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: December 31, 2003

                                       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) 422-1100
              (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 [ ] No [ X ].

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest  practicable  date:  As of June 30,  2004,  there were
13,137,138 shares of the Common Stock, par value $.001 per share, outstanding.

<PAGE>

                             A.B. Watley Group Inc.

<TABLE>
<CAPTION>
Index

PART I-- FINANCIAL INFORMATION                                                                                    PAGE
<S>                                                                                                               <C>
           Item 1.  Financial Statements

            Condensed Consolidated Statements of Financial Condition
                           As of December 31, 2003 (Unaudited) and September 30, 2003..............................3

            Condensed Consolidated Statements of Operations
                           For the Three Months Ended December 31, 2003 and 2002 (Unaudited).......................4

            Condensed Consolidated Statements of Cash Flows
                           For the Three Months Ended December 31, 2003 and 2002 (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...................................17

            Item 4.  Controls and Procedures......................................................................18

PART II-- OTHER INFORMATION

                  Item 1.  Legal Proceedings .....................................................................18

                  Item 2.  Changes in Securities..................................................................22

                  Item 3.  Default on Senior Securities...........................................................22

                  Item 4.  Submission of Matters to a Vote of Security Holders....................................22

                  Item 5.  Other Information .....................................................................22

                  Item 6.  Exhibits and Reports on Form 8-K.......................................................23

Signatures........................................................................................................24

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>

                                                                                            DECEMBER 31, 2003    SEPTEMBER 30, 2003
                                                                                            -----------------    ------------------
                                                                                              (Unaudited)
ASSETS:
<S>                                                                                           <C>                  <C>
Cash and cash equivalents                                                                     $  1,813,573         $     41,296
Receivables from clearing brokers                                                                  214,265              223,556
Securities owned, at market value                                                                1,151,806            1,309,145
Property and equipment, net of accumulated depreciation
          of $6,669,886 and $6,574,033                                                           1,602,210            1,698,062
Loans receivable from related party                                                                258,227              272,727
Secured demand note                                                                              3,202,000            3,202,000
Security deposits                                                                                  175,000              175,000
Other assets                                                                                        74,959               19,894
                                                                                         ------------------   ------------------
TOTAL ASSETS                                                                                  $  8,492,040         $  6,941,680
                                                                                         ==================   ==================

LIABILITIES AND STOCKHOLDERS' DEFICIT:

Accounts payable and accrued liabilities                                                        10,155,051            9,769,760
Accrued liabilities to LLC Class B Members                                                       1,977,753            2,000,253
Payable to clearing broker                                                                       1,569,184            1,597,767
Securities sold not yet purchased                                                                  179,190               28,010
Notes payable to former officer                                                                    700,000              700,000
Notes payable - other                                                                            5,032,826            3,082,826
Subordinated borrowings                                                                          4,908,759            4,863,138
Subordinated borrowings - other                                                                    350,000              350,000
Subordinated borrowings from officer                                                               180,000              180,000
                                                                                         ------------------   ------------------
                                                                                                25,052,763           22,571,754
                                                                                         ------------------   ------------------

Series A Redeemable Convertible Preferred Stock $0.01 par value, 690 shares
   authorized and 630 issued and outstanding at December 31, 2003 and September
   30, 2003, respectively, and accrued dividends and interest (liquidation
   preference - $6,300,000)                                                                      6,867,001            6,867,001
                                                                                         ------------------   ------------------

STOCKHOLDERS' DEFICIT:

Preferred Stock, $0.001 par value, 1,000,000 shares authorized and none issued and
   outstanding at December 31, 2003 and September 30, 2003                                               -                    -
Common stock, $0.001 par value, 50,000,000 and 20,000,000 shares authorized at December
   31, 2003 and September 30, 2003, respectively and 13,137,138 and 12,787,139 issued
   and outstanding at December 31, 2003 and September 30, 2003, respectively                        12,787               12,787
Additional paid-in capital                                                                      47,134,108           47,111,608
Option costs                                                                                       (9,329)             (13,996)
Accumulated deficit                                                                           (70,565,290)         (69,607,474)
                                                                                         ------------------   ------------------
TOTAL STOCKHOLDERS' DEFICIT                                                                   (23,427,724)         (22,497,075)
                                                                                         ------------------   ------------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                   $  8,492,040        $   6,941,680
                                                                                         ==================   ==================
</TABLE>

            See notes to condensed consolidated financial statements


                                       3
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                            THREE MONTHS ENDED
                                                                                               DECEMBER 31,

