FIRST MONTAUK FINANCIAL CORP, 10-K, 1999-04-15

FIRST MONTAUK FINANCIAL CORP
10-K, 1999-04-15
SECURITY BROKERS, DEALERS & FLOTATION COMPANIES

Previous: PGI INC, 10KSB40, 1999-04-15

Next: WESTWOOD GROUP INC, 10-K, 1999-04-15

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _______________________ to ______________________

Commission File No. 0-6729

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

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

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

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

Name of each exchange on
Title of each class which registered

None

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

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

<PAGE>
2

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

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

The issuer's revenues for its most recent fiscal year: $41,876,378.

The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of April 13, 1999 was
$19,384,316.

The number of shares of Common Stock outstanding, as of April 13, 1999 was
9,890,727.

DOCUMENTS INCORPORATED BY REFERENCE

Not Applicable

[Cover Page 2 of 2 Pages]

<PAGE>
3

PART I
Item 1. Business

Introduction
- ------------

First Montauk Financial Corp. ("FMFC") is a holding company, which, through
its wholly-owned subsidiary, First Montauk Securities Corp. ("FMSC"), is
primarily engaged as a retail and institutional securities brokerage firm. FMFC
also sells insurance products through its subsidiary Montauk Insurance Services,
Inc. ("MISI"). FMSC is a registered broker/dealer with the Securities and
Exchange Commission ("SEC"), a member of the National Association of Securities
Dealers Regulation, Inc. ("NASD"), the Municipal Securities Rule Making Board
("MSRB"), and the Securities Investor Protection Corporation ("SIPC"). FMSC's
business activities consist primarily of retail sales and trading of listed and
unlisted equity and fixed-income securities; government, municipal and corporate
securities; and options. FMSC earns commissions from individual and
institutional securities transactions and market making activities. All
securities transactions are cleared through FMSC's clearing firm on a fully
disclosed basis. FMSC also provides investment banking services such as private
and public securities offerings.

FMSC is currently licensed to conduct its broker/dealer business in 49
states, the District of Columbia, and the Commonwealth of Puerto Rico. FMSC
maintains approximately 148 branch and/or satellite offices, all of which are
maintained by affiliates. The Company has approximately 360 registered
representatives and services approximately 46,000 retail and institutional
customer accounts.

FMSC's primary method of operation is the affiliate program, which allows
registered representatives to operate as independent contractors. An affiliate
of FMSC establishes his own office and is solely responsible for the payment of
all expenses associated with the operation of the branch office, including rent,
utilities, furniture, equipment, stock quotation machines, and general office
supplies. In return, the affiliate representative is entitled to retain a
significantly higher percentage of the commissions generated by his sales than a
registered representative in a standard brokerage arrangement. The affiliate
program is designed to attract experienced brokers with existing clientele who
desire to operate their own office.

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

In 1991, MISI was formed for the purpose of offering and selling variable
annuity, variable life as well as traditional life and health insurance
products. Currently, MISI is licensed in the states of Alabama, Alaska, Arizona,
California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Montana (pending), Missouri, New Hampshire, New Jersey, New Mexico,
New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia
and Wisconsin. MISI derives revenue from insurance-related products and services
from the existing customer base of FMSC's Registered Representatives, who are
insurance licensed. In fiscal year 1998, the Company earned gross commissions of
$2,544,092 from the sale of insurance and annuity policies.

In 1998, FMSC registered with the Securities and Exchange Commission under
the Investment Advisers Act of 1940 in order to provide investment advisory
services and offer fee-based managed accounts to its clientele. Currently, FMSC
is licensed as an Investment Advisor in the States of Alaska, Arizona,
California, Connecticut, Florida, Hawaii, Indiana, New Jersey, New York, North
Carolina, Pennsylvania, Texas, and West Virginia. Although to date FMSC has
received minimal revenue from its advisory services, management intends to
promote this area of operation during the next fiscal year.

FMFC and its subsidiaries maintain their principal executive offices at
Parkway 109 Office Center, 328 Newman Springs Road, Red Bank, New Jersey 07701,
(732) 842-4700.

<PAGE>
4

Recent Developments
- -------------------

Global Loans

In 1996, the Company formed Montauk Advisors, Inc. ("MAI") as a
wholly-owned subsidiary to act as an agent for various leasing companies to
offer business equipment leases to its clientele. In fiscal year 1997, MAI
ceased doing business due to concerns over the financial condition of Global
Financial Corp. ("Global"), the company that sold and currently services the
leases, and an affiliated equipment vendor, Fem-Com Systems Inc. ("FCS"). Since
1997 MAI has made loans to Global totaling approximately $2,217,000. These loans
were made for the purpose of assisting Global in meeting cash flow deficiencies
arising from the nonpayment of scheduled monthly installments on certain
delinquent, canceled and non-performing leases. The loans, some of which bear
interest at 8% per annum and were due at various times during 1998, are
currently in default. The notes are guaranteed by Global, FCS, Biblio, Inc.
("Biblio") and the shareholder of FCS and Biblio. The notes are partially
collateralized by mortgage liens on real estate owned by the principal
shareholder of FCS and Biblio, a pledge of the shares of Global and FCS, and
various liens on the assets of FCS. The Company does not believe the collateral
will be sufficient to cover the unpaid balance of the loans and therefore has
reserved for the portion of the loans deemed to be uncollectible. As of December
31, 1998, MAI had loaned $2,066,045 to Global, and had established a reserve
against the loans totaling $1,775,000.

In August 1998, Global informed the purchasers of the leases that it was
reducing the monthly payments to 60% of the original amount. The Company is
reevaluating its continued financial support of Global through loan advances,
and is attempting to formulate a final resolution of the Global leases. There
can be no assurance that the Company will not incur significant expenditures in
respect of this matter in the future.

Century Discount Investments

In June 1997, FMSC established a discount brokerage division "Century
Discount Investments" ("Century"), to offer investors convenient and prompt
retail brokerage services at significantly reduced commission rates. Century is
designed to serve investors who do their own research and make their own
investment decisions. These customers seek to avoid the higher brokerage
commissions for securities research, market recommendations or portfolio
management associated with full service brokerage firms. FMSC believes that this
market segment has become increasingly significant to the brokerage industry and
will continue to grow in the future. Century's business will concentrate on the
execution of unsolicited transactions on an agency basis from retail customers.
Century is able to offer customers reduced commission rates since its service is
not dependent on individual broker-customer relationships to generate orders.
Century does not assign customer accounts to individual brokers and all Century
registered representatives have immediate access to customer accounts and market
information necessary to respond to any customer inquiry and order.

In February 1999, FMSC appointed Seth Rosen to fill the newly created
position of President of Century. FMSC intends to use Mr. Rosen's experience in
the discount brokerage industry to expand Century's services and customer base
in 1999, including offering online discount brokerage and related investment
services. The online service will provide customers with automated securities
order placement, market information and research capabilities through the
Internet. Eventually, Century intends to offer a broad range of investment
services to the self-directed, sophisticated online retail customer.

Description of Business
- -----------------------

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

<PAGE>
5

As of February 23, 1999, FMSC operated 148 affiliate branch and/or
satellite offices in addition to its main office located in Red Bank, New
Jersey. There are approximately 360 registered representatives in these offices,
as well as 68 support staff employees in the main office. Affiliate branch and
satellite offices are located in the following 28 states and Saudi Arabia:

AFFILIATE BRANCH/
STATE SATELLITE OFFICE

Alaska 1
Arizona 2
California 7
Connecticut 4
Delaware 1
Florida 8
Georgia 2
Illinois 1
Indiana 1
Massachusetts 1
Minnesota 3
Mississippi 1
Missouri 2

AFFILIATE BRANCH/
STATE SATELLITE OFFICE

New Hampshire 1
North Carolina 6
North Dakota 2
New Jersey 27
New Mexico 1
New York 36
Ohio 2
Pennsylvania 18
Rhode Island 2
Tennessee 1
Texas 2
Virginia 5
Washington 8
West Virginia 1
Wisconsin 1
Saudi Arabia 1

FMSC transacts business in the following areas:

Equities:
Listed 26%
Over-The-Counter 35%
Municipal, Government 3%
Corporate Bonds 4%
Unit Investment Trusts 1%
Mutual Funds 16%
Options 9%
Insurance 6%

<PAGE>
6

The following table reflects FMSC's various sources of revenues and the
percentage of total revenues for fiscal 1998. Revenues from agency transactions
in securities for individual customers of FMSC are shown as commissions.
Revenues from transactions in securities for individual customers where FMSC
acted in a principal capacity are reflected in principal transactions. Also
reflected in principal transactions are trading profits from market making and
other trading activities.

Year Ended December 31, 1998
----------------------------

Amount Percent
------ -------

Agency commissions from
Equity Securities,
Options and Mutual Funds $30,741,404 73.4%

Principal Transactions in
Equity Securities, Municipal,
Government and Corporate Bonds$ 8,795,599 21.0%

Interest and other Income(1) $ 1,572,063 3.8%

Investment Banking(2) $ 767,312 1.8%
---------- ---

Total Revenues $41,876,378 100.0%

(1) "Other Income" consists primarily of rental income and dividends.

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

Registered Representative Recruitment and
Registered Representative Affiliate Program
- -------------------------------------------

FMSC's goal is to recruit well-trained, experienced registered
representatives who require little training and who have proven production
records with an established customer account base. Since all registered
representatives are paid on a commission earned basis, the costs associated with
the hiring of new registered representatives are limited to general expenses
consisting of orientation materials, compliance manuals and operational
information.

FMSC continues to experience significant competition from other securities
brokerage firms for registered representatives. Larger, more established firms
with greater financial resources possess an advantage in competing with FMSC and
attracting representatives, clients and investment dollars. (See "Business -
Competition".)

The Affiliate Program
- ---------------------

FMSC's affiliate program is designed to attract professionals in all facets
of the financial services industry to affiliate with FMSC as registered
representatives. These individuals must possess a sufficient level of commission
brokerage business and experience to enable the individual to independently
support his own office. The program also enables financial professionals such as
insurance agents, real estate brokers, financial planners, and accountants, who
already provide some type of financial or brokerage services to their clients,
to become a registered representative with FMSC. This is intended to allow the
professional to offer securities products and services to their clients through
FMSC, and insurance products through MISI. Affiliates operate in their own
office, which functions as either a registered branch office or a satellite
location. A location is considered a registered branch if it contains three or
more registered individuals, and publicly offers brokerage services. A
registered branch is designated as either an Office of Supervisory Jurisdiction
(OSJ) or non-OSJ branch office depending on whether the office contains a
registered principal responsible for the supervision of registered
representatives at that location. A satellite location has fewer than three
individuals who conduct business, does not have a registered principal on site,
and does not publicly offer brokerage services. Registered representatives
within a satellite location are supervised by a registered principal at an OSJ
or FMSC's headquarters. Management believes the affiliate program is attractive
to established brokers because it combines the flexibility of operating an
independent office with the structure and support of an established firm.
<PAGE>
7

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

FMSC provides full support services to each of the affiliates, including
access to stock and options execution and over-the-counter stock trading;
products such as insurance, mutual funds and investment advisory programs; and
research, compliance, supervision and related services. Currently, Schroder &
Co., Inc. provides clearing services for FMSC, and E D & F Man International
Securities, Inc. and others provide execution services.

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

FMSC is ultimately responsible for supervising each and every affiliate and
related registered representative. FMSC can incur substantial liability from
improper actions of any of the affiliate representatives. (See "Legal
Proceedings"). Effective January 1, 1996, the Company obtained a professional
liability errors and omissions insurance policy which provides coverage for
certain actions taken by the Company's registered representatives, employees and
other agents in connection with the purchase and sale of securities and the
administration of individual retirement plans. The program provides coverage for
each incident up to $1,000,000 with an aggregate policy limit of $5,000,000,
with a deductible per incident of $50,000. The first $10,000 of the deductible
is the responsibility of individual representatives. These limits apply through
January 31, 2000, when the policy is up for renewal. Each registered
representative is required to pay a portion of the policy premium. The policy
excludes claims involving the sale of low-priced securities (penny stocks) and
partnerships; criminal or deliberate fraudulent acts, defamation, as well as
certain other activities.

Retail Commission Business
- --------------------------

Most of FMSC's revenues are derived from agency and principal commissions
from retail (individual) and institutional customers on brokerage transactions
in exchange-listed and over-the-counter equity and fixed income securities. When
FMSC receives an order for a security in which FMSC makes a market or has
inventory, FMSC may act as a principal and purchase from, or sell to, its
customer the desired security on a disclosed basis at a price set in accordance
with applicable securities regulations.
<PAGE>
8

Investment Banking Activities
- -----------------------------

The Company's investment banking revenues are principally derived from
participation in public offerings of equity securities and acting as placement
agent in the private placement of securities. The Company does not generally
derive a significant or material portion of its revenues from its investment
banking operation. For the fiscal year ended December 31, 1998, investment
banking activities, including sales concessions earned as a syndicate or selling
group member, accounted for approximately 2% of the Company's revenues. FMSC
acted as a placement agent in three private placements and participated as a
syndicate or selling group member in approximately 105 offerings in fiscal 1998.

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

Principal Transactions
- ----------------------

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

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

Investment Activities
- ---------------------

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

<PAGE>
9

Research Services
- -----------------

Research activities include the review and analysis of general market
conditions, industry segments and specific companies; the issuance of in-depth
written reports on companies, with recommendations on specific actions to buy,
sell or hold; the furnishing of information to retail and institutional
customers; and responses to inquiries from customers and account executives.
Research services are directed primarily at identifying attractive investment
opportunities in small, medium and emerging growth companies, and in special
situation investments. FMSC presently conducts a limited amount of research
activities directly through a research analyst employed by it and also utilizes
external sources. These direct research activities principally relate to the
preparation of specialized reports on selected securities for general
distribution to FMSC's retail customers, and/or research assistance to the
Company's retail sales force. The Company also obtains additional research
reports and information from various other sources, such as Schroder & Co.,
Inc., Emerald Research, Argus, and others.

Asset Management and Portfolio Advisory Service Fees
- ----------------------------------------------------

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

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

Managed account programs generally require the client to pay a single fee
for portfolio advisory services, brokerage execution and custody and periodic
account performance evaluation, rather than a fee plus commissions. Revenues
from asset-managed accounts and portfolio advisory services are generated from
accounts that charge a fee based on a percentage of assets under management.

In October 1998, FMSC signed a limited clearing agreement with Wexford
Clearing Services Corp. ("Wexford"), a division of Prudential Securities to
offer its "Mutual Fund Choice" program. The program, managed by Prudential
Advisors, Inc., enables the registered representatives to prepare an asset
allocation model for the client choosing from a selected universe of mutual
funds suitable for the client. The funds are purchased at net asset value,
without a sales charge, and included in the designed portfolio. For this
service, the client is charged a quarterly fee based upon the value of the
assets in the portfolio. A portion of the fee is retained by Prudential for
managing the accounts and providing statements to the clients.

