<PAGE>

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

  (Mark One)

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

                 For the quarterly period ended: March 31, 2001

                                       OR

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

                 For the transition period from _____ to ______

                         Commission file number: 1-14897

                             A.B. Watley Group Inc.
                             ----------------------
             (Exact name of registrant as specified in its charter)

                     Delaware                       13-3911867
                     --------                       ----------
          (State or other jurisdiction of        (I.R.S. Employer
           incorporation or organization)       Identification No.)

                       40 Wall Street, New York, NY 10005
                       ----------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (212) 422-1100
                                 --------------
              (Registrant's telephone number, including area code)

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 / /.

The number of shares outstanding of the issuer's common stock, par value $.001
per share, as of May 9, 2001 was 10,986,796.

<PAGE>

                             A. B. Watley Group Inc.

Index

PART I - FINANCIAL INFORMATION                                              Page

    Item 1. Financial Statements

    Consolidated Statements of Financial Condition
          March 31, 2001 (Unaudited) and
          September 30, 2000                                                  3

    Consolidated Statements of Operations
          Three months and six months ended
          March 31, 2001 and 2000 (Unaudited)                                 4

    Consolidated Statements of Cash Flows
          Six months ended March 31, 2001 and
          2000 (Unaudited)                                                    5

    Notes to Consolidated Financial Statements (Unaudited)                    6

    Item 2. Management's Discussion and Analysis
    of Financial Condition and Results of Operations                          8

    Item 3. Quantitative and Qualitative Disclosures About
    Market Risk                                                              11

PART II - OTHER INFORMATION

    Item 6. Exhibits and Reports on Form 8-K                                 12

Signatures                                                                   13

                                        2
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

                             A. B. Watley Group Inc.
                 Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                               March 31, 2001    September 30, 2000
                                                                                (unaudited)
ASSETS
<S>                                                                             <C>                <C>
Cash and cash equivalents                                                       $  2,029,052       $  5,090,083
Restricted cash                                                                      492,731            531,432
Securities owned at market value                                                     227,069            391,161
Receivables from clearing brokers                                                  1,773,694          1,119,909
Property and equipment net of accumulated depreciation
    of $5,577,486 and $2,292,737 at March 31, 2001 and
    September 30, 2000, respectively                                              17,643,969         18,523,320
Investments                                                                          626,112            728,614
Loans receivable from related party                                                  123,048            128,071
Other assets                                                                       2,509,439          2,520,054
                                                                                ------------       ------------
Total assets                                                                    $ 25,425,114       $ 29,032,644
                                                                                ============       ============


LIABILITIES AND STOCKHOLDERS'  EQUITY
Subordinated borrowings                                                         $    350,000       $    350,000
Subordinated borrowings from officer                                                 180,000             55,000
Notes payable to officers                                                          7,170,000          3,625,000
Securities sold not yet purchased                                                     11,009            180,993
Notes payable, net of unamortized discounts of $87,372
    and $127,533 at March 31, 2001 and September 30, 2000, respectively              973,908          1,728,261
Bank loan                                                                               --                3,333
Deferred rent incentives                                                           1,559,134          1,399,554
Accounts payable and accrued liabilities                                           7,564,690          7,063,840
Other liabilities                                                                  2,175,786          2,448,877
                                                                                ------------       ------------
Total liabilities                                                                 19,984,527         16,854,858
                                                                                ------------       ------------

STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 20,000,000 shares authorized at March 31, 2001
    and September 30, 2000, respectively, 8,841,565 and 8,798,090 issued and
    outstanding at March 31, 2000 and September 30, 2000, respectively                 8,842              8,798
Additional paid-in capital                                                        24,921,355         24,814,573
Option costs, net                                                                    (79,331)           (93,331)
Accumulated deficit                                                              (19,410,279)       (12,552,254)
                                                                                ------------       ------------
Total stockholders' equity                                                         5,440,587         12,177,786
                                                                                ------------       ------------
Total liabilities and stockholders' equity                                      $ 25,425,114       $ 29,032,644
                                                                                ============       ============
</TABLE>


          See accompanying Notes to Consolidated Financial Statements.

