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

                                  FORM 10-KSB/A
                                 AMENDMENT NO. 1

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

                          Commission File No.: 1-31292

                        EMPIRE FINANCIAL HOLDING COMPANY
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

                   Florida                                 56-3627212
      -------------------------------                  -------------------
      (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                  Identification No.)

                       2170 West State Road 434, Suite 100
                       Suite 100, Longwood, Florida 32779
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (407) 774-1300
                           ---------------------------
                           (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:

    Title of Each Class                Name of Each Exchange on Which Registered
    -------------------                -----------------------------------------
Common Stock, $.01 Par Value                    American Stock Exchange

           Securities Registered Pursuant to Section 12(g) of the Act:

                                      None

         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 contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

         The issuer's revenues for its fiscal year ended December 31, 2005:
$22,485,731.

         The aggregate market value of the voting stock held by non-affiliates
of the Company as of March 20, 2006 computed by reference to the average bid and
asked prices of registrant's common stock reported on the American Stock
Exchange on such date was $5,959,420.

         The number of shares of outstanding registrant's Common Stock, $.01 par
value per share, as of March 20, 2006 was 6,889,005.

         Transitional Small Business Disclosure Format (check one): Yes___ No_X_

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.

                                EXPLANATORY NOTE

PART III (ITEMS 9 THROUGH 12 AND ITEM 14) WERE OMITTED IN OUR ORIGINAL FILING OF
OUR FORM 10-KSB. SINCE WE HAVE NOT FILED A DEFINITIVE PROXY STATEMENT PURSUANT
TO REGULATION 14A UNDER THE SECURITIES AND EXCHANGE ACT WITHIN 120 DAYS AFTER
THE CLOSE OF OUR FISCAL YEAR, THIS ANNUAL REPORT IS HEREBY AMENDED TO INCLUDE
THESE PREVIOUSLY OMITTED ITEMS.


                                TABLE OF CONTENTS

                                                                            Page
PART I

         Item 1  Description of Business ...................................   4

         Item 2  Description of Property ...................................  16

         Item 3  Legal Proceedings .........................................  17

         Item 4  Submission of Matters to a Vote of Security Holders .......  17

PART II

         Item 5  Market for Common Equity, Related Stockholder Matters and
                 Small Business Issuers Purchases of Equity Securities......  18

         Item 6  Management's Discussion and Analysis or Plan of Operation..  21

         Item 7  Financial Statements ......................................  32

         Item 8  Changes in and Disagreements With Accountants on
                 Accounting and Financial Disclosure........................  32

         Item 8A Controls and Procedures....................................  32

         Item 8B Other Information..........................................  32

Part III

         Item 9  Directors, Executive Officers, Promoters and Control
                 Persons; Compliance With Section 16(a) of the Exchange Act.  33

         Item 10 Executive Compensation.....................................  35

         Item 11 Security Ownership of Certain Beneficial Owners and
                 Management ................................................  37

         Item 12 Certain Relationships and Related Transactions.............  38

         Item 13 Exhibits...................................................  41

         Item 14 Principal Accountant Fees and Services.....................  44

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         This Annual Report on Form 10-KSB contains statements about future
events and expectations which are, "forward looking statements". Any statement
in this 10-KSB that is not a statement of historical fact may be deemed to be a
forward looking statement. Forward-looking statements represent our judgment
about the future and are not based on historical facts. These statements
include: forecasts for growth in the number of customers using our service,
statements regarding our anticipated revenues, expense levels, liquidity and
capital resources and other statements including statements containing such
words as "may," "will," "expect," "believe," "anticipate," "intend," "could,"
"estimate," "continue" or "plan" and similar expressions or variations. These
statements reflect the current risks, uncertainties and assumptions related to
various factors including, without limitation, fluctuations in market prices,
competition, changes in securities regulations or other applicable governmental
regulations, technological changes, management disagreements and other factors
described under the heading "Factors affecting our operating results, business
prospects, and market price of stock" and elsewhere in this report and in other
filings made by us with the SEC. Based upon changing conditions, should any one
or more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, believed, estimated or intended. We
undertake no obligation to update, and we do not have a policy of updating or
revising, these forward-looking statements. Except where the context otherwise
requires, the terms "we," "us," or "our" refer to the business of Empire
Financial Holding Company ("EFH" or the "Company") and our wholly-owned
subsidiaries; Empire Financial Group, Inc. ("EFG") and Empire Investment
Advisors, Inc. ("EIA")

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<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

OVERVIEW

         We provide a broad range of securities brokerage, asset management and
market making services to individual investors, independent registered
representatives, unaffiliated broker dealers and institutional and wholesale
customers in all 50 states and also in Europe, Asia and other locations. We also
offer investment advisory, investment banking and corporate financing services.

GROWTH STRATEGY

         Our current growth strategy commenced in mid-2005 with management
changes and our recapitalization. The establishment and initial implementation
of strong financial and management control systems allowed us to make more
timely management decisions, begin to optimize revenues and better monitor and
control expenses. With these controls in place and the new capital investment,
we expect to increase revenues, margins and profits from our market making and
institutional trading activities, expand investment banking activities,
initiated in 2005, recruit quality registered representatives, and maximize
revenues from an increasing offering of financial products.

         We will continue to recruit entrepreneurial financial advisors with
established customer bases who generate substantial income and who desire
independence in conducting their business. Historically, these financial
advisors have been primarily independent contractors. We offer them flexibility
in selecting investment products best suited to their customers' investment
objectives, and supervision over branch office operations as required for
regulatory compliance. In return, the financial advisors pay the capital costs
and most operating expenses associated with their branch offices. Independent
ownership and operation of branch offices enables us to expand our business with
relatively minimal capital outlay and without a proportionate increase in either
capital costs or operating expenses. As our ability to offer investment banking
products to our independent representatives develops, we believe we will attract
additional representatives interested in this type of financial services.

         We have implemented a new back office and field operations system along
with a new accounting system which will enhance our ability to grow and provide
our independent financial advisor base and their clients with up-to-date on-line
information management. It will provide our back office support system with the
tools to greatly increase our productivity without significantly increasing
personnel and other service costs. This will allow us to service a significantly
larger volume of business through a greater number of financial advisors. This
software implementation and conversion process was largely completed in the
fourth quarter of 2005 with the field operations internet based system currently
being implemented. We believe that these activities and the systems necessary to
support them will allow us to potentially double our number of representatives
by 2007.

         We also intend to continue to service, other broker dealers as well as
our independent and in house financial advisor base. We plan to expand the
number of securities for which we make a market and aggressively market our
established order execution capabilities to additional domestic and
international broker dealers, hedge funds and institutions. We intend to
capitalize by offering the underserved small to mid-size institutions services

                                        4
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usually reserved for larger institutional clients. We will continue to
strengthen our relationships with customers by offering our electronic trade
routing, market making services, delivery and execution systems in addition to
traditional telephonic order capabilities. Continued implementation of these
strategies will increase our transaction volume thus increasing our net trading
revenues. We also believe that the recent improvements in our capital structure
and profitability provides the platform to allow us to increase the number of
markets and transactions we process for unaffiliated broker dealers and
institutions.

         As part of our growth strategy, in September of 2005 we opened an
institutional and corporate finance office in New York City with a satellite
institutional office in New Jersey. These new offices enable us to service small
to mid-size quality institutions by offering them execution services and early
to mid-stage investment opportunities.

BROKERAGE SERVICES

         FULL SERVICE RETAIL BROKERAGE SERVICES

         We provide full service brokerage services directly to our retail
customers, including individuals and small to mid-sized institutions such as
banks, credit unions, hedge funds, money managers, mutual funds and pension
funds. Trained registered representatives execute buy and sell orders for
customers for stocks, bonds, traded options, commodities, and financial
derivatives and, where requested, provide account management, advisory
information and oversight services. Our customers also receive back office
support, client statements and reports, branch office regulatory compliance
support and advisory services. Approximately 73% of our 2005 revenues and
approximately 75% of our 2004 revenues were derived from commissions and fees
generated in connection with our retail financial brokerage services.

         To expand out full service brokerage operation, in 2005 we opened an
office in Boca Raton, Florida employing four salaried registered representatives
who will market our brokerage services in the lucrative South Florida area. We
have merged our previously established south Florida market making and trading
operations with the Boca Raton retail operation to consolidate our operating
costs and improve the economies of scale. We plan to expand this operation in
2006.

         SUPPORT SERVICES FOR INDEPENDENT BROKER NETWORK

         We also provide back office and administrative functions for a
nationwide network of independent registered representatives, who process
securities transactions through us. As of December 31, 2005 approximately 180
independent registered representatives in 26 independently owned offices, were
being supported through our capital management division. The services provided
include order execution, client statements and reports, branch office regulatory
compliance support and advisory services, for which we receive a transaction
fee, reimbursement of licensing and insurance costs and a participation in their
revenues. They also utilize our execution, market making and web-based services
to provide access to investments to their client base. These representatives
provide their own offices and typically pay all of their office overhead and
marketing expenses.

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         As part of our efforts to expand this independent broker network, we
recruit experienced and productive independent financial advisors by offering
them an attractive compensation package and the independence of owning and
operating their own branch office. Generally, each office pays substantially all
costs associated with establishing and operating the office in return for a
relatively high portion of gross commission revenue.

         We offer a comprehensive line of brokerage services to our independent
representatives, including:

         o  United States and foreign equities
         o  United States government securities
         o  Municipal securities
         o  Mutual funds
         o  Variable annuity and variable life insurance products,
         o  Fixed annuities general insurance products
         o  Portfolio planning and management
         o  Money market funds
         o  Clearing services through our third party clearing arrangements
         o  Client and branch management systems and services

         During October of 2005, we entered in to an agreement with a licensed
registered representative to open an independent office in Uniondale, New York
(Long Island). The agreement obligates us to provide a line of credit of up to
$2.5 million to finance the office equipment and furniture, start-up costs of
the office and leasehold improvements. The agreement also provides a series of
payments to brokers as an incentive to bring their established clients to us.
The line of credit is collateralized by promissory notes executed by the brokers
and the manager to us and requires each broker and manager to remain with us for
a specified period of time and produce various levels of sales. The line of
credit is also collateralized by all equipment and leasehold improvements as
well as the personal guarantee of the manager. Once fully operational, we
anticipate that the Long Island office will generate significant revenues.

MARKET MAKING AND ORDER EXECUTION SERVICES

         We provide market making and execution services for unaffiliated broker
dealers and institutions. Our systems allow us to receive orders telephonically
or electronically. Our services consist of filling orders received from
independent broker dealers to buy securities or sell securities in domestic or
foreign securities. As a market maker, we offer to buy shares from, or sell
shares to, broker dealers. We display the prices at which we are willing to buy
and sell these securities and adjust our prices in response to market
conditions. We sometimes commit our own capital and typically derive revenue
from the difference between the prices at which we buy and sell shares. We
generally receive a fee or commission for providing institutional execution
services. Our trading revenues are dependent on our ability to take advantage of
daily stock price fluctuations and institutional order flow. Thus, we must be
able to evaluate and act rapidly on market trends and manage risk successfully.
Our methodology focuses on the dynamic, real-time analysis of market activity
and price movements, which enables us to increase our revenues and manage risk
better. We utilize state of the art industry standard execution and compliance
systems to manage our risk and seamlessly process and settle transactions with
unaffiliated broker dealers. We maintain strict inventory management procedures
and seek to reduce our exposure from market volatility.

                                        6
<PAGE>

         Approximately 24% of our revenues for the year ended December 31, 2005
and 2004 were derived from these services.

INVESTMENT BANKING SERVICES

         During 2005, we opened an office in New York City to facilitate the
operations of our newly formed institutional investment banking division. This
office provide services to small and medium sized companies that seek capital to
expand their businesses and further implement their business plans. There are
numerous companies that are too small to obtain services from the larger
investment banks. We have employed personnel who have substantial experience
with larger firms who initiate, negotiate and place much needed capital to these
companies from institutions and retail sources.

         Our New York and New Jersey offices engage in institutional trading
utilizing experienced securities licensed professionals who both support our
investment banking operations and provide institutional clients with trading and
execution services.

INVESTMENT ADVISORY SERVICES

         We offer fee-based investment advisory services to our customers,
independent registered investment advisors and unaffiliated broker dealers
through our wholly owned subsidiary, Empire Investment Advisors, Inc. These
services are delivered through a platform that uses a variety of independent
third party providers. We believe these services enable us to establish more
comprehensive relationships with our customers. The investment advisory services
we provide include:

         o  investment portfolio planning with recommendations on asset
            allocations based on customers risk tolerances and long term needs;

         o  recommendations and separate account manager and mutual fund
            research and due diligence;

         o  portfolio performance review and reallocation;

         o  all inclusive wrap accounts for registered investment advisors.

         These services are provided via an all-inclusive fee based on assets
under management. As of December 31, 2005, the average fee being charged was
approximately 140 basis points per annum of the value of our customer's managed
assets. EIA is registered as an investment adviser in all 50 states under the
Investment Company Act of 1940.

         Our investment advisory services provide a competitive advantage to our
capital management division. The independent registered representatives of this
division can offer the product and services of EIA to their retail clients upon
affiliating with EIA allowing them to compete with bank and trust companies in
offering investment advisory services to high net worth clients.

ANCILLARY RETAIL BROKERAGE SERVICES

         We offer the following ancillary services to our full service brokerage
customers and the customers of our independent broker network:

                                        7
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         o  MARKET DATA AND FINANCIAL INFORMATION. We continually receive a
            direct line, or feed, of detailed quote data, market information and
            news. Our retail customers can create their own personal watch list
            of stocks and options for quick access to current pricing
            information. We provide our customers with access to various
            real-time quotes services.

         o  PORTFOLIO TRACKING AND RECORDS MANAGEMENT. Customers have online
            access to a listing of all their portfolio assets held with us, cost
            basis (if purchased through us), current price and current market
            value. The system offers the ability to transfer data to popular
            software programs such as Microsoft Money and Quicken to allow our
            customers to calculate unrealized profits and losses for each asset
            held in addition to the many other features these programs may
            offer. Online account holders may elect to receive electronic
            confirmations and detailed monthly statements. All clients receive
            printed confirmations and statement unless they elect electronic.
            Our clearing firm provides for the transmittal of proxy, annual
            report and tender offer materials to our customers.

         o  CASH MANAGEMENT SERVICES. Customer dividends, interest, sales
            proceeds and deposits are credited to customer accounts. We also
            provide cash management services to our customers. For example,
            funds not invested in securities earn interest in a credit interest
            program or can be invested in money market funds. In addition, we
            provide checking services and debit cards for our customer accounts
            through a commercial bank.

         o  ACCOUNT SECURITY. We use a combination of proprietary and industry
            standard security measures to protect customers' assets. Customers
            are assigned unique account numbers, user identifications and
            passwords that must be used each time they log on to our system. We
            rely on encryption and authentication technology to provide the
            security necessary to effect the confidential exchange of
            information. We do not plan to share customer data with third
            parties.

COMPETITION

         The market for brokerage services is extremely competitive with many
large national firms and numerous smaller regional and local firms providing
services. This competition is expected to continue to grow in the future. Many
competitors are significantly larger and can advertise and promote their
services in ways that are closed to us. We believe that the major competitive
factors for brokerage services include cost, service, and quality, ease of use
and customer satisfaction.

         We provide market making and execution services for equity securities
to unaffiliated broker dealers. The market for these services is rapidly
evolving and intensely competitive. We expect competition to continue to
intensify in the future. We compete primarily with wholesale, national and
regional broker dealers and trade execution firms such as Knight Trading Group,
Inc., as well as electronic communications networks, which provide a direct
trading venue to institutional and retail investors. We compete primarily on the
basis of execution quality, customer service and technology.

                                        8
<PAGE>

         In investment banking we compete primarily with larger regional and
national firms who offer similar services, but sometimes on a larger scale.

TECHNOLOGY

         We believe our use of traditional and proprietary systems and software
allow us to maintain low fixed processing and labor costs in our retail and
market making businesses. We utilize direct and Internet-based order systems
that link our retail, broker dealer and institutional customers to our back
office and market making services. Our systems allow us to process and reconcile
transactions more effectively by maximizing the use of our execution and
clearing services in trade orders we receive.

         We utilize third party technology vendors, employees, local consultants
to support our technology efforts. We continually evaluate our systems. We will
either outsource software or technology development or use third party packages
when we deem it more cost effective than building the technology.

GOVERNMENT REGULATION

         BROKER DEALER REGULATION

         The securities industry is subject to extensive regulation under
federal and state law. The Securities and Exchange Commission ("SEC") is the
federal agency responsible for administering the federal securities laws. In
general, broker dealers are required to register with the SEC under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Our
subsidiary, EFG, is a broker dealer registered with the SEC. Under the Exchange
Act, every registered broker dealer that does business with the public is
required to be a member of and is subject to the rules of the National
Association of Securities Dealers ("NASD"). Securities professionals associated
with a broker-dealer also are subject to registration and supervision by the
NASD. The NASD has established conduct rules for all securities transactions
among broker dealers and private investors, trading rules for the
over-the-counter markets and operational rules for its member firms. The NASD
conducts examinations of member firms, investigates possible violations of the
federal securities laws and its own rules, and conducts disciplinary proceedings
involving member firms and associated individuals. The NASD administers
qualification testing for all securities principals and registered
representatives in accordance with its rules and on behalf of the state
securities authorities which apply the same or additional examination
requirements.

         We are also subject to regulation under state law. Empire Financial
Group, Inc. is registered as a broker dealer in all 50 states and in Puerto
Rico. An amendment to the federal securities laws prohibits the states from
imposing substantive requirements on broker dealers that exceed those imposed
under federal law. This amendment, however, does not preclude the states from
imposing registration requirements on broker dealers that operate within their
jurisdiction, from sanctioning these broker dealers for engaging in misconduct
or from supervising associated persons that operate within a state.

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<PAGE>

         NET CAPITAL REQUIREMENTS AND LIQUIDITY

         As a registered broker dealer and a member of the NASD, EFG is subject
to the Net Capital Rule. The Net Capital Rule, which specifies minimum net
capital requirements for registered broker dealers, is designed to measure the
general financial integrity and liquidity of a broker dealer and requires that
at least a minimum part of its assets be kept in relatively liquid form. In
general, net capital is defined as net worth (assets minus liabilities), plus
qualifying subordinated borrowings and certain discretionary liabilities, and
less certain mandatory deductions that result from excluding assets that are not
readily convertible into cash and from valuing conservatively security
positions. Among these deductions are adjustments which reflect the possibility
of a decline in the market value of securities prior to disposition.

         The Net Capital Rule also provides that the SEC may restrict for up to
20 business days any withdrawal of equity capital, or unsecured loans or
advances to stockholders, employees or affiliates if the capital withdrawal,
together with all other net capital withdrawals during a 30-day period, exceeds
30% of excess net capital and the SEC concludes that the capital withdrawal may
be detrimental to the financial integrity of the broker dealer. In addition, the
Net Capital Rule provides that the total outstanding principal amount of certain
of a broker dealer's subordinated indebtedness, the proceeds of which are
included in its net capital, may not exceed 70% of the sum of the outstanding
principal amount of all subordinated indebtedness included in net capital, par
or stated value of capital stock, paid in capital in excess of par, retained
earnings and other capital accounts for a period in excess of 90 days.

         EFG is a member of the Securities Investor Protection Corporation which
provides, in the event of the liquidation of a broker dealer, protection for
clients' accounts up to $500,000, subject to a limitation of $100,000 for claims
for cash balances.

         INVESTMENT COMPANY ACT

         Our subsidiary, EIA, is registered with the SEC as an investment
adviser under the Investment Company Act of 1940. Registration by the SEC does
not represent an endorsement of EIA by the SEC. EIA must comply with rules that
govern the way it conducts its business, including the information that must be
given to clients, records that must be maintained, compliance procedures and
ethical requirements that must be enforced, and terms that must be included in
advisory agreements. As an investment adviser, Empire Advisers is a fiduciary
for its clients, and must act with loyalty and care in the performance of its
duties.