Management's goal is to increase fee-based revenues by continuing to
provide diversified advisory services and products to its affiliates.

Competition
- -----------

FMSC encounters intense competition in all aspects of its business and
competes directly with many other securities firms for clients, as well as
registered representatives. A significant number of such competitors offer their
customers a broader range of financial services and have substantially greater
resources. Retail firms such as Merrill Lynch Pierce Fenner & Smith
Incorporated, Smith Barney, Inc. and Morgan Stanley/Dean Witter dominate the
industry; however, the Company also competes with numerous regional and local
firms. FMSC also competes for experienced brokers with other firms offering an
independent affiliate program such as Corporate Securities Group, Inc., Robert
Thomas Securities, Inc. and Linsco/Private Ledger Corp.

In addition, a number of firms offer discount brokerage services to
individual retail customers and generally effect transactions at substantially
lower commission rates on an "execution only" basis, without offering other
services such as investment recommendations and research. Moreover, there is
substantial commission discounting by full-service broker-dealers competing for
institutional and individual brokerage business. The Company has recently
entered the discount brokerage arena through its Century Discount Investments
division. (See "Recent Developments".) Additionally, the recent emergence of
online trading has further intensified the competition for brokerage customers.
The continued expansion of discount brokerage firms and online trading could
adversely affect the Company's retail business.
<PAGE>
10

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

FMSC competes through its advertising and recruiting programs for
registered representatives interested in joining its affiliate program. FMSC
often offers incentives to qualified registered representatives to join the
Company. These incentives can include cash loans, both forgivable based on
duration of association and/or production levels, as well as non-forgivable,
incentive stock options and a higher payout during a transitional period. FMSC
is currently implementing new computer programs developed by the Clearing
Broker, Schroder & Co., Inc., to better service its affiliates and to attract
new brokers. The system will enable brokers at any office to instantly access
customer accounts, determine cash positions, send and receive electronic mail,
and receive research reports and compliance memoranda through a computer work
station.

Administration, Operations, Transaction Processing and Customer Accounts
- ------------------------------------------------------------------------

FMSC currently utilizes the services of Schroder & Co., Inc. as its primary
clearing broker (the "Clearing Broker"). FMSC does not hold any funds or
securities of its customers. The Clearing Broker, on a fee basis, processes all
securities transactions for FMSC's account and the accounts of its customers.
Services of the Clearing Broker include billing and credit control, and receipt,
custody and delivery of securities, for which FMSC pays a portion of the
commissions it receives from customer transactions. By engaging the processing
services of a clearing broker, FMSC is exempt from certain reserve requirements
imposed by Rule 15c3-3 under the Securities Exchange act of 1934 (the "1934
Act"). (See "Net Capital Requirements".) The Clearing Broker is neither a
partner nor a joint venturer with FMSC, nor does the Clearing Broker have any
direct or indirect interest in FMSC, financial or otherwise, or any control of
FMSC's business, affairs or internal operations. The Clearing Broker, however,
does provide secured margin loans to FMSC and its customers to finance the
purchase of securities. Under its clearing agreement with the Clearing Broker,
FMSC has agreed to indemnify and hold the Clearing Broker harmless from certain
liabilities or claims. As required by the NASD and certain other authorities,
FMSC carries a fidelity bond covering loss or theft of securities, as well as
embezzlement and forgery. The bond provides total coverage of $5,000,000 (with a
$10,000 deductible provision per incident). In addition, the accounts of its
customers are protected by the Securities Investor Protection Corporation
("SIPC") for up to $500,000 for each customer, subject to a limitation of
$100,000 for claims for cash balances, with an additional $50,000,000 of
protection provided by a private insurance company for the benefit of each
customer. SIPC is funded through assessments on registered broker-dealers. SIPC
fees are assessed at the rate of .00065% of net operating revenues (as defined).

Government Regulation
- ---------------------

The securities industry is subject to extensive and constantly evolving
federal and state regulations promulgated by the SEC and various state agencies,
as well as self-regulatory organizations such as the NASD. The principal purpose
of such regulations is the protection of customers and the securities markets
rather than the protection of creditors and shareholders of broker-dealers. The
SEC is the federal agency charged with the administration of the federal
securities laws. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules
(subject to approval by the SEC) which govern the industry and conduct periodic
examinations of member broker-dealers. Securities firms are also subject to
regulation by state securities commissions in the states in which they are
registered. FMSC is registered with, and subject to, the state securities
commissions in 49 states, the District of Columbia and the Commonwealth of
Puerto Rico.
<PAGE>
11

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

Net Capital Requirements
- ------------------------

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

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

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

At December 31, 1998, FMSC had net capital of $1,668,964 which was
$1,418,964 in excess of required net capital, and its ratio of aggregate
indebtedness to net capital was 2.17 to 1. Failure to maintain the required net
capital may subject a firm to suspension or expulsion by the NASD, the
Commission and other regulatory bodies and ultimately may require its
liquidation. The net capital rule also prohibits payments of dividends,
redemption of stock and the prepayment or payment in respect of principal of
subordinated indebtedness if net capital, after giving effect to the payment,
redemption or repayment, would be less than specified percentage (120%) of the
minimum net capital requirement. Compliance with the net capital rule could
limit those operations of the Company's brokerage subsidiaries that require the
intensive use of capital, such as underwriting and trading activities, and also
could restrict the Company's ability to withdraw capital from its operating
subsidiaries, which in turn, could limit the Company's ability to pay dividends,
repay debt and redeem or purchase shares of its outstanding capital stock.

Employees
- ---------

The Company currently has approximately 360 registered representatives of
which 315 are associated with affiliate offices. In addition, the Company
employs 88 support employees in the areas of operations, compliance, accounting,
and administration.

There is an intense competition among securities firms for executives with
extensive securities industry experience. To a large degree, FMSC's future
success will depend upon its continuing ability to locate, hire and retain
highly skilled executives. FMSC considers its relations with its employees to be
satisfactory.
<PAGE>
12

Item 2. Properties

Offices and Facilities
- ----------------------

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

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

Facilities for all branch and/or satellite offices are the responsibility
of the Affiliate and FMSC incurs no cost, expense or obligation for these
facilities. Similarly, all furnishings, fixtures, telephone systems, office
equipment and quote and market data systems are likewise solely the
responsibility of the Affiliate.

Item 3. Legal Proceedings

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

In June 1997, the Securities and Exchange Commission entered an Order
against FMSC relating to an alleged failure to supervise a former affiliate
office in Houston, TX. Without admitting or denying the findings of the SEC,
FMSC consented to the issuance of an Order, making findings and imposing
remedial sanctions and a Cease-and-Desist Order. FMSC was (1) ordered to cease
and desist from present or future violations of Securities (15)(c) and 17(a) of
the Securities Exchange Act of 1934 ("Exchange Act") and Rules 15c3-1, 17a-3,
17a-5 and 17a-11 thereunder, (2) censured and required to pay a fine of $50,000,
and (3) required to pay disgorgement and interest of $227,042, which was
credited towards previously paid customer settlements.

In addition, FMSC was required to, and did retain, an independent
Consultant to conduct a review of, and to report and make recommendations as to
FMSC's supervisory and compliance policies and procedures, particularly as they
relate to the firm's affiliate program and the supervision of the firm's branch
offices by the main office. On February 1, 1999, FMSC submitted its Affidavit of
Compliance setting forth the details of its adoption and implementation of the
recommendations contained in the Consultant's Final Report. In summary, FMSC
developed and implemented substantial changes to its supervisory and compliance
policies and procedures, including the development of a hierarchical regional
supervisory structure. As part of this restructuring, FMSC hired a National
Supervisor, appointed three Regional Supervisors for the East, Central and West
Regions, and designated other branch office managers as Divisional Supervisors.
In addition, FMSC revised its internal audit and recruiting procedures,
developed supervisory compliance policies and procedures, and during early 1999
held its first Regional/Divisional Supervisory training program.

In February 1997, FMSC entered into a Consent Decree with the State of
Florida, without admitting or denying the findings, relating to the alleged
failure to supervise a former affiliate office in Houston. FMSC agreed to pay a
fine of $15,000, engage an independent consultant, as well as other provisions
temporarily limiting brokerage activities in the State of Florida. During 1998,
FMSC conducted internal audits of its Florida branches and was inspected by
examiners from the State of Florida. The State's examination has not been
completed, but FMSC expects that this matter will be concluded during Spring
1999. In the interim, FMSC has been granted permission to recruit brokers in
existing branch offices within the State.
<PAGE>
13

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

The Company was a defendant in a civil action brought by the City of
Painesville, Ohio in connection with its purchase of mortgage-backed securities
related to the activities of the former Houston branch office representatives.
The Company settled this claim for $500,000 in June 1998.

FMSC is both a claimant and counter-respondent in an arbitration, which it
brought against another securities firm arising out of the trading activities of
the former Houston branch office. The firm has filed a counter-claim against
FMSC seeking an unspecified amount of damages.

FMSC is a respondent in various customer arbitrations seeking damages of
various amounts. In one arbitration a customer seeks damages in excess of
$1,000,000 as a result of alleged forgery and misappropriation by a former
registered representative who was the executor of the estate and trustee under
the client's will. Another claimant seeks damages as a result of the alleged
mishandling of a customer account, seeking damages that aggregate $650,000. FMSC
is vigorously defending both of these actions and believes it has meritorious
defenses.

FMSC is a respondent in another customer arbitration seeking to hold it
liable as a successor in interest to another broker-dealer with whom the
customer conducted securities transactions upon which the claim was brought.
FMSC has strongly asserted that it is not a successor to any other broker-dealer
and is vigorously defending this claim.

FMSC is also named as a respondent in other pending customer arbitrations
and litigations relating to its securities business. These claims are in various
stages of progress and are being vigorously contested or settled as warranted
under the specific facts and circumstances of each case. Although management is
unable to derive a meaningful estimate of the possible costs that may arise from
these pending claims, they believe it will not have a significant impact on
future earnings.

The Company continues to review the extent to which settled and pending
claims, including Houston customer settlements, may be covered under its
insurance policies. In January 1997, the Company negotiated a $650,000
settlement with one of its insurance carriers in consideration of a general
release from coverage on various matters. The Company has also filed suit
against one of its insurers to compel coverage of several settled claims. There
can be no assurance that the Company will be successful in its efforts to
recover additional funds from its insurers on settled claims, or that monetary
losses, if any, from future claims, settlements or adverse judgments will be
covered under the Company's existing insurance policies.

Item 4. Submission of Matters on a Vote of Security Holders
Not Applicable.

<PAGE>
14

PART II

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

A. Principal Market

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

B. Market Information

The Company's Common Stock commenced trading in the over-the-counter market
in 1987. On April 14, 1999, the Company's common stock had a high and low bid
price of $2.75 and $2.66, respectively.

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

Common Stock

Fiscal Year 1998 High $ Low $

1st Quarter 2.875 2.00
2nd Quarter 3.28 2.41
3rd Quarter 2.53 1.01
4th Quarter 1.875 1.125

Fiscal Year 1997 High $ Low $

1st Quarter 3.125 .96
2nd Quarter 2.78125 2.4375
3rd Quarter 2.75 2.15625
4th Quarter 2.875 2.1875

<PAGE>
15

<TABLE>

Item 6. Selected Financial Data
Year ended December 31,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Operating results:
Revenues:
Commissions $30,741,404 $ 27,018,244 $ 25,749,690 $ 17,113,296 $ 9,861,294
Net dealer inventory
and trading gains 8,795,599 7,257,576 7,660,700 9,763,940 7,781,667
Investment banking 767,312 1,433,100 634,329 388,249 766,013
Insurance recovery - 650,000 - - -
Interest and other income 1,572,063 1,383,713 1,044,969 1,076,718 691,413
--------- --------- --------- --------- -------

Total revenues 41,876,378 37,742,633 35,089,688 28,342,203 19,100,387
---------- ---------- ---------- ---------- ----------
Expenses:
Commissions, employee
compensation and
benefits 31,766,060 26,785,205 25,428,184 19,542,578 14,242,933
Clearing and floor
brokerage 3,674,859 3,021,709 3,139,142 3,112,474 1,828,197
Communications and
occupancy 2,557,313 1,860,350 1,662,936 1,260,209 961,582
Legal matters and
related costs 2,377,336 1,452,001 2,731,997 1,542,328 345,735
Write-down of Note
Receivable - Global
Financial Corp. 1,775,000 -- -- -- --
Other operating expenses 2,961,974 2,093,670 2,006,615 1,439,926 1,247,345
Interest 131,215 84,695 105,772 192,752 157,660
---------- ---------- ---------- ---------- ----------
Total expenses 45,243,757 35,297,630 35,074,646 27,090,267 18,783,452
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes (3,367,379) 2,445,003 15,042 1,251,936 316,935
Income taxes (benefit) (604,532) 968,178 (17,747) 483,848 124,799

Net income (loss) $(2,762,847) $ 1,476,825 $ 32,789 $ 768,088 $ 192,136
Net income (loss)
applicable to
common stock $(2,762,847) $ 1,476,825 $ 32,789 $ 768,088 $ 192,136
Net income per
common share:
Basic $ (0.28) $ 0.17 $ 0.01 $ 0.10 $ 0.02
Diluted $ (0.28) $ 0.14 $ 0.01 $ 0.09 $ 0.02
Weighted average shares outanding
Basic 9,725,116 8,788,734 7,767,224 8,044,622 8,070,406
Diluted 9,725,116 10,351,032 8,623,538 8,380,906 8,409,267
Financial condition:
Total assets $11,543,734 $ 11,971,934 $ 8,742,039 $10,486,967 $ 7,082,267
Total liabilities $ 5,320,107 $ 4,732,467 $ 4,625,260 $ 6,886,021 $ 4,066,545
Common Stock issued with
Guaranteed selling price $ 36,500 $ 346,500 $ 421,500 $ - $ -
Stockholders' equity $ 6,187,127 $ 6,892,967 $3,695,279 $ 3,600,946 $ 3,015,722

</TABLE>

<PAGE>
16

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

Results of Operations - Three Years Ended December 31, 1998

Fiscal 1998 was the Company's tenth consecutive year of record revenues,
surpassing 1997 record levels of $37,743,000. Total revenues of $41,876,000
represented an increase of 11% over the prior year. The Company benefited along
with the rest of the brokerage industry as fiscal 1998 continued the extremely
favorable market trends of the prior two fiscal years. Almost every revenue
category realized higher revenues when compared with the prior two years; the
sole exception being investment banking, which is discussed below.

Year Ended December 31,
1998 1997 1996
(000's) % Change (000's) % Change (000's)
------- -------- ------- -------- -------
Revenues:
Commissions $30,741 14 $ 27,018 5 $ 25,750
Net dealer inventory
and trading gains 8,796 21 7,258 (5) 7,661
Investment banking 767 ( 46) 1,433 126 634
Insurance recovery -- (100) 650 100 --
Interest and other income 1,572 14 1,384 32 1,045
$41,876 11 $37,743 8 $35,090

The rise in revenues in fiscal years 1998 and 1997 resulted from increased
commissions, both in absolute dollars and as a percentage, from agency
transactions in general securities (stocks, bonds and options). The increase in
agency transactions is primarily attributable to the addition of several high-
volume affiliated brokers. Commissions from mutual fund transactions accounted
for the largest dollar increase from 1996 to 1997.

