SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
          x         ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934   [FEE REQUIRED]

                  For the fiscal year ended December 31, 1997
                                       OR
         o        TRANSITION  REPORT  PURSUANT TO SECTION 13 or 15(d) OF THE
                  SECURITIES  EXCHANGE  ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _______________________ to ______________________

                           Commission File No. 0-6729

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

       New Jersey                                           22-1737915
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                         Identification No.)
328 Newman Springs Road, Red Bank, NJ                         07701
 (Address of principal executive offices)                   (Zip Code)

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

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

                                                     Name of each exchange on
         Title of each class                              which registered

               None                

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

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


<PAGE>


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

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

The issuer's revenues for its most recent fiscal year:  $37,742,633.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the price at which the stock was sold,  or the average bid and
asked prices of such stock, as of April 7, 1998 was $20,661,935.

The  number  of  shares of  Common  Stock  outstanding,  as of April 7, 1998 was
9,630,444.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable





















                            [Cover Page 2 of 2 Pages]


<PAGE>



                                     PART I
Item 1.   Business

Introduction

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

         FMSC is currently licensed to conduct its broker-dealer  business in 49
states and the District of Columbia.  FMSC  maintains  approximately  124 branch
and/or satellite offices, all of which are maintained by affiliates. The Company
has  approximately  388 registered  representatives  and services  approximately
35,000 retail and institutional customer accounts.

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

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

         In 1991,  MISI was  formed  for the  purpose of  offering  and  selling
variable annuity, variable life as well as traditional life and health insurance
products. Currently, MISI is licensed in the states of Alabama, Alaska, Arizona,
California,  Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas,
Kentucky,  Maine,  Maryland,  Michigan,  New Jersey,  New York,  North Carolina,
Pennsylvania,  Rhode Island, South Carolina, Virginia, Washington and Wisconsin.
MISI derives  revenue  from  insurance-related  products  and services  from the
existing base of FMSC's Registered  Representatives  who are insurance licensed.
In fiscal year 1997, the Company earned $1,813,000 in gross commissions from the
sale of insurance and insurance related products.

         In 1993,  the  Company  formed  Montauk  Advisors,  Inc.  ("MAI")  as a
wholly-owned subsidiary.  MAI engages in the sale of equipment leasing contracts
as agent for various leasing companies.  The equipment financed to date includes
copiers,  facsimile machines and other business machines.  These leases are sold
to various  customers from which MAI derives a commission.  In fiscal year 1997,
MAI  suspended  this  business due to financial  concerns with the leasing agent
which was furnishing the leases. See "Global Loans" below.

         FMFC and its  subsidiaries  (with the  exception of MISI) each maintain
their  principal  executive  offices at Parkway  109 Office  Center,  328 Newman
Springs  Road,  Red Bank,  New Jersey  07701,  telephone  (732)  842-4700.  MISI
maintains its principal  offices at One Mack Centre Drive,  Paramus,  New Jersey
07652, telephone (201) 634-0700.

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

Rights Offering

         FMFC  recently   completed  an  offering  (the  "Rights  Offering")  of
3,072,779  units (the  "Units"),  to holders  ("Shareholders")  of record of its
common  stock,  no par value (the  "Common  Stock") at the close of  business on
December 15, 1997 (the "Record Date"),  pursuant to non-transferable rights (the
"Rights")  to  purchase  Units at a price of $.45  per Unit  (the  "Subscription
Price"). All of the Units were sold with the Company's  shareholders  purchasing
1,784,491  Units  through the  exercise of their basic  subscription  rights and
1,288,288 Units through the exercise of their over subscription rights.  Holders
of Rights ("Rights Holders") were not required to pay any brokerage fees for the
subscription  of Units under the Rights  Offering.  Rights  Holders were able to
exercise  their  Rights until 5:00 p.m.  Eastern time on February 16, 1998.  The
Rights Offering was completed on February 17, 1998 with all of the Units sold.

     Each  Unit  consisted  of one  Class A  Redeemable  Common  Stock  Purchase
Warrant,  one Class B Redeemable  Common Stock Purchase  Warrant and one Class C
Redeemable Common Stock Purchase  Warrant.  Each Class A Redeemable Common Stock
Purchase Warrant (the "Class A Warrants"),  entitles the holder to purchase from
February  17, 1998 to February 17, 2001 one share of Common Stock of the Company
(the "Class A Warrant Shares"), at an exercise price of $3.00 per share, subject
to adjustment  in certain  circumstances.  Each Class B Redeemable  Common Stock
Purchase Warrant (the "Class B Warrants"),  entitles the holder to purchase from
February 17, 1998 to February 17, 2003 one share of Common Stock of the Company,
at an  exercise  price of $5.00 per  share,  subject  to  adjustment  in certain
circumstances.  Each Class C Redeemable  Common  Stock  Purchase  Warrants  (the
"Class C  Warrants"),  entitles the holder to purchase from February 17, 1998 to
February 17, 2005 one share of Common Stock of the Company (the "Class C Warrant
Shares"),  at an exercise  price of $7.00 per share,  subject to  adjustment  in
certain circumstances.

Discount Brokerage Business

         In June 1997 two registered representatives who formerly ran a discount
brokerage  firm joined FMSC to establish a discount  brokerage  operation in the
Company's  Paramus,  New Jersey office. To date, the company has earned $167,540
in commissions from Century  Discount  Securities  ("CDS"),  which operated as a
separate   division  of  FMSC.  The  primary  employees  who  assisted  FMSC  in
establishing  CDS receive a salary and are  eligible to receive up to 90% of the
commissions  generated  from CDS after the  deduction of operation  expenses and
salaries.  It is  anticipated  that CDS will  continue  to  expand  through  the
implementation of a new advertising  programs.  However,  the discount brokerage
business is highly competitive and there can be no assurance the Company will be
able to successfully expand this new business line.

Global Loans

     Montauk Advisors,  Inc. ("MAI") has made various loans totaling  $1,094,500
to Global Financial Corp.  ("Global"),  the financing company which sold leasing
contracts through MAI. These loans were made for the purpose of assisting Global
in meeting  cash flow  deficiencies  arising  from the  nonpayment  of scheduled
monthly installments on certain delinquent and non-performing  leases. The loans
bear  interest  at 8% per annum and are due in April and May 1998.  MAI,  at its
sole option,  may accept payment on the loans on an installment  basis,  and may
extend  any or all of the  loans.  The first note which was due on April 1, 1998
has been extended to September 1, 1998. Most of the arrears are due from Fem-Com
Systems Inc. ("FCS"),  Global's  affiliated  equipment vendor, and Biblio,  Inc.
"Biblio"),  an affiliate of FCS. The notes are guaranteed by Global, FCS, Biblio
and the shareholder of FCS and Biblio.  The notes are further  collateralized by
mortgage  liens on real estate  owned by the  principal  shareholder  of FCS and
Biblio, the shareholder's  personal guarantee,  a pledge of the shares of Global
and FCS, and various liens on the assets of Global. MAI expects that Global will
seek  additional  loans from MAI in the short-term  which will be evaluated on a
case by case basis.

         Additionally,  MAI has provided  certain  financing for the purchase of
equipment by FCS. FCS is indebted to Global for payment on certain leases and is
paying  Global from time to time based on its available  cash flow.  The Company
believes that MAI's assistance to FCS in financing  current and future equipment
purchases, will enable FCS to generate additional cash flow to pay Global, which
will eventually enable Global to repay the loans made by MAI. However, there can
be no  assurance  that  Global  will be able to  repay  the  loans  or that  the
collateral will be sufficient to cover the outstanding principal of the loans in
the event of a default.

PacificHealth Laboratories, Inc. Initial Public Offering

     In  December  1997  FMSC  completed  the   underwriting  of   PacificHealth
Laboratories,   Inc.   initial  public  offering.   FMSC,   acting  as  managing
underwriter, sold 1,200,000 shares of Common Stock at an offering price of $6.00
per share.  FMSC  received  gross  commissions  of  $673,500  as well as 120,000
Underwriter's Warrants exercisable at $8.70 per share.

Montauk Strategic Alliance Group

     In 1997 the Company  created a division called Montauk  Strategic  Alliance
Group ("MSAG"). MSAG was created to provide investment,  insurance and financial
planning  products,  services and consulting to certified and public accountants
and their  clients.  The  program  requires  CPAs and PAs to  become  affiliated
registered  representatives  with the firm and  expand  the  financial  services
offered to their clients.

Uptick Technologies Agreement

         The Company  entered into an agreement  (the  "Agreement')  with Uptick
Technologies,  Inc.  ("Uptick")  on  August  1, 1997  whereby  Uptick  agreed to
develop,  deliver and install certain computer software (the "Uptick  software")
for FMSC. The Uptick Software consist of certain pre-existing Uptick proprietary
software and components  specifically  developed for FMSC by Uptick.  The Uptick
Software will be used by FMSC for sales  production  and  operation  management.
FMSC shall have a perpetual,  except as it may be terminated in accordance  with
the terms of the  Agreement,  non-exclusive,  royalty  free  license  to use the
Uptick  Software.   Uptick  will  also  provide,  at  FMSC's  request,  computer
consulting  services   customarily  rendered  by  software  consultants  in  the
financial services industry.

New Office Lease

     In March 1997 the Company  entered  into a new seven year lease  commencing
February 1, 1998 for 22,762  square feet of gross  rentable area in the building
currently  occupying the Company's  headquarters  in Red Bank, New Jersey.  (See
Item II. Properties/Offices and Facilities).

Advertising/Marketing/Recruiting Campaigns

         In Fiscal  1997 the  Company  embarked  on a new  advertising/marketing
campaign designed to recruit new account executives for the Company's  Affiliate
program.  The  campaign,  entitled  "The  Freedom to  Succeed,"  is  directed at
recruiting new registered  representatives  and expanding the affiliate base and
encompasses a comprehensive  program which includes video and print  advertising
materials.  FMSC  produced  and filmed a ten minute video titled the "Freedom to
Succeed,"  which   introduces   First  Montauk  to  registered   representatives
considering FMSC, as well as advertising  material,  brochures,  folders,  and a
Product & Services Guide for recruiting purposes.

         FMSC  has  also  expanded  the  marketing  and  advertising   materials
available to existing  affiliates.  FMSC  provides  affiliates  with  compliance
approved,  personalized ads for newspapers and magazines;  30 second  television
commercials which can be customized with the affiliates name and photograph; and
full color booklets explaining the "independent advantage" to clients.

     FMSC also has a presence on Internet.  Phase I of  www.firstmontauk.com  is
complete and serves dual purposes:  investor relations and recruiting.  Phase II
will be  complete  during  the  current  fiscal  year and will  enable  existing
affiliates  to access  research,  accounts,  and  internal  literature  on-line.

Description of Business

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

         As of March 11, 1998, FMSC operated 124 affiliate  branch and satellite
offices in addition to its main office  located in Red Bank,  New Jersey.  There
are approximately 388 registered representatives in these offices, as well as 55
support  staff  employees in the main  office.  Affiliate  branch and  satellite
offices are located in the following 27 states:

          AFFILIATE BRANCH/                                 AFFILIATE BRANCH/
STATE     SATELLITE OFFICE                  STATE           SATELLITE OFFICE 

Alaska            1                     New Hampshire             2
Arizona           2                     North Carolina           10
California        6                     New Jersey               20
Connecticut       5                     New Mexico                1
Delaware          1                     New York                 24
Florida           9                     Ohio                      2
Georgia           3                     Pennsylvania             12
Illinois          2                     Rhode Island              3
Indiana           1                     Texas                     3
Massachusetts     1                     Virginia                  5
Maryland          1                     Washington                4
Minnesota         1                     West Virginia             1
Mississippi       1                     Wisconsin                 1
Missouri          1
 
FMSC transacts business in the following areas in:

Equities:
         Listed                          28%
         Over-The-Counter                38%
Municipal, Government                     3%
Corporate Bonds                           4%
Unit Investment Trusts                    2%
Mutual Funds                             19%
Options                                   1%
Insurance*                                5%
---------------------------
*    A portion of the  insurance  commission  is payable to Montauk  Insurance
     Services, Inc. while variable annuity commission is payable through FMSC.

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

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

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

                                                            Period
                                                 Year Ended December 31, 1997

                                                     Amount          Percent
Commissions:

Equity Securities,
  Options and Mutual Funds                        $27,018,244           72%

Principal Transactions:
  Equity Securities, Municipal, Government
  and Corporate Bonds                             $ 7,257,576           19%

Interest and Other Income(1)                      $ 2,033,713            5%

Investment Banking(2)                             $ 1,433,100            4%
                                                  -----------          ---- 
Total Revenues                                    $37,742,633          100%

--------------------------
1.   "Other Income" consists  primarily of rental income,  dividends,  and
     an insurance recovery.
2.   Investment   banking   revenues   consists  of   commissions,
     selling concessions, consulting fees and other income from syndicate
     activities and placement agent fees.

Registered Representative Recruitment and
Registered Representative Affiliate Program

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

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

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

The Affiliate Program

         FMSC's  affiliate  program is designed to attract  professionals in all
phases of the financial  services  industry to affiliate with FMSC as registered
representatives. Management believes that the affiliate program is attractive to
established  brokers  because  it  combines  the  flexibility  of  operating  an
independent  office  with the  structure  and  support of an  established  firm.
Currently  FMSC  has  122  locations  operated  by  registered   representatives
participating  in the affiliate  program.  It is through this affiliate  program
that FMSC seeks to continue to expand its customer base and retail activities by
adding brokers with established clientele.

