreciation, and liability
insurance costs of $416,000 accounted for the majority of the decrease.

         Income tax expense (benefit) for the years ended December 31, 2006,
2005 and 2004 was $27,000, $78,000, and $(13,000), respectively. The effective
tax rate on pre-tax income (loss) was 3.3%, 3.1%, and (1.8%), during 2006, 2005
and 2004, respectively. The difference in the rate between 2005 and 2004 was due
to the state loss carryback claims in 2004. As of December 31, 2006, 2005 and
2004, 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.

         The net loss applicable to common stockholders was $1,005,000, or
$(0.06) per basic and diluted share for 2006 compared to a net income applicable
to common stockholders of $2.1 million, or $0.15 and $0.12 per basic and diluted
share, respectively, for 2005.

2005 Compared to 2004

Overview

         Revenues decreased $1.1 million for 2005, to $58.1 million, from $59.2
million for 2004. Included in total revenue for 2005 is the recognition of $4.9
million of the remaining deferred revenue in connection with the termination of
our financial agreement with Fiserv. Excluding this one-time revenue, operating
revenues decreased approximately $6 million, or 10% when compared to 2004. Our
2005 results were negatively impacted by a net reduction of approximately 80
registered representatives during 2005 and a decrease in the aggregate number of
customer accounts we service from approximately 60,000 to approximately 50,000.

         Expenses in 2005 decreased approximately $2.9 million to $55.6 million,
from $58.5 million in 2004. The reduction in expense in 2005 was primarily
related to lower commission and clearing expenses directly related to the
reduction in commission revenue. In addition, legal matters and related costs
decreased by $941,000 over 2004 due to our continued efforts to control
litigation matters and our overall risk management.

Revenues

         Commission revenue decreased 12%, or $5.2 million, from $42.7 million
in 2004 to $37.5 million in 2005. This was primarily due to a reduction in 2005
in the number of registered representatives whose business mix was more
transaction in nature. Agency commissions on individual and institutional
securities transactions, the largest segment of this category, decreased $6.0
million, or 23%, to $20.5 million in 2005, from $26.5 million in 2004. Mutual
fund revenues increased $217,000 from $6.1 million in 2004, to $6.3 million in
2005. Insurance revenues, on the other hand, decreased by $520,000 in 2005 to
$4.2 million, from $4.7 million in 2004. Commissions generated from alternative
investments and fees from managed accounts both increased in 2005, from $2.3
million and $2.6 million, respectively in 2004 to $3.0 million and $3.2 million,
respectively in 2005.
<PAGE>

         Total revenues from principal transactions, which include
mark-ups/mark-downs on transaction in which we act as principal, proprietary
trading and the sale of fixed income and equity securities decreased $3.5
million, or 38%, from $9.1 million in 2004 to $5.6 million in 2005. The decrease
was primarily due to a reduction in the number of registered representatives who
conducted more of these types of transactions. Revenues from all fixed income
sources, which include municipal, government, and corporate bonds and unit
investment trusts decreased in 2005 by $1.2 million when compared to 2004.

         Investment banking revenues in 2005 increased $3.9 million, or 144%,
from $2.7 million in 2004 to $6.6 million in 2005. In 2005, we reported our
highest annual investment banking revenues than in any previous year in the
Company's history.

         Interest and other income in 2005 totaled $8.4 million, as compared to
$4.7 million in 2004, an increase of $3.7 million. Most of the increase is
attributable to the recognition of the $4.9 million of the remaining deferred
revenue in connection with the termination of our financial agreement with
Fiserv.

Expenses

         Total expenses decreased by approximately $2.9 million, or 5%, in 2005
to $55.6 million from $58.5 million in 2004. In February 2005, we recorded
additional compensation expense of $1.43 million in connection with a separation
agreement with one of our senior officers. Excluding this one-time expense,
expenses decreased $4.3 million over 2004.

         Commission expense, consistently the largest expense category and which
is directly related to commission revenue, decreased 6%, or $2.5 million, from
$39.9 million for 2004, to $37.4 million for 2005. Compensation and benefits
expense for management, operations and clerical personnel remained relatively
constant for 2005 at $7.0 million. Salaries and related payroll taxes decreased
by approximately $700,000, from $6.3 million in 2004 to $5.6 million in 2005.
The decrease for 2005 was primarily attributable to reduction in the workforce
during 2004 and 2005. Stock and option compensation costs increased $737,000
during 2005 in connection with stock grants issued in February 2005 to several
senior executives. The net cost of health insurance premiums in 2005 decreased
by $33,000 compared to 2004 mostly due to the reduction in the workforce.

         Clearing and floor brokerage costs decreased $540,000, from $2.5
million in 2004, to $1.9 million in 2005. This expense category is directly
related to the volume of transaction business which decreased in 2005.

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

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

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

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

Liquidity and Capital Resources

         We maintain a highly liquid balance sheet with approximately 81% for
2006 and 2005 and 73% for 2004, 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 2006 by $845,000. Net
cash used in operating activities during 2006 was $668,000, as a result of a 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.

         Net cash used in 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 used in
operating activities in 2004 was $2,020,000, primarily attributable to decreases
in commissions' payable of $1,180,000, and accrued expenses of $726,000.

         Additions to property and equipment of $34,000 accounted for the use of
cash from investing activities for 2006. In 2005 and 2004, investing activities
consumed $42,720 and $212,000, respectively, for additions to capital
expenditures.

         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 2004 used $175,000 in cash primarily
related to capital leases and the repurchase of common shares.

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 $168,506
during 2006 and $285,340 during 2005, including $210,879 dividends in arrears.
(See Note 16 to the consolidated financial statements).
<PAGE>

         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,
as amended, and/or Rule 506 of Regulation D, promulgated there under relating to
transactions by an issuer not involving any public offering.

         In September 2003, we commenced an additional private offering of up to
$3,000,000 of 6% convertible debentures to accredited investors. Each debenture
is convertible at an initial conversion price of $0.50 per share, subject to
adjustment for stock dividends, combinations, splits, recapitalizations, and
like events. Interest on the debentures accrues at the rate of 6% per annum and
is payable in cash on a semi-annual basis on April 1st and October 1st of each
year until maturity or conversion. Each debenture is due and payable five (5)
years from issuance, unless previously converted into shares of common stock.
The offering was completed on December 31, 2003. In the offering, we sold an
aggregate principal amount of $1,895,000 of debentures. The proceeds of the
financing 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, as amended, and/or Rule 506 of Regulation D,
promulgated there under relating to transactions by an issuer not involving any
public offering. For more information, see a discussion of the debentures under
the captions Item 1. "Business -- Debenture Conversions" above.

         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 were
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 was an aggregate principal amount
of $25,000 of convertible debentures outstanding, which are convertible at $.50
per share.

         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 of 1933 and the regulations of
the SEC and we relied upon the exemption from registration under Section 4(2) of
the Securities Act of 1933 to issue the shares of Series B Preferred Stock. The
Company paid $80,000 and $51,556 dividends on the Series B Preferred Stock for
2006 and 2005, respectively. (See Note 16 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.
<PAGE>

Net Capital
         At December 31, 2006, Montauk Financial Group had net capital of
$2,735,223 which was $2,485,223 in excess of its required net capital of
$250,000 and the ratio of aggregate indebtedness to net capital was 1.34 to 1.

Consolidated Contractual Obligations and Lease Commitments

         The table below provides information about our commitments related to
debt obligations, leases, guarantees and investments as of December 31, 2006.
This table does not include any projected payment amounts related to our
potential exposure to arbitrations and other legal matters, nor does it include
any potential lease commitment related to the Okun Lease.
<TABLE>
<S>                                          <C>             <C>         <C>            <C>           <C>

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

   Debt Obligations                          $208,333         $16,667           $0           $0         $225,000

   Capital Lease Obligations                        0               0            0            0                0

   Operating Lease Obligations                893,308         863,148      620,989       50,762        2,428,207
   Note Payable                                     0               0            0            0                0


   Other Long-Term Obligations
   Reflected on Balance Sheet under
   GAAP                                             0               0            0            0                  0
                                        -------------- --------------- ------------ ------------ ----------------
   Total                                   $1,101,641        $879,815     $620,989      $50,762       $2,653,207
                                        ============== =============== ============ ============ ================
</TABLE>

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.
<PAGE>

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
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.

Revenue recognition

         Securities transactions, commission income, sales concessions from
participation in syndicated offerings and related expenses are recorded on a
trade date basis. Insurance and mutual fund commissions received from outside
vendors are recognized as income when earned. Securities owned and securities
sold, but not yet repurchased are stated at quoted market value with unrealized
gains and losses included in earnings. Investment account securities not readily
marketable are carried at estimated fair value as determined by management with
unrealized gains and losses included in earnings.

Long-lived Assets

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

Clearing Agreement

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

Income taxes

         Due to significant operating losses from 2001-2003 we have established
a valuation allowance against all of our deferred tax benefits as of December
31, 2006, 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.
<PAGE>

New Accounting Standards

Statement of Financial Accounting Standard 157, Fair Value Measurements
("SFAS 157"):

         On September 15, 2006, the Financial Accounting Standard Board issued a
SFAS 157, "Fair Value Measurements", that provides enhanced guidance for using
fair value to measure assets and liabilities. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances.

         This Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including financial
statements for an interim period within that fiscal year. The Company will adopt
this pronouncement effective for periods beginning January 1, 2008. We are
currently evaluating the impact of adopting this pronouncement on our financial
statements.

         In September 2006, FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)". SFAS No. 158 requires an employer to
recognize the funded status of a defined benefit postretirement plan as an asset
or liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. The funded status of a benefit plan is defined as the difference between
the fair value of the plan assets and the plan's benefit obligation. For a
pension plan the benefit obligation is the projected benefit obligation and for
any other postretirement benefit plan, such as a retiree health care plan, the
benefit obligation is the accumulated postretirement benefit obligation. SFAS
No. 158 requires an employer to recognize as a component of net periodic benefit
costs pursuant to SFAS No. 87 "Employers' Accounting for Pensions". SFAS No. 158
also requires an employer to measure the funded status of a plan as of the date
of its year-end. Additional footnote disclosure is also required about certain
effects on net periodic benefit costs for the next year that arise from the
delayed recognition of gains or losses, prior service costs or credits, and
transition asset or obligation. Except for the year-end measurement requirement,
SFAS No. 158 is effective for the year ending December 31, 2006. The adoption of
this Statement in 2006 did not have a material impact on the financial condition
or results of operations of the Company.


         FSP FAS 123(R)-5 was issued on October 10, 2006. The FSP provides that
instruments that were originally issued as employee compensation and then
modified, and that modification is made to the terms of the instrument solely to
reflect an equity restructuring that occurs when the holders are no longer
employees. No change in the recognition or the measurement (due to a change in
classification) of those instruments will result if both of the following
conditions are met: (a). There is no increase in fair value of the award (or the
ratio of intrinsic value to the exercise price of the award is preserved, that
is, the holder is made whole), or the antidilution provision is not added to the
terms of the award in contemplation of an equity restructuring; and (b). All
holders of the same class of equity instruments (for example, stock options) are
treated in the same manner. The provisions in this FSP shall be applied in the
first reporting period beginning after the date the FSP is posted to the FASB
website. We will adopt this FSP from its effective date. We currently do not
believe that its adoption will have any impact on our financial statements.

<PAGE>

         In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109 (FIN 48), which provides clarification
related to the process associated with accounting for uncertain tax positions
recognized in consolidated financial statements. FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken, or expected to be taken, in a tax return.
FIN 48 also provides guidance related to, among other things, classification,
accounting for interest and penalties associated with tax positions, and
disclosure requirements. We are required to adopt FIN 48 on January 1, 2007,
although early adoption is permitted. We are currently evaluating the impact of
adopting FIN 48 on our consolidated financial statements.


         In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities", which permits entities to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. An entity would report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied
instrument by instrument, with a few exceptions; the decision is irrevocable;
and it is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 requires disclosures that facilitate comparisons (a) between
entities that choose different measurement attributes for similar assets and
liabilities and (b) between assets and liabilities in the financial statements
of an entity that selects different measurement attributes for similar assets
and liabilities. SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Upon implementations, an entity
shall report the effect of the first remeasurement to fair value as a cumulative
effect adjustment to the opening balance of retained earnings. Since the
provisions of SFAS No. 159 are applied prospectively, any potential impact will
depend on the instruments selected for fair value measurement at the time of
implementation.


Impact of Inflation

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

Risk Management

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

Market Risk. Certain of our business activities expose us to market risk. This
market risk represents the potential for loss that may result from a change in
value of a financial instrument as a result of fluctuations in interest rates,
equity prices or changes in credit rating of issuers of debt securities. This
risk relates to financial instruments we hold as investment and for trading.
Securities inventories are exposed to risk of loss in the event of unfavorable
price movements. Securities positions are marked to market on a daily basis.
Market-making activities are client-driven, with the objective of meeting
clients' needs while earning a positive spread. At December 31, 2006 and
December 31, 2005, equity securities positions owned, and sold, not yet
purchased were approximately $198,447 and $303,612, and $495 and $3,564,
respectively. In our view, the potential exposure to market risk, trading
volatility and the liquidity of securities held in the firm's inventory accounts
could potentially have a material effect on its financial position.
<PAGE>

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

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

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

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 8.    Financial Statements

         See Financial Statements attached hereto at pages F-1 to F-34.

