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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004

COMMISSION FILE NUMBER 0-23410

CROWN FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

525 Washington Boulevard, Jersey City, NJ 07310

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (201) 459-9500

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At June 10, 2004, the number of shares outstanding of the Registrant’s Common Stock was 13,157,570.

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CROWN FINANCIAL GROUP, INC.

FORM 10-Q QUARTERLY REPORT

For the Three Months Ended April 30, 2004

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Unless the context otherwise requires, the “Company”, “Crown”, “We”, or “Our” shall mean Crown Financial Group, Inc.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CROWN FINANCIAL GROUP, INC.

Consolidated Statements of Financial Condition

(Unaudited)

See accompanying notes which are an integral part of these financial statements

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CROWN FINANCIAL GROUP, INC.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes which are an integral part of these financial statements

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CROWN FINANCIAL GROUP, INC.

Consolidated Statement of Changes in Stockholders’ Equity

For the Three Months Ended April 30, 2004

(Unaudited)

See accompanying notes which are an integral part of these financial statements

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CROWN FINANCIAL GROUP, INC.

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes which are an integral part of these financial statements

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CROWN FINANCIAL GROUP, INC.

Notes to Consolidated Financial Statements

1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS

CROWN FINANCIAL GROUP, INC. (the “Company”) is a leading market maker currently making markets in excess of 9,700 securities listed on the Nasdaq National Market System, Nasdaq SmallCap, OTC Bulletin Board and the Pink Sheets. The Company is a registered broker-dealer with the United States Securities and Exchange Commission (“SEC”) and is a member of the National Association of Securities Dealers, Inc. (“NASD”). The Company provides securities trading, underwriting, investment banking and brokerage services for individuals, institutions and corporations. The Company, like other broker dealers, is directly affected by general economics and market conditions, including fluctuations in volume and price level of securities, changes in interest rates, all of which have an impact on the Company’s liquidity.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Crown Financial International Limited (“CFIL”), which was established on June 2, 2003, in London, England. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim period. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The nature of the Company’s business is such that the results of an interim period are not necessarily indicative of the results for the full year. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004, as filed with the SEC.

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 reporting period. Actual results could differ from those estimates.

Securities Owned, Securities Sold, Not Yet Purchased and Related Revenue Recognition

Securities transactions, and related commission revenue and expense, if applicable, are recorded on a trade date basis.

Securities owned and securities sold, not yet purchased are carried at market value and are recorded on a trade date basis with unrealized gains and losses included in net trading revenue. Net trading revenue (trading gains, net of trading losses) and commissions and related expenses, including compensation and benefits, execution and clearance fees and payments for order flow, are also recorded on a trade date basis. The Company’s clearing agreements call for payment of or receipt of interest income, net of interest expense, for facilitating the settlement and financing of securities transactions.

The market value of securities owned, and securities sold, not yet purchased, which consist primarily of equities, is determined by the Company utilizing quoted market prices, dealer quotes and prices obtained from independent third parties.

Substantially all of the Company’s financial assets and liabilities are carried at market value or at amounts which, because of the short-term nature of the financial instruments, approximate current fair value.

Underwriting fees are recorded at the time the underwriting is completed.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposit accounts at banks.

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Concentration of Credit Risks

The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk related to cash.

Other Investments

Other investments are included within other assets on the Statements of Financial Condition, include the Company’s investment in ViewTrade, Inc., and are accounted for at the lower of cost or fair value. The fair value of other investments, for which a quoted market or dealer price is not available, is based on management’s estimate. Among the factors considered by management in determining the fair value of investments are the financial condition, operating results and cash flows of the issuer, the long-term business potential of the issuer, the terms and liquidity of the investment, the sales price of recently issued securities, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments.

Furniture, Equipment, Capitalized Software and Leasehold Improvements

Furniture and equipment is stated at cost, less accumulated depreciation. Office furniture and equipment are depreciated over their estimated useful lives, ranging from three to seven years using the straight-line method. Leasehold improvements are amortized over the shorter of the remaining life of the lease or the estimated economic life of the improvements.

During the year ended January 31, 2004, the Company began capitalizing certain costs incurred in connection with developing or obtaining internal use software pursuant to Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Unamortized capitalized software development costs of $1,010,961 and $773,203 are carried in furniture, equipment, capitalized software and leasehold improvements in the Consolidated Statement of Financial Condition as of April 30 and January 31, 2004, respectively. Of the $1,010,961 of unamortized capital software as of April 30, 2004, $584,212 represented software that was still in development and was not being amortized and $426,749 represented software that had been placed in service and was being amortized. Of the $773,203 of unamortized capital software as of January 31, 2004, $455,784 represented software that was still in development and was not being amortized and $317,419 represented software that had been placed in service and was being amortized.

Receivables from Trading and Sales Personnel

Some trading and sales personnel receive draws, which represent advances against future commission payments. Receivables from trading and sales personnel result when the cumulative earned commission payments are less than the cumulative draws paid. The Company expects to collect these receivables from future earned commissions.

The Company has established a reserve as an offset to the receivable balance on the basis of a review of historical collections and estimates of future collections. The reserve amount is $69,824 and $360,697 at April 30 and January 31, 2004, respectively. During the three month period ended April 30, 2004, certain receivables that were fully reserved were written-off because the underlying compensation was recharacterized as salary expense.

Stock Based Compensation

The Company has established employee stock option plans administered by the Board of Directors. Under the plans, options may be granted to employees of the Company and other qualified individuals up to an aggregate of 8,000,000 shares of Common Stock. As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123 Accounting for Stock-Based Compensation, the Company accounts for the stock options issued to employees and directors as fixed plan options using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation cost is recorded to the extent, if any, that the exercise price of the option is less than the market price of the underlying common stock on the date of grant. Any such compensation expense is charged to income over the service period (vesting period). The Company recognized $22,860 and $42,745 of compensation expense on such grants during the three months ended April 30, 2004, and 2003, respectively.

