FORM 10-QSB

                       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: June 30, 2004
                                                  -------------

                                       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.)


                       90 Park Avenue, New York, NY 10016
                       ----------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)


                                 (212) 500-6500
                                 --------------
              (Registrant's telephone number, including area code)

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

                                      None

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

                         Common Stock, $0.001 par value

                                (Title of Class)

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 [ ].

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest  practicable  date:
As of August 13, 2004,  there were 18,137,138 shares of the Common Stock, par
value $.001 per share, outstanding.
<PAGE>

                             A.B. Watley Group Inc.

Index

<TABLE>
<CAPTION>
                                                                                                          PAGE
<S>                                                                                                         <C>
PART I -- FINANCIAL INFORMATION

          Item 1.  Financial Statements

          Condensed Consolidated Statements of Financial Condition

                            As of June 30, 2004 (Unaudited) and September 30, 2003 ......................    3

          Condensed Consolidated Statements of Operations

                            For the Three Months and Nine Months Ended June 30, 2004 and 2003 (Unaudited)    4

          Condensed Consolidated Statements of Cash Flows

                            For the Three Months and Nine Months Ended June 30, 2004 and 2003 (Unaudited)    5

          Notes to Condensed Consolidated Financial Statements (Unaudited) ..............................    6


          Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations    15


          Item 3.  Quantitative and Qualitative Disclosures About Market Risk ...........................   19


          Item 4.  Controls and Procedures ..............................................................   20

PART II -- OTHER INFORMATION

          Item 1.  Legal Proceedings ....................................................................   20


          Item 2.  Changes in Securities ................................................................   24

          Item 3.  Default on Senior Securities .........................................................   24

          Item 4.  Submission of Matters to a Vote of Security Holders ..................................   24

          Item 5.  Other Information ....................................................................   24

          Item 6.  Exhibits and Reports on Form 8-K .....................................................   25

Signatures ..............................................................................................   26


Certifications
</TABLE>


                                       2
<PAGE>

PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                             A.B. WATLEY GROUP INC.
            CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                                                         JUNE 30,      SEPTEMBER 30,
                                                                                                           2004             2003
                                                                                                       ------------    ------------
                                                                                                       (Unaudited)
<S>                                                                                                    <C>             <C>
ASSETS:
Cash and cash equivalents                                                                              $    312,079    $     41,296
Receivables from clearing brokers                                                                           177,564         223,556
Securities owned, at market value                                                                                --       1,309,145
Property and equipment, net of accumulated depreciation
   of $677,382 and $6,574,033                                                                                39,780       1,698,062
Loans receivable from related party                                                                         258,227         272,727
Secured demand note                                                                                              --       3,202,000
Security deposits                                                                                           145,000         175,000
Other assets                                                                                                 61,711          19,894
                                                                                                       ------------    ------------
TOTAL ASSETS                                                                                           $    994,361    $  6,941,680
                                                                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' DEFICIT:
Accounts payable and accrued liabilities                                                                  9,871,210       9,769,760
Accrued liabilities to LLC Class B Members                                                                1,922,303       2,000,253
Payable to clearing broker                                                                                       --       1,597,767
Securities sold not yet purchased                                                                                --          28,010
Notes payable to former officer                                                                             700,000         700,000
Notes payable - other                                                                                     2,571,446       3,082,826
Subordinated borrowings                                                                                   2,383,233       4,863,138
Subordinated borrowings - other                                                                             350,000         350,000
Subordinated borrowings from officer                                                                        180,000         180,000
                                                                                                       ------------    ------------
                                                                                                         17,978,192      22,571,754
                                                                                                       ------------    ------------


Series A Redeemable Convertible Preferred Stock $0.01 par value, 690 shares
   authorized, 70 and 630 shares issued and outstanding at June 30, 2004 and
   September 30, 2003, respectively,  and accrued dividends and interest
   (liquidation preference - $700,000 and $6,300,000 at June 30, 2004 and
   September 30, 2003, respectively)                                                                        858,376       6,867,001
                                                                                                       ------------    ------------


STOCKHOLDERS' DEFICIT:
Preferred Stock, $0.001 par value, 1,000,000 shares authorized and none issued and outstanding at
   June 30, 2004 and September 30, 2003                                                                          --              --
Common stock, $0.001 par value, 50,000,000 and 20,000,000 shares authorized at June 30, 2004 and
   September 30, 2003, respectively and 13,137,138 and 12,787,139 issued and outstanding at June 30,
   2004 and September 30, 2003, respectively                                                                 13,137          12,787
Additional paid-in capital                                                                               54,309,883      47,111,608
Option costs                                                                                                     --         (13,996)
Accumulated deficit                                                                                     (72,165,227)    (69,607,474)
                                                                                                       ------------    ------------
TOTAL STOCKHOLDERS' DEFICIT                                                                             (17,842,207)    (22,497,075)
                                                                                                       ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                            $    994,361    $  6,941,680
                                                                                                       ============    ============
</TABLE>

      See accompanying notes to condensed consolidated financial statements


                                       3
<PAGE>

                             A.B. WATLEY GROUP INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED JUNE 30,     NINE MONTHS ENDED JUNE 30,
                                                    ----------------------------    ---------------------------
                                                         2004            2003            2004            2003
                                                         ----            ----            ----            ----
<S>                                                 <C>             <C>             <C>             <C>
REVENUES:
Commissions                                         $  1,679,184    $  1,716,675    $  4,764,511    $  4,409,349
Data service fees                                         22,437          46,130          50,939          62,336
Principal transactions                                        --       2,669,454       2,356,633       6,624,125
Interest income and other income                         317,138         310,398         907,769       1,321,264
                                                    ------------    ------------    ------------    ------------
TOTAL REVENUES                                         2,018,759       4,742,657       8,079,852      12,417,074

Interest expense                                         257,302         301,700         857,575         726,223
                                                    ------------    ------------    ------------    ------------
NET REVENUES                                           1,761,457       4,440,957       7,222,277      11,690,851
                                                    ------------    ------------    ------------    ------------

EXPENSES AND OTHER CHARGES:
Commissions, floor brokerage and clearing charges      1,030,423       1,678,542       3,508,842       4,213,913
Employee compensation and related costs                  629,622       2,461,346       3,224,087       6,326,377
Communications                                            37,394         189,546         363,115       1,014,473
Business development                                       9,249          70,018          88,579         198,268
Professional services                                    167,261         356,311         440,832       1,371,860
Occupancy and equipment costs                            202,310         336,741         869,290       1,821,825
Depreciation and amortization                             52,378         138,369         250,765       1,098,062
Other expenses                                            49,428         214,914         423,842       1,562,570
Abandonment of leasehold improvements                   (412,844)             --         610,678              --
Loss on investments                                           --              --              --          84,287
                                                    ------------    ------------    ------------    ------------
TOTAL EXPENSES                                         1,765,221       5,445,787       9,780,030      17,691,635
                                                    ------------    ------------    ------------    ------------
                                                          (3,764)     (1,004,830)     (2,557,753)     (6,000,784)
NET LOSS
Preferred stock dividends                                     --          63,000              --        (252,000)
                                                    ------------    ------------    ------------    ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS          $     (3,764)   $ (1,067,830)   $ (2,557,753)   $ (6,252,784)
                                                    ============    ============    ============    ============

BASIC AND DILUTED LOSS PER COMMON SHARE             $      (0.00)   $      (0.09)   $      (0.20)   $      (0.50)
                                                    ============    ============    ============    ============

Weighted average shares outstanding                   13,137,138      12,508,852      13,013,512      12,508,852
                                                    ============    ============    ============    ============
</TABLE>

      See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

                             A.B. WATLEY GROUP INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         FOR THE NINE MONTHS ENDED JUNE 30,
                                                                                                2004           2003
                                                                                                ----           ----
<S>                                                                                         <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                                    $(2,557,753)   $(6,000,784)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
    Non-cash compensation and service costs
      Options costs                                                                              13,996         18,672
      Amortization of debt discount in connection with
         issuance of warrants and subordinated debt                                             136,862         91,240
      Amortization of finance charge in connection with
         notes payable                                                                           87,500             --
      Penalties - preferred stock                                                                    --        759,107
      Minority interest applicable to LLC Class B members                                       (32,950)       (87,019)
      Depreciation and amortization                                                             250,765      1,098,062
      Loss on abandonment of leasehold improvements                                           1,407,218             --
      Write-off of deferred rent incentives                                                    (796,540)            --
    Changes in assets and liabilities:
    (Increase) decrease in operating assets:
       Restricted cash                                                                               --        292,565
       Receivables from clearing brokers                                                         45,992      1,028,588
       Securities owned                                                                       1,309,145       (833,445)
       Loans receivable from related party                                                       14,500             --
       Security deposits                                                                         30,000        (27,295)
       Other assets                                                                             (41,817)       (49,243)
    Increase (decrease) in operating liabilities:
       Accounts payable and accrued liabilities                                               1,100,790      1,237,826
       Payable to clearing broker                                                            (1,597,767)     2,336,279
       Securities sold, not yet purchased                                                       (28,010)       169,987
                                                                                            -----------    -----------
    Net cash (used in) provided by operating activities                                        (658,069)        34,540
                                                                                            -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                                                  --        (13,268)
                                                                                            -----------    -----------
    Net cash provided by (used in) investing activities                                              --        (13,268)
                                                                                            -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - other                                                           2,338,620        250,000
Repayment of notes payable - other                                                           (1,825,000)      (450,000)
Repayment of notes payable                                                                     (125,000)            --
Proceeds from secured demand note receivable                                                    585,232             --
Capital distribution to LLC Class B members                                                     (45,000)       (35,038)
                                                                                            -----------    -----------
    Net cash provided by (used in) financing activities                                         928,852       (235,038)
                                                                                            -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                        $   270,783    $  (213,766)
Cash and cash equivalents at beginning of period                                                 41,296        213,766
                                                                                            -----------    -----------
Cash and cash equivalents at end of period                                                  $   312,079    $        --
                                                                                            ===========    ===========

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES
  AND DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for:
      Interest                                                                              $    52,500    $   188,131
      Taxes                                                                                          --             --

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES AND DISCLOSURE OF
    CASH FLOW INFORMATION:
Issuance of common stock for financing charge in connection with notes payable              $    87,500             --
Conversion of Series A Preferred Stock for warrants                                         $ 6,008,625             --
Forgiveness of notes payable for warrants                                                   $ 1,102,500             --
Liquidation of secured demand note                                                          $ 2,616,767
Forgiveness of penalties on preferred stock                                                          --    $ 1,070,593
Preferred stock dividends                                                                            --    $   252,000
Issuance of secured demand note                                                                      --    $ 5,000,000
Issuance of subordinated borrowing                                                                   --    $ 5,000,000
Debt discount in connection with issuance of warrants and subordinated debt                          --    $   273,723
Settlements of minority interests                                                                    --    $    87,019
</TABLE>

      See accompanying notes to condensed consolidated financial statements


                                       5
<PAGE>

                             A.B. WATLEY GROUP INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   ORGANIZATION AND BUSINESS

     A.B.  Watley  Group  Inc.  ("ABWG"  or  the  "Company")  is a  U.S.  public
corporation.  The Company  conducts  business  primarily  through its  principal
subsidiaries,  A.B. Watley Direct, Inc. ("Direct") and A.B. Watley Futures Corp.
("ABW  Futures"),  operating  as one  integrated  business  segment.  ABWG  is a
Delaware corporation organized on May 15, 1996.

     Direct is a  registered  broker-dealer  with the  Securities  and  Exchange
Commission  ("SEC"),  and a member of the  National  Association  of  Securities
Dealers,  Inc.  ("NASD").  Direct is an  introducing  broker-dealer,  conducting
business  in  electronic   trading,   information  and  brokerage  services  and
institutional  trading.  Direct clears all transactions through clearing brokers
on a fully disclosed  basis.  Accordingly,  Direct is exempt from Rule 15c3-3 of
the Securities and Exchange Act of 1934.