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

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

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

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

         FMSC is ultimately responsible for supervising each and every affiliate
and related registered representative. FMSC can incur substantial liability from
improper  actions  of  any  of  the  affiliate   representatives.   (See  "Legal
Proceedings"). Effective January 1, 1996, the Company implemented a professional
liability  errors and omissions  insurance  program which provides  coverage for
actions taken by the Company's registered  representatives,  employees and other
agents for actions in connection  with the purchase and sale of  securities  and
the administration of individual retirement plans. The program provides coverage
for each incident up to $1,000,000 with an aggregate policy limit of $5,000,000,
with a  deductible  per  incident of $50,000,  the first  $5,000 of which is the
responsibility of individual representatives. The policy period for these limits
is  twenty-four  (24)  months  commencing  January  31,  1998.  Each  registered
representative  is  assessed  a premium  which is  payable  monthly.  The policy
excludes  claims   involving  the  sale  of  low-priced  or  "penny  stocks"  or
partnerships,  criminal or deliberate  fraudulent  acts,  defamation and company
sponsored employee benefit plans, as well as other exclusions.

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

Retail Commission Business

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

Investment Banking Activities

         The Company's  investment banking revenues are principally derived from
participation in public  offerings of equity  securities and acting as placement
agent in the private placement of securities. For the fiscal year ended December
31, 1997, investment banking activities, including sales concessions,  accounted
for approximately 4% of the Company's revenues.

         To date, the Company has not derived  significant or material  revenues
from its investment banking services.  Through its relationships with investment
banking  clients,  the Company intends to expand this business.  There can be no
assurance  that the Company will be  successful  in these efforts or that future
efforts will result in significant  revenue or increased  profit to the Company.
The  corporate  finance  function  of the  Company  seeks to raise  capital  for
corporations  in a variety of businesses.  In December 1997,  FMSC completed its
second  underwriting  of an initial public offering for $7,200,000 of the common
stock of PacificHealth Laboratories,  Inc. The PacificHealth Laboratories,  Inc.
offering was the second public  offering  following the Manhattan Bagel Company,
Inc.  public  offering  in  1994,  in which  FMSC  also  acted  as the  managing
underwriter.   FMSC  also  participates  in  other  underwritings  of  corporate
securities  as a syndicate  or selling  group  member.  FMSC  participated  as a
syndicate or selling group member in approximately 90 offerings in fiscal 1997.

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

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

         FMSC also acted as a placement agent in three private placements during
the  fiscal  year  ended  December  31,  1997.  FMSC is  continuously  reviewing
potential private offerings for future participation. See "Certain Relationships
and Related Transactions".

         Principal Transactions

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

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

         Investment Activities

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

         Research Services

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

         Asset Management and Portfolio Advisory Service Fees

         Since  1995,  FMSC  has  been  an SEC  registered  Investment  Adviser,
providing investment advisory services to clients through both firm-sponsored as
well  as  independent,   third-party  sponsored  advisory  programs  offered  to
individual  and  institutional  clients.  FMSC is  registered  as an  investment
adviser in those states requiring registration, including:

                    Alaska                    New Jersey
                    California                New York
                    Connecticut               North Carolina
                    Delaware                  Pennsylvania
                    Florida                   Rhode Island
                    Indiana                   Texas
                    Massachusetts             Washington
                    Michigan                  West Virginia

Some of the programs  available to clients are discretionary  management,  while
others  are  non-discretionary.  Certain  programs  require  the client to pay a
single fee for portfolio advisory services,  brokerage execution and custody and
periodic account performance evaluation.

         Revenues  from asset  management,  asset-based  products and  portfolio
advisory  service fees rose to $438,377 in 1997  primarily due to an increase in
the number of Company's registered representatives who have established advisory
accounts which charge a fee,  based on a percentage of assets under  management.
Fee-based  revenues  rose due to  increases  in the  number of client  fee-based
accounts,  and a wider  choice of  fee-based  products  available to clients and
registered representatives.

         Management's  goal is to increase  fee-based  revenues by continuing to
provide   diversified   advisory  services  to  its  affiliates  that  meet  the
requirements of both individual as well as institutional clients.

Competition

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

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

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

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

Administration,  Operations,  Transaction
Processing and Customer Accounts

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

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

         As required by the NASD and certain other  authorities,  FMSC carries a
fidelity bond covering loss or theft of securities,  as well as embezzlement and
forgery.  The amount of the bond provides total  coverage of $5,000,000  (with a
$10,000  deductible  provision per incident).  In addition,  the accounts of its
customers  are  protected  by the  Securities  Investor  Protection  Corporation
("SIPC")  for up to  $500,000  for each  customer,  subject to a  limitation  of
$100,000  for  claims  for  cash  balances  with an  additional  $25,000,000  of
protection  provided  by a private  insurance  company  for the  benefit of each
customer. SIPC is funded through assessments on registered broker-dealers.  SIPC
assessments  were .00065% of net  operating  revenues (as  defined).

Government Regulation

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

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

Net Capital Requirements

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

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

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

         At December 31, 1997, FMSC had net capital of approximately  $2,398,817
which was  $2,148,817  in  excess  of  required  net  capital,  and its ratio of
aggregate indebtedness to net capital was 1.28 to 1.

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

Employees

         The   Company   currently   utilizes   approximately   388   registered
representatives of which 326 are associated with affiliate offices. In addition,
the Company employs 55 support employees in the areas of operations, compliance,
accounting, administrative and clerical.

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

Item 2.   Properties

Offices and Facilities

     In March 1997, the Company entered into a new seven year lease (the "Master
Lease"),  commencing  February 1, 1998 for 22,762 square feet of gross  rentable
area at its executive  offices  which are located at Parkway 109 Office  Center,
328 Newman  Springs  Road,  Red Bank,  New Jersey.  The rent for the premises is
$35,850  per month,  and in  addition  to the base  rent,  the  Company  pays as
additional  rent,  a  proportional  share of any  increases in real estate taxes
above the amount paid during the 1998 calendar year, insurance premiums relating
to the premises, and all utility charges relating to the use of the premises. In
March  1998,  the  Company  signed  a  First   Amendment  to  the  Master  Lease
incorporating  all of the other rented space in the Red Bank  facility  into the
March 1997 Master Lease. The First Amendment to the Lease covers an aggregate of
32,442 gross rentable square feet at a monthly rental payment of $52,000 through
January  2005.  The Master  Lease and First  Amendment  also  contain a six-year
option to renew providing for a base rental payment of approximately $65,000 per
month.

     In  June  1996,  Montauk  Insurance   Services,   the  Company's  insurance
subsidiary,  leased  3,150  square  feet in  Paramus,  New  Jersey  to house its
administrative  offices.  In September  1997 the Paramus  office also became the
home of Century  Discount  Securities,  the  Company's  new  discount  brokerage
operation. The three year lease provides for monthly base rent of $5,053 for the
first year, $5,315 for the second year, and $5,578 for the third year.

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

Item 3.   Legal Proceedings

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

         In June, 1997, the Securities and Exchange  Commission entered an Order
against  FMSC  relating to an alleged  failure to  supervise a former  affiliate
office in Houston,  TX.  Without  admitting  or denying the findings of the SEC,
FMSC consented to the issuance of an Order making findings and imposing remedial
sanctions and a Cease-and-Desist Order in the matter of First Montauk Securities
Corp.,  Admin. Proc. File No. 3-9342,  Release No. 34-38775 (June 25, 1997) (the
"Order").  FMSC was (1)  ordered  to cease and  desist  from  present  or future
violations of  Securities  (15)(c) and 17(a) of the  Securities  Exchange Act of
1934 ("Exchange Act") and Rules 15c3-1, 17a-3, 17a-5 and 17a-11 thereunder,  and
(2)  censured  and  required  to pay  disgorgement  in the  amount of  $175,458,
pre-judgment  interest in the amount of $51,584 and a civil money penalty in the
amount of $50,000.  In  addition,  FMSC was  required  to retain an  independent
Consultant to conduct a review of, and to report and make recommendations as to,
FMSC's supervisory and compliance policies and procedures,  particularly as they
relate to the firm's affiliate  program and the supervision of the firm's branch
offices  by the main  office.  The  Consultant  issued its draft  report  during
January,  1998.  FMSC prepared its response to the  Consultant in early February
and await receipt of the Final Report. FMSC will then commence implementation of
the Consultant's recommendations within the time frame set forth in the order.

        In February, 1997, FMSC entered into a Consent Decree with the State of
Florida,  without  admitting  or denying the  findings,  relating to the alleged
failure to supervise a former affiliate office in Houston.  FMSC agreed to pay a
fine of $15,000, engage an independent  consultant,  as well as other provisions
temporarily limiting brokerage activities in the State of Florida. (See above)

         FMSC has been the subject of other legal  actions  relating to the sale
of securities by the Houston  office.  In 1996, the Company,  without  admitting
liability or wrongdoing,  settled  various claims  asserted by Escambia  County,
Florida for  $900,000 in cash.  In January  1997,  the Company  settled  another
customer  lawsuit  for  $750,000,   with  $500,000  payable  upon  execution  of
settlement  documents,  and the  balance  of  $250,000  payable  in five  annual
installments of $50,000 plus interest at 8% per annum. The five installments are
evidenced by notes payable,  which have been  subordinated  to the claims of the
Company's  general  creditors  under a subordination  agreement  approved by the
NASD.

         In  fiscal  1997,  the  Company  settled  two  civil  lawsuits  and one
arbitration in the aggregate amount of $1,706,455.  Each of these cases resulted
from claims made by customers of the former  Houston  branch  office  registered
representatives  in  connection  with the  purchase of certain  Mortgage  Backed
Securities ("MBS").

         The Company is a defendant in one  remaining  civil action  relating to
these matters which is currently pending in the United States District Court for
the Northern District of Ohio, Eastern Division, (case number 1:96CV 1063), City
of Painesville,  Ohio v. First Montauk Financial Corp., First Montauk Securities
Corp. et al. The Plaintiff seeks  compensatory  damages of an unspecified amount
estimated by Plaintiff to be not less than  $5,000,000  plus  punitive  damages,
attorney's  fees,  interest  and cost.  A  similar  arbitration  proceeding  was
commenced  in  November  1997  seeking  $1,000,000  in  damages.  The Company is
vigorously defending these cases and based upon discussions with special counsel
and other  information,  it believes that it has a  meritorious  defense to this
action.  This belief is derived from,  among other things,  discussions with the
Company's counsel.

         In 1997,  FMSC  settled a customer  arbitration  for  $500,000 in cash.
Under terms of the  settlement,  the Company also issued to the customer and her
counsel a total of 150,000 five-year  warrants to purchase FMFC common stock for
$1.25 per share.  Two of the  Company's  officers  agreed to guarantee a minimum
selling  price of $1.917 per share with  respect  to the shares  underlying  the
warrants and established a $100,000 escrow account with personal funds to secure
the guarantee.  The  warrantholders  had a sixty-day period in which to exercise
the  warrants  and sell the shares,  commencing  from the date that the warrants
were registered for resale.  The warrant  registration  became effective in June
1997. The individuals exercised their warrants in 1997 at various dates on which
the quoted market price for the shares exceeded the guaranteed price.

         FMSC is also a respondent in certain pending customer arbitrations, and
other matters relating to its securities  business.  These claims are in various
stages of progress and are being vigorously contested.

         Management  is unable to derive a meaningful  estimate of the amount or
range of  possible  loss  that may arise out of  pending  litigation  (including
litigation costs in any particular  subsequent quarterly or annual period, or in
the aggregate). However, it is possible that the financial condition, results of
operations,  or cash flows of the  Company  in  subsequent  quarterly  or annual
periods  could be  materially  affected by the ultimate  outcome of such pending
litigation or proceedings.

         The  Company is  presently  reviewing  the extent to which  settled and
pending claims may be covered under its insurance policies. In January 1997, the
Company  negotiated a $650,000  settlement with one of its insurance carriers in
consideration of a general release from coverage on various matters. Discussions
with other carriers for  reimbursement  of  settlements  paid by the Company are
continuing. There can be no assurance that the Company will be successful in its
efforts to recover additional funds from its insurers on settled claims, or that
monetary losses,  if any, from future claims,  settlements or adverse  judgments
will be covered under the Company's existing insurance policies.

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

            Not Applicable.


<PAGE>

                                     PART II

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

A.   Principal Market

     The  Company's  Common  Stock is  traded  in the  over-the-counter  market.
Trading in the  Company's  Common Stock is reported on the NASD  Bulletin  Board
system and by the National  Daily  Quotation  Service  published by the National
Quotation Bureau,  Inc. The Company believes that there is an established public
trading market for the Company's  Common Stock based on the volume of trading in
the  Company's  Common Stock and the  existence of market  makers who  regularly
publish  quotations for the Company's Common Stock. The Company's Class A, Class
B and Class C Warrants  commenced  trading in the  over-the-counter  market upon
their issuance in March 1998.

B.       Market Information

     The Company's Common Stock commenced trading in the over-the-counter market
in 1987.  On April 7, 1998,  the  Company's  common stock had a high and low bid
price of $2.71875 and $2.53125, respectively.