As required by SFAS No. 123, stock options issued to other than employees or directors are valued at fair value, using the Black-Scholes option pricing model, and the value of the options is charged to expense as the options vest. The Company recognized no expense on such grants during the three months ended April 30, 2004, and 2003, respectively

As required by SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the Company has computed for pro forma disclosure purposes, the fair value of options granted to employees and directors using the Black-Scholes option pricing model. It should be noted that the Black-Scholes option-pricing model was developed for use in

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estimating the fair value of the traded options, which have no vesting restrictions and are fully transferable, and therefore are different from employee and director options which have both vesting and transfer restrictions which may affect their value. In addition, option valuation models required the input of highly subjective assumptions including the expected stock price volatility. In applying the Black-Scholes option pricing model, the Company used the following assumptions:

The following pro forma information of net loss and net loss per share was determined as if the Company had accounted for the stock option plans under the fair value method of SFAS No. 123:

The weighted average fair value of the stock options granted was $1.26 and $1.12 for the three months ended April 30, 2004, and 2003, respectively.

Restatement and Restatement Costs

In January of 2003, John P. Leighton became the Company’s Co-Chairman and Chief Executive Officer. Subsequently, he assumed the role of sole Chairman and President, and installed a new management team and a new business plan. In mid-September 2003, a new finance team was also appointed to further the implementation of this new business plan.

On October 17, 2003, as part of the closing of the Company’s financial records for the month of September 2003, the new finance team of the Company determined that certain items in the Company’s previously issued unaudited financial statements for the interim periods of the year ended January 31, 2004, were misstated. The Company immediately commenced an internal review to determine the scope of the financial statement misstatements and to issue restated financial statements (the “Restatement”) for any prior periods materially impacted by the misstatements.

As a result of the findings of the review, the Company restated its financial statements for the years ended January 31, 2003, 2002 and 2001, including the corresponding 2003 interim periods, and the quarterly periods ended April 30, 2003 and July 31, 2003. The restated financial statements were filed with the SEC in March 2004 in amended annual and quarterly reports.

The internal review and the restatement of the financial statements required significant outside resources in the form of accounting services in order to complete the process on a timely basis. The direct accounting costs isolated as Restatement Costs in the Consolidated Statements of Operations, represent the professional fees incurred during the three months ended April 30, 2004 related to this project. During the fiscal year ended January 31, 2004, $505,612 of Restatement Costs were incurred related to the restatement project.

Unearned Compensation

Unearned compensation represents the portion of option related charges which will be amortized as compensation expense over the remainder of the applicable vesting periods.

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Income Taxes

The Company provides for current and deferred taxes payable or refundable utilizing the liability method prescribed by SFAS No. 109. That method recognized deferred assets and liabilities for differences between the financial reporting and tax bases of assets and liabilities, utilizing currently enacted tax laws and rates. Deferred tax expenses or benefits represent changes in deferred tax assets or liabilities between years.

The Company files a federal income tax return as well as state income tax returns in certain jurisdictions. Additionally, the Company has a branch that is treated as a corporation for UK tax purposes. The Company includes the UK branch as a disregarded entity in its federal income tax return.

At April 30, 2004, the Company had a federal net operating loss carryforward of approximately $ 18,000,000. The federal net operating loss carryforwards begin to expire in the fiscal year ending in 2022 and expires completely in the fiscal year ending in 2023.

In addition, the Company has state net operating loss carryforwards. The state net operating loss carryforwards range by jurisdiction up to approximately $ 24,000,000. These state net operating loss carryforwards expire between fiscal years ended in 2009 and 2011.

At April 30, 2004 the Company has net deferred tax assets, before valuation allowances, of $11,928,993. The Company’s deferred tax assets are subject to a 100% valuation allowance as currently management is unable to conclude that it is more likely than not the Company will generate sufficient future taxable income to realize the deferred tax assets.

The following table reconciles the provision to the U.S. federal statutory income tax rate:

Earnings Per Common Share

Basic earnings per common share (“EPS”) have been calculated by dividing net loss by the weighted average shares of Common Stock outstanding during the year. Diluted EPS reflects the potential reduction in EPS using the treasury stock method to reflect the impact of common share equivalents if stock awards such as stock options and restricted stock were exercised or converted into common stock.

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months ended April 30, 2004 and 2003:

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For the three months ended April 30, 2004 and 2003, common stock equivalents in the amount of 5,278,059 and 2,210,092 shares were not included in the calculation of weighted average shares for diluted EPS because the Company incurred losses during the periods and the effect of their inclusion would be anti-dilutive.

Reclassifications

Certain fiscal 2004 amounts have been reclassified to conform with fiscal 2005 classifications.

3. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

Marketable securities owned consist of investment securities at quoted market values. 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.

4. DEPOSITS WITH AND RECEIVABLES FROM BROKERS AND DEALERS

The Company maintains clearing agreements with Spear, Leads & Kellogg (“SLK”) and Fiserv Securities, Inc., (“Fiserv”). Under the agreement with SLK, the Company maintains a clearing deposit of $1,000,000. The Company primarily clears its proprietary equity market making and institutional client activity through SLK. Under the agreement with Fiserv, the Company maintains a clearing deposit of $100,000. The Company primarily clears its fixed income and individual investor activity through Fiserv.

The amounts receivable from brokers and dealers consist of the following:

5. SIGNIFICANT CUSTOMERS

The Company considers significant customers to be customers who account for 10% or more of the total trades by the Company during the period. The Company had one such significant customer, a U.S. broker-dealer, which accounted for 21% of the total trades for the three months ended April 30, 2004, as compared to two such significant customers accounting for 30% and 17% of the total trades in the comparable period in 2003.

The Company’s customers include both institutions and broker-dealers. Institutional clients primarily include mutual funds, pension plans, plan sponsors, hedge funds, trusts and endowments. Broker-dealer clients include global, national and regional broker-dealers and on-line brokers.

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6. NET CAPITAL REQUIREMENTS

As a registered broker-dealer, the Company is subject to regulatory requirements intended to ensure the general financial soundness and liquidity of broker-dealers and requiring the maintenance of minimum levels of net capital, as defined in the SEC Rule 15c3-1. These regulations also prohibit a broker-dealer from repaying subordinated borrowings, paying cash dividends, making loans to its parent, affiliates or employees, or otherwise entering into transactions which would result in a reduction of its total net capital to less than 120% of its required minimum capital. Moreover, broker-dealers are required to notify the SEC before repaying any subordinated borrowings, paying dividends and making loans to its parent, affiliates or employees, or otherwise entering into transactions, which, if executed, would result in a reduction of 30% or more of its excess net capital (net capital less minimum requirement). The SEC has the ability to prohibit or restrict such transactions if the result is detrimental to the financial integrity of the broker-dealer. At April 30, 2004, the Company had net capital of $1,265,531, compared to a minimum net capital requirement of $1,000,000.