         ADDITIONAL REGULATION

         Due to the increasing popularity and use of the Internet and other
online services, various regulatory authorities are considering laws and/or
regulations with respect to the Internet or other online services covering
issues such as user privacy, pricing, copyrights and quality of services. The
growth and development of the market for online commerce may prompt more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. Moreover, the recent increase in the
number of complaints by online traders could lead to more stringent regulations
of online trading firms and their practices by the SEC, NASD and other
regulatory agencies.

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         Furthermore, the applicability to the Internet and other online
services of existing laws in various jurisdictions governing issues such as
other taxes and personal privacy is uncertain and may take years to resolve. As
our services are available over the Internet in multiple states and foreign
countries, and as we have numerous clients residing in these states and foreign
countries, these jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each such state and foreign country.

EMPLOYEES

         As of December 31, 2005, we had 42 full-time employees of which 7 were
in management, 18 provided operation and client support for our retail and order
execution services, 2 provide accounting services, and 15 provided order
execution and market making services to our correspondents and retail client
base. We also supported a network of 26 independently owned offices or OSJ's
with a total of 180 independent contractors. The independent contractors provide
retail services to our customers. No employee is covered by a collective
bargaining agreement or is represented by a labor union. We consider our
employee and independent contractor relations to be good.

RISK FACTORS

         NET CAPITAL

         On February 6, 2005, EFG received a letter from the NASD threatening
disciplinary action for failure to maintain required net capital during the
period from September 2003 to February 14, 2005 and alleging our violation of
other NASD rules, while acting through our former financial and operations
principal. While at December 31, 2005 our net capital was approximately $292,000
above our required net capital, at this time we cannot determine the nature or
severity of any legal or other regulatory sanctions that might be imposed on us
or on certain of our employees in connection with this NASD disciplinary action,
but any sanctions could include fines, penalties, disgorgement of profits, the
issuance of cease and desist orders or suspension or expulsion as a broker
dealer.

         Failure to maintain the required net capital may subject EFG to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies and ultimately could require EFG's
liquidation. The Net Capital Rule prohibits payments of dividends, redemption of
stock, the prepayment of subordinated indebtedness and the making of any
unsecured advance or loan to a shareholder, employee or affiliate, if the
payment would reduce the firm's net capital below a certain level.

         AMERICAN STOCK EXCHANGE LISTING

         We cannot assure you that we will be able to continue to satisfy the
requirements necessary to remain listed on the American Stock Exchange ("AMEX")
or that the Amex will change its rules or that the AMEX will not take additional
actions to delist our common stock. If for any reason, our stock were to be
delisted from the AMEX, we may not be able to list our common stock on another
national exchange or market. If our common stock is not listed on a national
exchange or market, the trading market for our common stock may become illiquid.
Upon any such delisting, our common stock could become subject to the penny
stock rules of the SEC, which generally are applicable to equity securities with
a price of less than $5.00 per share, other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided

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that current price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock rules require
a broker dealer, before a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker dealer also must provide the
customer with bid and ask quotations for the penny stock, the compensation of
the broker dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules require that, before a transaction
in a penny stock that is not otherwise exempt from such rules, the broker dealer
must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. As a result of these requirements, if our common stock were to
become subject to the penny stock rules, it is likely that the price of our
common stock would decline and that our stockholders would find it more
difficult to sell their shares.

         SUBSTANTIAL NOTES RECEIVABLE

         In October of 2005, we opened an independently owned office in
Uniondale, New York. We have advanced substantial funds to the owner of that
office and have received the personal guarantee of that owner. The note
receivable of approximately $1.7 million dollars is collateralized by that
guarantee, notes from the registered representatives and furniture and fixtures
of the office. Due to the uncertainty of several factors such as the ability of
the OSJ manager to retain the brokers, market conditions and regulatory factors,
there is no assurance that we will be able to recover the funds loaned.

         COMPETITIVE DISADVANTAGES

         Our competitors generally have greater marketing, financial and
technical resources than ours. These competitors can offer a wider range of
services and financial products than we can. Our competitors also have greater
name recognition and more extensive client bases. These competitors may be able
to respond more quickly to new or changing opportunities, technologies and
client requirements and may be able to undertake more extensive promotional
activities, offer more attractive terms to clients and adopt more aggressive
pricing policies. Moreover, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties or may consolidate to enhance their services and products. We expect
that new competitors or alliances among competitors will emerge and may acquire
significant market share.

         CONTROL OF OUR COMPANY

         A limited liability company ("LLC") and its individual members
beneficially own approximately 75% of the Company's outstanding common stock
(assuming the conversion of the Series B convertible preferred stock owned by
the LLC). The Chairman of our Board of Directors is also co-managing director of
the LLC and can effectively control most matters relating to our Company.

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         OFF BALANCE SHEET RISK

         Retail customer transactions are cleared through the clearing broker on
a fully disclosed basis. In the event that customers default in payments of
funds or delivery of securities, the clearing broker may charge the Company for
any loss incurred in satisfying the customer obligations. Additional credit risk
occurs if the clearing brokers of affiliates do not fulfill their obligations.
The Company regularly monitors the activity in its customer accounts for
compliance with margin requirements.

         In addition, we have sold securities which we do not currently own and
therefore will be obligated to purchase the securities at a future date. We have
recorded these obligations in our financial statements at December 31, 2005 at
the market values of the securities and will incur a loss if the market value
decreases subsequent to December 31, 2005.

         CONCENTRATIONS OF CREDIT RISK

         We are engaged in various trading and brokerage activities in which
counterparties primarily include broker-dealers, banks and other financial
institutions. In the event counterparties do no fulfill their obligations, we
may be exposed to risk. The risk of default depends on the creditworthiness of
the counterparty or issuer of the instrument. It is our policy to review, as
necessary, the credit standing of each counter-party.

         Our cash in bank accounts, at times, exceeds the Federal Deposit
Insurance Corporation ("FDIC") insurable limit of $100,000. We have not
experienced any previous losses due to this policy.

         EMPLOYEE MISCONDUCT

         Employee misconduct could result in regulatory sanctions and
unanticipated costs to us. Because our business involves handling cash and
marketable securities on behalf of our customers, employee misconduct could
result in unknown and unmanaged risks or losses. Misconduct by employees could
also include binding us to transactions that exceed authorized limits or present
unacceptable risks or hiding from us unauthorized or unsuccessful activities.

         MARKET PRICE FLUCTUATIONS

         Our order execution services involve the purchase and sale of
securities predominantly as principal, instead of buying and selling securities
as an agent for our customers. As a result, we may own securities or may be
required to buy or sell securities to complete customer transactions. During the
period that we own the securities or may be required to buy or sell securities,
market prices could fluctuate significantly which could result in lost revenues
to us and adversely affect our profitability.

         INDEPENDENT REGISTERED REPRESENTATIVES

         Our independent registered representatives could terminate their
relationship with us on little or no notice and could associate with another
broker dealer. The independent registered representatives can transfer their
client accounts which could adversely affect our revenues.

                                       13
<PAGE>

RECENT DEVELOPMENTS

         COMPLIANCE WITH AMERICAN STOCK EXCHANGE CONTINUED LISTING REQUIREMENTS

         On December 30, 2005, we received a letter from the AMEX stating that
we had resolved a listing deficiency based on having less than $4 million of
stockholders' equity. We cured this deficiency by increasing our stockholders
equity from a negative 1.8 million at January 1, 2005 to a positive 5.2 million
at year end. We achieved this increase in stockholder equity by sale of common
and preferred stock, converting debt to equity and recognizing income of
approximately $2.5 million.

         RESOLUTION OF THREATENED SEC ENFORCEMENT ACTION

         In November of 2005, we received and executed a settlement offer from
the SEC resolving and removing the threat of an enforcement action brought to
our attention in May 2004 for our role in trading of mutual funds shares on
behalf of our clients. The settlement is subject to ratification by the SEC main
office in Washington, D.C. In the quarter ending June 30, 2005, we placed
$350,000 in an escrow account and we continue to maintain that escrow amount
against the estimated final cost of the proposed settlement.

         NATIONAL ASSOCIATION OF SECURITIES DEALERS NET CAPITAL LETTER

         On February 6, 2006, we received a letter from the NASD stating that
they intend to recommend disciplinary action be brought against us for failing
to maintain the minimum net capital required by Securities Exchange Act ("SEA")
Rule 15c3-1. The letter states that from September 2003 until February 14, 2005,
that we, acting through our former Financial and Operations Principal ("FINOP"),
prepared and submitted materially inaccurate Financial and Operational Combined
Uniform Single Report ("FOCUS Reports"). The NASD letter further states that the
firm, acting through it former FINOPs, prepared and maintained materially
inaccurate net capital computations in violation of NASD rules. Also during the
period beginning in September of 2003 until December of 2004, we implemented a
material change in business operations by increasing the number of equity
securities in which we made a market from 136 to 1427 without filing an
application for approval with the NASD thus violating regulations. At December
31, 2005, we reported net capital of $827,716, which is $291,716 above the
required net capital of $536,000.

         The NASD has given us the opportunity to submit reasons indicating why
the action should not be brought against us and we are in the process of
preparing our response.

         During the period of February 7 through February 9 of 2005, EFG halted
operations due to a net capital deficiency. During this time period, it
decreased the number of markets in which it participated as market makers and
thereby lowered our capital requirements to $689,000 on February 9, 2005. In
addition to lowering our capital requirements, we infused $850,000 of additional
capital in order to increase capital to the needed level. During this period,
EFG lost pre-tax profits of approximately $5,000 to $7,000 during the three day
period that it ceased operations. We estimated that cessation of this trading
activities caused approximately a 2% reduction in its ratio of current assets to
liabilities.

         At December 31, 2004, we had negative net capital of approximately
$600,000 (calculated in accordance with the applicable SEC regulations), which
was approximately $1,600,000 below the amount of required net capital. This
deficiency resulted in a net capital violation as of December 31, 2004.

                                       14
<PAGE>

         CHANGE OF CONTROL AND EQUITY INFUSION

         As a result of agreements entered into during the year ended December
31, 2005, we have new controlling stockholders and have received substantial
inflows of equity capital. The following transactions occurred during 2005 with
a limited liability company (an "LLC") and a former officer of ours which has
resulted in a new controlling stockholder:

         o  We sold convertible preferred stock Series B with the stated value
            of $700,000 in exchange for $500,000 cash and cancellation of a
            $200,000 note previously issued (convertible in to 1,166,666 shares
            of our common stock at $.60 per share);

         o  LLC exercised an option to acquire 1,666,666 shares of our common
            stock at $.60 per share for $750,000 in cash and cancellation of a
            $250,000 note previously issued;

         o  LLC acquired 500,000 shares of our common stock and an option to
            purchase an additional 1,050,000 shares of our common stock from an
            former officer of ours;

         o  We exchanged 10,000 shares of our preferred stock Series A,
            outstanding for debt in the amount of $240,000 and a severance
            obligation owed to a former officer of the Company and a trust
            controlled by him, for 7,062 shares of our preferred stock series C
            valued at $770,040. (convertible in to shares of our common stock at
            $2.00 per share);

         o  We sold 833,334 shares of common stock for $500,000 in cash;

         SALE OF ONLINE TRADING DISCOUNT BUSINESS

         On November 21, 2005, we entered into a transfer agreement pursuant to
which we transferred to a broker dealer all of the active and inactive customer
accounts associated with our online trading discount business for a sales price
of $452,000. At December 31, 2005, both parties to the transfer agreement had
met all requirement of the agreement. The online trading discount business
accounted for $416,843 or 2.5% of our commissions and fee revenues and incurred
a loss of approximately $17,000 in 2005.

OUR COMPANY

         Empire Financial Holding Company was organized as a corporation under
the laws of the State of Florida in 2000 to serve as the parent of Empire
Financial Group, Inc., a registered broker dealer, and Empire Investment
Advisors, Inc., a registered investment advisor. Our principal executive offices
are located at 2170 West State Road 434, Suite 100, Longwood, Florida 32779, and
our telephone number is 1-800-569-3337. Our shares are listed on the American
Stock Exchange and quoted under the symbol "EFH" and began trading in April of
2002. Our website is located at www.empirefinancialholding.com. Information
contained in or connected to our web site is not part of this report.

                                       15
<PAGE>

         Our periodic filings are available on our website or can be requested
directly from us for those persons that make a request in writing (Attn:
Investor Relations) or by e-mail (investorrelations@empirenow.com), and we will
provide free of charge our Annual Reports on Form 10-KSB, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, our
proxy statements and/or reports filed by officers and directors with the
Securities and Exchange Commission under Section 16(a) of the Securities
Exchange Act. These reports are also available on the Securities Exchange
Commission website at www.sec.gov by searching the EDGAR database for our
company's filings under the name "Empire Financial" and selecting Empire
Financial Holding Company.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

         Our principal executive offices are located in approximately 8,000
square feet of office space at 2170 West State Road 434, Suite 100, Longwood,
Florida 32779. These offices are leased pursuant to a lease which expires on
February 28, 2010 and provides for an average rent of approximately $11,608 per
month, plus sales and property taxes.

         During the second and third quarters of 2005, we opened three offices
that are owned and supervised by us and operated by our employees. These offices
are located in New York City, New York, Ridgewood, New Jersey and Boca Raton,
Florida.

         The New York office is located at 14 East 60th Street, Suite 208 and
occupies approximately 700 square feet with monthly rentals of $2,700. This
office houses our New York investment banking operations as well as servicing
institutional clients with trading and execution services.

         The New Jersey office is located at 213 E. Ridgewood Avenue, Second
Floor and occupies 723 square feet with monthly rentals of $1,600. This office,
a satellite of our New York office, also services institutional clients with
trading and execution services.

          Due to the large amount of travel to the New York area and significant
costs associated with overnight hotel rooms, we maintain an apartment at 140
East 56th Street in New York City. The apartment is approximately 700 square
feet with monthly rentals of $3,500 of which we pay $2,000. We share the cost of
the apartment with an employee who commutes from Florida to New York frequently.

         We have also opened an office in Boca Raton, Florida. The Boca Raton
office is located at 555 South Financial Group, Suite 400 with approximately
2,000 square feet and a monthly rental of approximately $4,200. This office
employs registered individuals who will market our retail brokerage services in
the lucrative South Florida area. We have merged our established South Florida
market making and trading operations within the Boca Raton operation to
consolidate our operating costs and improve the economies of scale.

         As of December 31, 2005, we serviced 26 fully independent offices
throughout the United States. We do not have lease agreements for these offices
or any direct financial commitment. The rent for these facilities is an
obligation of the independent contractors who are located in each of them.

                                       16
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

         On October 17, 2003, we received the first of a series of subpoenas
issued by the SEC in an investigation entitled "In re Certain Mutual Fund
Trading Practices, File No. NY-7220". The investigation sought information
regarding whether certain persons and entities engaged in, or aided and abetted
others to engage in, certain practices in connection with the trading of mutual
funds shares in violation of the federal securities laws, including enabling or
permitting preferred customers to engage in late trading or market timing of
mutual fund shares, among other things. The New York Attorney General was also
conducting a similar investigation. We have cooperated fully with the SEC and
the New York Attorney General in their investigations.

         On May 25, 2004, we received a notice, commonly referred to as a Wells
notice, from the SEC indicating that the staff of the commission intended to
recommend to the commission the commencement of an enforcement action against us
for our role in the trading of mutual fund shares on behalf of our clients.

         During the quarter ending June 30, 2005, we estimated that the cost of
settling any enforcement action would be approximately $350,000. Therefore, we
recognized an expense of $275,000 for our share of the settlement and recorded a
receivable of $75,000 from a former officer who is obligated under an agreement
to pay for his share of the settlement. An accrual of $350,000 was recorded on
the books of the EFG which increased liabilities and the expense, decreased
income by $275,000, thereby causing a decrease in basic earnings per share of
approximately $0.05. In addition, the working capital ratio decreased by about
6%.

         We have since received and executed a settlement offer from the SEC and
have placed $350,000 in an escrow account pending ratification by the SEC's main
office in Washington, D.C. This provision is represented on the Statement of
Financial Condition for the year ended December 31, 2005 as cash in escrow with
the corresponding liability shown in accrued expenses and other liabilities.

         Our business involves substantial risks of liability, including
exposure to liability under federal and state securities laws in connection with
the underwriting or distribution of securities and claims by dissatisfied
clients for fraud, unauthorized trading, churning, mismanagement and breach of
fiduciary duty. In recent years there has been an increasing incidence of
litigation involving the securities industry, including class actions which
generally seek rescission and substantial damages. In the ordinary course of
business, we and our principals are, and may become a party to additional legal
or regulatory proceedings or arbitrations. We are not currently involved in any
additional legal or regulatory proceeding or arbitrations, the outcome of which
is expected to have a material adverse impact on our business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

         No matters were submitted to a vote of security holders during the
fourth quarter of 2005.

                                       17
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
         BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
------------------------------------------------------------------------

         Market Prices. Our common stock began trading on the American Stock
Exchange ("AMEX") on April 9, 2002, under the symbol "EFH". Set forth below is
high and low price information for the common stock as reported on the AMEX for
each period presented.

              2004               HIGH SALES PRICE       LOW SALES PRICE
         First Quarter                 $1.75                $1.15
         Second Quarter                 2.10                  .96
         Third Quarter                  1.15                  .65
         Fourth Quarter                 1.30                  .65


              2005               HIGH SALES PRICE       LOW SALES PRICE
         First Quarter                 $1.01                 $.95
         Second Quarter                 1.65                 1.50
         Third Quarter                  2.20                 2.20
         Fourth Quarter                 3.65                 3.47

         As of March 20, 2006, there were approximately 430 stockholders of
record of our common stock.

DIVIDEND INFORMATION.

         We have not paid any dividends to our common stockholders since January
1, 2003. We do not anticipate paying any dividends in the foreseeable future. We
intend to retain earnings to finance the development and expansion of our
business. Payment of dividends in the future will be subject to the discretion
of our board of directors and will depend on our ability to generate earnings,
our need for capital and our overall financial condition.

EQUITY COMPENSATION PLAN.

         The following table provides information as of December 31, 2005 with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance.

                                       18
<PAGE>

                      Equity Compensation Plan Information

                                                                 Number of
                                                                 securities
                                                            remaining available
                          Number of                         for future issuance
                        securities to                           under equity
                        be issued upon   Weighted-average    compensation plan
                         exercise of      exercise price        (excluding
                         outstanding      of outstanding    securities reflected
Plan Category              options,          options,          in column (a)
                             (a)               (b)                  (c)

Equity Compensation
plans approved by
stockholders              2,000,000           $1.89                  -

Equity compensation
plans not approved by
stockholders                 74,514            1.89                  -
                        --------------   ----------------

Total                     2,074,514           $1.89                  -
                        ==============   ================

STOCK TRANSACTIONS

         For the year ended December 31, 2005, following stock, option and
warrant transactions occurred causing resulting in a change in control of our
Company:

         o  We sold 416,667 shares of common stock for $250,000 in cash;

         o  We sold 7,000 shares of Series B Convertible Preferred Stock
            accompanied with an option to acquire 1,666,666 shares of common
            stock at an exercise price of $.60 per share, in exchange for
            $500,000 of cash and cancellation of a $200,000 note previously
            issued to us;

         o  A trust administered by a former officer of ours sold 500,000 shares
            and an option to purchase an additional 1,050,000 shares of the
            Company's common stock for an undisclosed amount. The option expires
            on various dates from 24 to 42 months after May 20, 2005, and has
            exercise prices ranging from $1.25 to $2.25 per share; we exchanged
            10,000 shares of our preferred stock Series A, outstanding debt in
            the amount of $240,000 and a severance obligation owed to a former
            officer of the Company and a trust controlled by him, for 7,062
            shares of our preferred stock series C valued at $770,040. The
            preferred stock series C is convertible in to shares of our common
            stock at $2.00 per share.

         o  We sold 416,667 shares of common stock for $250,000.

         o  Options that were granted in conjunction with the sale of our Series
            B preferred stock, were exercised for $750,000 and satisfaction of
            notes payable in the amount of $250,000.