                                                                                        2003                 2002
                                                                                   ---------------      ---------------
REVENUES:
<S>                                                                                  <C>                  <C>
Commissions                                                                          $  1,296,934         $  1,477,976
Data service fees                                                                          39,916               16,897
Principal transactions                                                                  1,465,212            1,945,306
Interest income and other income                                                          290,726              739,521
                                                                                   ---------------      ---------------
TOTAL REVENUES                                                                          3,092,788            4,179,700

Interest expense                                                                          272,481              146,893
                                                                                   ---------------      ---------------
NET REVENUES                                                                            2,820,307            4,032,807
                                                                                   ---------------      ---------------

EXPENSES AND OTHER CHARGES:

Commissions, floor brokerage and clearing charges                                       1,173,687            1,015,216
Employee compensation and related costs                                                 1,371,133            1,807,785
Communications                                                                            217,859              282,448
Business development                                                                      101,890               21,699
Professional services                                                                     240,334              399,024
Occupancy and equipment costs                                                             357,997            1,091,539
Depreciation and amortization                                                             100,519              499,407
Other expenses                                                                            214,704              506,229
Loss on investments                                                                             -               84,287
                                                                                   ---------------      ---------------
TOTAL EXPENSES                                                                          3,778,123            5,707,634
                                                                                   ---------------      ---------------
                                                                                     $  (957,816)        $ (1,674,827)
NET LOSS

Preferred stock dividends                                                                       -             (94,500)
                                                                                   ---------------      ---------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS                                           $  (957,816)        $ (1,769,327)
                                                                                   ===============      ===============

BASIC AND DILUTED LOSS PER COMMON SHARE                                              $     (0.07)        $      (0.14)
                                                                                   ===============      ===============

Weighted average shares outstanding                                                    12,787,138           12,508,852
                                                                                   ===============      ===============
</TABLE>

            See notes to condensed consolidated financial statements


                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                                             THREE MONTHS ENDED
                                                                                DECEMBER 31,
                                                                           2003             2002
                                                                        -----------      -----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
<S>                                                                     <C>              <C>
Net loss                                                                $  (957,816)     $(1,674,827)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
    Non-cash compensation and service costs
      Options costs                                                           4,667            9,334
      Debt discount in connection with
    issuance of
        Warrants and subordinated debt                                       45,621             --
    Penalties - preferred stock                                                --            381,107
    Depreciation and amortization                                            95,852          499,408
    Changes in assets and liabilities:
    (Increase) decrease in operating assets:

        Restricted cash                                                        --            229,474
        Receivables from clearing brokers                                     9,292         (229,299)
        Securities owned                                                    157,339        2,143,466
        Loans receivable from related party                                  14,500             --
        Security deposits                                                      --              2,705
        Other assets                                                        (55,065)         (27,332)
    Increase (decrease) in operating liabilities:
        Accounts payable and accrued liabilities                            385,289         (767,288)
        Payable to clearing broker                                          (28,582)            --
        Securities sold, not yet purchased                                  151,180             --
                                                                        -----------      -----------

    Net cash provided by (used in) operating activities                 $  (177,723)     $   566,748
                                                                        -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from loan                                                      $    22,500             --
                                                                        -----------      -----------
    Net cash provided by investing activities                           $    22,500             --
                                                                        -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from loan                                                      $ 1,950,000          250,000
Repayment of notes payable                                                     --           (200,000)
Capital distribution to LLC Class B members                                 (22,500)             (38)
                                                                        -----------      -----------
    Net cash provided by financing activities                           $ 1,927,500      $    49,962
                                                                        -----------      -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                 1,772,277          616,710
Cash and cash equivalents at beginning of period                             41,296          213,766
                                                                        -----------      -----------
Cash and cash equivalents at end of period                              $ 1,813,573      $   830,476
                                                                        ===========      ===========

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES
  AND DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for:
               Interest                                                 $    46,675      $    52,268
                                                                        -----------      -----------
               Taxes                                                    $      --        $      --
                                                                        -----------      -----------
</TABLE>

            See 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,  Inc. ("A.B.  Watley"),  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  block 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 clears all of its business through clearing brokers on a fully disclosed
basis.

      In  January  2004,  A.B.   Watley,   Inc.  as  a  result  of  net  capital
deficiencies,  ceased operations.  In February 2004, A.B. Watley,  Inc. withdrew
its registration as a broker/dealer.

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
consolidated  financial  statements  be read in  conjunction  with  the  audited
condensed  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.
Management does not believe that the adoption of this  pronouncement will 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  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.