     ABW Futures is an introducing  broker/dealer  registered  with the National
Futures  Association and conducts  futures trading  activity for customers.  ABW
Futures  cleared  all  of its  business  through  clearing  brokers  on a  fully
disclosed  basis.  On June 30,  2004,  the  Company  sold ABW Futures to a third
party. The sale of ABW Futures did not have any material impact on the Condensed
Consolidated Financial Statements.

2.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United  States of America  (GAAP) and reflect all normal  recurring  adjustments
which are, in the opinion of management,  necessary for a fair  presentation  of
the  results  for the  interim  periods  presented.  Pursuant  to the  rules and
regulations  of the  SEC,  certain  footnote  disclosures,  which  are  normally
required under GAAP, have been omitted.  It is recommended  that these condensed
consolidated  financial  statements  be read in  conjunction  with  the  audited
consolidated  financial  statements  included in the Company's  Annual Report on
Form 10-K for the year ended  September 30, 2003.  The results of operations for
any interim period are not necessarily indicative of results for the full year.

     The condensed  consolidated  financial  statements  include the accounts of
ABWG and its wholly owned subsidiaries.  All significant  intercompany  balances
and transactions  have been  eliminated.  Certain prior period amounts have been
reclassified to conform to the current period's presentation. The preparation of
the financial  statements in  conformity  with GAAP 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.

     In  January   2003,   as  revised  in  December   2003,   the  FASB  issued
Interpretation No. 46 ("FIN 46"),  "Consolidation of Variable Interest Entities,
an  Interpretation  of ARB No. 51." FIN 46 requires  certain  variable  interest
entities  to be  consolidated  by the primary  beneficiary  of the entity if the
equity investors in the entity do not have the  characteristics of a controlling
financial  interest or do not have  sufficient  equity at risk for the entity to
finance its activities  without additional  subordinated  financial support from
other  parties.  FIN 46 is  effective  for all new  variable  interest  entities
created or acquired  after  January 31,  2003.  For variable  interest  entities
created or acquired  prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period  beginning  after March 15, 2004.
The  adoption  of this  pronouncement  did not  have a  material  effect  on the
Company's financial statements.

Equity-Based Compensation

     As  permitted  by FASB  Statement  No.  123,  Accounting  for  Stock  Based
Compensation  ("FAS  123"),  which  establishes  a fair  value  based  method of
accounting  for  equity-based  compensation  plans,  the  Company has elected to
follow  Accounting  Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25") for recognizing  equity-based  compensation  expense for
financial  statement  purposes.   Under  APB  25,  no  compensation  expense  is
recognized  at the time of option  grant if the  exercise


                                       6
<PAGE>

price of the  employee  stock  option is fixed and  equals or  exceeds  the fair
market value of the  underlying  common stock on the day of grant and the number
of shares to be issued  pursuant to the  exercise of such  options are known and
fixed at the grant date.

     In  December  2002,  the FASB issued  Statement  No.  148,  Accounting  for
Stock-Based  Compensation-Transition  and Disclosure ("FAS 148").  This standard
amends the  disclosure  requirements  of FAS 123 for fiscal  years  ending after
December  15, 2002 to require  prominent  disclosure  in both annual and interim
financial  statements about the method used and the impact on reported  results.
The Company  follows the  disclosure-only  provisions of FAS 123 which  requires
disclosure  of the pro forma  effects on net income  (loss) as if the fair value
method of accounting  prescribed by FAS 123 had been adopted, as well as certain
other information.

     The following table summarizes relevant  information as to reported results
under the Company's  intrinsic value method of accounting for stock awards, with
supplemental  information as if the fair value recognition provisions of FAS 123
had been  applied for the three and nine month  periods  ended June 30, 2004 and
2003 as follows:

<TABLE>
<CAPTION>
                                    Three Months Ended June 30,       Nine Months Ended June 30,
                                  ------------------------------    ------------------------------
                                       2004             2003             2004            2003
                                  -------------    -------------    -------------    -------------
      <S>                         <C>              <C>              <C>              <C>
      Net loss                    $      (3,764)   $  (1,067,830)   $  (2,557,753)   $  (6,252,784)
      Stock-based employee
      compensation cost, net
      of tax effect, under
      fair value accounting            (139,256)        (148,326)        (296,835)        (333,732)
                                  -------------    -------------    -------------    -------------
      Pro forma net loss under
      Fair Value Method           $    (143,020)   $  (1,216,156)   $  (2,854,588)   $  (6,586,516)
                                  -------------    -------------    -------------    -------------
      Loss per share
      basic and diluted           $       (0.00)   $       (0.09)   $       (0.20)   $       (0.50)
      Per share stock-based
      employee compensation
      cost, net of tax effect,
      under fair value
      accounting                           0.01             0.01             0.02             0.03
                                  -------------    -------------    -------------    -------------
      Pro forma loss per
      share - basic and diluted   $       (0.01)   $       (0.10)   $       (0.22)   $       (0.53)
                                  -------------    -------------    -------------    -------------
</TABLE>

     There were no options  granted during the three months ended June 30, 2004.
As of June  30,  2004  and 2003  there  were  4,692,700  and  2,192,700  options
outstanding,  respectively. As of June 30, 2004 options outstanding had exercise
prices  ranging  between  $0.10 and $17.50  and  expirations  extending  through
January 2014.

     During the three months ended June 30, 2004, the Company  issued  5,561,478
warrants in  connection  with the  conversion  of Series A  Preferred  Stock and
987,771 warrants in connection with the conversion of certain notes payable.  As
of June 30, 2004,  there were 12,647,446  warrants  outstanding.  As of June 30,
2004 warrants  outstanding  had exercise  prices ranging between $0.00 and $3.69
and expirations extending through March 2012.

Loss Per Share

     Basic loss per share was  computed  using the  weighted  average  number of
outstanding common shares. Diluted per share amounts when applicable include the
effect of  dilutive  common  stock  equivalents  from the  assumed  exercise  of
options,  warrants  and the  convertible  preferred  stock.  Dilutive  per share
amounts are computed  excluding common stock  equivalents  since their inclusion
would  be  anti-dilutive.  Total  shares  issuable  upon the  exercise  of stock
options,  warrants and the conversion of preferred  stock for the as of June 30,
2004 and 2003 were 17,746.353 and 13,342,641, respectively.

3.   GOING CONCERN

     The Company has  continued  to incur  consolidated  net losses and negative
cash flows from operations.  Additionally,  the Company has significant deficits
in  both  working  capital  and  stockholders`   equity.   These  factors  raise
substantial  doubt about the Company`s  ability to continue as a going  concern.
The financial  statements do not include any adjustments  that might result from
the outcome of this  uncertainty.  As a result,  management  of ABWG may seek to
raise  additional  capital from time to time to fund


                                       7
<PAGE>

operations through private  placements of equity or debt instruments.  There can
be no assurance that any of these alternatives will be successful.

4.   NET CAPITAL REQUIREMENTS

     Direct is subject to the SEC's Uniform Net Capital Rule ("Rule 15c3-1"). In
accordance  with this rule,  Direct is required to maintain  defined minimum net
capital  equal to the greater of $5,000 or 6-2/3% of aggregate  indebtedness  as
defined.  As of June 30,  2004,  Direct had net  capital of  $196,230  which was
$169,813 in excess of its minimum requirement.

5.   FINANCIAL  INSTRUMENTS  WITH OFF BALANCE SHEET RISK AND  CONCENTRATIONS  OF
     CREDIT RISK

     Pursuant to clearance  agreements,  the clearing and depository  operations
for the Company  and its  customers'  securities  transactions  are  provided by
clearing broker-dealers.  The Company earns commissions as an introducing broker
for the  transactions  of its customers.  In the normal course of business,  the
Company's  customer  activities  involve the execution and settlement of various
customer  securities  transactions.  These  activities may expose the Company to
off-balance-sheet  risk in the event the  customer or other  broker is unable to
fulfill its contracted  obligations  and the Company has to purchase or sell the
security underlying the contract at a loss.

     The Company's customer securities are transacted on either a cash or margin
basis.  In margin  transactions,  the clearing  broker extends the credit to the
Company's   customers,   subject  to  various  regulatory  margin  requirements,
collateralized by cash and securities in the customers'  accounts.  However, the
Company is required  to contact the  customer  and to either  obtain  additional
collateral  or to  sell  the  customer's  position  if  such  collateral  is not
forthcoming. The Company is responsible for any losses on such margin loans, and
has agreed to  indemnify  its  clearing  brokers  for losses  that the  clearing
brokers may sustain from the customer accounts introduced by the Company.

     The Company seeks to control the risks  associated with these activities by
reviewing the credit  standing of each customer and  counterparty  with which it
does business. Further, working with the clearing brokers, it requires customers
to maintain margin collateral in compliance with various regulatory and internal
company policy  guidelines.  The clearing brokers monitor required margin levels
daily and, pursuant to such guidelines,  request customers to deposit additional
collateral or reduce securities positions when necessary. The Company's exposure
to these risks becomes magnified in volatile  markets.  As of June 30, 2004, the
Company  has  provided a reserve for  uncollectible  receivables  from  clearing
brokers in the amount of $1,166,777.

     The Company may at times maintain  positions in equity securities on both a
long and short basis. While long positions  represent the Company's ownership of
securities,  short positions represent obligations of the Company.  Accordingly,
both long and short  positions  may result in gains or losses to the  Company as
market values of securities fluctuate. To manage the risk of losses, the Company
marks long and short  positions  to market daily and  continuously  monitors the
market fluctuations.

     Securities sold, but not yet purchased represent obligations of the Company
to deliver the  specified  security at a contracted  price and thereby  create a
liability  to  repurchase  the  security  in the  market at  prevailing  prices.
Accordingly,  these  transactions  result  in off  balance  sheet  risk,  as the
Company's  ultimate  obligation to satisfy the sale of securities  sold, but not
yet  purchased may exceed the amount  recognized  in the Condensed  Consolidated
Statements of Financial Condition.

6.   REDEEMABLE CONVERTIBLE PREFERRED STOCK

     On November 29,  2001,  the Company  entered into the Series A  Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement") to issue and sell,
in a private placement,  an aggregate of 630 (690 shares  authorized,  par value
$.01)  shares of Series A Redeemable  Convertible  Preferred  Stock  ("Preferred
Stock").  Each share is  convertible  into 3,390 shares of the Company`s  Common
Stock at an exercise price of $2.95.  The purchasers of the Preferred Stock were
issued warrants,  expiring in 5 years from the date of issuance,  to purchase an
additional 1,629,069 shares of Common Stock at an exercise price of $2.95.

     Pursuant to the Purchase  Agreement and the  Registration  Rights Agreement
(the "Registration Agreement"),  the Company was required to file a registration
statement  (the  "Registration  Statement")  with the  Securities  and  Exchange
Commission  registering for resale the 2,135,700 shares of Common Stock issuable
upon the conversion of the shares of Preferred  Stock,  and the 1,629,069 shares
of Common Stock subject to purchase  upon exercise of the warrants.  The Company
has not yet  filed a  Registration  Statement


                                       8
<PAGE>

and will not be able to have  the  Registration  Statement  filed  and  declared
effective  within  the  period  required.  A  penalty  of 2% of the  liquidation
preference  value of the Preferred Stock for each  thirty-day  period accrues to
each holder of Preferred Stock and is added to the liquidation preference amount
until  cured.  In June 2003 the  holders  of the  Preferred  Stock  executed  an
agreement which waived their rights to penalties,  dividends and stock issuances
during  the  period  June 1,  2003  through  May 31,  2004.  For the year  ended
September  30, 2003,  penalties  accrued  through June 30, 2003 in the amount of
$1,070,593 were reversed and recorded as additional paid-in-capital.

     The Preferred Stock includes a liquidation  preference of $10,000 per share
and bears a cumulative dividend at an initial 6% annual rate, which increases to
a 15%  annual  rate after  eighteen  months,  payable  twice a year in shares of
Common  Stock.  In June 2003 the  holders of the  Preferred  Stock  executed  an
agreement which waived their rights to penalties,  dividends and stock issuances
during the period June 1, 2003 through May 31, 2004.