                                       19
<PAGE>

         As a result of the completion of the above transactions, a limited
liability company, gained control of the Company from a former officer.

         Unrelated to the change of control of our Company, we also recorded the
following equity transactions:

         o  We issued 50,000 shares of common stock in exchange for $50,000 owed
            by the Company to the lender;

         o  An officer of the Company, exercised 200,000 options covering 55,629
            shares of the Company's common stock, granted under the stock option
            plan in 2003;

         o  We cancelled 200,000 shares of our common stock and issued warrants
            to purchase 50,000 shares of our common stock, at $1.25 per share,
            as a result of cancellation of an agreement previously executed in
            2004;

         o  We sold 100,000 shares of common stock at $1.00 per share and
            warrants to purchase 60,000 shares at $2.00 for $100,000 in cash;
            150,000 shares of common stock at $1.00 per share and warrants to
            purchase 60,000 shares at $1.50 for $150,000 in cash; 151,515 shares
            of common stock at $1.65 for $250,000;

         o  We issued 2,000 shares of Series D preferred stock with a stated
            value of $200,000 in exchange for accounts payable;

         o  We sold 20,000 shares of common stock at $2.50 per share, five year
            warrants to purchase 12,500 shares of our common stock at $3.73 and
            a thirty day option assignment from a stockholder to purchase 12,500
            shares of stock at $1.25 per share from a former officer for cash of
            $50,000;

         o  100,000 shares of common stock, five year warrants to purchase
            62,500 shares of our common stock at $3.73 and a thirty day option
            assignment to purchase 62,500 shares of stock at $1.25 per share for
            $250,000;

         o  We sold 10,000 shares of the Company's newly created Series E
            preferred stock valued at $75.00 per share in exchange for listed
            common stock valued at $783,750 at the time of the exchange, and
            3,333 shares of the Company's newly created Series E preferred stock
            valued at $75.00 per share for $250,000.

         Also during the fourth quarter, the Company converted, at the election
of several of the convertible note holders, $200,000 of convertible notes to
common stock valued at $2.00 per share and $72,079 of convertible notes to
common stock at the value of $2.50 per share. As a result of this conversion,
the Company issued:

      o  100,000 shares of common stock in exchange for $200,000 worth of
         convertible notes payable;

      o  13,635 shares of our common stock in exchange for $34,089 worth of
         convertible notes payable;

      o  15,200 shares of common stock in exchange for $38,000 worth of
         convertible notes payable to a major shareholder and previous officer
         of the Company.

                                       20
<PAGE>

         The table below outlines the conversion price of all outstanding
convertible issues, both debt and equity:

         Convertible Issue                      Conversion Price
         -----------------                      ----------------
         Series B preferred stock                    $0.60
         Series C preferred stock                     2.00
         Series D preferred stock                     2.00
         Series E preferred stock                     3.51
         Notes payable, 10% convertible debt          2.00

         The Company granted options to purchase 1,575,000 shares of the
Company's common stock to officers and key employees during 2005 at a weighted
average exercise price of $2.04. Of the 1,575,000 options granted during the
year, 275,000 options were granted to employees, 650,000 were granted to
officers who are not members of the Board of Directors, 500,000 were allocated
to officers who are members of the Board of Directors and 150,000 were granted
to outside members of the Board of Directors. 280,000 options vest immediately
and 1,295,000 options vest monthly over a two year period.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

INTRODUCTION

         We were incorporated in Florida during February 2000. Most of our
business is conducted through our wholly owned subsidiaries, Empire Financial
Group, Inc. and Empire Investment Advisors, Inc. Empire Financial Group, Inc.
was founded in 1992 and merged into Empire Financial Holding Company in 2000.
Accordingly, the following discussion and analysis of our financial condition
and results of operations is based on the combined results of these businesses.

         Empire Financial Group, Inc. ("EFG") is our financial brokerage
services subsidiary providing brokerage services to full service retail and
institutional customers. We provide our registered representatives and advisors
back office compliance and administrative services over the telephone at
1-800-569-3337 or through their designated registered representative. We provide
our retail customers access to useful financial products and services through
our website and by telephone. Our customers may, upon request, also receive
advice from our brokers regarding stock, bonds, mutual funds and insurance
products. We also provide securities execution and market making services,
providing execution services involving filling orders to purchase or sell
securities received from unaffiliated broker dealers on behalf of their retail
customers. We typically act as principal in these transactions and derive our
net trading revenues from the difference between the price paid when a security
is bought and the price received when that security is sold. We typically do not
receive a fee or commission for providing retail order execution services.

         Additionally through Empire Investment Advisors, Inc. ("EIA"), we offer
fee-based investment advisory services to our customers, independent registered
investment advisors and unaffiliated broker dealers. These services are
web-based and are delivered through a platform that combines a variety of
independent third party providers.

                                       21
<PAGE>

         Services include access to separate account money managers, managed
mutual fund portfolios, asset allocation tools, separate account manager and
mutual fund research, due diligence and quarterly performance review. We charge
our customers an all-inclusive fee for these services, which is based on assets
under management. As of December 31, 2005, the annual fee was equal to
approximately 140 basis points times the assets under management.

CRITICAL ACCOUNTING POLICIES

         Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. Because we operate in the financial services industry,
we follow certain accounting guidance used by the brokerage industry. Our
consolidated balance sheet is not separated into current and non-current assets
and liabilities. Certain financial assets, such as trading securities are
carried at fair market value on our consolidated statements of financial
condition while other assets are carried at historic values.

         We account for income taxes on an asset and liability approach to
financial accounting and reporting. Deferred income tax assets and liabilities
are computed annually for differences between the financial and tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred asset will not be realized. Income
tax expense is the tax payable or refundable for the period, plus or minus the
change during the period in deferred tax assets and liabilities.

ACCOUNTING FOR CONTINGENCIES

         We accrue for contingencies in accordance with Statement of Accounting
Standards ("SFAS") No. 5, "Accounting for Contingencies," when it is probable
that a liability or loss has been incurred and the amount can be reasonably
estimated. Contingencies by their nature relate to uncertainties that require
our exercise of judgment both in assessing whether or not a liability or loss
has been incurred and estimated the amount of probable loss.

USE OF ESTIMATES

         Note 2 to our consolidated financial statements contains a summary of
our significant accounting policies, many of which require the use of estimates
and assumptions that affect the amounts reported in the consolidated financial
statements for the periods presented. We believe that of our significant
accounting policies are based on estimates and assumptions that require complex,
subjective judgments which can materially impact reported results.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

         In December 2004, the FASB issued Statement of Financial Standards No.
123 (revised 2004), SHARE-BASED PAYMENT ("SFAS No. 123 (R)"), which is a
revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and amends FASB Statement No. 95,
STATEMENT OF CASHFLOWS. Generally, the approach to accounting for share-based
payments in SFAS No. 123(R) is similar to the approach described in SFAS No.

                                       22
<PAGE>

123. However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Pro forma disclosure of the fair value of
share-based payments is no longer an alternative to financial statement
recognition. SFAS No. 123(R) is effective for small public business issuers at
the beginning of the first fiscal year beginning after December 15, 2005, and
therefore effective for the year ending December 31, 2006 for the Company.

         The Company expects the adoption of SFAS No. 123(R) to have a material
effect on its financial statements, in the form of additional compensation
expense, on a quarterly and annual basis. It is not possible to precisely
determine the expense impact of adoption since a portion of the ultimate expense
that is recorded will likely relate to awards that have not yet been granted.
The expense associated with these future awards can only be determined based on
factors such as the price for the Company's common stock, volatility of the
Company's stock price and risk free interest rates as measured at the grant
date. However, the pro forma disclosures related to SFAS No. 123 included in the
Company's historic financial statements are relevant data points for gauging the
potential level of expense that might be recorded in future periods.

         Statement of Financial Accounting Standards No. 151, INVENTORY COSTS,
an amendment of ARB No. 43, Chapter 4 (SFAS 151) was issued in November 2004 and
becomes effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not expect that SFAS 151 will have any
effect on future financial statements.

         Statement of Financial Accounting Standards No. 152, ACCOUNTING FOR
REAL ESTATE TIME-SHARING TRANSACTIONS, an amendment of FASB Statements No. 66
and 67 (SFAS 152) was issued in December 2004 and becomes effective for
financial statements for fiscal years beginning after June 15, 2005. The Company
does not expect that SFAS 152 will have any effect on future financial
statements.

         Statement of Financial Accounting Standards No. 153, EXCHANGES OF
NON-MONETARY ASSETS, an amendment of APB Opinion No. 29 (SFAS 153) was issued in
December 2004 and becomes effective for non-monetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company does not expect
that SFAS 153 will have any effect on future financial statements.

         Statement of Financial Accounting Standards No. 154, ACCOUNTING CHANGES
AND ERROR CORRECTIONS, a replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154) was issued in May 2005 and becomes effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not expect that SFAS 154 will have any significant
effect on future financial statements.

         Statement of Financial Accounting Standards No. 155, ACCOUNTING FOR
CERTAIN HYBRID FINANCIAL INSTRUMENTS--AN AMENDMENT OF FASB STATEMENTS NO. 133
AND 140, was issued in February 2006 and is effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. Certain parts of this Statement may
be applied prior to the adoption of this Statement. Earlier adoption is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued financial statements, including financial statements for any
interim period for that fiscal year. Provisions of this Statement may be applied
to instruments that an entity holds at the date of adoption on an
instrument-by-instrument basis. The Company does not expect that SFAS 155 will
have any significant effect on future financial statements.

                                       23
<PAGE>

         In March 2005, FASB Interpretation No. 47, ACCOUNTING FOR CONDITIONAL
ASSET RETIREMENT OBLIGATIONS--AN INTERPRETATION OF FASB STATEMENT NO. 143 (FIN
47). FIN 47 is effective no later than the end of fiscal years ending after
December 15, 2005 (December 31, 2005, for calendar-year enterprises).
Retrospective application for interim financial information is permitted but is
not required. Early adoption of this Interpretation is encouraged. The Company
does not expect that FIN 47 will have any significant effect on future financial
statements.

         In December 2004, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement of
Position 04-2, ACCOUNTING FOR REAL ESTATE TIME-SHARING Transactions (SOP 04-2).
SOP 04-2 is effective for financial statements issued for fiscal years beginning
after June 15, 2005, with earlier application encouraged. The Company does not
expect that SOP 04-2 will have any effect on future financial statements.

         In September 2005, AcSEC issued Statement of Position 05-1: ACCOUNTING
BY INSURANCE ENTERPRISES FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH
MODIFICATIONS OR EXCHANGES OF INSURANCE CONTRACTS (SOP 05-1). SOP 05-1 is
effective for fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. The Company does not expect that SOP 05-1 will have any
effect on future financial statements.

         FASB Staff Position (FSP) FAS 13-1--ACCOUNTING FOR RENTAL COSTS
INCURRED DURING A CONSTRUCTION PERIOD, was issued on October 6, 2005 and becomes
effective for the new transactions or arrangements entered into after the
beginning of the first fiscal quarter following the date that the final FSP is
posted by the FASB. The Company does not expect that FSP 13-1 will have any
significant effect on future financial statements.

         On June 29, 2005, the FASB ratified the consensus reached for Emerging
Issues Task Force (EITF) Issue No. 05-5, ACCOUNTING FOR EARLY RETIREMENT OR
POST-EMPLOYMENT PROGRAMS WITH SPECIFIC FEATURES (SUCH AS TERMS SPECIFIED IN
ALTERSTEILZEIT EARLY RETIREMENT ARRANGEMENTS). The consensus in this Issue
should be applied to fiscal years beginning after December 15, 2005, and
reported as a change in accounting estimate effected by a change in accounting
principle as described in paragraph 19 of FASB Statement 154. The Company does
not expect that EITF 05-5 will have any significant effect on future financial
statements.

         On September 28, 2005, the FASB ratified the consensus reached for EITF
Issue No. 05-7, ACCOUNTING FOR MODIFICATIONS TO CONVERSION OPTIONS EMBEDDED IN
DEBT INSTRUMENTS AND RELATED ISSUES. The provisions of this Issue should be
applied to future modifications of debt instruments beginning in the first
interim or annual reporting period beginning after December 15, 2005. The
Company expects that the application of EITF 05-7 could have an effect on
interest and debt valuations in future financial statements. It is not possible
to determine the impact, if any, from the application of EITF05-7.

         On September 28, 2005, the FASB ratified the consensus reached for EITF
Issue No. 05-8, INCOME TAX CONSEQUENCES OF ISSUING CONVERTIBLE DEBT WITH A
BENEFICIAL CONVERSION FEATURE. The provisions of this Issue should be applied
beginning in the first interim or annual reporting period beginning after
December 15, 2005. The Company expects that the application of EITF 05-8 could
have an effect on he income tax expense reported in future financial statements.
It is not possible to determine the impact, if any, from the application of
EITF05-8.

                                       24
<PAGE>

MARKET-MAKING ACTIVITIES

         Securities owned and securities sold, not yet purchased, which
primarily consist of listed, over-the-counter, American Depository Receipts and
foreign ordinary stocks, are carried at market value and are recorded on a trade
date basis. Market value is estimated daily using market quotations available
from major securities exchanges and dealers.

SOURCES AND DESCRIPTION OF REVENUES

COMMISSIONS AND FEES.

         Approximately 73% of our 2005 revenues and approximately 75% of our
2004 revenues consist of commissions and fees. Commissions and fees include
revenues generated from transactional fees charged to retail and institutional
customers. Commissions and fees also include mutual fund transaction commissions
and trailer fees, which are periodic fees paid by mutual funds as an incentive
to keep assets invested with them over time. Transactional fees charged to
retail and institutional customers are primarily affected by changes in
transaction volumes and changes in the commission or fee rates charged per
transaction. The significant growth in our daily average trading volumes in the
U.S. and major global equities markets has increased our trading commissions and
transaction fees.

EQUITIES MARKET-MAKING TRADING REVENUES, NET

         Approximately 24% of our 2005 and 2004 revenues consist of equities
market-making trading revenues, net. Equities market-making trading revenues are
generated from the difference between the price we pay to buy securities and the
price we are paid when we sell securities. Volatility of stock prices, which can
result in significant price fluctuations in short periods of time, may result in
trading gains or losses. Our equities market-making trading revenues are
dependent on our ability to evaluate and act rapidly on market trends and manage
risk successfully. We typically act as principal in these transactions and do
not receive a fee or commission for providing order execution services.

         Our 2005 trading revenues, net, were $5,451,815 which consisted of net
realized gains of $5,912,358 and net unrealized losses of $460,543.

DESCRIPTION OF OPERATING EXPENSES

EMPLOYEE COMPENSATION AND BENEFITS.

         Employee compensation and benefits, which include salaries and wages,
incentive compensation, stock compensation and related employee benefits and
taxes accounted for approximately 21% of our expenses during 2005 and
approximately 20% of our expenses during 2004. Approximately 60% of our
employees are compensated primarily on a performance basis. Therefore, a
significant portion of compensation and benefits expense will fluctuate based on
our operating revenue.

COMMISSIONS AND CLEARING COSTS.

         Commissions and clearing costs include commissions paid to independent
brokers, fees paid to floor brokers and exchanges for trade execution costs,
fees paid to third-party vendors for data processing services and fees paid to

                                       25
<PAGE>

clearing entities for certain clearance and settlement services. Commissions and
clearing costs generally fluctuate based on transaction volume. Approximately
67% of our 2005 expenses and approximately 63% of our 2004 expenses consisted of
commissions and clearing costs.

GENERAL AND ADMINISTRATIVE

         Our general and administrative expenses consist primarily of executive
compensation, legal, accounting and other professional fees, software consulting
fees, travel and entertainment expenses, insurance coverage, depreciation,
occupancy expenses and other similar operating expenses. These expenses
accounted for approximately 10% and 15% of our expenses for 2005 and 2004,
respectively.

OTHER INCOME AND EXPENSES

         Other income and expenses consist of interest income earned on our
capital reserves and bank balances while interest expenses are costs of capital
employed in our market making activities to purchase and hold inventory and to
service our debt. Interest income, net of interest expense for 2005 and 2004
were $56,132 and $69,802, respectively.

         Also included in other income and expenses for 2005, we recognized an
expense of $275,000 resulting from our executing an agreement pending with the
Securities and Exchange Commission over mutual fund trading activities in 2002
and 2003. We also generated $452,000 in one time revenues from the sale of our
online discount trading business. There were no other income and expense items
in 2004.

RESULTS OF OPERATIONS - DECEMBER 31, 2005 COMPARED WITH DECEMBER 31, 2004

         Total revenues for the year ended December 31, 2005 increased
$1,059,948 or 5%, to $22,485,731 from a $21,425,783 reported for the year ended
December 31, 2004. Commissions and fees revenue accounted for $220,209 or
approximately 21% of the increase in total revenues while trading revenues from
equities and market-making activities accounted for $388,182, or approximately
37% of the $1,059,948 increase in total revenues. Our new investment banking
division accounted for $266,410, or approximately 25% of the increase in
revenues. We did not have an active investment banking division in 2004.

         The increase in total revenues is primarily due to the reasons
described below.

         Commission and fees revenue increased $220,209 to $16,374,914 from
$16,154,705 in 2004, due mainly to the addition of two new company operated
offices in New York City and Boca Raton which generated approximately $597,000
in revenues or approximately 4% of our total commission and fees revenue.

         Commission and fees revenues accounted for approximately 73% and 75% of
our total revenues for the years ended December 31, 2005 and 2004, respectively.

         Trading revenues increased $388,182 to $5,451,815 in 2005 from
$5,063,633, in 2004, for an increase of approximately 8%. This increase is due
primarily to better market conditions and controls placed on the proprietary
inventory accounts. Our new company operated offices, which are primarily
trading, also contributed to the increased availability of transactions in
stocks in which we make markets.

                                       26
<PAGE>

         Operating expenses in 2005 decreased $693,773, or approximately 3%, to
$22,373,382 from $23,067,155 in 2004, for a combination of reasons as described
below:

         Clearing and execution costs in 2005 increased $564,144, or
approximately 4%, to $15,070,113 from $14,505,969 in 2004. This increase is
partly due to an increase in high priced quotation and execution services added
to accommodate our new offices and the increased activity in our market making
activities. In order to commence operations in the new locations, we increased
our clearing costs while not having yet realized the full revenues associated
with these offices. Early in 2005, our firm had two clearing firms with which we
transacted business. During the year, we terminated our relationship with one of
the clearing firms and we incurred costs associated with transferring accounts
to our remaining clearing firm. As a percentage, commissions and clearing costs
accounted for approximately 67% and 63% of total expenses for the years ended
December 31, 2005 and 2004, respectively.

         Employee compensation and benefits in 2005 increased $122,412, or
approximately 3%, to $4,789,976 from $4,667,564 in 2004. This increase is
primarily due to restructuring our compensation package associated with our
market making activities to a more performance based system. We also recognized
$152,163 in compensation expense due to variable options issued to the President
in 2003 which were exercised in 2005. The employer portion of health care
covered increased approximately 50% over prior year costs. The increased
compensation was partially offset by a reduction in expense of $240,000 that
resulted from reversing the stock given as compensation in 2004 when the
agreement was cancelled in 2005. Employee compensation and benefits as a
percentage of total expenses increased from approximately 20% in 2004 to 21% in
2005.