Net trading profits increased 21% in 1998 from the prior year, primarily as
a result of increased principal trading in fixed income securities. Investment
banking revenues significantly declined in 1998 as compared to 1997, the year in
which FMSC earned significant fees from the underwriting of an initial public
offering for Pacific Health Laboratories, Inc. However, revenues from other
investment banking activities, including participation in syndicates and selling
groups, increased in 1998 over 1997 levels as a direct result of FMSC's
increased focus and efforts in this area.

Year Ended December 31,
1998 1997 1996
(000's) % Change (000's) % Change (000's)
------- -------- ------- -------- -------

Expenses:
Commissions, employee
compensation and
benefits $ 31,766 19 $ 26,785 5 $ 25,428
Clearing and floor
brokerage 3,675 22 3,022 (4) 3,139
Communications and
occupancy 2,557 37 1,860 12 1,663
Legal matters and
related costs 2,377 63 1,452 (47) 2,732
Write-down of Note
Receivable - Global
Financial Corp. 1,775 100 -- 0 --
Other operating expenses 2,962 41 2,094 4 2,007
Interest 131 54 85 (20) 106
------ -- ------ --- ------
Total expenses $ 45,243 28 $ 35,298 1 $35,075

During 1998, the Company paid commissions, employee compensation and
employee benefits of $31,766,000 (76% of total revenues) as compared to
$26,785,000 (71% of total revenues) in 1997. This category includes salaries,
commission expense, and benefits for salaried employees. Commissions paid to
registered representatives for fiscal 1998 totaled $26,622,000 and accounted for
more than $4,200,000, or 85% of the total increase in this expense category over
fiscal 1997. This is due to a combination of higher payouts utilized to attract
the larger producing registered representatives, and an increase in transactions
revenue in 1998.
<PAGE>
17

For 1998, the Company paid salaries of $4,247,000 for management,
operations and clerical personnel, as compared to $3,658,000 in 1997 and
$2,753,000 in 1996. The increase in 1997 and 1998 was due primarily to the
compensation of employees of the Century Discount division, who are paid a
salary rather than on a commission basis. The Company also hired additional
trading assistants, compliance and operational personnel.

Clearing costs increased by $653,000 from 1997 to 1998 and decreased by
$117,000 from 1996 to 1997. The dollar increase in 1998 reflects the increased
volume in securities transactions, which carry clearance and floor brokerage
charges. Clearing costs as a percentage of revenues have remained fairly
constant over the period from 1996 to 1998.

Communications and occupancy costs rose by $697,000 in 1998, an increase of
over 37% from 1997. The largest increase in this category is in the area of rent
expense. This is a result of a new master lease agreement effective February
1998, which expanded the Company's facilities. The new seven-year lease, as
amended, covers an aggregate of 32,442 gross rentable square feet at a monthly
rental payment of $52,000 through January 2005. The amended master lease also
contains a six-year renewal option providing for a base rental payment of
approximately $65,000 per month. The continuing increases in communication and
information processing expenses in fiscal 1998 and 1997 reflect the costs of
further enhancement and expansion of the Company's systems of internal
communication and information dissemination, as well as higher general business
volume which gave rise to increased costs for telephone, postage and market data
services.

Legal matters and related costs include payments to defend and settle
customer claims, provisions for pending litigation and general corporate
matters. These costs totaled $2,377,000 in 1998, an increase of 63% over the
prior year.

The Company was a defendant in a civil action relating to FMSC's former
Houston affiliate office that sold mortgage-backed securities to its customers.
The Company settled this claim for $500,000 in June 1998. A similar arbitration
proceeding, which was reserved for in 1998, was settled in early 1999 for
$100,000. The Company either settled or accrued for various other customer
arbitrations throughout 1998, aggregating $750,000.

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

As required by SEC Order, and in an effort to reduce future legal claims
and liabilities, the Company retained an independent consultant to conduct a
review of, and to report and make recommendations as to FMSC's supervisory and
compliance policies and procedures, particularly as they relate to the firm's
affiliate program and the supervision of the firm's branch offices by the main
office. FMSC developed and implemented substantial changes to its supervisory
and compliance policies and procedures, including the development of a
hierarchical regional supervisory structure. As part of this restructuring, FMSC
hired a National Supervisor, appointed three Regional Supervisors for the East,
Central and West Regions, and designated other branch office managers as
Divisional Supervisors. In addition, FMSC revised its recruiting procedures,
developed supervisory compliance materials and held its first
Regional/Divisional Supervisory training program.

Management believes that these measures, along with other planned action,
will assist in the reduction of customer claims. However, there is no assurance
that the Company will be successful in its efforts to reduce such claims in the
future.

During 1997 and 1998, the Company, through its wholly-owned subsidiary
Montauk Advisors Inc., ("MAI"), made various loans to Global Financial Corp.
("Global"). These loans have a balance as of April 15, 1999 of $2,217,000 before
reserves. Global is a lease servicing company that sold leases through MAI.
These loans were made for the purpose of assisting Global in meeting cash flow
deficiencies arising from the nonpayment of scheduled monthly installments on
certain delinquent, canceled and non-performing leases. The loans, some of which
bear interest at 8% per annum and were due at various times during 1998, are
currently in default. The notes are guaranteed by Global, FemCom Systems, Inc.,
("FCS"), Biblio, Inc. ("Biblio") and the shareholder of FCS and Biblio. The
notes are partially collateralized by mortgage liens on real estate owned by the
principal shareholder of FCS and Biblio, a pledge of the shares of Global and
FCS, and various liens on the assets of FCS.

During 1998, the Company undertook a full review of the Global loans to
evaluate their collectability, and determined that, based on various events and
circumstances, including the default status of the loans, the insolvency of
Global and FCS, and steadily declining collections on the lease portfolio
serviced by Global, the loans to Global have been impaired. Accordingly, the
Company has recorded an impairment loss of $1,775,000 in its financial
statements for 1998. This amount reflects management's best estimate of the
extent of the loan impairment based on available current information, including
the amount and value of the collateral.

Other operating expenses increased from $2,094,000 in 1997 to $2,962,000 in
1998. The majority of the $868,000 increase, or $394,000, is the result of
reserves and write-offs of customer unsecured debits and broker receivables.
Advertising and business development costs increased by $139,000 in 1998. The
increase reflects the Company's continued use of advertising and marketing
campaigns to attract registered representatives to affiliate program. The
Company expects advertising and business development costs to increase with
respect to the promotion of its new discount brokerage division, Century
Discount Investments.
<PAGE>
19

The Company's effective tax rate in 1998 and 1997 was (18)% and 40%,
respectively. The rate in 1998 is lower than expected because of management's
decision to reduce the future tax benefits available from net operating loss
carryforwards and other deferred tax assets by recording a valuation allowance
of $731,000 in the 1998 Statement of Operations. The decision was based on
uncertainties regarding the resolution of various pending legal claims and the
previously discussed Global matter. Offsetting these concerns in part is
management's favorable view of market conditions in 1999, and the settlement of
practically all claims related to the Houston office.

The Company's record revenues were achieved as a result of the combination
of a robust economy and favorable investment climate in the United States, and
the addition of new affiliated registered representatives during 1998. In
expectation of future revenue growth, the Company is continuing to invest in its
infrastructure. This investment includes expansion of its corporate
headquarters, development of new marketing and advertising campaigns,
acquisition of a new data management system, and the hiring of additional legal,
trading and compliance personnel.

Despite continued strong revenue growth, the Company's performance was
again negatively impacted by costs totaling $ 2,377,000 to defend and settle
various legal matters during 1998, as well as the write-down of a note
receivable from Global Financial Corp. of $1,775,000. These costs, in large
part, accounted for the net loss of $2,763,000 suffered by the Company for
fiscal 1998.

Liquidity and Capital Resources

The Company maintains a highly liquid balance sheet with more than 50% of
the Company's assets consisting of cash and cash equivalents, securities owned,
and receivables from the Company's clearing firm and other broker-dealers.
Market making and other securities dealer activities require the Company to
carry significant levels of securities inventories in order to meet customer and
internal trading needs. The balances in the Company's cash, inventory and
clearing firm accounts can and do fluctuate significantly from day to day,
depending on market conditions, daily trading activity, and investment
opportunities. The Company monitors these accounts on a daily basis in order to
ensure compliance with regulatory capital requirements and to preserve
liquidity.

Operating activities used cash of $378,000 during 1998. Inventory positions
of securities held by the Company decreased by $924,000, while securities sold
but not yet purchased decreased by $482,000. Loan reserves, specifically the
reserve against Global loans, increased by $1,775,000.

In 1998 and 1997, the Company realized tax benefits of $116,000 and
$723,000, respectively, related to the exercise of stock options during the
fiscal year. (See Notes to the consolidated financial statements). These tax
benefits are available to reduce actual corporate tax liabilities. Under
applicable accounting rules, such benefits are reported as an increase in
stockholders' equity rather than as an item of income.

Investing activities required cash of $1,847,000 during the year. Additions
to capital expenditures consumed $986,000, most of which was for the renovation
of the newly acquired lease space at the headquarters complex. The remainder of
capital expenditures were for the purchase of new computers to support the
Company's upgraded and enhanced market data services, office furniture and
equipment for the home office expansion and the development of the sales
tracking and operations management system. The Company projects 1999
expenditures for technology and other capital needs to be approximately
$600,000.

Net amounts advanced to brokers and affiliates increased by $329,000 to
$598,000. The increase is attributable to loans to new affiliates as an
inducement to join the Company, advances to employees, and receivables from
brokers as a result of trading losses and customer debits which are broker
obligations.
<PAGE>
20

MAI made loans to Global, net of repayments, of $1,497,000 in 1998, and
additional net loans to Global of $176,000 to date in 1999. The Company is
reevaluating its continued financial support of Global through loan advances,
and is attempting to formulate a final resolution of the Global leases in order
to minimize further economic losses. There can be no assurance that the Company
will not incur significant expenditures in respect to this matter in the future.
(See Notes to Consolidated Financial Statements and Recent Developments in
Business Section)

Financing activities provided cash of $2,049,000 in 1998. In March 1998 the
Company received gross proceeds of $1,383,000 from the offering of 3,072,779
units; each unit consisting of one Class A Warrant, one Class B Warrant and one
Class C Warrant exercisable at various prices over the next six years. Should
the market price of the Company's common stock increase to the level where any
or all of the classes or a portion of the classes of warrants become
exercisable, the Company will obtain additional proceeds from the exercise of
the warrants. An additional $347,000 was received from the exercise of 432,050
stock options by various individuals during the year. In October 1998, the
Company issued a series of Convertible Promissory Notes aggregating $570,000 to
a private investor in consideration of $300,000 in cash and an income stream
from equipment lease investments with a remaining balance of approximately
$270,000. The notes carry interest at the rate of 10% per annum, payable
semi-annually, and are convertible into a maximum of 380,000 shares of the
Company's Common Stock at the rate of $1.50 per share. The notes mature in five
years; however, the Company is required to pay 20% of the original outstanding
principle amount into a sinking fund on or before each annual anniversary date
of the Notes. The equipment lease investments are serviced by Global and were
originally sold to investors through MAI. The Company has recorded a loan
discount of $99,899, representing the difference between the note principal of
$570,000, and the cash received plus the estimated discounted payment stream
from the leases. The discount is being amortized over the term of the notes.

The Company has various bank notes totaling $244,844. These notes bear
interest at the prime rate (7.75% at December 31, 1998), and are collateralized
by equipment owned by the Company. Principal payments are scheduled as follows:
1999 - $95,925, 2000 - $95,925, and 2001 - $52,944.

In 1998, the Company entered into a capital lease arrangement with Sun Data
to acquire new equipment costing $88,000 and to refinance through a
sale/leaseback transaction existing fixed assets with a book value of
approximately $340,000. The net cash received by the Company as a result of this
transaction was approximately $270,000.

At December 31, 1998, the Company's broker-dealer subsidiary had net
capital of $1,669,000, which was $1,419,000 in excess of its required net
capital of $250,000, and the ratio of aggregate indebtedness to net capital was
2.17 to 1.

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

Purchase Commitments

In 1997, the Company entered into a three-year agreement with a long
distance carrier under which the Company has committed to pay minimum annual
charges of $300,000 in each of the three contract years, in consideration of
favorable rates on telephone and data communications service during the
commitment period.
<PAGE>
21

Year 2000 Issue

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

The Company has reviewed its compliance with what has come to be known as
the Year 2000 Issue ("Y2K"). The Company does not create or develop its own
proprietary computer programs. Rather, it is reliant on outside vendors or
providers for verification of the compliance of their applications, which are
utilized by the Company. The Company has currently identified 17 programs and
applications that were purchased/licensed by the Company for various departments
as mission critical systems requiring compliance with Y2K. We have requested
each vendor to supply verification that the program and/or application utilized
by the firm is, or will be, Y2K compliant before the Year 2000.

The most significant of these outside vendors is the Company's clearing
firm, Schroder & Co., Inc. Schroder & Co. has been mandated by the NYSE to
participate in industry testing of all computer interfaces relating to
securities processing. These tests have been ongoing since early Spring 1999. To
date, the Company has not been advised of any problems relating to the clearing
firm's compliance with Y2K readiness. The Company voluntarily agreed to
participate with Schroder in point to point testing of the interfaces and
applications provided by them. We anticipate that such tests will be completed
by August 31, 1999.

The Company has designated an individual within the organization to
coordinate the Y2K compliance issues and to communicate with each software and
service provider, to ensure Y2K compliance before the turn of the century. While
management has not finalized an estimate of the cost of internal system
modifications, it does not believe that these costs will have a material impact
on the Company's operations in fiscal 1999.

In addition, FMSC inventoried its computer and systems operations that
could be affected by Y2K issues, including steps to remediate systems requiring
such attention. This has included a review of our facilities, office equipment,
telecommunications systems, market data services and third-party products and
services used by our company, and retention of consultants, where necessary.
During February, 1999, FMSC issued a letter to securities account clients
reporting on the progress of its Y2K readiness program. The Company is working
to take the necessary steps to ensure, as far as practicable, that the firm's
systems will function without interruption after the millennium change. FMSC
expects to continue its evaluation process relating to contingency planning.

FMSC, as a registered broker-dealer and investment adviser, is required to
and has made required filings with various regulatory authorities concerning the
status of its preparedness progress for Y2K compliance. FMSC has also contracted
with an independent public accounting firm to conduct a special Y2K audit and to
complete its report prior to April 30, 1999. Such report is required pursuant to
applicable SEC and NASD rules and regulations.
<PAGE>
22

Impact of Inflation and Other Factors

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

Factors Affecting "Forward-Looking Statements"

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

Recently Issued Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for all derivative instruments.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial position or results of operations.