                                       3
<PAGE>

                             A.B. Watley Group Inc.
                      Consolidated Statements of Operations
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                       Three Months Ended              Six Months Ended
                                                       ------------------              ----------------
                                                    March 31,       March 31,       March 31,       March 31,
                                                      2001            2000            2001            2000
                                                  ------------    ------------    ------------    ------------
<S>                                               <C>             <C>             <C>             <C>
Revenues:
Commissions                                       $  5,215,536    $ 10,091,323    $ 11,402,064    $ 16,734,946
Data service revenues                                  373,993         461,915         807,685         974,961
Principal transactions                               1,047,331       1,594,791       2,135,686       2,635,485
Interest and other income                              524,787         547,976       1,036,361         893,154
Interest income - related party                          1,545           1,545           3,090           3,090
                                                  ------------    ------------    ------------    ------------
Total revenues                                       7,163,192      12,697,550      15,384,886      21,241,636
Interest expense                                       136,397          68,765         261,390         133,386
Interest expense - related party                       103,663           3,750         175,021           7,500
                                                  ------------    ------------    ------------    ------------
Net revenues                                         6,923,132      12,625,035      14,948,475      21,100,750
                                                  ------------    ------------    ------------    ------------
Expenses:

Clearing charges, floor brokerage and data fees      2,889,350       4,680,318       5,692,269       7,972,574
Employee compensation and related costs              3,422,691       3,163,103       6,421,552       5,509,191
Communications                                         560,089         399,994       1,047,594         851,450
Business development                                   644,965       2,426,983       1,456,522       3,775,923
Professional services                                  908,470         404,850       1,133,244         959,040
Occupancy and equipment costs                        1,496,654       1,287,149       2,872,196       2,418,588
Depreciation and amortization                        1,285,495         202,368       2,561,541         438,589
Other expenses                                         290,513         241,705         474,119         402,242
                                                  ------------    ------------    ------------    ------------
Total expenses                                      11,498,227      12,806,470      21,659,037      22,327,597
                                                  ------------    ------------    ------------    ------------
Loss before income taxes                            (4,575,095)       (181,435)     (6,710,562)     (1,226,847)
Loss on investments                                     33,333              --         132,502              --
                                                  ------------    ------------    ------------    ------------
Loss before income tax                              (4,608,428)       (181,435)     (6,843,064)     (1,226,847)
Income tax provision                                        --           8,400          14,961          18,960
                                                  ------------    ------------    ------------    ------------
Net loss                                          $ (4,608,428)   $   (189,835)   $ (6,858,025)   $ (1,245,807)
                                                  ============    ============    ============    ============
Basic and diluted earnings per share              $      (0.52)   $      (0.02)   $      (0.78)   $      (0.15)
                                                  ============    ============    ============    ============
Weighted average shares outstanding                  8,831,999       7,981,745       8,819,171       7,956,745
                                                  ============    ============    ============    ============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                        4
<PAGE>

                             A.B. Watley Group Inc.
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                 Six Months Ended
                                                                 ----------------
                                                          March 31, 2001   March 31,2000
                                                          --------------   -------------
<S>                                                        <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss                                                   $(6,858,025)     $(1,245,807)
Adjustments to reconcile net loss to net cash (used in)
   operating activities:
      Non-cash compensation/service costs                       14,000           33,735
      Depreciation and amortization                          2,561,541          438,589
      Loss on investments                                      132,502               --

      Changes in assets and liabilities:

      (Increase) decrease in operating assets:

          Restricted cash                                       38,701          (11,228)
          Securities owned                                     164,092           97,910
          Receivables from clearing brokers                   (653,785)        (745,054)
          Loans receivable from related party                   (1,545)           5,023
          Other assets                                           7,315         (588,360)
      Increase (decrease) in operating liabilities:
          Securities sold, not yet purchased                  (169,984)          (2,921)
          Accounts payable and accrued liabilities            (539,037)       2,838,240
          Other liabilities                                     22,380          139,565
                                                           -----------      -----------
Net cash (used in) provided by operating activities         (5,281,845)         959,692
                                                           -----------      -----------
CASH FLOWS USED IN INVESTING ACTIVITIES