7. RELATED PARTY TRANSACTIONS

The Company acquired an interest in ViewTrade of approximately 15% through ViewTrade’s acquisition of the Company’s former subsidiary, EMeyerson.com, Inc. This investment is recorded at $104,744 as of both April 30 and January 31, 2004, and is included in Other Assets in the Consolidated Statements of Financial Condition. ViewTrade subleased space from the Company until the lease was terminated on February 29, 2004. The Company recorded sublease income of $68,203 for the three months ended April 30, 2003, and no income was recorded for the three months ended April 30, 2004. This income is included in Other Income in the Consolidated Statements of Operations.

8. SUBORDINATED LOANS

The Company entered into a NASD approved subordinated loan agreement with SLK dated June 3, 1997 and effective August 1, 1997. The loan is for $2,000,000 and it matured on August 31, 1999, but was extended to August 31, 2003. The maturity of the subordinated loan was again extended, to August 31, 2005, by an agreement dated July 22, 2003, which the Company and SLK entered into in conjunction with a renegotiation of the clearing services SLK provides to the Company. The subordinated loan is subject to monthly interest payments at the Prime Rate and is unsecured. This subordinated loan is considered debt for purposes of the debt to debt-equity ratio.

9. COMMITMENTS AND CONTINGENT LIABILITIES

The Company has entered into arrangements with organizations, including clearing brokers, which provide for indemnification against losses, costs, claims and liabilities arising from the performance of their obligations under our agreement, except for gross negligence or bad faith. The Company has had no claims or payments pursuant to these or prior agreements, and we believe the likelihood of a claim being made is remote. In accordance with applicable margin lending practices, customer balances are typically collateralized by customer securities or supported by other types of recourse provisions.

The Company leases office space under noncancelable operating leases, including a British pound denominated lease related to its U.K. subsidiary. The office leases contain certain escalation clauses whereby the rental commitments may be increased if certain conditions are satisfied and specify yearly adjustments to the lease amounts based on annual adjustments to the Consumer Price Index. The Company leases certain computer and other equipment under noncancelable operating leases. Additionally, the Company leases its office equipment under various leases expiring in 2005 and 2006.

The rental expense for the three months ended April 30, 2004 and 2003 was $297,512 and $260,128 respectively. As of April 30, 2004, future minimum rental commitments under all noncancelable office leases, computer leases and equipment leases were as follows:

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The Company has entered into guaranteed employment contracts with certain of its employees of approximately $975,000 for the year ended January 31, 2005 and $400,000 for the year ended January 31, 2006.

The following litigation and arbitration matters are pending at April 30, 2004:

RAINBOW MEDICAL (FLORIDA)

Harry Binder, on behalf of himself and all others similarly situated, Plaintiff, v. Rainbow Medical Inc., Rainbow Pediatrics, Inc., M.H. Meyerson & Co., Inc., Hugo D. Goldstraj, M.D, Marcela C. Goldstraj, M.D., Roberto P. Novo, M.D., Sandra R. Giblin, Martin Leventhal, Gina Bertinelli, Defendants, Circuit Court of the Eleventh Judicial Circuit, Miami Dade, Florida, Case No. 00-24851 CA.

On September 19, 2000, plaintiff commenced a class action lawsuit alleging that the class, consisting of all investors who purchased investment units in Rainbow Medical, Inc. (“Rainbow”) in a $2.5 million private placement offering in June 1997, purchased units which became worthless when, after the offering closed, certain officers and inside directors of Rainbow, specifically defendants Hugo D. Goldstraj, M.D., Marcela C. Goldstraj, M.D., and Roberto P. Novo, M.D., looted Rainbow and stole the proceeds of the offering. The Company was the placement and selling agent for the private placement. Martin Leventhal, C.P.A., a director of the Company became an outside director of Rainbow after the offering closed.

Plaintiff in its Amended Complaint claims against the Company and Leventhal for breach of fiduciary duty, negligent misrepresentation and negligence. Plaintiff alleges that the Company failed to make certain disclosures in the offering memorandum concerning legal proceedings involving Rainbow’s officers, that the Company failed to ensure that Rainbow engaged in certain corporate actions and that Rainbow failed to use the offering proceeds in the manner stated in the offering memorandum. Plaintiff seeks approximately $2.6 million in damages on behalf of the “class” of investors.

On July 19, 2001, plaintiff Harry Binder, as the putative class representative, filed a motion to have the lawsuit certified as a class action. On December 11, 2001, the Trial Court issued an Order denying the motion. Plaintiff appealed the Court’s Order denying class certification. On November 27, 2002, the Third District Court of Appeal, Florida issued a decision affirming the Trial Court’s denial of class certification. Accordingly, the only claims that now remain in the case are plaintiff’s individual claims, which seek damages of $37,500, together with interest and attorney’s fees. The Company intends to defend itself vigorously against any litigation by plaintiff of his individual claims, and has not recorded a provision for any loss that may be incurred as a result of the action.

FEDERAL SECURITIES CLAIMS (NEW JERSEY)

In re M.H. Meyerson & Co., Inc. Securities Litigation, United States District Court, District of New Jersey, 02 div. 2724.

On June 6, 2002, the plaintiff (who is also the plaintiff in the Florida lawsuit discussed above) filed a Class Action Complaint against the Company and defendants, Martin Meyerson, Kenneth Koock, Estate of Eugene Whitehouse, Jeffrey Meyerson, Bertram Siegel, Martin Leventhal and Alfred Duncan who are directors of the Company. In their complaint, Plaintiffs allege fraud claims under the federal securities law relating to the Company’s disclosures, and alleged failures to disclose certain information relating to prior litigations involving the Company, the efforts of the Company’s subsidiary, eMeyerson.com, Inc., to develop an electronic trading program through a license agreement with TradinGear.com, Inc., and a litigation arising from eMeyerson’s termination of that agreement, and other matters. Plaintiffs seek damages in excess of $15 million for the alleged class.