                                       6
<PAGE>


      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 following three months ended December 31, 2003 and 2002
as follows:


                                          THREE MONTHS ENDED DECEMBER 31,
                                          --------------------------------
                                              2003                2002
                                         -------------       ------------

         NET LOSS                         $  (957,816)      $(1,674,827)

         STOCK-BASED EMPLOYEE
         COMPENSATION COST, NET
         OF TAX EFFECT, UNDER
         FAIR VALUE ACCOUNTING                 18,323           114,717
                                          ------------       ------------

         PRO FORMA NET LOSS UNDER
         FAIR VALUE METHOD                $  (976,139)      $(1,789,544)
                                          ------------       ------------

         LOSS PER SHARE
         BASIC AND DILUTED                $     (0.07)      $     (0.14)

         PER SHARE STOCK-BASED
         EMPLOYEE COMPENSATION
         COST, NET OF TAX EFFECT,
         UNDER FAIR VALUE
         ACCOUNTING                              0.00               0.01
                                          ------------       ------------

         PRO FORMA LOSS PER
         SHARE - BASIC AND DILUTED       $      (0.07)      $      (0.15)
                                         -------------       ------------

      There were no options  granted or forfeited  during the three months ended
December  31,  2003.  As of  December  31,  2003  there were  2,692,700  options
outstanding.

      As of December 31, 2003 and 2002, the Company had warrants  outstanding of
7,037,036 and 6,500,036,  respectively,  with exercise  prices  ranging  between
$0.00 and $19.47 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 three months
ended December 31, 2003 and 2002 were 13,400,954 and 12,805,641 respectively.

3.    LIQUIDITY AND CAPITAL RESOURCES

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


                                       7
<PAGE>


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 December  31,  2003,  Direct had net capital of $6,641 which was
$1,641 in excess of its minimum  requirement.  As of March 31, 2004,  Direct had
excess net capital of $30,435.

      AB Watley  Futures  is  subject to minimum  net  capital  requirements  of
several regulatory  organizations,  the most restrictive of which is the greater
of $30,000 or 4% of its "funds required to be segregated and secured",  as these
terms are defined. As of December 31, 2003, ABW Futures had net capital $43,926,
which was $13,926 in excess of the minimum  requirement.  As of March 31,  2004,
Futures had excess net capital of $2,065.

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 December 31, 2003,
the Company has provided a reserve for  uncollectible  receivables from clearing
brokers in the amount of $941,841.

      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.


                                       8
<PAGE>


      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  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 years ended September 30, 2003, penalties accrued through June 30,
2003 in the amount of  $1,070,593  have been 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 December 31, 2003 and September 30, 2003, the dilutive effect of the
conversion of preferred stock would result in the issuance of 3,671,218 shares.

      In June 2004,  holders of 560  shares of Series A  Redeemable  Convertible
Preferred  Stock  ("Securities  Holders")  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.  The  warrants
entitle the holders to cash and stock dividends in the event ABWG declares such.

7.    NOTES AND LOANS PAYABLE

      The Company's  outstanding  obligation under notes and loans payable as of
December 31, 2003 and September 30, 2003 was as follows:


                                      December 31, 2003     September 30, 2003
                                      ------------------    ------------------
Borrowings under line of credit           $   3,082,826         $   3,082,826
Notes payable to former officers                700,000               700,000
Loans payable - other                         1,950,000                     -
                                      ------------------    ------------------
                                          $   5,732,826         $   3,782,826
                                      ==================    ==================


      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,  on January 21, 2004, the Company  borrowed  $265,000
from the same third party at the rate of 20% per annum.


                                       9
<PAGE>


      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  represents  a finance  charge.  The loan was  payable  in
fourteen  equal monthly  installments.  As of April 30, 2004, the Company repaid
the  loan  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 December 31,
2003,  the  Company  has  borrowed  $3,082,826  under this  commitment,  and has
recorded  accrued interest payable of $590,363.  The loan is  collateralized  by
certain assets of the Company as defined in the loan agreement.

      In June  2004,  the  Company  converted  a note  payable  in the amount of
approximately  $1,086,000  into  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 and expire in June 2011.  The  warrants  entitle the holders to cash
and stock dividends in the event ABWG declares such.

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
$1,798,000 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.