<PAGE>
23

Item 8. Financial Statements

See Financial Statements attached hereto.

Item 9. Disagreements on Accounting and Financial Disclosure

Not Applicable.

<PAGE>
24

PART III

Item 10. Directors and Executive Officers

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

Name Age Position

Herbert Kurinsky 67 Director, President and Chief Executive
Officer of FMFC and of FMSC and
Registered Options Principal of FMSC

William J. Kurinsky 38 Director, Vice President, Chief Operating
and Chief Financial Officer and Secretary
of FMFC and of FMSC and Financial/Operations
Principal of FMSC

Robert I. Rabinowitz, Esq. 41 General Counsel, FMFC, Chief Administrative
Officer, Vice President and General
Securities Principal of FMSC

Norma Doxey 59 Director, VP of Operations, FMSC

Ward R. Jones, Jr. 68 Director

David I. Portman 58 Director

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

All officers serve at the discretion of the Board of Directors. Family
relationships exist among the following officers and directors: Mr. Herbert
Kurinsky is the uncle of Mr. William J. Kurinsky. Mr. Robert I. Rabinowitz is
the brother-in-law of Mr. William J. Kurinsky.
<PAGE>
25

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

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

Robert I. Rabinowitz, Esq. is General Counsel of the Company since 1987. He
concurrently served as General Counsel of First Montauk Securities from 1986
until 1998 when a new general counsel was named. Thereafter, he became the Chief
Administrative Officer of FMSC as well as a General Securities Principal. From
January 1986 until November 1986, he was an associate attorney for Brodsky,
Greenblatt & Renahan, a private practice law firm in Rockville, Maryland. Mr.
Rabinowitz is an attorney at law licensed to practice in New Jersey, Maryland
and the District of Columbia, and is a member of the Board of Arbitrators for
the National Association of Securities Dealers, Department of Arbitration.
Mr. Rabinowitz's wife is a neice of Mr. Herbert Kurinsky and a sister of Mr.
William Kurinsky.

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

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

David I. Portman has been a director of the Company since June 15, 1993.
From 1978 to the present, Mr. Portman served as the President of Triad Property
Management, Inc., a private corporation which builds, invests in and manages
real estate properties in the State of New Jersey. Mr. Portman was a Director of
Ultra Med, Inc. from 1986 to 1991, a high tech medical equipment manufacturer.
Mr. Portman also serves as a director and officer of Pacific Health
Laboratories, Inc., a position he has held since August 1995. In 1997, FMSC
underwrote an initial public offering of the common stock of Pacific Health
Laboratories, Inc., and is currently a market maker in the stock.

<PAGE>
26

Significant Employees

Mark D. Lowe, 40, has been President of Montauk Insurance Services, Inc.
since October 1998. From 1982 to 1998 Mr. Lowe was a Senior Consultant with
Congilose & Association, a financial services firm specializing in insurance and
estate planning. Mr. Lowe became a Certified Financial Planner (CFP) in July
1991. Mr. Lowe attended Ocean County College in Toms River, NJ. Mr. Lowe is the
Treasurer of the Estate and Financial Planning Council of Central New Jersey.

Seth Rosen, 46, has been President of Century Discount Investments since
September 1998. From December 1997 to June 1998, Mr. Rosen served as an
executive consultant with Cowen & Co. From 1994 to 1997, Mr. Rosen served as a
Managing Director of National Discount Brokers, a division of Sherwood
Securities.

Certain Reports

No person who, during the fiscal year ended December 31, 1998, was a
Director, officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only class of securities of the Company registered
under Section 12 of the Securities Exchange Act of 1934 (the "Act") (a
"Reporting Person") failed to file on a timely basis, reports required by
Section 16 of the Act during the most recent fiscal year or prior years. The
foregoing is based solely upon a review by the Company of Forms 3 and 4 during
the most recent fiscal year as furnished to the Company under Rule 16a-3(d)
under the Act, and Forms 5 and amendments thereto furnished to the Company with
respect to its most recent fiscal year, and any representation received by the
Company from any reporting person that no Form 5 is required.

Item 11. Executive Compensation
----------------------

Summary of Cash and Certain Other Compensation

The following provides certain information concerning all Plan and Non-Plan
(as defined in Item 402 (a)(ii) of Regulation S-K) compensation awarded to,
earned by, paid or accrued by the Company during the years ended December 31,
1998, 1997 and 1996 to each of the named executive officers of the Company.

SUMMARY COMPENSATION TABLE

Annual Compensation Long Term
Compensation

Securities
Underlying
Name & Principal Other Annual Options/ SARs
Position Year Salary Bonus Compensation Granted(1)

Herbert Kurinsky 1998 $175,000 $ 0 $ 10,096(2) 100,000
Chairman, Chief 1997 $168,269 $ 0 $ 2,724(2) 50,000
Executive Officer (3) 1996 $175,000 $ 40,000 $ 41,072(2) 0

William J. Kurinsky 1998 $175,000 $ 0 $ 10,221(4) 100,000
Vice President, 1997 $158,173 $ 0 $ 1,534(4) 75,000
Chief Operating and 1996 $175,000 $ 0 $ 11,884(4) 0
Financial Officer
and Secretary (5)

Robert I. Rabinowitz 1998 $125,000 $15,000 $ 295(6) 100,000
General Counsel, FMFC, 1997 $111,154 $10,000 $ 5,676(6) 75,000
Chief Administrative 1996 $100,000 $ 5,000 $ 383(6) 0
Officer, FMSC (7)
<PAGE>
27

1) In 1997, the Board of Directors authorized a grant to purchase 50,000,
75,000 and 75,000 shares of the Company's Common Stock each to Herbert Kurinsky,
William J. Kurinsky and Robert I. Rabinowitz at exercise prices of $.96, $1.05
and $1.0625, respectively. These options have vested and are exercisable until
January 14, 2002. In 1998, the Board of Directors authorized an additional grant
to purchase 100,000 shares at exercise prices of $1.9375, $2.13 and $1.9375 to
Herbert Kurinsky, William J. Kurinsky and Robert I. Rabinowitz, respectively.
See "Aggregated Options/Sar Exercises in Last Fiscal Year and Fy-End Option/Sar
Values."

2) Includes (i) for 1998, vacation pay of $10,096; (ii) for 1997,
commissions of $2,724; (iii) for 1996, an automobile allowance of $7,512,
commissions of $10,512, dues of $7,440 and loan forgiveness of $15,606.

3) Mr. Herbert Kurinsky is the beneficial owner of 1,518 shares of the
Company's Common Stock as of December 31, 1998, which shares had a market value
of $2,182 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.

4) Includes: (i) for 1998, commissions of $125 and vacation pay of $10,096;
(ii) for 1997, commissions of $1,534; (ii) for 1996, loan forgiveness in the
amount of $11,884.

5) Mr. William Kurinsky is the beneficial owner of 1,348,423 shares of the
Company's Common Stock as of December 31, 1998, which shares had a market value
of $1,938,358 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.

6) Includes commissions of $295 in 1998; (ii) $5,676 for 1997, (iii) $383
for 1996.

7) Mr. Robert I. Rabinowitz is the beneficial owner of 2,500 shares of the
Company's Common Stock as of December 31, 1998, which shares had a market value
of $3,594 as of that date, without giving effect to the diminution in value
attributable to the restriction on said shares.

Compensation of Directors

The Company pays directors, who are not employees of the Company, a
retainer of $250 per meeting of the Board of Directors attended and for each
meeting of a committee of the Board of Directors not held in conjunction with a
Board of Directors meeting. Directors employed by the Company are not entitled
to any additional compensation as such. During fiscal year 1998, the Board of
Directors met on three occasions and all directors were present.

Committees of the Board of Directors

The Board of Directors has established an Audit Committee comprised of Ward
R. Jones and David Portman. The Audit Committee met on 1 occasion during fiscal
year 1998. The Audit Committee reviews (i) the Company's audit functions, (ii)
the finances, financial condition, and interim financial statements of the
Company with management, and (iii), the year end financial statements of the
Company with the Company's independent auditors. Members of the Audit Committee
do not receive additional compensation for such service.

<PAGE>
28

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table contains information with respect to the named
executive officers concerning options granted during the year ended December 31,
1998

INDIVIDUAL GRANTS

Number of % of Total
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted(#) Fiscal Year Price ($Sh) Date

Herbert Kurinsky 100,000 7.2% $1.9375 8/02/03
William J. Kurinsky 100,000 7.2% $2.13 8/02/03
Robert I. Rabinowitz 100,000 7.2% $1.9375 8/02/03

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

Value of
Shares Number of Unexercised
Acquired Unexercised In-the-money
on Value Options as of Options at
Name Exercise Realized December 31,1998 December 31,1998(1)
- ---- -------- -------- ---------------- -------------------
Exercisable Exercisable
/Unexercisable /Unexercisable
Herbert Kurinsky -- $0 390,000/0 $ 560,625/$0
William J. Kurinsky 200,000 $550,000 415,000/0 $ 596,563/$0
Robert I. Rabinowitz -- $0 230,000/0 $ 330,625/$0

(1) Based upon the closing bid price of the Company's Common Stock on
December 31, 1998 ($1.4375 per share), less the exercise price for the aggregate
number of shares subject to the options.

Employment Agreements

In January 1996, the Company entered into new three-year employment
contracts with Herbert Kurinsky, as President and William J. Kurinsky, as
Executive Vice President. The contracts provide for base salaries of $175,000
for the first year of the agreement for each, increasing in each case at the
rate of 10% per year. Each will also be entitled to receive a portion of a bonus
pool consisting of 10% of the pre-tax profits of the Company, to be determined
by the executive management (e.g. Herbert Kurinsky and William J. Kurinsky). The
bonus pool would require a minimum of $500,000 pretax profit per year in order
to become effective. The agreements have been renewed for an additional year.
Each is also entitled to receive commissions at the same rate as paid to other
non-affiliate registered representatives of the Company. They are also entitled
to purchase from FMSC, up to 20% of all underwriters and/or placement agent
warrants or options which are granted to FMSC upon the same price, terms and
conditions afforded to FMSC as the underwriter or placement agent. Each employee
also receives health insurance benefits and life insurance as generally made
available to regular full-time employees of the Company, and reimbursement for
expenses incurred on behalf of the Company and the use of an automobile, or in
the alternative, an automobile allowance. The contracts also provide for
severance benefits equal to three times the previous year's salary in the event
either of the employees is terminated or their duties significantly changed
after a change in management of the Company as defined in the agreement.
<PAGE>
29

Incentive Stock Option Plan

In September 1992, the Company adopted the 1992 Incentive Stock Option Plan
(the "1992 Plan"). The 1992 Plan provided for the grant of options to purchase
up to 2,000,000 shares of the Company's Common Stock and is intended for
employees of the Company and consultants. In June 1998, the Company's
shareholders approved an amendment to the 1992 Plan (the "Amended Plan") to
increase the number of shares reserved for issuance from 3,500,000 to 6,000,000.
Under the terms of the Amended Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISOs").

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

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

The Board or the Stock Option Committee, as the case may be, may, in its
sole discretion, grant bonuses or authorize loans to or guarantee loans obtained
by an optionee to enable such optionee to pay any taxes that may arise in
connection with the exercise or cancellation of an option. Unless sooner
terminated, the Amended Plan will expire in 2006. To date, options to purchase a
total of 4,156,500 shares of the Company's Common Stock have been issued under
the Amended 1992 Plan.

Director Plan

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

In June 1996, the Company's shareholders approved an amendment to the
Non-Executive Director Stock Option Plan to provide for the elimination of
non-discretionary stock grants to members of any advisory board established by
the Company. An eligible member of an advisory board may receive an option to
purchase shares of the Company's Common Stock under the Director Plan as
provided for in the discretion of the Company's Board of Directors.
<PAGE>
30

The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. Until
otherwise provided in the Stock Option Plan the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of Common Stock of the Company or a combination of
both. The term of each option commenced on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non-executive director will receive options or the number of shares subject to
the option, the term of the option or the exercisability of the option. However,
the Committee will make all determinations of the interpretation of the Director
Plan. Options granted under the Director Plan are not qualified for incentive
stock option treatment. To date, a total of 180,000 options have been granted to
the Company's Non-Executive members of the Board of Directors.

Senior Management Plan

In 1996, the Company adopted the 1996 Senior Management Incentive Plan (the
"Management Plan"). The Management Plan provides for the issuance of up to
2,000,000 shares of Common Stock either upon issuance of options issued under
the Plan or grants of restricted stock or incentive stock rights. Awards may be
granted under the Management Plan to executive management employees by the Board
of Directors or a committee of the board, if one is appointed for this purpose.
The Management Plan provides for four types of awards: stock options, incentive
stock rights, stock appreciation rights ("SARs"), and restricted stock purchase
agreements. The stock options granted under the Management Plan can be either
ISOs or non-lSOs similar to the options granted under the Employee Stock Option
Plan, except that the exercise price of non-lSOs shall not be less than 85% of
the fair market value of the Common Stock on the date of grant. Incentive stock
rights consist of incentive stock units equivalent to one share of Common Stock
in consideration for services performed for the Company. If services of the
holder terminate prior to the incentive period, the rights become null and void
unless termination is caused by death or disability. Stock appreciation rights
allow a Grantee to receive an amount in cash equal to the difference between the
fair market value of the stock and the exercise price, payable in cash or shares
of Common Stock. The Board or committee may grant limited SARs, which become
exercisable upon a "change of control" of the Company. A change of control
includes the purchase by any person of 25% or more of the voting power of the
Company's outstanding securities, or a change in the majority of the Board of
Directors.

Awards granted under the Management Plan are also entitled to certain
acceleration provisions that cause awards granted under the Plan to immediately
vest in the event of a change of control or sale of the Company. Awards under
the Management Plan may be made until 2006. To date the Company has granted a
total of 1,185,000 options under the Senior Management Plan.
<PAGE>
31

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

The following table sets forth, as of April 14, 1999, the number and
percentage of outstanding shares of Common Stock beneficially owned by each
person known by the Company to own beneficially more than 5% of the Company's
outstanding shares of Common Stock and Common Stock Warrants, by each director
of the Company, and by all directors and officers of the Company as a group.

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

Herbert Kurinsky 391,518(2) 3.8%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

William J. Kurinsky 1,773,423(3) 16.6%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

Robert I. Rabinowitz, Esq. 286,999(4) 2.8%
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

Ward R. Jones 90,000(5) *
7 Leda Lane
Guilderland, NY 12084

Norma Doxey 42,400(6) *
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, NJ 07701

David I. Portman 179,800(7) 1.8%
300 Ocean Avenue, Apt. 6A
Long Branch, NJ 07740

All Directors and 2,764,140(2-7) 23.9%
Officers as a group
(7 persons in number)

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

(2) Includes vested and presently exercisable options of Mr. Herbert
Kurinsky to purchase 390,000 shares of Common Stock.