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

         None

Item 9A.    Controls and Procedures

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

         No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
year ended December 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

Item 9B.        Other Information

         None


<PAGE>


<TABLE>

                                 PART III

Item 10.  Directors and Executive Officers

     Our  directors  and  executive  officers  for the year ended  December 31,
2006 are as set forth  below.  During  2006,  our Board consisted of six
individuals.  On February 24, 2006,  Mr.  David I. Portman was elected to our
Board.  In November,  2006 Mr.  Herbert Kurinsky and Mr. William J. Kurinsky
resigned from our Board.  They were replaced by Mr. Phillip  D'Ambrisi and
Ms. Celeste Leonard on January 5, 2007 and February 22, 2007, respectively.
<S>                                  <C>          <C>

Board of Directors

Name                                 Age          Position

Victor K. Kurylak                    50           Class II Director, Chief Executive Officer and President, First
                                                  Montauk Financial Corp.

Ward R. Jones, Jr.                   75           Class III Director, First Montauk Financial Corp.

Barry D. Shapiro                     65           Class II Director, First Montauk Financial Corp.

David I. Portman                     65           Class III Director, First Montauk Financial Corp.

Phillip D'Ambrisi                    49           Class I Director, First Montauk Financial Corp.

Celeste M. Leonard                   50           Class I Director, First Montauk Financial Corp.


Executive Officers

Name                                 Age          Position

Victor K. Kurylak                    50           Chief Executive Officer and President, First Montauk Financial
                                                  Corp. and Montauk Financial Group

Phillip D'Ambrisi                    49           Chief Operating Officer, First Montauk Financial Corp. and Montauk
                                                  Financial Group

Celeste M. Leonard                   50           Chief Compliance Officer, Montauk Financial Group

Robert I. Rabinowitz*                49           Executive Vice President, General Counsel and Secretary -First
                                                  Montauk Financial Corp. and Montauk Financial Group

Mindy A. Horowitz                    49           Acting Chief Financial Officer -First
                                                  Montauk Financial Corp., Chief Financial Officer, Treasurer,
                                                  Fin.Op.- Montauk Financial Group

-------------------------------------------------------------------------------------------------------------------------
         * On January 31, 2007, Robert I. Rabinowitz,  Esq.  resigned his positions as Executive Vice President,
Secretary and General Counsel of First Montauk  Financial  Corp. and Montauk  Financial  Group. On March 1, 2007,
these positions were filled by Jeffrey Fahs, Esq.

</TABLE>
<PAGE>

         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.
<PAGE>

         David I. Portman rejoined our Board of Directors on February 24, 2006,
and had previously served on our Board from 1993 until December 31, 2002. Mr.
Portman is the president of TRIAD Development, a real estate company that has
numerous commercial and rental properties in New Jersey, a position that he has
held since 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.

         Phillip D'Ambrisi was elected to serve as a Class I member of our Board
of Directors on January 5, 2007. Since August 2006, Mr. D'Ambrisi has been the
Chief Operating Officer of FMSC. Mr. D'Ambrisi has over 25 years of management
experience in the financial services industry. Most recently, he served as
Senior Vice President and Chief Operating Officer of Horner, Townsend & Kent,
Inc., a subsidiary of The Penn Mutual Life Insurance Company. Previously, from
1989 to 2004, Mr. D'Ambrisi was employed by MONY Securities Corporation, a
subsidiary of The MONY Group, initially as a Senior Vice President and Chief
Operating Officer from 1989 to 1999 and then as the President and Chief
Executive Officer from 1999 to 2004. He has also worked in various management
positions at Mutual of New York, Securities Settlement Corporation and Dean
Witter Reynolds, Inc. Mr. D'Ambrisi is a graduate of Rutgers University and
holds NASD Series 7, 63 and 24 licenses.

         Celeste M. Leonard was 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, she 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.

         Robert I. Rabinowitz, Esq. has been our General Counsel since 1987. In
February 2005, he became our secretary, and retained the position of Executive
Vice President and General Counsel. Previously, he served as General Counsel of
Montauk Financial Group from 1986 until 1998 when a new general counsel was
named. Thereafter, he became the Chief Administrative Officer of Montauk
Financial Group as well as a General Securities Principal. From January 1986
until November 1986, he was an associate attorney for Brodsky, Greenblatt &
Renahan, a private practice law firm in Rockville, Maryland. Mr. Rabinowitz is
an attorney at law licensed to practice in New Jersey, Maryland and the District
of Columbia, and is a member of the Board of Arbitrators for the NASD,
Department of Arbitration. Mr. Rabinowitz graduated from the American University
with a BA in 1979 and from The Antioch School of Law with a JD in 1982. Mr.
Rabinowitz resigned from his positions effective on January 31, 2007. 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.
<PAGE>

         Mindy A. Horowitz, CPA, 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. Ms. Horowitz is a Certified Public
Accountant.

         Jeffrey J. Fahs, Esq., 38, became our Executive Vice President,
Secretary and General Counsel on March 1, 2007, and has over 15 years of
experience in the financial services industry in various regulatory, legal and
compliance capacities. Most recently, Mr. Fahs was a Senior Regulatory Counsel
for Citigroup Global Markets, Inc. Previously, from 2003 to 2005, he served as
Assistant General Counsel and Deputy Chief Compliance Officer for the retail and
high net worth brokerage units at JPMorgan Chase & Co. From 2000 to 2003, Mr.
Fahs served as General Counsel and Chief Compliance Officer for Wall Street
Access and Wall Street Advisors, LLC. From 1999 to 2000, he served as Compliance
Counsel and Compliance Sales Practice Manager for Josephthal & Co. Finally, from
1993 to 1999, Mr. Fahs held various positions with the NYSE, NASD and the Oregon
Division of Finance and Corporate Securities. Mr. Fahs is a member of the SIFMA
Legal and Compliance Division and serves on the SIFMA Legal Committee. Mr. Fahs
is a graduate of Messiah College with a B.S. in Economics and holds a Juris
Doctorate degree from St. John's University School of Law. He is a member of the
bar in the States of New York, Oregon and Washington, and also holds NASD/NYSE
Series 4, 7, 9, 10, 14, 24, and 63 licenses.

Significant Employee

         Kevin O'Friel,  42, Chief Supervisory  Officer,  FMSC. Mr. O'Friel has
over twenty years experience in the financial  services industry,  including
sales  supervision,  administration  and operations.  Mr. O'Friel joins Montauk
from Neuberger Berman where he was Business Control Manager for the Investment
Adviser affiliate of Lehman Brothers.  Previously,  Mr. O'Friel held various
compliance and operations  management positions with Oppenheimer,  Stanford
Group and Prudential  Securities Inc. He holds NASD Series 3, 4, 7, 8, 14,
24, 53, 63 and 65 licenses.

         Mark D. Lowe, 47, has been President of Montauk  Insurance  Services,
Inc. since October 1998. From 1982 to 1998 Mr. Lowe was a Senior  Consultant
with Congilose & Associates,  a financial  services firm  specializing in
insurance and estate planning.  Mr. Lowe became a  Certified  Financial
Planner  (CFP) in July  1991,  a  Chartered  Financial  Planner  (ChFC)  in
2001 and a  Chartered  Life Underwriter  (CLU) in 2003.  Mr. Lowe graduated
Ocean County  College in Toms River,  NJ. Mr. Lowe is the past President of the
Estate and Financial Planning Council of Central New Jersey.

Certain Reports

         No person who, during the year ended December 31, 2006, was a Director,
officer or beneficial owner of more than ten percent of our common stock (which
is the only class of our securities registered under Section 12 of the
Securities Exchange Act of 1934) failed to file on a timely basis, reports
required by Section 16 of the Securities Exchange Act during the most recent
fiscal year or prior years. The foregoing is based solely upon our review of
Forms 3 and 4 during the most recent fiscal year as furnished us under Rule
16a-3(d) under the Securities Exchange Act, and Forms 5 and amendments thereto
furnished to us with respect to its most recent fiscal year, and any
representation received by us from any reporting person that no Form 5 is
required.
<PAGE>

Meetings of Directors

         During 2006, the full Board of Directors met on eleven occasions. No
member of the Board of Directors attended less than 75% of the aggregate number
of (i) the total number of meetings of the Board of Directors or (ii) the total
number of meetings held by all Committees of the Board of Directors.

Committees of the Board of Directors

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

         For the year ended December 31, 2006, the members of the committees,
and a description of the duties of the Committees were as follows:

         Audit Committee.  Our Audit Committee acts to:

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

         During the year ended December 31, 2006, the Audit Committee met on
four occasions. The Audit Committee adopted a written charter governing its
actions effective June 23, 2000. During the year, the members of the Audit
Committee were Ward R. Jones, 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.

         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,
2006, the committee met on two occasions.
<PAGE>

         Special Committee. The Special Committee of the Board was formed on
February 24, 2006 for the purpose of reviewing and evaluating any transactions
that may be presented to the Board for the benefit of the shareholders. The
Special Committee, which consists of our three independent members of the Board,
met on three occasions during 2006.  Mr. David Portman serves as chairman of
this committee.

Compensation Committee Interlocks and Insider Participation

         There are no Compensation Committee interlocks between the members of
our Compensation Committee and any other entity. None of the members of the
Board's Compensation Committee are executive officers of our company.

Compensation of Directors

         We pay our Directors who are not also our employees a retainer of $250
per meeting of the Board of Directors attended and for each meeting of a
committee of the Board of Directors not held in conjunction with a Board of
Directors meeting. In 2004 the Board authorized additional payments to our
Directors who are not our employees, to include an annual payment of $5,000
payable in quarterly installments. Members of the Audit Committee are also
entitled to an additional $750 per annum payment. Directors that are also our
employees are not entitled to any additional compensation as such. In 2007 the
board authorized an increase in the annual payment to $15,000 payable in advance
in quarterly installments. Members of the Audit Committee are also entitled to
any additional $5,000 payment per annum payable in advance in quarterly
installments.

         In addition, members of the Special Committee received an initial cash
fee of $5,000 and an additional $10,000 to evaluate the merger agreement with
the Okun Purchasers described elsewhere in this Report.

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, 2006.



<PAGE>


Item 11.  Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

         This Compensation Discussion and Analysis ("CD&A") describes our
compensation philosophy and policies for 2006 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.

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
executive officers, our Compensation Committee is guided by the following
objectives and principles:

        o        Encourage creation of shareholder value and achievement of
                 strategic corporate objectives;

        o        Integrate compensation with our annual and long-term corporate
                 objectives and strategy, and focus executive behavior on the
                 fulfillment of those objectives;

        o        Provide a competitive total compensation package that enables
                 us to attract and retain, on a long-term basis, high caliber
                 personnel; and

        o        Hold our executives 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 executive officer 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:
<PAGE>

         1. Base salary. Compensation levels for each our NEOs, including the
         Chief Executive Officer, are generally set within the range of salaries
         that the Compensation Committee believes are paid to 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, Philip D'Ambrisi and Celeste M. Leonard. (See further
         discussion below.)

         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 he shall be entitled to purchase shall be determined
         by the Compensation Committee 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.
<PAGE>

                In addition, the Compensation Committee believes that equity
         ownership by key executives helps to balance the short term focus of
         annual incentive compensation with a longer term view and may help to
         retain key executive officers. 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 2006 to the NEOs, the base salary increases approved
         in December 2005 and the proposed merger discussed elsewhere in this
         Report, no stock options or restricted stock grants were recommended or
         approved for award to the NEOs in or for 2006.

                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 and employees. In addition we provide group term insurance
         with a maximum coverage of $50,000, as well as long-term disability.

                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 as well as other 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.



<PAGE>

Employment Contracts, Termination of Employment and Change in Control Agreements

Herbert Kurinsky

         On February 1, 2006, we entered into a separation agreement with
Herbert Kurinsky, our Chairman of the Board of Directors, which provided for the
termination of his employment as of that date. Pursuant to the terms of the
agreement, we 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. Furthermore, the separation agreement provided for a
continuation of medical insurance coverage for 48 months for Mr. Kurinsky and
his wife, an automobile allowance of $600 for 36 months, which resulted in a
charge to earnings of $64,691, and the immediate vesting of all stock grants in
accordance with his employment agreement, which resulted in an additional charge
to earnings of $36,458. Both the separation agreement and promissory note
contained a change of control provision requiring the acceleration of certain
payments in the event of a change in control of the Company. As a result of the
Okun Purchasers' acquisition of 24.6% of our stock in late June 2006, the change
of control provisions of Mr. Kurinsky's promissory note and separation agreement
were triggered, and consequently, in July 2006 we paid Mr. Kurinsky $505,000.

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

Phillip D'Ambrisi

         In August 2006, the Company hired a new Chief Operating Officer with
employment terms, which provide him with an annual base salary of $250,000 and
bonuses of $200,000 for 2006 and $100,000 each year through December 31, 2008,
provided he is still employed by the Company at the end of each year. While the
terms of his employment have not yet been reflected in a formal employment
agreement, the Company's intent is 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.
<PAGE>

 Celeste Leonard

         In August 2006, FMSC entered into an employment agreement with a new
Chief Compliance Officer, which provides her with an annual base salary of
$200,000 and bonuses of $200,000 for 2006 and $100,000 each year through
December 31, 2008, provided she is still employed by the Company at the end of
each year.