         General and administrative expenses in 2005 decreased $1,151,208 or
approximately 33%, to $2,287,449 from $3,438,657 in 2004. This decrease is
primarily attributable to the continued downward trend of outside legal costs
associated with defending the SEC enforcement action. As a percentage of total
expenses, general and administrative expenses were 10% and 15% for 2005 and
2004, respectively.

         Our other income and expenses consisted partly of interest income,
interest expense and two isolated events as described below:

         For the year ended 2005, our interest income increased approximately
24% to $210,386 over interest income in 2004 of $170,327 due mainly to our
higher cash reserves deposited with our bank and the increased clearing deposit
at our clearing firm. Our interest expense increased approximately 53% to
$154,254 over $100,525 in 2004 due mainly to the higher interest costs
associated with our margin debt incurred in maintaining our securities inventory
used in our market making activities and servicing our debt.

         November of 2005, we sold our online discount trading business to an
unrelated third party which generated a one time gain of $452,000. We also
recorded an expense of $275,000 in relation to a settlement offer from the SEC
resolving and removing the threat of an enforcement action brought against us
for our role in trading of mutual funds shares on behalf of our clients. In
2004, we did not have any other items of other income and expense.

                                       27
<PAGE>

         For the year ended December 31, 2005, we reported net income applicable
to common stockholders of $2,294,969, or $.44 per basic share and $.38 per
diluted share, as compared to a net loss applicable to common stockholders of
$1,599,695, or $.50 per basic and diluted loss per share for the year ended
December 31, 2004. The reported net income for 2005 was largely due to a one
time adjustment to income from the recognition of deferred tax assets in the
amount of $2,117,000 or $.41 per basic share and $.35 per diluted share.
Management believes that the deferred tax assets will be utilized in the future
based on current profitable operations and future projections and therefore has
reversed the allowance which was previously set up against the deferred tax
assets.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 2005, we had $9,849,433 in assets, approximately 48%
of which consisted of cash or assets readily convertible into cash, principally
securities owned and receivables from clearing brokers, which include interest
bearing cash balances held with our clearing organization. Historically, we have
financed our business primarily through cash generated by operations, as well as
proceeds from our initial public offering and follow-on private placements of
stock and debt offerings as discussed below:

         During 2005 we used cash from operations of $1,422,397 while during
2004 we used $542,458. The major uses of cash from operations for the year ended
December 31, 2005 resulted from an increase in our deposits held at our clearing
organization of $768,916, increase in our long and short inventory positions for
our market making activities of $1,135,894, increase in our prepaid expense and
other assets of 294,488 and the $350,000 in cash we placed in an escrow account
pending final ratification our settlement agreement with the SEC. These
increases were partially offset by a decrease in our commissions and other
receivable from our clearing organization of $1,597,305 and $669,833 decrease in
our accrued expenses and other liabilities.

         Net cash used in investing activities for 2005 and 2004 was $1,501,747
and $151,256, respectively. This increase in cash used was mainly due to the
development of an independent office and the three Company offices in 2005 in
which we advanced $1,806,701 against notes and was partially offset by the
proceeds of $452,000 received from the sale of our online discount trading
business.

         Net cash provided by financing activities was $3,260,863 in 2005, as
compared to $344,311 provided in 2004.

         Our financing activities in 2005 included proceeds of $2,350,000 from
the sales of our common and preferred stock and $750,000 in cash proceeds from
the exercising of options granted to our majority stockholder. We also received
marketable securities in exchange for our Series E preferred stock valued at the
time of the exchange at $783,750.

         During 2005, we issued two notes to our clearing organization in the
amount of $700,000. The first note was issued on March 20, 2005 in the amount of
$200,000 and carries an interest rate of 2% over the prime rate and matured in
February of 2006. The second note to our clearing organization in the amount of
$500,000 was executed on December 15, 2005 and also carried an interest rate at
2% over the prime rate.

                                       28
<PAGE>

         On March 20, 2005, we issued a promissory note to a former officer of
the Company as part of a settlement agreement in conjunction with the sale of
our former subsidiary, Advantage Trading Group, in the amount of $325,000. The
note replaced a note previously issued in 2004 in the amount of $400,000. We
paid $153,704 in interest payments and extension fees on the $400,000. The note
bears interest at 12% with a fixed monthly principal payment of $18,056. We made
nine principal and interest payments totaling $187,075. The fully amortizing
note matures on September 20, 2006. At December 31, 2005, the unpaid principal
balance was $162,500.

         On March 20, 2005, we issued a 12% note to a former officer of our
Company in the amount of $50,000. The note requires interest only payments of
$500 per month and matured in February of 2006.

         On May 20, 2005 we issued a 12% note to an unrelated third party in the
amount of $500,000. As of December 20, 2005, we had made payments totaling
$535,243 which fully satisfied the note.

         Also during May of 2005, we issued a note to our controlling
stockholder in the amount of $250,000 as part of the change of control
transaction. The note was satisfied as part of the exercising of stockholder's
options to purchase our common stock.

         In December of 2003, we issued $472,089 worth of convertible, 10%
notes, to 8 unrelated third parties, requiring semi-annual payments of interest
only. The notes mature in December of 2006. During December of 2005, $272,089 of
these notes were converted to common stock of the Company. The notes convert at
$2.00 per share. We issued 136,044 share of our common stock as a result of
these conversions. At December 31, 2005, the Company remains indebted to the
remainder of the convertible notes for $200,000.

         Based on our current rate of cash outflows, we believe that our net
cash and liquid assets totaling $4,718,140 at December 31, 2005 will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the foreseeable future. Management's plan to return to
profitability has been successful but will require a longer period of sustained
profitability in order to fully judge its ultimate success.

         Our plan has several different aspects. We have addressed our capital
shortages through a recapitalization. This was accomplished by a sale/issuance
of additional equity securities and cash generated from sale of our online
trading business. We have shown by issuing additional debt and equity and
attaining profitability, the Company can generate the funds necessary to
continue our restructuring of operations.

         We have made, and will continue to make, changes to our cost structure
and operating systems. These changes include implementing additional financial
controls, obtaining new technology to improve operating efficiency, and adding
qualified, experienced personnel.

         We believe that the additional capital, improved cost structure and
efficiency, and an enhanced ability to provide services to the planned additions
of sales personnel will enable us to return to profitability. New personnel will
enable us to grow market making and execution services, increase our retail
sales force, and add new investment banking activities.

                                       29
<PAGE>

         We have implemented our plan, which returned us to marginal
profitability. The plan has several different aspects, which we will continue to
implement, as outlined below:

         o  increase our market making revenues by adding additional stocks in
            which we make a market;

         o  expand our institutional trading activities by continuing to add
            quality trading personnel with existing institutional clients;

         o  expand our investment banking activities by actively seeking small
            to mid-size companies that need debt and equity to continue their
            expansion plans;

         o  continue to recruit quality registered representatives;

         o  expand our offering of proprietary financial products to our retail
            and institutional customer.

         The Company has resolved several outstanding regulatory issues that
have enabled us to focus on operating our business in full compliance with all
applicable laws and regulations.

         If our plans change, or our assumptions change or prove to be
inaccurate, or if our available cash otherwise proves to be insufficient to
implement our business plans, we may require additional financing through
subsequent equity or debt financings. The Company cannot predict whether
additional funds will be available in adequate amounts or on acceptable terms.
If funds are needed but not available, the Company's business may be harmed.

NET CAPITAL REQUIREMENTS

         Our broker dealer subsidiary, Empire Financial Group, Inc. (`EFG"), is
subject to the requirements of the Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934, which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, should not exceed 15 to 1. Net capital and related ratio of
aggregate indebtedness to net capital, as defined, may fluctuate on a daily
basis.

         At December 31, 2005, EFG had positive net capital of $827,716
(calculated in accordance with the applicable SEC regulations), which was
$291,716 in excess of our required net capital.

         The ratio of aggregate indebtedness to net capital was 4 to 1. We claim
exemption from Rule 15c3-3 under Paragraph (k) (2) (ii) of the Rule as all
customer transactions are cleared through other broker dealers on a
fully-disclosed basis.

OFF-BALANCE SHEET ARRANGEMENTS

         We have no off-balance sheet arrangements.

         Tabular Disclosure of Contractual Obligations

Listed below is a tabular representation of our long-term debt obligations,
capital lease obligations, operating lease obligations, purchase obligations and
other long-term liabilities reflected on our balance sheet under GAAP as of
December 31, 2005.

                                       30
<PAGE>

                              Payment due by period
                              ---------------------
                                       Less than                       More than
Contractual Obligations        Total     1 year   1-3 years  3-5 years  5 years
-----------------------        -----     ------   ---------  ---------  -------
Long-term debt obligations   $904,167   $904,167      -           -         -
Capital lease obligations        -          -         -           -         -
Operating lease obligations  $660,660   $207,506  $471,264    $313,782

FACTORS AFFECTING OUR OPERATIONS, BUSINESS PROSPECTS AND MARKET PRICE OF STOCK

         For the year ending December 31, 2005, we returned to profitability.
Our net income attributable to common stockholders of $2,294,969 was mainly due
to recognition of deferred tax assets principally arising from the Company's
prior net operating loss carryforwards. Had we not recognized these assets, we
would have reported net income applicable to common stockholders of $177,969.
Included in net profit was a one time reversal of a stock compensation expense
item that was previously expensed in 2004 in the amount of $240,000. Also in
2005, we recognized a one-time expense of $275,000 resulting from our executing
an agreement pending with the Securities and Exchange Commission over mutual
fund trading activities in 2002 and 2003. We also generated $452,000 in one-time
revenues from the sale of our online discount trading business.

         Although we were profitable in 2005, there are no assurances that we
will be able to maintain profitability. We did, however, increase our
stockholder equity $7,064,865 from a deficit in 2004 of $1,897,607 to a positive
$5,167,258 at December 31, 2005. This increase was in large part due to the
recognition of a deferred tax asset of $2,117,000 in the third and fourth
quarters of 2005 and sale of our stock. We sold common stock for $2,346,922 and
preferred stock valued at $1,886,290 and exchanged preferred stock for
marketable securities valued at market value for $783,750 which significantly
increased our stockholders equity. We cancelled our Series A preferred stock
valued at $300,000 and converted $1,448,951 of convertible notes and other
liabilities to equity.

         We settled pending federal and state investigations relating to our
role in the trading of mutual fund shares on behalf of our clients. As of this
time, we have executed a settlement agreement with the Securities and Exchange
Commission which is pending ratification by the SEC's Washington, DC office. We
have accrued a regulatory reserve for $350,000 of which $275,000 is our
obligation and $75,000 is the obligation of one of our former officers.

         Our continued existence is dependent upon our ability to generate cash
either from operations or from new financings. We will continue implementing our
plan, which we believe will allow us to continue profitability. We intend to
continue to expand our market making and order execution services through
increased marketing to independent third party broker dealers and investment
advisors. The change in our ownership as previously discussed and our ability to
bring in additional equity and debt proceeds will help us to further expand our
core businesses.

         Subsequent to December 31, 2005, stockholders' equity was increased by
$725,000 from the proceeds of the sale of 290,000 shares of common stock. We
also have issued 863,074 shares of our newly created Series F preferred stock,
to unrelated third parties, for $2,804,990. The series F preferred stock
includes five year warrants to purchase 431,537 shares of our common stock at
$4.50 per share and carries a 4% cumulative dividend.

                                       31
<PAGE>

         However, there is no assurance that we will maintain profitability or
be able to generate cash from either operations of from issuance of additional
debt or equity financings which may hinder our plans for expansion.

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

         The consolidated financial statements of Empire Financial Holding
Company, the accompanying notes thereto and the independent registered public
accounting firm's report are included as part of this Annual Report on Form
10-KSB and immediately follow the signature page of this Annual Report on Form
10-KSB.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.
------------------------------------------------------------------------

         None.

ITEM 8A. CONTROLS AND PROCEDURES
--------------------------------

         Management, including our President and Chief Financial Officer,
evaluated our controls and procedures related to our reporting and disclosure
obligations as of December 31, 2005. These officers have concluded that, based
on these evaluations, these disclosure controls and procedures (as defined in
Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act) were effective to ensure that (i) material
information relating to us is known to these officers, particularly material
information related to the period for which this period report is being
prepared; and (ii) this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
rules and forms promulgated by the Securities and Exchange Commission.

         There have been no significant changes in our internal control over
financial reporting during the fiscal year ended December 31, 2005, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 8B. OTHER INFORMATION
--------------------------

         None.

                                       32
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
----------------------------------------------------------------------

         Our executive officer and directors and their respective ages as of May
1, 2006 are as follows:

                                Director
Name                      Age    Since     Position
----                      ---   --------   --------

Donald A. Wojnowski Jr.   46      2004     President, Chief Executive Officer
                                           and Director

Rodger E. Rees            51               Chief Financial Officer and Secretary
                                           of Empire Financial Holding Company,
                                           Inc. and Empire Financial Holding
                                           Group, Inc.

John J. Wilson            57               Vice President and Chief Compliance
                                           Officer of Empire Financial Group,
                                           Inc.

Bradley Gordon            53      2003     Director

Steven M. Rabinovici      54      2005     Chairman of the Board and Director

John C. Rudy              64      2005     Director

Kirk M. Warshaw           48      2005     Director

         Donald A. Wojnowski Jr. is our President, Chief Executive Officer and a
member of the Board of Directors. Mr. Wojnowski is also the President and Chief
Executive Officer of one of our wholly-owned subsidiaries, Empire Financial
Group, Inc. Mr. Wojnowski was elected Chief Executive Officer in July of 2005
and has served as our President since June 2004. Prior to holding his current
position, Mr. Wojnowski was our Vice President of Business Development, a
position he held from September 1999 until February 2004. Mr. Wojnowski joined
us in 1993 and has been a member of our Board since June 2004.

         Bradley L. Gordon has served as a director of our company since June
2003. Mr. Gordon also serves as an audit committee member. Since April 2000, Mr.
Gordon has been the managing member of Concept Acquisitions LLC, an
international franchise management and holding company. From September 1997 to
April 2000, Mr. Gordon was a director and the chief operating officer of
Ultimate Franchise Systems, Inc. In addition, Mr. Gordon has held various
executive management positions within various private and public retail and
wholesale service companies. Mr. Gordon's responsibilities have encompassed
strategic planning, management and profit responsibility of multi-billion dollar
organizations. Mr. Gordon has also been directly involved with and responsible
for the growth of start-up companies through the maturity and final
consolidation stages of their life cycles.

                                       33
<PAGE>

         Steven M. Rabinovici became a director of our company in May 2005 and
was elected Chairman of the Board in July 2005. Mr. Rabinovici has over 25 years
experience as a senior executive in both the profit and non-profit sectors. From
1992 through 2004, Mr. Rabinovici was the chief executive officer of Complete
Management Inc., a physician practice management company.

         Rodger E. Rees was elected as our Chief Financial Officer and Secretary
in May 2005. Mr. Rees has been the Chief Operating Officer of Empire Financial
Group, Inc. and Empire Investments Advisors, Inc., two of our wholly-owned
subsidiaries, since February 2005. From July 2001 through February 2005, Mr.
Rees served as the director of independent broker dealer services for Empire
Financial Group, Inc. From February 1995 through July 2001, Mr. Rees was
President and Chief Operating Officer of Centennial Capital Holdings, Inc. (a
financial services company). Mr. Rees is a licensed certified public accountant
in the State of Georgia.

         John C. Rudy became a director of our company in May 2005. Mr. Rudy
also serves as an audit committee member. Mr. Rudy has over 35 years of
experience in financial and business operations. Since 1992, Mr. Rudy has been
President of Beacon Consulting Associates, a business consulting and accounting
firm, which he founded. Mr. Rudy has been a Certified Public Accountant since
1972.

         Kirk M. Warshaw became a director of our company in May 2005. Mr.
Warshaw also serves as an audit committee member. Mr. Warshaw is a financial
professional with over 20 years experience providing accounting, financial and
advisory services. Over the last five years, Mr. Warshaw has advised his clients
in over $170 million worth of buy/sell transactions. He has arranged over $64
million in equity and debt financing for small companies as well as assisting in
the formation of two small public companies. Mr. Warshaw has been a Certified
Public Accountant since 1982.

         John J. Wilson was appointed our Vice President and Chief Compliance
Officer in November 2005. Prior to joining Empire Financial Group, Inc., Mr.
Wilson was Director of Compliance for National Securities Corporation from July
of 2003 until November of 2005. From December 2000 through November 2003, Mr.
Wilson served in the same capacity with Weatherly Securities Corporation.


         All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed.


         Our Audit Committee is comprised of three non-employee members of our
Board of Directors. The Board of Directors has determined that:

   (1)   all current committee members are "independent" as that term is
         defined in the applicable rules and regulations of the American Stock
         Exchange (AMEX) and the Securities and Exchange Commission (SEC);

   (2)   all current committee members are financially literate; and,

   (3)   Kirk M. Warshaw qualifies as an "Audit Committee financial expert" as
         that term is defined at Item 401 (e) of Regulation S-B.

                                       34
<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers, and persons who own more than 10%
of our outstanding common stock, to file with the SEC, initial reports of
ownership and reports of changes in ownership of our equity securities. Such
persons are required by SEC regulations to furnish us with copies of all such
reports they file.

         To our knowledge, based solely on a review of the copies of such
reports furnished to us and written or oral representations that no other
reports were required for such persons, our officers, directors and greater than
10% beneficial owners are in compliance with all applicable Section 16(a) filing
requirements.

CODE OF ETHICS

         We adopted a Code of Ethical Conduct, effective July 2004, which is
applicable to all of our directors, executive officers, and employees, including
our President and Chief Financial Officer. The Code of Ethical Conduct includes
provisions applicable to our senior executive officers consistent with the
Sarbanes-Oxley Act of 2002. Our Code of Ethical Conduct has been filed with the
SEC and is posted on our website at www.empirenow.com under the "Corporate
Governance" section. We will also provide at no charge a copy of the Code of
Ethical Conduct to any person upon written request addressed to our President
and Chief Executive Officer, Don Wojnowski, at our principal executive office,
located at Empire Financial Holding Company, 2170 West State Road 434, Suite
100, Longwood, Florida 32779.

ITEM 10. EXECUTIVE COMPENSATION
-------------------------------

Executive Compensation

         The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2005,
2004, and 2003 by (i) Empire's Chief Executive Officer and (ii) the most highly
compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the 2005 fiscal year and whose salary as
determined by Regulation S-B, Item 402, exceeded $100,000. The individuals
falling within categories (i) and (ii) are collectively referred to as the
"Named Executives". We did not offer stock appreciation rights or make any
long-term incentive plan payouts during these three fiscal years.
<TABLE>
                                   SUMMARY COMPENSATION TABLE
<CAPTION>
                                            ANNUAL COMPENSATION          LONG TERM COMPENSATION
                                     ---------------------------------   -----------------------
                                                                         RESTRICTED   SECURITIES
         NAME AND                                         OTHER ANNUAL     STOCK      UNDERLYING
    PRINCIPAL POSITION        YEAR    SALARY     BONUS    COMPENSATION     AWARDS      OPTIONS
---------------------------   ----   --------   -------   ------------   ----------   ----------
<S>                           <C>    <C>        <C>       <C>            <C>          <C>
Donald A. Wojnowski Jr. (1)   2005   $250,000   $47,006     $     --           --       300,000
 President and Chief          2004    150,000        --       82,181           --            --
 Executive Officer            2003    150,000        --      312,471           --       125,000


Rodger E. Rees (2)            2005   $180,000   $37,136           --           --            --
 Chief Financial Officer      2004    135,000     5,445           --           --            --
 and Secretary                2003    135,000    14,665           --       20,000        30,000
</TABLE>
_________

                                       35
<PAGE>

(1) Mr. Wojnowski served as Vice President of Business Development from
September 1999 through February 2004 and was elected as President in June 2004
and elected Chief Executive Officer in July 2005. Other Annual Compensation" for
Mr. Wojnowski consists of brokerage commissions

(2) Mr. Rees was elected as Chief Financial Officer and Secretary in May 2005.
During 2004 and 2003, Mr. Rees served as Chief Operating Officer and Director of
Independent Broker/dealer Services, respectively. Mr. Rees returned 250,000
options to the company in April 2006.