(3) Includes vested and presently exercisable options of Mr. William J.
Kurinsky to purchase 415,000 shares of Common Stock, and 120,000 Class A
Warrants, 120,000 Class B Warrants and 120,000 Class C Warrants.

(4) Includes 265,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options, 35,000 of which are
owned by Mr. Rabinowitz's wife, of which he disclaims beneficial ownership, and
2,000 shares are owned by his children. Mr. Rabinowitz also owns 5,833 Class A
Warrants, 5,833 Class B Warrants and 5,833 Class C Warrants.
<PAGE>
32

(5) Includes 90,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options.

(6) Includes 35,000 shares of Common Stock reserved for issuance upon the
exercise of 25,000 vested and presently exercisable stock options and 10,000
shares non-vested stock options.

7) Includes 80,000 shares of Common Stock reserved for issuance upon the
exercise of vested and presently exercisable stock options, 16,600 Class A
Warrants, 16,600 Class B Warrants and 16,600 Class C Warrants.

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

Item 13. Certain Relationships and Related Transactions

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

<PAGE>
33

PART IV

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

(A) 1. Financial Statements
--------------------

See Financial Statements Attached Hereto.

2. Exhibits
--------

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

(B) Reports on Form 8-K
-------------------

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

<PAGE>
34

SIGNATURES

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

FIRST MONTAUK FINANCIAL CORP.

By /s/ Herbert Kurinsky
-----------------------------
Herbert Kurinsky, President
Dated: April 15, 1999

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

/s/ Herbert Kurinsky April 15, 1999
- -------------------------------
Herbert Kurinsky
President, Chief Executive
Officer and Director

/s/ William J. Kurinsky
- ------------------------------- April 15, 1999
William J. Kurinsky
Vice-President, Chief Operating
and Chief Financial Officer, and
Principal Accounting Officer,
Secretary and Director

/s/ Norma Doxey April 15, 1999
- -------------------------------
Norma Doxey, Director

/s/ Ward R. Jones, Jr.
- ------------------------------- April 15, 1999
Ward R. Jones, Jr., Director

/s/ David I. Portman
- ------------------------------- April 15, 1999
David I. Portman, Director

<PAGE>
35

EXHIBITS INDEX

The exhibits designated with an asterisk (*) have previously been filed
with the Commission in connection with the Company's Registration Statement on
Form S-l, File No. 33-24696, those designated (**) have been filed with the
Company's Form 10-KSB for the fiscal year ended December 31, 1993, those
designated (***) have been previously filed with the Company's Registration
Statement on Form S-3, File No. 33-65770, and pursuant to 17 C.F.R. Sections
201.24 and 240.12b-32, are incorporated by reference to the document referenced
in brackets following the description of such exhibits. Those designated (****)
denotes exhibits which have been filed with the Company's Form 10-KSB for the
fiscal year ended December 31, 1994. Those designated (******) denotes exhibits
which have been filed with the Company's Proxy Statement dated May 30, 1996.
Those designated (*******) denotes exhibits which have been filed with the
Company's Form 10-KSB for the fiscal year ended December 31, 1996. Those
designated (********) denotes exhibits which have been filed with the Company's
Form 10-K for the fiscal year ended December 31, 1997, and (++) denotes exhibits
filed herewith.

Exhibit No. Description

3.1* Amended and Restated Certificate of Incorporation adopted at
1989 Special Meeting in lieu of Annual Meeting of Shareholders.

3.2* Amended and Restated By-Laws.

4.1* Form of Common Stock Certificate.

4.4* Form of Underwriter's Warrant.

10.7* Sublease between Prime Asset Management Corp. and the Registrant
dated December 6, 1989.

10.8* Clearing Agreement between the Registrant and Wertheim Schroder
& Co., Incorporated dated January 21, 1991.

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

10.11*** Employment Agreement between First Montauk Financial Corp. and
Herbert Kurinsky dated January 1, 1993.

10.12*** Employment Agreement between First Montauk Financial Corp. and
William Kurinsky dated January 1, 1993.

10.13*** Lease Agreement between First Montauk Securities Corp. and River
Office Equities dated September 7, 1993.

10.14**** Lease Addendum Agreement between First Montauk Securities Corp.
and River Office Equities dated June 21, 1994.

10.15***** Sublease Agreement between First Montauk Securities Corp.
and Pilot Laboratories, Inc. dated September 19, 1995, and
Master Lease Agreement between River Office Equities and Pilot
Laboratories, Inc. dated August 31, 1987.

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

10.17******* Office Lease Agreement between First Montauk Securities Corp.
and River Office Equities dated March 5, 1997.
<PAGE>
36

10.18++ Employment Agreement between First Montauk Securities Corp. and
Mark Lowe dated October 15, 1998.

10.19++ Employment Agreement between First Montauk Securities Corp. and
Seth Rosen dated January 25, 1999.

27++ Financial Data Schedule

28.1* 1992 Incentive Stock Option Plan.

28.2* 1992 Non-Executive Director Stock Option Plan.

28.3****** Amended and Restated 1992 Incentive Stock Option Plan.

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

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

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

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

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

<PAGE>
37

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
First Montauk Financial Corp.

We have audited the accompanying consolidated statements of financial
condition of First Montauk Financial Corp. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Montauk Financial Corp. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.

Schneider Ehrlich & Associates LLP
(successor to Schneider Ehrlich & Wengrover LLP)

Jericho, New York
March 17, 1999

<PAGE>

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

December 31,
1998 1997

ASSETS

Cash $ 613,513 $ 789,883
Due from clearing firm 2,876,202 2,707,782
Securities owned, at market 2,685,879 3,150,772
Securities owned, not readily marketable, at
estimated fair value 47,381 506,732
Commissions receivable 250,803 246,250
Employee and broker receivables 598,212 927,195
Furniture, equipment and leasehold
improvements - net 2,074,470 1,357,854
Notes receivable 477,729 938,054
Due from officers 131,501 146,691
Other assets 1,087,289 1,164,753
Deferred tax assets - net 700,755 35,968
---------- ----------
Total assets $11,543,734 $11,971,934
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Securities sold, but not yet purchased,
at market $ 327,047 $ 809,523
Notes payable - bank 244,844 340,769
Subordinated notes payable 200,000 250,000
Convertible promissory notes payable 473,625 --
Commissions payable 1,531,644 1,624,316
Accounts payable 802,497 501,267
Accrued expenses 905,154 812,590
Capitalized lease payable 373,579 --
Other liabilities 461,717 394,002
--------- ---------
Total liabilities 5,320,107 4,732,467
--------- ---------

Common stock issued with guaranteed
selling price - no par value, 18,000
and 173,000 shares issued and
outstanding, respectively 36,500 346,500

Commitments and contingencies (See Notes)

STOCKHOLDERS' EQUITY

Preferred Stock, 5,000,000 shares authorized,
$.10 par value, no shares issued and
outstanding -- --
Common Stock, no par value, 30,000,000 shares
authorized, 9,801,493 and 9,198,444 shares
issued and outstanding, respectively 4,980,977 4,334,173
Additional paid-in capital 2,979,831 1,173,437
Retained earnings (accumulated deficit) (1,192,471) 1,570,376
Less: Deferred compensation (581,210) (185,019)
-------- --------
Total stockholders' equity 6,187,127 6,892,967
--------- ---------

Total liabilities and stockholders'
equity $11,543,734 $11,971,934
=========== ===========

See notes to consolidated financial statements.

<PAGE>

FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,
1998 1997 1996
Revenues:

Commissions $30,741,404 $27,018,244 $25,749,690
Principal transactions 8,795,599 7,257,576 7,660,700
Investment banking 767,312 1,433,100 634,329
Insurance recovery -- 650,000 --
Interest and other income 1,572,063 1,383,713 1,044,969
--------- --------- ---------

41,876,378 37,742,633 35,089,688
---------- ---------- ----------

Costs and expenses:

Commissions, employee compensation
and benefits 31,766,060 26,785,205 25,428,184
Clearing and floor brokerage 3,674,859 3,021,709 3,139,142
Communications and occupancy 2,557,313 1,860,350 1,662,936
Legal matters and related costs 2,377,336 1,452,001 2,731,997
Write-down of Note Receivable
- Global Financial Corp. 1,775,000 -- --
Other operating expenses 2,961,974 2,093,670 2,006,615
Interest 131,215 84,695 105,772
--------- --------- ---------

45,243,757 35,297,630 35,074,646
---------- ---------- ----------

Income (loss) before income taxes (3,367,379) 2,445,003 15,042

Income taxes (tax benefit) (604,532) 968,178 (17,747)
-------- ------- -------

Net income (loss) $(2,762,847) $ 1,476,825 $ 32,789
=========== =========== ===========
Per share of Common Stock:

Basic $ (0.28) $ .17 $ .01
=========== =========== ===========

Diluted $ (0.28) $ .14 $ .01
=========== =========== ===========

Number of common shares used in
basic earnings per share 9,725,116 8,788,734 7,767,224
Incremental shares from assumed
conversion of options -- 1,562,298 856,314
--------- --------- ---------

Number of common shares used in
diluted earnings per share 9,725,116 10,351,032 8,623,538
========= ========== =========

See notes to consolidated financial statements.

FIRST MONTAUK FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1996 TO DECEMBER 31, 1998

Retained
Additional Earnings
Common Stock Paid-in (Accumulated Treasury Stock Deferred Stockholders'
Shares Amount Capital Deficit) Shares Amount Compensation Equity
------ ------ ------- ------------ -------- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Balances at January 1, 1996 7,920,106 $3,320,012 $ 220,172 $ 60,762 -- $ -- $ -- $ 3,699,946

Exercise of stock options 137,375 89,611 -- -- -- -- -- 89,611
Tax benefit related to exercise
of stock options -- -- 23,789 -- -- -- -- 23,789
Repurchase of common stock -- -- -- -- (196,802) (230,506) -- (230,506)
Shares issued to settle legal claims 165,000 178,650 -- -- -- -- -- 178,650
Net income for the year -- -- -- 32,789 -- -- -- 32,789
--------- --------- ------- ------ ------- ------- ------ ---------
Balances at December 31, 1996 8,222,481 3,588,273 243,961 93,551 (196,802) (230,506) -- 3,695,279

Exercise of stock options 973,025 662,754 -- -- -- -- -- 662,754
Exercise of common stock
purchase warrants 150,000 187,500 -- -- -- -- -- 187,500
Deferred compensation -- -- 206,871 -- -- -- (206,871) --
Amortization of deferred
compensation -- -- -- -- -- -- 21,852 21,852
Cancellation of shares held
in treasury (196,802) (230,506) -- -- 196,802 230,506 -- --
Sale of restricted stock 12,240 23,027 -- -- -- -- -- 23,027
Transfer from temporary equity 37,500 103,125 -- -- -- -- -- 103,125
Tax benefit related to exercise
of stock options -- -- 722,605 -- -- -- -- 722,605
Net income for the year -- -- -- 1,476,825 -- -- -- 1,476,825
--------- --------- --------- --------- ------- ------- ------- ---------
Balances at December 31, 1997 9,198,444 4,334,173 1,173,437 1,570,376 -- -- (185,019) 6,892,967

Proceeds from rights offering -- -- 1,382,751 -- -- -- -- 1,382,751
Registration costs -- -- (236,317) -- -- -- -- (236,317)
Exercise of stock options 432,050 342,419 -- -- -- -- -- 342,419
Exercise of common stock
purchase warrants 999 4,995 -- -- -- -- -- 4,995
Deferred compensation -- -- 544,179 -- -- -- (544,179) --
Amortization of deferred compensation -- -- -- -- -- -- 147,988 147,988
Transfer from temporary equity 170,000 299,390 -- -- -- -- -- 299,390
Tax benefit related to exercise of
stock options -- -- 115,781 -- -- -- -- 115,781
Net loss for the year -- -- -- $(2,762,847) -- -- -- (2,762,847)
--------- --------- -------- ---------- ------ ------- -------- ---------
Balances at December 31, 1998 9,801,493 $4,980,977 $2,979,831 $(1,192,471) -- $ -- $(581,210) $ 6,187,127
========= ========== ========== =========== ====== ======= ========= ==========

See notes to consolidated financial statements.
</TABLE>

<PAGE>

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

Years ended December 31,
1998 1997 1996

INCREASE (DECREASE) IN CASH

Cash flows from operating activities:
Net income (loss) $(2,762,847) $1,476,825 $ 32,789
----------- --------- --------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Common stock issued with
guaranteed selling price 30,000 28,125 421,500
Shares issued to settle legal claims -- - 178,650
Tax benefit related to exercise of
stock options 115,781 722,605 23,789
Depreciation and amortization 357,831 348,508 272,050
Amortization of deferred
compensation 147,988 21,852 --
Amortization of bond discount 3,524 -- --
Loan reserves 1,775,000 69,000 --
Payment of common stock guarantees (40,610) -- --
Other 22,000 -- --
Increase (decrease) in cash
attributable to changes in assets
and liabilities:
Due from clearing firm (168,420) (842,357) (4,171,457)
Securities owned - at market 464,893 (1,021,337) 4,985,072
Securities owned - not readily
marketable 459,351 (506,732) --
Commissions receivable (4,553) (89,837) 227,455
Other assets 22,224 (532,728) (338,846)
Deferred income taxes (664,787) 516,200 (182,995)
Securities sold but not yet
purchased (482,476) 681,896 (38,755)
Commissions payable (92,672) 72,098 85,028
Income taxes payable -- -- (621,690)
Accounts payable 301,229 12,570 105,385
Accrued expenses 70,564 (749,307) 419,782
Other liabilities 67,715 213,486 (315,240)
--------- ---------- ---------
Total adjustments 2,384,582 (1,055,958) 1,049,728
--------- ---------- ---------
Net cash provided by (used in)
operating activities (378,265) 420,867 1,082,517
-------- ---------- ---------

Cash flows from investing activities:
Due from officers 15,190 25,287 (16,454)
Employee and broker receivables 328,983 (185,592) (384,078)
Issuance of notes receivable (2,091,704) (788,414) --
Collection of notes receivable 777,029 11,360 52,000
Purchase of stock in ECM -- -- (60,000)
Sale of stock in ECM -- -- 36,000
Capital expenditures (986,315) (534,005) (668,314)
Other assets 109,344 15,087 (87,460)
---------- --------- ---------
Net cash used in investing
activities (1,847,473) (1,456,277) (1,128,306)
---------- ---------- ----------

Cash flows from financing activities:
Proceeds from notes payable 300,000 -- 479,625
Payments of notes payable (145,925) (117,536) (68,864)
Proceeds from capital lease
financing 304,068 -- --
Issuance of common stock -- 23,027 --
Repurchase of common stock -- -- (230,506)
Payments of capitalized lease
payable (18,621) -- --
Proceeds from rights offering 1,382,751 -- --
Registration costs (120,320) -- --
Proceeds from exercise of common
stock options and warrants 347,415 850,254 89,611
--------- ---------- ---------
Net cash provided by financing
activities 2,049,368 755,745 269,866
--------- ---------- ---------
Net increase (decrease) in cash (176,370) (279,665) 224,077
Cash at beginning of year 789,883 1,069,548 845,471
--------- ---------- ---------
Cash at end of year $ 613,513 $ 789,883 $1,069,548
========== ========== =========

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

(continued)

Supplemental disclosures of cash flow
information:
Cash paid (refunded) during the
period for:
Interest $ 131,215 $ 84,695 $ 105,772
Income taxes $ (223,871) $ (203,480) $ 1,019,242

Debt issued in exchange for lease
investment $ 170,101 -- --

Equipment financed under capital
lease $ 88,132 -- --

Transfer of temporary equity to
permanent capital $ 340,000 $ 103,125 --

See notes to consolidated financial statements.

