<PAGE>


                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                  For the quarterly period ended: June 30, 2002
                                                  -------------
                                       OR

          ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from _____ to ______

                         Commission file number: 1-14897


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


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


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


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

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

The number of shares  outstanding of the issuer`s common stock,  par value $.001
per share, as of February 21, 2003 was 12,508,852.

<PAGE>

                             A.B. Watley Group Inc.

<TABLE>
<CAPTION>
Index

PART I-- FINANCIAL INFORMATION                                                                            Page

           Item 1.  Financial Statements

            Condensed Consolidated Statements of Financial Condition
<S>                                                                                                       <C>
                           As of June 30, 2002 (Unaudited) and September 30, 2001 .......................   3

            Condensed Consolidated Statements of Operations

                           For the Three Months and Nine Months Ended June 30, 2002 and 2001 (Unaudited)    4

            Condensed Consolidated Statements of Cash Flows

                           For the Nine Months Ended June 30, 2002 and 2001 (Unaudited) .................   5

            Notes to Condensed Consolidated Financial Statements (Unaudited) ............................   7


            Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations  14


            Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........................  17


            Item 4. Controls and Procedures .............................................................  19

PART II-- OTHER INFORMATION

            Item 1. Legal Proceedings ...................................................................  19

            Item 2. Changes in Securities ...............................................................  19

            Item 3. Default on Senior Securities ........................................................  19

            Item 4. Submission of Matters to a Vote of Security Holders .................................  19

            Item 5. Other Information ...................................................................  19

            Item 6. Exhibits and Reports on Form 8-K ....................................................  19

Signatures ..............................................................................................  20


Certifications ..........................................................................................  21
</TABLE>



                                      -2-
<PAGE>


PART I -- FINANCIAL INFORMATION
Item 1.  Financial Statements


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


<TABLE>
<CAPTION>
                                                                                        June 30,    September 30,
                                                                                          2002           2001
                                                                                      ------------   -----------
                                                                                       (Unaudited)
Assets:
<S>                                                                                     <C>            <C>
Cash and cash equivalents                                                             $     66,881   $    508,053
Restricted cash                                                                            429,576        500,334
Receivables from clearing brokers                                                        3,449,534      2,294,533
Securities owned at market value                                                            13,937        343,434
Property and equipment, net of accumulated depreciation
          of $10,777,843 and $8,659,868                                                  6,134,157     14,806,945
Loans receivable from related party                                                        252,527        257,197
Receivable from E*Trade                                                                  3,228,790           --
Security deposits                                                                          147,376      1,444,480
Other assets                                                                               509,594      1,377,700
                                                                                      ------------   ------------
Total Assets                                                                          $ 14,232,372   $ 21,532,676
                                                                                      ============   ============

Liabilities and Stockholders` Equity:
Accounts payable and accrued liabilities                                                10,337,497      7,953,542
Accrued liabilities to LLC Class B Members                                               2,499,037           --
Securities sold not yet purchased                                                           10,591        372,545
Notes payable - other                                                                    6,874,627      3,437,323
Notes payable to officers                                                                3,100,000      4,350,000
Lease obligations and other                                                              1,896,924      1,957,075
Subordinated borrowings - other                                                            350,000        350,000
Subordinated borrowings from officer                                                       180,000        180,000
                                                                                      ------------   ------------
                                                                                        25,248,676     18,600,485
                                                                                      ------------   ------------

Series A redeemable convertible preferred stock $0.01 par value, 690 shares authorized
  and 630 and 0 issued and outstanding at June 30, 2002 and September 30, 2001 and
  accrued dividends (liquidation preference  - $6,300,000)                               6,244,102           --
                                                                                      ------------   ------------

Stockholders` (Deficit) Equity:
Preferred Stock $0.01 par value, 1,000,000 shares authorized and none issued and
   outstanding at June 30, 2002 and September 30, 2001                                        --             --
Common stock, $0.001 par value, 20,000,000 shares authorized at June 30, 2002
   and September 30, 2001, respectively, 12,508,852 and 10,995,796 issued
   and outstanding at June 30, 2002 and September 30, 2001                                  12,509         10,996
Additional paid-in capital                                                              44,140,954     37,224,984
Option costs                                                                               (41,997)      (267,798)
Deferred compensation costs                                                               (258,995)      (459,563)
Accumulated deficit                                                                    (61,112,877)   (33,576,428)
                                                                                      ------------   ------------
Total Stockholders` (Deficit) Equity                                                   (17,260,406)     2,932,191
                                                                                      ------------   ------------
Total Liabilities and Stockholders` (Deficit) Equity                                  $ 14,232,372   $ 21,532,676
                                                                                      ============   ============
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                      -3-
<PAGE>