EMPLOYMENT CONTRACTS

         On August 2, 2005, the Company entered into a one year employment
agreement with Donald A. Wojnowski. The employment agreement extends through
June 1, 2007 and automatically renews on a monthly basis. The agreement can be
terminated by either party with 90 days notice. Pursuant to his employment
agreement, Donald A. Wojnowski was retained as President and Chief Executive
Officer and his total compensation is $240,000 per year plus bonus

         On August 2, 2006, the Company entered into a one year employment
agreement with Steven M. Rabinovici. The employment agreement extends through
June 2007 and automatically renews on a monthly basis . The agreement can be
terminated by either party with 90 days notice. Pursuant to his employment
agreement, Steven M. Rabinovici was retained as a director and Chairman of the
Board and his total compensation is $120,000 per year plus bonus.

         On November 15, 2005, the Company entered into a one year employment
agreement with John J. Wilson. The employment agreement extends through November
15, 2006 and automatically renews on a monthly basis . The agreement can be
terminated by either party with 90 days notice. Pursuant to his employment
agreement, John J. Wilson was retained as Vice President and Chief Compliance
Officer and his total compensation is $150,000 per year plus bonus.

Gagne Severance Arrangements; Exchange Agreement

         On June 25, 2004, Kevin M. Gagne and our company entered into a
Severance Agreement, pursuant to which Mr. Gagne's employment with us was
terminated and he resigned as one of our officers and directors. Pursuant to the
Severance Agreement, Mr. Gagne will receive severance payments from us in the
amount of $10,000 per month for 36 months commencing August 1, 2004. In
addition, the Severance Agreement provides for mutual releases of all matters
arising out of or related to Mr. Gagne's employment with us and any of our
subsidiaries or to Mr. Gagne serving as an officer or director of our company or
any of our subsidiaries, other than our obligations to indemnify Mr. Gagne and
Mr. Gagne's covenant not to compete with our company. Pursuant to the terms of
the Severance Agreement, we also granted to Mr. Gagne certain registration
rights to register shares of our common stock owned by Mr. Gagne.

         Pursuant to the terms of the certain stock purchase agreement, dated
March 8, 2005, among Mr. Gagne, the Gagne Trust and our company, on May 20,
2005, Gagne and the Gagne Trust exchanged (a) 10,000 shares of our Series A
Convertible Preferred Stock owned by the Gagne Trust, (b) certain outstanding
debt owed to Gagne by us in the approximate amount of $240,000 and (c) our
remaining severance obligations under the Severance Agreement, all for our
issuing to the Gagne Trust 7,062 shares of Series C Convertible Preferred Stock
with a stated value of $706,200. The Series C Convertible Preferred Stock is
convertible into shares of our common stock at $2.00 per share. We also borrowed
$100,000 from Gagne in February 2005, which note was repaid by us in full on May
20, 2005.

                                       36
<PAGE>

COMPENSATION OF DIRECTORS

COMPENSATION. Non-affiliated directors receive annual compensation in the amount
of (i) $5,000 per year in cash to be paid by the Company in quarterly in arrears
(pro-rated for partial periods served by any non-affiliate director), (ii) $500
in cash for attendance at meetings of the Board of Directors and (iii) $250 in
cash for attendance at meetings of any committees of the Board of Directors.
However, neither affiliated directors nor directors who are also employed by the
Company receive any fee or compensation for their services as directors. All
members of the Board of Directors receive reimbursement for reasonable
travel-related expenses actually incurred in connection with their attendance at
meetings of the Board of Directors.

OPTIONS. Directors are eligible to receive options under our Amended and
Restated 2000 Incentive Compensation Plan. Additionally, upon a person's
election as a non-affiliated director, such non-affiliated director is
automatically granted an option to purchase 10,000 shares of our common stock or
more, at the discretion of management, as well as an automatic annual grant of
an option to purchase 10,000 shares of our common stock on each anniversary of
the date such non-affiliated director was first elected as one of our directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

         Our voting securities outstanding on May 1, 2006 consisted of 6,889,005
shares of common stock. The following table shows as of May 1, 2006, the amount
of voting securities beneficially owned by (i) each of our current executive
officers, (ii) each of our directors (iii) all of our directors and executive
officers as a group and (iv) each person known by us to beneficially own more
than 5% of any class of our outstanding voting securities. Unless otherwise
stated, the address of each holder is c/o Empire Financial Holding Company, 2170
West State Road 434, Suite 100, Longwood, Florida 32779.
<TABLE>
<CAPTION>
                                                        NUMBER OF
                                                       SHARES OWNED      TOTAL
                                         NUMBER OF      SUBJECT TO     NUMBER OF
                                           SHARES      EXERCISE OF       SHARES      PERCENTAGE
                                        BENEFICIALLY    OPTIONS OR    BENEFICIALLY       OF
     NAME OF BENEFICIAL OWNER              OWNED         WARRANTS        OWNED       OUTSTANDING
------------------------------------    ------------   ------------   ------------   -----------
<S>                                     <C>            <C>            <C>            <C>
Donald A. Wojnowski Jr. (1) ........        219,157        425,000        644,157        7.86%
Bradley L. Gordon (2) ..............         32,635         88,522        112,635        1.48%
Steven M. Rabinovici (4,5) .........      4,468,182        810,000      5,278,182       64.43%
John C. Rudy (3) ...................             --         50,000         50,000         .61%
Kirk M. Warshaw (3) ................             --         50,000         50,000         .61%
Kevin M. Gagne (4,5) ...............      1,810,300             --      1,810,300       22.10%
Rodger E. Rees (6) .................         25,103         30,000         55,103         .67%
All directors and executive officers
 as a group (6 individuals) ........      4,745,077      1,553,522      6,298,599       77.68%
_________
</TABLE>
(1) Mr. Wojnowski holds 51,000 shares of common stock in his retirement account
and 168,157 shares personally. He also has options to purchase 425,000 shares of
common stock at $2.00 per share of which 275,000 of the options are exercisable
within 60 days.

(2) Mr. Gordon, in addition to 32,635 shares of common stock owned of record,
owns options that are currently eligible to purchase 20,000 shares at $1.10 per
share and 50,000 shares at $2.05 per share as well as warrants to purchase 8,522
shares of common stock at $5.46 per share.

                                       37
<PAGE>

(3) Mr. Rudy and Mr. Warshaw each own options that are currently eligible to
purchase 50,000 shares of our common stock at $2.05 per share.

(4) The Gagne First Revocable Trust owns 1,457,200 shares of our common stock on
record and 7,062 shares of Series C preferred stock that are currently eligible
to be converted into 353,100 shares of our common stock. The Gagne First
Revocable Trust delivered to EFH Partners, LLC irrevocable proxies, dated May
20, 2005, covering 1,050,000 shares of our common stock. Series F preferred
stock purchasers purchased 500,000 of these options in March 2006 with the
balance of 550,000 options currently eligible to be exercised by EFH Partners,
LLC.

(5) Steven M. Rabinovici has dispositive and voting power with respect to (a)
3,301,515 shares of our common stock owned of record by EFH Partners, LLC, (b)
7,000 shares of Series B Preferred Stock, par value $.01 per share, owned of
record by EFH Partners, LLC which rank superior to our common stock and are
currently convertible into an aggregate of 1,166,666 shares of our common stock,
(c) warrants to purchase 60,000 shares of our common stock at $1.50 per share,
(d) warrants to purchase 200,000 shares of our common stock at $2.00 per share
and (e) 550,000 shares of our common stock , which are covered by irrevocable
proxies, dated May 20, 2005, delivered by The Gagne First Revocable Trust to EFH
Partners, LLC, which permit EFH Partners, LLC to vote theses shares on all
matters, except that without the approval of the Gagne First Revocable Trust,
these shares may not be voted in favor of (i) the sale of all or substantially
all of our assets, (ii) our merger with any other entity or (iii) the
authorization of a new employee stock option plan or an increase in the number
of shares of our common stock available under any existing employee stock option
plan. Mr. Rabinovici is the manager of EFH Partners, LLC and has the right to
vote these shares of our common stock. (See footnote 3 above)

(6) Mr. Rees, in addition to owning 25,103 shares of our common stock also owns
options that are currently eligible to purchase 30,000 shares of our common
stock at $1.12 per share.

         For information regarding securities authorized under our equity
compensation plan, see Item 5.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

         The following is a discussion of certain relationships and related
transactions for the years ended December 31, 2005 and 2004.

Goble Settlement Agreement

         On October 31, 2004, we entered into the Settlement Agreement and the
Mutual Release with Henry N. Dreifus, Kevin M. Gagne, Bradley L. Gordon, John J.
Tsucalas, The Goble Trust and Richard L. Goble, pursuant to which all
outstanding controversies between the parties were settled and each party
further agreed to dismiss any and all pending lawsuits between and among one
another with prejudice. Additionally, the Mutual Release provides for certain
releases by (i) us, on behalf of our self and our officers, directors (excluding
Mr. Goble) and employees solely in their capacity as our officers, directors and
employees, (ii) Mr. Goble and (iii) the Goble Trust.

         Pursuant to the Settlement Agreement, on November 6, 2004, we
repurchased from the Goble Trust and Mr. Goble an aggregate of 2,088,000 shares
(the "Goble Shares") of our common stock, $.01 par value per share (our "Common
Stock").

                                       38
<PAGE>

         In consideration for the purchase of the Goble Shares and in connection
with the execution of the Settlement Agreement, (i) Mr. Goble and the Goble
Trust received from us all of the issued and three year unsecured promissory
note in the original principal sum of $400,000 (the "Goble Note"), and (ii) we
agreed to assume Mr. Goble's obligation to pay the Assumed G&G Purchase Price
(as defined below) to The Gagne First Revocable Trust (the "Gagne Trust").

         Mr. Goble, Mr. Gagne and the Gagne Trust also entered into a Stock
Purchase Agreement, dated as of November 6, 2004 (the "G&G Stock Purchase
Agreement"), whereby Mr. Goble purchased from the Gagne Trust all of the
outstanding capital stock of G & G Holdings, Inc. ("G&G"), a Florida corporation
jointly owned by Messrs. Gagne and Goble, for partial consideration to be paid
to the Gagne Trust on November 6, 2004, which includes (i) $250,000 in cash,
(ii) a three year unsecured promissory note in the original principal sum of
$500,000 (the "Gagne Note"), and (iii) 10,000 shares of Series A Convertible
Preferred Stock, $.01 par value per share, issued by us (collectively, the
"Assumed G&G Purchase Price").

         In connection with our assumption of Mr. Goble's obligation to pay the
Gagne Trust the Assumed G&G Purchase Price pursuant to the terms and conditions
of the G&G Stock Purchase Agreement, we executed the Gagne Note in favor of the
Gagne Trust in the principal sum of $500,000 with simple interest thereon at an
annual rate of six percent until December 31, 2005 and nine percent thereafter.
The principal amount of the Gagne Note will be payable in monthly installments
in the amount of $13,888.89 per installment until the earlier of full repayment
of the Gagne Note or November 15, 2006. Additionally, in the event that we
receive any proceeds from the issuance of any equity security (other than in
connection with the exercise of stock options) or in connection with the
incurrence of any indebtedness for money borrowed (excluding indebtedness
incurred by us in connection with margin loans to customers), we are required to
make principal payments in an aggregate amount equal to 50% of the net proceeds
to the Gagne Trust and to the payee of the Goble Note in an amount proportional
to the then outstanding principal amount of the Gagne Note and the Goble Note.
Further, in the event that we receive any proceeds from the sale, assignment or
transfer of our customer accounts, then we shall be obligated to make principal
payments to the Gagne Trust and to the payee of the Goble Note simultaneously
with the receipt of such proceeds an aggregate amount equal to the net proceeds
actually received by us, in an amount proportional to the then outstanding
principal amount of the Gagne Note and the Goble Note.

         In connection with our assumption of Mr. Goble's obligation to pay to
the Gagne Trust the Assumed G&G Purchase Price pursuant to the terms and
conditions of the G&G Stock Purchase Agreement, we also authorized the
designation of Series A Convertible Preferred Stock and issued 10,000 shares of
our Series A Convertible Preferred Stock to the Gagne Trust. Pursuant to the
Certificate of Designation, Preferences and Rights of the Series A Preferred
Stock, the Series A Convertible Preferred Stock ranks prior to our Common Stock
and is convertible into shares of Common Stock at $2.00 per share.

         As summarized above, in partial consideration for the purchase of the
Goble Shares and in connection with the execution of the Settlement Agreement,
we executed the Goble Note in favor of Mr. Goble and the Goble Trust in the
principal sum of $400,000 with simple interest thereon at an annual rate of six
percent until December 31, 2005 and nine percent thereafter. The principal
amount of the Goble Note will be payable in monthly installments in the amount
of $11,111.11 per installment until the earlier of full repayment of the Goble
Note or November 15, 2006. Additionally, the Goble Note has provisions for
mandatory principal repayment identical to the provisions contained in the Gagne
Note, which provisions are summarized above.

                                       39
<PAGE>

         On March 1, 2005, we cancelled the Goble Note in exchange for a $75,000
cash payment to Mr. Goble and the issuance of a new note to him in the principal
sum of $325,000 (the "New Goble Note") with simple interest thereon at an annual
rate of twelve percent. Principal on the New Goble Note is due and payable
monthly in equal monthly installments until September 20, 2006, together with
accrued and unpaid interest. Further, in the event that we receive any proceeds
from the sale of all or substantially all of our assets or the sale of a
significant business unit, then we shall be obligated to make principal payments
to Goble in an aggregate amount equal to 25% of the gross proceeds actually
received by us up to the amount of any remaining balance payable under the New
Goble Note. In addition, notwithstanding the foregoing, in the event that we
consummate a merger in which we are not the surviving entity, then
simultaneously with the consummation of the merger, the entire unpaid principal
balance, and all accrued and unpaid interest, shall immediately be due and
payable.

EFH Partners Transaction

         Pursuant to the terms of that certain stock purchase agreement, dated
March 8, 2005 between EFH Partners, LLC., a Delaware limited liability company
and our company, we have executed all of the following transactions with EFH
Partners, LLC that resulted in EFH Partners, LLC gaining control of our company:

         o  The Company sold 416,667 shares of common stock for $250,000 in
            cash;

         o  The Company sold 7,000 shares of Series B Convertible Preferred
            Stock accompanied with an option to acquire 1,666,666 shares of
            common stock at an exercise price of $.60 per share, in exchange for
            $500,000 of cash and cancellation of a $200,000 note previously
            issued to us;

         o  A trust administered by a former officer of ours sold 500,000 shares
            and an option to purchase an additional 1,050,000 shares of the
            Company's common stock for an undisclosed amount. The option expires
            on various dates from 24 to 42 months after May 20, 2005, and has
            exercise prices ranging from $1.25 to $2.25 per share; we exchanged
            10,000 shares of our preferred stock Series A, outstanding debt in
            the amount of $240,000 and a severance obligation owed to a former
            officer of the Company and a trust controlled by him, for 7,062
            shares of our preferred stock series C valued at $770,040. The
            preferred stock series C is convertible in to shares of our common
            stock at $2.00 per share.

         o  The Company sold 416,667 shares of common stock for $250,000. On
            June 29, the options, granted in conjunction with the sale of our
            Series B preferred stock, were exercised for $1,000,000 in cash.

Other Related Party Transactions

         The Company executed a transaction with two members of EFH Partner,
LLC. The Company sold 10,000 shares of the Company's newly created Series E
preferred stock valued at $75.00 per share in exchange for listed common stock
valued at $783,750 at the time of the exchange, and 3,333 shares of the
Company's newly created Series E preferred stock valued at $75.00 per share for
$250,000 cash.

                                       40
<PAGE>

We also executed the following two related party transactions:

         o  Issued 13,635 shares of our common stock to a member of our board of
            directors in exchange for $34,089 worth of convertible notes
            payable;

         o  Issued 15,200 shares of common stock to a former officer and major
            shareholder of the Company in exchange for $38,000 worth of
            convertible notes payable

ITEM 13. EXHIBITS
-----------------

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

3.1          Articles of Incorporation of Empire Financial Holding Company (1)

3.2(a)       Bylaws of Empire Financial Holding Company(1)

3.2(b)       Amendment to Sections 3.9 and 4.16 of Bylaws of Empire Financial
             Holding Company(2)

4.1          Form of Underwriter's Warrant Agreement, including form of Warrant
             Certificate(1)

4.2          Form of Common Stock Certificate (1)

4.3          Certificate of Designation, Preferences and Rights of Series A
             Convertible Preferred Stock of Empire Financial Holding Company(4)

4.4          Articles of Amendment designating Series B Convertible Preferred
             Stock, Series C Convertible Preferred Stock, and Series D
             Convertible Preferred Stock of Empire Financial Holding Company,
             dated May 19, 2005 (5)

4.5          Articles of Amendment designating Series E Convertible Preferred
             Stock of Empire Financial Holding Company, dated December 14, 2005
             (6)

4.6          Articles of Amendment increasing the number of authorized shares of
             Series E Convertible Preferred Stock of Empire Financial Holding
             Company, dated February 21, 2006 (7)

4.7          Articles of Amendment designating Series F Convertible Preferred
             Stock of Empire Financial Holding Company, dated March 13, 2006

10.1         Amended and Restated 2000 Incentive Compensation Plan(9)

10.2*        Severance Agreement between Empire Financial Holding Company and
             Kevin M. Gagne(10)

10.3*        Employment Agreement between Empire Financial Holding Company and
             Patrick E. Rodgers(9)

10.4*        Employment Agreement between Empire Financial Holding Company and
             Donald A. Wojnowski Jr.(9)

                                       41
<PAGE>

10.5         Lease between Empire Financial Holding Company and Emerson
             Investments International, Inc., relating to the lease of the
             Registrant's principal executive offices(9)

10.6         Form of Indemnification Agreement between Empire Financial Holding
             Company and each of its Directors and executive officers(1)

10.7         Mutual Release between Empire Financial Holding Company, Richard L.
             Goble, the Richard L. Goble First Revocable Trust, Henry N.
             Dreifus, Kevin M. Gagne, Bradley L. Gordon, and John J. Tsucalas(3)

10.8         Stock Purchase Agreement between the Gagne First Revocable Trust,
             Kevin M. Gagne and Richard L. Goble(3)

10.9         Promissory Note in the principal amount of $500,000, executed by
             Empire Financial Holding Company in favor of Kevin M. Gagne and the
             Gagne First Revocable Trust(3)

10.10        Fully Disclosed Clearing Agreement by and between Penson Financial
             Services, Inc. and Empire Financial Group, Inc.(9)

10.11        Stock Purchase Agreement, dated March 8, 2005, between Empire
             Financial Holding Company and EFH Partners, LLC.(11)

10.12        Stock Exchange Agreement, dated March 8, 2005, between Empire
             Financial Holding Company, Kevin M. Gagne and the Gagne First
             Revocable Trust.(11)

10.13        Transfer Agreement by and among Empire Financial Holding Company,
             Empire Financial Group, Inc., Regal Securities, Inc., and Penson
             Financial Services, Inc., as Clearing Broker dated as of November
             21, 2005. (12)

10.14        Form of Securities Purchase Agreement dated as of March 10, 2006
             (8)

10.15        Form of Warrant to be issued in connection with Securities Purchase
             Agreement dated as of March 10, 2006 (8)

10.16        Employment Agreement with Donald A. Wojnowski dated June 1, 2005

10.17        Employment Agreement with Steven M. Rabinovici dated June 1, 2005

10.18        Employment Agreement with John J. Wilson date November 15, 2005

14.1         Code of Ethical Conduct(9)

21.1         Subsidiaries of Empire Financial Holding Company(9)

31.1         Certification by Principal Executive Officer pursuant to Rule
             13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934,
             as amended

31.2         Certification by Principal Financial Officer pursuant to Rule
             13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934,
             as amended

                                       42
<PAGE>

32.1         Principal Executive Officer Certification pursuant to Rule
             13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of
             1934, as amended, and 18 U.S.C. Section 1350

32.2         Principal Financial Officer Certification pursuant to Rule
             13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of
             1934, as amended, and 18 U.S.C. Section 1350
_________________

*    Indicates management contract or compensatory plan or arrangement

(1)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Registration Statement on Form S-1 Registration No.
     333-86365.