Subsequently, a virtually identical class action lawsuit was filed by other plaintiffs against the same defendants in the same court, Choung v. M.H. Meyerson & Co., Inc., et al., U.S. District Court of New Jersey, 02 Civ. 3622. On September 24, 2002, the District Court consolidated the two cases under the caption, “In re M.H. Meyerson & Co. Securities Litigation,” Master File No. 02-CV-2724. The plaintiffs have served an Amended Complaint, which repeats the allegations of the initial pleading.

Upon the Company’s motion, and pursuant to an Order of the U.S. District Court dated September 29, 2003, the consolidated action was dismissed with leave to amend within thirty days. On or about October 30, 2003, plaintiffs filed a Second Amended Consolidated Class Action Complaint (“Second Amended Complaint”). All defendants have recently filed a motion to dismiss the Second Amended Complaint.

On June 3, 2004, the court granted the plaintiffs’ motion to file a Third Amended Complaint to include facts arising from the Company’s restatement of its financial results for fiscal 2001, 2002 and 2003 and the interim periods ended April 30, 2003 and July 31, 2003. The Company is currently preparing a response to the Third Amended Complaint.

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The Company believes that the allegations of the Second Amended Complaint, and those the plaintiffs have included in the Third Amended Complaint, are meritless and fail to state legally valid claims. The defendants intend to continue to contest the allegations vigorously and have not recorded a provision for any loss that may be incurred as a result of the action.

C.V.I. GROUP ARBITRATION

C.V.I. Group v. M.H. Meyerson & Co., Inc. and Bear Stearns & Co., Inc.

In May 1999, claimants filed a Statement of Claim in arbitration with the National Association of Securities Dealers (“NASD”) alleging that the Company wrongfully transferred 20,000,000 shares of Whitehall Enterprises, Inc. that were deposited with the Company and its then clearing agent, Bear Stearns & Co., Inc. (“Bear Stearns”). Claimants contend that their damages are based upon the market price of the shares at the date of the transfer, $.25 per share. This claim is partially covered by the Company’s Broker/Dealer Errors and Omissions Policy for a net amount of $1,000,000.

The Company denied all liability and asserted that the transfer of the shares were authorized and duly executed by each of the claimant entities, EMES, SLR, and Ontario, to Global Financial. Each of EMES, SLR, and Ontario, in its respective Power of Attorney, appointed Global Financial as its agent and attorney-in-fact with full and unlimited power and authority to buy, sell, assign, endorse, and transfer all securities of any nature standing anywhere in the name, respectively, of EMES, SLR, and Ontario. Claimants sent copies of each of the Powers of Attorney to the Company to facilitate the transfer of the shares to Global Financial.

The evidence showed that claimants did not send a revocation of the Powers of Attorney until January 27, 2000, which was three days after the shares were transferred. Moreover, the Powers of Attorney specifically stated that any revocation is ineffective for any transaction that was initiated before a revocation. This matter was arbitrated in Buffalo, NY on October 15-17, 2001.

On January 8, 2002, the NASD arbitration panel awarded $5,000,000 in compensatory damages against the Company and Bear Stearns. The award was joint and several against both firms. Neither Bear Stearns nor the Company asserted cross claims against each other in the arbitration. Either may attempt, subject to defenses of the other, to assert a cross claim against the other under the clearing agreement or other law for its share of the award. The Company and Bear Stearns have each filed motions to vacate the award in its entirety with the U.S. District Court for the District of New Jersey. Bear Stearns has also requested the Court to vacate the award as to itself, if the Court does not vacate the entire award. Although the Company previously expected that these motions together, with the Claimant’s motion to confirm, would be resolved sometime during the second calendar quarter of 2004, the Company is now unable to predict the timing of the resolution of this matter.

While both the management of the Company and its legal counsel believe that a vacation or modification of the award is very possible, due to the fact that the legal grounds for vacating an award are somewhat narrow, the Company has elected to record the $5,000,000 adverse award as a liability in its financial statements. Because the award is joint and several, and may be overturned, the Company has not accrued a reserve for interest on the award. The Company has a Securities Broker/Dealer’s Professional Liability Insurance policy with coverage of $1,000,000 for each loss. The insurance company has acknowledged that the adverse arbitration award is covered under the policy. Accordingly, the Company has recorded a $1,000,000 insurance receivable in the consolidated financial statements.

HOOVER ARBITRATION

James D. Hoover, Jr. and Kimberly R. Hoover v. M.H. Meyerson & Co, Inc., Martin H. Meyerson and Ronald Heller, NASD Arbitration No. 03-02234

In March 2003, claimants filed a Statement of Claim in arbitration with the NASD alleging the respondents engaged in excessive and unauthorized trading and entered into unsuitable investments in the claimants’ account. Claimants further alleged that respondent, Heller, solicited investments in several private placements in which respondents had vested interests. Claimants seek damages in the amount of $2.5 million. In May 2003, the Company filed its answer denying the allegation and moved to dismiss the claim.

The Company believes that the allegations in the Statement of Claim are meritless. The Company intends to continue to contest the allegations vigorously.

NEWMAN ARBITRATIONS

Annette Newman, IRA v. M.H. Meyerson & Co, Inc., NASD Arbitration No. 02-07064

Claimant filed arbitration with the NASD alleging a former registered representative of the Company recommended and entered into unsuitable investments for claimant’s account. Claimant also alleged that the registered representative engaged in unauthorized trading in the claimant’s account. Claimant seeks damages in the amount of $113,000. In March 2003, the Company filed its answer denying all allegations.

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Martin Newman and Annette Newman v. M.H. Meyerson & Co, Inc., NASD Arbitration No. 03-00129

In January 2003 claimants filed a Statement of Claim in arbitration with the NASD alleging a former registered representative of the Company engaged in excessive trading and made unauthorized investments in the claimants’ account. Claimants also alleged that Company failed to supervise adequately the activities of its representative. Claimants seek damages in the amount of $120,100. On April 3, 2003, the Company filed its answer denying all allegations.

Miscellaneous

From time to time, certain of the Company’s past and present officers, directors and employees have been named as parties in lawsuits, securities arbitration and administrative claims. These past and present officers, directors and employees are currently the subject of proceedings that are in their initial stages. In the opinion of management, based upon consultation with legal counsel, the Company is not currently a party to any other legal or arbitration proceeding not already disclosed, the adverse outcome of which, individually or in the aggregate, that can be predicted with any reasonable certainty, could have a material adverse effect on the Company’s business, financial condition and operating results.