<PAGE>

NOTE 1 - NATURE OF BUSINESS

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

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

The Company also has two other wholly-owned subsidiaries, Montauk Insurance
Services, Inc. ("MISI") and Montauk Advisors, Inc. ("MAI"). MISI sells a range
of insurance products; MAI previously sold investments in equipment leases.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Revenue Recognition

Securities transactions, investment banking revenues, and commission income
and related expenses are recorded on a trade date basis. Securities owned and
securities sold but not yet repurchased are stated at quoted market values with
unrealized gains and losses reflected in earnings. Investment account securities
not readily marketable are carried at estimated fair value as determined by
management with unrealized gains and losses included in earnings.

Commissions earned from the sale of insurance products are recognized upon
approval of the customer application by the insurance carrier.

Depreciation and Amortization

Furniture and equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment and amortization of capital leases are
computed generally on a straight-line basis over the estimated useful lives of
the assets, ranging from three to seven years or terms of the leases,
respectively. Leasehold improvements are amortized over the shorter of either
the asset's useful life or the related lease term.

Statement of Cash Flows

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

Net Income (Loss) per Share

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

<PAGE>

Use of Estimates

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

Long-lived Assets

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

Stock-based Compensation

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

Income Taxes

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

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

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

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

Recently Issued Accounting Pronouncement

NOTE 3 - TRADING AND INVESTMENT SECURITIES

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

December 31,
1998 1997
Sold but Sold but
not yet not yet
Owned Purchased Owned Purchased

Obligations of U. S. government
and its agencies $ 20,900 $ -- $ 304,815 $ --
State and municipal obligations 41,415 -- 515,781 --
Corporate stocks and bonds 2,353,286 243,119 2,042,020 799,503
Corporate bonds 270,278 50,738 288,156 2,466
Options and warrants -- 33,190 -- 7,554
--------- ------- --------- -------
$2,685,879 $327,047 $ 3,150,772 $809,523
========== ======== =========== ========

<PAGE>

Securities not readily marketable include investment securities (a) for
which there is no market on a securities exchange or no independent publicly
quoted market, (b) that cannot be publicly offered or sold unless registration
has been effected under the Securities Act of 1933, or (c) that cannot be
offered or sold because of other arrangements, restrictions or conditions
applicable to the securities or to the Company. At December 31, 1998 and 1997,
these securities at estimated fair values consisted of the following:

December 31,
1998 1997

Corporate stocks $ -- $236,640
Options and warrants 47,381 270,092
------ -------
$ 47,381 $506,732
====== =======

NOTE 4 - EMPLOYEE AND BROKER RECEIVABLES

This account consists of the following:
December 31,
1998 1997

Commission advances $ 79,317 $215,119
Loans to brokers and non-executive
employees 518,895 712,076
------- -------
$598,212 $927,195
======= =======

Receivables are generally non-interest bearing and due on
demand.

NOTE 5 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Furniture, equipment and leasehold improvements consist of the following:

December 31,
1998 1997

Furniture and fixtures $ 812,360 $ 672,988
Computer and office equipment 2,033,729 1,442,108
Leasehold improvements 513,014 169,560
--------- ---------
3,359,103 2,284,656
Less: Accumulated depreciation
and amortization (1,284,633) (926,802)
---------- ---------
$ 2,074,470 $1,357,854
========== =========

Depreciation expense was $357,831, $348,508 and $272,050 in
1998, 1997 and 1996, respectively.

NOTE 6 - NOTES RECEIVABLE
December 31,
1998 1997

Environmental Coupon Marketing, Inc.
(ECM) $149,640 $149,640
Global Financial Corp. (Global) 322,237 582,804
Fem-Com Copy Systems, Inc. (FCS) 5,852 205,610
------- -------
$477,729 $938,054
======= =======

a) ECM is a closely-held marketer of recycling programs to retailers. The loan
is currently in default and stated at approximate net realizable value. The
1997 financial statements reflect a $69,000 write-down of the loan.

Also in 1997, the Company wrote off its $84,000 investment in ECM common
stock.
<PAGE>

b) Beginning in 1997, MAI has made loans to Global, the financing company that
packaged and sold leasing investments through MAI, in order to assist
Global in meeting cash flow deficiencies arising from the nonpayment of
scheduled monthly installments on certain delinquent and non-performing
leases. Most of the arrears are due from leases originated by FCS, Global's
affiliated equipment vendor, and Biblio, Inc. ("Biblio"), an affiliate of
FCS. The MAI notes are guaranteed by Global, FCS, Biblio, and the
shareholder of FCS and Biblio. The notes are further collateralized by
mortgage liens on real estate owned by the shareholder of FCS and Biblio, a
pledge of all of the outstanding shares in Global, and various recorded
liens on the assets of FCS and Biblio.

During 1998, the Company undertook a full review of the Global loans to
evaluate their collectability, and determined that, based on various events
and circumstances, including the default status of the loans, the
insolvency of Global and FCS, and steadily declining collections on the
lease portfolio serviced by Global, the loans to Global have been impaired.
Accordingly, the Company has recorded an impairment loss of $1,775,000 in
its financial statements for 1998. The loan reserve reflects management's
best estimate of the extent of loan impairment based on available current
information. Eventual outcomes could differ from estimated amounts.

c) MAI has provided FCS with working capital financing to purchase
equipment for resale to FCS customers. The balance is payable on demand.

NOTE 7 - DUE FROM OFFICERS

Advances to officers are unsecured and currently bear interest at the rate
of 6% per annum. These loans are due on demand. Interest on these loans totaled
$8,223, $7,817 and $9,428 in 1998, 1997 and 1996, respectively.

NOTE 8 - NOTES PAYABLE - BANK

These notes evidence two secured term loans bearing interest at the prime
rate (7.75% at December 31, 1998), and are collateralized by equipment owned by
the parent corporation. Principal maturities are scheduled as follows: 1999 -
$95,925, 2000 - $95,925, and 2001 - $52,994.

NOTE 9 - SUBORDINATED NOTES PAYABLE

The notes are payable in four remaining annual installments of $50,000 plus
interest at 8% per annum. Each note is subordinated to the claims of FMSC's
general creditors under a subordination agreement approved by the NASD.

NOTE 10 - CONVERTIBLE PROMISSORY NOTES PAYABLE

In 1998, the Company issued a series of convertible promissory notes
aggregating $570,000 to a private investor in consideration of $300,000 in cash
and an income stream from the assignment of equipment lease investments. The
notes carry interest at the rate of 10% per annum, payable semi-annually, and
are convertible into up to 380,000 shares of the Company's Common Stock at the
rate of $1.50 per share. The notes mature in five years; however, the Company is
required to pay 20% of the original outstanding principal into a sinking fund on
or before each annual anniversary date of the notes. The notes are callable at
the Company's option upon thirty days written notice at 105% above par. The
equipment lease investments assigned to the Company in the transaction are
serviced by Global and were originally sold to the investor through MAI.

The Company has recorded a loan discount of $99,899, representing the
difference between the note principal of $570,000, and the cash received plus
the estimated discounted payment stream from the leases. The discount is being
amortized over the term of the notes. Amortization expense was $3,524 in 1998.

NOTE 11 - ACCRUED EXPENSES

Accrued expenses consist of the following:

December 31,
1998 1997

Reserves for legal matters $661,531 $640,000
Other 243,623 172,590
------- -------
$905,154 $812,590
======= =======

<PAGE>

NOTE 12 - INCOME TAXES

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

December 31,
1998 1997 1996

Currently payable
(refundable):
Federal $ -- $ 299,584 $ 150,505
State 60,255 161,134 37,103
---------- ------- --------
60,255 460,718 187,608
---------- ------- --------

Deferred:
Federal (1,008,591) 470,277 (198,875)
State (387,665) 37,183 (6,480)
Valuation allowance 731,469 -- --
---------- ------- --------
(664,787) 507,460 (205,355)
---------- ------- --------
$ (604,532) $ 968,178 $ (17,747)
========== ======= ========

The current portion of the federal income tax benefit in 1997 reflects
refundable taxes of approximately $193,000 from the carryback of net
operating losses. At December 31, 1998 the Company had federal net
operating loss carryforwards of $173,000 available to offset future federal
taxable income. The carryforwards expire at various dates through 2018.

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

December 31,
1998 1997 1996

Expected statutory federal
income tax $(1,144,909) $831,301 $ 2,256
Non-taxable income -- (12,080) (5,457)
Non-deductible expenses 11,456 10,200 4,576
State taxes, net of federal
tax benefit (200,021) 146,700 (19,122)
Other (2,527) (7,943) --
Valuation allowance 731,469 -- --
---------- ------- -------
$ (604,532) $968,178 $(17,747)
========== ======= =======

The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1998
and 1997 are:

December 31,
1998 1997

Deferred tax assets:
Accrued reserves $1,205,632 $171,465
Net operating loss 160,190 87,504
Other 146,697 33,349
--------- -------
1,512,519 292,318
--------- -------

Deferred tax liabilities:
Unrealized investment gains 16,952 197,990
Depreciation 54,176 58,360
Other 9,167 --
--------- -------
80,295 256,350
--------- -------
1,432,224 35,968
Valuation allowance (731,469) --
-------- -------
Net deferred tax asset $ 700,755 $ 35,968
========= =======

Based on its review of available evidence, management has established a
valuation allowance to offset a portion of the benefits of the Company's
net deferred tax assets because their realization is uncertain.
<PAGE>

NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES

Leases

The Company leases office facilities and equipment under operating leases
expiring at various dates through 2005. The lease for the Company's headquarters
has a six-year renewal option through 2011.

In 1998, the Company entered into a capital lease to acquire new equipment
costing $88,000 and to refinance through a sale/leaseback transaction existing
fixed assets with a book value of approximately $304,000.

Future minimum lease payments as of December 31, 1998 were:

Capital Operating
Lease Leases

1999 $142,704 $ 836,005
2000 142,704 719,047
2001 146,986 648,758
2002 -- 642,184
2003 -- 639,993
Thereafter -- 693,325
------- ---------

Total minimum lease payments 432,394 $4,179,312
Less: Amount representing =========
interest on capital lease 58,815
-------
$373,579
=======

Operating lease expense for 1998, 1997 and 1996 totaled $857,715, $498,815
and $426,172, respectively.

Legal Matters

The Company has been involved in a number of lawsuits and regulatory
investigations relating to the sale of securities by a former affiliate office
located in Houston, Texas. In 1996, the Company, without admitting liability or
wrongdoing, settled various claims asserted by Escambia County, Florida, a
former customer of the Houston office, for $900,000 in cash. In January 1997,
the Company settled another customer lawsuit for $750,000, with $500,000 payable
upon execution of settlement documents, and the balance of $250,000 payable in
five annual installments of $50,000 plus interest at 8% per annum. The five
installments are evidenced by notes payable, which have been subordinated to the
claims of FMSC's general creditors under a subordination agreement approved by
the NASD. In 1997, FMSC entered into an Offer of Settlement with the SEC
relating to the activities of the Houston office. Under terms of the settlement,
FMSC paid a $50,000 fine and agreed to engage an independent compliance examiner
to audit FMSC's compliance procedures. FMSC was permitted to offset other SEC
monetary assessments totalling approximately $227,000 against Houston customer
settlements previously paid by the firm. FMSC entered into a similar consent
decree with the State of Florida, pursuant to which FMSC paid a $15,000 fine and
agreed to temporary restrictions on brokerage activities in the state. In 1998,
the Company settled another Houston customer lawsuit for $500,000 in cash. In
March 1999, the Company reached a $100,000 settlement in the last pending
customer lawsuit involving the Houston office.

<PAGE>

FMSC is also both a claimant and a counter-respondent in an arbitration
which it brought against another securities firm arising out of the trading
activities of the former Houston office. The securities firm has filed a
counterclaim against FMSC seeking an unspecified amount of damages.

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

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

The Company continues to review the extent to which settled and pending
claims, including Houston customer settlements, may be covered under its
insurance policies. In January 1997, the Company negotiated a $650,000
settlement with one of its insurance carriers in consideration of a general
release from coverage on various matters. The Company has also filed suit
against one of its insurers to compel coverage of several settled claims. There
can be no assurance that the Company will be successful in its efforts to
recover additional funds from its insurers on settled claims, or that monetary
losses, if any, from future settlements or adverse judgments will be covered
under the Company's existing insurance policies.

Purchase commitments

Income tax audit

The Internal Revenue Service is currently conducting a field audit of the
Company's federal income tax returns for 1995, 1996 and 1997. The Company is
unable to determine at this time what impact, if any, the outcome of the audit
will have on its business, financial condition or results of operations.

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

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

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

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

NOTE 15 - DEFINED CONTRIBUTION PLAN

The Company sponsors a defined contribution pension plan [401(k)] covering
all participating employees. The Company may elect to contribute up to 100% of
each participant's annual contribution to the plan. Employer contributions for
1998, 1997 and 1996 amounted to $38,077, $33,060, and $44,400, respectively.
<PAGE>

NOTE 16 - COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE

From time to time, the Company has issued unregistered shares of its Common
Stock in settlement of various customer claims and invoices for legal services.
With respect to these shares, the Company provides a guarantee to pay to the
selling stockholder the difference between a target price and the actual selling
price of the shares upon expiration of the statutory holding period. The holders
of the shares may elect to retain the shares once the holding period lapses.
Such an election will release the Company from any further obligation to the
stockholders.

The Company has established a temporary equity account to record its
maximum liability from the guarantees. Payment of any shortfall is charged to
this account. Any balance remaining at the end of the respective holding periods
is credited to permanent capital. Following is a schedule of activity in this
account for 1998 and 1997:

Shares Amount

Balance, January 1, 1997 210,500 $ 421,500

Increase in guarantee with respect to
37,500 at $.75 per share -- 28,125

Reclassification of shares to permanent capital (37,500) (103,125)
------- -------
Balance, December 31, 1997 173,000 346,500

Issuance of additional shares 15,000 30,000

Payment of guarantee -- (40,610)

Reclassification of shares to permanent capital (170,000) (299,390)
------- -------
Balance, December 31, 1998 18,000 $ 36,500
======= =======

NOTE 17 - STOCK OPTION PLANS

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

In June 1998, the Company's stockholders approved an amendment to the 1992
Plan to increase the number of shares reserved for issuance from 3,500,000 to
6,000,000 shares. Under the 1992 Plan, options may be granted to employees,
consultants and registered representatives of the Company, but only options
issued to employees will qualify for incentive stock option treatment (ISOs).
The exercise price of an option designated as an ISO shall not be less than the
fair market value of the Common Stock on the date of grant. However, ISOs
granted to a ten percent stockholder shall have an exercise price of at least
110% of such fair market value. At the time an option is granted, the Board of
Directors shall fix the period within which it may be exercised. Such exercise
period shall not be less than one year nor more than ten years from the date of
grant. The 1992 plan will expire in May 2002.