Purchases of property and equipment, net                      (728,531)      (3,855,332)
Investments                                                    (30,000)              --
Deferred rent incentives                                       255,676          757,920
                                                           -----------      -----------
Net cash used in investing activities                         (502,855)      (3,097,412)
                                                           -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercised stock options                          106,826               --
Proceeds from exercised warrants                                    --          350,000
Repayment of notes payable                                    (754,353)        (244,070)
Proceeds from notes payable-officer                          3,670,000               --
Payment of lease obligations under capital leases             (295,471)              --
Repayment of bank loan                                          (3,333)         (20,000)
                                                           -----------      -----------
Net cash provided by financing activities                    2,723,669           85,930
                                                           -----------      -----------
Net decrease in cash and cash equivalents                   (3,061,031)      (2,051,790)
Cash and cash equivalents at beginning of period             5,090,083        9,298,822
                                                           -----------      -----------
Cash and cash equivalents at end of period                 $ 2,029,052      $ 7,247,032
                                                           ===========      ===========

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES
      AND DISCLOSURE OF CASH FLOW INFORMATION
Accounts payable for purchases of property and equipment   $ 1,039,867      $ 1,687,768
Cash paid for:
      Interest                                             $   169,861      $   119,386
      Taxes                                                     14,961           48,541
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                        5
<PAGE>

                             A.B. Watley Group Inc.
                   Notes to Consolidated Financial Statements
                                   (UNAUDITED)

1. Organization and Basis of Presentation

A.B. Watley Group Inc. ("ABWG" or the "Company"), which was formerly known as
Internet Financial Services Inc., conducts business primarily through its
principal subsidiary, A.B. Watley, Inc. ("A.B. Watley"). A.B. Watley is a
registered broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. ABWG is a
Delaware corporation organized May 15, 1996.

A.B. Watley is an introducing broker-dealer which conducts business in
electronic trading, information and brokerage services, as well as institutional
block trading. A.B. Watley clears all transactions through two clearing brokers
on a fully disclosed basis. Accordingly, A.B. Watley is exempt from Rule 15c3-3
of the Securities and Exchange Commission ("SEC").

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the year
ended September 30, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto for the fiscal year ended September
30, 2000 included in the Company's Annual Report on Form 10-KSB.

The consolidated financial statements include the accounts of ABWG and its
wholly-owned subsidiary, A.B. Watley. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts reflect
reclassifications to conform to current year's presentations.

2. Net Capital Requirement

A.B. Watley is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Net
Capital Rule") which requires A.B. Watley to maintain minimum net capital such
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. The Net Capital Rule also requires that equity capital may
not be withdrawn or cash dividends paid if A.B. Watley's resulting net capital
ratio would exceed 10 to 1. At March 31, 2001, A.B. Watley had net capital, as
defined, of $579,831 which was $350,553 in excess of its required net capital
of $229,278. The aggregate indebtedness to net capital ratio was .59 to 1.

                                        6
<PAGE>

                             A.B. Watley Group Inc.
                   Notes to Consolidated Financial Statements
                                   (UNAUDITED)

3. Earnings Per Share

Since the Company recognized a net loss for the three months ended March 31,
2001 and six months ended March 31, 2001 and 2000, diluted earnings per common
share is the same as basic earnings per common share for both periods.

4.  Notes Payable to Officers

The Company issued the following promissory notes to officers and major
stockholders of the Company:

       Effective                Maturity           Principal      Interest
          Date                    Date              Amount          Rate
          ----                    ----              ------          ----
     March 23, 2000         March 22, 2002            75,000        10%
     May 31, 2000           May 30, 2002             500,000         7%
     June 30, 2000          May 31, 2002           1,200,000         7%
     August 20, 2000        July 31, 2002          1,000,000         7%
     September 24, 2000     September 23, 2002       500,000         7%
     October 24, 2000       October 23, 2002         300,000         7%
     October 30, 2000       October 29, 2002         300,000         7%
     November 30, 2000      November 29, 2002        300,000         7%
     December 18, 2000      December 17, 2002        500,000         7%
     January 31, 2001       December 31, 2003      1,000,000         7%
     February 22, 2001      February 21, 2003        500,000         7%
     March 31, 2001         February 28, 2003        995,000         7%
                                                  ----------
                                                  $7,170,000
                                                  ==========

As of March 31, 2001, accrued interest on notes payable to officers was
$160,061.

5.  Subsequent Event

On April 2, 2001 the Company sold 2,027,241 shares of common stock in a private
placement offering. The common stock was issued at $5.50 per share. The private
placement offering generated total net proceeds of $10,089,825. In addition the
Company issued warrants expiring April 1, 2004 to acquire 608,174 shares of the
Company's common stock at an exercise price of $6.75 per share. The Company will
register the shares for resale under the Securities Act of 1933.