Jeffrey J. Fahs, Esq.

         In January 2007, FMSC entered into an employment agreement with a new
Executive Vice President, Secretary and General Counsel which provides 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.

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 will received a base salary of
$140,000 per year, which was increased to $152,000 per year in 2006, and is
eligible to participate in our bonus and option plans, receives health and
benefits as provided to our executives and is entitled to a car allowance. In
the event of termination of 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 and (iii) payment of the costs of health and other benefits for 12
months.

Robert I. Rabinowitz

         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 will be
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. He and the Company entered into an eleven month consulting
agreement, effective February 1, 2007, for which he will also be paid additional
consideration for his continued cooperation in providing assistance to the
Company in the transition of his responsibilities to new personnel.
<PAGE>


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,
2006, 2005 and 2004 to each of our named executive officers.



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

                                                                         Non-Equity     Nonqualified
                                      Fiscal          Stock     Option   Incentive Plan Deferred       All Other
Name and Principal Position           Year   Salary   Awards    Awards   Compensation   Compensation  Compensation
                                                      ($)       ($)      ($)            Earnings ($)  ($)              Total ($)
Herbert Kurinsky                      2006   $ 16,667 $0        $ 0          $0         $0    $0        $914,908(1)    $ 931,575
Former Chairman of the Board of       2005    200,000  100,000    0           0          0     0            0            300,000
Directors - FMFC                      2004    200,000   42,570  131,250(2)    0          0     0            0            373,820

Victor K. Kurylak, President,         2006    300,000  200,000    0           0          0     0            0            500,000
Chief Executive Officer, FMFC         2005    275,000  200,000  570,000(3)    0          0     0            0          1,045,000
and Montauk Financial Group           2004    250,000   63,181   87,500(4)  53,750(7)    0     0            0            454,431

Phillip D'Ambrisi, Chief Operating    2006    250,000  200,000    0           0          0     0            0            450,000
Officer, FMFC and
Montauk Financial Group

Celeste M. Leonard, Chief             2006    200,000  200,000    0           0          0     0            0            400,000
Compliance Officer, Montauk
Financial Group

Robert I. Rabinowitz                  2006    200,000      0       0          0          0     0         200,000(10)     400,000
General Counsel - FMFC and            2005    190,000   20,000   57,000(5)  66,450(8)    0     0            0            333,450
Montauk Financial                     2004    180,000   25,000     0        25,700(8)    0     0            0            230,700
Group
Mindy A. Horowitz                     2006    152,000   35,000     0          0          0     0            0            187,000
Acting Chief Financial Officer,       2005    140,000   20,000   57,000(6)  33,257(9)    0     0            0
FMFC, and Chief Financial             2004    125,000   20,000     0          0          0     0            0            145,000
Officer, Fin. Op. Montauk
Financial Group

</TABLE>
<PAGE>

1)       Mr. Kurinsky's separation agreement provided for a cash payment of
         $300,000, a note in the principal amount of $550,217 plus interest at
         the rate of 4.5% per annum, auto allowance of $20,095 and health
         insurance benefits valued at $44,596 over the term of the agreement.
         See "Employment Contracts, Termination of Employment and Change in
         Control Agreements" above.
2)       In January 2004, Mr. Herbert Kurinsky was issued 375,000 shares of
         restricted common stock in conjunction with his employment agreement,
         which said shares had a market value of $131,250 on the date of
         issuance.
3)       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.
4)       In January 2004, Mr.  Kurylak was issued 250,000 shares of restricted
         common stock which shares had a market value of $87,500
         on the date of issuance.
5)       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.
6)       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.
7)       In January 2004, the Compensation Committee authorized an option grant
         to Mr. Victor K. Kurylak to purchase 250,000 shares of common stock at
         an exercise price of $.50 per share for 5 years. These options were
         initially valued at $53,750 based on the Black Scholes method of
         valuation.
8)       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. In 2004, the
         Compensation Committee authorized an option grant to Mr. Rabinowitz to
         purchase 100,000 shares of common stock at an exercise price of $.50
         for five years. These options were initially valued at $66,450 and
         $25,700, respectively in 2005 and 2004 based on the Black Scholes
         method of valuation.
9)       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.
10)      Pursuant to a separation agreement with Mr. Rabinowitz dated November
         14, 2006, he is entitled to receive a severance payment of $200,000, to
         be paid at the rate of $16,667 per month beginning February 1, 2007.


<PAGE>

2006 GRANTS OF PLAN-BASED AWARDS

         There were no grants made to any NEOs of options or restricted stock
during the year ended December 31, 2006.

OUTSTANDING EQUITY AWARDS AT 2006 YEAR-END
<TABLE>
<S>                  <C>          <C>            <C>           <C>       <C>          <C>       <C>            <C>          <C>

                                         Options Awards                                                    Stock Awards
------------------- -------------- -------------  ------------  ---------- ------------ -------------- -------------- -------
                                                                                                                           Equity
                                                                                                                           Incentive
                                                                                                                Equity     Plan
                                                                                                                Incentive  Awards:
                                                                                                                Plan       Market or
                                                                                                                Awards     Payout
                                                  Equity                                                        Number of  Value of
                                                  Incentive                                                     Unearned   Unearned
                                                  Plan Awards                                       Market      Shares,    Shares,
                      Number of    Number of      Number of                            Number of    Value of    Units,     Units or
                      Securities   Securities     Securities                           Shares or    Shares or   or Other    Other
                      Underlying   Underlying     Underlying                           Units of     Units of    Rights      Rights
                      Unexercised  Unexercised    Unexercised   Options    Option      Stock That   Stock That  That       That
                      Options (#)  Options (#)    Unearned      Exercise   Expiration  Have Not     Have Not    Have Not   Have Not
Name                  Exercisable  Unexercisable  Options (#)   Price ($)  Date        Vested (#)   Vested ($)  Vested (#) Vested($)
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Herbert Kurinsky    -                 -                -          -          -            -              -          -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Victor K.
Kurylak             250,000(1)        0                -          0.50       12/31/08     -              -          -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Phillip D'Ambrisi   -                 -                -          -          -            -              -          -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Celeste M.
Leonard             -                 -                -          -          -            -              -          -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Robert I.
Rabinowitz          100,000(2)        0                -          0.50       02/16/09    33,333(4)   15,333(5)      -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Robert I.
Rabinowitz          150,000(3)        0                -          1.25       07/27/10     -              -          -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Mindy A. Horowitz   100,000(2)        0                -          0.50       12/30/08    33,333(4)   15,333(5)      -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------
Mindy A. Horowitz     75,000(3)       0                -          1.25       07/27/10     -              -          -          -
------------------- -------------- -------------  ------------  ---------  -----------  ----------- ----------- ---------- ---------

1)       Represents the number of vested stock options as of December 31, 2006. 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, 2006.  These options vested 100% upon grant on
         February 17, 2004 in the case of Mr. Rabinowitz and December 31, 2003 in the case of Ms. Horowitz.  Options expire
         5 years from the date of grant.
3)       Represents the number of vested stock options as of December 31, 2006. These options vested 100% upon grant on July 28,
         2005. Options expire 5 years from the date of grant.
4)       Represents the number of unvested restricted stock grants as of December 31, 2006. The restricted stock vested on February
         1, 2007.
5)       Represents the market value of unvested shares of restricted stock as of December 31, 2006. Amounts in this column
         reflect the December 31, 2006 closing price of the common stock of $.46 per share.
</TABLE>


<PAGE>

         2006 OPTION EXERCISES AND STOCK VESTED
<TABLE>
<S>                       <C>                   <C>                    <C>                    <C>


------------------------ --------------------------------------------- ----------------------------------------------
                         Option Awards (1) Stock Awards
------------------------ --------------------------------------------- ----------------------------------------------
Name                     Number of Shares       Value Realized on      Number of Shares        Value Realized on
                         Acquired on Exercise                          Acquired on Vesting
                         (#)(1)                 Exercise ($)(2)        (#)(3)                  Vesting ($)(4)
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Herbert Kurinsky         200,000                24,000                 0                       0
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Victor K Kurylak         0                      0                      333,333                 323,333
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Robert I. Rabinowitz     0                      0                       33,333                  35,000
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
Mindy A. Horowitz        0                      0                       33,333                 35,000
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>

(1)        Information relates to stock option exercises during 2006.
(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 2006. (4) Represents the market value of the vested
           restricted stock grants on date of vesting.


2006 DIRECTOR'S COMPENSATION TABLE

         The following table shows, for the year ended December 31, 2006, the
compensation paid to each of our non-executive directors:

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

         ------------------------------ --------------------- ---------------- ---------------------
         Name                           Fees Earned or Paid   Option Awards    Total ($)
                                        in Cash ($)           ($)(4)
         ------------------------------ --------------------- ---------------- ---------------------
         William J Kurinsky              151,740(1)            0                 151,740
         ------------------------------ --------------------- ---------------- ---------------------
         Barry Shapiro                    23,313(2)            0                  23,313
         ------------------------------ --------------------- ---------------- ---------------------
         Ward R Jones Jr.                 23,313(2)            0                  23,313
         ------------------------------ --------------------- ---------------- ---------------------
          David Portman                   19,438(3)            0                  19,438
         ------------------------------ --------------------- ---------------- ---------------------
</TABLE>
<PAGE>

        (1)  Amount represents payments made to Mr. Kurinsky in accordance with
             a consulting agreement dated February 8, 2005.
        (2)  Represents payments made to each Mr. Shapiro and Mr. Jones for
             a) annual cash payment of $5,000 as a non-executive board
             member, of which $3,750 was paid in 2006 b) annual cash payment of
             $750 as a member of the Audit Committee, of which $563 was paid in
             2006 c) annual cash payment of $15,000 as a member of the Special
             Committee, and d) cash payment of $4,000 for attendance at Board,
             Special Committee and Audit Committee meetings in 2006.
        (3)  Represents payments made to Mr. Portman for a) annual cash payment
             of $2,500 as a non-executive board member, of which $1,250 was
             paid in 2006 b) annual cash payment of $375 as a member of the
             Audit Committee, of which $188 was paid in 2006 c) annual cash
             payment of $15,000 as a member of the Special Committee, and
             d) cash payment of $3,000 for attendance at Board, Special
             Committee and Audit Committee meetings in 2006.
        (4)  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.


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 thereunder 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 which are designated as Incentive Stock Options
which become exercisable in any calendar year may not exceed $100,000.

         The Board may, in its sole discretion, grant bonuses or authorize loans
to or guarantee loans obtained by an optionee to enable such optionee to pay any
taxes that may arise in connection with the exercise or cancellation of an
option. Unless sooner terminated, the 2002 Incentive Plan will expire in 2012.
<PAGE>

         Effective as of the date of this Annual Report, since the adoption of
the 2002 Incentive Plan, we have issued 1,088,402 options to registered
representatives and employees which have not been exercised or cancelled. There
remain 38,000 options outstanding from our 1992 Incentive Stock Option Plan,
resulting in a total of 1,126,402 options outstanding.

Director Plan

          In June 2002, we adopted the Non-Executive Director Stock Option Plan
(the "Director Plan"). The Director Plan provides that each Non-Executive
Director will automatically be granted an option to purchase 20,000 shares each
September 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. To date, a total of
215,000 options have been granted to our Non-Executive directors under the
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.
<PAGE>

         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 1,015,000 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 April 16, 2007
with respect to (i) each director and each executive officer, (ii) all directors
and officers as a group, and (iii) the persons (including any "group" as that
term is used in Section l3(d)(3) of the Securities Exchange Act of l934), known
by us to be the beneficial owner of more than five (5%) percent of our common
stock. Shares of common stock subject to options exercisable within 60 days from
the date of this table are deemed to be outstanding and beneficially owned for
purposes of computing the percentage ownership of such person but are not
treated as outstanding for purposes of computing the percentage ownership of
others.