Dissatisfied customers of the Company’s broker-dealer clients may complain to the NASD or the SEC who may investigate those complaints. These complaints may even rise to the level of arbitration or disciplinary action. In addition, the securities industry is subject to extensive regulation under federal, state and applicable international laws. As a result, the Company is required to comply with many complex laws and rules and the Company’s ability to so comply is dependent in large part upon the establishment and maintenance of a qualified compliance system. The Company is aware of no other SEC or NASD review, or NASD arbitration that would have a materially adverse impact on the Company’s business, financial condition and operating results.

10. SUBSEQUENT EVENTS

Commencing in May 2004, the Company sold, in a series of private offerings, 1,603,600 shares of Company common stock in exchange for $1,568,420 in cash. These shares were sold without registration and are subject to restrictions under the Securities Act of 1933, as amended (“Securities Act”), and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q as well as the Annual Report on Form 10-K and amended Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 filed with the SEC on April 30 and June 1, 2004, respectively.

Critical Accounting Policies

Our critical accounting policies are more fully described in Note 2 of Notes to the Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of the our consolidated financial position and consolidated results of operations and require the application of significant judgment by our management or can be materially affected by changes, from period to period, in economic factors or conditions that are outside the control of management. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. The following discusses our critical accounting policies and estimates.

Other Investments— Other investments are included within other assets on the Statements of Financial Condition, include the Company’s investment in ViewTrade, Inc., and are accounted for at the lower of cost or fair value. The fair value of other investments, for which a quoted market or dealer price is not available, is based on management’s estimate. Among the factors considered by management in determining the fair value of investments are the financial condition, operating results and cash flows of the issuer, the long-term business potential of the issuer, the terms and liquidity of the investment, the sales price of recently issued securities the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuations in the near term. Investments are reviewed on an ongoing basis to ensure that the valuations have not been impaired.

Stock Options—As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the Company accounts for the stock options issued to employees and directors as fixed plan options using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation cost is recorded only to the extent, if any, that the exercise price of the option is less than the market price of the underlying common stock on the date of grant. Any such compensation expense is charged to income over the service period (vesting period).

As required by SFAS No. 123, stock options issued to other than employees or directors are valued at fair value, using the Black-Scholes option pricing model, and the value of the options is charged to expense as the options vest.

As required by SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”), the Company has computed for pro forma disclosure purposes, the fair value of options granted to employees and directors using the Black-Scholes option pricing model. It should be noted that the Black-Scholes option-pricing model was developed for use in estimating the fair value of the traded options, which have no vesting restrictions and are fully transferable, and therefore are different from employee and director options which have both vesting and transfer restrictions which may affect their value. In addition, option valuation models required the input of highly subjective assumptions including the expected stock price volatility. Such assumptions may change over time.

Allowance for doubtful accounts—In the third quarter of fiscal 2003, the Company began recording an allowance against accounts receivable from trading and sales personnel. That allowance is $69,824 at April 30, 2004. Accounts receivable from trading and sales personnel represent amounts owed to the Company by its traders and sales persons for draws (i.e., advance compensation payments) in excess of their profits and commissions earned. New management has assessed the probability of collection for each receivable and has established an allowance consistent with that assessment. However, estimating the allowance is highly subjective, and estimates may differ significantly from the actual amount because the majority of our traders and sales persons are new to the Company, and the Company’s new management does not have a lengthy history about collections from its traders and sales persons. We will reassess and refine our methodology continuously as the new management accumulates sufficient history of collections from its traders and sales persons, and that process may result in changes to our estimates. During the three month period ended April 30, 2004, certain receivables that were fully reserved were written-off because the underlying compensation was recharacterized as salary expense.

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Capitalization of proprietary software—During the year ended January 31, 2004, the Company began capitalizing certain costs incurred in connection with developing or obtaining internal use software pursuant to Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Unamortized capitalized software development costs of $1,010,961 are carried in furniture, equipment, capitalized software and leasehold improvements in the Consolidated Statement of Financial Condition as of April 30, 2004. Of that amount, $584,212 represents software that is still in development and is not being amortized and $426,749 represents software that has been placed in service and is being amortized. Capitalized software is amortized over its estimated useful life of three years.

Contingent liabilities—As discussed in Note 9 of Notes to Consolidated Financial Statements, the Company is the defendant in several law suits or arbitrations brought by brokerage customers or investors who purchased securities in offerings for which the Company acted as underwriter or placement agent. The claims in these actions represent contingent liabilities, which are accounted for under SFAS No. 5, Accounting for Contingencies. Under SFAS No. 5. a loss and a liability is recorded for a settlement or award when management concludes that such loss is probable and can be reasonably estimated. In many of the actions described in Note 9, we intend to vigorously defend ourselves, and/or are presently unable to predict the outcome, and therefore to date have not accrued for any losses. However, as these actions proceed and more information becomes available, our assessment of the future outcome of a matter may change or, notwithstanding our defenses, we may choose to settle a matter or a plaintiff may receive an award, at which time a loss may be recorded. The actual future outcomes of these matters may differ from our assessments at any point in time, and significant differences could have a material affect on our financial position and results of operations.

Income taxes—As part of the process of preparing our financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from the difference in the financial reporting and tax treatments of specific items, such as stock compensation, the valuation of financial instruments, the allowance for doubtful accounts, and other items. These differences result in deferred tax assets and liabilities. We also record a deferred tax asset for net operating loss carryforwards. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Our future tax expense as reported in the financial statements will be affected by the extent to which we establish a valuation allowance or the increase or decrease in the allowance during a period. To date, we have recorded a valuation allowance of $11,928,993, the entire amount of our deferred tax assets (primarily net operating loss carryforwards), as currently we cannot determine that it is more likely than not that we will generate sufficient taxable income in the U.S. to use those net operating loss carryforwards. In the event that actual results differ from these estimates, or we adjust these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our financial position and results of operations.

Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FIN No. 46, Consolidation of Variable Interest Entities. The FASB subsequently revised and issued Financial Interpretation (“FIN”) No. 46 (Revised) in December 2003. FIN No. 46 requires a company to consolidate a variable interest entity (“VIE”) if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Before FIN No. 46, VIEs were commonly referred to as special purpose entities. As the Company does not have any interests in VIEs, the adoption of this statement did not have an effect on its consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB No. 133 Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for derivative contracts and hedging instruments entered into after June 30, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and must be applied to all financial instruments at the beginning of the third quarter of 2003. The adoption of this statement did not have an effect on the Company’s consolidated financial statements.

FORWARD LOOKING INFORMATION

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and information relating to the Company that are based on management’s exercise of business judgment as well as assumptions made by and information currently available to management.

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When used in this document, the words “anticipate,” “believe,” “estimate,” “expect,” and “intend” and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements.

RESULTS OF OPERATIONS

Certain Factors Affecting Results of Operations

Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward-looking statements. Several of these factors include, without limitation the Company’s ability to:

We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.

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Revenues

Our revenues consist principally of net trading revenue from U.S. securities market-making activities. Net trading revenue, which consists of trading gains, net of trading losses and commission equivalents, is primarily affected by changes in U.S. equity trade and share volumes, our average revenue capture per share, dollar value of equities traded, our ability to properly manage inventory positions, changes in our execution standards, volatility in the marketplace, our mix of broker-dealer and institutional clients and by regulatory changes and evolving industry customs and practices.

Securities transactions with clients are executed as principal, riskless principal or agent. Profits and losses on principal transactions and commission equivalents on riskless principal transactions are included within net trading revenue, and commissions earned on agency transactions are included within commissions. We execute the majority of our institutional client orders on a riskless principal or agency basis, generating commission equivalents or commissions. We execute the majority of our broker-dealer client orders as principal. Commissions and fees are primarily affected by changes in our trade and share volumes in listed securities and changes in commission rates.

We also earned commissions from our retail customers, which are primarily affected by changes in our retail customers’ trade and share volume, changes in the number of retail customer accounts, as well as changes in commission rates. As a part of the new management’s focus on market making activities, the Company exited the retail business and transferred the majority of our retail customer accounts to GunnAllen Financial, Inc. on March 27, 2004.

We earn underwriting and advisory fees from our corporate clients, mostly on an agency basis. Underwriting and investment banking fees are primarily affected by the level of underwriting and advisory assignments we obtain, as well as volatility in the marketplace and investor sentiment.

We earn interest income from our cash held at banks and cash held in trading accounts at clearing brokers. The Company’s clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by clearing brokers for facilitating the settlement and financing of securities transactions. Net interest is primarily affected by interest rates, the changes in cash balances held at banks and clearing brokers and our level of securities positions owned compared to our securities positions in which we are short.

Expenses

Our principal operating expenses consist of employee compensation and benefits, execution and clearance charges, and communication and data processing.

Other operating expenses are:

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Three Months Ended April 30, 2004 and 2003

The net loss for the three months ended April 30, 2004 was $754,197, resulting in a loss per share on a fully diluted basis of $0.07. This compares to a net loss of $2,114,127 and a loss per share of $0.26 on a fully diluted basis for the comparable period in 2003. The reduction in the Company’s net loss in the first quarter of the year ending January 31, 2005 (“fiscal 2005”) when compared with the first quarter of the year ended January 31, 2004 (“fiscal 2004”) reflects the effects of the growth in the Company’s revenues. That revenue growth reflects the Company’s new business plan, which is focusing on expanding the Company’s trade execution market share. As the revenues have grown, the variable portion of the compensation costs and the variable execution and clearance charges have increased along with the revenue growth. In addition, while certain fixed expenses have been rationalized and reduced whenever possible, other technology and business development expenses have increased in order to facilitate the expanded market share of trade executions.

In the three months ended April 30, 2004, total revenues increased 192.4% to $6.5 million, from $2.2 million in the comparable period for 2003, primarily due to increased net trading revenues from our U.S. securities market-making activities.

Expenses increased 67.1% to $7.2 million in 2004, from $4.3 million in 2003, primarily as a result of increases in variable costs such as employee compensation and benefits, and execution and clearance charges, plus an increase in communications and data processing expenses and $283,775 of expenses related to the restatement of the Company’s financial statements.

Revenues

Net trading revenue from market-making activities increased 251.4% to $6.0 million for the three months ended April 30, 2004 from $1.7 million for the comparable period in 2003. The revenues increased primarily due to increases in trade and share volumes. Volume increased due to both an overall increase in market volume and an increase in our market share resulting from the expansion and upgrading of our market-making operation.

Underwriting and investment banking fees decreased 29.5% to $50,000 for the three months ended April 30, 2004, from $70,896 for the comparable period in 2003. This decrease is due to a reduction in the amount of underwriting transactions or advisory contracts in 2004.

Commissions increased 17.6% to $402,424 for the three months ended April 30, 2004, from $342,095 for the comparable period in 2003. This increase is due to both increased market volume as well as an increase in our market share in commission-based business in 2004.

Interest and other income decreased 89.3% to $9,890 for the three months ended April 30, 2004, from $92,159 for the comparable period in 2003. This decrease was primarily due to the termination of a sublease agreement.

Expenses

Employee compensation and benefits expense increased 114.1% to $3.6 million for the three months ended April 30, 2004, from $1.7 million for the comparable period in 2003. The increase was primarily due to higher sales and trading payouts as a result of increased gross trading profits and margins, the hiring of experienced senior management, sales and trading professionals, and certain prior period salary forfeitures. These increases were partially offset by the effects of reductions of sales and trading professionals that were replaced with more experienced personnel and the elimination of our retail business.

Execution and clearance fees increased 23.1% to $1.1 million for the three months ended April 30, 2004, from $0.9 million for the comparable period in 2003. The increase is due to increased trade and share volume as well as increased costs related to executing orders through ECN’s. Execution and clearance charges as a percentage of revenues declined to 16% from 39%, for the three month periods ending April 30, 2004 and 2003, respectively.

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Communication and data processing expense increased 72.9% to $921,709 for the three months ended April 30, 2004, from $533,220 for the comparable period in 2003. The increase is primarily attributable to increased costs associated with the enhanced trading platform that was installed midway through calendar year 2003 and additional requirements for market data services.

Occupancy and rental expense decreased 2.5% to $332,734 for the three months ended April 30, 2004, from $341,256 for the comparable period in 2003.