Subordinated Borrowings

      At December 31, 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
$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  December  31, 2003.  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.  On  September  29, 2003,
subordinated  borrowings  of $530,000  bearing  interest  rate at 12% - 15% were
converted to equity subordinations for Net Capital purposes. Interest expense of
approximately  $103,649  and $16,149 was  incurred  on  subordinated  borrowings
during the quarter ended December 31, 2003 and 2002, respectively.


                                       10
<PAGE>


      SUBORDINATED BORROWINGS AS OF DECEMBER 31, 2003 AND SEPTEMBER 30, 2003 ARE
AS FOLLOWS:


     DECEMBER 31, 2003   SEPTEMBER 30, 2003   INTEREST RATE         MATURITY
     ------------------  ------------------   -------------    -----------------
          $ 5,000,000          $5,000,000            7%        JUNE    30, 2004
          $   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
     ------------------    ----------------
          $ 5,530,000          $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 (which
was repaid in April 2004) of the $5 million outstanding principal of the secured
demand note (see Legal Procedings).

9.    COMMITMENTS AND CONTINGENCIES

      The Company did not file required reports with the SEC on a timely basis .
Specifically,  the  quarterly  reports  on Form  10-QSB for the  quarters  ended
December 31, 2003 and March 31, 2004. The Company`s financial  statements do not
reflect a reserve for any potential fines or penalties that may result from such
late  filings.  In  addition,  the Company has not filed its tax returns for the
years ended September 30, 2003, 2002 & 2001.

      Our principal  offices are located at 40 Wall Street,  New York, NY, where
we occupy  approximately  28,500 square feet 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 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 will  vacate the  remaining  portion of the  premises
prior to July 1, 2004.  The Company  has signed a  confession  of  judgment  for
$609,441 and the  landlord  has reserved the right to seek a money  judgment for
all rent arrears (a provision has been provided in financial  statements)  after
the Company has vacated the premises.

      Upon the Company  relocating  its corporate  offices in 2004,  the Company
expects  to  record  a  charge  for   abandonment  of  equipment  and  leasehold
improvements in the amount of approximately $1,000,000.

      We are a defendant in an action  titled  Michael  Fielman v. A.B.  Watley,
Inc. and A.B.  Watley  Group,  Inc.,  that was filed in the Supreme Court of the
State of New York, County of Nassau,  Index No. 012082/02 on July 10, 2002. This
is an action for unpaid wages seeking $28,657,  plus statutory  damages,  costs,
and attorneys'  fees. This matter has been settled in the amount of $34,657 over
an  installment  basis of eight months.  A.B.  Watley Group Inc. has paid $6,000
towards the settlement.

      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
$195,355,  plus  interest,  costs and  attorney's  fees.  The Company has denied
liability in its entirely and has indicated that it intends to vigorously defend
this matter.  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.,  which  was  filed in the  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  $352,573.73,  plus interest  accrued
thereon,  (a provision  has been provided in 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.


                                       11
<PAGE>


      We are defendant in an action titled Hyperfeed Technologies,  Inc. v. A.B.
Watley Group Inc.,  filed in the 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 in the amount of $185,503,  plus interest accrued thereon.
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,  which was filed in or about April 2003,
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. Pre-hearing discovery
is still being  conducted  and there is currently a hearing  scheduled  for June
29-30, 2004 in Boston, Massachusetts.

      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
the A.B.  Watley,  Inc. on about July 15, 2003 seeking damages of  approximately
$94,800 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 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  financial  statements).  A.B.  Watley,  Inc.  denies all
wrongdoing in connection with this matter, and has counterclaim in the amount of
$600,000  for breaches of contract  and  fiduciary  duties.  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.  Claimants 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  $465,583  (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.

      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,  on
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 financial statements) which is presently owed.

      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 of approximately $215,000.  Plaintiff filed
a complaint  alleging breach of contract.  Plaintiff has a judgment against A.B.
Watley  Group,  Inc. in the amount of $179,882 (a provision has been provided in
financial statements) with interest accrued thereon from July 10, 2003.

      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.


                                       12
<PAGE>


      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 for unpaid  telephone  bills in the amount of
$20,000 (a  provision  has been  provided in 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
$5,000 towards this settlement.

      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 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 parities reached
a settlement,  which  contemplates a total payment of $174,000 to plaintiff over
the course of two years. The Company has paid $30,000 towards the settlement.