     The holders of Preferred  Stock may elect to convert  their shares into the
Company`s  Common Stock at any time,  just as they may choose to exercise  their
related warrants at any time. The holders of Preferred Stock also have the right
to  require  the  Company  to redeem  all of the  Preferred  Stock for cash upon
certain triggering  events, as defined in the Agreement.  Such triggering events
have occurred. The holders of the Preferred Stock waived their Redemption Rights
through July 31, 2004.

     The  $6,300,000  aggregate  purchase  price of the Preferred  Stock and the
warrants was  allocated  $4,340,383  to the  Preferred  Stock and the balance of
$1,959,617 was attributed to the fair value of the warrants.  In connection with
this transaction,  the Company issued Preferred Stock and received cash proceeds
of $3,324,291 (net of issue costs) and exchanged a note payable in the amount of
$2,500,000  ("Senior  Subordinated  Demand  Note") for  $2,750,000  plus accrued
interest.

     Since the holders of the Preferred  Stock may require the Company to redeem
all of the Preferred  Stock,  the Company has excluded the Preferred  Stock from
Stockholders` Deficit in the accompanying Condensed  Consolidated  Statements of
Financial Condition.

     The holders are not subject to any limitations on the number of conversions
of Preferred Stock or subsequent  sales of the  corresponding  Common Stock that
they can effect,  other than a prohibition on any holder  acquiring a beneficial
ownership of more than 4.95% of the outstanding  shares of the Company`s  Common
Stock.

     As of June 30, 2004 and  September  30, 2003,  the  dilutive  effect of the
conversion  of  preferred  stock  would  result in the  issuance  of 406,207 and
3,671,218 shares, respectively.

     In June holders of 560 shares of Series A Redeemable  Convertible Preferred
Stock  recorded  at  $6,008,625   including  dividends  and  interest,   in  the
accompanying Condensed Consolidated  Statements of Financial Condition converted
their preferred stock into warrants to purchase 5,462,387 shares of common stock
of the Company.  The exercise price for each of the common shares to be received
upon exercise of the warrants is $0.01.  The warrants have a term of seven years
and expire in June 2011. As of June 30, 2004, the impact of the preferred  stock
conversion and the issuance of warrants was to decrease Series A Preferred Stock
by $6,008,625 and to increase Additional Paid-in Capital by the same amount.

     In July 2004,  the Company and holders of 70 shares of Series A  Redeemable
Convertible  Preferred  Stock  recorded  at  $858,376  including  dividends  and
interest,  in the accompanying  Condensed  Consolidated  Statements of Financial
Condition reached an agreement to convert their preferred stock into warrants to
purchase  780,342  shares of common stock of the Company.  As July 31, 2004, the
impact of the  preferred  stock  conversion  and the issuance of warrants was to
decrease Series A Preferred Stock by $858,376 and to increase Additional Paid-in
Capital by the same amount.

7.   NOTES AND LOANS PAYABLE

     The Company's  outstanding  obligation  under notes and loans payable as of
June 30, 2004 and September 30, 2003 was as follows:

                                                 June 30,          September 30,
                                                   2004                2003
                                                ----------         -------------
Borrowings under line of credit                 $2,182,826          $3,082,826
Notes payable to former officer                    700,000             700,000
Loans payable - other                              388,620                  --
                                                ----------          ----------
                                                $3,271,446          $3,782,826
                                                ==========          ==========



                                       9
<PAGE>

     On December 23, 2003, the Company borrowed $1,800,000 from a third party at
the  rate of 20%  per  annum.  On  January  16,  2004  the  Company  repaid  the
$1,800,000. Subsequently, during January and February 2004, the Company borrowed
an additional $388,620, including accrued interest, from the same third party at
the rate of 20% per annum. The note is due on demand.

     On October 8, 2003, the Company borrowed $150,000 from a third party lender
at the rate of 12% per annum and issued 250,000  shares of the Company's  common
stock,  which  represented a finance charge of $87,500.  The loan was payable in
fourteen  equal  monthly  installments.  During the three months ended March 31,
2004, the Company made principal payments in the amount of $25,000.  As of April
30, 2004, the Company repaid the loan, and accrued interest,  through $21,000 in
cash payments and offset $139,150 against commissions owed to the Company by the
lender.

     In March 2002,  one of the holders of the Company's  Preferred  Stock led a
group that granted a line of credit of  $4,200,000  to the  Company.  Borrowings
under  the line of credit  are  payable  on demand  after  June 18,  2002,  with
interest  payable  at 10%.  The  proceeds  of the loans  were  used for  working
capital.  Additionally, one member of the group was granted warrants to purchase
1,000,000  shares of the Company's Common Stock at an exercise price of $0.918 a
share in connection with the loan facility and a consultant retained by a member
of the  group  was also  granted  warrants  to  purchase  50,000  shares  of the
Company's Common Stock at an exercise price of $0.918 a share. The fair value of
the warrants  were  amortized and recorded as interest  expense.  As of June 30,
2004,  the  Company  has  borrowed  $2,182,826  under this  commitment,  and has
recorded  accrued interest payable of $552,004.  The loan is  collateralized  by
certain assets of the Company as defined in the loan agreement.

     In June  2004,  certain  note  holders  agreed to  forgive  notes  payable,
including accrued  interest,  in the amount of $1,102,500 in return for warrants
to purchase  987,771  shares of common stock of the Company.  The exercise price
for each of the common  shares to be received  upon  exercise of the warrants is
$0.01.  The warrants have a term of seven years. As of June 30, 2004, the impact
of the  forgiveness  of the notes  payable and the  issuance of warrants  was to
decrease Notes Payable by $900,000,  decrease Accrued  Liabilities,  for accrued
interest, by $202,500 and to increase Additional Paid-in Capital $1,102,500.

     In July 2004, the Company and certain note holders  reached an agreement to
forgive notes payable,  including accrued interest,  in the amount of $2,621,815
in return for  warrants  to  purchase  1,000,000  shares of common  stock of the
Company.  The exercise  price for each of the common  shares to be received upon
exercise of the warrants is $0.19.  In addition  the Company  agreed to amend an
existing warrant agreement, for 1,000,000 shares of common stock of the Company,
held by the note holder to reflect a decrease in the  exercise  price from $0.91
to $0.01.  The warrants will have a term of seven years.  There was no financial
statement  impact for the amendment to the warrant exercise price. The impact of
the  forgiveness  of the notes  payable  and the  issuance  of  warrants  was to
decrease Notes Payable by $2,182,826,  decrease Accrued Liabilities, for accrued
interest, by $542,495 and to increase and to increase Additional Paid-in Capital
$2,725,321.

8.   SECURED DEMAND NOTE AND SUBORDINATED BORROWINGS

Secured Demand Note

     On January  15,  2003,  the  Company  entered  into a Secured  Demand  Note
Collateral  Agreement  (the  "SDN"),  whereby a  subordinated  lender  agreed to
deposit  $5,000,000 worth of collateral in accounts to be held by the Company to
secure a  subordinated  loan for the same amount.  The loan had been approved by
the NASD and was included for the purposes of computing  net capital  under Rule
15c3-1.

     During  the term of the SDN,  the  Company  liquidated  approximately  $2.4
million of the SDN Collateral.  This cash was used by the Company to support its
operations.   This  transaction  is  reflected  in  the  accompanying  Condensed
Consolidated  Statements of Financial  Condition as a reduction of the principal
amount  of the SDN.  As of June  30,  2004,  in  connection  with the  Company's
repayment of approximately $2.9 million of principal and interest, the remaining
balance of the SDN was reduced to $-0-.

Subordinated Borrowings

     At September 30, 2003  subordinated  borrowings  consisted of $5,530,000 of
subordinated  notes payable to general  creditors,  of which $5,000,000  bearing
interest  at 7% is due on June  30,  2004,  $200,000  bearing  interest  at 15%,
$150,000  bearing  interest at 13%, and the balance of $180,000 bearing interest
at 12% are due on October  31,  2006.  In  connection  with the  issuance of the


                                       10
<PAGE>

$5,000,000  subordinated  borrowing the Company issued warrants to the lender to
purchase 500,000 shares of ABWG common stock at $0.75.

     The Company  recorded a debt  discount  in the amount of $273,724  which is
amortized to interest expense over the life of the subordinated  loan.  Interest
expense  relating to the  warrants  was  $45,621 for the quarter  ended June 30,
2004. At June 30, 2004, the debt discount related to the  subordinated  loan has
been fully  amortized.  On January 22, 2004,  the NASD rescinded its approval of
the Subordinated  Borrowing Agreement.  A.B. Watley ceased operations in January
2004.  In  February  2004,   A.B.   Watley   withdrew  its   registration  as  a
broker/dealer. To the extent borrowings are required for the Company's continued
compliance with minimum net capital requirements, they may not be repaid. Of the
total  subordinated  borrowings,  $180,000 is from an officer and shareholder of
ABWG.  Interest  expense of  approximately  $59,000 and $105,000 was incurred on
subordinated  borrowings  during  the  quarter  ended  June 30,  2004 and  2003,
respectively.

     SUBORDINATED  BORROWINGS  AS OF JUNE 30, 2004 AND SEPTEMBER 30, 2003 ARE AS
FOLLOWS:

          June 30, 2004    September 30, 2003   Interest Rate       Maturity
      ------------------   ------------------   -------------   ----------------
             $ 2,383,233           $5,000,000            7%     Matured
             $   125,000             $125,000           12%     October 31, 2006
             $    55,000              $55,000            0%     October 31, 2006
             $   200,000             $200,000           15%     October 31, 2006
             $   150,000             $150,000           13%     October 30, 2006
      ------------------     ----------------
             $ 2,913,233           $5,530,000
      ==================     ================

     In March  2003,  the  holder of the $5  million  secured  demand  note (the
"Noteholder")  demanded repayment of the note. In April 2004, the parties agreed
to  discontinue  the  arbitration  without  prejudice  pursuant to a  settlement
agreement  that  provided  for the  repayment of  approximately  $2.9 million of
principal  and  interest  (which  was  repaid in April  2004) of the $5  million
outstanding principal of the secured demand note (see Legal Procedings). In June
2004,  the note matured and the Company has not paid the  remaining  balance and
has not  received  an  extension  of the  maturity  date.  As of June 30,  2004,
$2,383,233 remains due and outstanding.

9.   COMMITMENTS AND CONTINGENCIES

     Our  principal  offices were located at 40 Wall Street,  New York, NY at an
annual cost of approximately  $920,000 per year, plus  escalations.  The initial
term of the lease for such  office  space  expires  in June 2009.  Our  previous
landlord,   40  Wall  Street,   LLC,  commenced  two  separate   landlord/tenant
proceedings  seeking money judgments and orders of eviction against the Company.
Both  proceedings have been settled whereby the Company vacated a portion of the
premises in March 2004 and the remaining  portion in June 2004.  The Company has
signed a confession of judgment for $609,441 and the landlord is seeking a money
judgment for all rent arrears (a provision  has been  provided in the  financial
statements). In connection with Company's relocation of its headquarters from 40
Wall Street,  New York, NY to 90 Park Avenue,  New York. NY, for the nine months
ended June 30, 2004, the Company  abandoned  leasehold  improvements  with a net
book value of $1,407,218  which was partially  offset by a write-off of deferred
rent  incentives  of $796,540,  resulting  in a net loss of  $610,678,  which is
included in Abandonment of Leasehold  Improvements in the Condensed Consolidated
Statement of Operations.

     We are a defendant in an action titled Michael Fielman v. A.B. Watley, Inc.
and A.B. Watley Group,  Inc.,  Supreme Court of the State of New York, County of
Nassau,  Index No.  012082/02,  filed on July 10,  2002.  This is an action  for
unpaid wages seeking  $28,658,  plus statutory  damages,  costs,  and attorneys'
fees.  This matter has been  settled in the amount of $34,658 (a  provision  has
been provided in the financial  statements)  over an installment  basis of eight
(8) months.  A.B.  Watley Group Inc. has paid $11,152 towards the settlement and
is in default of its settlement agreement.