                                        7
<PAGE>

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

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB. The results of operations for the three and six months ended March 31,
2001 are not necessarily indicative of the results for the entire fiscal year
ending September 30, 2001.

Results of Operations

Three months ending March 31, 2001 compared to the quarter ending March 31, 2000

REVENUES. Total revenues for the quarter ending March 31, 2001 were $7,163,192,
a decrease of 44%, as compared to revenues of $12,697,550 for the quarter ending
March 31, 2000. Revenues from commissions decreased by $4,875,787, or 48%, from
$10,091,323 for the March 2000 quarter to $5,215,536 for the March 2001 quarter
due primarily to the significant decrease in overall trading activity by online
traders. During the quarter ending March 31, 2001, the Company's online
brokerage division had total billed transactions of 235,755 and average billed
transactions of 3,803 per day, a decrease of 47% compared to an average daily
billed transaction rate of 7,135 per day during the March 2000 quarter totaling
449,513 billed transactions. Data service revenues decreased by $87,922, or 19%,
from $461,915 for the March 2000 quarter to $373,993 for the quarter ending
March 31, 2001 due to a change in our pricing structure, and the decrease in the
number of Ultimate Trader online accounts. Revenues from principal transactions
decreased by $547,460, or 34%, from $1,594,791 for the March 2000 quarter to
$1,047,331 for the quarter ending March 31, 2001, mainly as a function of the
significantly lower volumes of business conducted by both the online brokerage
division's trading desk and the third-market institutional sales division.
Interest and other income decreased slightly from $547,976 for the March 2000
quarter to $524,787 for the quarter ending March 31, 2001 due to decreases in
customer margin and asset balances.

Interest expense increased from $68,765 for the March 2000 quarter to $136,397
for the March 2001 quarter as result of interest charged on capitalized lease
obligations. Interest expense - related party increased from $3,750 for the
quarter ending March 31, 2000, to $103,663 for the quarter ending March 31,2001,
due to additional borrowings from officers.

As a result of the foregoing, net revenues decreased by $5,701,903, or 45%, from
$12,625,035 for the March 2000 quarter to $6,923,132 for the quarter ending
March 31, 2001. Nearly all of our revenues were generated by clients in the
United States and no single group of related clients accounted for 10% or more
of our revenues.

EXPENSES EXCLUDING INTEREST. Total expenses decreased by $1,308,243, or 10%,
from $12,806,470 for the March 2000 quarter to $11,498,227 for the quarter
ending March 31, 2001. Commissions, floor brokerage and clearing charges
represent payments to our clearing and floor brokers who facilitate our clients'
transactions. As a result of the large decrease in the volume of business
conducted by our online clients and the conversions of our customers to our
proprietary direct access trading platform, such expenses decreased by
$1,790,968, or 38%, from $4,680,318 for the March 2000 quarter to $2,889,350 for
the quarter ending March 31, 2001. Employment compensation and related costs
increased by $259,588, or 8%, from $3,163,103 for the March 2000 quarter to
$3,422,691 for the quarter ending March 31, 2001, due to a decrease of 51
employees, offset by expenses for software developers that are no longer working
on capitalizable software development projects and, accordingly, have their
salaries expensed in the current period. Included in these current period
compensation and related costs are $615,167 incurred to modify our software to
be used by our licensing partner in accordance with our licensing agreement.

Communications expense increased by $160,095, or 40%, from $399,994 for the
March 2000 quarter to $560,089 for the quarter ending March 31, 2001 as a
function of adding additional lines from our data providers and ECN's to our
Dallas location, in order to create a back-up to our systems. The Company
expects that the foregoing expenses will start to decrease as the Company
renegotiates its contracts with these providers. Business development costs
consist of advertising costs which have mostly been for television, radio,
online and print advertising to obtain new clients. These expenses decreased by
$1,782,018, or 73%, from $2,426,983 for the March 2000 quarter to $644,965 for
the quarter ending March 31, 2001 as the Company decreased its planned
advertising and promotional efforts.