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

           Directors, Officers                                   Amount and Percentage
           and 5% Shareholders (1)                              Of Beneficial Ownership (1)
           -----------------------                              ---------------------------
                                                              Number of Shares          Percent
           Victor K. Kurylak
           Parkway 109 Office Center                             1,500,000( 2)             7.99%
           328 Newman Springs Road
           Red Bank, NJ 07701

           Phillip D'Ambrisi                                             0                    0%
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701

           Celeste Leonard                                               0                    0%
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701

           Mindy A. Horowitz                                       275,000 (3)             1.47%
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701

           Jeffrey J. Fahs                                               0                    0%
           Parkway 109 Office Center
           328 Newman Springs Road
           Red Bank, NJ 07701

           Ward R. Jones                                           120,000 (4)                 *
           300 West Jersey Road
           Lehigh Acres, FL  33936

           David I. Portman                                         65,000 (5)                 *
           142 Highway 35
           Eatontown, NJ 07724

           Barry D. Shapiro, CPA                                   100,000 (6)                 *
           331 Newman Springs Road
           Red Bank, NJ 07701

           Edward H. Okun                                       11,117,027 (7)             52.8%
           10800 Midlothian Turnpike
           Suite 300
           Richmond, Virginia 23235

           All  Directors  and  Officers  as  a
           group (8 persons in number)                           2,060,000                 9.49%
------------------------------------------

* Indicates less than 1%

<PAGE>

 (1)     Unless  otherwise  indicated below,  each director,  officer and 5% shareholder has sole voting and sole
         investment power with respect to all shares that he beneficially owns.
 (2)     Amounts and  percentages  indicated for Mr. Kurylak  include an aggregate of 1,250,000  restricted  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
         restricted 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 15,000 shares of common stock.
 (6)     Includes vested and presently exercisable options of Mr. Shapiro to purchase 100,000 shares of common stock.
 (7)     As reported under Schedule 13D/A4 filing made by Mr. Okun, dated February 23, 2007. According to the Schedule 13D/A4
         filing made by Mr. Okun, Mr. Okun has voting and dispositive power over shares of common stock owned by
         FMFG Ownership, Inc. (5,105,522 shares) and FMFG Ownership II, Inc. (6,011,505 shares). Mr. Okun owns 100% of the
         capital stock of each of FMFG Ownership, Inc. and FMFG Ownership II, Inc. and is the sole director and president
         of each company. The percentage of beneficial ownership of the Company's shares of common stock indicated is based
         upon the sum of (i) 18,511,553 (the Company's shares of common stock outstanding as of November 14, 2006, the date
         the Company's quarterly report for the quarter ended September 30, 2006 was filed with the SEC), (ii) 1,978,240
         (the number of shares of common stock which may be issued upon the conversion of 197,824 shares of Series B
         Preferred Stock beneficially owned by Mr. Okun which is convertible at any time on a one for ten basis at the
         option of Mr. Okun), and (iii) 566,174 (the number of shares of common stock which may be issued upon the
         conversion of 283,087 shares of Series A Preferred Stock beneficially owned by Mr. Okun which is convertible at
         any time on a one for two basis at the option of the holder).
</TABLE>


<PAGE>


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, 2006, including the 2002 Incentive
Stock Option 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.

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

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

Equity Compensation Plans             2,137,402(1)                   $0.79                    3,848,400(2,3)
Approved by Stockholders
------------------------------ --------------------------- --------------------------- ------------------------------

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

Total                                 2,137,402(1)                   $0.79                    3,848,400(2,3)
============================== =========================== =========================== ==============================
</TABLE>

1.       Includes 924,402 options issued pursuant to the our 2002 Incentive
         Stock Option Plan, 38,000 options issued pursuant to our 1992 Incentive
         Stock Option Plan, as amended, 160,000 options issued pursuant to our
         Director Plan, and 1,015,000 options and shares issued pursuant to our
         1996 Management Plan.
2.       Includes 3,548,400 options available for issuance under our 2002
         Incentive Stock Option Plan. 3. Includes 300,000 options assumed
         available for issuance under our Directors Plan.

<PAGE>

Item 13.          Certain Relationships and Related Transactions

         For  information  concerning  the terms of the employment  agreements
entered into between us and Messrs.  Herbert  Kurinsky, Victor K. Kurylak,
Robert I.  Rabinowitz,  and Philip  D'Ambrisi and Ms. Mindy A. Horowitz,
Ms. Celeste M. Leonard and Mr. Jeffrey J. Fahs, the separation  agreements
entered into with Herbert  Kurinsky and Robert I. Rabinowitz,  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, 2006, and
fees billed for other services rendered by our independent auditors during those
periods.
<TABLE>
<S>                                       <C>                                  <C>

---------------------------------------- ------------------------------------- -------------------------------------
                                          Year Ended December 31, 2006                            Year Ended
                                                                                                  December 31, 2005
---------------------------------------- ------------------------------------- -------------------------------------

Audit Fees (1)                                                       $169,900                              $169,400
---------------------------------------- ------------------------------------- -------------------------------------

Audit-Related Fees (2)                                                $15,325                               $46,325
---------------------------------------- ------------------------------------- -------------------------------------

Tax Fees (3)                                                          $29,500                               $44,728
---------------------------------------- ------------------------------------- -------------------------------------

All Other Fees (4)                                                         $0                                    $0
---------------------------------------- ------------------------------------- -------------------------------------

Total                                                                $214,725                              $260,453
---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
<PAGE>

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

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

         Consistent with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent auditor. Prior to
engagement of the independent auditor for the next year's audit, management will
submit a detailed description of the audit and permissible non-audit services
expected to be rendered during that year for each of four categories of services
described 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.
<PAGE>

                                     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 30, 2007
beginning on page F-1 of this report.

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

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

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

Deferred tax assets:

              Year ended December 31, 2006      $ 3,578,522                   $     3,387                     $ 3,581,909
              Year ended December 31, 2005      $ 5,120,839                   $(1,542,317)                    $ 3,578,522
              Year ended December 31, 2004      $ 5,381,000                   $  (260,161)                    $ 5,120,839

Broker loan reserves:

              Year ended December 31, 2006      $ 1,085,135                   $  (277,600)                    $   807,535
              Year ended December 31, 2005      $ 1,402,631                   $  (317,496)                    $ 1,085,135
              Year ended December 31, 2004      $ 1,805,322                   $  (402,691)                    $ 1,402,631

</TABLE>

         3.       Exhibits

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


<PAGE>


                                   SIGNATURES

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

                                        FIRST MONTAUK FINANCIAL CORP.


                                        By  /s/ Victor K. Kurylak
                                           --------------------------
Dated:  April 16, 2007                     Victor K. Kurylak
                                           Chief Executive Officer and President

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


/s/ Victor K. Kurylak                                             April 16, 2007
-------------------------------------------
Victor K. Kurylak, Chief Executive Officer,
President and Director

/s/ Phillip D'Ambrisi                                             April 16, 2007
-------------------------------------------
Phillip D'Ambrisi, Chief Operating Officer
and Director


/s/ Celeste M. Leonard                                            April 16, 2007
-------------------------------------------
Celeste M. Leonard, Chief Compliance Officer
and Director


/s/ Mindy A. Horowitz                                             April 16, 2007
-------------------------------------------
Mindy A. Horowitz, Acting Chief Financial Officer
and Principal Accounting Officer


/s/ Ward R. Jones, Jr.                                            April 16, 2007
-------------------------------------------
Ward R. Jones, Jr., Director


/s/ Barry D. Shapiro                                              April 16, 2007
-------------------------------------------
Barry D. Shapiro, Director


/s/ David I. Portman                                              April 16, 2007
-------------------------------------------
David I. Portman, Director



<PAGE>


                                  EXHIBIT INDEX

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

---------------- --------------------------------------------------------------------------------------------
Exhibit No.                                              Description
2.1              Agreement  and Plan of Merger  dated as of February  10,  2005 by and among  First  Montauk
                 Financial  Corp.,  Olympic  Cascade  Financial  Corp.  and  FMFC  Acquisition   Corporation
                 (Previously filed as Exhibit 10.1 to our Current Report on Form
                 8-K dated February 11, 2005).

2.2              Amended and  Restated  Agreement  and Plan of Merger dated as of June 27, 2005 by and among
                 First Montauk  Financial  Corp.,  Olympic  Cascade  Financial  Corp.  and FMFC  Acquisition
                 Corporation (Previously filed as Exhibit 10.1 to our Current
                 Report on Form 8-K dated June 28, 2005).

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

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

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

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

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

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

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

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

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

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

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

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

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

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).
</TABLE>
<PAGE>


<TABLE>
<S>              <C>

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

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

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

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

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

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

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

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

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

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

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).

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.

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

21*              Subsidiary Companies

23.1*            Consent of Lazar, Levine & Felix.

31.1*            Certification of Chief Executive Officer and President

31.2*            Certification of Acting Chief Financial Officer

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

32.2 *           Certification of Mindy A. Horowitz pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
                 to Section 906 of the Sarbanes-Oxley Act of 2002.
----------------- --------------------------------------------------------------------------------------------
++ Denotes management contracts or compensation plans or arrangements in which
directors or executive officers are eligible to participate.
</TABLE>

<PAGE>


             Report of Independent Registered Public Accounting Firm


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

We have audited the accompanying consolidated statements of financial condition
of First Montauk Financial Corp. and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2006. We have also audited the schedules listed in the accompanying
index. These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules 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 schedules are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our 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 also includes
examining, on a test basis, evidence supporting amounts and disclosures in the
financial statements and schedules, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedules. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Montauk
Financial Corp. and subsidiaries at December 31, 2006, and 2005, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the schedules
presents fairly, in all material respects, the information set forth therein.




Morristown, New Jersey                   /s/ Lazar, Levine and Felix LLP
March 30, 2007



                                      F-1
<PAGE>


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


                                     FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                                                               December             December
                                                                                                 2006                 2005

ASSETS
Cash and cash equivalents                                                                     $1,145,751           $1,990,815
Due from clearing firm                                                                         4,988,747            4,756,646
Securities owned, at market value                                                                198,447              303,612
Prepaid expenses                                                                                 285,480              287,394
Employee and broker receivables - net of reserve for bad debt
 of $807,536 and $1,085,135 respectively                                                         343,491              309,199
Property and equipment - net                                                                     239,033              449,460
Other assets                                                                                     597,968              622,804
                                                                                               ----------          ----------
    Total assets                                                                              $7,798,917           $8,719,930
                                                                                               ==========          ==========

LIABILITIES
Accounts payable                                                                                 313,427              486,676
Accrued expenses                                                                                 995,426            1,373,354
Income taxes payable                                                                               4,167               32,167
Commissions payable                                                                            2,378,935            2,027,379
Securities sold, not yet purchased, at market value                                                  495                3,564
6% convertible debentures                                                                         25,000            1,250,000
Capital leases payable                                                                               820                8,555
Note payable                                                                                           -              200,000
Other liabilities                                                                                 67,156              110,384
                                                                                               ---------            ---------
    Total liabilities                                                                          3,985,426            5,492,079
                                                                                               ---------            ---------
Commitments and contingencies (See notes)

STOCKHOLDERS' EQUITY
Preferred stock, 3,929,898 shares authorized, $.10 par value,
   no shares issued and outstanding                                                                --                   --
Series A convertible preferred stock, 625,000 shares authorized, $.10 par value
   305,369 shares issued and outstanding; liquidation preference $1,526,845                       30,537               30,537
Series B convertible redeemable preferred stock, 445,102 shares authorized,
   $.10 par value, 197,824 shares issued and outstanding, liquidation
   preference:  $1,000,000                                                                        19,782               19,782
Common stock, no par value, 60,000,000 and 30,000,000 shares authorized,
   18,526,553 and 15,937,407 shares issued and outstanding, respectively                      11,646,620           10,444,110
Additional paid-in capital                                                                     1,930,810            1,930,810
Accumulated deficit                                                                           (9,814,258)          (9,197,388)
                                                                                              ----------           -----------
    Total stockholders' equity                                                                 3,813,491            3,227,851
                                                                                              ----------           -----------
    Total liabilities and stockholders' equity                                                $7,798,917           $8,719,930
                                                                                              ==========           ===========


                                       See notes to consolidated financial statements.

                                                            F-2
</TABLE>

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

                                             FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                                  CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                      Twelve months ended Dec 31
                                                                             2006                2005               2004
Revenues:

Commissions                                                               $39,920,168        $37,493,733        $42,732,238
Principal transactions                                                      4,079,243          5,578,820          9,058,259
Investment banking                                                          3,420,685          6,640,402          2,716,042
Interest and other income                                                   3,540,324          8,370,711          4,680,702
                                                                           ----------         ----------         ----------
     Total revenue                                                         50,960,420         58,083,666         59,187,241
                                                                           ----------         ----------         ----------
Expenses:

Commissions, employee compensation and benefits                            43,137,778         44,398,131         46,851,474
Executive separation                                                        1,151,266          1,432,937              --
Clearing and floor brokerage                                                1,527,675          1,926,005          2,466,027
Communications and occupancy                                                1,797,281          2,483,056          2,664,256
Legal matters and related costs                                             1,095,064          1,773,604          2,714,769
Other operating expenses                                                    2,982,665          3,467,972          3,489,425
Interest                                                                       78,248            100,123            284,093
                                                                           ----------         ----------         ----------
     Total expenses                                                        51,769,977         55,581,828         58,470,044
                                                                           ----------         ----------         ----------
Net income (loss) before income taxes                                        (809,557)         2,501,838            717,197
Provision (benefit) for income taxes                                           26,992             77,544            (13,305)
                                                                           ----------         ----------         -----------
   Net income (loss)                                                      $  (836,549)        $2,424,294          $ 730,502
   Preferred stock dividends                                                 (168,506)          (285,340)           (90,689)
                                                                           ----------         ----------         -----------
   Net income (loss) applicable to common stockholders                    $(1,005,055)        $2,138,954          $ 639,813
                                                                           ==========         ==========         ===========

Earnings(loss) per share:
  Basic                                                                       $ (0.06)            $ 0.15             $ 0.07
  Diluted                                                                     $ (0.06             $ 0.12             $ 0.04

Weighted average number of shares of stock outstanding:
  Basic                                                                    17,004,254         14,032,057          9,270,350
  Diluted                                                                  17,004,254         20,109,178         15,629,920





                                              See notes to consolidated financial statements.