     We are a defendant in an action titled General  Electric  Capital Corp., as
Assignee of Sun  Microsystems,  Inc. v. A.B.  Watley Group,  Inc. f/k/a Internet
Financial Services,  Inc., Supreme Court of the State of New York, County of New
York, Index No 117675/02,  filed August 7, 2002. This is a breach of contract in
connection  with the lease of  equipment,  which seeks  compensatory  damages of
$195,356,  plus  interest,  costs  and  attorney's  fees (a  provision  has been
provided in the financial statements).  The parties have reached a settlement in
principle for the payment of $50,000 in two  installments  although an agreement
has not been finalized.


                                       11
<PAGE>

     Our former legal counsel,  has filed a complaint  against the Company.  The
title of the action is Hartman & Craven LLP v. A.B. Watley, Inc. and A.B. Watley
Group Inc.,  Supreme Court of the State of New York,  County of New York,  Index
No.:  109502/03,  filed May 23, 2003.  Plaintiff has filed a Complaint  against,
amongst others, A.B. Watley Group, Inc. and A.B. Watley, Inc. for damages in the
amount of  $352,574,  plus  interest  accrued  thereon,  (a  provision  has been
provided in the financial statements),  for unpaid legal fees. A.B. Watley Group
Inc.  and A.B.  Watley,  Inc.  deny  liability,  in part,  and have  asserted  a
counterclaim for malpractice and breach of contract for unspecified  damages. At
this point,  it is difficult to determine the amount,  if any, that A.B.  Watley
Group Inc. and A.B. Watley,  Inc. may be held liable for.  Plaintiff has filed a
motion for summary  judgment,  which has been fully submitted and briefed before
the Court.  The Court  granted the motion in part and denied the motion in part.
The parties  are  awaiting an executed  judgment  and are  conducting  pre-trial
discovery.

     We are defendant in an action titled Hyperfeed  Technologies,  Inc. v. A.B.
Watley Group Inc.,  Supreme Court of the State of New York,  County of New York,
Index No. 111538/03 on June 24, 2003. Plaintiff has domesticated an out-of-state
judgment against A.B. Watley Group Inc. in the amount of $180,503, plus interest
accrued  thereon (a provision has been  provided in the  financial  statements).
Currently, Plaintiff is conducting post-judgment discovery.

     We are respondent in an  arbitration  titled Sean MacDonald and Adam Silver
v. A.B. Watley,  Inc., NASD  Arbitration No. 03-02644.  In the Office of Dispute
Resolution  for the NASD,  Claimants  filed this  Statement of Claim against the
Company on March 20, 2003.  This action seeks  unspecified  damages for improper
margin sell-outs by A.B. Watley, Inc. A.B. Watley, Inc. denies all wrongdoing in
connection  with this  matter  asserting  that it acted in  accordance  with its
customer  agreement as well as applicable  federal securities laws. In addition,
A.B. Watley, Inc. has asserted a counterclaim to recover the margin debt left by
Claimants.  A  hearing  on this  matter  was  held on June  29,  2004 in  Boston
Massachusetts. A.B. Watley, Inc. is awaiting a decision.

     We are respondent in an  arbitration  titled John W. Donavan and Bettina H.
Wolff v. A.B.  Watley,  Inc., NASD  Arbitration No.  03-05212.  In the Office of
Dispute Resolution for the NASD, Claimants filed this Statement of Claim against
A.B. Watley,  Inc. on July 15, 2003 seeking damages of approximately  $94,788 (a
provision  has  been  provided  in the  financial  statements)  relating  to the
suitability of Claimants'  investments.  A.B. Watley, Inc. denies all wrongdoing
in connection  with this matter  asserting that it acted in accordance  with its
customer  agreement as well as applicable  federal  securities laws. The parties
have agreed to a settlement in principle although a formal settlement  agreement
has not been consummated.

     We are respondent in an arbitration titled Steven Messina, Brian Kelly, and
Thomas Messina v. A.B.  Watley,  Inc.,  NASD  Arbitration No.  02-04649.  In the
Office of Dispute  Resolution  for the NASD,  Claimants  filed this Statement of
Claim against A.B. Watley, Inc. This action,  which was filed on August 7, 2002,
seeks actual damages, consisting of unpaid commissions in the amount of $147,000
(a provision has been provided in the financial  statements).  A.B. Watley, Inc.
denies  all  wrongdoing  in  connection  with this  matter,  and has  asserted a
counterclaim  in the amount of $600,000 for  breaches of contract and  fiduciary
duties. A hearing in this matter has not yet been scheduled.  A.B. Watley,  Inc.
intends to vigorously defend this matter and prosecute its counterclaim.

     We are  respondent  in an  arbitration  titled Gary Miller v. A.B.  Watley,
Inc., NASD Arb. No.:  03-07144.  Claimant filed this Claim against A.B.  Watley,
Inc. on September 29, 2003 seeking damages of approximately  $49,000 relating to
breach of contract.  A.B.  Watley,  Inc.  submitted its answer in this matter on
December 4, 2003 denying all liability in connection with the Claim. Pre-hearing
discovery is still being conducted and there is a hearing  scheduled for October
28-29, 2004 in New York, New York.

     We are defendant in an action titled Pentech  Financial  Services,  Inc. v.
A.B.  Watley Group Inc.,  Supreme Court of the State of New York,  County of New
York,  Index No.  02-126759.  On December 11, 2002,  Plaintiff filed a complaint
against A.B.  Watley Group Inc. for an alleged breach of a lease  agreement.  On
May 28,  2003,  Plaintiff  obtained a  judgment  in the  amount of  $465,584  (a
provision  has been  provided in financial  statements)  plus  interest  accrued
thereon.  A.B. Watley Group Inc. executed a settlement  agreement with Plaintiff
for a total settlement of $522,584, over an installment basis.  Currently,  A.B.
Watley Group Inc. is in default of the settlement agreement.

     We are defendant in an action titled Siemens Financial Services, Inc. f/k/a
Siemens Credit  Corporation  v. A.B.  Watley Group,  Inc.,  Supreme Court of the
State of New York, County of New York, Index No. 603769/2002,  filed October 16,
2002.  This  action  is for  damages  arising  out of the  alleged  breach  of a
contract.  Plaintiff seeks damages of approximately $215,000. Plaintiff obtained
a  judgment  against  A.B.  Watley  Group,  Inc.  in the amount of  $179,883  (a
provision has been provided in the financial  statements)  with interest accrued
thereon from July 10, 2003. A.B. Watley Group Inc. has paid $10,000 towards this
balance.

     We are respondent in an arbitration  titled Jeffrey Spittel v. A.B. Watley,
Inc., NASD Arbitration No. 03-08076. In the Office of Dispute Resolution for the
NASD,  Claimant filed this  Statement of Claim on November 5, 2003,  against the
Company claiming


                                       12
<PAGE>

breach of contract, respondeat superior, and misappropriation and conversion, in
the amount of $7,500 plus punitive damages, costs,  disbursements and reasonable
attorneys'  fees.  A.B.  Watley,  Inc. filed an answer on January 12, 2004. A.B.
Watley, Inc. denies all wrongdoing in connection with this matter and intends to
vigorously defend this matter.

     We are defendant in an action titled Sprint  Communication  v. A.B. Watley,
Inc., United States District Court,  Southern District of New York, Index No. 03
CV 6926.  Plaintiff filed a Complaint against A.B. Watley,  Inc. on September 9,
2003  alleging  breach of contract  seeking  damages of $20,000 (a provision has
been  provided  in the  financial  statements)  plus costs,  disbursements,  and
attorneys'  fees.  The  parties  have  settled  this  matter  for  $10,000 on an
installment  basis over four months.  A.B. Watley,  Inc. has paid $7,500 towards
this settlement and is in default of its settlement agreement.

     We are  defendant in an action  titled  Peter  Wigger v. A.B.  Watley Group
Inc.,  Supreme  Court of the  State of New York,  County of New York,  Index No.
604124/02,  filed November 13, 2002. Plaintiff filed a complaint alleging breach
of a  commission  agreement  and  unpaid  wages due and owing.  Plaintiff  seeks
damages  in the  amount  of  $398,750  (a  provision  has been  provided  in the
financial  statements)  plus  interest  accrued  thereon.  Plaintiff has filed a
motion of for summary  judgment  on his  claims.  On or about April 23, 2004 the
parties reached a settlement,  which contemplates a total payment of $174,000 to
Plaintiff over the course of two (2) years. The Company has paid $36,000 towards
the settlement and is in default of its settlement agreement.

     We are defendant in an action titled Lehr Construction Corp. v. A.B. Watley
Group, Inc., Supreme Court of New York, County of New York, Index No. 600276/02,
filed November 12, 2003.  This action is for damages  arising out of the alleged
breach of a construction  contract.  Plaintiff  sought damages of  approximately
$233,794.  On March 6,  2003,  the  parties  reached a  settlement  in which the
Company  consented  to a Judgment in the amount of  $295,857,  less any payments
made by A.B.  Watley Group Inc., and the parties  simultaneously  entered into a
Forbearance Agreement (the "Agreement"),  which set forth a payment schedule for
A.B.  Watley Group Inc.  A.B.  Watley  Group Inc.  has paid $75,000  towards the
Judgment. On December 17, 2003, Plaintiff issued A.B. Watley Group Inc. a Notice
of Default under the Agreement, which A.B. Watley Group Inc. has failed to cure.
Under the  Agreement,  Plaintiff may execute on the  outstanding  balance of the
Judgment  in the amount of  $169,917,  (a  provision  has been  provided  in the
financial statements) without further notice to A.B. Watley Group Inc. Plaintiff
has taken efforts to seek information to collect upon the judgment.

     We are defendant in an action  titled A.B.  Watley  Group,  LLC/  Martinez/
2-4173-03-036  Section 806  Sarbanes-Oxley  Act of 2002, filed June 18, 2003. On
July 11, 2003, the U.S.  Department of Labor ("DOL") gave A.B. Watley Group Inc.
("ABW Group")  notice that John  Martinez,  a former  Financial  and  Operations
Principal  for the  Company,  had filed a Complaint  against the ABW Group under
Section 806 of the Sarbanes-Oxley Act of 2002 (the "Act"). The Complaint alleges
that ABW Group  terminated  Mr.  Martinez  in  violation  of the Act for raising
net-capital issues with the National Association of Securities Dealers, Inc. - a
private  self-regulatory  organization.  The Complaint  seeks: (i) Mr. Martinez'
base pay (at the annual  rate of  $150,000  per annum) for the period from March
14, 2003 through April 7, 2003; (ii) the difference between his current base pay
with  his  new  employer  ($130,000)  and  his  base  pay at the  Company  for a
reasonable  period of time;  (iii)  relocation  costs  incurred in obtaining new
employment in Baltimore,  Maryland;  (iv)  litigation  costs;  (v) his commuting
costs  during the time period  April 7, 2003 until the  unspecified  time of his
relocation  in  Baltimore,  Maryland;  (vi)  interest on the monies due him; and
(vii) any  additional  compensation  deemed  appropriate by the DOL. On July 30,
2003,  ABW Group  responded  to the  complaint  and  submitted  its response and
evidentiary  materials to the DOL. The Response  denies all liability and raised
several defenses to the Complaint. On March 9, 2004, the DOL gave notice that it
had  completed its  investigation  and dismissed  the  complaint.  Mr.  Martinez
subsequently  requested a hearing on the determinations made by the DOL. The DOL
has  scheduled a formal  hearing on the merits of Mr.  Martinez'  complaint  for
August 17, 2004. The Company intends to vigorously defend this matter.

     We are  respondent in an  arbitration  titled MCI Worldcom  Communications,
Inc. v. A.B. Watley Group, Inc., (JAMS Arbitration,  Reference # 1410003356). On
September  16,  2003,  claimant  filed  this  arbitration  against  the  Company
asserting a breach of contract  claim in the amount of $135,644 (a provision has
been provided in the  financial  statements).  On January 26, 2004,  the Company
submitted its Answer  denying all material  allegations  and  asserting  several
affirmative  defenses.  On March 22, 2004,  the  Arbitrator  held a  Preliminary
Conference  and issued a  Preliminary  Hearing  Order  directing  the parties to
submit a brief  addressing the  arbitrability  of one Claimant's  claims and the
Company's  statue of  limitations  defense.  The briefs are  pending  before the
Arbitrator. On April 28, 2004, JAMS informed the parties that the Arbitrator had
resigned due to illness.  A new  Arbitrator  has not yet assigned to the matter.
The Company intends to continue to vigorously defend the matter.