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


<TABLE>
<CAPTION>
                                                             Three Months Ended            Nine Months Ended
                                                                   June 30,                      June 30,
                                                                   --------                      --------
                                                             2002            2001          2002           2001
                                                         ------------   ------------   ------------   ------------
Revenues:
<S>                                                              <C>            <C>           <C>            <C>
Commissions                                                $2,441,796     $4,125,864    $14,641,927    $15,527,928
Data service fees                                             121,722        273,797        383,059      1,081,482
Sale of Software Income                                     1,191,000             --      1,191,000             --
Principal transactions                                        155,433        500,871      1,156,191      2,636,557
Interest and other income                                   1,410,433        605,756      2,834,470      1,645,207
                                                         ------------   ------------   ------------   ------------
Total revenues                                              5,320,384      5,506,288     20,206,647     20,891,174

Interest expense                                              304,263        182,319      2,538,506        443,709
Interest expense - related parties                            127,625        111,873        387,591        286,894
                                                         ------------   ------------   ------------   ------------
Net revenues                                                4,888,496      5,212,096     17,280,550     20,160,571

Expenses and other charges:
Commissions, floor brokerage and clearing charges           1,914,415      2,633,426     10,221,360      8,325,695
Employee compensation and related costs                     2,276,615      2,893,108      8,868,357      9,314,660
Communications                                                934,107        489,803      2,667,109      1,537,397
Business development                                           16,509        531,698        428,087      1,988,220
Professional services                                       1,043,127      1,437,920      2,363,628      2,571,164
Occupancy and equipment costs                               1,195,684      1,558,622      5,813,973      4,430,818
Depreciation and amortization                               1,480,383      1,435,468      5,194,649      3,997,009
Other expenses                                                387,349        262,830      1,417,417        736,949
Loss on investments                                                --        571,112             --        703,614
Impairment of intangibles                                   2,146,000             --      7,870,110             --
Abandonment of leasehold improvements                         618,028             --        618,028             --
Minority interest applicable to LLC Class B members          (487,374)            --       (899,869)            --
                                                         ------------   ------------   ------------   ------------
Total expenses                                             11,524,843     11,813,987     44,562,849     33,605,526
                                                         ------------   ------------   ------------   ------------


Loss before income taxes and extraordinary item           (6,636,347)    (6,601,891)   (27,282,299)   (13,444,955)
Income tax provision                                              --         (5,000)        (4,150)       (19,961)
                                                         ------------   ------------   ------------   ------------
Loss before extraordinary item                            (6,636,347)    (6,606,891)   (27,286,449)   (13,464,916)
Extraordinary loss on extinguishment of debt                      --             --       (250,000)            --
                                                         ------------   ------------   ------------   ------------
Net loss                                                 $(6,636,347)   $(6,606,891)   $27,536,449)   $13,464,916)
                                                         ============   ============   ============   ============
Basic and diluted loss per common share:

Loss before extraordinary item                           $(6,636,347)   $(6,606,891)  $(27,286,449)  $(13,464,916)
       Deemed dividend to preferred shareholders
- beneficial conversion                                                                 (1,639,797)
       Deemed dividend to preferred shareholders
- accretion of redemption                                   (588,732)                   (1,371,732)
       Preferred stock dividends                             (94,500)                     (220,500)
                                                         ------------   ------------   ------------   ------------
Loss before extraordinary item attributable to
common shareholders                                       (7,319,579)    (6,606,891)   (30,518,478)   (13,464,916)
       Extraordinary loss on extinguishment of debt                                       (250,000)
                                                         ------------   ------------   ------------   ------------
Net loss attributable to common shareholders            $ (7,319,579)  $ (6,606,891) $ (30,768,478)  $(13,464,916)
                                                         ============   ============   ============   ============

Loss before extraordinary item                          $      (0.59)  $      (0.61) $       (2.44)  $      (1.41)
Extraordinary item                                      $          -   $          -  $       (0.02)  $          -
Basic and diluted loss per share                        $      (0.59)  $      (0.61) $       (2.46)  $      (1.41)