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

Common Stock

Fiscal Year 1998                      High $           Low $
     1st Quarter                      2.875            2.00
     2nd Quarter                      2.75             2.50
     (through April 6, 1998)

Fiscal Year 1997                      High $           Low $
     1st Quarter                      3.125             .96
     2nd Quarter                      2.78125          2.4375
     3rd Quarter                      2.75             2.15625
     4th Quarter                      2.875            2.1875

Fiscal Year 1996                      High $           Low $
     1st Quarter                      1.0625            .84375
     2nd Quarter                      2.1875            .8125
     3rd Quarter                      1.53             1.03125
     4th Quarter                       1.13              .80

<PAGE>

Item 6. Selected Financial Data

                                   Year ended December 31,
                     1997          1996           1995      1994       1993
Operating results:

Revenues:

Commissions     $ 27,018,244 $ 25,749,690  $ 17,113,296 $ 9,861,294 $ 9,075,148
Net dealer 
 inventory amd
 trading gains     7,257,576    7,660,700     9,763,940   7,781,667   8,956,755
Investment banking 1,433,100      634,329       388,249     766,013     531,314
Insurance recovery   650,000         -             -           -          -
Interest and other
 income            1,383,713    1,044,969     1,076,718     691,413     454,425
                  ----------   ----------    ----------  ----------  ----------
Total revenues    37,742,633   35,089,688    28,342,203  19,100,387  19,017,642
                  ----------   ----------    ----------  ----------  ----------
Expenses:

Commissions, employee
 compensation and
 benefits         26,785,205   25,428,184    19,542,578  14,242,933  15,072,621
Clearing and floor 
 brokerage         3,021,709    3,139,142     3,112,474   1,828,197   1,672,127
Communications and
 occupancy         1,860,350    1,662,936     1,260,209     961,582     583,257
Legal matters and
 related costs     1,452,001    2,731,997     1,542,328     345,735     108,502
Other operating
 expenses          2,093,670    2,006,615     1,439,926   1,247,345     810,011
Interest              84,695      105,772       192,752     157,660      70,008
                   ---------    ---------     ---------   ---------     -------

Total expenses    35,297,630    35,074,646   27,090,267  18,783,452  18,316,526
                  ----------    ----------   ---------   ----------  ----------

Income before
 income taxes      2,445,003        15,042    1,251,936     316,935     701,116
Income taxes
 (benefit)           968,178       (17,747)     483,848     124,799     (52,525)
                     -------       -------      -------     -------     ------- 

Net income      $  1,476,825     $ 32,789   $   768,088  $  192,136  $  753,641
Net income
 applicable to
 common stock   $  1,476,825     $ 32,789   $   768,088  $  192,136  $  740,564
Net income per
 common share:
    Basic       $       0.17     $   0.01   $      0.10  $     0.02  $     0.11
    Diluted     $       0.14     $   0.01   $      0.09  $     0.02  $     0.09

Weighted average
 shares outanding
    Basic          8,788,734    7,767,224     8,044,622   8,070,406   6,723,342
    Diluted       10,351,032    8,623,538     8,380,906   8,409,267   8,066,476

Financial condition:

Total assets    $ 11,971,934   $8,742,039   $10,486,967  $7,082,267  $6,800,407
Long-term debt  $    444,844   $  362,380   $    21,612  $   47,544  $    -
Other liabili-
 ties           $  4,287,623   $4,262,880   $ 6,864,409  $4,019,001  $4,743,730
Common Stock
 issued with 
 guaranteed
 selling price  $    346,500   $  421,500   $      -     $     -     $   11,500
Stockholders'
 equity         $  6,892,967   $3,695,279   $ 3,600,946  $3,063,266  $2,056,677



<PAGE>

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

Results of Operations

Fiscal 1997 as Compared to Fiscal 1996

     Total revenues for 1997 were $37,742,633,  the best revenue  performance in
the Company's history,  as compared to 1996's record levels of $35,089,688.  The
Company  benefited  with the rest of the brokerage  industry in 1997 from record
gains in the U.S. equity markets.  Despite continued strong revenue growth,  the
Company's performance was again negatively impacted by costs totaling $1,452,001
to defend and settle various legal matters during 1997.  These costs eroded what
would have been additional operating profits for the year.

     Commission income from the sale of listed and over-the-counter  securities,
mutual  funds,  insurance  products and other agency  transactions  rose 5% to a
record  $27,018,244  (72% of total revenues) as compared to $25,749,690  (73% of
total  revenues) in 1996. The largest  revenue  increase in 1997 once again came
from the rise of  mutual  fund  investments  among  retail  customers,  who have
continued to  participate in the securities  markets in record  numbers.  Mutual
fund commission  revenues rose from $3,851,731 in 1996 to $5,480,434 in 1997, an
increase of 42%.  These  commissions  accounted for 15% of the  Company's  total
revenues in 1997. Commissions from the insurance products division,  which began
operations  in 1995,  continued its steady  growth rate,  increasing  sales from
$1,719,102 in 1996 to  $2,025,967  in 1997, as the Company  continued to promote
the sale of insurance related products and pursue insurance  licensing among its
existing registered representatives.  Management is making a continued effort to
expand the asset management and fee based segments of the Company's business, as
these  areas  continue to increase in favor  within the  investing  public.  The
Company has increased the number of fee-based  packaged products and services to
its  customers,  including  insurance,  annuity and managed  account  providers.

     Revenues from  principal  transactions  decreased by 5% from 1996 levels of
$7,660,700  (22% of total  revenues) to  $7,257,576  (19% of total  revenues) in
1997. Revenues from market-making  activities in  over-the-counter  equities and
trading  profits  decreased  slightly  during  1997 as the  major  focus  of the
Company's business continued to shift away from executing principal transactions
and towards commission and fee based revenue. In addition, the implementation of
new order  handling  and  "price  improvement"  rules  have  made  market-making
activities  less  profitable.  The Company has  continued to execute more of its
over-the-counter  equity business on an agency basis,  whereby the Company earns
commissions  for serving as an agent between its customer and another  brokerage
firm making a market in the particular security being traded.

     Investment  banking  revenues  rose from  $634,329 in 1996 to $1,433,100 in
1997. This increase was principally due to the completion of an underwriting for
PacificHealth Laboratories, Inc. in December 1997. The Company also participated
in  approximately  90 syndicate  transactions  and acted as placement  agent for
three private placements during the fiscal year. The Company intends to continue
exploring  various  opportunities  in the  investment  banking  area,  including
securities private placements and underwritings.

     Interest income  increased by $223,723 to $1,063,092 in 1997, due primarily
to higher credit  balances in the  Company's  proprietary  accounts,  as well as
higher credit and margin debit balances in customer  accounts during the current
fiscal year.

     During  1997  the  Company  paid  commissions,  employee  compensation  and
employee  benefits  of  $26,785,205  (71% of  total  revenues)  as  compared  to
$25,428,184  (72% of total revenues) in 1996. This category  includes  salaries,
commission expense, and fringe benefits for salaried employees. Commissions paid
to registered  representatives for 1997 were $22,356,878 (59% of total revenues)
as compared to  $21,932,573  (63% of total  revenues)  in 1996.  The  percentage
decrease in 1997 was partially due to the increased level of investment  banking
income,  which  involves a lower  commission  payout.  In  addition,  commission
expense as a percentage of total revenues  fluctuates  depending upon the mix of
commission-based business and trading profits or losses, as well as the relative
contribution  to revenues  from the  Company's  in-house  brokers and  affiliate
offices.  In-house  brokers receive a lower  commission  payout than independent
affiliates, but are not generally required to pay their own overhead.

     For  1997,  the  Company  paid  salaries  of  $3,658,010  for   management,
operations  and clerical  personnel,  as compared to  $2,752,482  in 1996.  This
increase was due in part to the addition of several new key employees, including
individuals  retained to establish the Company's new discount division,  Century
Discount  Securities.  The Company also hired additional  trading assistants and
other operational and clerical personnel for transactions processing.

     Clearing costs declined  slightly from  $3,139,142 (9% of revenues) in 1996
to $3,021,709  (8% of revenues) in 1997.  The  percentage  of clearing  costs to
total revenue will fluctuate  depending upon the  combination of agency business
and  proprietary  trading,  as well as the average  revenue per transaction in a
particular period.

     Communications  and occupancy costs rose by $197,414 to $1,860,350 in 1997,
an  increase  of 12% over 1996.  The  increase  is due to the  expansion  of the
Company's  headquarters and higher charges for communication networks and market
data services.  Management expects this expense category to increase as a result
of a new master  lease  agreement  effective  February  1998 which  expands  the
Company's facilities.  The new seven year lease, as amended, covers an aggregate
of 32,442  gross  rentable  square feet at a monthly  rental  payment of $52,000
through  January 2005.  The master lease and  amendment  also contain a six year
renewal option providing for a base rental payment of approximately  $65,000 per
month. The expanded office will house additional  registered  representatives as
well as  administrative  and  clerical  personnel.  The new  facility  will also
include an expanded order and trading room, as well as improved distribution and
operation areas.

     Legal matters and related costs include payments to settle customer claims,
professional   fees  and  other  defense  costs,   and  provisions  for  pending
litigation.  These costs  totaled  $1,452,001  in 1997, a decrease of 47% from a
total of $2,731,997 in the prior year.

     The  Company is a defendant  in a civil  action  relating to FMSC's  former
Houston affiliate office which sold mortgage-backed securities to its customers.
The Plaintiff seeks  compensatory  damages of an unspecified amount estimated by
Plaintiff to be not less than $5,000,000 plus punitive damages, attorney's fees,
interest and cost. A similar  arbitration  proceeding  was commenced in November
1997 seeking  $1,000,000 in damages.  The Company is vigorously  defending these
cases and based upon discussions with special counsel and other information,  it
believes that it has meritorious defenses to these actions.

     In 1996, FMSC settled a customer arbitration for $500,000 in cash. In 1997,
FMSC paid the cash  settlement,  and also issued 150,000  five-year  Warrants to
purchase  FMFC Common Stock for $1.25 per share to the customer and her counsel.
In 1997 the individuals exercised their Warrants from which the Company received
proceeds of $187,500.

     The  Company  has also  been  the  subject  of a  Securities  and  Exchange
Commission Administrative Order that was entered in June 1997, which resulted in
a $50,000  fine and  censure.  The Company  also  agreed to disgorge  profits of
$175,000  from gains on  securities  sold from the Houston  office.  The SEC has
informally  consented to credit the disgorgement against amounts already paid by
FMSC in  settlement  of civil  litigations  brought by former  customers  of the
Houston  office.  The  settlement  also  includes the  requirement  to engage an
independent compliance examiner to audit FMSC's compliance procedures.

     FMSC is also a respondent in certain  pending  customer  arbitrations,  and
other matters relating to its securities  business.  These claims are in various
stages of progress and are being vigorously contested.

     Management is unable to derive a meaningful estimate of the amount or range
of possible loss that may arise out of pending litigation  (including litigation
costs  in any  particular  subsequent  quarterly  or  annual  period,  or in the
aggregate).  However,  it is possible that the financial  condition,  results of
operations,  or cash flows of the  Company  in  subsequent  quarterly  or annual
periods  could be  materially  affected by the ultimate  outcome of such pending
litigation or proceedings.

     The Company is presently  reviewing the extent to which settled and pending
claims may be covered under its insurance policies. In January 1997, the Company
negotiated  a  $650,000  settlement  with  one  of  its  insurance  carriers  in
consideration of a general release from coverage on various matters. Discussions
with other carriers for  reimbursement  of  settlements  paid by the Company are
continuing. There can be no assurance that the Company will be successful in its
efforts to recover additional funds from its insurers on settled claims, or that
monetary losses,  if any, from future claims,  settlements or adverse  judgments
will be covered under the Company's existing insurance policies.

     In an effort to reduce future legal claims and liabilities, the Company has
hired an additional staff attorney, a new director of compliance and has engaged
the services of an independent compliance consultant to provide  recommendations
to the Company's  management  in  connection  with  supervisory  and  regulatory
matters.  Management  believes  that these  measures,  along with other  planned
action,  will assist in the reduction of customer claims.  However,  there is no
assurance  that the  Company  will be  successful  in its efforts to reduce such
claims in the future.

     Other operating expenses increased from $2,006,615 in 1996 to $2,093,670 in
1997. The Company is continuing to invest in its affiliate  recruitment  program
through  increased  advertising  and marketing  campaigns.  The Company  expects
insurance  premiums to  increase  due to  additional  errors and  omissions  and
fidelity bond coverages.

     The Company's  record revenues and profits were achieved as a result of the
continued robust economy and favorable  investment  climate in the United States
during 1997. The Company continued its trend of building its  infrastructure for
future growth, including expansion of the corporate headquarters,  new marketing
and advertising  campaigns,  the investment in a new data management system, and
the hiring of additional legal and compliance personnel.

Fiscal 1996 as Compared to Fiscal 1995

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

     Operating  activities  contributed cash of $420,867 during 1997.  Inventory
positions  of  securities  held  by  the  Company  increased  by  $1,528,069.  A
substantial  portion of the Company's assets are liquid,  consisting of cash and
assets  readily  convertible  into cash,  such as  securities  inventories,  and
receivables due from the Company's clearing firm, which increased by $842,357 to
$2,707,782 at the end of 1997. The balances in the Company's cash, inventory and
clearing  firm  accounts  can and do  fluctuate  significantly  from day to day,
depending  on  market  conditions,   daily  trading  activity,   and  investment
opportunities.  The Company monitors these accounts on a daily basis in order to
ensure  compliance  with  regulatory   capital   requirements  and  to  preserve
liquidity.

     In 1997 and 1996,  the  Company  realized  tax  benefits of  $722,605  and
$23,789,  respectively,  related to the  exercise  of stock  options  during the
fiscal year. (See Note 2 to the consolidated  financial  statements).  These tax
benefits  are  available  to reduce  actual  corporate  tax  liabilities.  Under
applicable  accounting  rules,  such  benefits  are  reported  as an increase in
stockholders' equity rather than as an item of income.

     Investing  activities used cash of $1,456,277 in 1997. Capital expenditures
of $534,005 consisted primarily of an investment in a new securities back office
data  management  system,  additional  computer  equipment,  and  furniture  and
fixtures for the company's  home office  expansion.  The cost to develop the new
data  management  system will continue into 1998. On August 1, 1997, the Company
entered  into  a  Software   License  and  Development   Agreement  with  Uptick
Technologies, Inc. ("Uptick") to develop, deliver and install a sales production
and  operations  management  system,  based  upon  Uptick  proprietary  software
programs and the Company's functional specifications.  In payment of the license
fee, the Company caused its parent to issue 58,400 shares of its Common Stock to
Uptick and to use its best efforts to prepare,  file and effect  registration of
the  Shares  pursuant  to the  Securities  Act of 1933 with an option to put the
stock  back to the  Company  in the  event  that the  Company  fails  to  effect
registration of the shares. The license fee and Common Stock have been valued at
$175,000.  In  addition,  the  Company is  obligated  to pay Uptick  development
services  charges and  consulting  service fees at an hourly rate billed monthly
and reimburse  Uptick for certain costs and expenses.  The Company  retained the
ability to receive from Uptick certain stated  percentages  (ranging from 20% to
5%) of all license  fees earned and  received by Uptick for license of the sales
production and  operations  management  system to unrelated  third parties up to
July 7, 2000. The amount of revenue-sharing from license fees will be limited to
the total of all contract payments made by the Company to Uptick.