                                                                     F-3
</TABLE>

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

                                                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                             FOR THE PERIOD FROM JANUARY 1, 2004 TO DECEMBER 31, 2006



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

Balances at January 1, 2004                 311,089    31,109           -      $  -          9,065,486    6,724,853        950,592

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

Increase in deferred compensation              -         -              -         -               -         154,464           -
Amortization of deferred compensation
Common stock issued in connection
   with legal settlements                      -         -              -         -             25,000       25,000           -
Issuance of restricted stock in connection
  with employment agreements                   -         -              -         -          1,300,000      741,000
Repurchase of common stock
Cancellation of treasury shares
Issuance of preferred stock in connection
   with separation agreement                   -         -           197,824     19,782           -            -           980,218
Conversion of preferred stock into
   common 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      1,930,810

Increase 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        197,824    $19,782     18,526,553  $11,646,620    $ 1,930,810
                                            =======   ========     ========== =========     ==========   ===========    ==========



                                                          See notes to consolidated financial statements.

                                                                              F-4
</TABLE>

<PAGE>
<TABLE>

                                        FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                    FOR THE PERIOD FROM JANUARY 1, 2004 TO DECEMBER 31, 2006
<S>                                                        <C>                    <C>          <C>        <C>        <C>

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

Balances at January 1, 2004                                $(11,678,659)          $ (115,334)     -      $   -      $ (4,087,439)

Increase in deferred compensation                                  -                (432,471)     -          -          (350,000)
Amortization of deferred compensation                              -                 158,924      -          -           158,924
Repurchase of common stock                                         -                    -      (60,217)   (21,162)       (21,162)
Cancellation of treasury shares                                    -                    -       60,217     21,162           -
Issuance of restricted stock in connection
   with employment agreements                                      -                    -         -          -           350,000
Conversion of preferred stock into
   common stock
Exercise of incentive stock options                                -                    -         -          -               558
Conversion of bonds into common stock                              -                    -         -          -           120,000
Net income                                                      730,502                 -         -          -           730,502
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      -          -           896,160
Common stock issued in connection
   with legal settlements                                          -                    -         -          -           25,000
Issuance of restricted stock in connection                                                                                  -
   with employment agreements                                      -                (741,000)     -          -              -
Issuance of preferred stock in connection
   with separation agreement                                       -                    -         -          -         1,000,000
Conversion of preferred stock into
   common stock
Exercise of incentive stock options                                -                    -         -          -           343,071
Exercise of warrants                                               -                    -         -          -           158,283
Conversion of bonds into common stock                              -                    -         -          -         1,765,000
Payment of preferred stock dividends                           (285,340)                -         -          -         (285,340)
Net income                                                    2,424,294                 -         -          -         2,424,294
                                                             -----------            ---------   --------   ---------   ----------
Balances at December 31, 2005                                (8,809,203)            (388,185)     -          -         3,227,851

Increase in deferred compensation                                  -                  76,266      -          -              -
Amortization of deferred compensation                              -                 272,373      -          -           272,373
Reclass to common stock                                            -                  39,546      -          -              -
Exercise of incentive stock options                                -                    -         -          -            33,504
Cashless exercise of incentive stock options                       -                    -         -          -              -
Cashless exercise of warrants                                      -                    -         -          -            22,211
Expired warrant obligation                                         -                    -         -          -            37,607
Conversion of bonds into common stock                              -                    -         -          -         1,225,000
Payment of preferred stock dividends                           (168,506)                -         -          -          (168,506)
Net loss                                                       (836,549)                -         -          -          (836,549)
                                                             -----------
Balances at December 31, 2006                              $ (9,814,258)              $ -         -          -       $ 3,813,491
                                                             ===========               =========  ========  =======   ==========


                                                  See notes to consolidated financial statements

                                                                         F-5
</TABLE>
<PAGE>

<TABLE>
<S>                                                                        <C>            <C>                 <C>
                                   FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                   Twelve months ended Dec 31
                                                                             2006            2005              2004
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES

 Net income (loss)                                                          $ (836,549)     $ 2,424,294         $ 730,502

Adjustments to reconcile net income (loss) to net cash (used in)
    provided by operating activities:
 Depreciation and amortization of property and equipment                       244,500          384,169           538,549
 Amortization of stock compensation and deferred costs                         341,228        1,064,619           223,708
 Amortization of deferred income                                                --           (5,105,116)         (875,008)
 Common stock issued in legal settlement                                        --               25,000           --
 Preferred shares issued in connection with separation agreement                --            1,000,000           --
 Loss on disposition of peroperty and equipment                                 --              --                  4,692
 Note payable issued in connection with separation agreement                  (200,000)         200,000           --
 Increase (decrease) in cash attributable to changes in assets
 and liabilities:
 Due from clearing firm                                                       (232,100)       1,059,173          (596,552)
 Securities owned                                                              105,165           67,108          (201,186)
 Prepaid expenses                                                                1,914           53,427           113,520
 Employee and broker receivables                                               (33,202)         239,041           100,402
 Income taxes receivable                                                             -           40,525           (37,900)
 Other assets                                                                  (44,020)         101,395           360,461
 Securities sold, not yet purchased                                             (3,069)        (170,762)          104,996
 Commissions payable                                                           351,556         (472,414)       (1,179,903)
 Accounts payable                                                             (173,249)        (128,108)         (257,789)
 Accrued expenses                                                             (177,928)         295,169          (725,788)
 Income taxes payable                                                          (28,000)         (12,379)          (63,365)
 Other liabilities                                                              15,500          (70,113)         (259,836)
                                                                             ----------       ----------       -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                           (668,254)         995,028        (2,020,497)
                                                                             ----------       ----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property and equipment                                           (34,073)         (42,720)         (212,000)
                                                                             ----------       ----------       -----------
NET CASH USED IN INVESTING ACTIVITIES                                          (34,073)         (42,720)         (212,000)
                                                                             ----------       ----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Payment of capital lease                                                       (7,735)         (53,905)         (153,961)
 Repurchase of common shares                                                      --              --              (21,162)
 Proceeds from exercise of incentive stock option                               33,504          343,071               558
 Payment of preferred stock dividends                                         (168,506)        (285,340)            --
                                                                             ----------       ----------       -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                           (142,737)           3,826          (174,565)
                                                                             ----------       ----------       -----------
Net (decrease) increase in cash and cash equivalents                          (845,064)         956,134        (2,407,062)
Cash and cash equivalents at beginning of period                             1,990,815        1,034,681         3,441,743
                                                                             ----------       ----------       -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 $ 1,145,751      $ 1,990,815       $ 1,034,681
                                                                             ==========       ==========       ===========
Supplemental disclosures of cash flow information:
 Cash paid during the period for:
 Interest                                                                  $   106,739        $ 133,967         $ 212,080
                                                                             ==========       ==========       ===========
Income taxes                                                                   128,020        $  92,473         $  67,960
                                                                             ==========       ==========       ===========
Noncash financing activity:
 Equipment acquired through capital lease financing                               --              --             $ 69,585
 Proceeds from exercise of warrants                                           $ 22,211        $ 158,283             --
 6% convertible debentures converted into common stock                     $ 1,225,000      $ 1,765,000         $ 120,000


                                    See notes to consolidated financial statements.

                                                           F-6

</TABLE>
<PAGE>


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


NOTE 1 -          NATURE OF BUSINESS

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

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

NOTE 2 -          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Basis of Presentation

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

                  Revenue Recognition

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

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

                  Advertising

                  Advertising costs are expensed as incurred and totaled
                  $52,259, $68,924, and $114,829 in 2006, 2005, and 2004,
                  respectively.

                  Property and Equipment

                  Furniture, equipment and leasehold improvements are stated at
                  cost. Depreciation on furniture and equipment is computed over
                  the estimated useful lives of the assets, ranging from three
                  to ten years. Capitalized 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 on the straight-line method for
                  financial reporting purposes and on an accelerated basis for
                  income tax purposes.


                                      F-7

<PAGE>

                  Cash Equivalents

                  For purposes of the Statement of Cash Flows, the Company
                  considers all highly liquid debt instruments purchased with an
                  original maturity of three months or less to be cash
                  equivalents. Cash equivalents consisted of money market funds
                  at December 31, 2006 and 2005.

                  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). For 2006,
                  the basic and diluted calculation is the same due to losses
                  incurred and accordingly the result of including potentially
                  dilutive securities is anti-dilutive.
<TABLE>
<S>                                                  <C>                       <C>                          <C>
                  In accordance with SFAS 128, the following table reconciles
                  basic shares outstanding to fully diluted shares outstanding:

                                                                     Twelve months ended December 31,
                                                          2006                      2005                      2004
                                                          ----                      ----                      ----
     Numerator - basic:

     Net income (loss)                                $(836,549)                $2,424,294                  $730,502
     Deduct:  dividends  earned/paid  during
     the year                                          (168,506)                  (285,340)                  (90,689)
                                                     ------------               -----------               ------------

     Numerator  for  basic  earnings  (loss)
     per share                                      $(1,005,055)                $2,138,954                  $639,813
                                                     ===========                ===========               ============

     Numerator - diluted:

     Numerator  for  basic  earnings  (loss)
     per share                                      $(1,005,055)                $2,138,954                  $639,813
     Add: Preferred stock dividends                          --                    285,340                        --
     Add: Convertible debenture interest                     --                     86,582                    45,735
                                                     -----------                -----------               -------------

     Numerator for diluted  earnings  (loss)
     per share                                      $(1,005,055)                $2,510,876                  $685,548
                                                     ===========                ===========               =============

     Denominator:
     Weighted average common shares
     outstanding                                     17,004,254                 14,032,057                 9,270,350
     Effect of dilutive securities:
       Stock options and warrants                            --                  1,160,173                   235,820
       Restricted shares                                     --                    438,708                    93,750
       Convertible preferred stock Series B                  --                  1,978,240                        --
       Convertible debentures                                --                  2,500,000                 6,030,000
                                                     -----------                -----------               -------------
     Denominator   for   diluted    earnings         17,004,254                 20,109,178                15,629,920
     (loss) per share
                                                     ===========                ===========               =============


                                      F-8
<PAGE>
</TABLE>
                  The following securities, presented on a common share
                  equivalent basis, have been excluded from the per share
                  computations because they are antidilutive:
<TABLE>
<S>                                                  <C>                    <C>                           <C>

                                                                        Year ended December 31,
                                                          2006                    2005                          2004
                                                          ----                    ----                          ----

       Stock Options                                 2,137,402               1,934,844                     3,514,998
       Warrants                                        407,518                  82,409                     3,385,946
       Convertible debt                                 25,000                      --                            --
       Restricted Shares                               100,000                      --                            --
       Convertible preferred stock                   2,283,609                 610,738                       610,738
</TABLE>

                  Use of Estimates

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

                  Long-lived Assets

                  The Company evaluates impairment losses on long-lived assets
                  used in operations, primarily property and equipment, when
                  events and circumstances indicate that the carrying value of
                  the assets might not be recoverable in accordance with FAS No.
                  144 "Accounting for the Impairment or Disposal of Long-lived
                  Assets". For purposes of evaluating the recoverability of
                  long-lived assets, the undiscounted cash flows estimated to be
                  generated by those assets would be compared to the carrying
                  amounts of those assets. If and when the carrying values of
                  the assets exceed their fair values, the related assets will
                  be written down to fair value. The Company has determined that
                  there was no impairment for the years ended December 31, 2006
                  and 2005.

                  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.



                                      F-9

<PAGE>

                  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.

                  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.

                  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.

                  Prior to January 1, 2006, the Company accounted for similar
                  employee transactions in accordance with APB 25 which employed
                  the intrinsic value method of measuring compensation cost.
                  Accordingly, compensation expense was not recognized for
                  employee fixed stock options if the exercise price of the
                  option equaled or exceeded the fair value of the underlying
                  stock at the grant date. While FAS 123, for employee options,
                  encouraged recognition of the fair value of all stock-based
                  awards on the date of grant as expense over the vesting
                  period, companies were permitted to continue to apply the
                  intrinsic value-based method of accounting prescribed by APB
                  25 and disclose certain pro-forma amounts as if the fair value
                  approach of FAS 123 had been applied. In December 2002, FAS
                  No. 148, Accounting for Stock-Based Compensation-Transition
                  and Disclosure, an amendment of FAS 123, was issued, which, in
                  addition to providing alternative methods of transition for a
                  voluntary change to the fair value method of accounting for
                  stock-based employee compensation, required more prominent
                  pro-forma disclosures in both the annual and interim financial
                  statements. The Company complied with these disclosure
                  requirements for all applicable periods prior to January 1,
                  2006.



                                      F-10

<PAGE>

                  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 year ended December 31, 2006 include
                  share-based compensation expense for the employee options and
                  shares totaling approximately $31,000 and is included in the
                  Consolidated Statements of Operations within commissions,
                  employee compensation and benefits. No income tax benefit has
                  been recognized in the income statement for share-based
                  compensation arrangements as the Company has provided for 100%
                  valuation allowance on net deferred tax assets. Stock
                  compensation expense for employee options and shares recorded
                  under APB 25 in the Consolidated Statements of Operations for
                  the twelve months ended December 31, 2005 totaled $767,000.

                  Employee stock options compensation expense in 2006 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.

                  Accounting for Non-employee Awards:

                  The Company accounted 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 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
                  $36,000 for the twelve months ended December 31, 2006 compared
                  to $129,000 and $42,000 for the twelve months ended December
                  31, 2005 and 2004, respectively. These amounts are included in
                  Consolidated Statements of Operations within commissions,
                  employee compensation and benefits.