Weighted average shares outstanding                       12,508,852     10,908,084     12,508,852      9,515,476

</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                      -4-
<PAGE>



                             A.B. Watley Group Inc.
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            Nine Months Ended
                                                                 June 30,
                                                        ---------------------------
                                                           2002            2001
                                                        ------------   ------------
Cash flows used in operating activities:
<S>                                                     <C>            <C>
Net loss                                                $(27,536,449)  $(13,464,916)
Adjustments to reconcile net loss to net cash used in
   Operating activities:
       Non-cash compensation and service costs               200,568         21,000
       Options costs                                         225,801             --
       Sale of Software                                   (1,191,000)            --
       Penalties - preferred stock                           311,487             --
       Issuance of warrants                                1,390,569             --
       Minority interest applicable to LLC
       Class B Members                                      (899,869)            --
       Loss on investments                                        --        703,614
       Depreciation and amortization                       5,328,023      3,997,009
       Loss on impairment of intangibles                   7,870,110             --
       Loss on extinguishment of debt                        250,000             --
       Loss on disposal of leasehold
       improvements                                          618,028             --
       Changes in assets and liabilities:
       (Increase) decrease in operating assets:
              Restricted cash                                 70,758         38,462
              Receivables from clearing brokers           (1,242,901)      (123,358)
              Securities owned                             4,880,475        191,839
              Loans receivable from related party              4,670          3,478
              Security deposits                            1,297,104             --
              Other assets                                   439,295          2,087
       Increase (decrease) in operating liabilities:
              Accounts payable and accrued liabilities     2,323,822     (1,905,370)
              Securities sold, not yet purchased          (3,720,537)      (163,140)
              Lease obligations and other                    (60,152)        33,571
                                                        ------------   ------------
Net cash used in operating activities                     (9,440,198)   (10,665,724)
                                                        ------------   ------------

Cash flows from (used in) investing activities:
Purchases of property and equipment, net                    (216,798)    (1,709,541)
Proceeds of sale of software license                       1,771,210             --
Investments                                                       --        (30,000)
                                                        ------------   ------------
Net cash provided by ( used in) investing
activities                                                 1,554,412     (1,739,541)
                                                        ------------   ------------
Cash flows from financing activities:
Proceeds from issuance of common stock                            --     10,012,127
Proceeds from sale of preferred stock                      3,324,291             --
Proceeds from exercised stock options                             --        987,290
Proceeds (repayment) of notes payable                      3,779,686       (938,928)
Proceeds from notes payable to officer                       900,000        975,000
Payment of capital lease obligations                              --       (451,672)
Capital contribution by LLC Class B members                  446,307             --
Capital distribution to LLC Class B members               (1,005,670)            --
Repayment of bank loan                                            --         (3,333)
                                                        ------------   ------------
Net cash provided by financing activities
                                                           7,444,614     10,580,484
                                                        ------------   ------------
Net decrease in cash and cash equivalents                   (441,172)    (1,824,781)
Cash and cash equivalents at beginning of period             508,053      5,090,083
                                                        ------------   ------------
Cash and cash equivalents at end of period                   $66,881     $3,265,302
                                                        ============   ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                      -5-
<PAGE>

                             A.B. Watley Group Inc.
                 Condensed Consolidated Statements of Cash Flows
                             (Unaudited), Continued

<TABLE>
<CAPTION>
                                                                        Nine Months Ended
                                                                              June 30,
                                                                     -----------------------
                                                                          2002        2001
                                                                     -------------  --------
Supplemental non-cash financing activities
     and disclosure of cash flow information:
<S>                                                                  <C>            <C>
Exchange of property and equipment in payment of operating expenses  $          --  $317,802
                                                                     =============  ========
Receivable from E*Trade                                              $   3,809,000  $     --
                                                                     =============  ========
Issuance of notes payable in payment of operating
expenses                                                             $     225,714  $     --
                                                                     =============  ========

Notes payable assigned to clearing broker                            $   2,150,000  $     --
                                                                     =============  ========
Preferred stock dividends                                            $     220,500  $     --
                                                                     =============  ========
Exchange of subordinated debt for preferred stock                    $   2,500,000  $     --
                                                                     =============  ========
Deemed dividend to preferred shareholders -beneficial
conversion                                                           $   1,639,797  $     --
                                                                     =============  ========
Deemed dividend to preferred shareholders -accretion of
redemption feature                                                   $   1,371,732  $     --
                                                                     =============  ========
Net assets of On-Site acquired by the issuance of
common stock                                                         $   5,703,000  $     --
                                                                     =============  ========
Cash paid for:
    Interest                                                         $     179,897  $458,442
                                                                     =============  ========
    Taxes                                                            $          --  $ 14,961
                                                                     =============  ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                      -6-
<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") and ABW TRADING,  LLC ("LLC"),
which operate as one integrated business segment.  LLC ceased operations on June
18, 2002. ABWG is a Delaware corporation organized on May 15, 1996.