The Company has reserved 1,000,000 shares of its Common Stock for issuance
under the Director Plan. Options to purchase 20,000 shares of Common Stock are
granted to each Non-Executive Director on August 1 of each year, provided such
individual has continually served as a Non-Executive Director for the
twelve-month period immediately preceding the date of grant. The options will
expire in five years from the date of grant. The exercise price of such options
shall be equal to the fair market value of the Company's Common Stock on the
date of grant. The Director Plan will terminate in May 2002.

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

<PAGE>

A summary of the activity in the Company's stock option plans for the
three-year period ended December 31, 1998 is presented below:

Range of
Exercise
Shares Prices

Options outstanding, December 31, 1995 2,117,500 $ .41 - 1.75
Granted 279,000 .875 - 1.33
Canceled (123,000) .56 - 1.00
Exercised (137,375) .50 - 1.00

Options outstanding, December 31, 1996 2,136,125 $ .41 - 1.75
Granted 1,517,500 .96 - 2.75
Canceled (56,500) .56 - .875
Exercised (973,025) .41 - 1.75

Options outstanding, December 31, 1997 2,624,100 $ .41 - 2.75
Granted 1,442,500 1.00 - 2.50
Canceled (381,250) .50 - 2.75
Exercised (432,050) .41 - 2.25

Options outstanding, December 31, 1998 3,253,300 $ .69 - 2.75

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

Shares of common stock available
for future grant 4,108,550
Weighted-average grant date fair value of options
granted during each year using the Black-Scholes
option pricing model
1996 $.55
1997 $.73
1998 $.71

The Company applies APB No. 25 in accounting for employee stock options.
Accordingly, compensation is recognized in the financial statements only for the
fair value of options issued to non-employee directors, consultants and
affiliate brokers. Such compensation is amortized to expense over the related
options' vesting periods. Compensation expense recognized in 1998 and 1997
totaled $147,988 and $21,652, respectively.

Pro forma net earnings and earnings per share information, as required by
SFAS No. 123, have been determined as if the Company had accounted for employee
stock options under the fair value method. The fair value of these options was
estimated at grant date using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1997 and 1996:

1998 1997 1996

Risk free interest rates 5.03% 6.23% 6.05%
Expected option lives 2.4 years 3.75 years 5 years
Expected volatilities 46.5% 46.5% 76.5%
Expected dividend yields 0% 0% 0%

The Company's pro forma information follows:

Net income (loss) 1998 1997 1996

As reported $(2,762,847) $1,476,825 $ 32,789
Proforma (3,292,291) 1,246,276 (26,597)

Basic income (loss) per share
As reported $(.28) $.17 $ .01
Proforma $(.34) .14 (.01)

Diluted income (loss) per share
As reported $(.28) $.14 $ .01
Proforma $(.34) .12 (.01)

<PAGE>

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

Additional information as of December 31, 1998 with respect to all
outstanding options is as follows:

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

$.69 - .96 737,600 1.61 $0.80 627,400 $0.81
1.00 - 1.38 789,200 3.43 1.14 387,080 1.12
1.56 - 1.94 702,500 4.36 1.79 352,500 1.87
2.00 - 2.75 1,024,000 4.05 2.43 422,440 2.41

3,253,300 3.41 $1.61 1,789,420 $1.46

NOTE 18 - STOCKHOLDERS' EQUITY

Rights offering

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

Exercise Price Exercise Period
Warrant Per Share from Date of Issuance

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

Each shareholder of record as of December 15, 1997 received three rights
for each share of Common Stock held as of the record date, with three rights
required to subscribe for a single Unit at a price of $.45 per Unit. The
offering raised gross proceeds of $1,382,750 before deducting registration costs
of approximately $236,000. There are currently 3,072,446 Class A, Class B and
Class C warrants outstanding, respectively.

Recapitalization

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

Preferred Stock

The Company is presently authorized to issue 5,000,000 shares of Preferred
Stock, none of which have been issued at December 31, 1998. The preference, if
any, to be given to preferred shares is determinable at the time of issuance.

Stock Repurchases

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

Sale of Restricted Stock

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

Issuance of Common Stock

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

<PAGE>

NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments, which requires that all entities disclose the fair value of
financial instruments, as defined, for both assets and liabilities recognized
and not recognized in the statement of financial condition. Substantially all of
the Company's financial instruments at December 31, 1998, consisting primarily
of marketable debt and equity securities, amounts due from FMSC's clearing firm,
accounts payable and accrued expenses, and notes payable are carried at, or
approximate fair value due to their short-term nature, the use of mark-to-market
accounting for trading securities, or because they carry market rates of
interest.

NOTE 20 - NET CAPITAL REQUIREMENTS

FMSC is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires FMSC to maintain minimum net capital,
as defined. At December 31, 1998, FMSC had net capital of $1,668,964, which was
$1,418,964 in excess of its required net capital of $250,000. FMSC's ratio of
aggregate indebtedness to net capital was 2.17 to 1.

NOTE 21 - RELATED PARTY TRANSACTION

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

EMPLOYMENT AGREEMENT

AGREEMENT effective as of October 15, 1998 by and between FIRST MONTAUK
FINANCIAL CORP., a New Jersey corporation, with executive offices at Parkway 109
Office Center, 328 Newman Springs Road 07701-5698 (hereinafter jointly referred
to as the "Employer") and MARK D. LOWE with an address at 43 Richard Lane, West
Long Branch, New Jersey 07764 (hereinafter referred to as the "Employee").

W I T N E S S E T H :

WHEREAS, the Employer desires to secure for itself the benefit of the
Employee's background, experience, ability and expertise as an Insurance
Products and Sales Coordinator and President of Montauk Insurance Services,
Inc., ("MISI") and is desirous of employing the Employee to perform the services
as set forth in this Agreement and under the terms herein provided; and,

WHEREAS, the Employee is willing to provide his background, experience,
ability, expertise as a Insurance Products and Sales Coordinator, and perform
such services and accept such employment on the terms and conditions set forth
in this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual convenants
herein set forth, the parties hereto agree as follows:

1. EMPLOYMENT AND SCOPE OF DUTIES

A. Employer shall employ Employee and the Employee agrees to be employed by
the Employer on a full-time basis during the Employment Period, Insurance
Products and Sales Coordinator and President of Montauk Insurance Services,
Inc., ("MISI"), having and maintaining the requisite licenses and registrations
in order to effectively coordinate and facilitate and promote the proper sales
and servicing of insurance and insurance-related products and services through
all of the Company's licensed insurance agents and registered representatives,
in variable and fixed annuity products, life, health an disability insurance and
the renewals of each of these products (hereinafter "Insurance Business"). The
Employee shall report and be responsible to: Herb Kurinsky, the President and
C.E.O.; William Kurinsky, Executive Vice President and CFO; and Robert I.
Rabinowitz, Managing Director. Employee shall be expected to coordinate with the
Legal & Compliance Department on matters involving compliance and legal issues
affecting the agents and registered representatives ("RR's") and the Company's
sales, marketing and recruiting departments on matters involving such
departments. Employee shall, except during vacation periods or absences due to
temporary illness, devote substantially all of his business time, attention and
energies to his duties and responsibilities as described hereunder.

B. Subject to the terms and conditions contained herein, Employee shall
also (i) provide administrative services, product marketing, sales, technical
and product support with respect to the development and retention of Agents and
RR's and insurance cases; (ii) assist Employer and its authorized
representatives and staff in actively recruiting new, qualified Agents and RR's;
and (iii) from time to time, perform such other services and tasks related to
the foregoing as may be reasonably necessary to the performance of the above
duties and responsibilities, and Employer hereby engages Employee to provide and
perform the same.

C. The Principal location of the Employee's employment shall be at 328
Newman Springs Road, Red Bank, New Jersey 07701, although the Employee
understands and agrees that he may be required to travel for business reasons to
the Company's Branch office and satellite locations throughout the United States
from time to time.

D. Employer hereby agrees at its discretion to provide the personnel and
administrative support services to Employee necessary for him to perform the
Services hereunder.
<PAGE>

2. TERM

The parties agree that this Agreement shall commence on or about October
15, 1998 (the "Commencement Date") and shall terminate on the earlier of (i) the
mutual agreement of Employer and Employee or (ii) on the one (1) year
anniversary from the date hereof (the "Initial Term"). This Agreement shall be
automatically renewable for two (2) additional one (1) year terms at the
anniversary date unless terminated by either party upon thirty (30) days written
notice prior to the anniversary date, or as otherwise provided for herein.

3. COMPENSATION.

(a). For the first year of the Employment Period, Employer agrees to
compensate the Employee at an annual rate equal to $75,000. Employer shall pay
such sums to Employee in its regular payroll cycle. Employee shall be entitled
to an annual increase of ten percent (10%) of this base salary for the second
and third successive year of employment upon renewal of the Employee's term of
Employment.

(b). Employee shall also be compensated as a producing Agent/broker for
Employer. Employee shall receive seventy (70%) percent payout after clearing
costs of any commission income and sales credit generated by Employee.

( c). Employee shall be paid a signing bonus of $60,000 payable over a two
(2) year period at the rate of $10,000 per quarter. This payment shall be due
and payable even if Employee's term of Employment is not renewed for a second
year.

(d). Employer also agrees to pay Employee an Incentive Bonus calculated at
one percent (1%) percent above the Gross Premiums of the Current Annual Base
Commission Rate ("Base Gross"), of all annuity products, both fixed and
variable, which has been determined by Employer and Employee to be $2,800,000
per annum. Said production override shall be payable to Employee on a quarterly
basis.

(e) Employer also agrees to pay Employee an Incentive Bonus calculated at
twenty percent (20%) percent of all agency override and renewal commissions on
all life, health, disability and long-term care business engaged in by the
registered Agents and RR's of the Employer. Said incentive bonus shall be
payable to Employee within thirty days of the Employer's fiscal year end.

(f) Employee shall be entitled to receive pursuant to Employer's Stock
Option Plan, as amended, an initial grant of Incentive Stock Options of 50,000
FMFK Stock Options at an exercise price of $1.25. Said options shall be granted
pursuant to all terms and conditions of the Company's Incentive Stock Option
Plan, as amended, and shall vest at the rate of 33% per year of continued
employment with the Employer. All provisions of the Amended Plan as set forth
therein shall be applicable to Employee's initial grant and any subsequent stock
option grants. Employee acknowledges receipt of a copy of the Amended Stock
Option Plan.

(g). Employer shall pay the cost of Employee's licenses, continuing
education requirements, and costs for E & O coverage.
<PAGE>

4. REIMBURSEMENT OF EXPENSES.

During the period of said employment, the Employer shall reimburse the
Employee or pay directly on his behalf, all business, travel, entertainment and
other ordinary and necessary expenses incurred directly in connection with the
performance of Employee's duties and in furtherance of the business of the
Employer. Employee shall not be reimbursed for any personal expenses or for any
business expense in excess of $1,500.00 which has not been approved in writing
in advance by a Senior Officer of Employer. Employee shall submit periodic
(weekly or monthly) itemized expense reports for out-of-pocket business expenses
paid by the Employee and for which reimbursement is sought from Employer.

5. INSURANCE AND OTHER BENEFITS.

(a). Employee shall be eligible to participate in Employer's medical,
health and dental insurance benefit plans which are currently furnished to
Senior Executives and shall pay twenty-five (25%) of costs for premiums;

(b). Employee shall be eligible to participate in Employer's 401(k) Plan.

6. TERMINATION OF EMPLOYMENT.

In addition to Paragraph 2, during the Initial Term, the Employee's
employment may also be terminated on the occurrence of any one or more of the
following events:

(a) The death of the Employee;

(b) The failure by the Employee to substantially perform his duties and
responsibilities as Insurance Coordinator hereunder, owing to physical or mental
incapacity (hereinafter referred to as "disability"), which disability shall be
as defined under the Company's disability insurance policy and shall continue
for more than three (3) consecutive months.
<PAGE>

(c) For "Cause", which shall mean (i) the failure by the Employee
substantially perform his duties hereunder, for reasons other than death or
disability after written notice by Employer and a thirty (30) day period to cure
said failure; (ii) the engaging by the Employee in a material, intentional
breach of the Firm's Policies and Procedures or misconduct materially injurious
to the Employer; or (iii) the commission by the Employee of an act constituting
common law fraud or a felony or any other criminal offense.

(d) In the event that Employee's employment hereunder terminates for any
reason other than for reasons indicated in Paragraph (c) i - iii, the Company
shall pay to Employee severance payments equal to one time the previous year's
Base Salary and unreimbursed business expenses. Employee shall forfeit any
unaccrued employee's Incentive Bonus in the event that he has failed to
substantially perform his duties as described herein or is terminated for Cause.
Upon any termination of this Agreement, all of the rights, privileges and duties
of the Employee hereunder shall cease, except for his rights under Paragraph 3
(c) and 6(d) and his continuing obligations to Employer under Paragraph 7
hereunder.

7. DISCLOSURE OF INFORMATION.

(a) All memoranda, notes, records or other documents made or compiled by
the Employee or made available to him during the term of his employment
concerning the business of the Employer shall be and remain the Employer's
property and shall be delivered by the Employee to Employer at termination of
Employee's employment. Employee shall not use for himself or others or divulge
to others, any proprietary or confidential information of the Employer, obtained
by him as a result of his employment, unless authorized in advance by a Senior
Officer of Employer.