                                      F-11
<PAGE>

                  The weighted average estimated fair value of all stock options
                  granted during the twelve months ended December 31, 2006, 2005
                  and 2004 was $0.56, $0.41 and $0.28, respectively. The fair
                  value of options at the date of grant was estimated using the
                  Black-Scholes option pricing model. During 2006, the Company
                  took into consideration guidance under FAS 123(R) and SEC
                  Staff Accounting Bulletin No. 107 ("SAB 107") when reviewing
                  and updating assumptions. The expected volatility is based
                  upon historical volatility of our 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. Previously such assumptions were determined
                  based on historical data.

                  The assumptions made in calculating the fair values of all
                  options are as follows:
<TABLE>
<S>                                                          <C>                      <C>                       <C>

                                                              2006                     2005                     2004
                                                              ----                     ----                     ----

                 Expected volatility                           72%                      68%                     102%
                 Expected dividend yield                        0%                       0%                       0%
                 Risk-free interest rate               3.71%-4.82%              3.71%-4.35%              1.01%-3.72%
                 Expected term (in years)                1-4 years                1-5 years                1-5 years
</TABLE>


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

                  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 and 2004 comparable
                  periods:


                                      F-12
<PAGE>
<TABLE>
                  <S>                                                   <C>                        <C>

                                                                               Years ended December 31,
                                                                            2005                       2004
                                                                            ----                       ----

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

                  Pro forma net income - basic                           1,840,272                    479,356

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

                  Pro forma net income - diluted                        $2,212,194                   $525,091

                  Net income per share:

                  Basic - as reported                                        $0.15                      $0.07
                  Diluted - as reported                                      $0.12                      $0.04
                  Basic - pro forma                                          $0.13                      $0.05
                  Diluted - pro forma                                        $0.11                      $0.03
                                                                         =========                  ==========
</TABLE>

                  Recent Pronouncements Affecting the Company

                  In September 2006, the SEC staff issued Staff Accounting
                  Bulletin No. 108, "Considering the Effects of Prior Year
                  Misstatements when Quantifying Misstatements in Current Year
                  Financial Statements." SAB 108 was issued in order to
                  eliminate the diversity of practice surrounding how public
                  companies quantify financial statement misstatements.

                  Traditionally, there have been two widely recognized methods
                  for quantifying the effects of financial statement
                  misstatements: the "roll-over" method and the "iron curtain"
                  method. The roll-over method focuses primarily on the impact
                  of a misstatement on the income statement-including the
                  reversing effect of prior year misstatements-but its use can
                  lead to the accumulation of misstatements in the balance
                  sheet. The iron-curtain method, on the other hand, focuses
                  primarily on the effect of correcting the period-end balance
                  sheet with less emphasis on the reversing effects of prior
                  year errors on the income statement.

                  In SAB 108, the SEC staff established an approach that
                  requires quantification of financial statement misstatements
                  based on the effects of the misstatements on each of the
                  company's financial statements and the related financial
                  statement disclosures. This model is commonly referred to as a
                  "dual approach" because it requires quantification of errors
                  under both the iron curtain and the roll-over methods.


                                      F-13
<PAGE>

                  SAB 108 permits existing public companies to initially apply
                  its provisions either by (i) restating prior financial
                  statements as if the "dual approach" had always been used or
                  (ii) recording the cumulative effect of initially applying the
                  "dual approach" as adjustments to the carrying value of assets
                  and liabilities as of January 1, 2006 with an offsetting
                  adjustment recorded to the opening balance of retained
                  earnings.

                  Statement of Financial Accounting Standard 157, Fair Value
                  Measurements ("SFAS 157"): On September 15, 2006, the
                  Financial Accounting Standard Board issued a standard that
                  provides enhanced guidance for using fair value to measure
                  assets and liabilities. The standard applies whenever other
                  standards require (or permit) assets or liabilities to be
                  measured at fair value. The standard does not expand the use
                  of fair value in any new circumstances. This Statement is
                  effective for financial statements issued for fiscal years
                  beginning after November 15, 2007, and interim periods within
                  those fiscal years. Earlier application is encouraged,
                  provided that the reporting entity has not yet issued
                  financial statements for that fiscal year, including financial
                  statements for an interim period within that fiscal year. The
                  Company will adopt this pronouncement effective for periods
                  beginning January 1, 2008. We are currently evaluating the
                  impact of adopting this pronouncement on our consolidated
                  financial statements.

                  In September 2006, FASB issued SFAS No. 158, "Employers'
                  Accounting for Defined Benefit Pension and Other
                  Postretirement Plans - an amendment of FASB Statements No. 87,
                  88, 106 and 132(R)". SFAS No. 158 requires an employer to
                  recognize the funded status of a defined benefit
                  postretirement plan as an asset or liability in its statement
                  of financial position and to recognize changes in that funded
                  status in the year in which the changes occur through
                  comprehensive income. The funded status of a benefit plan is
                  defined as the difference between the fair value of the plan
                  assets and the plan's benefit obligation. For a pension plan
                  the benefit obligation is the projected benefit obligation and
                  for any other postretirement benefit plan, such as a retiree
                  health care plan, the benefit obligation is the accumulated
                  postretirement benefit obligation. SFAS No. 158 requires an
                  employer to recognize as a component of net periodic benefit
                  costs pursuant to SFAS No. 87 "Employers' Accounting for
                  Pensions". SFAS No. 158 also requires an employer to measure
                  the funded status of a plan as of the date of its year-end.
                  Additional footnote disclosure is also required about certain
                  effects on net periodic benefit costs for the next year that
                  arise from the delayed recognition of gains or losses, prior
                  service costs or credits, and transition asset or obligation.
                  Except for the year-end measurement requirement, SFAS No. 158
                  is effective for the year ending December 31, 2006. The
                  adoption of this Statement in 2006 did not have a material
                  impact on the financial condition or results of operation of
                  the Company.

                  FSP FAS 123(R)-5 was issued on October 10, 2006. The FSP
                  provides that instruments that were originally issued as
                  employee compensation and then modified, and that modification
                  is made to the terms of the instrument solely to reflect an
                  equity restructuring that occurs when the holders are no
                  longer employees. No change in the recognition or the
                  measurement (due to a change in classification) of those
                  instruments will result if both of the following conditions
                  are met: (a). There is no increase in fair value of the award
                  (or the ratio of intrinsic value to the exercise price of the



                                      F-14
<PAGE>

                  award is preserved, that is, the holder is made whole), or the
                  antidilution provision is not added to the terms of the award
                  in contemplation of an equity restructuring; and (b). All
                  holders of the same class of equity instruments (for example,
                  stock options) are treated in the same manner. The provisions
                  in this FSP shall be applied in the first reporting period
                  beginning after the date the FSP is posted to the FASB
                  website. We will adopt this FSP from its effective date. We
                  currently do not believe that its adoption will have any
                  impact on our consolidated financial statements.

                  In July 2006, the Financial Accounting Standards Board (FASB)
                  issued FASB Interpretation No. 48, Accounting for Uncertainty
                  in Income Taxes--an interpretation of FASB Statement No. 109
                  (FIN 48), which provides clarification related to the process
                  associated with accounting for uncertain tax positions
                  recognized in consolidated financial statements. FIN 48
                  prescribes a more-likely-than-not threshold for financial
                  statement recognition and measurement of a tax position taken,
                  or expected to be taken, in a tax return. FIN 48 also provides
                  guidance related to, among other things, classification,
                  accounting for interest and penalties associated with tax
                  positions, and disclosure requirements. We are required to
                  adopt FIN 48 on January 1, 2007, although early adoption is
                  permitted. We are currently evaluating the impact of adopting
                  FIN 48 on our consolidated financial statements.

                  In February 2007, the FASB issued SFAS No. 159, "The Fair
                  Value Option for Financial Assets and Financial Liabilities",
                  which permits entities to measure many financial instruments
                  and certain other items at fair value that are not currently
                  required to be measured at fair value. An entity would report
                  unrealized gains and losses on items for which the fair value
                  option has been elected in earnings at each subsequent
                  reporting date. The objective is to improve financial
                  reporting by providing entities with the opportunity to
                  mitigate volatility in reported earnings caused by measuring
                  related assets and liabilities differently without having to
                  apply complex hedge accounting provisions. The decision about
                  whether to elect the fair value option is applied instrument
                  by instrument, with a few exceptions; the decision is
                  irrevocable; and it is applied only to entire instruments and
                  not to portions of instruments. SFAS No. 159 requires
                  disclosures that facilitate comparisons (a) between entities
                  that choose different measurement attributes for similar
                  assets and liabilities and (b) between assets and liabilities
                  in the financial statements of an entity that selects
                  different measurement attributes for similar assets and
                  liabilities. SFAS No. 159 is effective for financial
                  statements issued for fiscal years beginning after November
                  15, 2007. Upon implementations, an entity shall report the
                  effect of the first remeasurement to fair value as a
                  cumulative effect adjustment to the opening balance of
                  retained earnings. Since the provisions of SFAS No. 159 are
                  applied prospectively, any potential impact will depend on the
                  instruments selected for fair value measurement at the time of
                  implementation. The Company is currently evaluating the impact
                  of adopting this pronouncement on our consolidated financial
                  statements.

                  Reclassifications

                  Certain reclassifications have been made to 2005 and 2004
                  consolidated financial statements to conform to 2006
                  presentation.


                                      F-15
<PAGE>

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

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

                                                                               December 31,
                                                                   2006                           2005
                                                                   ----                           ----

                                                                        Sold not yet                   Sold not yet
                                                             Owned         purchased         Owned        purchased

                  Corporate stocks                         $97,941         $     495       $48,661              $--
                  U.S. government agency and
                  municipal obligations                      6,621                --         2,677               --
                  Corporate bonds                               --                --       130,083            1,964
                  Other                                     93,885                --       122,191            1,600
                                                       ------------ ----------------- ------------- ----------------
                                                          $198,447         $     495      $303,612           $3,564
                                                       ============ ================= ============= ================
</TABLE>

                  Securities owned and securities sold, not yet purchased
                  consist of trading securities at quoted market values. The
                  Company also owns investment securities, consisting of shares
                  of common stock and common stock purchase warrants, some of
                  which are publicly offered and can be sold and some of which
                  cannot be publicly offered or sold until registered under the
                  Securities Act of 1933. At December 31, 2006 and 2005,
                  investment securities consist of stock purchase warrants and
                  common stock at an estimated total fair value of $92,483 and
                  $121,991 respectively.


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

                                                                                     December 31,

                                                                            2006                       2005
                                                                            ----                       ----

                  Commission advances                                   $320,329                   $293,043
                  Forgivable loans                                       220,425                    151,651
                  Other loans                                            610,272                    949,640
                                                                      -----------               ------------
                                                                       1,151,026                  1,394,334
                  Less: reserve for bad debts                           (807,535)                (1,085,135)
                                                                      -----------               ------------
                                                                      -----------               ------------
                                                                        $343,491                   $309,199
                                                                      ===========               ============
</TABLE>

                  The Company has arrangements with certain registered
                  representatives to forgive their loans if they remain licensed
                  with the Company for an agreed upon period of time, generally
                  one to five years, or meet specified performance goals. The
                  loans are being amortized to commission expense for financial
                  reporting purposes over the term of the loan. Loan
                  amortization charged to compensation was $187,109, $122,155,
                  and $112,171 in 2006, 2005, and 2004, 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.


                                      F-16
<PAGE>

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

                                                                       December 31,
                                                                                                  Estimated
                                                                   2006             2005         Useful Life
                                                                   ----             ----         -----------
                  Computer and office equipment              $2,903,760       $2,873,705               3 to 7 years
                  Furniture and fixtures                      1,697,630        1,693,612              7 to 10 years
                  Leasehold improvements                        807,227          807,227              Term of lease
                                                            ------------      ----------
                                                              5,408,617        5,374,544
                  Less: accumulated depreciation
                  and amortization expense                   (5,169,584)      (4,925,084)
                                                            ------------      -----------
                                                               $239,033         $449,460
                                                            ============      ===========
</TABLE>

                  Depreciation and amortization expense was $244,500, $384,169
                  and $538,549, in 2006, 2005 and 2004, respectively.


NOTE 6 -          OTHER ASSETS


                  December 31,
<TABLE>
                 <S>                                                              <C>                 <C>

                  Other assets consist of the following:                              2006                2005
                                                                                      ----                ----

                  Commissions and concessions receivable                          $425,592            $374,185
                  Deferred financing costs-net                                         810              69,868
                  Security deposits                                                153,592             144,406
                  Other                                                             17,974              34,345
                                                                                  ---------          -----------
                                                                                  $597,968            $622,804
                                                                                  =========          ===========
</TABLE>

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

NOTE 7 -          DEFERRED INCOME

                  The Company received cash advances totaling $7,750,000 over
                  the four-year period between 2000 and 2004 in accordance with
                  an agreement with its former clearing firm, Fiserv. All
                  advances were recorded as deferred income and were being
                  amortized to earnings over the term of the 10-year agreement.
                  In April 2005 the agreement with Fiserv was terminated and the
                  remaining unamortized cash advance of $4,886,000 was
                  recognized as income. Amortization of approximately
                  $5,105,000, and $875,000 in 2005 and 2004, respectively, was
                  included in Interest and Other Income in the Consolidated
                  Statements of Operations. Advances were subject to income
                  taxes in the year of receipt.