     Amounts  advanced  to brokers  and  affiliates  increased  by  $185,592  to
$927,195.  The  increase  is  attributable  to  loans  to new  affiliates  as an
inducement to join the Company,  advances to  employees,  and  receivables  from
brokers  as a result of  trading  losses and  customer  debits  which are broker
obligations.  The  Company,  through its  subsidiary,  Montauk  Advisors,  Inc.,
("MAI")  made loans to Global of $569,500 in 1997.  During the first  quarter of
1998, MAI made additional  loans to Global of $525,000.  The loans bear interest
at 8% per annum and are due in April and May 1998.  MAI at its sole option,  may
accept payment of the loans on an installment  basis,  and may extend any or all
of the loans. The first note which was due on April 1, 1998 has been extended to
September 1, 1998. Global is the finance company, which packaged and sold leases
to  investors  through  MAI.  These loans were made for the purpose of assisting
Global  in  meeting  cash  flow  deficiencies  arising  from the  nonpayment  of
scheduled monthly installments on certain delinquent and non-performing  leases.
Most of the arrears are due from Fem-Com Copy Systems,  Inc.  ("FCS"),  Global's
affiliated  equipment vendor and Biblio, Inc.  ("Biblio"),  an affiliate of FCS.
The MAI notes are guaranteed by Global;  FCS;  Biblio and the shareholder of FCS
and Biblio.  The notes are  further  collateralized  by  mortgage  liens on real
estate  owned by the  shareholder  of FCS and  Biblio,  a  pledge  of all of the
outstanding  shares in Global,  and various  recorded liens on the assets of FCS
and Biblio.  MAI expects  that  Global  will seek  additional  funds to meet its
continuing lease payment obligations.

     MAI has provided FCS with working capital  financing to purchase  equipment
for resale to FCS customers. MAI believes, but cannot assure, that by continuing
to provide this kind of financial  assistance,  FCS will be better positioned to
repay its  indebtedness to Global.  MAI charges a 1% commitment fee on the loans
plus  interest at the rate of 12% per annum.  The loans are  evidenced by a note
which is payable with interest on September 30, 1998.

     Financing  activities  provided  cash of  $755,745 in 1997.  Proceeds  from
exercise of stock  options and  warrants of $850,254  and the receipt of $23,027
from the issuance of shares of common stock was partially  offset by payments on
bank loans during the year of  $117,536,  under term notes  bearing  interest at
prime (8.5% at December 31, 1997).

     At December  31,  1997,  the  Company's  broker-dealer  subsidiary  had net
capital  of  $2,398,817,  which was  $2,148,817  in excess of its  required  net
capital of $250,000,  and the ratio of aggregate indebtedness to net capital was
1.28 to 1.

     Management believes that the Company's liquidity needs at least through the
next fiscal  year,  will be provided by  operating  income and the proceeds of a
rights  offering to  stockholders  of record on December 15, 1997. In March 1998
the Company received gross proceeds of $1,382,750 from the offering of 3,072,779
units; each unit consisting of one Class A Warrant,  one Class B Warrant and one
Class C Warrant.  The warrants  have  exercise  prices and  expiration  dates as
follows:

                  Warrant           Exercise Price            Expiration Date
                  -------           --------------            ---------------

                  Class A           $3.00                     February 17, 2001

                  Class B           $5.00                     February 17, 2003

                  Class C           $7.00                     February 17, 2005


     Should the market price of the Company's common stock increase to the level
where any or all of the classes or a portion of the  classes of warrants  become
exercisable,  the Company will obtain  additional  proceeds from the exercise of
the warrants.

     In 1997 the  Company  converted  a portion  of one of its legal  settlement
obligations  into a  subordinated  loan with the debtor.  The five year $250,000
loan  bears  interest  at the rate of 8% per  annum,  with  payments  of $50,000
principal  and  interest on the  declining  balance due on the first of April of
each of the five years of the loan.  The first payment of principal and interest
was made on April 1, 1998. The loan is subordinated to the liabilities of FMSC's
general creditors, and has been approved as to its form by the NASD.

Purchase Commitments


     In 1997,  the  Company  entered  into a  three-year  agreement  with a long
distance  carrier  under which the Company has  committed to pay minimum  annual
charges of $300,000 in each of the three contract  years,  in  consideration  of
favorable  rates  on  telephone  and  data  communications  service  during  the
commitment period.

Year 2000 Issue


     The onset of the year 2000 brings  challenges to companies who use and rely
on computers  and  technology as a function of their  businesses.  Many existing
computer  programs  use only two digits to  identify  a year in the date  field.
These programs were designed and developed without considering the impact of the
upcoming  change in the century.  If not corrected,  many computer  applications
could fail or create erroneous results by or at the Year 2000.

     The Company has commenced reviewing its compliance with what has come to be
known as the Year 2000 issue  ("Y2K").  The  Company  does not create or develop
computer  programs  on its own.  Rather,  it is reliant on outside  vendors  for
verification of the compliance of their  applications  which are utilized by the
Company.  The Company has currently identified 17 programs which are utilized by
the Company in various  departments,  which require compliance with Y2K. We have
requested each of these vendors to supply  verification  that the software which
is utilized by the firm is or will be Y2K  compliant by the Year 2000.  The most
significant of these outside vendors is the Company's clearing firm,  Schroder &
Co., Inc.

     The Company has already received some verbal notices of compliance,  but is
awaiting a final  written  confirmation  from these  vendors.  The  Company  has
designated  an  individual   within  the  organization  to  coordinate  the  Y2K
compliance  issue, to communicate with each of the software and service vendors,
to ensure Y2K compliance  before the turn of the century.  While  management has
not finalized an estimate of the cost of internal system modifications,  it does
not  believe  that  these  costs will have a  material  impact on the  Company's
operations in fiscal 1998.

Impact of Inflation and Other Factors

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

Factors Affecting "Forward-Looking Statements"

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

Effects of Recently Issued Accounting Standards


     In June 1997,  SFAS 130,  "Reporting  Comprehensive  Income," and SFAS 131,
"Disclosures  About  Segments of an Enterprise  and Related  Information,"  were
issued.  SFAS 130 addresses standards for reporting and display of comprehensive
income  and its  components,  and SFAS 131  requires  disclosure  of  reportable
operating segments.  In February 1998, SFAS 132,  "Employers'  Disclosures About
Pensions  and Other  Post-retirement  Plans" was issued.  SFAS 132  standardizes
pension disclosures. These statements are effective in 1998. The Company will be
reviewing these  pronouncements to determine their applicability to the Company,
if any.

Item 8.    Financial Statements
                  See Financial Statements attached hereto.

Item 9.    Disagreements on Accounting and Financial Disclosure
                  Not Applicable.


<PAGE>

                                    PART III
Item 10. Directors and Executive Officers

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

Name                  Age                       Position
----                  ---                       --------

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

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

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

Edward L. Bayarski    47    President, MISI

Norma Doxey           58    Director

Ward R. Jones, Jr.    67    Director

David I. Portman      57    Director
                                               
     The Company's Certificate of Incorporation  provides for the classification
of the Board of Directors into three classes of Directors,  each class as nearly
equal in number as possible  but not less than one  Director,  each  director to
serve  for  a  three-year   term,   staggered  by  class.   The  Certificate  of
Incorporation  further provides that a Director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of the holders of
at least 70% of the combined  voting power of the Company's  voting stock,  with
vacancies  on the Board being  filled only by a majority  vote of the  remaining
Directors  then in  office.  "Cause"  is  defined  as the  willful  failure of a
director to perform in any  substantial  respect such  Director's  duties to the
Corporation  (other  than any such  failure  resulting  from  incapacity  due to
physical  or  mental  illness),   willful  malfeasance  by  a  Director  in  the
performance  of  his  duties  to  the   Corporation   which  is  materially  and
demonstrably  injurious to the  Corporation,  the commission by a Director of an
act of fraud in the performance of his duties,  the conviction of a Director for
a felony  punishable by  confinement  for a period in excess of one year, or the
ineligibility  of a Director for  continuation  in office  under any  applicable
rules, regulations or orders of any federal or state regulatory authority.

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

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

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

     Brian M. Cohen is a General Securities and Municipal Securities  Principal,
of FMSC from August, 1986, to present. He is the manager of the fixed-income and
government securities department of FMSC. From August, 1984, to August, 1986, he
was a vice president and registered  representative  with Homestead  Securities,
Inc. Mr. Cohen is a cousin to Mr.  Herbert  Kurinsky and Mr.  William  Kurinsky.
Brian M.  Cohen,  one of FMSC's  principals,  submitted  a  Settlement  Offer in
connection with an SEC administrative  proceeding which provides for a two month
suspension from  association  with any  broker/dealer  and an eighteen month bar
from acting in any supervisory capacity thereafter. Mr. Cohen also agreed to pay
a monetary fine of $5,000.

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

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

     Ward R. Jones,  Jr. has been a director of the  Company  since June,  1991.
From 1955 through 1990, Mr. Jones was employed by Shearson  Lehman Brothers as a
registered representative,  eventually achieving the position of Vice President.
Mr. Jones is currently a registered  representative of First Montauk  Securities
Corp., but does not engage in any securities business.

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

Certain Reports

     No person  who,  during the fiscal  year ended  December  31,  1997,  was a
Director,  officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only class of  securities  of the Company  registered
under  Section  12 of  the  Securities  Exchange  Act of  1934  (the  "Act")  (a
"Reporting  Person")  failed  to file on a timely  basis,  reports  required  by
Section 16 of the Act during the most  recent  fiscal year or prior  years.  The
foregoing  is based  solely upon a review by the Company of Forms 3 and 4 during
the most recent  fiscal year as  furnished  to the Company  under Rule  16a-3(d)
under the Act, and Forms 5 and amendments  thereto furnished to the Company with
respect to its most recent fiscal year, and any  representation  received by the
Company from any reporting person that no Form 5 is required.

Item 11. Executive Compensation

Summary of Cash and Certain Other Compensation

     The following provides certain information concerning all Plan and Non-Plan
(as  defined in Item 402 (a)(ii) of  Regulation  S-B)  compensation  awarded to,
earned by,  paid or accrued by the Company  during the years ended  December 31,
1997, 1996 and 1995 to each of the named executive officers of the Company.

                           SUMMARY COMPENSATION TABLE

                             Annual Compensation                   Long Term
                                                                   Compensation
                                                                   ------------
                                                         Securities        
                                                         Underlying
Name & Principal                                Other Annual      Options/ SARs
Position              Year     Salary   Bonus   Compensation      Granted(1) 
--------              ----     ------   -----   ------------      ---------- 
 
Herbert Kurinsky     1997  $168,269        0        $  2,724(2)    50,000
 Chairman, Chief     1996  $175,000     $40,000     $ 41,070(2)        0
 Executive Officer(3)1995  $101,000      90,000     $  8,594(2)   200,000
 
William J. Kurinsky  1997  $158,173        0        $  1,534(4)    75,000
Vice President,      1996  $175,000        0        $ 11,884(4)        0
 Chief Operating and 1995  $121,000     $90,000     $ 39,409(4)   200,000
 Financial Officer   
 and Secretary (5)

Brian M. Cohen       1997  $100,000     $ 2,500     $  2,126(6)    50,000
Vice President and   1996  $100,000        0        $ 17,385(6)      0
General Securities   1995  $ 87,115     $15,000     $  6,365(6)     5,000
 Principal, FMSC     

Edward L. Bayarski   1997  $125,000         0       $ 55,275(7)       0
 President, MISI     1996  $ 87,308     $ 7,256     $ 38,061(7)    60,000
                     1995  $ 33,654     $ 9,000     $  8,639(7)    40,000
                             

     1) In 1995, the Board of Directors  authorized a grant to purchase  200,000
shares of the  Company's  Common  Stock each to Herbert  Kurinsky and William J.
Kurinsky at an exercise  price of $.75 and $.8352  respectively.  Mr.  Cohen was
granted an option to purchase  5,000 shares at $.75.  These  options have vested
and are  exercisable  until  November  5, 2000 for Messrs.  Kurinsky,  and until
December  14, 2000 for Mr.  Cohen.  In 1996,  Edward L.  Bayarski was granted an
option to purchase  60,000 shares of Common Stock at an exercise  price of $1.02
per share. These options vest at 20% a year from the date of grant and expire in
2001. In 1997, the Board of Directors authorized an additional grant to purchase
50,000 shares and 75,000 shares at exercise  prices of $.96 and $1.05 to Herbert
Kurinsky and William J.  Kurinsky,  respectively.  Mr. Cohen was also granted an
additional  50,000  options to purchase  stock at an exercise  price of $.96 per
share.  All 1997 option  grants  expire  five years from the date of grant.  See
"Aggregated  Options/Sar  Exercises  in Last Fiscal  Year and Fy-End  Option/Sar
Values."

     2)  Includes:  (i) for 1997,  commissions  of  $2,724;  (ii) for  1996,  an
automobile allowance of $7,512,  commissions of $10,512, dues of $7,440 and loan
forgiveness of $15,606; and (iii) for 1995, an automobile allowance of $8,594.