                                        8
<PAGE>

Professional services increased by $503,620, or 124%, from $404,850 for the
March 2000 quarter to $908,470 for the quarter ending March 31, 2001 due to the
use of software consultants totaling $653,803. These software consultants were
utilized to better enable us to modify our software to be used by our licensing
partner in accordance with our licensing agreement. These costs were offset by
reduced employee acquisition costs. Occupancy and equipment costs increased by
$209,505, or 16%, from $1,287,149 for the March 2000 quarter to $1,496,654 for
the quarter ending March 31, 2001, due to the addition of 7,000 square feet at
40 Wall Street and the leasing of additional equipment to increase our capacity
and to facilitate the transition of our clients to our proprietary direct access
trading platform. Depreciation and amortization increased by $1,083,127, or
535%, from $202,368 for the March 2000 quarter to $1,285,495 for the quarter
ending March 31, 2001 due to the implementation of our direct access trading
platform and the related amortization of capitalized software as well as
amortization of equipment purchased under capitalized leases. Other expenses
increased by $48,808, or 20%, from $241,705 for the March 2000 quarter to
$290,513 for the quarter ending March 31, 2001.

As a consequence of the foregoing, our operating loss increased from a net loss
of $189,835 for the March 2000 quarter to a net loss of $4,608,428 for the
quarter ending March 31, 2001.

Six months ended March 31, 2001 compared to six months ended March 31, 2000.

NET REVENUES. Total revenues for the six months ended March 31, 2001 were
$15,384,886, a decrease of $5,856,750, or 28%, as compared to revenues of
$21,241,636 for the six months ended March 31, 2000. Revenues from commissions
decreased by $5,332,882 or 32% from $16,734,946 for the six months ended March
31, 2000 to $11,402,064 due primarily to the decrease in overall trading
activity by online traders. During the six months ending March 31, 2001, the
Company's online brokerage division had total billed transactions of 533,805 and
average billed transactions of 4,270 per day, a decrease of 28% compared to an
average daily billed transaction rate of 5,935 per day during the six months
ending March 31, 2000, totaling 753,686 billed transactions. Data service
revenues also decreased by $167,276, or 17%, from $974,961 for the six months
ending March 31, 2000 to $807,685 for the six months ending March 31, 2001, due
to the decrease in the number of Ultimate Trader online accounts, as well as a
change in our pricing structure. Revenues from principal transactions decreased
by $499,799, or 19%, from $2,635,485 for the six month period ending March 31,
2000 to $2,135,686 for the six month period ending March 31, 2001, mainly as a
function of the significantly lower volume of business conducted by both the
online brokerage division's trading desk and the third-market institutional
sales division. Interest and other income increased from $893,154 for the six
month period ending March 31, 2000 to $1,036,361 for the six months ending March
31, 2001.

Interest expense increased from $133,386 for the six months ended March 31, 2000
to $261,390 for the six months ending March 31, 2001 as a result of interest
charged on capitalized lease obligations. Interest expense related party
increased $167,521, from $7,500 for the six months ending March 31, 2000, to
$175,021 for the six months ending March 31, 2001, due increased borrowings from
officers.

As a result of the foregoing, net revenues decreased by $6,152,275, or 29%, from
$21,100,750 for the six months ending March 31, 2000 to $14,948,475 for the six
months ending March 31, 2001. Nearly all of our revenues were generated by
clients in the United States and no single client or group of related clients
accounted for 10% or more of our revenues.

EXPENSES EXCLUDING INTEREST. Total expenses decreased by $668,560, or 3%, from
$22,327,597 for the six months ending March 31, 2000 to $21,659,037 for the six
months ending March 31, 2001. Commissions, floor brokerage and clearing charges
represent payments to our clearing and floor brokers who facilitate our clients'
transactions. As a result of the decrease in the volume of business conducted by
our online customers and the conversion of our customers to our proprietary
direct access trading platform, such expenses decreased by $2,280,305, or 29%,
from $7,972,574 for the six months ending March 31, 2000 to $5,692,269 for the
six months ending March 31, 2001. Employment compensation and related costs
increased by $912,361, or 17%, from $5,509,191 for the six months ending March
31, 2000 to $6,421,552 for the six months ending March 31, 2001, largely due to
software developers that are no longer working on capitalizable software
projects and, accordingly, have their salaries expensed in the current period.
Included in these current period compensation expenses are $615,167 incurred to
modify our software to be used by our licensing partner in accordance
with our license agreement. In addition we gave raises to our employees in order
to remain competitive and retain key employees, these increase were mitigated by
a reduction of 51 employees during the quarter ending March 31, 2001.