NOTE 8 -          6% CONVERTIBLE DEBENTURES

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


                                      F-17
<PAGE>

                  In October 2004, holders of $120,000 of the subordinated
                  convertible debentures presented their debentures to the
                  Company for conversion. The Company issued 240,000 shares of
                  common stock and retired $120,000 of the debentures. During
                  2005, holders of $1,765,000 of the 6% subordinated convertible
                  debentures presented their debentures to the Company for
                  conversion. The Company issued 3,530,000 shares of common
                  stock and retired $1,765,000 of the debentures.

                  During 2006, $35,000 of the Company's subordinated convertible
                  debentures were presented to the Company for conversion. The
                  Company issued 70,000 shares and retired $35,000 of the
                  debentures. 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 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 is
                  $25,000 and is due to mature in 2007. In 2006, the Company
                  paid $35,811 in interest to holders of the convertible
                  debentures. In 2005 and 2004, the Company paid $111,567 and
                  $176,943, respectively in interest to holders of the
                  convertible debentures.

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

                                                                                              December 31,
                  Accrued expenses consist of the following:                             2006               2005
                                                                                         ----               ----

                  Accrued litigation costs                                           $237,000           $751,331
                  Accrued penalties and fines                                              --             50,000
                  Accrued payroll                                                     484,941            340,977
                  Accrued separation costs                                            200,000                 --
                  Accrued professional fees                                           167,500            154,250
                  Other accrued expenses                                              105,985             76,796
                                                                                   -----------        -----------
                                                                                   $1,195,426         $1,373,354
                                                                                   ===========        ===========
</TABLE>




                                      F-18
<PAGE>

NOTE 10 -         INCOME TAXES

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

                                                                            Year ended December 31,
                                                              2006                    2005                  2004
                                                              ----                    ----                  ----
                  Currently payable
                  (refundable):
                    Federal                                $    -                  $    -              $     -
                    State                                   27,000                  78,000              (13,000)
                                                           --------                -------             ----------
                                                            27,000                  78,000              (13,000)
                                                           --------                -------             ----------


                  Deferred:
                    Federal                                      -                       -                     -
                    State                                        -                       -                     -
                                                                 -                       -                     -
                                                           --------                -------             -----------
                  Provision (benefit) for                  $27,000                 $78,000             $(13,000)
                  income taxes
                                                           ========                ========            ===========
</TABLE>

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

                                                                                  Year ended December 31,

                                                                            2006             2005            2004
                                                                            ----             ----            ----

                  Expected federal tax benefit at
                    statutory rate                                  $    (275,000)         $851,000      $ 244,000
                  State taxes, net of federal tax effect                   18,000            51,000         (7,000)
                  Non-deductible expenses                                  43,000           408,000         10,000
                  Increase (decrease) in valuation allowance                3,000        (1,542,000)      (260,000)
                  Other reserves not deductible                           238,000           310,000             --
                                                                    --------------      ------------      ----------
                  Provision (benefit) for income taxes              $      27,000         $  78,000      $ (13,000)
                                                                    ==============      ============      ===========
</TABLE>





                                      F-19

<PAGE>

                  The tax effects of the temporary differences that give rise to
                  significant portions of the deferred tax assets and
                  liabilities as of December 31, 2006 and 2005 are:
<TABLE>
                  <S>                                                            <C>                    <C>

                                                                                   Year ended December 31,

                                                                                  2006                  2005
                                                                                  ----                  ----
                  Deferred tax assets:
                    Reserves and allowances                                $   351,000           $   723,000
                    Federal tax loss carryforwards                           2,233,000             1,741,000
                     State tax loss carryforwards                              528,000               508,000
                    Accrued and stock-based compensation                       418,000               387,000
                     Other                                                      52,000               220,000
                                                                            -----------           -----------
                  Subtotal                                                   3,582,000             3,579,000
                  Valuation allowance                                       (3,582,000)           (3,579,000)
                                                                            ----------            -----------
                   Net deferred tax assets                                 $      --             $      --
                                                                            ==========            ===========
</TABLE>

                  The Company has determined that, based upon available
                  information, the probability of utilizing its deferred tax
                  assets does not meet the "more likely than not" test under
                  SFAS 109. As such, a 100% valuation allowance has been
                  provided against deferred tax assets as of December 31, 2006
                  and 2005.

                  The Company and its subsidiaries file a consolidated federal
                  tax return and separate state returns. At December 31, 2006,
                  the Company has approximately $6,566,000 and $8,795,000 of
                  federal and state operating loss carryforwards, respectively,
                  available to offset future taxable income. These losses expire
                  at various dates through 2026.

NOTE 11 -         COMMITMENTS AND CONTINGENT LIABILITIES

                  Operating Leases:

                  The Company leases office facilities and equipment under
                  operating leases expiring at various dates through 2010.
                  Certain leases require the Company to pay increases in real
                  estate taxes, operating costs and repairs over certain base
                  year amounts. Operating lease expense for the years ended
                  December 31, 2006, 2005 and 2004 was approximately $886,880,
                  $989,000, and $1,154,000, respectively.

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

                            Year ending December 31,

                                    2007                  $       893,308
                                    2008                          863,148
                                    2009                          620,989
                                    2010                           50,762
                                    2011 and beyond                  --
                                                                ---------
                                                              $ 2,428,207


                                      F-20
<PAGE>

                  New Lease Agreement:

                  On September 22, 2006, FMSC, as tenant, IPofA Water View, LLC,
                  a Delaware limited liability company and an affiliate of Mr.
                  Okun, as landlord, entered into a Deed of Lease Agreement
                  ("Okun Lease") for general office space consisting of
                  approximately 29,800 useable square feet located at
                  10 Highway 35, Red Bank, New Jersey. The Company originally
                  entered into the Okun Lease in connection with the merger with
                  the Okun Purchasers for the purpose of using the leased
                  premises as its corporate headquarters and general office
                  space for its business operations. The Okun Lease is for a
                  term of ten years (120 months) with a commencement date
                  of September 22, 2006. However, since the landlord was unable
                  to give the Company possession on that date, the commencement
                  date would be adjusted to the date the Company was first given
                  possession of the leased premises, and the expiration date
                  would be adjusted to reflect the term of the Okun Lease.
                  Pursuant to the Okun Lease, the base rent will be $61,090 per
                  month plus taxes and operating expenses for the entire 10 year
                  term. The Company's current lease at its corporate
                  headquarters provides for monthly rent payments of $50,762 and
                  is scheduled to expire on January 31, 2010.

                  As part of the pending lawsuit which the Company filed against
                  Mr. Okun and certain affiliates of Mr. Okun, in the New Jersey
                  Superior Court, the Company is seeking to void the Okun Lease.
                  For a further discussion, see Note 17.

                  Master Services Agreement

                  On January 4, 2007, the Company entered into a master services
                  agreement with an outside entity for development of certain
                  software, data integration and business processing improvement
                  consulting services.  The term of the agreement is for a
                  minimum of 3 years and under the agreement the Company will
                  pay $480,000 over an initial 12 month period and then $20,000
                  a month thereafter.

                  Employment Agreements:

                  Effective February 1, 2005, Mr. Victor K. Kurylak, the
                  President and Chief Operating Officer, was appointed to become
                  the Chief Executive Officer of the Company and FMSC. The
                  Company entered into an employment agreement with Mr. Kurylak,
                  which superseded his existing agreement, and allowed for
                  issuance, as a bonus payment for the Company's performance for
                  the year ended December 31, 2004, and in consideration of his
                  assuming the position of Chief Executive Officer, 1,000,000
                  shares of the Company's common stock. In the event of
                  termination without cause, the CEO is entitled to a severance
                  payment consisting of accrued compensation, benefit
                  continuation and payment of base salary for the greater of
                  three months or the unexpired term. Based on the change of
                  control provision of Mr. Kurylak's employment agreement, all
                  outstanding restricted stock grants immediately vested in June
                  2006.

                  In August 2006, the Company hired a new Chief Operating
                  Officer with employment terms, which provide him with an
                  annual base salary of $250,000 and bonuses of $200,000 for
                  2006 and $100,000 each year through December 31, 2008,
                  provided he is still employed by the Company at the end of
                  each year. While the terms of his employment have not yet been
                  reflected in a formal employment agreement, the Company's
                  intent is 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.

                  In August 2006, FMSC entered into an employment agreement with
                  a new Chief Compliance Officer, which provides her with an
                  annual base salary of $200,000 and bonuses of $200,000 for
                  2006 and $100,000 each year through December 31, 2008,
                  provided she is still employed by the Company at the end of
                  each year.


                                      F-21
<PAGE>

                  In November 2006, FMSC entered into an employment agreement
                  with a new Chief Supervisory Officer, which provides him with
                  an annual base salary of $140,000 for 2006 and 2007 increasing
                  to $150,000 for 2008 and bonuses of $100,000 each year through
                  December 31, 2007, provided he is still employed by the
                  Company at the end of each year.

                  In January 2007, FMSC entered into an employment agreement
                  with a new Executive Vice President, Secretary and General
                  Counsel which provides 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.

                  Separation Agreements:

                  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
                  will continue to provide him and his wife with medical
                  insurance coverage for 48 months and an automobile allowance
                  of $600 for 36 months. In addition, pursuant to his employment
                  agreement all stock grants 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 will be 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. He and the Company entered into an eleven month
                  consulting agreement, effective February 1, 2007, for which he
                  will also be paid additional consideration for his continued
                  cooperation in providing assistance to the Company in the
                  transition of his responsibilities to new personnel.




                                      F-22
<PAGE>

                  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.

                  As of December 31, 2006, 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.

                  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.

                  SEC Investigation

                  The SEC is investigating whether FMSC, and/or certain former
                  employees failed reasonably to supervise the securities
                  trading and research activities of a former analyst. The
                  investigation covered the time period from approximately
                  March 2000 until January 2004 when the Capital Markets Group
                  was dissolved and the analyst resigned. The SEC has recently
                  advised us that it intends to recommend bringing an
                  enforcement proceeding against FMSC, one of its former
                  principals and another former employee for failing to
                  supervise reasonably. The SEC will be seeking a monetary
                  penalty and an order suspending the former principal from
                  acting in a supervisory capacity for a period of time. FMSC is
                  entitled to make a Wells submission to the SEC staff and
                  intends to make such a submission or otherwise attempt to
                  negotiate a resolution with the SEC. It is believed that any
                  resolution will include a monetary penalty which will not have
                  a materially adverse effect on our financial statements.


                                      F-23
<PAGE>

                  NASD Enforcement Sales Practice Investigation

                  The NASD Department of Enforcement is conducting an
                  investigation of the sales practice activities of certain
                  individuals who were formerly registered representatives of
                  FMSC, as well as the supervision of those activities by FMSC.
                  On April 9, 2007, NASD notified FMSC through a "Wells call"
                  that it intends to file an administrative action against it in
                  connection with an alleged failure to reasonably supervise the
                  activities of three former registered representatives of FMSC.
                  NASD has not indicated what penalties it would seek in such an
                  action, monetary or otherwise. FMSC is entitled to make a
                  Wells submission to the NASD Staff and currently intends to
                  make such a submission or otherwise attempt to negotiate a
                  resolution with NASD. It is believed that any resolution will
                  include a monetary penalty which will not have a materially
                  adverse effect on our financial statements.

                  Merger Agreement, Termination and Subsequent Litigation

                  See Note 17 for a complete description of the merger
                  agreement, its termination and subsequent litigation.

NOTE 12-          CLEARING AGREEMENT

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

                  Contemporaneously, on April 21, 2005, Montauk Financial
                  Group entered into a clearing agreement with National
                  Financial Services, LLC ("NFS") to clear its brokerage
                  business and to custody firm and customer funds and
                  securities.  The clearing agreement became effective on
                  April 21, 2005. The new clearing agreement has an initial
                  term of eight years and will automatically renew for
                  successive one year terms, unless either party provides a
                  notice of termination prior to the expiration of the initial
                  or any renewal term. In the event of an early termination of
                  the clearing agreement, other than for a change in control
                  of the Company, Montauk Financial Group will pay NFS a
                  termination fee of between $2 million in the first year of the
                  agreement and declining to $250,000 in the last year of the
                  agreement, depending on if and when such early termination
                  occurs. During the second quarter of 2006, Montauk Financial
                  Group signed an amendment to the clearing agreement with NFS,
                  adopting, among other things, a schedule of reduced clearing
                  rates. In addition, Montauk Financial Group agreed to a change
                  in the termination fee whereby Montauk Financial Group
                  will pay NFS between $5 million in the first year of the
                  agreement and declining to $750,000 in the last year of the
                  agreement.

                  During the second quarter of 2006, Montauk Financial Group
                  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 Montauk Financial Group 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 Montauk Financial Group among various expense
                  and revenue categories.


                                      F-24
<PAGE>

NOTE 13-          CAPITAL LEASE OBLIGATIONS

                  The Company leases certain equipment under non-cancelable
                  lease agreements, which meet the criteria for capitalization.
                  The cost, accumulated depreciation and net book value of
                  equipment under the capital leases as of December 31, 2006
                  were $43,434, $27,279, and $16,155, respectively.