     We are  respondent in an arbitration  titled Darren Kirsch v. A.B.  Watley,
Inc. NASD Arbitration No. 03-08772.  In the Office of Dispute Resolution for the
NASD,  Claimant  filed this  Statement  of Claim  against A.B.  Watley,  Inc. on
December  5, 2003,  claiming


                                       13
<PAGE>

breach of  contract  in the  amount  of $8,800  plus  costs,  disbursements  and
reasonable  attorney's  fees. A.B.  Watley,  Inc. filed an answer on February 4,
2004. A.B. Watley, Inc. denies all wrongdoing in connection with this matter and
intends to vigorously defend this matter.  Pre-hearing  discovery is still being
conducted and there is currently a hearing  scheduled for August 17-18,  2004 in
New York, New York.

     In March  2003,  the  holder of the $5  million  secured  demand  note (the
"Noteholder")  demanded  repayment of the note.  On March 31, 2003,  ABW filed a
NASD  Arbitration  Demand  and a  Statement  of  Claim  with  the  NASD  Dispute
Resolution  office.  The  arbitration  sought to enforce the  provisions  of the
secured demand note agreement and to prevent premature withdrawal by the lender.
In April  2004,  the  parties  agreed to  discontinue  the  arbitration  without
prejudice pursuant to a settlement  agreement that provided for the repayment of
approximately  $2.9  million  (which was repaid in April 2004) of the $5 million
outstanding  principal of the secured demand note. The Noteholder agreed that as
long  as the  Company  is not in  default  of any of its  obligation  under  the
settlement  agreement,  not to  commence  any  litigation  with  respect  to the
outstanding  balance due on the secured  demand note prior to December 20, 2004.
On June 4, 2004 the  Noteholder  sent the  Company a notice of default  alleging
that the Company did not meet certain of its obligations  under the terms of the
settlement  agreement.  In June 2004,  the note  matured and the Company has not
paid the  remaining  balance and has not  received an  extension of the maturity
date.

     Our former  landlord,  W.B. Wood & Co. Inc.  filed a Notice of Petition for
Non-Payment against us in the District Court of the County of Suffolk,  November
3, 2003,  for failure to pay amounts  owed in  connection  with our lease of our
Melville, New York office space. We did not respond to the action and our former
landlord  obtained a judgment against us in the amount of $17,019,  (a provision
has been provided in the financial statements) which is presently owed.

     We are  plaintiff in an action titled A.B.  Watley  Group,  Inc. v. John J.
Amore, et al., Supreme Court of the State of New York, County of New York, Index
No.  602993/03,  filed  September 23, 2003. The Company has sued its former CEO.
The defendant, sued under various psuedo-names, has filed Counterclaims.

     We are defendant in an action titled John J. Amore v. Steven Malin and A.B.
Watley,  Inc., Supreme Court of the State of New York, County of New York, Index
No.  603833/03,  filed December 8, 2003.  Plaintiff sued A.B.  Watley,  Inc. for
breach of contract,  seeking  $500,000,  and Steven  Malin,  our  Chairman,  for
slander seeking  $5,000,000.  Defendants filed their answer denying  plaintiff's
allegations. We deny all wrongdoing in connection with this matter and intend to
vigorously defend this matter.

     We are respondent in an arbitration  titled William Frymer v. A.B.  Watley,
Inc., NASD Dispute Resolution Arbitration No. 03-05524,  filed July 30, 2003. In
this  matter a former  employee  of the Company  has  commenced  an  arbitration
alleging  breach  of  express  and  implied  contract,   quantum   meruit/unjust
enrichment,  and  violation  of the New York labor Law.  The Claimant is seeking
what he alleges is the balance of his unpaid  contractual  salary ($791,166) and
bonus  compensation,  benefits and severance pay, stock options totaling 500,000
shares at an exercise price of $1.80 per share, 25% liquidated damages under the
Labor Law, punitive  damages,  interest,  attorney's fees and other relief.  The
Company  answered  the  Statement  of Claim and  denied  Claimant's  substantive
allegations.  Discovery is underway,  and a hearing is scheduled  for  September
8-10 and 14, 2004. We deny all  wrongdoing  in  connection  with this matter and
intend to vigorously defend this matter.

     We are respondent in an arbitration  titled James B. Fellus v. A.B. Watley,
Inc., NASD Dispute Arbitration No. 03-05526, filed July 30, 2003. In this matter
a former employee of the Company has commenced an arbitration alleging breach of
express and implied contract, quantum meruit/unjust enrichment, and violation of
the New York Labor Law. The Claimant seeks what he alleges is the balance of his
unpaid  contractual  salary  ($875,000)  and bonus  compensation,  benefits  and
severance pay, stock options totaling 2.5 million shares at an exercise price of
$0.10 per share and 3.0 million  shares at an exercise price of $1.00 per share.
A lump sum payment of the sum of the highest  month's Retail  Division and Fixed
Income Division pretax profit incentive multiplied by 48, 25% liquidated damages
under the Labor  Law,  punitive  damages,  interest,  attorney's  fees and other
relief.  The Company  answered the Statement of Claim and denied the  Claimant's
substantive  allegations.  Discovery is underway, and a hearing is scheduled for
October 25-28,  2004. We deny all wrongdoing in connection  with this matter and
intend to vigorously defend this matter.

     In addition to the foregoing,  in the ordinary  course of business,  we and
our principals are, and may become,  a party to legal or regulatory  proceedings
commenced  by the  NASD,  the SEC or state  securities  regulators  relating  to
compliance,  trading  and  administrative  problems  that  are  detected  during
periodic  audits and  inspections or reported by  dissatisfied  customers.  Such
matters,  if pursued by such entities,  could rise to the level of  disciplinary
action. We are not currently involved in any proceeding by a governmental agency
or  self-regulatory  organization,  the  outcome of which is  expected to have a
material  adverse effect on our business.  There can be no assurance that one or
more future  disciplinary  actions,  if decided  adversely  us, would not have a
material  adverse  effect on our  business,  financial  condition and results of
operations.


                                       14
<PAGE>

10.  INCOME TAXES

     The Company has net  operating  loss  carryforwards  ("NOL's")  for federal
income tax purposes approximating $69,000,000 as of June 30, 2004. The NOL's are
scheduled to expire no sooner than September 30, 2013.

     The ultimate  realization of the deferred tax asset is primarily  dependent
upon the  generation  of future  taxable  income prior to the  expiration of the
NOL's. In assessing the realizability of deferred tax assets resulting from such
NOL's, management considers whether it is more likely than not that some portion
or all of  the  deferred  tax  assets  will  not  be  realized.  Management  has
established a 100%  valuation  allowance for such deferred tax asset,  since the
Company has not yet generated taxable net income.

11.  SUBSEQUENT EVENT

     In July  2004,  the  Company  sold  5,000,000  shares of  common  stock for
$2,000,000  in  a  private  placement  transaction.  The  Company  has  received
approximately  $500,000  towards the purchase of the shares,  with the remaining
balance to be received in  quarterly  installments  through  April 1, 2005.  The
sales made pursuant to the private placement offering were private  transactions
without registration in reliance on the exemption provided by Section 4(2), Rule
506 of Regulation D and Regulation S of the Securities Act of 1933, as amended.

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-K and this Form 10-QSB. The results of operations for interim periods
are not necessarily indicative of the results for the entire fiscal year.

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.

RESULTS OF OPERATIONS

THREE  MONTHS  ENDED JUNE 30, 2004  COMPARED TO THE THREE  MONTHS ENDED JUNE 30,
2003

     REVENUES.  Total  revenues  for the three  months  ended June 30, 2004 were
$2,018,759  a decrease  of  $2,723,898  or 57.4%,  as  compared  to  revenues of
$4,742,657, for the three months ended June 30, 2003. Components of the decrease
in revenues are as follows:

     Commissions: For the three months ended June 30, 2004, we earned commission
revenues of  $1,679,184  representing  a $37,491 or 2.2% decrease as compared to
commission  revenues of  $1,716,675  for the  corresponding  period in 2003,  as
retail commissions were comparable during these periods.

      Data  Service  Fees:  Our  revenues  from data  service fees for the three
months  ended June 30, 2004 were  $22,437 as compared to $46,130,  for the three
months  ended June 30, 2003  representing  a decrease of 51.4% or $23,693 due to
increased rebates of data services fees to customers.


                                       15
<PAGE>

     Revenues from Principal Transactions: There were no revenues from principal
transactions  during  the  three  months  ended  June 30,  2004 as  compared  to
$2,669,454  for the three  months  ended June 30,  2003.  The  Company no longer
engages in principal trading.

     Interest and Other  Income:  Interest and Other Income for the three months
ended June 30,  2004 was  $317,138  representing  a $6,740 or 2.2%  increase  as
compared to $310,398 for the three months ended June 30, 2003,  primarily due to
increased interest rates.

     Interest Expense: Interest expense for the three months ended June 30, 2004
and June 30, 2003,  respectively,  were $257,302 and $301,700.  This decrease of
$44,398 or 14.7%  resulted  from a  decrease  in a  subordinated  loan which was
partially repaid in April 2004.

     Net Revenues: As a result of the foregoing, for the three months ended June
30, 2004 total net revenues were  $1,761,457  compared to the three months ended
June 30, 2003 of  $4,440,957,  net revenues  decreased by  $2,679,500  or 60.3%.
Customers in the United States  generated the majority of revenues and no single
customer or group of customers accounted for 10% or more of our revenues.

     EXPENSES.  Total  expenses  for the three  months  ended June 30, 2004 were
$1,765,221,  a  $3,680,566  or 67.6%  decrease  compared  to total  expenses  of
$5,445,787 for the three months ended June 30, 2003.  Components of the decrease
in expenses are as follows:

     Commissions,  Floor  Brokerage and Clearing  Charges:  For the three months
ended June 30, 2004 and June 30, 2003 we incurred  $1,030,423  and $1,678,542 of
Commissions, Floor Brokerage and Clearing Charges, respectively.  This $648,119,
or 38.6%,  decrease  represents  favorable  cost  reductions  and  reductions in
proprietary trading activity.

     Employee  Compensation and Related Costs: Employee Compensation and Related
Costs of $629,622 for the three months ended June 30, 2004 reflects a $1,831,724
or 74.4%  decrease as compared to $2,461,346  incurred for such costs during the
three months  ended June 30, 2003.  This  decrease is  attributable  to both the
reduction in the number of employees and the elimination of compensation paid to
the  proprietary  trading  division,   as  the  Company  no  longer  engages  in
proprietary trading.

     Communications:  Communications expense for the three months ended June 30,
2004 amounted to $37,394,  a $152,152 or 80.3%  decrease as compared to $189,546
for the three months ended June 30,  2003.  This  decrease is largely due to the
consolidation of various data lines and obtaining  competitive  pricing with new
vendors.

     Business  Development:  Our Business Development costs decreased $60,769 to
$9,249 for the three  months  ended  June 30,  2004 from  $70,018  for the three
months ended June 30, 2003. This decrease was due to reducing  advertising costs
and less travel expense for marketing purposes.

     Professional  Services:  Professional  Services primarily consists of legal
and  accounting  costs  in  addition  to the  cost  of  external  administrative
consultants. For the three months ended June 30, 2004, our professional services
amounted to $167,261 as compared to $356,311 for the three months ended June 30,
2003,  representing a decrease of $189,050 or 53.1%. This decrease was primarily
the result of reduced audit and legal fees.

     Occupancy  and  Equipment:  The costs for  Occupancy  and Equipment for the
three months  ended June 30, 2004 were  $202,310 a decrease of $134,431 or 39.9%
compared to  $336,741  for the three  months  ended June 30,  2003.  Such costs,
primarily  consisting of lease costs for both office space and  equipment,  have
decreased  due to  terminated  leases  as  part  of  our  overall  cost  cutting
initiatives.