Communications expense increased by $196,144, or 23%, from $851,450 for the six
months ending March 31, 2000 to $1,047,594 for the six months ending March 31,
2001 as a function of adding additional lines from our data providers and ECN's
to our Dallas location, in order to create a back-up to our systems. The Company
expects that the foregoing expenses will start to decrease as the Company
renegotiates its contracts with these providers.

Business development costs consist of advertising costs to obtain new clients,
which costs have mostly been for television, radio, online and print
advertising. These expenses decreased by $2,319,401, or 61%, from $3,775,923 for
the six months ending March 31, 2000 to $1,456,522 for the six months ending
March 31, 2001 as the Company decreased its planned advertising and promotional
efforts.

                                        9
<PAGE>

Professional services increased by $174,204, or 18%, from $959,040 for the six
months ended March 31, 2000 to $1,133,244 for the six months ending March 31,
2001 due to the use of software consultants totaling $653,803. These software
consultants were utilized to better enable us to modify our software to be used
by our licensing partner in accordance with our licensing agreement. These costs
were offset by reduced employee acquisition costs. Occupancy and equipment costs
increased by $453,608, or 19%, from $2,418,588 for the six months ending March
31, 2000 to $2,872,196 for the six months ending March 31, 2001, primarily due
to the addition of 7000 square feet at 40 Wall Street and the leasing of
additional equipment to increase our capacity and to facilitate the relocation
efforts. Depreciation and amortization increased by $2,122,952, or 484%, from
$438,589 for the six months ending March 31, 2000 to $2,561,541 for the six
months ending March 31, 2001 due to the implementation of our proprietary direct
access trading platform and the related amortization of capitalized software as
well as the amortization of equipment purchased under capitalized leases.
Other expenses increased by $71,877, or 18%, from $402,242 for the six months
ending March 31, 2000 to $474,119 for the six months ending March 31, 2001.

The income tax provision decreased from $18,960 for the six months ended March
31, 2000 to $14,961 for the six months ending March 31, 2001.

As a consequence of the foregoing, our net loss increased from $1,245,807 for
the six months ending March 31, 2000 to a net loss of $6,858,025 for the six
months ending March 31, 2001.

Liquidity and Capital Resources

Prior to our initial public offering ("IPO"), our capital requirements had
exceeded our cash flow from operations as we have been building our business.
Since the IPO, the proceeds from the IPO, the exercise of stock options and
warrants of $3,348,818, the sale of $3,000,000 of stock through our equity line
facility, loans from officers of $7,170,000 and cash flow from operations have
been able to satisfy our cash needs as we continue to grow our business.

Effective August 8, 2000, we entered into an agreement with an investment group
providing us with an eighteen-month equity line of up to $48,000,000. The
agreement allows us to draw down funds in exchange for equity. We are not
obligated to take down any of the funds and pricing is based upon ninety four
percent of the volume weighted average price of our common stock for the 22 days
prior to each takedown. We have registered the securities to be sold to the
investment group pursuant to the equity line facility for resale under the
Securities Act of 1933. On September 6, 2000, we drew down $3,000,000 of the
equity line, and issued 333,333 shares to the investment group and received net
proceeds of $2,850,000.

On April 2, 2001 the Company sold 2,027,241 shares of common stock in a private
placement offering. The common stock was issued at $5.50 per share. The private
placement offering generated total net proceeds of $10,149,825. In addition the
Company issued warrants expiring April 1, 2004 to acquire 608,174 shares of the
Company's common stock at an exercise price of $6.75 per share. The Company will
register the shares for resale under the Securities Act of 1933.

Cash used in operating activities during the six months ending March 31, 2001
was $5,281,825, as compared to cash provided by operating activities during the
six months ended March 31, 2000 of $959,692. The Company had a net loss of
$6,858,025, an increase in receivables from brokers of $653,785, a decrease in
accrued liabilities of $571,953, a decrease in securities sold, not yet
purchased of $169,984, a decrease in securities owned of $164,092, a decrease in
restricted cash of $38,701, and non-cash items such as depreciation and
amortization of $2,561,541 and a loss from investments of $132,502.