     3) Mr.  Herbert  Kurinsky is the  beneficial  owner of 1,518  shares of the
Company's  Common Stock as of December 31, 1997, which shares had a market value
of approximately $4,317 as of that date, without giving effect to the diminution
in value attributable to the restriction on said shares.

     4)  Includes:  (i) for 1997,  commissions  of $1,534;  (ii) for 1996,  loan
forgiveness  in the  amount of  $11,884;  and (iii)  for  1995,  commissions  of
$39,409.

     5) Mr. William  Kurinsky is the beneficial owner of 1,348,423 shares of the
Company's  Common Stock as of December 31, 1997, which shares had a market value
of  approximately  $3,834,578  as of that  date,  without  giving  effect to the
diminution in value attributable to the restriction on said shares.

     6)  Includes:   (i)  for  1997,  commissions  of  $2,126;  (ii)  for  1996,
commissions of $7,578,  and automobile  allowance of $4,650 and loan forgiveness
of $5,157; and (iii) for 1995, commissions of $2,045 and an automobile allowance
of $4,320.

     7)  Includes:  (i)  for  1997,  commissions  of  $55,275;  (ii)  for  1996,
commissions of $38,061; and (iii) for 1995, includes commissions of $8,639.

Compensation of Directors

     The  Company  pays  directors,  who are not  employees  of the  Company,  a
retainer of $250 per  meeting of the Board of  Directors  attended  and for each
meeting of a committee of the Board of Directors not held in conjunction  with a
Board of Directors  meeting.  Directors employed by the Company are not entitled
to any additional  compensation  as such.  During fiscal year 1997, the Board of
Directors met on 5 occasions. Committees of the Board of Directors

     The Board of Directors  has  established  an Audit  Committee  comprised of
William J.  Kurinsky and David  Portman.  The Audit  Committee met on 1 occasion
during fiscal year 1997.  The Audit  Committee  reviews (i) the Company's  audit
functions, (ii) with management, the finances,  financial condition, and interim
financial  statements of the Company,  and (iii) with the Company's  independent
auditors, the year end financial statements of the Company. Members of the Audit
Committee do not receive additional compensation for such service.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

     The  following  table  contains  information  with  respect  to  the  named
executive  officers  concerning  options held as of the year ended  December 31,
1997.

                                INDIVIDUAL GRANTS

                    Number of       % of Total
                    Underlying      Granted to     Exercise
                    Options/SARs    Employees in   or Base
     Name           Granted(#)      Fiscal Year    Price ($Sh)   Expiration Date
     ----           ------------    -----------    -----------   ---------------
Herbert Kurinsky    50,000          3.4%           $ .96         1/15/02
William J. Kurinsky 75,000          5.0%            1.05         1/15/02
Brian M. Cohen      50,000          3.4%             .96         1/15/02
Edward L. Bayarski    --             --               --            --


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

                                                             Value of
                    Shares               Number of           Unexercised
                    Acquired             Unexercised         In-the-money
                    on        Value      Options as of       Options at
     Name           Exercise  Realized   December 31,1997    December 31,1997(1)
     ----           --------  --------   ----------------    -------------------
                                         Exercisable/Unexer. Exercisable/Unexer.
Herbert Kurinsky     200,000 $412,711      290,000/0        $  596,688/$0
William J. Kurinsky    ---      ---        515,000/0        $1,064,281/$0
Brian M. Cohen        95,000 $177,247       55,000/0        $  103,406/$0
Edward L. Bayarski    28,000 $ 64,750       24,000/48,000   $   43,770/93,780


     (1) Based  upon the  closing  bid price of the  Company's  Common  Stock on
December  31,  1997  ($2.84375  per  share),  less the  exercise  price  for the
aggregate number of shares subject to the options.

Employment Agreements

     In  January  1996,  the  Company  entered  into new  three-year  employment
contracts  with Herbert  Kurinsky,  as  President  and William J.  Kurinsky,  as
Executive Vice  President.  The contracts  provide for base salaries of $175,000
for the first year of the  agreement  for each,  increasing  in each case at the
rate of 10% per year. Each will also be entitled to receive a portion of a bonus
pool consisting of 10% of the pre-tax  profits of the Company,  to be determined
by the executive management (e.g. Herbert Kurinsky and William J. Kurinsky). The
bonus pool would  require a minimum of $500,000  pretax profit per year in order
to become  effective.  In 1997, each formally waived his right to receive a cash
bonus for fiscal year 1997. Each is also entitled to receive  commissions at the
same  rate as paid to  other  non-affiliate  registered  representatives  of the
Company. They are also entitled to purchase up to 20% of all underwriters and/or
placement  agent  warrants  or  options  which  are  granted  to  First  Montauk
Securities Corp. from FMSC upon the same price, terms and conditions afforded to
FMSC as the underwriter or placement  agent.  Each employee also receives health
insurance  benefits and life  insurance as generally  made  available to regular
full-time  employees of the Company,  and reimbursement for expenses incurred on
behalf of the  Company and the use of an  automobile  or in the  alternative  an
automobile allowance. The contracts also provide for severance benefits equal to
three times the previous  year's  salary in the event either of the employees is
terminated or their duties significantly changed after a change in management of
the Company as defined in the agreement.

Incentive Stock Option Plan

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

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

     Under the Amended Plan,  the exercise  price of an option  designated as an
ISO shall not be less than the fair market value of the Common Stock on the date
the option is granted.  However,  in the event an option designated as an ISO is
granted to a ten  percent  stockholder  (as  defined in the  Amended  Plan) such
exercise price shall be at least 110% of such fair market value. Exercise prices
of Non-ISO  options may be less than such fair market value.  The aggregate fair
market value of shares  subject to options  granted to a  participant  which are
designated as ISOs which become  exercisable in any calendar year may not exceed
$100,000.

     The Board or the Stock  Option  Committee,  as the case may be, may, in its
sole discretion, grant bonuses or authorize loans to or guarantee loans obtained
by an  optionee  to enable  such  optionee  to pay any  taxes  that may arise in
connection  with the  exercise  or  cancellation  of an  option.  Unless  sooner
terminated, the Amended Plan will expire in 2006. To date, options to purchase a
total of 3,379,000  shares of the Company's  Common Stock have been issued under
the Amended 1992 Plan.

Director Plan

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

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

     The exercise  price for options  granted  under the Director  Plan shall be
100% of the fair market  value of the Common  Stock on the date of grant.  Until
otherwise  provided  in the Stock  Option  Plan the  exercise  price of  options
granted under the Director Plan must be paid at the time of exercise,  either in
cash,  by delivery of shares of Common Stock of the Company or by a  combination
of each. The term of each option  commenced on the date it is granted and unless
terminated sooner as provided in the Director Plan,  expires five years from the
date of grant.  The Director Plan is administered by a committee of the board of
directors  composed  of not fewer than three  persons  who are  officers  of the
Company (the  "Committee").  The Committee has no discretion to determine  which
non-executive  director or advisory  board  member will  receive  options or the
number  of  shares  subject  to  the  option,  the  term  of the  option  or the
exercisability   of  the  option.   However,   the   Committee   will  make  all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for  incentive  stock option  treatment.  To
date,  a  total  of  260,000   options  have  been  granted  to  the   Company's
Non-Executive members of the Board of Directors.

Senior Management Plan

     In 1996, the Company adopted the 1996 Senior Management Incentive Plan (the
"Management  Plan").  The  Management  Plan  provides  for the issuance of up to
2,000,000  shares of Common Stock either upon  issuance of options  issued under
the Plan or grants of restricted stock or incentive stock rights.  Awards may be
granted under the Management Plan to executive management employees by the Board
of Directors or a committee of the board,  if one is appointed for this purpose.
The Management Plan provides for four types of awards--stock options,  incentive
stock  rights,   stock  appreciation   rights,  and  restricted  stock  purchase
agreements.  The stock options  granted under the Management  Plan can be either
ISOs or non-lSOs  similar to the options granted under the Employee Stock Option
Plan,  except that the exercise  price of non-lSOs 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 the Company.  If services of the
holder terminate prior to the incentive period,  the rights become null and void
unless termination is caused by death or disability.  Stock appreciation  rights
allow a Grantee to receive an amount in cash equal to the difference between the
fair market value of the stock and the exercise price, payable in cash or shares
of Common  Stock.  The Board or  committee  may grant  limited SARs which become
exercisable  upon a "change  of  control"  of the  Company.  A change of control
includes  the  purchase by any person of 25% or more of the voting  power of the
Company's  outstanding  securities,  or a change in the majority of the Board of
Directors.

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

     In 1997, the Company  granted a total of 175,000 options to three executive
officers.

Item 12. Security Ownership of Certain
         Beneficial Owners and Management

     The  following  table  sets  forth,  as of March 24,  1998,  the number and
percentage  of  outstanding  shares of Common Stock  beneficially  owned by each
person known by the Company to own  beneficially  more than 5% of the  Company's
outstanding  shares of Common Stock and Common Stock Warrants,  by each director
of the Company, and by all directors and officers of the Company as a group.

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

Herbert Kurinsky                               291,518(2)         2.95%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

William J. Kurinsky                          1,663,423(3)        16.19%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

Brian M. Cohen                                  60,563(4)          *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701
 
Edward L. Bayarski                              72,000 (5)         *
One Mack Centre Drive
Paramus, NJ 07652

Ward R. Jones                                  100,000(6)          *
7 Leda Lane
Guilderland, NY 12084

Norma Doxey                                     42,400(7)          *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

David I. Portman                               159,800(8)         1.64%
19 Pal Drive
Wayside, NJ 07712

All Directors and                            2,389,704(2-8)      20.78%
Officers as a group
(7 persons in number)

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

     (2)  Includes  vested and  presently  exercisable  options  of Mr.  Herbert
Kurinsky, to purchase 290,000 shares of Common Stock.

     (3) Includes  vested and presently  exercisable  options of Mr.  William J.
Kurinsky  to  purchase  315,000  shares of Common  Stock,  and  120,000  Class A
Warrants, 120,000 Class B Warrants and 120,000 Class C Warrants.

     (4) Includes  55,000 shares of Common Stock  reserved for issuance upon the
exercise of vested and presently  exercisable  stock options,  and 1,521 Class A
Warrants, 1,521 Class B Warrants and 1,521 Class C Warrants.

     (5) Includes  72,000 shares of Common Stock  reserved for issuance upon the
exercise of 24,000  vested and  presently  exercisable  stock options and 48,000
shares non-vested stock options.

     (6) Includes  100,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options.

     (7) Includes  35,000 shares of Common Stock  reserved for issuance upon the
exercise of 18,000  vested and  presently  exercisable  stock options and 17,000
shares non-vested stock options.

     (8) Includes  60,000 shares of Common Stock  reserved for issuance upon the
exercise of vested and  presently  exercisable  stock  options,  16,600  Class A
Warrants, 16,600 Class B Warrants and 16,600 Class C Warrants.

     NOTE:     All Class A Warrants are exercisable at $3.00 per share for a
               period of three (3) years from February 17, 1998.
               All Class B Warrants are  exercisable at $5.00 per share for a
               period of five (5) years from  February 17,  1998.
               All Class C Warrants  are  exercisable  at $7.00 per share for a
               period of seven (7) years from February 17, 1998.

Item 13.   Certain Relationships and Related Transactions

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

     Advances  and loans to the  Company's  three  Executive  Officers,  Herbert
Kurinsky,  William J.  Kurinsky  and Brian M. Cohen and  Director  Norma  Doxey,
totaling  $136,300 are unsecured  and currently  bear interest at the rate of 6%
per annum. These loans are due on demand.

     The Company served as placement  agent in a private  placement  offering by
PacificHealth  Laboratories  which commenced in August 1995 and was completed in
April 1996. PacificHealth sold 250,000 shares of 10% Convertible Preferred Stock
in the private  placement at $10.00 per share. The Company received  commissions
of approximately $250,000 from the private placement offering. In December 1997,
the Company underwrote an initial public offering of PacificHealth  Laboratories
from which the Company  realized  gross  commissions of  approximately  $720,000
before sales concessions,  plus reimbursement for expenses (See "Business"). Mr.
David Portman, a director of the Company, also serves as an officer and director
of PacificHealth, and is a significant stockholder of PacificHealth.

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

     In July  1995,  the  Company  commenced  a private  placement  on behalf of
Environmental  Coupon  Marketing,   Inc.  ("ECM")  a  closely-held  marketer  of
recycling  programs to retailers  featuring store coupons and cash incentives to
consumers. In anticipation of the offering, in August 1995, the Company loaned a
total of  $282,000  to ECM.  The first loan,  in the amount of  $100,000,  bears
interest at the rate of 6% per annum and was  scheduled to mature on the earlier
of a proposed private placement of ECM securities,  or August 5, 1996. In August
1996, the Company  extended  repayment of the loan to July 15, 1997. The Company
received a payment of $11,360 in 1997, which was applied against principal.  The
balance of the loan is  currently in default.  The second loan,  in the original
amount of $182,000,  is  non-interest  bearing and may be  converted  into up to
350,000  shares of ECM common  stock at the rate of $.52 per share.  The Company
sold $52,000 of principal amount of this loan to four unaffiliated investors for
face value in 1996.  This loan was  scheduled  to mature on October 5, 1996,  at
which time the Company  extended it for one year to October 5, 1997. The loan is
currently  in default.  Both loans are  partially  secured by certain  equipment
owned by ECM. Management has reduced the combined loan balance by $69,000 to its
estimated  realizable value as of December 31, 1997. The Company does not accrue
interest on the ECM notes.

     The Company also purchased  150,000 shares of ECM common stock for $.40 per
share, or $60,000 in 1995, and an additional 150,000 shares for $60,000 in 1996.
Subsequent  to the 1996  purchase,  the Company  sold 37,500 and 52,500  shares,
respectively,  to an officer  of the  Company  and a  consultant,  for cost,  or
$36,000.  In 1997,  the Company  wrote off the $84,000  balance of its ECM stock
investment.