      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 $65,000
towards the Judgment.  On December 17, 2003,  Plaintiff issued A.B. Watley Group
Inc. a Notice of Default  under the  Forbearance  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 $179,917,  (a provision has
been provided in 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,
Case No.  2-4173-03-36  Section 806  Sarbanes-Oxley  Act of 2003, filed June 18,
2003.  On July 11, 2003,  the U.S.  Department of Labor ("DOL") gave the Company
notice that John Martinez,  a former Financial and Operations  Principal for the
Company,  had filed a complaint  against the  Company  under  Section 806 of the
Sarbanes-Oxley  Act of 2002 (the "Act").  The Complaint alleges that the Company
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, the
Company  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 Department of Labor 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  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
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 this matter.


                                       13
<PAGE>


      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.

      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. We have sued our former CEO who has
filed a counterclaim against our company.

      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  filed a  complaint
alleging breach of a contract against A.B.  Watley,  Inc. seeking damages in the
amount of $500,000 and slander  against  Steven  Malin,  our  Chairman,  seeking
damages  in the  amount  of  $5,000,000.  We have  filed an answer  denying  all
wrongdoing.  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 Arbitration No.  03-05524,  filed July 30, 2003. A former employee of
the Company has  commenced  this  arbitration  claiming  breach of contract  and
violation  of New York labor laws.  The  Claimant is seeking  unpaid  salary and
bonus,  stock  options,  liquidated  damages and punitive  damages.  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 Arbitration No.  03-05526,  filed July 30, 2003. A former employee of
the Company has  commenced  this  arbitration  claiming  breach of contract  and
violation  of New York labor laws.  The  Claimant is seeking  unpaid  salary and
bonus,  stock  options,  a lump sum  payment of the sum of the  highest  month's
Retail Division and Fixed Income Division pretax profit incentive  multiplied by
48,  liquidated  damages  and  punitive  damages.  We  deny  all  wrongdoing  in
connection with this matter and intend to vigorously defend this 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, Claimants filed this Statement of Claim against the Company 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 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.

10.   INCOME TAXES

      The Company has net  operating  loss  carryforwards  ("NOL's") for federal
income tax purposes approximating $68,000,000 as of December 31, 2003. 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.


                                       14
<PAGE>


ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      The  following  discussion  of the  financial  condition  and  results  of
operations of the Company  should be read in conjunction  with the  consolidated
financial  statements and notes thereto  included in the Company's Annual Report
on Form 10-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 DECEMBER 31, 2003 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2002

      REVENUES.  Total  revenues  for the quarter  ended  December 31, 2003 were
$3,092,788  - a decrease of 26%, as compared to revenues of  $4,179,700  for the
quarter ended December 31, 2002.

      Commissions:  For the  three-month  period  ending  December 31, 2003,  we
earned commission revenues of $1,296,934 representing a 12% decrease as compared
to commission revenues of $1,477,976 for the corresponding  period in 2002. This
decrease in  commission  revenues  resulted from  reductions in overall  trading
volume.

      Data Service Fees: Our revenues from data service fees for the three-month
period  ending  December  31, 2003 were  $39,916 as compared to the December 31,
2002 of $16,897  representing  an increase  of 136%.  This  increase  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 25%.  We earned  $1,465,212  from such  transactions
during the three-month period ending December 31, 2003 as compared to $1,945,306
for the  three-month  period ending December 31, 2002. This decrease in revenues
resulted from reductions in proprietary trading volume.

      Interest and Other Income:  Interest and Other Income for the  three-month
period  ending  December  31, 2003 was $290,726  representing  a $448,795 or 61%
decrease as compared to $739,521 for the three-month  period ending December 31,
2002. The decrease was primarily due to the benefit from  favorable  settlements
with vendors included in the December 31, 2002 quarterly results.

      Interest Expense:  Interest expense for December 31, 2003 and December 31,
2002, respectively, were $272,481 and $146,893. This increase of $125,588 or 85%
resulted from an increase in subordinated loans and company borrowings.

      Net Revenues: As a result of the foregoing, for the quarter ended December
31, 2003 total net  revenues  were  $2,820,307  compared  to the  quarter  ended
December 31, 2002 of  $4,032,807,  net revenues  decreased by $1,212,500 or 30%.
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 quarter  ended  December 31, 2003 were
$3,778,123,  a 34% decrease  compared to total  expenses of  $5,707,634  for the
three-month period ending December 31, 2002.

      Commissions,  Floor  Brokerage and Clearing  Charges:  For the three-month
periods ending December 31, 2003 and December 31,2002 we incurred $1,173,687 and
$ 1,015,216 of Commissions,  Floor Brokerage and Clearing Charges, respectively.
The 16% increase in costs  represent  payments to our clearing and floor brokers
who  facilitate  security  transactions  for  both  our  customers  and  our own
proprietary accounts.