Professional fees decreased 27.3% to $319,564 for the three months ended April 30, 2004, from $439,825 for the comparable period in 2003. The decrease is primarily due to a decrease in legal costs associated with outstanding litigation and arbitration matters.

Business development expense increased 115.6% to $250,650 for the three months ended April 30, 2004, from $116,268 for the comparable period in 2003. The increase is primarily attributable to the expenses for a client event held in the first quarter of fiscal 2005 to market our products and services.

Postage, printing and office supplies expense decreased 54.8% to $58,189 for the three months ended April 30, 2004 from $128,633 for the comparable period in 2003. The decrease is primarily attributable to a reduction in the headcount and other cost reduction measures.

Depreciation and amortization increased 104.0% to $108,363 for the three months ended April 30, 2004, from $53,108 for the comparable period in 2003. This increase is primarily due to an increase in technology and software development expenditures, resulting in increased depreciation and amortization expense.

Interest expense decreased 26.1% to $20,000 for the three months ended April 30, 2004, from $27,065 for the comparable period in 2003. The decrease is a result of reducing our subordinated debt outstanding.

Other expenses increased 89.5% to $327,903 for the three months ended April 30, 2004, from $172,992 for the comparable period in 2003. This increase is primarily due to increased software licensing fees and insurance costs, partially offset by a decrease in research costs.

Three Months Ended April 30, 2004 and Three Months Ended January 31, 2004

The net loss for the three months ended April 30, 2004 was $754,197 compared to the net loss of $1,181,465 for the three months ended January 31, 2004. Revenues for the three months ended April 30, 2004 were $6.5 million compared to revenues of $6.7 million for the three months ended January 31, 2004.

The Company’s operating results improved for the first quarter of fiscal 2005, as compared to the fourth quarter of fiscal 2004, despite the decline in revenues, as the result of reductions in compensation expenses (incentive compensation accruals and variable sales and trader compensation), professional fees, Restatement Costs, and variable execution and clearance charges.

Revenues declined in the first quarter of fiscal 2005, as compared to the fourth quarter of fiscal 2004, as the result of a slight decline in net trading revenues, partially offset by increased commission revenues.

Liquidity and Capital Resources

The Company’s statements of financial position reflect a liquid financial position as cash and assets readily convertible to cash (principally receivables from brokers and dealers and securities owned) represent 70% and 74% of total assets at April 30, 2004 and January 31, 2004, respectively. Receivables from brokers and dealers include interest-bearing cash balances held with clearing brokers, including, or net of, amounts related to securities transactions that have not yet reached their contracted settlement date, which is generally within three business days of the trade date. Securities owned principally consist of equity securities that trade on Nasdaq, on the OTC Bulletin Board and in the Pink Sheets.

Net cash used in operating activities for the three months ended April 30, 2004 and 2003 was $456,445 and $2,307,164, respectively. Our net cash used in operating activities is materially impacted by changes in our results of operations, as well as the level of our long and short securities positions, and the cash and equity balances at our clearing brokers. The negative operating cash flows for the three months ended April 30, 2004 were financed from cash and cash equivalents on hand at January 31, 2004. For the three months ended April 30, 2003 the negative operating cash flows were financed from the proceeds of the issuance of common stock and cash and cash equivalents on hand at January 31, 2003.

Net cash used in investing activities for the three months ended April 30, 2004 was $374,006. The 2004 investing outflows resulted from the purchase of fixed assets and the capitalization of internally developed software during the year. For the three months ended April 30, 2003 investing activities provided cash flows of $53,200 from the sale of securities investments.

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Net cash provided by financing activities for the three months ended April 30, 2004 and 2003 was $212,323 and $1,602,536 respectively. During the three months ended April 30, 2004 we issued 125,000 shares of Common Stock in private offerings and 3,637 shares related to option exercises. The proceeds from the issuance of common stock during the three months ended April 30, 2004 were used for the Company’s working capital purposes and to increase the Company’s level of stockholders’ equity and the Company’s net capital as defined in SEC Rule 15c3-1.

The Company currently does not have any outstanding bank borrowings or long-term debt, and does not have any available lines of credit.

The Company has not declared and paid, nor does it expect to declare and pay any dividends on the Common Stock in the near term.

Contractual Obligations

In connection with its operating activities, the Company enters into certain contractual obligations. The Company’s future cash payments associated with its contractual obligations pursuant to its operating leases and guaranteed employment contracts longer than one year as of April 30, 2004 are summarized below:

Off-Balance Sheet Arrangements

As of April 30, 2004, the Company did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market making activities expose the Company to significant risks, including but not limited to changes in price and/or liquidity of its trading positions. The Company uses an automated trading system to provide management with a real-time overview of its traders’ activity, positions, and profit/loss. Each trader’s total positions are regularly reviewed and limited by management.

In the course of the Company’s business, it maintains inventory, consisting mainly of Nasdaq and OTC securities. The market value of the Company’s inventory was $2,070,061 in long positions and $525,061 in short positions at April 30, 2004. The loss to the Company, assuming a hypothetical 10% decline in prices, would be $154,500 due to the losses on the long positions being partially offset by gains on the short positions.

The Company, from time to time, invests in certificates of deposit and/or maintains interest bearing balances in its accounts with its clearing brokers, for working capital purposes, which are classified as cash equivalents and receivables from clearing brokers, respectively, in the Statements of Financial Condition. The receivables from clearing brokers, less the portion required to meet margin requirements, are all available for immediate withdrawal, and the certificates of deposit are for periods of 31 days or less, and do not present a material market risk. The Company does not normally trade or carry positions in listed derivative instruments.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, the Company carried out, under the supervision of and with the participation of the Company’s management, including the Company’s Interim Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), an evaluation of the effectiveness of its “disclosure controls and procedures” (as the term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder.

Further, there were no changes in the Company’s internal controls over financial reporting during the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The nature of the Company’s business subjects it to claims, lawsuits, regulatory examinations, and other proceedings in the ordinary course of business. While the Company is contesting liability and/or the amount of damages in each pending matter, the ultimate outcome of the matters described at Note 9 in the Notes to Consolidated Financial Statements included in this Form 10-Q for the three months ended April 30, 2004, and other proceedings and claims pending against the Company, cannot be determined at this time and the results of these matters cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the Company’s results of operations in any future period, depending partly on the results for that period, and a substantial judgment could have a material adverse impact on the Company’s financial condition, results of operations, or cash flows. However, it is the opinion of management at this time, after consultation with legal counsel and information currently available, that the ultimate outcome of these existing claims and proceedings will not have a material adverse impact on the financial condition of the Company, although they might be material to operating results for any particular period, depending, in part upon operating results for that period.