<PAGE>

                                     PART IV


Item 14.          Exhibits, Financial Statements
                  and Reports on Form 8-K       

     (A)  1. Financial Statements

     See Financial Statements Attached Hereto.
 
          2.   Exhibits

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

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


<PAGE>

                                   SIGNATURES

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

                                               FIRST MONTAUK FINANCIAL CORP.


                                               By  /s/ Herbert Kurinsky       
                                                 Herbert Kurinsky, President
Dated:  April 15, 1998

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

/s/ Herbert Kurinsky                                           April 15, 1998
Herbert Kurinsky
President, Chief Executive
Officer and Director


/s/ William J. Kurinsky_                                       April 15, 1998
William J. Kurinsky
Vice-President, Chief Operating
and Chief Financial Officer, and
Principal Accounting Officer,
Secretary and Director


/s/ Norma Doxey                                                 April 15, 1998
Norma Doxey, Director



/s/ Ward R. Jones, Jr.,                                         April 15, 1998
Ward R. Jones, Jr., Director


/s/ David I. Portman                                            April 15, 1998
David I. Portman, Director



<PAGE>

                                 EXHIBITS INDEX
 

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

Exhibit No.                                 Description

   3.1*        Amended and Restated Certificate of Incorporation adopted at
               1989 Special Meeting in lieu of Annual Meeting of Shareholders.
 
   3.2*        Amended and Restated By-Laws.
 
   4.1*        Form of Common Stock Certificate.

   4.4*        Form of Underwriter's Warrant.
 
  10.7*        Sublease between Prime Asset Management Corp. and the Registrant
               dated December 6, 1989.
 
  10.8*        Clearing Agreement between the Registrant and Wertheim Schroder
               & Co., Incorporated dated January 21, 1991.

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

  10.11***     Employment Agreement between First Montauk Financial Corp. and
               Herbert Kurinsky dated January 1, 1993.
 
  10.12***     Employment Agreement between First Montauk Financial Corp. and
               William Kurinsky dated January 1, 1993.
 
  10.13***     Lease Agreement between First Montauk Securities Corp. and River
               Office Equities dated September 7, 1993.
 
  10.14****    Lease Addendum Agreement between First Montauk Securities Corp.
               and River Office Equities dated June 21, 1994.
 
  10.15*****   Sublease Agreement between First Montauk Securities Corp.
               and Pilot Laboratories, Inc. dated  September  19,  1995,  and
               Master  Lease Agreement between River Office Equities and Pilot
               Laboratories, Inc. dated  August 31, 1987.

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

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

  27           Financial Data Schedule

  28.1*        1992 Incentive Stock Option Plan.

  28.2*        1992 Non-Executive Director Stock Option Plan.
 
  28.3******   Amended and Restated 1992 Incentive Stock Option Plan.

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

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

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

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

  28.8******** First  Amendment to Office Lease  Agreement dated March 5, 1997
               between First Montauk  Securities  Corp.  and River Office
               Equities dated March 3, 1998.

 






<PAGE>

                         REPORT OF INDEPENDENT AUDITORS


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

     We have  audited the  accompanying  consolidated  statements  of  financial
condition of First Montauk  Financial Corp. and  subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders'  equity,  and cash flows for each of the three years in the period
ended  December  31,  1997.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  based on our  audits.

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


     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position of First
Montauk  Financial Corp. and  subsidiaries as of December 31, 1997 and 1996, and
the  consolidated  results of their  operations and their cash flows for each of
the three  years in the  period  ended  December  31,  1997 in  conformity  with
generally accepted accounting principles.

                                  Schneider  Ehrlich & Wengrover LLP

Woodbury, New York
March 12, 1998


<PAGE>

                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                           December 31,
                                                    1997                1996

ASSETS

Cash                                            $   789,883         $ 1,069,548
Due from clearing firm                            2,707,782           1,865,425
Securities owned, at market                       3,150,772           2,129,435
Securities owned, not readily marketable,
 at estimated fair value                            506,732                 --
Commissions receivable                              246,250             156,413
Employee and broker receivables                     927,195             741,603
Furniture, equipment and leasehold
 improvements - net                               1,357,854           1,200,933
Notes receivable                                    938,054             230,000
Due from officers                                   146,691             171,978
Other assets                                      1,164,753             624,536
Deferred tax asset - net                             35,968             552,168
                                                     ------             -------

     Total assets                               $11,971,934         $ 8,742,039
                                                ===========         ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Securities sold, but not yet purchased,
 at market                                      $   809,523         $   127,627
Notes payable - bank                                340,769             458,305
Subordinated notes payable                          250,000                  --
Commissions payable                               1,624,316           1,552,218
Accounts payable                                    501,267             494,697
Accrued expenses                                    812,590           1,811,897
Other liabilities                                   394,002             180,516
                                                    -------             -------

     Total liabilities                            4,732,467           4,625,260
                                                  ---------           ---------

Common stock issued with guaranteed
 selling price -
  no par value, 173,000 and 210,500
  shares issued and outstanding,
  respectively                                      346,500             421,500
                                                    -------             -------

Commitments and contingent liabilities
 (See Notes)

STOCKHOLDERS' EQUITY

Preferred Stock, 5,000,000 shares authorized, $.10
     par value, no shares issued and outstanding        --                  --
Common Stock, no par value, 30,000,000 shares
     authorized, 9,198,444 and 8,222,481 shares issued
     and outstanding, respectively                4,334,173           3,588,273
Additional paid-in capital                        1,173,437             243,961
Retained earnings                                 1,570,376              93,551
Less:  Deferred compensation                       (185,019)                 --
                                                   --------           ---------
                                                  6,892,967           3,925,785
Less:    196,802 common shares in treasury in
         1996, at cost                                  --             (230,506)
         -----                                    --------            --------- 
     Total stockholders' equity                   6,892,967           3,695,279
                                                  ---------           ---------
     Total liabilities and stockholders' equity $11,971,934         $ 8,742,039
                                                ===========         ===========


<PAGE>

                 FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                 Years ended December 31,
                                             1997        1996           1995
Revenues:

Commissions                             $27,018,244   $25,749,690   $17,113,296
Net dealer inventory and trading gains    7,257,576     7,660,700     9,763,940
Investment banking                        1,433,100       634,329       388,249
Insurance recovery                          650,000           --            --
Interest and other income                 1,383,713     1,044,969     1,076,718
                                          ---------     ---------     ---------

Total revenues                           37,742,633    35,089,688    28,342,203
                                         ----------    ----------    ----------

Expenses:

Commissions, employee compensation
     and benefits                        26,785,205    25,428,184 19,542,578
Clearing and floor brokerage              3,021,709     3,139,142  3,112,474
Communications and occupancy              1,860,350     1,662,936  1,260,209
Legal matters and related costs           1,452,001     2,731,997  1,542,328
Other operating expenses                  2,093,670     2,006,615  1,439,926
Interest                                     84,695       105,772    192,752
                                         ----------    ---------- ----------

                                         35,297,630    35,074,646 27,090,267
                                         ----------    ---------- ----------

Income before income taxes                2,445,003        15,042  1,251,936
 
 
Provision (benefit) for income taxes        968,178       (17,747)   483,848
                                          ---------    ----------  ---------

Net income                              $ 1,476,825   $    32,789 $  768,088
                                        ===========   =========== ==========

Earnings per share data:

     Basic                              $       .17   $       .01 $      .10
                                        ===========   =========== ==========

     Diluted                            $       .14   $       .01 $      .09
                                        ===========   =========== ==========

Number of common shares used in
     basic earnings per share             8,788,734     7,767,224  8,044,622

Incremental shares from assumed
     conversion of options                1,562,298       856,314    336,284
                                          ---------       -------    -------

Number of common shares used in
     diluted earnings per share          10,351,032     8,623,538  8,380,906
                                         ==========     =========  =========



<PAGE>

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

                                                  Years ended December 31,
                                            1997           1996        1995

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Cash flows from operating activities:
     Net income                           $ 1,476,825   $   32,789   $  768,088
                                          -----------   ----------   ----------
Adjustments to reconcile net income to
     net cash provided by operating
      activities:
     Shares issued to settle legal claims        --        178,650         --
     Loan reserves                             69,000          --          --
     Common stock issued with guaranteed
      selling price                            28,125      421,500         --
     Tax benefit related to exercise of
      stock options                           722,605       23,789         --
     Depreciation and amortization            348,508      272,050      184,818
     Amortization of deferred compensation     21,852          --          --
     Increase (decrease) in cash attributable
      to changes in assets and liabilities
       Commissions receivable                 (89,837)     227,455     (250,901)
       Securities owned - at market        (1,021,337)   4,985,072   (2,197,289)
       Securities owned - not readily
        marketable                           (506,732)         --          --
       Other assets                          (532,728)    (338,846)     (34,863)
       Due from/to clearing firm             (842,357)  (4,171,457)      26,781
       Securities sold but not yet purchased  681,896      (38,755)    (288,600)
       Commissions payable                     72,098       85,028      714,994
       Accounts payable                        12,570      105,385       63,363
       Accrued expenses                      (749,307)     419,782    1,372,891
       Income taxes payable                       --      (621,690)     615,636
       Other liabilities                      213,486     (315,240)     334,345
       Deferred income taxes                  516,200     (182,995)    (309,778)
                                            ---------    ---------    --------- 
         Total adjustments                 (1,055,958)   1,049,728      231,397
                                            ---------    ---------    ---------
Net cash provided by operating activities     420,867    1,082,517      999,485
                                            ---------    ---------    ---------

Cash flows from investing activities:
     Due from officers                         25,287      (16,454)      (4,370)
     Employee and broker receivables         (185,592)    (384,078)     156,742
     Capital expenditures                    (534,005)    (668,314)    (435,539)
     Collection of notes receivable            11,360       52,000     (276,000)
     Issuance of notes receivable            (788,414)         --           --
     Purchase of stock in ECM                     --       (60,000)         --
     Sale of stock in ECM                         --        36,000          --
     Other assets                              15,087      (87,460)     (60,000)
                                            ---------    ---------      ------- 
Net cash used in investing activities      (1,456,277)  (1,128,306)    (619,167)
                                           ----------   ----------     -------- 

Cash flows from financing activities:
     Proceeds from notes payable - bank           --       479,625          --
     Payment of notes payable - bank         (117,536)     (68,864)     (25,934)
     Stock registration costs                     --           --        (2,814)
     Issuance of common stock                  23,027          --           --
     Proceeds from exercise of stock options
      and warrants                            850,254       89,611       13,985
     Repurchase of common stock                   --      (230,506)    (194,035)
                                            ---------     --------     -------- 



<PAGE>

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

                                                  Years ended December 31,
                                            1997           1996        1995

Net cash provided by (used in) financing
 activities                                   755,745      269,866     (208,798)
                                            ---------      -------     -------- 
Net increase (decrease) in cash and cash
 equivalents                                 (279,665)     224,077      171,520
Cash and cash equivalents at beginning of
 year                                       1,069,548      845,471      673,951
                                            ---------      -------      -------
Cash and cash equivalents at end of year  $   789,883  $ 1,069,548   $  845,471
                                          ===========  ===========   ==========
Supplemental disclosures of cash flow
information:
     Cash paid (refunded) during the period for:
         Interest                         $    84,695  $   105,772   $  192,752
         Income taxes                     $  (203,480) $ 1,019,242   $  149,722


Transfer of temporary equity to
 permanent capital                        $   103,125


<PAGE>
<TABLE>

                                            FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                       FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 31, 1997

                                                   Additional
                                 Common Stock      Paid-in     Retained    Treasury Stock         Deferred         Stockholders'
                              Shares     Amount    Capital     Earnings   Shares      Amount      Compensation        Equity
<S>                         <C>       <C>       <C>        <C>              <C>        <C>         <C>          <C>  
                             
Balances at January 1, 1995 8,112,406 $3,306,027 $ 417,021   $(707,326)       --          --           --            $3,015,722

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

Exercise of stock options     137,375     89,611        --          --        --           --          --                89,611
Tax benefit related to
    exercise of stock options      --         --    23,789          --        --           --          --                23,789
Repurchase of common stock         --         --        --          -- (196,802)   $(230,506)          --              (230,506)
Shares issued to settle legal
    claims                    165,000    178,650        --          --        --           --          --               178,650
Net income for the year            --         --        --      32,789        --           --          --                32,789
                              -------    -------  ---------     ------ ---------   ----------         ----------        --------
Balances at December 31,
 1996                       8,222,481 $3,588,273  $243,961   $  93,551 (196,802)   $(230,506)          --            $3,695,279
 
Exercise of stock options     973,025    662,754        --          --       --            --          --               662,754
Exercise of common stock
 purchase warrants            150,000    187,500        --          --       --            --          --               187,500   
Deferred compensation              --         --   206,871          --       --            --     (206,871)                 --
Amortization of deferred
 compensation                      --         --        --          --       --            --       21,852               21,852
Cancellation of shares
 held in treasury            (196,802)  (230,506)       --          --  196,802      230,506           --                   --   
Sale of restricted stock       12,240     23,027        --          --       --            --          --                 23,027
Transfer from temporary
 equity                        37,500    103,125        --          --       --            --          --                103,125
Tax benefit related to
 exercise of stock                  
 otions                            --        --     722,605         --       --            --          --                722,605    
Net income for the year            --        --         --     1,476,825     --            --          --              1,476,825
                              --------   -------    --------   ---------  ------     ---------    --------            ----------
 
Balances at December 31,
 1997                       9,198,444  $4,334,173  $1,173,437 $1,570,376     --            --     (185,019)           $6,892,967
                            =========  ==========  ========== ========== =======     ==========   =========            ==========
     
</TABLE>

                 See notes to consolidated financial statements.

<PAGE>
  40



 






NOTE 1 -        NATURE OF BUSINESS

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

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

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

NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

     Certain reclassifications have been made to prior year financial statements
to conform to the 1997 presentation.