                                       15
<PAGE>


      Employee Compensation and Related Costs: Employee Compensation and Related
Costs of $1,371,133 for the three-month period ending December 31, 2003 reflects
a 24%  decrease as compared to  $1,807,785  incurred  for such costs  during the
three-month   period  ending  December  31,  2002.  This  $436,652  decrease  is
attributable  to both the  reduction  in the  number of  employees  and to lower
compensation  paid to the  proprietary  trading  division as a result of reduced
trading gains from principal transactions.

      Communications:  Communications  expense for the three-month period ending
December 31, 2003  amounted to $217,859,  a 23% decrease as compared to $282,448
for the three-month  period ending  December 31, 2002. This $64,589  decrease is
largely due to the consolidation of various data lines and obtaining competitive
pricing with new vendors.

      Business  Development:  Our Business  Development  costs increased $80,191
from $21,699 for the three months  ending  December 31, 2002 to $101,890 for the
three months ending December 31, 2003. This increase was due to participating in
trade  shows,  and  advertising  in trade  publications  to  solicit  new Retail
Customers.

      Professional  Services:  Professional Services primarily consists of legal
and  accounting  costs  in  addition  to the  cost  of  external  administrative
consultants.   For  the  three-month   period  ending  December  31,  2003,  our
professional  services  amounted to  $240,334  as  compared to $399,024  for the
three-month period ending December 31, 2002, representing a decrease of $158,690
or 40%. This decrease was primarily the result of reduced audit and legal fees.

      Occupancy  and  Equipment:  The costs for  Occupancy and Equipment for the
three-month period ending December 31, 2003 were $357,997 a decrease of $733,542
or  67%  compared  to  the  three-month  period  ending  December  31,  2002  of
$1,091,539.  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
$398,888  or 80% when  comparing  $100,519  for the  three-month  period  ending
December 31, 2003 to $499,407  for the  three-months  ending  December 31, 2002,
primarily  due to the  disposal  of  assets  subject  to such  depreciation  and
amortization. We previously sold software to an affiliate of our clearing broker
and had  written off  intangible  assets  recognized  as a result of the On-Site
acquisition

      Other Expenses:  For the  three-month  period ending December 31, 2003, we
incurred  $214,704 of Other  Expenses,  as  compared  to $506,229  for the three
month-period  ending  December  31,  2002.  Other  expenses  decreased by 58% or
$291,525 due to our overall cost cutting initiatives.

      Net  Loss:  As a  result  of the  fore-mentioned  factors,  our  Net  Loss
decreased by 43%.  Comparing $957,816 for the three-month period ending December
31,2003 and $1,674,827 for the three-month period ending December 31, 2002

LIQUIDITY AND CAPITAL RESOURCES

      As  indicated  by  the  accompanying   unaudited   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.


      Cash  utilized  by  operating  activities  during the three  months  ended
December  31,  2003 was  $177,723,  as compared  to cash  provided by  operating
activities  of $566,748 for the three months ended  December 31, 2002.  Cash was
principally  used  to fund  the net  loss of  $957,816,  net of  non-cash  items
including  depreciation and amortization of $95,852, debt discount in connection
with issuance of warrants of $45,621 and non-cash  compensation/service costs of
$4,667.  In addition,  cash was provided by  increases  in  securities  owned of
$157,339,  loans receivable from related party of $14,500, offset by an increase
in other assets of $55,065. Cash was provided by an increase in accounts payable
and accrued  liabilities  of $385,289 and  securities  sold not yet purchased of
$151,180, offset by a decrease in payable to clearing broker of $28,582.


      Cash was provided by investing  activities in the amount of $22,500 during
the three months ended December 31, 2003,  compared to no cash used in investing
activities during the three months ended December 31, 2002.

      Cash  provided by financing  activities  was  $1,927,500  during the three
months ended December 31, 2003 compared to $49,962 during the three months ended
December 31, 2002. Cash provided by financing activities during the three months
ended December 31, 2002,  principally consisted of a net increase in outstanding
notes payable.


                                       16
<PAGE>


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.
Management does not believe that the adoption of this  pronouncement will 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.

RISK FACTORS

      The  following  factors and should other  information  in this Form 10-QSB
should carefully be considered when evaluating the Company and its stock. A more
detailed  discussion of the following risk factors is presented in the Company's
Annual Report on Form 10-K.

      o     If we are unable to continue revenue generation  initiatives,  enter
            into a strategic  business  combination or obtain additional funding
            sources at  acceptable  terms,  our ability to operate our  business
            will be significantly diminished.