     Depreciation and Amortization:  Depreciation and Amortization  decreased by
$85,991 or 62.1% when comparing $52,378 for the three months ended June 30, 2004
to $138,369  for the three  months  ended June 30,  2003,  primarily  due to the
disposal of assets subject to such depreciation and amortization.

     Other  Expenses:  For the three  months  ended June 30,  2004,  we incurred
$49,428 of Other  Expenses,  as compared to $214,914  for the three months ended
June 30, 2003.  Other expenses  decreased by $165,486 or 77.0%  primarily due to
the holders of our Series A Preferred  Stock waiving rights to penalties and our
overall cost cutting initiatives.


                                       16
<PAGE>

     Preferred Stock Dividends:  There were no Preferred Stock Dividends for the
three months  ended June 30,  2004,  as compared to $63,000 for the three months
ended June 30, 2003. On June 1, 2003, the Holders of the Preferred  Stock waived
their rights to dividends through May 31, 2004.

     Abandonment  of Leasehold  Improvements:  In connection  with the Company's
relocation  of its  headquarters  from 40 Wall Street,  New York,  NY to 90 Park
Avenue,  New York.  NY, for the three  month  ended June 30,  2004,  the Company
abandoned  leasehold  improvements  with a net book value of $383,696  which was
offset by a write-off of deferred rent  incentives  of $796,540,  resulting in a
non-recurring reduction of expenses in the amount of $412,844.

     Net Loss: As a result of the foregoing  factors,  our Net Loss decreased by
$1,064,066  comparing  $3,764  for the  three  months  ended  June  30,  2004 to
$1,067,830 for the three months ended June 30, 2003.

NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2003

     REVENUES.  Total  revenues  for the nine  months  ended June 30,  2004 were
$8,079,852 a decrease of 34.9%,  as compared to revenues of $12,417,074  for the
nine months ended June 30, 2003.  Components  of the decrease in revenues are as
follows:

     Commissions:  For the nine months ended June 30, 2004, we earned commission
revenues of $4,764,511  representing  a $355,162 or 8.1% increase as compared to
commission  revenues of $4,409,349 for the  corresponding  period in 2003.  This
increase in commission revenues resulted from increased trading volumes.

     Data  Service  Fees:  Revenues  from data  service fees for the nine months
ended June 30, 2004 were  $50,939 as compared to the nine months  ended June 30,
2003 of $62,336  representing  a decrease  of 18.3%.  This  decrease  was due to
customers moving from third party software to the Ultimate Trader software.

     Revenues from Principal  Transactions:  Revenues from proprietary  security
transactions  decreased by 64.4%. We earned  $2,356,633  from such  transactions
during the nine months  ended June 30, 2004 as  compared to  $6,624,125  for the
nine months ended June 30, 2003. This $ 4,267,492  decrease in revenues resulted
from   reductions  in  proprietary   trading   volumes  and,   ultimately,   the
discontinuance of proprietary trading in February 2004.

     Interest  and Other  Income:  Interest and Other Income for the nine months
ended June 30, 2004 was $907,769  representing  a $413,495 or 31.3%  decrease as
compared to $1,321,264 for the nine months ended June 30, 2003.

     Interest Expense:  Interest expense for the nine months ended June 30, 2004
and June 30, 2003,  respectively,  were $857,575 and $726,223.  This increase of
$131,352 or 18.1%  resulted from an increase in  subordinated  loans and company
borrowings.

     Net Revenues: As a result of the foregoing,  for the nine months ended June
30, 2004 total net revenues were $7,222,277 compared to $11,690,851 for the nine
months ended June 30, 2003, a decrease of $4,468,574 or 38.2%.  Customers in the
United States generated the majority of revenues and no single customer or group
of customers accounted for 10% or more of our revenues.

     EXPENSES.  Total  expenses  for the nine  months  ended June 30,  2004 were
$9,780,030,  a decrease of  $7,911,605 or 44.7%,  compared to total  expenses of
$17,691,635 for the nine months ended June 30, 2003.  Components of the decrease
in expenses are as follows:

     Commissions,  Floor  Brokerage  and Clearing  Charges:  For the nine months
ended June 30, 2004 and June 30, 2003 we incurred  $3,508,842  and $4,213,913 of
Commissions, Floor Brokerage and Clearing Charges, respectively.  This $705,071,
or 16.7%,  decrease in costs represents favorable cost reductions and reductions
proprietary trading activity.

     Employee  Compensation and Related Costs: Employee Compensation and Related
Costs of  $3,224,087  for the nine months  ended June 30, 2004  reflects a 49.0%
decrease as compared to  $6,326,377  incurred  during the nine months ended June
30, 2003. This $3,102,290  decrease is attributable to both the reduction in the
number of employees and to lower  compensation  paid to the proprietary  trading
division.


                                       17
<PAGE>

     Communications:  Communications  expense  for the nine month ended June 30,
2004 amounted to $363,115,  a 64.2% decrease compared to $1,014,473 for the nine
month period ended June 30, 2003.  This $651,358  decrease is largely due to the
consolidation of various data lines and obtaining  competitive  pricing with new
vendors.

     Business Development:  Our Business Development costs decreased $109,689 to
$88,579  for the nine  months  ended June 30,  2004 from  $198,268  for the nine
months ended June 30, 2003. This 55.3% decrease was due to reducing  advertising
costs and less travel expense for marketing purposes.

     Professional  Services:  Professional  Services primarily consists of legal
and  accounting  costs  in  addition  to the  cost  of  external  administrative
consultants.  For the nine months ended June 30, 2004, our professional services
amounted to $440,832  compared to $1,371,860 for the nine months ending June 30,
2003,  representing a decrease of $931,028 or 67.9%. This decrease was primarily
the result of  reduced  audit and legal fees and a  favorable  settlement  of an
outstanding balance with former legal counsel.

     Occupancy and Equipment: The costs for Occupancy and Equipment for the nine
months  ended  June 30,  2004 were  $869,290  a decrease  of  $952,535  or 52.3%
compared to  $1,821,825  for the nine months  ended June 30,  2003.  Such costs,
primarily  consisting of lease costs for both office space and  equipment,  have
decreased  due to  terminated  leases  as  part  of  our  overall  cost  cutting
initiatives.

     Depreciation and Amortization:  Depreciation and Amortization  decreased by
$847,297 or 77.2% when  comparing  $250,765  for the nine months  ended June 30,
2004 to $1,098,062 for the nine months ended June 30, 2003, primarily due to the
disposal of assets subject to such depreciation and amortization.

     Other  Expenses:  For the nine  months  ended June 30,  2004,  we  incurred
$423,842 of Other Expenses,  as compared to $1,562,570 for the nine months ended
June 30, 2003. Other expenses decreased by 72.9% or $1,138,728  primarily due to
the holders of our Series A Preferred  Stock waiving rights to penalties and our
overall cost cutting initiatives.

     Loss on Investments: For the nine months ended June 30, 2003, we incurred a
loss on investment of $84,287 from the sale of stock received in connection with
the sale of proprietary technology formerly owned by the Company.

     Preferred Stock Dividends:  For the nine months ended June 30, 2004, we did
not incur any Preferred  Stock  Dividends,  as compared to $252,000 for the nine
months period ended June 30, 2003. On June 1, 2003, the Holders of the Preferred
Stock waived their rights to dividends through May 31, 2004.

     Abandonment  of  Leasehold  Improvements:   In  connection  with  Company's
relocation  of its  headquarters  from 40 Wall Street,  New York,  NY to 90 Park
Avenue,  New York.  NY, for the nine  months  ended June 30,  2004,  the Company
abandoned  leasehold  improvements with a net book value of $1,407,218 which was
partially  offset by a  write-off  of  deferred  rent  incentives  of  $796,540,
resulting in a net expense of $610,678.

     Net Loss: As a result of the fore-mentioned factors, our Net Loss decreased
by 59.1%,  comparing  $2,557,753  for the nine  months  ended  June 30,  2004 to
$6,252,784 for the nine months ended June 30, 2003.

GOING CONCERN

     As indicated by the accompanying unaudited condensed consolidated financial
statements,  the Company has  significant  deficits in both working  capital and
stockholders'  equity. These factors raise substantial doubt about the Company's
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

LIQUIDITY AND CAPITAL RESOURCES

     Cash utilized in operating activities during the nine months ended June 30,
2004 was  $658,069,  as compared to cash  provided by  operating  activities  of
$34,540 for the nine months ended June 30, 2003.  Cash was  principally  used to
fund the net loss of $2,557,753,  net of non-cash items  including  depreciation
and  amortization  of  $250,765,   abandonment  of  leasehold   improvements  of
$1,407,218,  debt discount in connection  with issuance of warrants of $136,862,
financing  charge in  connection  with common stock issued with notes payable of
$87,500, minority interest applicable to LLC Class B member of $32,950 write-off
of deferred rent incentives of $796,540 and non-cash  compensation/service costs
of $13,996.  In addition,  cash was provided by  decreases  in


                                       18
<PAGE>

receivable  from clearing  brokers of $45,992,  securities  owned of $1,309,145,
loans receivable from related party of $14,500, and security deposits of $30,000
and an increase in accounts payable and accrued liabilities of $1,100,790.  Cash
was used by a decrease in other  assets of $41,817 and  increases  in payable to
clearing broker of $1,597,767, securities sold, not yet purchased of $28,010.

     Cash provided by financing  activities was $928,852  during the nine months
ended June 30, 2004  compared to cash used in the amount of $235,038  during the
nine months ended June 30, 2003.  Cash provided by financing  activities  during
the nine months ended June 30,  2004,  principally  consisted  of proceeds  from
notes payable of $2,338,620 and proceeds from secured demand note  receivable of
$585,232  offset by  repayments  of notes  payable of $125,000,  notes payable -
other of $1,825,000 and capital distribution to LLC Class B members of $45,000.

     The Company has  continued  to lower  expenses  by reducing  headcount  and
eliminating other non-essential expenses through its cost-cutting initiatives.

NET OPERATING LOSS CARRYFORWARDS

     The  Company's  net operating  loss  carryforwards  are scheduled to expire
beginning  in the year 2013.  The  issuance  of  additional  equity  securities,
together  with the Company's  recent  financing  and public  offering,  could be
deemed to result in an  ownership  change  and thus  could  limit our use of the
Company's 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.

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which those temporary  differences become deductible.  Management  considers the
reversal  of  deferred  tax  assets,  projected  future  taxable  income and tax
planning  strategies  in  making  this  assessment.  Based  upon  the  level  of
historical  taxable  income and  projections  for future taxable income over the
period for which the deferred tax assets are deductible,  management believes it
is more likely than not that the Company  will not realize the benefits of these
deductible differences.

RELEVANT ACCOUNTING STANDARDS

     In  January   2003,   as  revised  in  December   2003,   the  FASB  issued
Interpretation No. 46 ("FIN 46"),  "Consolidation of Variable Interest Entities,
an  Interpretation  of ARB No. 51." FIN 46 requires  certain  variable  interest
entities  to be  consolidated  by the primary  beneficiary  of the entity if the
equity investors in the entity do not have the  characteristics of a controlling
financial  interest or do not have  sufficient  equity at risk for the entity to
finance its activities  without additional  subordinated  financial support from
other  parties.  FIN 46 is  effective  for all new  variable  interest  entities
created or acquired  after  January 31,  2003.  For variable  interest  entities
created or acquired  prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period  beginning  after March 15, 2004.
The  adoption  of this  pronouncement  did not  have a  material  effect  on the
Company's financial statements.

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 our  clearing  brokers,  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.