Revenue Recognition

     Securities transactions, investment banking revenues, and commission income
and related  expenses are recorded on a trade date basis.  Securities  owned and
securities  sold but not yet repurchased are stated at quoted market values with
unrealized gains and losses reflected in 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.
 
     Commissions  earned from the sale of insurance products are recognized upon
approval of the customer application by the insurance carrier.

Depreciation and Amortization

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

Statement of Cash Flows

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

Net Income per Share

     The Company has adopted Statement of Financial  Accounting Standards No.128
(SFAS 128),  "Earnings per Share," which  supersedes APB Opinion No. 15 (APB No.
15).  Earnings per Share is effective for all periods  ending after December 15,
1997.  SFAS 128 requires  dual  presentation  of basic and diluted  earnings per
share (EPS) for complex  capital  structures  on the face of the  Statements  of
Operations. Basic EPS is computed by dividing net income by the weighted-average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution  from the exercise or conversion  of other  securities  into
common  stock.  Earnings  per share data have been  restated to conform with the
provision of SFAS 128. The impact of the change was not material.

Use of Estimates

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

Long-lived assets

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

Stock-based Compensation

     In October 1995, the Financial  Accounting  Standards Board issued SFAS No.
123, "Accounting for Stock-based  Compensation".  SFAS No. 123 requires that the
Company  either  recognize  in its  financial  statements  costs  related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans,  or make  pro  forma  disclosures  of such  costs  in a  footnote  to the
financial  statements.  The Company has elected to continue to use the intrinsic
value-based  method of APB Opinion no. 25, as allowed under SFAS 123, to account
for all of its employee  stock-based  compensation plans. The compensatory value
of  options  issued  to  outside  directors,   affiliate   brokers,   and  other
non-employees  is charged to  operations  over the vesting  period of the option
grants.

Income Taxes

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

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

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

     Under APB No. 25, compensation expense arising from the exercise of certain
employee stock options is deductible for income tax purposes only.  Accordingly,
the  related tax  benefits  from these  deductions  do not affect net income for
financial reporting  purposes,  and are accounted for as increases in additional
paid-in capital.

Deferred Registration Costs

     Costs  incurred in 1997 in connection  with the Company's  rights  offering
(see Note 20) have been deferred and will be changed to capital on the effective
date of the  registration.  Such costs totaled $116,000 in 1997 and are included
in Other Assets in the Statement of Financial Condition.

Recently Issued Accounting Pronouncements

     In June 1997,  SFAS 130,  "Reporting  Comprehensive  Income," and SFAS 131,
"Disclosures  About  Segments of an Enterprise  and Related  Information,"  were
issued.  SFAS 130 addresses standards for reporting and display of comprehensive
income  and its  components,  and SFAS 131  requires  disclosure  of  reportable
operating segments.  In February 1998, SFAS 132,  "Employers'  Disclosures About
Pensions  and Other  Post-retirement  Plans" was issued.  SFAS 132  standardizes
pension disclosures. These statements are effective in 1998. The Company will be
reviewing these  pronouncements to determine their applicability to the Company,
if any.

NOTE 3 -        TRADING AND INVESTMENT SECURITIES

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

                                                     December 31,
                                               1997               1996
                                                   Sold but            Sold but
                                                    not yet             not yet
                                         Owned    Purchased  Owned    Purchased
<TABLE>
<S>                              <C>          <C>        <C>          <C>
Obligations of U. S. government  
   and its agencies              $   304,815  $     --   $    29,647  $     --
State and municipal obligations      515,781        --       203,428    20,735
Corporate stocks and bonds         2,042,020    799,503    1,896,360   105,736
Corporate bonds                      288,156      2,466          --         --
Options and warrants                     --       7,554          --      1,156
                                     -------    -------    ---------  --------
                                                 
                                  $3,150,772   $809,523   $2,129,435  $127,627
                                  ==========   ========   ==========  ========
</TABLE>
                                  
     Securities not readily  marketable  include  investment  securities (a) for
which there is no market on a  securities  exchange or no  independent  publicly
quoted market,  (b) that cannot be publicly offered or sold unless  registration
has been  effected  under  the  Securities  Act of 1933,  or (c) that  cannot be
offered  or sold  because  of other  arrangements,  restrictions  or  conditions
applicable  to the  securities  or to the Company.  At December 31, 1997,  these
securities at estimated fair values consist of the following:

Corporate stocks                                                  $236,640
Options and warrants                                               270,092
                                                                   -------
                                                                  $506,732
                                                                  ========

NOTE 4 -        EMPLOYEE AND BROKER RECEIVABLES

                This account consists of the following:

                                                           December 31,
                                                      1997             1996

                Commission advances                $215,119         $ 99,172
                Loans to brokers and non-executive
                 employees                          712,076          642,431
                                                    -------          -------
                                                   $927,195         $741,603
                                                   ========         ========

     Receivables  are  generally  non-interest  bearing and due on demand.  Loan
principal  totaling  approximately  $96,000 at  December  31, 1997 is secured by
collateral consisting of cash and securities; the balance is unsecured.

NOTE 5 -        FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Furniture, equipment and leasehold improvements consist of the following:

                                                           December 31,
                                                     1997             1996

                Furniture and fixtures           $  672,988       $  615,683
                Computer and office equipment     1,442,108        1,030,521
                Leasehold improvements              169,560          163,368
                                                    -------          -------
                                                  2,284,656        1,809,572
                Less:  Accumulated depreciation
                       and amortization            (926,802)        (608,639)
                                                   --------         -------- 
                                                 $1,357,854       $1,200,933
                                                 ==========       ==========

     Depreciation expense was $348,508,  $272,050 and $184,818 in 1997, 1996 and
1995, respectively.

NOTE 6 - NOTES RECEIVABLE

                                                     1997             1996

                Environmental Coupon
                 Marketing, Inc.                 $149,640         $230,000
                Global Financial Corp.            582,804              --
                Fem-Com Copy Systems, Inc.        205,610              --
                                                  -------          -------      
                                                 $938,054         $230,000
                                                 ========         ========

     a) In 1995, the Company loaned a total of $282,000 to Environmental  Coupon
Marketing,  Inc.  ("ECM"),  a  closely-held  marketer of  recycling  programs to
retailers  featuring store coupons and cash  incentives to consumers.  The first
loan, in the amount of $100,000,  bears interest at the rate of 6% per annum and
was  scheduled to mature on the earlier of a proposed  private  placement of ECM
securities, or August 5, 1996. In August 1996, the Company extended repayment of
the loan to July 15,  1997.  The Company  received a payment of $11,360 in 1997,
which was applied  against  principal.  The balance of the loan is  currently in
default.  The second loan, in the original  amount of $182,000,  is non-interest
bearing and may be  converted  into up to 350,000  shares of ECM common stock at
the rate of $.52 per share. The Company sold $52,000 of principal amount of this
loan to four  unaffiliated  investors  for face  value in  1996.  This  loan was
scheduled  to mature on October 5, 1996,  at which time the Company  extended it
for one year to October 5, 1997.  The loan is currently  in default.  Both loans
are partially secured by certain equipment owned by ECM.  Management has reduced
the combined  loan balance by $69,000 to its  estimated  realizable  value as of
December 31, 1997. The Company does not accrue interest on the ECM notes.

     The Company also  purchased  150,000 shares of ECM common stock for $60,000
in 1995, and an additional 150,000 shares for $60,000 in 1996. Subsequent to the
1996 purchase,  the Company sold 37,500 and 52,500 shares,  respectively,  to an
officer of the Company and a  consultant,  for cost,  or $36,000.  In 1997,  the
Company wrote off the $84,000 balance of its ECM stock investment.

     b) In 1997,  MAI made  loans to  Global  Financial  Corp.  ("Global"),  the
financing  company that  packages and sells leasing  contracts  through MAI. The
loans bear interest at the rate of 8% per annum and are payable in April and May
1998. MAI, at its sole option, may accept payment of the loans on an installment
basis  over terms of up to  thirty-six  months.  The  purpose of the loans is to
assist Global in meeting cash flow  deficiencies  arising from the nonpayment of
scheduled monthly installments on certain delinquent and non-performing  leases.
Most of the arrears are due from Fem-Com  Copy  Systems,  Inc.("FCS"),  Global's
affiliated equipment vendor, and Biblio, Inc.  ("Biblio"),  an affiliate of FCS.
The MAI notes are guaranteed by Global;  FCS; Biblio, and the shareholder of FCS
and Biblio.  The notes are  further  collateralized  by  mortgage  liens on real
estate  owned by the  shareholder  of FCS and  Biblio,  a  pledge  of all of the
outstanding  shares in Global,  and various  recorded liens on the assets of FCS
and Biblio. MAI subsequently advanced additional funds to Global (See Note 20).

     c) MAI  has  provided  FCS  with  working  capital  financing  to  purchase
equipment for resale to FCS customers.  FCS generally pledges profits from these
sales  towards the  repayment of its  indebtedness  to Global.  MAI charges a 1%
commitment  fee on the loans plus  interest  at the rate of 12% per  annum.  The
loans are  evidenced by a note which is payable with  interest on September  30,
1998. FCS may prepay the note in whole or in part prior to maturity.

NOTE 7 -        DUE FROM OFFICERS

     Advances to officers are unsecured and currently  bear interest at the rate
of 6% per annum. These loans are due on demand.  Interest on these loans totaled
$7,817, $9,428 and $6,127 in 1997, 1996 and 1995, respectively.

NOTE 8 -        NOTES PAYABLE - BANK

     These notes evidence three secured term loans: the first loan,  obtained in
1994 in the original amount of $77,800 and subsequently  repaid,  was payable in
36 monthly  principal  installments  of $2,161  plus  interest at the prime rate
(8-1/2% at  December  31,  1997).  The other two loans,  obtained in 1996 in the
original  amounts  of  $179,625  and  $300,000,  are each  payable in 60 monthly
principal installments of $2,994 and $5,000, respectively,  plus interest at the
prime  rate.  The loans are  collateralized  by  equipment  owned by the  parent
corporation. Principal maturities are scheduled as follows: 1998 - $95,925, 1999
- $95,925, 2000 - $95,925, and 2001 - $52,994.

NOTE 9 -        ACCRUED EXPENSES

     Accrued expenses consist of the following:
                                                             December 31,
                                                        1997             1996

                Reserves for legal matters            $640,000       $1,573,000
                Other                                  172,590          238,897
                                                       -------          -------
                                                      $812,590       $1,811,897
                                                      ========       ==========


NOTE 10 -       INCOME TAXES

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

                                                     December 31,
                                         1997          1996             1995

                Currently payable
                 (refundable):
                      Federal        $ 299,584      $ 150,505        $ 620,196
                      State            161,134         37,103          181,315
                                       -------         ------          -------
                                       460,718         187,608          801,511
                                       -------         -------          -------

                Deferred:
                      Federal          470,277        (198,875)        (213,867)
                      State             77,183          (6,480)         (75,147)
                                        ------          ------          ------- 
                                       507,460        (205,355)        (289,014)
                                       -------        --------         -------- 
                                        
                Tax benefit of net
                 operating loss
                 carryforward             --               --           (28,649)

                                     $ 968,178       $ (17,747)       $ 483,848
                                     =========       =========        =========

     The current portion of the federal income tax benefit  reflects  refundable
taxes from the carryback of net operating losses of approximately $260,000.

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

                                                      December 31,
                                        1997             1996           1995

           Expected statutory federal
            income tax                $831,301        $  2,256        $425,658
           Non-taxable income          (12,080)         (5,457)            --
           Non-deductible expenses      10,200           4,576          10,200
           State taxes, net of federal
            tax benefit                146,700         (19,122)         76,639
           Tax benefit of net operating
            loss carryforward              --              --          (28,649)
           Other                        (7,943)            --              --
                                        ------         -------         ------- 
                                      $968,178        $(17,747)       $483,848
                                      ========        ========        ========

     The tax effects of the temporary  differences that give rise to significant
portions of the deferred tax assets and  liabilities as of December 31, 1997 and
1996 are:

                                                              December 31,
                                                         1997             1996

                Deferred tax assets:
                      Accrued reserves                 $171,465        $576,705
                      Net operating loss                 87,504          34,511
                      Other                              33,349          19,529
                                                         ------          ------
                                                        292,318         630,745
                                                        -------         -------
                Deferred tax liabilities:
                      Unrealized investment gains       197,990             --
                      Depreciation                       58,360          56,563
                      Other                                 --           22,014
                                                         ------          ------
                                                        256,350          78,577
                                                        -------          ------

                Net deferred tax asset                 $ 35,968        $552,168
                                                       ========        ========

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

NOTE 11 -       COMMITMENTS AND CONTINGENT LIABILITIES

     Operating leases

     The Company leases office  facilities and equipment under operating  leases
expiring at various dates through 2005. The lease for the Company's headquarters
has a six-year  renewal option  through 2011.  Following is a schedule of future
minimum  payments  due under  non-cancelable  leases with terms in excess of one
year:

               1998                     $  733,102
               1999                        730,575
               2000                        672,691
               2001                        627,444
               2002                        627,444
               2003 and beyond           1,307,175
                                         ---------
                                        $4,698,431
                                        ==========

     Rent  expense  for  1997,  1996 and 1995  totaled  $309,183,  $245,208  and
$225,683, respectively.

     Employment agreements

     Effective  January 1, 1996, the Company  approved new employment  contracts
for two of its officers. The contracts will run for three years, and provide for
annual  salaries of  $175,000  for the first  year,  with a provision  for a 10%
annual increase in the second and third years. The agreement also provides for a
bonus pool of up to 10% of consolidated  pre-tax profits. The bonus pool becomes
effective  each year only upon the  achievement  of  pre-tax  profits  exceeding
$500,000. The officers waived their bonuses for 1997.