                  Future minimum lease payments under capital lease obligations
                  at December 31, 2006 are as follows:

                  Year ending December 31, 2006:
                  Total minimum payments                                 $829
                  Less amount representing interest                        (9)
                                                                         -----
                                                                         -----
                  Total principal                                        $820
                                                                         =====

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

                  The Company executes securities transactions on behalf of its
                  customers. If either the customer or a counter-party 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.

                  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 $495 and $3,564 at December 31, 2006 and 2005,
                  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.



                                      F-25

<PAGE>

NOTE 15 -         PENSION PLAN

                  The Company sponsors a defined contribution 401(k) pension
                  plan covering substantially all employees who meet minimum age
                  and service requirements. The Company may elect to contribute
                  up to 100% of each participant's annual contribution to the
                  plan. There were no employer contributions in 2006, 2005 or
                  2004.

NOTE 16 -         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
                  Par value:  $.10 per share
                  Dividends: 6% per annum, payable quarterly at the rate of
                  $.075 per share until conversion
                  Voting rights:  None
                  Liquidation preference:   $5.00 per share
                  Conversion:  Convertible at the option of the holder anytime
                  into two shares of Common Stock at $2.50 per share; automatic
                  conversion  once the closing  price for the Common Stock is
                  $3.50 or above for 20 consecutive trading days, and the shares
                  are registered for public sale.

                  The Company issued 349,511 Series A shares in a private
                  exchange offering in 1999. As of December 31, 2006, a total of
                  44,142 preferred shares have been converted into 88,284 shares
                  of common stock.

                  The Company paid dividends on the Series A Preferred Stock in
                  the amount of $88,505 during 2006.

                  In June 2006, an affiliate of Mr. Okun purchased 283,087
                  shares of the Company's 305,369 outstanding shares of Series A
                  Preferred Stock in privately negotiated transactions. None of
                  such shares have been converted.




                                      F-26
<PAGE>

                  SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK

                  Preferred Stock - Series B

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

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

                  In February 2005, the Company issued 197,824 Series B
                  Preferred Shares in connection with a separation agreement
                  entered into with its former Chief Executive Officer. During
                  2006, the Company paid $80,000 of dividends on the Series B
                  preferred shares.

                  On February 23, 2007, an affiliate of Mr. Okun purchased all
                  197,824 shares of Series B Preferred Stock from such former
                  Chief Executive Officer in a privately negotiated transaction.
                  None of such shares have been converted.

                  Common Stock

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

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

NOTE 17 -         MERGER AGREEMENT, TERMINATION, AND SUBSEQUENT LITIGATION

                  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).


                                      F-27
<PAGE>

                  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, the Okun Purchasers beneficially owned 24.6%
                  of the Company's common stock (assuming all convertible
                  debentures were converted into shares of common stock and 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.

                  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 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 the
                  Company's common stock would have received $1.00 in cash for
                  each share of common stock. The lawsuit alleges, 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 demands
                  specific performance of the merger agreement and completion of
                  the merger. In the alternative, the Company is seeking
                  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
                  seeks 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. The Company claims that the Okun
                  Defendants fraudulently induced the Company to execute this
                  new lease by falsely representing that the Okun Purchasers
                  would consummate the merger (See Note 11).


                                      F-28
<PAGE>

                  On February 12, 2007, the Company received the Okun
                  Purchasers' answer to the lawsuit which contained several
                  counterclaims against it. In their counterclaims, the Okun
                  Purchasers allege that the Company breached the merger
                  agreement and failed to disclose certain material facts about
                  the Company, and seek the return of $2 million held in escrow
                  as well as compensatory damages, interest and costs. This
                  lawsuit is currently pending in the Superior Court of New
                  Jersey, Monmouth County Chancery Division.

                  The Okun Purchasers 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. The
                  Company believes these actions are based on the same facts and
                  circumstances as the previous action that the Company 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 the Company
                  filed in the New Jersey Superior Court. The Company and the
                  individual defendants believe that they acted properly on
                  behalf of the Company's shareholders and have meritorious
                  defenses against all of these claims. There can be, however,
                  no assurances as to the ultimate outcome of any of these
                  lawsuits.

                  On February 26, 2007, Mr. Okun and certain of his affiliates
                  filed an amendment to their Schedule 13D with the SEC
                  disclosing that they now beneficially own 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 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 the
                  Company's former officers and directors.


                                      F-29
<PAGE>

NOTE 18 -         STOCK OPTION PLANS

                  2002 Stock Incentive Plan

                  In June 2002, the Company adopted and its stockholders
                  approved the 2002 Incentive Stock Option Plan (the "2002
                  Plan"), replacing the 1992 Incentive Stock Option Plan (the
                  "1992 Plan"), which expired in September 2002. The 1992 Plan
                  provided for the granting of options to employees, consultants
                  and registered representatives of the Company, but only
                  options issued to employees qualify for incentive stock option
                  treatment ("ISOs"). Option exercise periods were fixed by the
                  Board of Directors on the grant date but no exercise period
                  could be less than one year or more than ten years from the
                  date of grant. As of December 31, 2006, a total of 38,000
                  options issued under the 1992 Plan remain outstanding.

                  The Company has reserved up to 5,000,000 shares of common
                  stock for issuance under the 2002 Plan. The 2002 Plan provides
                  for the grant of options, including ISOs to employees;
                  non-qualified stock options (NQSOs) to employees, consultants
                  and independent registered representatives; and stock
                  appreciation rights or any combination thereof (collectively,
                  "Awards"). The Board of Directors determines the terms and
                  provisions of each award granted under the 2002 Plan,
                  including the exercise price, term and vesting schedule. In
                  the case of ISO's, the per share exercise price must be equal
                  to at least 100% of the fair market value of a share of common
                  stock on the date of grant, and no individual will be granted
                  ISOs corresponding to shares with an aggregate fair value in
                  excess of $100,000 in any calendar year. The 2002 Plan will
                  terminate in 2012. As of December 31, 2006, options to
                  purchase a total of 924,402 shares were outstanding and
                  3,548,400 shares remained available for future issuance under
                  the 2002 Plan.

                  2002 Non-Executive Director Stock Option Plan

                  In June 2002, the Company adopted and its stockholders
                  approved the 2002 Non-Executive Director Stock Option Plan
                  (the "2002 Director Plan"), replacing the 1992 Non-Executive
                  Director Stock Option Plan, which expired in September 2002.
                  Under the 2002 Director Plan, each non-executive director will
                  automatically be granted an option to purchase 20,000 shares,
                  pro rata, on September 1st of each year or partial year of
                  service. The Plan will be administered by the Board of
                  Directors or a committee of the Board, which shall at all
                  times consist of not less than two officer/directors of the
                  Company who are ineligible to participate in the 2002 Director
                  Plan. The 2002 Director Plan does not contain a reserve for a
                  specific number of shares available for grant. Each option
                  issued under the 2002 Director Plan will be immediately vested
                  NQSOs, and will have a five-year term and an exercise price
                  equal to the 100% of the fair market value of the shares
                  subject to such option on the date of grant. The 2002 Director
                  Plan will terminate in 2012. As of December 31, 2006, 160,000
                  options were outstanding under the 2002 Non-Executive Director
                  Stock Plan.


                                      F-30
<PAGE>

                  1996 Senior Management Plan

                  In June 2000, the Company's stockholders approved an amendment
                  to the 1996 Senior Management Plan (the "1996 Plan") to
                  increase the number of shares reserved for issuance to key
                  management employees from 2,000,000 to 4,000,000 shares.
                  Awards can be granted through the issuance of incentive stock
                  rights, stock options, stock appreciation rights, limited
                  stock appreciation rights, and shares of restricted Common
                  Stock. The exercise price of an option designated as an ISO
                  may in no event be less than 100% of the then fair market
                  price of the stock (110% with respect to ten percent
                  stockholders), and not less than 85% of the fair market price
                  in the case of other options. As of December 31, 2006, options
                  to purchase 1,015,000 shares of restricted common stock were
                  issued and outstanding. The 1996 Plan terminated in June 2006.

                  A summary of the activity in the Company's stock option plans
                  (excluding restricted common shares) for the three-year period
                  ended December 31, 2006 is presented below:
<TABLE>
                  <S>                                                               <C>               <C>
                                                                                                      Weighted
                                                                                                       Average
                                                                                                      Exercise
                                                                                      Shares            Prices
                                                                                      ------            ------
                  Options outstanding, December 31, 2003                            3,556,498            1.19
                           Granted                                                    891,000             .57
                           Exercised                                                   (1,800)            .31
                           Canceled                                                  (789,500)           1.17
                                                                                     ---------

                  Options outstanding, December 31, 2004                            3,656,198            1.01

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


                           Granted                                                      3,000            1.18
                           Exercised                                                 (263,400)            .69
                           Canceled                                                  (309,500)           1.34
                                                                                  ------------
                  Options outstanding, December 31, 2006                            2,137,402            $.79
                                                                                    =========
</TABLE>
                  Shares of common stock available for future grant under
                  Company plans totaled 3,548,400 as of December 31, 2006. 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.


                                      F-31
<PAGE>

                  The weighted-average grant date fair value of all share
                  options granted during the twelve months ended December 31,
                  2006 and 2005 was $0.56 and $0.41, respectively. The intrinsic
                  value of all stock options exercised during the twelve months
                  of 2006 and 2005 was $54,000 and $204,000, respectively. Cash
                  received from the exercise of all stock options for the twelve
                  months ended December 31, 2006, 2005 and 2004 was $33,504,
                  $343,071 and $558, respectively.

                  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, 2006:
<TABLE>
                  <S>                                     <C>                     <C>

                  Nonvested Shares                        Shares                   Weighted-Average Grant -Date Fair
                                                                                                               Value
                  Nonvested January 1, 2006               950,000                              $0.47
                  Granted                                   --                                  --
                  Vested                                 (850,000)                             $0.46
                  Forfeited                                 --                                  --
                  Nonvested   December   31,
                  2006                                    100,000                              $0.57
</TABLE>

                  The total fair value of shares vested during the twelve months
                  ended December 31, 2006 and 2005 was $391,000 and $1,147,000,
                  respectively.

                  Additional information as of December 31, 2006 with respect to
                  all outstanding options is as follows:
<TABLE>
        <S>                      <C>               <C>             <C>              <C>                <C>

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

         $0.20 - $0.30             105,400            1.90             $0.26              104,560         $0.26
         $0.31 - $0.50             817,802            1.92             $0.49              754,922         $0.49
         $0.51 - $0.75             184,200            2.78             $0.70              156,760         $0.70
         $0.76 - $1.00             330,000            1.75             $0.89              206,000         $0.89
         $1.01 - $1.24             211,000            3.78             $1.09               83,200         $1.09
         $1.25 - $2.00             489,000            3.50             $1.27              489,000         $1.27

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

         $0.20 - $2.00           2,137,402            2.51             $ .79            1,794,442         $0.78

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

                  As of December 31, 2006, there was $39,000 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 1.6 years.


                                      F-32
<PAGE>

NOTE 19 -         FAIR VALUE OF FINANCIAL INSTRUMENTS

                  Financial instruments reported in the Company's consolidated
                  statement of financial condition consist of cash, securities
                  owned and sold, not yet purchased, loans receivable, warrants
                  subject to put options, 6% convertible debentures, accounts
                  payable and accrued expenses, and capital leases payable, the
                  carrying value of which approximated fair value at December
                  31, 2006 and 2005. The fair value of the financial instruments
                  disclosed is not necessarily representative of the amount that
                  could be realized or settled nor does the fair value amount
                  consider the tax consequences of realization or settlement.

NOTE 20 -         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, 2006, FMSC had net
                  capital of $2,735,223, which was $2,485,223 in excess of its
                  required net capital of $250,000. FMSC's ratio of aggregate
                  indebtedness to net capital was 1.34 to 1.

NOTE 21 -         UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
         <S>                                <C>                 <C>             <C>                   <C>

                                               March 31,         June 30,       September 30,          December 31,
                                                 2006              2006             2006                   2006
                                                 ----              ----             ----                   ----

         Revenues                          $13,312,022          $13,605,708       $11,274,175           $12,768,515
         Expenses                           14,334,955           12,529,761        11,424,899            13,480,362
         Net income (loss)                  (1,043,794)           1,051,747          (119,994)             (724,508)
         Net income (loss)
         applicable to common
         stockholders                      $(1,086,570)        $  1,008,881       $  (162,860)          $  (764,506)

         Income (loss) per
         common share:
         Net income (loss)
         applicable to common
         stockholders -
         Basic                                  $(0.07)               $0.06            $(0.01)               $(0.04)
         Diluted                                $(0.07)               $0.05            $(0.01)               $(0.04)
</TABLE>





                                      F-33

<PAGE>

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

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

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

       Income (loss) per common
       share:
       Net income (loss) applicable
       to common stockholders -
       Basic                                     $(0.06)              $0.28             $(0.05)              $(.03)
       Diluted                                   $(0.06)              $0.20             $(0.05)              $(.03)
</TABLE>


                  Included in the net (loss) in 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.

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

                  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 2006 and 2005 does not
                  necessarily equal the total computed for the entire year.




                                      F-34