(2)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Annual Report on Form 10-K for the fiscal year ended
     December 31, 2002.

(3)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated October 17, 2003.

(4)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated October 17, 2003.

(5)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated May 26, 2005.

(6)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated December 20, 2005

(7)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated February 28, 2006.

(8)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated March 17, 2006.

(9)  Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Annual Report on Form 10-K for the fiscal year ended
     December 31, 2004.

(10) Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated June 25, 2004.

(11) Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated March 8, 2005.

(12) Incorporated by reference from the exhibits filed with Empire Financial
     Holding Company's Current Report on Form 8-K dated November 23, 2005.

                                       43
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
------------------------------------------------

         During the fourth quarter of 2005, we hired Miller , Ellin & Company to
perform our annual audit, review our quarterly and annual SEC filings and
prepare our tax returns. Prior to the engagement of our new accounting firm, the
Sweeney, Gates & Co. had served as our independent public accountants since
1999.

         All fees paid in 2005 were paid to Sweeney, Gates & Company with the
exception of fees paid to Ohab and Company for tax services rendered conjunction
with our annual federal and state tax returns in addition to payroll tax
services.

AUDIT FEES.

         The aggregate fees billed for professional services rendered by Miller,
Ellin & Company and Sweeney, Gates & Co. for the audit of our annual financial
statements and for the review of our interim financial statements, which are
included in our Annual Report on Form 10-KSB and in our Quarterly Reports on
Form 10-QSB, and services that are normally provided in connection with
statutory and regulatory filings or engagements for fiscal year 2005 were
$81,413 to Sweeney Gates & Company and $166,890 to Miller Ellin & Company, and
for fiscal year 2004 were $108,408 to Sweeney Gates & Company.

AUDIT-RELATED FEES.

         The aggregate fees for assurance and related services billed by the
Firms that were reasonably related to the performance of the audit or review of
our financial statements and are not reported under Audit Fees above for fiscal
year 2005 were $63,282 paid to Miller, Ellin & Company with no audit related
fees paid to Sweeney Gates & Company . We paid Sweeney Gates & Company $1,605 in
audit-related fees for fiscal year 2004.

TAX FEES.

         The aggregate fees billed for professional services by Ohab and Company
for tax compliance, tax advice and tax planning for fiscal year 2005 were
$25,325 and for fiscal year 2004 were $0.

ALL OTHER FEES.

         There were fees in the amount of $2,944 billed in 2005 by Miller Ellin
& Company with no other fees were billed in 2004 for products and services other
than above.

AUDIT COMMITTEE PRE-APPROVAL POLICIES.

         The Audit Committee pre-approved approximately 40% of Audit Fees,
Audit-Related Fees and Tax Fees.

                                       44
<PAGE>

                                   SIGNATURES

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


                                        EMPIRE FINANCIAL HOLDING COMPANY


Dated    May 1, 2006                    By: /s/ Donald A. Wojnowski Jr.
                                        -------------------------------
                                        Donald A. Wojnowski Jr., President
                                        (Principal Executive Officer)


Dated    May 1, 2006                    By: /s/ Rodger E. Rees
                                        ----------------------
                                        Rodger E. Rees, Chief Financial Officer
                                        (Principal Financial Officer and
                                        Principal Accounting Officer)


         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.

Signatures                     Title                              Date

/s/ Donald A. Wojnowski Jr.    President and Director,            May 1, 2006
---------------------------    (Principal Executive Officer)
Donald A. Wojnowski Jr.

/s/ Rodger E. Rees             Chief Financial Officer,           May 1, 2006
------------------             (Principal Financial Officer and
Rodger E. Rees                 Principal Accounting Officer)

/s/ John Rudy                  Director                           May 1, 2006
-------------
John Rudy

/s/ Bradley L. Gordon          Director                           May 1, 2006
---------------------
Bradley L. Gordon

/s/ Steven M. Rabinovici       Director                           May 1, 2006
------------------------
Steven M. Rabinovici


                                       45
<PAGE>

                        EMPIRE FINANCIAL HOLDING COMPANY
                        CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


                                TABLE OF CONTENTS

                                                                            Page

Report of Independent Registered Public Accounting Firm .................... F-2

Report of Independent Registered Public Accounting Firm .................... F-3

Consolidated Statement of Financial Condition December 31, 2005 ............ F-4

Consolidated Statements of Operations Years Ended December 31, 2005
 and 2004 .................................................................. F-5

Consolidated Statements of Cash Flows Years Ended December 31, 2005
 and 2004 .................................................................. F-6

Consolidated Statements of Changes in Stockholders' Equity Years Ended
 December 31, 2005 and 2004 ................................................ F-8

Notes to Consolidated Financial Statements .................................F-10


                                       F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Empire Financial Holding Company and Subsidiaries

We have audited the accompanying consolidated statement of financial condition
of Empire Financial Holding Company and subsidiaries as of December 31, 2005,
and the related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for the year ended December 31, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 the Empire Financial
Holding Company and Subsidiaries at December 31, 2005, and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.


                                       Miller, Ellin & Company, LLP

New York, New York
March 14, 2006

                                       F-2
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Empire Financial Holding Company and Subsidiaries

We have audited the accompanying consolidated statement of financial condition
of Empire Financial Holding Company and subsidiaries as of December 31, 2004,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for the two years ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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 the Company at
December 31, 2004, and the results of its operations and its cash flows for the
two years ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company had substantial losses from
operations during 2004 and 2003, and had a stockholders' deficit of $1,897,607
as of December 31, 2004. Also, the Company is subject to pending federal and
state investigations relating to its involvement in trading in mutual fund
shares by its customers. These matters raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 3. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.


                                       Sweeney, Gates & Co.

Ft. Lauderdale, Florida
March 11, 2005

                                       F-3
<PAGE>

                        EMPIRE FINANCIAL HOLDING COMPANY
                  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
                                December 31, 2005

Assets

  Cash and cash equivalents .....................................  $    380,599
  Marketable securities owned, at market value ..................     2,612,037
  Securities not readily marketable, at estimated fair value ....       165,909
  Commissions and other receivables from clearing organization ..       551,816
  Deposits at clearing organization .............................     1,173,688
  Furniture and equipment, net ..................................       223,727
  Prepaid expenses and other assets .............................       483,089
  Deferred tax asset ............................................     2,117,000
  Cash in escrow ................................................       350,000
  Notes receivable ..............................................     1,791,568
                                                                   ------------

                                                                      9,849,433
                                                                   ============

Liabilities and stockholders' equity

Liabilities

  Notes payable .................................................  $    979,167
  Line of credit payable ........................................       350,000
  Accrued expenses and other liabilities ........................     1,021,487
  Securities sold, but not yet purchased, at market value .......       261,683
  Due to clearing organization ..................................     2,069,838
                                                                   ------------

    Total liabilities ...........................................  $  4,682,175
                                                                   ------------

Commitments and contingencies

Stockholders' equity

  Convertible preferred stock, series B, C, D and E
    $.01 par value 1,000,000 shares authorized
    29,395 issued and outstanding ...............................  $        294
  Common stock, $.01 par value
    100,000,000 shares authorized
    6,599,005 shares issued and outstanding .....................        65,990
  Additional paid-in capital ....................................    10,840,349
  Accumulated deficit ...........................................    (5,739,375)
                                                                   ------------

    Total stockholders' equity ..................................  $  5,167,258
                                                                   ------------

    Total liabilities and stockholders' equity ..................  $  9,849,433
                                                                   ============

        See accompanying notes to the consolidated financial statements.

                                       F-4
<PAGE>
<TABLE>
                           EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENT OF OPERATIONS
                                           December 31, 2005
<CAPTION>
                                                                         TWELVE MONTHS   TWELVE MONTHS
                                                                             ENDED           ENDED
                                                                          December 31,    December 31,
                                                                             2005             2004
                                                                         -------------   -------------
<S>                                                                       <C>             <C>
Revenues
  Commissions and fees .................................................  $ 16,374,914   $ 16,154,705
  Equity market making trading revenues, net ...........................     5,451,815      5,063,633
  Investment banking income ............................................       266,410              -
  Other ................................................................       392,593        207,445
                                                                          ------------   ------------

                                                                            22,485,731     21,425,783
                                                                          ============   ============

Expenses
  Employee compensation and benefits ...................................     4,789,976      4,667,564
  Clearing and execution costs .........................................    15,070,113     14,505,969
  General and administrative ...........................................     2,287,449      3,438,657
  Communications and data processing ...................................       225,844        454,965
                                                                          ------------   ------------

                                                                            22,373,382     23,067,155
                                                                          ------------   ------------

Income from operations .................................................       112,349     (1,641,372)
                                                                          ------------   ------------

Other income (expenses)
  Gain on sale of online trading discount business .....................       452,000              -
  Interest income ......................................................       210,386        170,327
  Provision for SEC settlement .........................................      (275,000)             -
  Interest expense .....................................................      (154,254)      (100,525)
                                                                          ------------   ------------

                                                                               233,132         69,802
                                                                          ------------   ------------

Income before income taxes .............................................       345,481     (1,571,570)
Income tax benefit .....................................................     2,117,000              -
                                                                          ------------   ------------
Net income .............................................................     2,462,481     (1,571,570)

Accrued preferred stock dividends ......................................      (167,512)       (28,125)
                                                                          ------------   ------------

Net income (loss) applicable to common shareholders ....................  $  2,294,969   $ (1,599,695)
                                                                          ============   ============

Basic and diluted earnings per share applicable to common stockholders:

  Earnings (loss) per share-basic and diluted ..........................  $       0.44   $      (0.50)
                                                                          ============   ============
  Earnings (loss) per share diluted ....................................  $       0.38   $      (0.50)
                                                                          ============   ============

Weighted average shares outstanding:
  Basic ................................................................     5,160,133      3,221,753
                                                                          ============   ============
  Diluted ..............................................................     6,084,538      3,221,753
                                                                          ============   ============

                   See accompanying notes to the consolidated financial statements.

                                                  F-5
</TABLE>
<PAGE>
<TABLE>
                           EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENT OF CASH FLOWS

<CAPTION>
                                                                         TWELVE MONTHS   TWELVE MONTHS
                                                                             ENDED           ENDED
                                                                          December 31,    December 31,
                                                                             2005             2004
                                                                         -------------   -------------
<S>                                                                       <C>             <C>
Cash flows from operating activities
  Net income (loss) ....................................................  $ 2,462,481     $(1,571,570)

  Adjustments to reconcile net income (loss) to net cash
   provided from operating activities
    Depreciation and amortization ......................................       77,443          30,061
    Amortization of customer lists .....................................            -         145,393
    Amortization of deferred compensation ..............................       63,683          70,145
    Provision for income tax benefits ..................................   (2,117,000)              -
    Proceeds from of sale of online trading discount business ..........     (452,000)              -
    Reversal of non-cash charge for stock ..............................     (240,000)              -
    Unrealized loss on securities ......................................      460,543               -
    Non-cash compensation expense ......................................       88,480         305,001
  (Increase) decrease in operating assets:
    Commissions and other receivables from clearing organizations ......    1,597,305      (1,511,842)
    Deposits at clearing organizations .................................     (768,916)       (100,304)
    Trading account securities, net ....................................   (1,135,894)        789,832
    Prepaid expenses and other assets ..................................     (294,488)         81,019
    Cash in escrow .....................................................     (350,000)              -
  Increase (decrease) in operating liabilities:
    Accrued expenses and other liabilities .............................     (669,833)      1,075,605
    Cash overdraft .....................................................     (144,202)        144,202
                                                                          -----------     -----------

      Total adjustments ................................................   (3,884,879)      1,029,112
                                                                          -----------     -----------

      Cash used by operating activities ................................   (1,422,397)       (542,458)

Cash flows from investing activities
  Purchases of furniture and equipment .................................     (162,179)       (151,256)
  Issuances of notes receivable ........................................   (1,806,701)              -
  Proceeds from sale of online trading discount business ...............      452,000               -
  Payments on notes receivalble ........................................       15,133               -
                                                                          -----------     -----------

    Total cash used by investing activities ............................   (1,501,747)       (151,256)
                                                                          -----------     -----------

Cash flows from financing activities
  Payments on notes payable ............................................   (1,721,528)       (177,778)
  Proceeds from issuance of notes payable ..............................    1,825,000         372,089
  Proceeds from line of credit .........................................      350,000               -
  Proceeds from sale of securities .....................................    2,350,000          25,000
  Proceeds from sale of warrants .......................................            -         125,000
  Proceeds from sale of options ........................................      750,000               -
  Fees paid for sale of stock ..........................................     (342,609)              -
  Stock subscriptions receivable .......................................       50,000               -
                                                                          -----------     -----------

    Total cash provided by financing activities ........................    3,260,863         344,311
                                                                          -----------     -----------


  Net increase (decrease) in cash and cash equivalents .................      336,719        (349,403)

  Cash and cash equivalents at beginning of period .....................       43,880         393,283
                                                                          -----------     -----------

  Cash and cash equivalents at end of period ...........................  $   380,599     $    43,880
                                                                          ===========     ===========
                                                                                  (continued)
                   See accompanying notes to the consolidated financial statements.

                                                  F-6
</TABLE>
<PAGE>
<TABLE>
                           EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENT OF CASH FLOWS
                                              (continued)
<CAPTION>
                                                                         TWELVE MONTHS   TWELVE MONTHS
                                                                             ENDED           ENDED
                                                                          December 31,    December 31,
                                                                             2005             2004
                                                                         -------------   -------------
<S>                                                                       <C>             <C>
Supplemental cash flow information:

  Interest .............................................................  $   154,254     $    76,766
                                                                          ===========     ===========

Supplemental disclosures of non-cash investing and financing activities:

  Conversion of debt to equity .........................................  $ 1,448,951     $         -
                                                                          ===========     ===========

  Marketable securities acquired through issuance of notes payable
    valued at $100,000 and warrants valued at $125,000 .................            -     $   225,000
                                                                          ===========     ===========

  Accrued preferred stock dividend .....................................  $    56,220     $    20,250
                                                                          ===========     ===========

  Deemed dividends from beneficial conversion feature on preferred stock  $   111,292     $         -
                                                                          ===========     ===========

  Conversion of accounts payable to preferred stock and warrants .......  $   543,178     $         -
                                                                          ===========     ===========

  Conversion of accounts payable to debt ...............................  $   100,000     $         -
                                                                          ===========     ===========

  Marketable securities acquired through issuance of
    Series E preferred stock at market value ...........................  $   783,750     $         -
                                                                          ===========     ===========

                   See accompanying notes to the consolidated financial statements.

                                                  F-7
</TABLE>
<PAGE>
<TABLE>
                                        EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                          FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

<CAPTION>
                                            Series A           Series B          Series C          Series D         Series E
                                        Preferred Stock    Preferred Stock   Preferred Stock   Preferred Stock   Preferred stock
                                       -----------------   ----------------  ----------------  ----------------  ---------------
                                       Shares    Amount    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount
                                       -------   -------   -------  -------  -------  -------  -------  -------  -------  ------
<S>                                    <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Balance at January 1, 2004 ..........   10,000   $   100         0  $     -        0     $  -        0     $  -        -  $    -

Warrants issued in connection .......        -         -         -        -        -        -        -        -        -       -
  with note .........................        -         -         -        -        -        -        -        -        -       -
Issuance of restricted stock ........        -         -         -        -        -        -        -        -        -       -
Issuance of common stock for
 establishment of independent office         -         -         -        -        -        -        -        -        -       -
Amortization of restricted stock ....        -         -         -        -        -        -        -        -        -       -
Amortization of conversion of .......        -         -         -        -        -        -        -        -        -       -
  stock options to common stock .....        -         -         -        -        -        -        -        -        -       -
Non-cash stock compensation .........        -         -         -        -        -        -        -        -        -       -
Common stock cancelled ..............        -         -         -        -        -        -        -        -        -       -
Sale of common stock ................        -         -         -        -        -        -        -        -        -       -
Net loss ............................        -         -         -        -        -        -        -        -        -       -
Dividends accrued on preferred stock         -         -         -        -        -        -        -        -        -       -
Prior per adjustment ................        -         -         -        -        -        -        -        -        -       -
                                       -------   -------   -------  -------  -------  -------  -------  -------  -------  ------
Balance at December 31, 2004 ........   10,000       100         -        -        -        -        -        -        -       -

Sale of common stock ................        -         -         -        -        -        -        -        -        -       -
Conversion of note to common stock ..        -         -         -        -        -        -        -        -        -       -
Sale of preferred stock Series B ....        -         -     7,000       70        -        -        -        -        -       -
Sale of preferred stock Series C ....        -         -         -        -    7,062       71        -        -        -       -
Sale of preferred stock Series D ....        -         -         -        -        -        -    2,000       20        -       -
Cancellation of preferred ...........        -         -         -        -        -        -        -        -        -       -
  stock Series A ....................  (10,000)     (100)        -        -        -        -        -        -        -       -
Sale of preferred stock Series E ....        -         -         -        -        -        -        -        -   13,333     133
Conversion of convertible 10% .......        -         -         -        -        -        -        -        -        -       -
  promissory notes to common stock ..        -         -         -        -        -        -        -        -        -       -
Charge to paid-in-capital for capital        -         -         -        -        -        -        -        -        -       -
  costs associated with change of ...        -         -         -        -        -        -        -        -        -       -
  control and issuance of common and         -         -         -        -        -        -        -        -        -       -
  preferred stock ...................        -         -         -        -        -        -        -        -        -       -
Reversal of common stock issued for
  establishment of independent office        -         -         -        -        -        -        -        -        -       -
Conversion of options to common stock        -         -         -        -        -        -        -        -        -       -
Amortization of restricted stock ....        -         -         -        -        -        -        -        -        -       -
Dividends accrued on preferred stock         -         -         -        -        -        -        -        -        -       -
Net income ..........................        -         -         -        -        -        -        -        -        -       -
                                       -------   -------   -------  -------  -------  -------  -------  -------  -------  ------
Balance at December 31, 2005 ........        -   $     -     7,000  $    70    7,062  $    71    2,000  $    20   13,333  $  133
                                       =======   =======   =======  =======  =======  =======  =======  =======  =======  ======
                                                                                                                     (continued)
                                 See accompanying notes to the consolidated financial statements.