     Legal matters

     In 1997,  FMSC entered into an Offer of Settlement with the SEC relating to
the activities of a former  affiliate  office located in Houston,  Texas.  Under
terms of the settlement, FMSC paid a $50,000 fine and agreed to disgorge profits
of $175,000 from gains on  securities  sold by the Houston  office.  The SEC has
informally  consented  to credit the  disgorgement  assessment  against  amounts
already  paid by FMSC in  settlement  of  civil  litigation  brought  by  former
customers of the Houston office. The settlement also includes the requirement to
engage an independent compliance examiner to audit FMSC's compliance procedures.
FMSC entered into a similar  consent decree with the State of Florida,  pursuant
to which  FMSC  paid a $15,000  fine and  agreed to  temporary  restrictions  on
brokerage  activities  in the  state.  FMSC has been  cooperating  with  ongoing
investigations  by the SEC and other  regulatory  authorities into activities of
the Houston office.

     FMSC has been the  subject of other legal  actions  relating to the sale of
securities  by the Houston  office.  In 1996,  the  Company,  without  admitting
liability or wrongdoing,  settled  various claims  asserted by Escambia  County,
Florida for  $900,000 in cash.  In January  1997,  the Company  settled  another
customer  lawsuit  for  $750,000,   with  $500,000  payable  upon  execution  of
settlement  documents,  and the  balance  of  $250,000  payable  in five  annual
installments of $50,000 plus interest at 8% per annum. The five installments are
evidenced by notes payable, which have been subordinated to the claims of FMSC's
general creditors under a subordination agreement approved by the NASD.

     In 1997,  the FMSC  settled a customer  arbitration  for  $500,000 in cash.
Under terms of the  settlement,  the Company also issued to the customer and her
counsel a total of 150,000 five-year  warrants to purchase FMFC common stock for
$1.25 per share.  Two of the  Company's  officers  agreed to guarantee a minimum
selling  price of $1.917 per share with  respect  to the shares  underlying  the
warrants and established a $100,000 escrow account with personal funds to secure
the guarantee.  The  warrantholders  had a sixty-day period in which to exercise
the  warrants  and sell the shares,  commencing  from the date that the warrants
were registered for resale.  The warrant  registration  became effective in June
1997. The individuals  exercised their warrants and sold their shares at various
dates in 1997 on which the  quoted  market  price for the  shares  exceeded  the
guaranteed price.

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

     The Company is presently  reviewing the extent to which settled and pending
claims may be covered under its insurance policies. In January 1997, the Company
negotiated  a  $650,000  settlement  with  one  of  its  insurance  carriers  in
consideration of a general release from coverage on various matters. Discussions
with other carriers for  reimbursement  of  settlements  paid by the Company are
continuing. There can be no assurance that the Company will be successful in its
efforts to recover additional funds from its insurers on settled claims, or that
monetary losses,  if any, from future  settlements or adverse  judgments will be
covered under the Company's existing insurance policies.

    Consulting Agreement

     In August  1997,  the  Company  and FMSC  entered  into a  contract  with a
technology  consulting firm for computer systems  consulting and the development
of sales compensation and operations  management  software.  In consideration of
the license to use preexisting proprietary software and source code, the Company
has agreed to issue the firm a total of 58,400 unregistered shares of its Common
Stock. The Company has further  committed to register the shares for resale.  If
the Company fails to register the shares in 1998 as specified in the  agreement,
the firm will be  entitled  to put the shares back to the Company for a total of
$175,000, or $3.00 per share. In the event the shares are registered, but unsold
in whole or in part within 60 days  subsequent to delivery of the first phase of
development,  as defined, the firm may request the Company to pay the difference
between  $175,000 and the net proceeds from the sale of shares to date. The firm
would then be required to surrender any unsold shares to the Company.

     The firm has agreed to share with FMSC a percentage of license fee revenue,
as defined, that it earns under future licensing agreements covering the product
developed  under its contract with FMSC. The amount of  revenue-sharing  will be
limited to the total of all contract payments that FMSC makes to the firm.

     Purchase commitments

     In 1997,  the  Company  entered  into a  three-year  agreement  with a long
distance  carrier  under which the Company has  committed to pay minimum  annual
charges of $300,000 in each of the three contract  years,  in  consideration  of
favorable  rates  on  telephone  and  data  communications  service  during  the
commitment period.

     NOTE  12  -  FINANCIAL   INSTRUMENTS  WITH   OFF-BALANCE   SHEET  RISK  and
                  CONCENTRATION OF CREDIT RISK

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

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

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

     NOTE 13 - DEFINED CONTRIBUTION PLAN

     The Company sponsors a defined  contribution pension plan [401(k)] covering
all participating  employees.  The Company may elect to contribute up to 100% of
each participant's  annual contribution to the plan. Employer  contributions for
1997, 1996 and 1995 amounted to $33,060, $44,400, and $36,122, respectively.

     NOTE 14 - COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE

     During 1996, the Company issued a total of 421,500 restricted shares of its
Common Stock in  settlement  of various  customer  claims and invoices for legal
services.  With respect to these shares, the Company has provided a guarantee to
pay to the selling  stockholder  the difference  between $2.00 per share and the
selling price of the shares upon expiration of the statutory  holding period. In
1997,  the Company  increased  the  guarantee to $2.75 per share with respect to
37,500  shares.  The  holders of the  restricted  shares may elect to retain the
shares once the holding period lapses. Such an election will release the Company
from any further obligation to the stockholders.

     The  Company  has  established  a  temporary  equity  account to record its
maximum liability from the guarantees.  Payment of any shortfall will be charged
to this  account.  Any balance  remaining at the end of the  respective  holding
periods will be credited to permanent capital. In 1997, a total of 37,500 shares
were sold in the open market at prices  exceeding the guarantee,  resulting in a
reclassification  of $103,125  to  permanent  capital.  The Company has placed a
total  of  $70,000  into  escrow  accounts  to  secure  some  of  the  remaining
guarantees.

     NOTE 15 - STOCK OPTION PLANS

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

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

     The Company has reserved  1,000,000 shares of its Common Stock for issuance
under the Director Plan.  Options to purchase  20,000 shares of Common Stock are
granted to each Non-Executive  Director on August 1 of each year,  provided such
individual  has  continually   served  as  a  Non-Executive   Director  for  the
twelve-month  period  immediately  preceding the date of grant. The options will
expire in five years from the date of grant.  The exercise price of such options
shall be equal to the fair market  value of the  Company's  Common  Stock on the
date of grant.  The Director  Plan will  terminate in May 2002. In June 1996 the
Company's  stockholders  approved an amendment to the Director Plan to eliminate
non-discretionary  grants to members of advisory boards established by the board
of directors.

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

     A summary of the  activity  in the  Company's  stock  option  plans for the
three-year period ended December 31, 1997 is presented below:

                                                                      Range of
                                                                      Exercise
                                                 Shares                Prices

  Options outstanding, December 31, 1994       1,331,500        $.41  -   2.625
       Granted                                   863,500         .50  -   1.00
       Canceled                                  (54,000)        .75  -   2.625
       Exercised                                 (23,500)        .41  -    .75
-------------------------------------------------------------------------------
  Options outstanding, December 31, 1995       2,117,500        $.41  -   1.75
       Granted                                   279,000         .875 -   1.33
       Canceled                                 (123,000)        .56  -   1.00
       Exercised                                (137,375)        .50  -   1.00
-------------------------------------------------------------------------------
  Options outstanding,  December 31, 1996      2,136,125        $.41  -   1.75
       Granted                                 1,517,500         .96  -   2.75
       Canceled                                  (56,500)        .56  -   .875
       Exercised                                (973,025)        .41  -   1.75
-------------------------------------------------------------------------------
  Options outstanding,  December 31, 1997      2,624,100        $.41   -  2.75

     Additional  information  with respect to options under the Company's option
plans is as follows:

     Shares of common stock available
      for future grant                                             2,669,800
     Weighted-average grant date fair value of options
      granted during each year using the Black-Scholes
      option pricing model
        1995   $.52
        1996   $.55
        1997   $.73

     The Company  applies APB No. 25 in accounting  for employee  stock options.
Accordingly, compensation is recognized in the financial statements only for the
fair  value  of  options  issued  to  non-employee  directors,  consultants  and
affiliate brokers.

     Such compensation is amortized to expense over the related options' vesting
periods. Compensation expense recognized in 1997 totaled $21,652.

     Pro forma net earnings and earnings per share  information,  as required by
SFAS No. 123, has been  determined  as if the Company had accounted for employee
stock options  under the fair value method.  The fair value of these options was
estimated  at grant date using a  Black-Scholes  option  pricing  model with the
following weighted-average assumptions for 1997, 1996 and 1995:

                                       1997           1996               1995

          Risk free interest rates     6.23%          6.05%              5.73%
          Expected option lives        3.75 years     5 years            5 years
          Expected volatilities        46.5%          76.5%              70.04%
          Expected dividend yields        0%             0%                  0%

          The Company's pro forma
           information follows:

          Net income (loss)            1997            1996               1995

          As reported               $1,476,825      $ 32,789           $768,088
          Proforma                   1,246,276       (26,597)           677,124

          Basic income (loss) per share
             As reported                  $.17          $ .01              $.10
             Proforma                      .14           (.01)              .08

          Diluted income (loss) per share
             As reported                  $.14          $ .01              $.09
             Proforma                      .12           (.01)              .08

     The full impact of calculating compensation expense for stock options under
SFAS No. 123 is not  reflected  in pro forma net income,  since such  expense is
amortized over the vesting period of those options as they vest.

     Additional  information  as of  December  31,  1997  with  respect  to  all
outstanding options is as follows:

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

  $ .41 -  .61     214,000     0.25      $0.60        202,000         $0.61
    .69 - 1.05   1,031,400     2.79       0.84        655,070          0.83
   1.06 - 1.30     661,700     4.44       1.13        227,532          1.14
   1.69 - 2.50     597,000     4.24       2.42        478,600          2.42
   2.59 - 2.75     120,000     4.50       2.67        200,000          2.63
 --------------------------------------------------------------------------
                 2,624,100                          1,763,202         $1.48
 --------------------------------------------------------------------------

     NOTE 16 - STOCKHOLDERS' EQUITY

     Recapitalization

     In June 1997,  the  Company's  stockholders  approved an  amendment  to the
Company's  Certificate  of  Incorporation  to  increase  the number of shares of
Common Stock authorized for issuance from 15,000,000 to 30,000,000.

     Preferred Stock

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

     Stock Repurchases

     In 1996 and 1995, respectively,  the Company repurchased a total of 196,802
and  215,800  shares of its Common  Stock in the open  market for  $230,506  and
$194,035  under now expired stock buy-back  programs  authorized by the Board of
Directors. All of the repurchased shares have been cancelled.

     Sale of Restricted Stock

     In 1997, the Company sold 12,240 unregistered shares of its Common Stock to
an affiliate broker for total consideration of $23,027.

     Issuance of Common Stock

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

     NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting  Standards  No.  107,  Disclosures  About  Fair  Value  of  Financial
Instruments,  which  requires  that all  entities  disclose  the  fair  value of
financial  instruments,  as defined, for both assets and liabilities  recognized
and not recognized in the statement of financial condition. Substantially all of
the Company's financial  instruments at December 31, 1997,  consisting primarily
of marketable debt and equity securities, amounts due from FMSC's clearing firm,
accounts payable and accrued expenses, and notes payable - bank, are carried at,
or  approximate  fair  value  due  to  their  short-term   nature,  the  use  of
mark-to-market  accounting for trading securities,  or because they carry market
rates of interest.

     NOTE 18 - NET CAPITAL REQUIREMENTS

     FMSC is subject to the  Securities  and  Exchange  Commission  Uniform  Net
Capital Rule (Rule 15c3-1), which requires FMSC to maintain minimum net capital,
as defined.  At December 31, 1997,  FMSC had net capital  $2,398,817,  which was
$2,148,817  in excess of its required  net capital of $250,000.  FMSC's ratio of
aggregate indebtedness to net capital was 1.28 to 1.

     NOTE 19 - RELATED PARTY TRANSACTIONS

     In 1997,  FMSC  served as  underwriter  for an initial  public  offering of
PacificHealth  Laboratories  ("PHL")  common stock.  One of the directors of the
Company is a director, officer and major stockholder of PHL. FMSC also served as
placement agent for two private placements of PHL securities in 1996, from which
it earned placement fees of $366,000.  Management  believes that the fees earned
by FMSC on the PHL financings represent arm's-length compensation.

     NOTE 20 - SUBSEQUENT EVENTS

     Rights offering

     In February  1998,  the Company  completed an offering of 3,072,779  Units,
each Unit  consisting of one Class A Redeemable  Common Stock Purchase  Warrant,
one Class B Redeemable Common Stock Purchase Warrant, and one Class C Redeemable
Common Stock Purchase Warrant.  The Warrants have the following  exercise prices
and terms:

                              Exercise Price                 Exercise Period
           Warrant             Per Share                  from Date of Issuance

           Class A               $3.00                         Three years
           Class B                5.00                         Five years
           Class C                7.00                         Seven years

     Each  shareholder  of record as of December 15, 1997 received  three rights
for each share of Common  Stock held as of the record  date,  with three  rights
required  to  subscribe  for a  single  Unit at a price of $.45  per  Unit.  The
offering raised gross proceeds of $1,382,750  before deducting related costs. As
of December 31, 1997, the Company had incurred  offering costs of  approximately
$116,000. The Class A, Class B and Class C warrants will unbundle from the Units
and trade separately.

     Loans to Global

     During the period  from  January 1, 1998 to March 11,  1998,  MAI  advanced
additional  funds of $490,000 to Global to repay  lease  investors.  These loans
bear  interest at 8% per annum and are secured by the same  collateral  securing
earlier MAI loans (see Note 6).