                                       17
<PAGE>


      o     Periods of declining securities prices, decreasing trade volumes, or
            uncertainty  in the public equity  markets may adversely  affect our
            revenues.

      o     We may not be able to adapt  with  rapid  technological  change in a
            cost effective manner.

      o     Operational risks may disrupt our business or limit our growth.

      o     Employee  misconduct  could harm us and is  difficult  to detect and
            deter.

      o     The  securities  industry  in  which  we  will  operate  is  heavily
            regulated by the Securities and Exchange Commission  ("SEC"),  state
            regulators,  and the  National  Association  of  Securities  Dealers
            ("NASD"). If we fail to comply with applicable laws and regulations,
            we may face penalties or other  sanctions that may be detrimental to
            our business.

      o     The failure to remain in compliance  with the Net Capital Rule would
            adversely   affect  our   ability  to   continue  to  operate  as  a
            broker-dealer.

      o     The failure of brokerage customers to meet their margin requirements
            could result in significant liabilities.

      o     We may be  obligated  to redeem  our Series A  Preferred  Stock at a
            point in the future.

      o     The  holders  of  our  Common  Stock  could  experience  substantial
            dilution  as a result of the  issuance  of and terms of our Series A
            Preferred Stock and the related warrants.

      o     We may be  required to obtain the consent of the holders of Series A
            Preferred Stock before taking  corporate  actions,  which could harm
            our business.

      o     We may be unable  to  obtain  critical  goods or  services  from our
            suppliers.

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 December 31,
2003. There have been no significant  changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to December 31, 2003.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      Our 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 will  vacate the  remaining  portion of the  premises
prior to July 1, 2004.  The Company  has signed a  confession  of  judgment  for
$609,441 and the  landlord  has reserved the right to seek a money  judgment for
all rent arrears (a provision has been provided in financial  statements)  after
the Company has vacated the premises.

      Upon the Company  relocating  its corporate  offices in 2004,  the Company
expects  to  record  a  charge  for   abandonment  of  equipment  and  leasehold
improvements in the amount of approximately $1,000,000.

      We are a defendant in an action  titled  Michael  Fielman v. A.B.  Watley,
Inc. and A.B.  Watley  Group,  Inc.,  that was filed in the Supreme Court of the
State of New York, County of Nassau,  Index No. 012082/02 on July 10, 2002. This
is an action for unpaid wages seeking $28,657,  plus statutory  damages,  costs,
and attorneys'  fees. This matter has been settled in the amount of $34,657 over
an  installment  basis of eight months.  A.B.  Watley Group Inc. has paid $6,000
towards the settlement.


                                       18
<PAGE>


      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
$195,355,  plus  interest,  costs and  attorney's  fees.  The Company has denied
liability in its entirely and has indicated that it intends to vigorously defend
this matter.  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.,  which  was  filed in the  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  $352,573.73,  plus interest  accrued
thereon,  (a provision  has been provided in 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.

      We are defendant in an action titled Hyperfeed Technologies,  Inc. v. A.B.
Watley Group Inc.,  filed in the 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 in the amount of $185,503,  plus interest accrued thereon.
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,  which was filed in or about April 2003,
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. Pre-hearing discovery
is still being  conducted  and there is currently a hearing  scheduled  for June
29-30, 2004 in Boston, Massachusetts.

      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
the A.B.  Watley,  Inc. on about July 15, 2003 seeking damages of  approximately
$94,800 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 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  financial  statements).  A.B.  Watley,  Inc.  denies all
wrongdoing in connection with this matter, and has counterclaim in the amount of
$600,000  for breaches of contract  and  fiduciary  duties.  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.  Claimants 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  $465,583  (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.


                                       19
<PAGE>


      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,  on
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 financial statements) which is presently owed.

      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 of approximately $215,000.  Plaintiff filed
a complaint  alleging breach of contract.  Plaintiff has a judgment against A.B.
Watley  Group,  Inc. in the amount of $179,882 (a provision has been provided in
financial statements) with interest accrued thereon from July 10, 2003.

      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 for unpaid  telephone  bills in the amount of
$20,000 (a  provision  has been  provided in 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
$5,000 towards this settlement.

      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 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 parities reached
a settlement,  which  contemplates a total payment of $174,000 to plaintiff over
the course of two years. The Company has paid $30,000 towards the settlement.