                                                               F-8
</TABLE>
<PAGE>
<TABLE>
                                        EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                          FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                                           (continued)
<CAPTION>

                                          Common Stock       Additional                                    Stock
                                       -------------------     paid-in     Accumulated    Deferred     subscriptions
                                        Shares     Amount      capital       deficit     compensation   receivable       Totals
                                       ---------   -------   -----------   -----------   ------------  -------------  ------------
<S>                                    <C>         <C>       <C>           <C>           <C>           <C>            <C>
Balance at January 1, 2004 ..........  3,194,450   $31,945   $ 5,763,374   $(6,462,774)  $  (133,828)  $          -   $  (801,183)

Warrants issued in connection
  with note .........................          -         -       125,000             -             -              -       125,000
Issuance of restricted stock ........     65,500       655        78,945             -             -              -        79,600
Issuance of common stock for
 establishment of independent office     200,000     2,000       238,000             -             -              -       240,000
Amortization of restricted stock ....          -         -             -             -        43,665              -        43,665
Amortization of conversion of .......          -
  stock options to common stock .....          -         -             -             -        26,480              -        26,480
Non-cash stock compensation .........          -         -       (25,880)            -             -              -       (25,880)
Common stock cancelled ..............    (21,925)     (219)      (10,375)            -             -              -       (10,594)
Sale of common stock ................     75,000       750        74,250             -             -        (50,000)       25,000
Net loss ............................          -         -             -    (1,571,570)            -              -    (1,571,570)
Dividends accrued on preferred stock           -         -       (28,125)            -             -              -       (28,125)
                                       ---------   -------   -----------   -----------   -----------   ------------   -----------
Balance at December 31, 2004 ........  3,513,025    35,131     6,215,189    (8,034,344)      (63,683)       (50,000)   (1,897,607)

Sale of common stock ................  3,071,516    30,715     2,316,207             -             -         50,000     2,396,922
Conversion of note to common stock ..     50,000       500        49,500             -             -              -        50,000
Sale of preferred stock Series B ....          -         -       699,930             -             -              -       700,000
Sale of preferred stock Series C ....          -         -       736,219             -             -              -       736,290
Sale of preferred stock Series D ....          -         -       199,980             -             -              -       200,000
Cancellation of preferred
  stock Series A ....................          -         -      (299,900)            -             -              -      (300,000)
Sale of preferred stock Series E ....          -         -     1,033,617             -             -              -     1,033,750
Deemed dividends from beneficial
  conversion feature on preferred
  stock .............................          -         -       111,292      (111,292)            -              -             -
Conversion of convertible 10% .......          -
  promissory notes to common stock ..    108,835     1,088       271,000             -             -              -       272,088
Charge to paid-in-capital for capital
  costs associated with change of
  control and issuance of common and
  preferred stock ...................          -         -      (342,609)            -             -              -      (342,609)
Reversal of common stock issued for
  establishment of independent office   (200,000)   (2,000)     (238,000)            -             -              -      (240,000)
Conversion of options to common stock     55,629       556        87,924             -             -              -        88,480
Amortization of restricted stock ....          -         -             -             -        63,683              -        63,683
Dividends accrued on preferred stock           -         -             -       (56,220)            -              -       (56,220)
Net income ..........................          -         -             -     2,462,481             -              -     2,462,481
                                       ---------   -------   -----------   -----------   -----------   ------------   -----------
Balance at December 31, 2005 ........  6,599,005   $65,990   $10,840,349   $(5,739,375)  $         -   $          -   $ 5,167,258
                                       =========   =======   ===========   ===========   ===========   ============   ===========

                                 See accompanying notes to the consolidated financial statements.

                                                               F-9
</TABLE>
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

1. NATURE OF BUSINESS

ORGANIZATION AND OPERATIONS - Empire Financial Holding Company (the "Company"),
a Florida corporation, owns Empire Financial Group, Inc. ("EFG") and Empire
Investment Advisors, Inc. ("EIA"). All intercompany transactions and accounts
have been eliminated in consolidation.

EFG is an introducing securities broker dealer which provides brokerage and
advisory services to retail and institutional customers and a trading platform,
order execution services and market making services for domestic and
international securities to its customers and network of independent registered
representatives. In November, the Company sold its online discount trading
business to an unrelated broker dealer. EIA is a fee-based investment advisory
service which offers its services to retail customers.

The Company's executive offices are located in Longwood, Florida with
independent registered representatives throughout the United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

MARKETABLE SECURITIES OWNED, AT MARKET VALUE - Marketable securities owned are
comprised of the equity securities held in the Company's inventory account for
its trading and market making operations. The securities are recorded at market
value with unrealized gains and losses reflected in the current period earnings.
Market values are generally based on prices from independent sources, such as
listed market prices or broker or dealer price quotations.

SECURITIES NOT READILY MARKETABLE, AT ESTIMATED FAIR VALUE - Securities not
readily marketable are comprised of equity securities held by the Company for
investment purposes. The securities are, for the most part, recorded at cost and
are not readily marketable due to the low daily trading volumes. The Company
still carries these securities at cost because management believes they will
recover their value from anticipated future events.

COMMISSIONS AND OTHER RECEIVABLES FROM CLEARING ORGANIZATION - Receivables from
broker dealers and clearing organizations represent monies due to the Company
from its clearing agent for transactions processed.

DEPOSIT AT CLEARING ORGANIZATION - The Company is required, by its clearing
agreement, to maintain a deposit with its clearing organization.

FURNITURE AND EQUIPMENT, NET - Property and equipment are recorded at cost.
Depreciation on property and equipment is provided utilizing the straight-line
method over the estimated useful lives of the related assets, which range from
five to seven years.

                                      F-10
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates the recoverability of
its property and equipment and other assets. The Company recognizes an
impairment of long-lived assets in the event the net book value of such assets
exceeds the estimated future undiscounted cash flows attributable to such assets
or the business to which such assets relate. When an asset exceeds its expected
cash flows, it is considered to be impaired and is written down to fair value,
which is determined based on either discounted future cash flows or appraised
values. The Company recorded no impairments for the year ended December 31, 2005
and 2004.

CLEARING AND EXECUTION COSTS - Clearing and execution costs include revenues
generated from transactional fees charged to retail and institutional customers
as well as commissions and fees from mutual fund transaction sales commissions
and trailer fees, which are periodic fees paid by mutual funds as an incentive
to keep assets invested with them over time.

SECURITIES TRANSACTIONS - Securities transactions and the related revenues and
expenses are recorded on a trade date basis.

EQUITY MARKET-MAKING TRADING REVENUES, NET - Consist of net realized and net
unrealized gains and losses on securities traded for the Company's own account.
Trading revenues are generated from the difference between the price paid to buy
securities and the amount received from the sale of securities. Volatility of
stock prices, which can result in significant price fluctuations in short
periods of time, may result in trading gains or losses. Gains or losses are
recorded on a trade date basis.

STOCK BASED COMPENSATION - The Company accounts for its employee stock option
plans under the intrinsic value method, in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. Compensation expense related to the
granting of employee stock options is recorded over the vesting period only, if,
on the date of grant, the fair value of the underlying stock exceeds the
option's exercise price. The Company has adopted the disclosure-only
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which
allows entities to continue to apply the provisions of APB No. 25 for
transactions with employees and provide pro forma net loss and pro forma loss
per share disclosures for employee stock grants made as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions.

Had the Company determined compensation expense of employee stock options based
on the estimated fair value of the stock options at the grant date, consistent
with the guidelines of SFAS 123, its net income would have been decreased to the
pro forma amount indicated below:

                                      F-11
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                                                       Year ended December 31,
                                                         2005           2004
                                                     -----------    -----------
Net income (loss) applicable to common
  stockholders as reported .......................   $ 2,294,969    $(1,599,695)

Subtract stock-based employee
  compensation expense related to stock
  options determined under the fair value method .      (383,172)      (207,791)

Add (deduct) amounts charged (credited) to
   compensation expense ..........................       152,163        (25,880)
                                                     -----------    -----------
  Pro forma ......................................   $ 2,063,960    $(1,833,366)
                                                     ===========    ===========

Net income (loss) per share applicable
 to common stockholders:
  As reported ....................................   $       .44    $      (.50)
                                                     ===========    ===========

  Pro forma ......................................   $       .40    $      (.57)
                                                     ===========    ===========

The per share weighted average fair value of options granted during the years
ended December 31, 2005 and 2004 was $ 1.89 and $ .78, respectively, on the
grant date using the following weighted average assumptions:

                                                       Year ended December 31,
                                                         2005           2004
                                                     -----------    -----------
Expected dividend yield ..........................       None           None
Risk-free interest rate ..........................       4.37%          5.01%
Expected life ....................................    3.0 years      9.4 years
Volatility .......................................      100.5%           74%

         The pro forma impact of options on the net income (loss) for the years
ended December 31, 2005 and 2004 is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
additional years of stock option grants.

INCOME TAXES - The Company accounts for income taxes on an asset and liability
approach to financial accounting and reporting. Deferred income tax assets and
liabilities are computed annually for differences between the financial and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. A
valuation allowance is recognized if, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred asset will
not be realized. Income tax expense is the tax payable or refundable for the
period, plus or minus the change during the period in deferred tax assets and
liabilities.

                                      F-12
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

MANAGEMENT ESTIMATES AND ASSUMPTIONS - The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America 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 reporting period. Actual results could
differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments other
than trading securities, which consist primarily of cash, commissions and other
receivables, deposits, notes payable, and accounts payable, approximate their
fair value due to their short-term nature.

EARNINGS/(LOSS) PER SHARE - Basic earnings/(loss) per share is computed by
dividing net income/(loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings/(loss) per share considers the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or resulted
in issuance of common stock. Options, convertible notes and convertible
preferred stock are included in the computation of net earnings/loss per share.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE - In December 2004,
the FASB issued Statement of Financial Standards No. 123 (revised 2004),
SHARE-BASED PAYMENT ("SFAS No. 123 (R)"), which is a revision of SFAS No. 123.
SFAS No. 123 (R) supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and amends FASB Statement No. 95, STATEMENT OF CASHFLOWS. Generally,
the approach to accounting for share-based payments in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. Pro forma disclosure of the fair value of share-based payments is no
longer an alternative to financial statement recognition. SFAS No. 123(R) is
effective for small public business issuers at the beginning of the first fiscal
year beginning after December 15, 2005, and therefore effective for the year
ending December 31, 2006 for the Company.

The Company expects the adoption of SFAS No. 123(R) to have a material effect on
its financial statements, in the form of additional compensation expense, on a
quarterly and annual basis. It is not possible to precisely determine the
expense impact of adoption since a portion of the ultimate expense that is
recorded will likely relate to awards that have not yet been granted. The
expense associated with these future awards can only be determined based on
factors such as the price for the Company's common stock, volatility of the
Company's stock price and risk free interest rates as measured at the grant
date. However, the pro forma disclosures related to SFAS No. 123 included in the
Company's historic financial statements are relevant data points for gauging the
potential level of expense that might be recorded in future periods.

Statement of Financial Accounting Standards No. 151, INVENTORY COSTS, an
amendment of ARB No. 43, Chapter 4 (SFAS 151) was issued in November 2004 and
becomes effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not expect that SFAS 151 will have any
effect on future financial statements.

                                      F-13
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Statement of Financial Accounting Standards No. 152, ACCOUNTING FOR REAL ESTATE
TIME-SHARING TRANSACTIONS, an amendment of FASB Statements No. 66 and 67 (SFAS
152) was issued in December 2004 and becomes effective for financial statements
for fiscal years beginning after June 15, 2005. The Company does not expect that
SFAS 152 will have any effect on future financial statements.

Statement of Financial Accounting Standards No. 153, EXCHANGES OF NON-MONETARY
ASSETS, an amendment of APB Opinion No. 29 (SFAS 153) was issued in December
2004 and becomes effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not expect that SFAS 153
will have any effect on future financial statements.

Statement of Financial Accounting Standards No. 154, ACCOUNTING CHANGES AND
ERROR CORRECTIONS, a replacement of APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154) was issued in May 2005 and becomes effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company does not expect that SFAS 154 will have any significant effect
on future financial statements.

Statement of Financial Accounting Standards No. 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS--AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140,
was issued in February 2006 and is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. Certain parts of this Statement may be applied
prior to the adoption of this Statement. Earlier adoption is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period for
that fiscal year. Provisions of this Statement may be applied to instruments
that an entity holds at the date of adoption on an instrument-by-instrument
basis. The Company does not expect that SFAS 155 will have any significant
effect on future financial statements.

In March 2005, FASB Interpretation No. 47, ACCOUNTING FOR CONDITIONAL ASSET
RETIREMENT OBLIGATIONS--AN INTERPRETATION OF FASB STATEMENT NO. 143 (FIN 47).
FIN 47 is effective no later than the end of fiscal years ending after December
15, 2005 (December 31, 2005, for calendar-year enterprises). Retrospective
application for interim financial information is permitted but is not required.
Early adoption of this Interpretation is encouraged. The Company does not expect
that FIN 47 will have any significant effect on future financial statements.

In December 2004, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AcSEC) issued Statement of Position
04-2, ACCOUNTING FOR REAL ESTATE TIME-SHARING TRANSACTIONS (SOP 04-2). SOP 04-2
is effective for financial statements issued for fiscal years beginning after
June 15, 2005, with earlier application encouraged. The Company does not expect
that SOP 04-2 will have any effect on future financial statements.

In September 2005, AcSEC issued Statement of Position 05-1: ACCOUNTING BY
INSURANCE ENTERPRISES FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH
MODIFICATIONS OR EXCHANGES OF INSURANCE CONTRACTS (SOP 05-1). SOP 05-1 is
effective for fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. The Company does not expect that SOP 05-1 will have any
effect on future financial statements.

                                      F-14
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

FASB Staff Position (FSP) FAS 13-1--ACCOUNTING FOR RENTAL COSTS INCURRED DURING
A CONSTRUCTION PERIOD, was issued on October 6, 2005 and becomes effective for
the new transactions or arrangements entered into after the beginning of the
first fiscal quarter following the date that the final FSP is posted by the
FASB. The Company does not expect that FSP 13-1 will have any significant effect
on future financial statements.

On June 29, 2005, the FASB ratified the consensus reached for Emerging Issues
Task Force (EITF) Issue No. 05-5, ACCOUNTING FOR EARLY RETIREMENT OR
POSTEMPLOYMENT PROGRAMS WITH SPECIFIC FEATURES (SUCH AS TERMS SPECIFIED IN
ALTERSTEILZEIT EARLY RETIREMENT ARRANGEMENTS). The consensus in this Issue
should be applied to fiscal years beginning after December 15, 2005, and
reported as a change in accounting estimate effected by a change in accounting
principle as described in paragraph 19 of FASB Statement 154. The Company does
not expect that EITF 05-5 will have any significant effect on future financial
statements.

On September 28, 2005, the FASB ratified the consensus reached for EITF Issue
No. 05-7, ACCOUNTING FOR MODIFICATIONS TO CONVERSION OPTIONS EMBEDDED IN DEBT
INSTRUMENTS AND RELATED ISSUES. The provisions of this Issue should be applied
to future modifications of debt instruments beginning in the first interim or
annual reporting period beginning after December 15, 2005. The Company expects
that the application of EITF 05-7 could have an effect on interest and debt
valuations in future financial statements. It is not possible to determine the
impact, if any, from the application of EITF05-7.

On September 28, 2005, the FASB ratified the consensus reached for EITF Issue
No. 05-8, INCOME TAX CONSEQUENCES OF ISSUING CONVERTIBLE DEBT WITH A BENEFICIAL
CONVERSION FEATURE. The provisions of this Issue should be applied beginning in
the first interim or annual reporting period beginning after December 15, 2005.
The Company expects that the application of EITF 05-8 could have an effect on he
income tax expense reported in future financial statements. It is not possible
to determine the impact, if any, from the application of EITF05-8.

3. CHANGE OF CONTROL

         On March 8, 2005, the Company entered into a stock purchase agreement
with a Delaware limited liability company, (the "Purchaser"), pursuant to which
the Company agreed to sell to the Purchaser shares of convertible preferred
stock with a stated value of $700,000, in exchange for $500,000 of cash and
cancellation of a $200,000 note previously issued by the Company to an affiliate
of the Purchaser. The preferred stock is convertible into shares of the
Company's common stock at $.60 per share. In addition to the issuance of the
preferred stock, the Company received at closing a loan from the Purchaser in
the amount of $250,000. Concurrent with these transactions, the Company granted
to the Purchaser an option to acquire an additional 1,666,666 common shares at
an exercise price of $.60 per share. The Purchaser exercised their option in
June of 2005 whereby the Company received cash in the amount of $750,000 and
satisfied the $250,000 note in exchange for the issuance of 1,666,666 shares of
the Company's common stock.

                                      F-15
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

         In addition, the stock purchase agreement provides that at the closing
(a) the Purchaser will have the right to designate three of our directors who
must be reasonably acceptable to the Company, two of whom must be independent
directors, and (b) the resignation of two directors of the Company.

         On March 8, 2005, the Company also entered into a stock exchange
agreement with a former officer of the Company and a trust controlled by him,
pursuant to which he agreed to exchange (a) 10,000 shares of the Company's
Series A Preferred Stock owned by him, (b) certain outstanding debt owed to him
by the Company in the approximate amount of $240,000 and (c) the Company's
remaining severance obligations owed to him, all in exchange for the Company
issuing to him shares of convertible preferred stock with a stated value of
$800,000. The preferred stock is convertible into shares of the Company's common
stock at $2.00 per share. The Company agreed to pay to him $150,000 no later
than June 30, 2007 and to repay at the closing a note owed to him by the Company
in the principal amount of $100,000.

         In addition, on March 8, 2005, the former officer of the Company and
the Purchaser entered into a stock purchase and option agreement, pursuant to
which, for an undisclosed amount, the Purchaser will acquire from him 500,000
shares of the Company's common stock and an option to purchase an additional
1,050,000 shares of the Company's common stock from him. The option will expire
on various dates from 24 to 42 months after the closing, unless accelerated as
provided in the option, and will have exercise prices ranging from $1.25 to
$2.25 per share. The former officer of the Company also agreed to deliver to the
Purchaser at the closing, irrevocable proxies covering the shares subject to the
option, which will permit the Purchaser to vote these shares on all matters,
except that without the approval of him, these shares may not be voted in favor
of (i) the sale of all or substantially all of the Company's assets, (ii) merger
with any other entity or (iii) the authorization of a new employee stock option
plan or an increase in the number of the Company's shares of common stock
available under any existing employee stock option plan.

         Due to the above transaction, the Purchaser has gained control of the
Company from the former officer.

                                      F-16
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

4. PROPERTY AND EQUIPMENT

At December 31, 2005, property and equipment consists of the following:

                                                            Estimated
                                                           useful lives
                                                           ------------
         Equipment                            132,511       5-7 years
         Computers                            208,106         5 years
         Furniture and fixtures                54,336         7 years
                                            ---------
                                              394,953
         Less accumulated depreciation       (171,226)
                                            ---------
                                            $ 223,727
                                            =========

Depreciation expense charged to income was $73,789 in 2005 and $30,061 in 2004.

5. NOTES RECEIVABLE

The Company has advanced funds to the owner of an independent office on Long
Island, New York (Uniondale) which is processing its business through the
Company and to certain registered representatives, in its two Company owned
offices in New York City and Boca Raton, Florida. The notes receivable, by
location, at December 31, 2005, were as follows:

                                               Amount
                                               ------
         Long Island office                 $ 1,695,318
         New York office                         23,958
         Boca Raton office                       72,292
                                            -----------
         Total notes receivable             $ 1,791,568
                                            ===========

Long Island note:
Principal and interest payments on the Long Island note are paid from the
override commission and fees generated by the registered representatives of the
Long Island office. The note payments are calculated using an amount that
represents, the difference between commission payments to the registered
representatives in that location and, ninety percent of gross commissions
generated. Payments will also include 50% of the income generated from the
office's transaction charges. The note carries a 10% interest rate and matures
on October 5, 2008 unless otherwise extended by mutual agreement. At December
31, 2005, the note was credited with payments of $15,133.

New York and Boca Raton notes:
These notes carry a 10% interest rate and are due on demand.