Cash used in investing activities was $502,855 during the six months ended March
31, 2001 compared to $3,097,412 during the six months ending March 31, 2000.
Uses of cash in the six months ending March 31, 2001 related to purchases of
equipment, software and leasehold improvements made in the Company's new
facility at 40 Wall Street. In addition to the cash used in investing activities
during the six months ended March 31, 2001, the Company accrued accounts payable
relating to purchases of property and equipment and leasehold improvements of
$1,039,867 during this period.

Cash provided by financing activities was $2,723,669 during the six months
ending March 31, 2001 compared to $85,930 during the six months ended March 31,
2000. Cash provided by financing activities during the six months ending March
31, 2001 consisted primarily of loans made by officers of the Company and
proceeds from the exercise of options.

Net Operating Loss Carryforward

The Company's net operating loss carryforward expires beginning in the year
2013. The issuance of additional equity securities, together with the Company's
recent financing and public offering, could result in an ownership change and
thus could limit our use of the Company's prior net operating losses. If the
Company achieves profitable operations, any significant limitation on the
utilization of our net operating losses would have the effect of increasing our
tax liability and reducing net income and available cash reserves. We are unable
to determine the availability of these net operating losses since this
availability is dependent upon profitable operations, which we have not
achieved.

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<PAGE>

Relevant Accounting Standards

We generally grant stock options to employees and consultants with an exercise
price not less than the fair market value at the date of grant. We account for
stock option grants to employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognize no compensation expense related to option grants issued at or above
the fair market value of the stock. In cases where we grant options below the
fair market value of the stock at the date of grant, the difference between the
strike price and the fair market value is treated as compensation expense and
amortized over the vesting period of the option, if any. Stock options granted
to consultants and others instead of cash compensation are recorded based upon
management's estimate of the fair value of the options or the related services
provided and expensed over the vesting period, if any.

In fiscal 1999, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." Under the new
standard, the Company is required to use the management approach to reporting
its segments. The management approach designates the internal organization that
is used by management for making operating decisions and assessing performance
as the source of the Company's segments. Based on this approach, we have
determined that we operate in one reporting segment.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The new standard does not
impact the Company's financial position or statement of operations.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. SFAS No. 140 is effective for
transactions after March 31, 2001. This standard does not materially impact the
Company's financial position or statement of operations.

Forward Looking Statements

Certain statements contained in this report, including statements regarding the
development of services and markets and future demand for services and other
statements regarding matters that are not historical facts, discuss future
expectations or other forward-looking information. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those contemplated by the statements.
Factors that might cause a difference include, but are not limited to, customer
trading activity, loss of one or more significant customers, changes in
technology, shifts in competitive patterns, ability to manage growth
effectively, risks associated with acquisitions including integration risks,
risks associated with strategic partnerships, various project-associated risks,
substantial competition, general economic and securities markets conditions,
risks associated with intellectual property rights, risks associated with
international operations and other risk factors listed from time to time in the
Company's filings and reports with the Securities and Exchange Commission.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Our primary financial instruments are cash in banks and money market
instruments. We do not believe that these instruments are subject to material
potential near-term losses in future earnings from reasonably possible near-term
changes in market rates or prices. We do not have derivative financial
instruments for speculative or trading purposes. In the normal course of
business, our customers enter into transactions where the risk of potential loss
due to market fluctuations or failure to perform exceeds the amount reported for
the transaction. We have established policies, procedures and internal processes
governing our management of market risk in the normal course of our business
operations. We, along with Penson Financial Services, Inc., our clearing broker,
continuously monitor our exposure to market and counter-party risk through the
use of a variety of financial, position and credit exposure reporting and
control procedures. In addition, we review the creditworthiness of each customer
and/or other counter-party with which we conduct business. We are not currently
exposed to any material currency exchange risk because the risk is borne by
international customers and our international partners, and we do not hold any
assets or incur any liabilities denominated in foreign currency.

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                           PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a) None.

(b) A report on Form 8-K, reporting "Item 5. Other Events and Regulation FD
Disclosure", was filed on March 19, 2001.

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                                   SIGNATURES

Pursuant to the requirements 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.

Date: May 14, 2001

                                       A. B. WATLEY GROUP INC

                                       By: /s/ Steven Malin
                                           -------------------------------------
                                           Steven Malin
                                           Chairman and Chief Executive Officer

                                       By: /s/ Joseph M. Ramos, Jr.
                                           -------------------------------------
                                           Joseph M. Ramos, Jr.
                                           Executive Vice President and Chief
                                           Financial Officer

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