                                       19
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

     During the quarter,  an evaluation was performed  under the supervision and
with the  participation  of the  Company's  management,  including the Principal
Executive Officer and the Principal  Financial Officer,  of the effectiveness of
the design and operation of the Company's  disclosure  controls and  procedures.
Based on that  evaluation,  the  Company's  management,  including the Principal
Executive  Officer  and the  Principal  Financial  Officer,  concluded  that the
Company's disclosure controls and procedures were effective as of June 30, 2004.
There have been no significant  changes in the Company's internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
June 30, 2004.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     Our  principal  offices were located at 40 Wall Street,  New York, NY at an
annual cost of approximately  $920,000 per year, plus  escalations.  The initial
term of the lease for such  office  space  expires  in June 2009.  Our  previous
landlord,   40  Wall  Street,   LLC,  commenced  two  separate   landlord/tenant
proceedings  seeking money judgments and orders of eviction against the Company.
Both  proceedings have been settled whereby the Company vacated a portion of the
premises in March 2004 and the remaining  portion in June 2004.  The Company has
signed a confession of judgment for $609,441 and the landlord is seeking a money
judgment for all rent arrears (a provision  has been  provided in the  financial
statements).

     We are a defendant in an action titled Michael Fielman v. A.B. Watley, Inc.
and A.B. Watley Group,  Inc.,  Supreme Court of the State of New York, County of
Nassau,  Index No.  012082/02,  filed on July 10,  2002.  This is an action  for
unpaid wages seeking  $28,658,  plus statutory  damages,  costs,  and attorneys'
fees.  This matter has been  settled in the amount of $34,658 (a  provision  has
been provided in the financial  statements)  over an installment  basis of eight
(8) months.  A.B.  Watley Group Inc. has paid $11,152 towards the settlement and
is in default of its settlement agreement.

     We are a defendant in an action titled General  Electric  Capital Corp., as
Assignee of Sun  Microsystems,  Inc. v. A.B.  Watley Group,  Inc. f/k/a Internet
Financial Services,  Inc., Supreme Court of the State of New York, County of New
York, Index No 117675/02,  filed August 7, 2002. This is a breach of contract in
connection  with the lease of  equipment,  which seeks  compensatory  damages of
$195,356,  plus  interest,  costs  and  attorney's  fees (a  provision  has been
provided in the financial statements).  The parties have reached a settlement in
principle for the payment of $50,000 in two  installments  although an agreement
has not been finalized.

     Our former legal counsel,  has filed a complaint  against the Company.  The
title of the action is Hartman & Craven LLP v. A.B. Watley, Inc. and A.B. Watley
Group Inc.,  Supreme Court of the State of New York,  County of New York,  Index
No.:  109502/03,  filed May 23, 2003.  Plaintiff has filed a Complaint  against,
amongst others, A.B. Watley Group, Inc. and A.B. Watley, Inc. for damages in the
amount of  $352,574,  plus  interest  accrued  thereon,  (a  provision  has been
provided in the financial statements),  for unpaid legal fees. A.B. Watley Group
Inc.  and A.B.  Watley,  Inc.  deny  liability,  in part,  and have  asserted  a
counterclaim for malpractice and breach of contract for unspecified  damages. At
this point,  it is difficult to determine the amount,  if any, that A.B.  Watley
Group Inc. and A.B. Watley,  Inc. may be held liable for.  Plaintiff has filed a
motion for summary  judgment,  which has been fully submitted and briefed before
the Court.  The Court  granted the motion in part and denied the motion in part.
The parties  are  awaiting an executed  judgment  and are  conducting  pre-trial
discovery.

     We are defendant in an action titled Hyperfeed  Technologies,  Inc. v. A.B.
Watley Group Inc.,  Supreme Court of the State of New York,  County of New York,
Index No. 111538/03 on June 24, 2003. Plaintiff has domesticated an out-of-state
judgment against A.B. Watley Group Inc. in the amount of $180,503, plus interest
accrued  thereon (a provision has been  provided in the  financial  statements).
Currently, Plaintiff is conducting post-judgment discovery.

     We are respondent in an  arbitration  titled Sean MacDonald and Adam Silver
v. A.B. Watley,  Inc., NASD  Arbitration No. 03-02644.  In the Office of Dispute
Resolution  for the NASD,  Claimants  filed this  Statement of Claim against the
Company on March 20, 2003.  This action seeks  unspecified  damages for improper
margin sell-outs by A.B. Watley, Inc. A.B. Watley, Inc. denies all wrongdoing in
connection  with this  matter  asserting  that it acted in  accordance  with its
customer  agreement as well as applicable  federal securities laws. In addition,
A.B. Watley, Inc. has asserted a counterclaim to recover the margin debt left by
Claimants.  A  hearing  on this  matter  was  held on June  29,  2004 in  Boston
Massachusetts. A.B. Watley, Inc. is awaiting a decision.

     We are respondent in an  arbitration  titled John W. Donavan and Bettina H.
Wolff v. A.B.  Watley,  Inc., NASD  Arbitration No.  03-05212.  In the Office of
Dispute Resolution for the NASD, Claimants filed this Statement of Claim against
A.B. Watley,  Inc.


                                       20
<PAGE>

on July 15, 2003 seeking damages of approximately  $94,788 (a provision has been
provided in the financial  statements) relating to the suitability of Claimants'
investments.  A.B.  Watley,  Inc.  denies all wrongdoing in connection with this
matter asserting that it acted in accordance with its customer agreement as well
as applicable  federal  securities laws. The parties have agreed to a settlement
in principle although a formal settlement agreement has not been consummated.

     We are respondent in an arbitration titled Steven Messina, Brian Kelly, and
Thomas Messina v. A.B.  Watley,  Inc.,  NASD  Arbitration No.  02-04649.  In the
Office of Dispute  Resolution  for the NASD,  Claimants  filed this Statement of
Claim against A.B. Watley, Inc. This action,  which was filed on August 7, 2002,
seeks actual damages, consisting of unpaid commissions in the amount of $147,000
(a provision has been provided in the financial  statements).  A.B. Watley, Inc.
denies  all  wrongdoing  in  connection  with this  matter,  and has  asserted a
counterclaim  in the amount of $600,000 for  breaches of contract and  fiduciary
duties. A hearing in this matter has not yet been scheduled.  A.B. Watley,  Inc.
intends to vigorously defend this matter and prosecute its counterclaim.

     We are  respondent  in an  arbitration  titled Gary Miller v. A.B.  Watley,
Inc., NASD Arb. No.:  03-07144.  Claimant filed this Claim against A.B.  Watley,
Inc. on September 29, 2003 seeking damages of approximately  $49,000 relating to
breach of contract.  A.B.  Watley,  Inc.  submitted its answer in this matter on
December 4, 2003 denying all liability in connection with the Claim. Pre-hearing
discovery is still being conducted and there is a hearing  scheduled for October
28-29, 2004 in New York, New York.

     We are defendant in an action titled Pentech  Financial  Services,  Inc. v.
A.B.  Watley Group Inc.,  Supreme Court of the State of New York,  County of New
York,  Index No.  02-126759.  On December 11, 2002,  Plaintiff filed a complaint
against A.B.  Watley Group Inc. for an alleged breach of a lease  agreement.  On
May 28,  2003,  Plaintiff  obtained a  judgment  in the  amount of  $465,584  (a
provision  has been  provided in financial  statements)  plus  interest  accrued
thereon.  A.B. Watley Group Inc. executed a settlement  agreement with Plaintiff
for a total settlement of $522,584, over an installment basis.  Currently,  A.B.
Watley Group Inc. is in default of the settlement agreement.

     We are defendant in an action titled Siemens Financial Services, Inc. f/k/a
Siemens Credit  Corporation  v. A.B.  Watley Group,  Inc.,  Supreme Court of the
State of New York, County of New York, Index No. 603769/2002,  filed October 16,
2002.  This  action  is for  damages  arising  out of the  alleged  breach  of a
contract.  Plaintiff seeks damages of approximately $215,000. Plaintiff obtained
a  judgment  against  A.B.  Watley  Group,  Inc.  in the amount of  $179,883  (a
provision has been provided in the financial  statements)  with interest accrued
thereon from July 10, 2003. A.B. Watley Group Inc. has paid $10,000 towards this
balance.

     We are respondent in an arbitration  titled Jeffrey Spittel v. A.B. Watley,
Inc., NASD Arbitration No. 03-08076. In the Office of Dispute Resolution for the
NASD,  Claimant filed this  Statement of Claim on November 5, 2003,  against the
Company claiming breach of contract,  respondeat superior,  and misappropriation
and  conversion,   in  the  amount  of  $7,500  plus  punitive  damages,  costs,
disbursements and reasonable  attorneys' fees. A.B. Watley, Inc. filed an answer
on January 12, 2004. A.B. Watley,  Inc. denies all wrongdoing in connection with
this matter and intends to vigorously defend this matter.

     We are defendant in an action titled Sprint  Communication  v. A.B. Watley,
Inc., United States District Court,  Southern District of New York, Index No. 03
CV 6926.  Plaintiff filed a Complaint against A.B. Watley,  Inc. on September 9,
2003  alleging  breach of contract  seeking  damages of $20,000 (a provision has
been  provided  in the  financial  statements)  plus costs,  disbursements,  and
attorneys'  fees.  The  parties  have  settled  this  matter  for  $10,000 on an
installment  basis over four months.  A.B. Watley,  Inc. has paid $7,500 towards
this settlement and is in default of its settlement agreement.

     We are  defendant in an action  titled  Peter  Wigger v. A.B.  Watley Group
Inc.,  Supreme  Court of the  State of New York,  County of New York,  Index No.
604124/02,  filed November 13, 2002. Plaintiff filed a complaint alleging breach
of a  commission  agreement  and  unpaid  wages due and owing.  Plaintiff  seeks
damages  in the  amount  of  $398,750  (a  provision  has been  provided  in the
financial  statements)  plus  interest  accrued  thereon.  Plaintiff has filed a
motion of for summary  judgment  on his  claims.  On or about April 23, 2004 the
parties reached a settlement,  which contemplates a total payment of $174,000 to
Plaintiff over the course of two (2) years. The Company has paid $36,000 towards
the settlement and is in default of its settlement agreement.

     We are defendant in an action titled Lehr Construction Corp. v. A.B. Watley
Group, Inc., Supreme Court of New York, County of New York, Index No. 600276/02,
filed November 12, 2003.  This action is for damages  arising out of the alleged
breach of a construction  contract.  Plaintiff  sought damages of  approximately
$233,794.  On March 6,  2003,  the  parties  reached a  settlement  in which the
Company  consented  to a Judgment in the amount of  $295,857,  less any payments
made by A.B.  Watley Group Inc., and the parties  simultaneously  entered into a
Forbearance Agreement (the "Agreement"),  which set forth a payment schedule for
A.B.  Watley Group Inc.  A.B.  Watley  Group Inc.  has paid $75,000  towards the
Judgment. On December 17, 2003, Plaintiff issued A.B. Watley Group Inc. a Notice
of Default under the Agreement, which A.B. Watley Group Inc. has failed to cure.
Under the  Agreement,


                                       21
<PAGE>

Plaintiff may execute on the  outstanding  balance of the Judgment in the amount
of $169,917, (a provision has been provided in the financial statements) without
further  notice to A.B.  Watley Group Inc.  Plaintiff  has taken efforts to seek
information to collect upon the judgment.

     We are defendant in an action  titled A.B.  Watley  Group,  LLC/  Martinez/
2-4173-03-036  Section 806  Sarbanes-Oxley  Act of 2002, filed June 18, 2003. On
July 11, 2003, the U.S.  Department of Labor ("DOL") gave A.B. Watley Group Inc.
("ABW Group")  notice that John  Martinez,  a former  Financial  and  Operations
Principal  for the  Company,  had filed a Complaint  against the ABW Group under
Section 806 of the Sarbanes-Oxley Act of 2002 (the "Act"). The Complaint alleges
that ABW Group  terminated  Mr.  Martinez  in  violation  of the Act for raising
net-capital issues with the National Association of Securities Dealers, Inc. - a
private  self-regulatory  organization.  The Complaint  seeks: (i) Mr. Martinez'
base pay (at the annual  rate of  $150,000  per annum) for the period from March
14, 2003 through April 7, 2003; (ii) the difference between his current base pay
with  his  new  employer  ($130,000)  and  his  base  pay at the  Company  for a
reasonable  period of time;  (iii)  relocation  costs  incurred in obtaining new
employment in Baltimore,  Maryland;  (iv)  litigation  costs;  (v) his commuting
costs  during the time period  April 7, 2003 until the  unspecified  time of his
relocation  in  Baltimore,  Maryland;  (vi)  interest on the monies due him; and
(vii) any  additional  compensation  deemed  appropriate by the DOL. On July 30,
2003,  ABW Group  responded  to the  complaint  and  submitted  its response and
evidentiary  materials to the DOL. The Response  denies all liability and raised
several defenses to the Complaint. On March 9, 2004, the DOL gave notice that it
had  completed its  investigation  and dismissed  the  complaint.  Mr.  Martinez
subsequently  requested a hearing on the determinations made by the DOL. The DOL
has  scheduled a formal  hearing on the merits of Mr.  Martinez'  complaint  for
August 17, 2004. The Company intends to vigorously defend this matter.