                                      F-17
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

6. NOTES PAYABLE

Notes payable at December 31, 2005, consisted of the following:

         Unsecured notes payable to a former officer of the EFH, which
         requires monthly installments of $18,056, plus interest at
         twelve percent through its maturity date. The note matures on
         September 20, 2006...........................................$  162,500

         Convertible notes payable to investors, interest payable
         semi-annually on June 30 and December 31 at ten percent.
         Notes convertible into common stock at $2.00 per share
         subject to certain adjustments. Payable in full on December
         31, 2006, if not converted...................................   200,000

         Unsecured note payable to the EFH's clearing organization
         which requires monthly installments of $16,667 plus interest
         at 2% over prime (nine percent at December 31, 2005). The
         note matures on February 20, 2006............................    33,333

         Unsecured note payable to the EFH's clearing organization,
         which requires monthly installments of $41,667 plus interest
         at 2% over prime (nine percent at December 31, 2005). The
         note matures on November 16, 2006............................   458,334

         Unsecured note payable to an investor, which requires monthly
         payments of $500 for interest only . The note matures on
         February 20, 2006............................................    50,000

         Unsecured non interest bearing note payable to a former
         officer, which is due upon final execution of the SEC
         settlement...................................................    75,000
                                                                      ----------
                                                                      $  979,167
                                                                      ==========

         The annual maturities of principal on the notes payable
         are as follows:

         Year ending December 31, 2006................................$  979,167
                                                                      ==========

7. LINE OF CREDIT PAYABLE

         On December 31, 2005, the Company entered into a promissory note that
gives the Company a $2,500,000 line of credit with an unrelated third party. The
note bears interest at 5% annually and matures on December 27, 2007. As of
December 31, 2005, the Company owed $350,000 on the line of credit.

                                      F-18
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

8. ACCRUED EXPENSES AND OTHER LIABILITIES

         At December 31, 2005, accrued expenses consisted of the following:

         Accrued payroll and taxes................................... $  271,559
         Accrued commissions and management fees.....................    199,578
         Accrued preferred stock dividend............................     56,220
         Accrued SEC regulatory reserve..............................    350,000
         Other expenses..............................................    144,130
                                                                      ----------
                                                                      $1,021,487
                                                                      ==========
9. EARNINGS PER SHARE

         Basic earnings per share are computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share considers the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that shared in the earnings of the entity.

Calculation of net income(loss) per share is as follows:

                                                       Years Ended December 31,
                                                       ------------------------
                                                          2005          2004
                                                       ----------   -----------
Numerator for net income (loss) per share:
Net income .........................................   $2,462,481   $(1,571,570)
Preferred stock dividends and deemed dividends from
  beneficial conversion feature on preferred stock .     (167,512)      (28,125)
                                                       ----------   -----------
Income attributable to common stockholders-basic ...    2,294,969    (1,599,695)

Plus: preferred stock dividends-Series B, C & D ....       43,095             -
                                                       ----------   -----------
Income attributable to common stockholders-diluted .    2,338,064    (1,599,695)
                                                       ==========   ===========
Denominator:
Basic weighted-average shares ......................    5,160,133     3,221,753
Outstanding options ................................      131,629             -
Outstanding warrants ...............................       73,598             -
Convertible preferred stock Series B ...............      719,178             -
Convertible preferred stock Series C ...............            -             -
Convertible notes ..................................            -             -
Convertible preferred stock Series D ...............            -             -
                                                       ----------   -----------
Diluted weighted-average shares ....................    6,084,538     3,221,753
                                                       ==========   ===========
Basic and diluted income (loss) per share:
Basic income per share .............................   $     0.44   $     (0.50)
                                                       ==========   ===========
Diluted income per share ...........................   $     0.38   $     (0.50)
                                                       ==========   ===========

                                      F-19
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Due to their anti-dilutive effect, the following potential common shares have
been excluded from the computation of diluted earning per share:

                                                       Years Ended December 31,
                                                       ------------------------
                                                          2005          2004
                                                       ----------   -----------

Warrants ...........................................      403,022             -
Stock options ......................................    1,570,000       765,000
Convertible preferred stock series A ...............       76,654             -
Convertible preferred stock series C ...............      217,664             -
Convertible preferred stock series D ...............       61,644             -
Convertible preferred stock series E ...............       15,095             -
Convertible notes ..................................      100,000             -

10. EQUITY

         For the year ended December 31, 2005, the Company recorded the
following stock, option and warrant transactions:

         o  The Company sold 416,667 shares of common stock for $250,000 in
            cash;

         o  The Company sold 7,000 shares of Series B Convertible Preferred
            Stock accompanied with an option to acquire 1,666,666 shares of
            common stock at an exercise price of $.60 per share, in exchange for
            $500,000 of cash and cancellation of a $200,000 note previously
            issued to us;

         o  A trust administered by a former officer of ours sold 500,000 shares
            and an option to purchase an additional 1,050,000 shares of the
            Company's common stock for an undisclosed amount. The option expires
            on various dates from 24 to 42 months after May 20, 2005, and has
            exercise prices ranging from $1.25 to $2.25 per share; we exchanged
            10,000 shares of our preferred stock Series A, outstanding debt in
            the amount of $240,000 and a severance obligation owed to a former
            officer of the Company and a trust controlled by him, for 7,062
            shares of our preferred stock series C valued at $770,040. The
            preferred stock series C is convertible in to shares of our common
            stock at $2.00 per share.

         o  The Company sold 416,667 shares of common stock for $250,000.

         o  On June 29, the options, granted in conjunction with the sale of our
            Series B preferred stock, were exercised for $750,000 in cash and
            satisfaction of a note payable in the amount of $250,000.

                                      F-20
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

         As a result of the completion of the above transactions, the Company is
no longer controlled by a former officer,

         Unrelated to the change of control of the Company, the following equity
transactions occurred in 2005:

         o  The Company issued 50,000 shares of common stock in exchange for
            $50,000 owed by the Company to the lender;

         o  An officer of the Company, exercised 200,000 options covering 55,629
            shares of the Company's common stock, granted under the stock option
            plan in 2003;

         o  The Company cancelled 200,000 shares of common stock and issued
            warrants to purchase 50,000 shares of our common stock, at $1.25 per
            share, as a result of cancellation of an agreement previously
            executed in 2004;

         o  Sold 100,000 shares of common stock at $1.00 per share and warrants
            to purchase 60,000 shares at $2.00 for $100,000; sold 150,000 shares
            of common stock at $1.00 per share and warrants to purchase 60,000
            shares at $1.50 per share for $150,000; sold 151,515 shares of
            common stock at $1.65 for $250,000;

         o  The Company issued 2,000 shares of Series D preferred stock with a
            stated value of $200,000 in exchange for accounts payable;

         o  Sold 20,000 shares of common stock at $2.50 per share, five year
            warrants to purchase 12,500 shares of our common stock at $3.73 and
            a thirty day option assignment from a stockholder to purchase 12,500
            shares of stock at $1.25 per share from a former officer for
            $50,000;

         o  Sold 100,000 shares of common stock, five year warrants to purchase
            62,500 shares of our common stock at $3.73 and a thirty day option
            assignment to purchase 62,500 shares of stock at $1.25 per share for
            $250,000;

         o  Sold 10,000 shares of the Company's newly created Series E preferred
            stock valued at $75.00 per share in exchange for listed common stock
            valued at $783,750 at the time of the exchange and 3,333 shares of
            the Company's Series E preferred stock valued at $75.00 per share
            for $250,000.

                                      F-21
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

         Also during the fourth quarter, the Company converted, at the election
         of several of the convertible note holders, $200,000 of convertible
         notes to common stock valued at $2.00 per share and $72,079 of
         convertible notes to common stock at the value of $2.50 per share. As a
         result of this conversion, the Company issued:

         o  80,000 shares of common stock in exchange for $200,000 worth of
            convertible notes payable;

         o  13,635 shares of our common stock in exchange for $34,089 worth of
            convertible notes payable;

         o  15,200 shares of common stock in exchange for $38,000 worth of
            convertible notes payable to a major shareholder and previous
            officer of the Company.

         The table below outlines the conversion price of all outstanding
convertible issues, both debt and equity:

         Convertible Issue                             Conversion Price
         -----------------                             ----------------
         Series B preferred stock....................     $  0.60
         Series C preferred stock....................        2.00
         Series D preferred stock....................        2.00
         Series E preferred stock....................        3.51
         Notes payable-10% convertible debt..........        2.00

11. STOCK OPTIONS -

         The Company adopted the 2000 Incentive Compensation Plan (the "Plan").
The Plan is designed to serve as an incentive for retaining directors,
employees, consultants and advisors. Stock options, stock appreciation rights
and restricted stock options may be granted to certain persons in proportion to
their contributions to the overall success of the Company as determined by the
board of directors. Of the stock options outstanding at December 31, 2004,
610,500 vested immediately upon grant, 50,000 vest over a two year period from
the date of grant and 210,000 vest over a three year period from the date of
grant.

         The Company granted options to purchase 1,575,000 shares of the
Company's common stock to officers and key employees during the year 2005 at a
weighted average exercise price of $2.04. Of the 1,575,000 options granted,
275,000 options were granted to employees, 650,000 were granted to officers who
are not members of the Board of Directors, 500,000 were granted to officers who
are members of the Board of Directors and 150,000 were granted to outside
members of the Board of Directors. 280,000 options vest immediately and
1,295,000 options vest monthly over a two year period.

                                      F-22
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

         The following table summarizes stock options at December 31, 2005:

                  Outstanding Stock Options          Exercisable Stock Options
               ------------------------------     ------------------------------
                Weighted                            Weighted
                 Average     Weighted               Average     Weighted
 Exercise       Remaining    Average               Remaining    Average
   Price       Contractual   Exercise             Contractual   Exercise
   Range         Shares        Life     Price       Shares        Life     Price
-----------    -----------   --------   -----     -----------   --------   -----
$ .90-$1.00       110,000      8.31     $ .99       102,778       8.21     $1.00
$1.10-$1.12       110,000      8.05     $1.11       110,000       8.05     $1.11
$1.17-$1.24        69,514      8.45     $1.20        43,937       8.34     $1.21
$1.50-$1.54       145,000      8.55     $1.52        89,583       8.84     $1.51
   $1.74           70,000      9.58     $1.74        17,500       9.58     $1.74
$2.00-$2.05     1,460,000      9.32     $2.01       638,056       9.18     $2.01
$2.89-$2.94       110,000      9.89     $2.94         9,583       9.88     $2.93

The following table summarizes stock option activity for the years ended
December 31, 2005 and 2004:

                                         Weighted              Weighted
                                          Average               Average
                                         Exercise              Exercise
                                          Shares      Price     Shares     Price
                                         ---------    -----    --------    -----

Outstanding at beginning of year......     765,000    $1.35     605,500    $1.36
Granted...............................   1,575,000     2.04     349,500     1.22
Exercised.............................    (200,000)    3.59           -        -
Cancelled.............................     (65,486)    1.17    (190,000)    1.21
                                         ---------             --------
Outstanding at end of year............   2,074,514     2.04     765,000     1.35
                                         =========             ========

Exercisable at end of year............   1,011,437     1.30     670,239     1.30
                                         =========             ========
Weighted average fair value of
 options granted during the year 2005.       $1.89                $1.22
                                         =========             ========

12. EMPLOYEE BENEFIT PLAN

The Company has one savings plan (the "Plan") that qualifies as a deferred
salary arrangement under Section 401(d) of the Internal Revenue Code of 1986. To
participate in the Plan, an employee of the Company must have at least three
months of full time service with the Company and be at least 18 years old. The
amount of salary deferral during any year for a Plan participant cannot exceed
the dollar limit imposed by applicable federal law. The Plan also provides that
the Company may match employee contributions to the Plan. The Company did not
make any contributions to the Plan during the years ended December 31, 2005 and
2004.

                                      F-23
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

13. INCOME TAXES

The federal and state income tax provision (benefit) for the years ended
December 31, 2005 and 2004 is summarized as follows:

                                                            2005         2004
                                                        -----------   ----------
         Current
            Federal ..................................  $         -   $        -
            State ....................................            -            -
                                                        -----------   ----------
                                                                  -            -
                                                        -----------   ----------

         Deferred
            Federal ..................................   (1,809,000)           -
            State ....................................     (308,000)           -
                                                         -----------  ----------
         Total provision (benefit) for income taxes ..  $(2,117,000)  $        -
                                                         ===========  ==========

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, the Company has incurred substantial losses in prior periods that
caused management to doubt, based on the available objective evidence; whether
it was more likely than not that the net deferred tax assets would be fully
realizable. Accordingly, the Company had provided for full valuation allowance
against its net deferred tax assets. During the year ended December 31, 2005 the
Company eliminated the valuation allowance that had been recorded because
management now believes that, based on current operations and future
projections, the benefits arising from the deferred tax assets will be realized.
The components of the Company's deferred tax assets at December 31, 2005 and
2004 were as follows:

                                                  2005         2004
                                               ----------   ----------
         Net operating losses carryforwards    $1,446,000    1,400,000
         Amortization of intangibles .......      645,000      650,000
         Other .............................       26,000       20,000
                                               ----------   ----------
         Deferred tax assets ...............    2,117,000    2,070,000
         Less : Valuation allowance ........            -   (2,070,000)
                                               ----------   ----------
         Net deferred tax asset ............   $2,117,000            -
                                               ==========   ==========

The Company has net operating loss carryforwards for federal tax purposes of
approximately $3,889,000 which expire in years 2022 through 2024. The amount
deductible per year is limited to approximately $630,000 under current tax
regulations.

                                      F-24
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

A reconciliation of the provision (benefit) for income taxes with amounts
determined by applying the statutory U.S. federal income tax rate to income
before income taxes is as follows:
                                                       Year Ended December 31,
                                                     --------------------------
                                                         2005            2004
                                                     -----------    -----------
Computed tax at the federal statutory rate of 34%    $   117,000       (534,000)
State taxes, net of federal benefit .............        (37,000)       (57,000)
Operating loss carryforwards ....................     (1,446,000)
Amortization of intangibles .....................       (645,000)
Non-deductible compensation .....................       (105,000)
Other ...........................................         (1,000)
Valuation allowance .............................                       591,000
                                                     -----------    -----------
Provision (benefit) for income taxes ............    $(2,117,000)             -
                                                     ===========    ===========
Effective income tax rate .......................          (613)%
                                                     ===========    ===========

14. COMMITMENTS AND CONTINGENCIES

Office Lease Commitments

The Company's subsidiary and its company-owned branch offices lease office
facilities under operating lease agreements. Lease expense totaled $223,678 and
$139,296 for the year ended December 31, 2005 and 2004, respectively.

The following is a schedule by year of future lease commitments:

         Year Ending
         December 31,
         ------------
             2006              $ 207,506
             2007                139,372
             2008                142,786
             2009                146,554
             2110                 24,442
                               ---------
                               $ 660,660
                               =========

Regulatory and Legal Matters

During 2005, the Company's subsidiary, EFG, received and executed a settlement
offer from the Securities and Exchange Commission. This settlement offer
resolved an enforcement action that was brought against EFG, in May of 2004, for
trading of mutual fund shares on behalf of our clients.

EFG has deposited $350,000 into an escrow account pending ratification by the
SEC's main office in Washington D.C. Therefore, the Company has recognized an
expense of $275,000, in its Consolidated Statement of Operations for its share
of the settlement and has recorded a receivable of $75,000 for an amount due
from a former officer of the parent. This payment is represented on the
Consolidated Statement of Financial Position for the year ended December 31,
2005 as cash in escrow and the receivable from the former officer is reflected
as a prepaid expense and other assets. The corresponding liability of $350,000
is reflected in accrued expenses and other liabilities.

                                      F-25
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Customer Complaints and Arbitration

From time to time, EFG can be a defendant or co-defendant in arbitration matters
incidental to its retail brokerage services business. EFG may contest the
allegations of the complaints in these cases and carries error and omission
insurance policy to cover such incidences. The policy terms require that the
Company pay a deductible of $100,000 per incident. In the opinion of management,
based on discussions with legal counsel, the outcome of any pending matters will
not result in a material adverse affect on the financial position or results of
operations of the Company or its subsidiaries.

The Company's subsidiaries' business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied clients for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years there has been an increasing
incidence of litigation involving the securities industry, including class
actions which generally seek rescission and substantial damages. In the ordinary
course of business, the Company operating through its subsidiaries and its
principals are, and may become a party to additional legal or regulatory
proceedings or arbitrations. The Company is not currently involved in any
additional legal or regulatory proceeding or arbitrations, the outcome of which
is expected to have a material adverse impact on the Company's business.

Employment Agreements

The Company has employment agreements with several of it key officers and a
director. The agreements typically are for a two year duration and can be
cancelled by either party upon 90 days written notice. Currently the Company has
three individuals who have employment agreements totaling $510,000 per year.

15. OFF BALANCE SHEET RISKS

Retail customer transactions are cleared through the clearing broker on a fully
disclosed basis. In the event that customers default in payments of funds or
delivery of securities, the clearing broker may charge the Company for any loss
incurred in satisfying the customer obligations. Additional credit risk occurs
if the clearing brokers of affiliates do not fulfill their obligations. The
Company regularly monitors the activity in its customer accounts for compliance
with margin requirements.

In addition, we have sold securities which we do not currently own and therefore
will be obligated to purchase the securities at a future date. We have recorded
these obligations in our financial statements at December 31, 2005 at the market
values of the securities and will incur a loss if the market value decreases
subsequent to December 31, 2005.

16. CONCENTRATION OF CREDIT RISKS

We are engaged in various trading and brokerage activities in which
counterparties primarily include broker-dealers, banks and other financial
institutions. In the event counterparties do no fulfill their obligations, we
may be exposed to risk. The risk of default depends on the creditworthiness of
the counterparty or issuer of the instrument. It is our policy to review, as
necessary, the credit standing of each counterparty.

                                      F-26
<PAGE>

                EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Our cash in bank accounts, at times, exceeds the Federal Deposit Insurance
Corporation ("FDIC") insurable limit of $100,000. We have not experienced any
previous losses due to this policy.

17. NET CAPITAL REQUIREMENTS AND VIOLATIONS OF BROKER DEALER SUBSIDIARY

The Company's subsidiary, EFG, is subject to SEC Uniform Net Capital Rule
15c3-1, which requires the maintenance of minimum net capital and requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. Net capital and the related ratio of aggregate indebtedness to
net capital, as defined, may fluctuate on a daily basis.

At December 31, 2005, EFG's net capital was $827,719 which exceeded the capital
requirement by $291,719.The Company's ratio of aggregate indebtedness to net
capital was 4.5 to 1. The Company claims exemption under rule 15c3-3 under
paragraph (k)(2)(ii) of the Rule as all customer transactions are cleared
through other broker-dealers on a fully disclosed basis.

18. SUBSEQUENT EVENTS

In January 2006, the Company increased our stockholders equity by $725,000 from
proceeds from the sale of 290,000 shares of common stock and the issuance of
181,500 warrants to purchase the Company's common stock at $4.99 per share.

On March 13, 2006, the Company issued 863,074 shares of newly created Series F
preferred stock, to unrelated third parties, for $2,804,990. The series F
preferred stock includes five year warrants to purchase 431,537 shares of the
Company's common stock at $4.50 per share and carries a 4% cumulative dividend.

On February 6, 2006, the Company received a letter from the National Association
of Securities Dealers ("NASD") stating that they intended to recommend that
disciplinary action be brought against the Company for failing to maintain the
minimum net capital required by Securities Exchange Act ("SEA") Rule 15c3-1. The
letter states that from September 2003 until February 14, 2005, that the
Company, acting through it former Financial and Operations Principal ("FINOP")
prepared and submitted materially inaccurate Financial and Operational Combined
Uniform Single Report ("FOCUS Reports"). The NASD letter further states that the
firm acting through it former FINOPs prepared and maintained materially
inaccurate net capital computation in violation of NASD rules. Also during the
period beginning in September of 2003 until December of 2004, the Company
implemented a material change in business operations by increasing the number of
equity securities in which it made a market from 136 to 1427 without filing an
application for approval with the NASD thus violating NASD regulations.

The NASD has given the Company the opportunity to submit reasons indicating why
the action should not be brought against us. The Company is in the process of
preparing it response. Management believes any action or settlement will not be
material in relation to the net worth of the Company.

                                      F-27