For further information on Legal Proceedings, see Note 9 in the Notes to Consolidated Financial Statements, included in this Form 10-Q for the three months ended April 30, 2004.

The NASD and Net Capital Requirements

Regulatory bodies, including the NASD, are charged with safeguarding the integrity of the securities and with protecting the interests of investors participating in those markets. Broker-dealers are subject to regulations covering all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure, record keeping and the conduct of directors, officers and employees.

The SEC, NASD and various other regulatory agencies have rigid rules, including the maintenance of specific levels of net capital by securities brokers and dealers pursuant to the SEC’s Uniform Net Capital Rule 15c3-1 with which the Company must comply. As of April 30, 2004, the Company had total net capital of $1,265,531, $265,531 in excess of the Company’s minimum net capital requirement of $1,000,000.

On April 21, 2004, the Company filed notice to the SEC and NASD in compliance with Rule 17a-11(b)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Company’s April 1, 2004 intra-day net capital deficiency, including a detailed accounting of the events that led to the deficiency. This deficiency arose, in part, due to a failure of the Company’s computerized primary risk management and assessment tool. On the morning of April 1, 2004, the Company received a significant increase in program trading volume and the impact on the Company’s trading positions went undetected for a period of time due to a failure of the computer system. When the computer risk and assessment system was restarted and magnitude of the positions became apparent, the Company took immediate action to stop accepting the program trades and to reduce its trading positions in order to assess its capital position and to analyze the sequence of events that led to the system failure. As of the close of business on April 1, 2004, the firm was back in net capital compliance. As a result of the preliminary investigation, which took several weeks to compile, the Company determined that a supervisory failure, in combination with the system failure, were the causal factors of the deficiency. The Company is developing a separate computerized risk management and assessment system so that there are redundant systems available to assess the Company’s capital position. In addition, the Company executed certain personnel changes, including suspensions and demotions.

The Nasdaq

In its November 26, 2003 notice to the Company, the Nasdaq Listing Qualifications Panel (the “Panel”) determined to delist the Company’s securities on the Nasdaq SmallCap Market effective as of December 1, 2003 (refer to disclosures made in the Current Report on Form 8-K filed with the SEC on November 28, 2003). The Company’s common stock is currently quoted in the Pink Sheets. The Company appealed the Panel’s decision to the Nasdaq Listing and Hearing Review Council, which subsequently affirmed the Panel’s delisting determination. The Company’s securities remain quoted in the Pink Sheets and, while there can be no assurance, the Company’s securities may become eligible to quoted on the OTC Bulletin Board.

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The Department of Labor

The Company is also subject to oversight by the U.S. Department of Labor in connection with our benefit plan. The annual 401(k) benefit plan audits for the years ended December 31, 2002 and 2001 had not been completed by the prior management on a timely basis. These audits are currently being performed and may lead to further examinations by the Department of Labor.

Other Matters

In March 2004, in connection with a U.S. Securities and Exchange Commission (“SEC”) investigation of trade activity, conduct, supervision and record-keeping at Knight Trading Group, Inc. (“Knight”), the SEC staff and the NASD Department of Market Regulation served Wells Notices to John Leighton (a former Knight Senior Vice President), Knight and other former Knight employees. Mr. Leighton is the Company’s Chairman, Chief Executive Officer and President. The Wells Notices indicate that the regulators are considering recommending civil injunctive and administrative enforcement actions for possible violations of securities laws. The Company is not a party to this matter.

On March 25, 2004, the Company announced that the Board accepted Mr. Leighton’s request for administrative leave to devote his full attention to addressing the aforementioned regulatory issues arising out of his tenure with another NASD member firm. The Board also accepted Mr. Leighton’s nomination of Charles B. Kennedy III as acting CEO and President.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

During the three months ended April 30, 2004, the Company sold in privately negotiated transactions 125,000 shares of Company common stock, not registered under the Securities Act of 1933, as amended (the “Securities Act”) to executive officers, or family members of executive officers, in exchange for $207,500 in cash pursuant to Section 4(2), Section 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws. These share issuances were approved by the Company’s Board of Directors. The investors in the Company’s securities had access to the kind of information about the Company that the Company would provide in a registration statement, were “accredited investors” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act and represented to the Company their intentions to acquire the Company’s securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the certificates representing the securities issued. No underwriter was used and no commissions were paid in connection with the issuance of the securities.

Subsequent to April 30, 2004, the Company additionally sold in privately negotiated transactions 1,603,600 shares of Company common stock, not registered under the Securities Act, to “accredited investors” (as the term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act) and an executive officer, in exchange for $1,568,420, in cash pursuant to Section 4(2), Section 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws. These share issuances were approved by the Company’s Board of Directors. The investors in the Company’s securities had access to the kind of information about the Company that the Company would provide in a registration statement, were “accredited investors” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act and represented to the Company their intentions to acquire the Company’s securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the certificates representing the securities issued. Placement fees totaling $35,180 were paid to two placement agents in connection with this share issuance.

All of the proceeds from the above referenced share issuances were used for the Company’s working capital purposes, to increase the Company’s level of shareholders’ equity and its net capital as defined in SEC Rule 15c3-1.

There were no purchases of equity securities during the three months ended April 30, 2004.

Item 3. Defaults Upon Senior Securities

None.

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

No matters were submitted to a vote of security holders of the Company during the three months ended April 30, 2004.

Item 5. Other Information

None.

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Item 6. Exhibits and Reports on Form 8-K

The following reports on Form 8-K were filed during the quarter ended April 30, 2004:

On March 10, 2004, a Current Report on Form 8-K was filed by the Company under Item 5, Other Events and Regulation FD Disclosure.

On April 13, 2004, a Current Report on Form 8-K was filed by the Company under Item 5, Other Events and Regulation FD Disclosure.

No financial statements were filed with any of the foregoing Current Reports on Form 8-K.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jersey City, State of New Jersey, on this 14th day of June, 2004.

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