      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 $65,000
towards the Judgment.  On December 17, 2003,  Plaintiff issued A.B. Watley Group
Inc. a Notice of Default  under the  Forbearance  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 $179,917,  (a provision has
been provided in 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,
Case No.  2-4173-03-36  Section 806  Sarbanes-Oxley  Act of 2003, filed June 18,
2003.  On July 11, 2003,  the U.S.  Department of Labor ("DOL") gave the Company
notice that John Martinez,  a former Financial and Operations  Principal for the
Company,  had filed a complaint  against the  Company  under  Section 806 of the
Sarbanes-Oxley  Act of 2002 (the "Act").  The Complaint alleges that the Company
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, the
Company  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 Department of Labor 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.


                                       20
<PAGE>


      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  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
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 this matter.

      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.

      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. We have sued our former CEO who has
filed a counterclaim against our company.

      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  filed a  complaint
alleging breach of a contract against A.B.  Watley,  Inc. seeking damages in the
amount of $500,000 and slander  against  Steven  Malin,  our  Chairman,  seeking
damages  in the  amount  of  $5,000,000.  We have  filed an answer  denying  all
wrongdoing.  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 Arbitration No.  03-05524,  filed July 30, 2003. A former employee of
the Company has  commenced  this  arbitration  claiming  breach of contract  and
violation  of New York labor laws.  The  Claimant is seeking  unpaid  salary and
bonus,  stock  options,  liquidated  damages and punitive  damages.  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 Arbitration No.  03-05526,  filed July 30, 2003. A former employee of
the Company has  commenced  this  arbitration  claiming  breach of contract  and
violation  of New York labor laws.  The  Claimant is seeking  unpaid  salary and
bonus,  stock  options,  a lump sum  payment of the sum of the  highest  month's
Retail Division and Fixed Income Division pretax profit incentive  multiplied by
48,  liquidated  damages  and  punitive  damages.  We  deny  all  wrongdoing  in
connection with this matter and intend to vigorously defend this 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, Claimants filed this Statement of Claim against the Company 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.


                                       21
<PAGE>


ITEM 2. CHANGES IN SECURITIES

      In June 2004, the Company and holders of 560 shares of Series A Redeemable
Convertible  Preferred  Stock  ("Securities  Holders")  recorded at  $6,008,625,
including dividends and interest, in the accompanying Consolidated Statements of
Financial Condition,  reached an agreement to convert their preferred stock into
warrants  to  purchase  5,462,387  shares of  common  stock of the  Company.  In
addition, the Company and certain of the Securities Holders reached an agreement
to convert a note  payable  by the  Company  in the  amount of  $1,086,548  into
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 will have a term of seven years,  expire in June 2011 and
entitle the holders to cash and stock dividends in the event ABWG declares such.

      On February 13, 2004, the Company issued 250,000 shares of common stock to
a third party in connection  with a $150,000  loan to the Company.  The loan was
payable in  fourteen  equal  monthly  installments.  As of April 30,  2004,  the
Company repaid the loan.

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.
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,  the Company and  holders of 560 shares of  Preferred  Stock
("Securities Holders") recorded at $6,008,625, including dividends and interest,
in the accompanying  Consolidated Statements of Financial Condition,  reached an
agreement to convert 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 will
have a term of seven years,  expire in June 2011 and entitle the holders to cash
and stock dividends in the event ABWG declares such.

      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.

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

      None.

ITEM 5. OTHER INFORMATION

      None.



                                       22
<PAGE>


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

      (a)   Exhibits

      31.1  Certification by Steven Malin,  Principal Executive Officer pursuant
            to Section 30 of the Sarbanes-Oxley Act of 2002.

      31.2  Certification by Robert Malin,  Principal Financial Officer pursuant
            to Section 30 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

            On February 13, 2004 the Company filed a Current Report on Form 8-K,
            and on February 17, 2004, the Company filed a Current Report on Form
            8K/A, to report that it has filed Form 12b-25  Notification  of Late
            Filing in connection with its inability to file its annual report on
            Form 10K for the year ended  September  30,  2003.  In addition  the
            Company  had not filed its  Quarterly  Report on Form 10-QSB for the
            quarter ended December 31, 2003.


                                       23
<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.


Signatures                          Title
Date

-------------------      ------------------------------
/s/ STEVEN MALIN         Chairman of the Board and Principal Executive Officer
July 6, 2004
Steven Malin


/s/ ROBERT MALIN         Vice-Chairman, Principal Financial Officer and Director
July 6, 2004
Robert Malin



                                       24