(b) Employee hereby sells, transfers and assigns to Employer, or to any
person or entity designated by the Employer, all of the right, title and
interest of Employee in and to all inventions, sales approaches or materials,
software, ideas, training materials, disclosures and improvements, whether
patented or unpatented, and copyrightable material, made or conceived by the
Employee, solely or jointly, in whole or in part, during the Employee Term which
are not generally known to the public or the industry or recognized as standard
practice and which (i) relate to services, trade marks or names, methods, ideas,
apparatus, designs, products, processes, procedures or devices which may be
sold, leased, used or under construction or development by Employer, its
subsidiaries or affiliates or any franchise affiliated with Employer and (ii)
arise (wholly or partly) from the effort of Employee during his employment with
Employer (hereinafter collectively referred to as an "Invention"). Employee
shall communicate promptly and disclose to Employer, in such form as Employer
requests, all information, details and data pertaining to any such Invention.
Employee hereby irrevocably appoints the Chief Executive Officer and/or
Executive Vice President lawful attorney to execute and deliver, with respect to
any Invention, such form of transfers and assignments and such other papers and
documents as reasonably may be required to permit Employer or any person or
entity designated by Employer to file and prosecute patent applications and, as
to copyrightable material, to obtain copyrights thereon. Employer shall pay all
costs incident to the execution and delivery of such transfers, assignments and
other documents. Any Invention by the Employee within twelve (12) months
following the termination of this Agreement shall be deemed to fall within the
provisions of this Section 7(b) unless Employee bears the burden of proof of
showing that the Invention was first conceived and made following such
termination.
<PAGE>

(c) For purposes of this Section 7, the term "proprietary or confidential
information" shall mean all information which is known only to Employee or to
Employee and employees, former employees, consultants or others in a
confidential relationship with Employer and relates to specific matters such as
trade secrets, customers, potential customers and vendor lists, pricing and
credit techniques, research and development activities, books and records and
private processes, as they may exist from time to time, which Employee may have
acquired or obtained by virtue of work heretofore or hereinafter performed for
or on behalf of Employer or which he may acquire or may have acquired knowledge
of during the performance of said work, and which is not known to other, or
readily available to others from sources other than Employee, or is not in the
public domain. In the event of a breach or a threatened breach by Employee of
the provisions of this Section 7, Employer shall be entitled to an injunction
restraining Employee from disclosing, in whole or in part, the aforementioned
proprietary or confidential information of Employer, or from rendering any
services to any person, firm, corporation, association or other entity to whom
such proprietary or confidential information, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein contained shall be
construed as prohibiting Employer from pursuing any other remedies available to
Employer for such breach or threatened breach, including the recovery of damages
from Employee.

8. REPRESENTATIONS OF EMPLOYEE

Employee represents and warrants to Employer that he is not currently
statutorily disqualified or restricted from becoming licensed as an insurance
agent or registered with any state or NASD, or of entering into this Employment
Agreement by any other enforceable agreement between Employee and any third
party.

9. NOTICES.

Any notices required or permitted to be given under the provisions of this
Employment Agreement shall be in writing and delivered personally or by
certified or registered mail, return receipt requested, postage prepaid to the
following persons at the following addresses, or to such other person at such
other address as any party may request by notice in writing to the other party
to this Agreement:

TO EMPLOYEE:

MARK D. LOWE
42 Richard Lane
West Long Branch, New Jersey 07764

TO EMPLOYER:

FIRST MONTAUK FINANCIAL CORP.
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, New Jersey 07701
Attn: General Counsel

10. ARBITRATION

Any and all disputes or controversies arising out of or relating to this
Agreement or breach thereof, shall be settled by arbitration under the auspices
of the NASD, Inc. in New York City, New York by a panel of three arbitrators in
accordance with the rules then pertaining to the NASD. The cost of such
arbitration proceeding shall be borne equally by the parties, each of whom shall
bear its or his own attorneys fees.

11. CONSTRUCTION.

This Employment Agreement shall be construed in accordance with, and be
governed by, the laws of the State of New Jersey.

12. SUCCESSOR AND ASSIGNS.

This Employment Agreement shall be binding on the successors and assigns of
the Employer and shall inure to the benefit and be enforceable by and against
its successors and assigns. This Employment Agreement is personal in nature and
may not be assigned or transferred by the Employee without the prior written
consent of the Corporation.

<PAGE>

13. ENTIRE AGREEMENT.

This instrument contains the entire understanding and agreement between the
parties relating to the subject matter hereof, and neither this Employment
Agreement nor any provision hereof may be waived, modified, amended, changed,
discharged or terminated, except by an agreement in writing signed by the party
against whom enforcement of any waiver, modification, change, amendment,
discharge or termination is sought.

14. COUNTERPARTS.

This Employment Agreement may be executed simultaneously in counterparts,
each of which shall be deemed an original, and all of which counterparts shall
together constitute a single agreement.

15. ILLEGALITY.

In case any one or more of the provisions of this Employment Agreement
shall be invalid, illegal or unenforceable in any respect, the validity, the
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.

16. CAPTIONS.

The captions of the sections hereof are for convenience only and shall not
control or affect the terms or provisions of this Employment Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.

ATTEST: FIRST MONTAUK FINANCIAL CORP.

- --------------------------- By:-----------------------------------
Secretary

-------------------------------(Dated)

MARK D. LOWE, Employee

ATTEST:

- --------------------------- ------------------------------(Dated)
Witness

EMPLOYMENT AGREEMENT

AGREEMENT effective as of January 25, 1999 by and between FIRST MONTAUK
SECURITIES CORP., a New Jersey corporation with executive offices at Parkway 109
Office Center, 328 Newman Springs Road 07701-5698 (hereinafter referred to as
the "Employer") and SETH ROSEN with an address at 209 Williamsburg Drive,
Shrewsbury, NJ 07702 (hereinafter referred to as the "Employee").

W I T N E S S E T H :

WHEREAS, the Employer desires to secure for itself the benefit of the
Employee's background, experience, ability and expertise as President of FMSC's
Century Discount Securities Division, Paramus NJ ("CDS") and Managing Director
of FMSC's Internet Trading Initiative, and is desirous of employing the Employee
to perform the services as set forth in this Agreement and under the terms
herein provided; and

WHEREAS, the Employee is willing to provide his background, experience,
ability, expertise as President of FMSC's Century Discount Securities Division,
Paramus NJ and Managing Director of FMSC's Internet Trading Initiative, and
perform such services and accept such employment on the terms and conditions set
forth in this Agreement;

NOW, THEREFORE, in consideration of the premises and the mutual convenants
herein set forth, the parties hereto agree as follows:

1. EMPLOYMENT AND SCOPE OF DUTIES

A. Employer shall employ Employee and the Employee agrees to be employed by
the Employer on a full-time basis during the Employment Period, as President of
FMSC's Century Discount Securities Division, Paramus NJ and Managing Director of
FMSC's Internet Trading Initiative, having and maintaining the requisite
licenses and registrations in order to effectively supervise Employer's
Registered Representatives located in the CDS Paramus office. The Employee shall
report and be responsible to: Herb Kurinsky, the President and C.E.O.; William
Kurinsky, Executive Vice President and Chief Financial Officer (CFO); and Robert
I. Rabinowitz, Chief Administrative Officer. Employee shall be expected to
coordinate with and obtain necessary approvals from General Counsel and the
Legal & Compliance Department on matters involving compliance, regulatory and
legal issues affecting CDS discount brokerage business and Internet Trading for
clients of the Firm. Employee shall, except during vacation periods or absences
due to temporary illness, devote substantially all of his business time,
attention and energies to his duties and responsibilities as President of CDS
hereunder.

B. Subject to the terms and conditions contained herein, Employee shall
also (i) provide administrative expertise, product knowledge, technical and
systems support with respect to the development and implementation of
third-party vendor provided electronic-based order entry and clearing firm
interfaces, including risk management technology for FMSC's trading desk, CDS's
separate trading desk and, (ii) supervise structure, manage, control
expenditures and operations of CDS through daily oversight of operations of CDS
staff including marketing, registration and assurance of regulatory compliance
by CDS; and (iii) from time to time, perform such other services and tasks
related to the foregoing as may be reasonably necessary to the performance of
the above duties and responsibilities, including reporting to FMSC Senior
Management with findings/recommendations to improve efficiencies of CDS and FMSC
Trading Capabilities and Employer hereby engages Employee to provide and perform
the same.

<PAGE>

C. The Principal locations of the Employee's employment shall be at 328
Newman Springs Road, Red Bank, New Jersey 07701 and One Mack Cnetre Road,
Paramus, NJ 07652, although the Employee understands and agrees that he may be
required to travel for business reasons to other offices of FMSC and from time
to time to other Firm locations.

D. Employer hereby agrees at its discretion to provide the personnel and
administrative support services to Employee necessary for him to perform the
Services hereunder.

2. TERM

The parties agree that this Agreement shall be terminable at will by either
party, and Employee shall commence employment on or about January 25, 1999 (the
"Commencement Date"). This Agreement shall terminate on the earlier of (i) the
mutual agreement of Employer and Employee upon providing 90 days written notice
to the other party prior to the termination date, or (ii) the demand of either
party to terminate upon 90 days prior written notice.

3. COMPENSATION.

(a). For the first year of the Employment Period, Employer agrees to
compensate the Employee at an annual rate equal to $120,000. Such sums shall be
paid to Employee by Employer in its regular payroll cycle.

(b). Employer also agrees to pay Employee a non guaranteed Incentive Cash
Bonus calculated at ten (10%) percent of Firm retention of the increase in
profits, (i.e., gross commissions, interest and other related revenue, net of
expenses), generated by CDS over the '98 base year level of profit. (Base year
increase).

(c). Employee shall be entitled to receive pursuant to Employer's Stock
Option Plan, an initial grant of Incentive Stock Options of 50,000 FMFK Stock
Options at an exercise price of $2.00. Said options shall be granted pursuant to
all terms and conditions of the Company's Incentive Stock Option Plan, as
amended, and shall vest at the rate of 20% per year of continued employment with
the Employer.

(e). Employer shall pay the cost of Employee's licenses, continuing
education requirements, and costs for E & O insurance coverage.

(f). Employer shall provide Employee with legal counsel selected by
Employer in connection with the defense of any customer initiated claim or
regulatory action.

4. REIMBURSEMENT OF EXPENSES.

During the period of said employment, the Employer shall reimburse the
Employee or pay directly on his behalf, all reasonable and necessary business,
travel and entertainment expenses incurred directly in connection with the
performance of Employee's duties and in furtherance of the business of the
Employer. Employee shall not be reimbursed for any personal expenses or for any
business expense in excess of $1,500.00 which has not been approved in writing
in advance by a Senior Officer of Employer. Employee shall submit periodic
(weekly or monthly) itemized expense reports for out-of-pocket business expenses
paid by the Employee and for which reimbursement is sought from Employer.

5. INSURANCE AND OTHER BENEFITS.

(a). Employee shall be eligible to participate in Employer's medical and
health insurance benefit plans which are currently furnished to Senior
Executives;

(b). Employee shall be eligible to participate in Employer's 401(k) Plan.

6. TERMINATION OF EMPLOYMENT.

This Agreement creates an employment at will. FMSC may voluntarily
terminate its employment with Employee at any time and for any reason after the
date of this Agreement. Employee may voluntarily terminate his association with
FMSC at any time and for any reason after the date of this Agreement. In the
event of a voluntary termination of this Agreement by either party, FMSC shall
have no obligation to pay employee, or his estate, or any other person or
entity, any salary, incentive bonus unreimbursed reasonable and ordinary
business expenses, or Incentive Stock Option Grant provided for in this
Agreement prior to the date of termination, except as shall have been earned by
Employee to the effective date of termination.
<PAGE>

In addition to Paragraph 2, during the Initial Term, the Employee's
employment may also be terminated on the occurrence of any one or more of the
following events:

(a) The death of the Employee;

(b) The failure by the Employee to substantially perform his duties and
responsibilities as set forth above, owing to physical or mental incapacity
(hereinafter referred to as "disability"), which disability shall be as defined
under the Company's disability insurance policy and shall continue for more
than three (3) consecutive months.

(c) For "Cause", which shall mean: (i) the failure by the Employee to
substantially perform his duties herein, for reasons other than death or
disability after written notice by Employer and a thirty (30) day period to cure
said failure; (ii) the engaging by the Employee in a material, intentional
breach of the Firm's Policies and Procedures or misconduct materially injurious
to the Employer; or (iii) the commission by the Employee of an act constituting
common law fraud or a felony or any other criminal offense.

(d) In the event that Employee's employment hereunder terminates for any
reason other than for reasons indicated in Paragraph (c) i - iii, the Company
shall pay to Employee all amounts accrued but unpaid hereunder through the date
of termination in respect of Base Salary and unreimbursed business expenses.
Employee's Incentive Bonus and Incentive Stock Option Grant shall be forfeited
by Employee in the event that he has failed to substantially perform his duties
as set forth herein, or is terminated for Cause. Upon any termination of this
Agreement, all of the rights, privileges and duties of the Employee hereunder
shall cease, except for his rights under this Paragraph 6(d) and his continuing
obligations to Employer under Paragraph 7 and 9 hereunder.

7. NO DISCLOSURE OF INFORMATION.

8. REPRESENTATIONS OF EMPLOYEE

Employee represents and warrants to Employer that he is not currently
statutorily disqualified or restricted from becoming licensed or registered with
any state or NASD, or of entering into this Employment Agreement by any other
enforceable agreement between Employee and any third party.

9. LIMITATION ON POWERS OF EMPLOYEE.

Employee understands and agrees that he has no power or authority to
conduct any Business for, with or through FMSC, or CDS, other than as granted by
this Agreement. Employee agrees that he will not hold himself out or purport, or
attempt to bind either FMSC or CDS in a manner inconsistent with this Agreement,
applicable law, rules or regulations, or FMSC Policies and Procedures or any
instruction or directive communicated to Employee.

<PAGE>

10. NOTICES.

TO EMPLOYEE:

SETH ROSEN
209 Williamsburg Drive
Shrewsbury, NJ 07702

TO EMPLOYER:

FIRST MONTAUK SECURITIES CORP.
Parkway 109 Office Center
328 Newman Springs Road
Red Bank, New Jersey 07701
Attn: General Counsel

11. ARBITRATION

12. CONSTRUCTION.

This Employment Agreement shall be construed in accordance with, and be
governed by, the laws of the State of New Jersey.

13. SUCCESSOR AND ASSIGNS.

14. ENTIRE AGREEMENT.

15. COUNTERPARTS.

This Employment Agreement may be executed simultaneously in counterparts,
each of which shall be deemed an original, and all of which counterparts shall
together constitute a single agreement.

<PAGE>

16. ILLEGALITY.

17. CAPTIONS.

The captions of the sections hereof are for convenience only and shall not
control or affect the terms or provisions of this Employment Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.

SETH ROSEN

(Dated) FIRST MONTAUK SECURITIES CORP.

By:
(Dated)

<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - DECEMBER 31, 1998 AND
CONSOLIDATED STATEMENT OF INCOME AS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K DECEMBER 31, 1998.
</LEGEND>
<NAME> First Montauk Financial Corp.
<CIK> 0000083125
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 614
<RECEIVABLES> 3,127
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 2,733
<PP&E> 2,074
<TOTAL-ASSETS> 11,544
<SHORT-TERM> 0
<PAYABLES> 3,701
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 327
<LONG-TERM> 1,034
0
0
<COMMON> 4,981
<OTHER-SE> 1,206
<TOTAL-LIABILITY-AND-EQUITY> 11,544
<TRADING-REVENUE> 8,796
<INTEREST-DIVIDENDS> 1,572
<COMMISSIONS> 30,741
<INVESTMENT-BANKING-REVENUES> 767
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 131
<COMPENSATION> 31,766
<INCOME-PRETAX> (3,367)
<INCOME-PRE-EXTRAORDINARY> (3,367)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,763)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)

</TABLE>