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

     LLC is a registered  broker-dealer  and a member of the Philadelphia  Stock
Exchange and was acquired by the Company in November  2001.  ABWG is the Class A
managing  member of LLC. LLC was formed as a means for registered  professionals
to engage in proprietary  trading utilizing LLC`s funds. As the managing member,
ABWG manages the  operations  of LLC and receives  trading fees from the Class B
members,  who are the  registered  professionals.  LLC clears  all  transactions
through a clearing broker.  Accordingly,  LLC is also exempt from Rule 15c3-3 of
the Securities  and Exchange Act of 1934. On May 9, 2002,  the Company  notified
the LLC Class B members  that it had  elected to cease the  proprietary  trading
business operations.

     On April 3, 2002, the Company received a determination letter from the NASD
Listing Qualifications Panel that the Company`s request for continued listing on
the NASDAQ  National  Market was denied.  In  accordance  with such denial,  the
Company`s  Common Stock was delisted from the NASDAQ Stock Market effective with
the open of business, April 4, 2002 (the "Delisting Date").

2.   Liquidity and Capital Resources

     As indicated by the accompanying unaudited condensed consolidated financial
statements,  the Company has  continued to incur  substantial  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.

     Trading  volume  has  significantly  decreased  and the  Company  has  lost
customers in its direct access business. To respond to its liquidity and capital
resource  needs  management  has  implemented  various cost cutting  initiatives
including  renegotiating  its  clearing  agreements  at  more  favorable  rates,
restructuring  its software license with E*Trade Group, Inc. and the sale of its
software  programs  known as Ultimate  Trader II,  Ultimate  Trader III,  Watley
Trader and related intellectual  property. The Company is also looking into more
traditional  lines of business such as fixed income and equity capital  markets,
as well as, the feasibility of expanding its existing business to attract active
traders and hedge funds. As a further fund raising  alternative,  the 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.

3.   Basis of Presentation

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

                                      -7-
<PAGE>

     The condensed  consolidated  financial  statements  include the accounts of
ABWG and its wholly owned  subsidiaries,  A.B.  Watley and LLC. All  significant
intercompany balances and transactions have been eliminated.  Certain prior year
amounts have been reclassified to conform to the current year`s presentation.

     "Securities  owned at market value" and "Securities sold not yet purchased"
represent the trading inventory of A.B. Watley and LLC. The Company`s ability to
use these securities for general corporate purposes is significantly  restricted
by its  clearing  agreements  and net  capital  requirements.  Accordingly,  the
Company  believes  these  securities  are generally not available to satisfy the
general cash flow needs of the Company.

4.   Acquisition of On-Site Trading, Inc.

     In an effort to increase its customer base and to achieve greater economies
of scale,  the Company  entered  into an Asset  Purchase  Agreement  (the "Asset
Purchase Agreement") with On-Site Trading, Inc. ("On-Site"). On October 1, 2001,
the Company  acquired the customer  lists and certain other  On-Site  assets and
liabilities (the retail business), including its 100% voting interest in On-Site
Trading LLC, a broker-dealer subsidiary (the proprietary trading business) which
was subsequently  renamed ABW TRADING,  LLC. Since the  acquisition,  the retail
business and proprietary  trading  business have operated as one reporting unit.
The  acquisition  was  accounted  for under the purchase  method of  accounting.
Pursuant  to the terms of the  Asset  Purchase  Agreement,  the  Company  issued
1,875,000  shares  (which was later  reduced by 361,944) of its Common  Stock to
On-Site.  Of these shares,  937,500 shares were delivered at closing and 106,806
shares ("Escrow  Shares") are being held in escrow to be released to the sellers
of On-Site  at a later  date.  The  remaining  468,750  shares are being held in
escrow  and are  deliverable  on a pro rata  basis  upon the  Company  achieving
certain  post-acquisition levels of revenues, as defined in the agreement. As of
June 30, 2002, approximately 200,000 of such shares have been earned by On-Site.