     We are  respondent in an  arbitration  titled MCI Worldcom  Communications,
Inc. v. A.B. Watley Group, Inc., (JAMS Arbitration,  Reference # 1410003356). On
September  16,  2003,  claimant  filed  this  arbitration  against  the  Company
asserting a breach of contract  claim in the amount of $135,644 (a provision has
been provided in the  financial  statements).  On January 26, 2004,  the Company
submitted its Answer  denying all material  allegations  and  asserting  several
affirmative  defenses.  On March 22, 2004,  the  Arbitrator  held a  Preliminary
Conference  and issued a  Preliminary  Hearing  Order  directing  the parties to
submit a brief  addressing the  arbitrability  of one Claimant's  claims and the
Company's  statue of  limitations  defense.  The briefs are  pending  before the
Arbitrator. On April 28, 2004, JAMS informed the parties that the Arbitrator had
resigned due to illness.  A new  Arbitrator  has not yet assigned to the matter.
The Company intends to continue to vigorously defend the matter.

     We are  respondent in an arbitration  titled Darren Kirsch v. A.B.  Watley,
Inc. NASD Arbitration No. 03-08772.  In the Office of Dispute Resolution for the
NASD,  Claimant  filed this  Statement  of Claim  against A.B.  Watley,  Inc. on
December  5, 2003,  claiming  breach of  contract  in the amount of $8,800  plus
costs,  disbursements and reasonable attorney's fees. A.B. Watley, Inc. filed an
answer on  February  4,  2004.  A.B.  Watley,  Inc.  denies  all  wrongdoing  in
connection  with this  matter and  intends to  vigorously  defend  this  matter.
Pre-hearing  discovery is still being conducted and there is currently a hearing
scheduled for August 17-18, 2004 in New York, New York.

     In March  2003,  the  holder of the $5  million  secured  demand  note (the
"Noteholder")  demanded  repayment of the note.  On March 31, 2003,  ABW filed a
NASD  Arbitration  Demand  and a  Statement  of  Claim  with  the  NASD  Dispute
Resolution  office.  The  arbitration  sought to enforce the  provisions  of the
secured demand note agreement and to prevent premature withdrawal by the lender.
In April  2004,  the  parties  agreed to  discontinue  the  arbitration  without
prejudice pursuant to a settlement  agreement that provided for the repayment of
approximately  $2.9  million  (which was repaid in April 2004) of the $5 million
outstanding  principal of the secured demand note. The Noteholder agreed that as
long  as the  Company  is not in  default  of any of its  obligation  under  the
settlement  agreement,  not to  commence  any  litigation  with  respect  to the
outstanding  balance due on the secured  demand note prior to December 20, 2004.
On June 4, 2004 the  Noteholder  sent the  Company a notice of default  alleging
that the Company did not meet certain of its obligations  under the terms of the
settlement  agreement.  In June 2004,  the note  matured and the Company has not
paid the  remaining  balance and has not  received an  extension of the maturity
date.

     Our former  landlord,  W.B. Wood & Co. Inc.  filed a Notice of Petition for
Non-Payment against us in the District Court of the County of Suffolk,  November
3, 2003,  for failure to pay amounts  owed in  connection  with our lease of our
Melville, New York office space. We did not respond to the action and our former
landlord  obtained a judgment against us in the amount of $17,019,  (a provision
has been provided in the financial statements) which is presently owed.

     We are  plaintiff in an action titled A.B.  Watley  Group,  Inc. v. John J.
Amore, et al., Supreme Court of the State of New York, County of New York, Index
No.  602993/03,  filed  September 23, 2003. The Company has sued its former CEO.
The defendant, sued under various psuedo-names, has filed Counterclaims.


                                       22
<PAGE>

     We are defendant in an action titled John J. Amore v. Steven Malin and A.B.
Watley,  Inc., Supreme Court of the State of New York, County of New York, Index
No.  603833/03,  filed December 8, 2003.  Plaintiff sued A.B.  Watley,  Inc. for
breach of contract,  seeking  $500,000,  and Steven  Malin,  our  Chairman,  for
slander seeking  $5,000,000.  Defendants filed their answer denying  plaintiff's
allegations. We deny all wrongdoing in connection with this matter and intend to
vigorously defend this matter.

     We are respondent in an arbitration  titled William Frymer v. A.B.  Watley,
Inc., NASD Dispute Resolution Arbitration No. 03-05524,  filed July 30, 2003. In
this  matter a former  employee  of the Company  has  commenced  an  arbitration
alleging  breach  of  express  and  implied  contract,   quantum   meruit/unjust
enrichment,  and  violation  of the New York labor Law.  The Claimant is seeking
what he alleges is the balance of his unpaid  contractual  salary ($791,166) and
bonus  compensation,  benefits and severance pay, stock options totaling 500,000
shares at an exercise price of $1.80 per share, 25% liquidated damages under the
Labor Law, punitive  damages,  interest,  attorney's fees and other relief.  The
Company  answered  the  Statement  of Claim and  denied  Claimant's  substantive
allegations.  Discovery is underway,  and a hearing is scheduled  for  September
8-10 and 14, 2004. We deny all  wrongdoing  in  connection  with this matter and
intend to vigorously defend this matter.

     We are respondent in an arbitration  titled James B. Fellus v. A.B. Watley,
Inc., NASD Dispute Arbitration No. 03-05526, filed July 30, 2003. In this matter
a former employee of the Company has commenced an arbitration alleging breach of
express and implied contract, quantum meruit/unjust enrichment, and violation of
the New York Labor Law. The Claimant seeks what he alleges is the balance of his
unpaid  contractual  salary  ($875,000)  and bonus  compensation,  benefits  and
severance pay, stock options totaling 2.5 million shares at an exercise price of
$0.10 per share and 3.0 million  shares at an exercise price of $1.00 per share.
A lump sum payment of the sum of the highest  month's Retail  Division and Fixed
Income Division pretax profit incentive multiplied by 48, 25% liquidated damages
under the Labor  Law,  punitive  damages,  interest,  attorney's  fees and other
relief.  The Company  answered the Statement of Claim and denied the  Claimant's
substantive  allegations.  Discovery is underway, and a hearing is scheduled for
October 25-28,  2004. We deny all wrongdoing in connection  with this matter and
intend to vigorously defend this matter.

ITEM 2. CHANGES IN SECURITIES

     In June  2004,  holders of 560  shares of Series A  Redeemable  Convertible
Preferred Stock recorded at $6,008,625 including dividends and interest,  in the
accompanying Condensed Consolidated  Statements of Financial Condition converted
their preferred stock into warrants to purchase 5,462,387 shares of common stock
of the Company.  The exercise price for each of the common shares to be received
upon exercise of the warrants is $0.01.  The warrants have a term of seven years
and expire in June 2011.

     In July 2004,  the Company and holders of 70 shares of Series A  Redeemable
Convertible  Preferred  Stock  recorded  at  $858,376  including  dividends  and
interest,  in the accompanying  Condensed  Consolidated  Statements of Financial
Condition reached an agreement to convert their preferred stock into warrants to
purchase 780,342 shares of common stock of the Company.

     In July  2004,  the  Company  sold  5,000,000  shares of  common  stock for
$2,000,000  in  a  private  placement  transaction.  The  Company  has  received
approximately  $500,000  towards the purchase of the shares,  with the remaining
balance to be received in  quarterly  installments  through  April 1, 2005.  The
sales made pursuant to the private placement offering were private  transactions
without registration in reliance on the exemption provided by Section 4(2), Rule
506 of Regulation D and Regulation S of the Securities Act of 1933, as amended.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

     On November  29,  2001,  the Company  entered  into a Series A  Convertible
Preferred   Purchase  Agreement  whereby  it  issued  630  shares  of  Series  A
Convertible  Preferred Stock,  par value $.01  ("Preferred  Stock") in a private
placement.  Each share is convertible  into 3,390 shares of the Company's Common
Stock at an exercise price of $2.95.  The purchasers of the Preferred Stock were
issued warrants,  expiring in 5 years from the date of issuance,  to purchase an
additional 1,629,069 shares of Common Stock at an exercise price of $2.95.

     Pursuant to the Purchase  Agreement and the  Registration  Rights Agreement
(the "Registration Agreement"),  the Company was required to file a registration
statement  (the  "Registration  Statement")  with the  Securities  and  Exchange
Commission  registering  for resale the shares of Common Stock issuable upon the
conversion of the shares of Preferred  Stock in the amount of 2,135,700  shares,
and upon the  exercise of warrants  to  purchase  shares of Common  Stock in the
amount  of  1,629,069.  As of the  date  hereof,  the  Company  has not  filed a
Registration  Statement and will not be able to have the Registration  Statement
filed and  declared  effective  within the  period  required.  As a result,  the
Company is in default of the Purchase Agreement and the Registration  Agreement.


                                       23
<PAGE>

      A penalty of 2% of the liquidation preference value of the Preferred Stock
for each  thirty-day  period  accrues to each holder of  Preferred  Stock and is
added to the  liquidation  preference  amount until cured.  As of June 30, 2003,
liquidated  damages of approximately  $692,594 has been accrued to the preferred
holders.

     In June  2004,  holders of 560  shares of Series A  Redeemable  Convertible
Preferred Stock recorded at $6,008,625 including dividends and interest,  in the
accompanying Condensed Consolidated  Statements of Financial Condition converted
their preferred stock into warrants to purchase 5,462,387 shares of common stock
of the Company.  The exercise price for each of the common shares to be received
upon exercise of the warrants is $0.01.  The warrants have a term of seven years
and expire in June 2011.

     In July 2004,  the Company and holders of 70 shares of Series A  Redeemable
Convertible  Preferred  Stock  recorded  at  $858,376  including  dividends  and
interest,  in the accompanying  Condensed  Consolidated  Statements of Financial
Condition reached an agreement to convert their preferred stock into warrants to
purchase 780,342 shares of common stock of the Company.

     On June 4, 2004, the holder of the $5 million  secured demand note sent the
Company a notice of default  alleging  that the Company did not meet  certain of
its obligations under the terms of the settlement  agreement.  In June 2004, the
note  matured  and the Company  has not paid the  remaining  balance and has not
received an extension of the maturity date.

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

     None.

ITEM 5. OTHER INFORMATION

     None.


                                       24
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits

          31.1      Certification by Steven Malin,  Principal  Executive Officer
                    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

          31.2      Certification by Robert Malin,  Principal  Financial Officer
                    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

          32.1      Certification by Steven Malin,  Principal  Executive Officer
                    pursuant to 18 U.S.C.  Section  1350 as adopted  pursuant to
                    Section 906 of the Sarbanes-Oxley Act of 2002

          32.2      Certification by Robert Malin,  Principal  Financial Officer
                    pursuant to 18 U.S.C.  Section  1350 as adopted  pursuant to
                    Section 906 of the Sarbanes-Oxley Act of 2002

     (b)  Reports on Form 8-K

                    None


                                       25
<PAGE>

SIGNATURE

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant has caused this Report to be signed on its behalf by the  undersigned
thereunto duly authorized.


              By:       /s/ STEVEN MALIN
                        ----------------
                        Chairman of the Board and Principal Executive Officer
                        Steven Malin
                        Dated:  August  13, 2004

              By:       /s/ ROBERT MALIN
                        ----------------
                        Vice-Chairman, Principal Financial Officer and Director
                        Robert Malin
                        Dated:  August 13, 2004


                                       26