     The final  purchase  price  reflects the issuance of 1,513,057  shares at a
purchase  price of $3.41 per share.  The $3.41 per share price was determined by
calculating the weighted  average share price of the Company`s  Common Stock for
the 3 days  prior  and 3 days  subsequent  to the  date  of the  acquisition  of
On-Site.  The excess purchase price of $8,584,000 over the fair value of the net
liabilities  acquired of $2,881,000 was allocated to "Intangibles"  representing
the customer  lists acquired (for the retail  business).  The customer lists are
being  amortized on a  straight-line  basis over a period of thirty-six  months.
Amortization  expense  for the  nine-month  period  ending  June 30,  2002,  was
approximately $715,000.

     The purchase  price of  $5,703,000,  including  expenses of  $543,000,  was
allocated to the net assets acquired as follows:

Securities owned, at market value...................          $4,551,000
Intangibles.........................................           8,584,000
Other assets........................................             265,000
                                                              ----------
Total assets........................................          13,400,000
                                                              ----------
Securities sold, but not yet purchased..............           3,358,000
Other liabilities...................................             381,000
Accrued liabilities to LLC Class B members..........           3,958,000
                                                              ----------
Total liabilities...................................           7,697,000
                                                              ----------
Net assets acquired.................................          $5,703,000
                                                              ==========

                                      -8-
<PAGE>

     The  following  pro forma  information  for the three and nine months ended
June 30, 2001,  gives effect to the Company`s  acquisition  of certain assets of
On-Site,  primarily  customer  lists  and  its  interest  in  the  broker-dealer
subsidiary;  the  assumption of certain  liabilities  of the  business;  and the
issuance  of Common  Stock,  as if it  occurred  on October  1, 2000.  Pro forma
information  for the three and nine months  ended June 30, 2002 is not  required
since the  Company  became the  introducing  broker for On-Site as of October 1,
2001 and as such,  the Condensed  Consolidated  Statements of Operations for the
2002 periods reflect the associated  commission revenues and expenses related to
the On-Site acquisition.


                                               Three Months  Nine Months
                                               ------------  -----------
                                                      June 30, 2001
                                                      -------------

Net revenues                                   $14,948,000  $ 53,112,000
                                               ===========  ============

Net loss applicable to common stockholders     ($6,864,000) ($16,109,000)
                                               ===========  ============
Weighted average number of shares outstanding   12,421,140    11,028,532
                                               ===========  ============
Per share:
Net loss applicable to common stockholders          ($0.55)       ($1.46)
                                               ===========  ============


     This pro forma  information does not purport to be indicative of what would
have occurred had the  acquisition  been completed as of October 1, 2000, or the
results which may occur in the future.

     During the quarter  ended June 30, 2002,  the acquired  customer  base,  of
On-Site,  continued  to  deteriorate  significantly.  This led to a decrease  in
On-Site`s   revenues  and  operating   cash  flows.   Management   believes  the
deterioration  is  attributable  to  many  causes  including   weakening  market
conditions,  as well as the loss and closing of branch operations which resulted
in a  permanent  impairment  in  the  value  of  the  customer  lists  acquired.
Therefore,  the Company  recorded an impairment  loss of  $2,146,000  during the
quarter ended June 30, 2002 related to the customer list acquired  which reduced
the carrying  value of such customer  list to $0 at June 30, 2002.  The customer
list acquired from On-Site has been determined to have minimal future value. For
the  quarters  ended  December  31,  2001,  March 31,  2002,  June 30,  2002 and
September  30,  2002 net  commissions  earned  from the retail  and  proprietary
businesses were $925,000, $901,000, $228,000 and $88,000, respectively.

     On May 9, 2002,  the Company  notified  the LLC Class B members that it had
elected to cease the proprietary  trading  business`s  operations as a result of
declining   revenues.   On  June  18,  2002,  LLC  withdrew  its  broker  dealer
registration and therefore ceased trading activities. The remaining liability to
the LLC Class B members as of March 31, 2002, was  approximately  $3,524,000 and
is included in the accompanying  Condensed  Consolidated  Statement of Financial
Condition as "Accrued Liabilities to LLC Class B Members".

5.   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 a conversion  price of $2.95 per common  share.  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 the exercise of warrants to purchase shares of Common Stock in the amount of
1,629,069.  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

                                      -9-
<PAGE>

of  Preferred  Stock and is added to the  liquidation  preference  amount  until
cured. As of June 30, 2002,  liquidated  damages of approximately  $311,000 were
accrued to the preferred holders.

     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.  As of June 30, 2002,  dividends of $220,500 were accrued for the
Preferred  Stock.  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 equal to the greater of the liquidation  preference amount plus any accrued
but unpaid  dividends  and penalties or the aggregate of the market value of the
shares of the Common  Stock into which such  shares of the  Preferred  Stock are
then convertible,  upon certain  triggering events, as defined in the Agreement.
Since the holders of the  Preferred  Stock may require the Company to redeem all
of the Preferred  Stock upon the occurrence of certain  events,  the Company has
excluded the  Preferred  Stock from  Stockholders`  Deficit in the  accompanying
Condensed  Consolidated  Statement  of Financial  Condition.  The holders of the
Preferred Stock have waived their  Redemption Right and have agreed to amend the
Certificate to provide that the Company has until September 30, 2002 to (a) file
the  Registration  Statement and (b) to be listed on any of the NASDAQ  National
Market,  the NASDAQ SmallCap Market,  the OTC Bulletin Board, the New York Stock
Exchange, Inc. or the American Stock Exchange, Inc. Although, the waiver has not
been amended or extended, to date, no redemption notice has been received by the
Company from any of the Preferred stockholders.

     The aggregate  purchase  price of the  Preferred  Stock and the warrants of
$6,300,000  were allocated to the Preferred Stock with a value of $4,340,383 and
the  balance  of  $1,959,617  was  attributed  to the fair  market  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.  The  premium of  $250,000  was  recorded  as an
extraordinary  loss on the extinguishment of debt in December 2001. The discount
associated  with the value of the  warrants is being  accreted  over a ten-month
period through September 30, 2002, the date the redemption  waiver expires.  For
the nine  months  ended  June 30,  2002  amortization  of the  discount  totaled
$1,371,731.

     The Company recorded a deemed dividend of $1,639,797,  in the first quarter
of 2002,  relating to the beneficial  conversion feature of the Preferred Stock,
after taking into account the value of the warrants issued.  The deemed dividend
increases the loss applicable to common stockholders in the calculation of basic
and diluted net loss per common share and is included in  stockholders`  deficit
as offsetting charges and credits to additional paid-in capital.  In recognition
of the  redemption  features of the Preferred  Stock,  the Company  excluded the
Preferred  Stock  from  stockholders`  deficit  in  the  accompanying  condensed
consolidated financial statements.

     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.

6.   Net Capital Requirement

     A.B. Watley is subject to the Securities and Exchange  Commission`s Uniform
Net Capital Rule ("Rule  15c3-1").  In accordance with this rule, A.B. Watley is
required to maintain  defined  minimum net capital to the greater of $100,000 or
6-2/3% of aggregate indebtedness as defined.

     As of February 28, 2002,  March 31, 2002, and April 30, 2002,  A.B.  Watley
had a net capital  deficit as defined,  of $520,836,  $1,487,966,  and $637,141,
respectively,  which is a violation of Rule 15c3-1. In addition, as of September
30, 2002, A.B. Watley had a net capital deficit of $301,523.  These deficiencies
were  cured  through  additional  funding  through  outside  sources  and  funds
generated from operations.

     Currently, A.B. Watley is required to report net capital on a weekly basis.
These  reports may be subject to further  examination  and review by the SEC and
the NASD.

7.   Stockholders` Equity - Stock Options and Warrants

     At June 30, 2002, the company had outstanding 772,000 options and 4,124,000
warrants with exercise  prices ranging between $0.92 and $ 22.00 and expirations
extending through September 2012.

                                      -10-

<PAGE>
8.   Notes and Loans Payable

a) Notes Payable - Officers
   ------------------------

     As at June 30, 2002, notes payable to officers consisted of the following:

                                                Principal            Interest
     Effective Date          Maturity Date       Amount                Rate
     --------------          -------------    -----------         ------------
       11/30/00                11/29/03        $  300,000                  7%
        2/25/01                 2/25/03           950,000                 10%
        2/25/01                 2/25/03           950,000                 10%
       10/01/01                10/01/02           500,000                 10%
       02/02/02              On demand            200,000                 10%
       10/01/01                10/01/02           200,000                 10%
                                              -----------
                                              $ 3,100,000
                                              ===========


     As of June 30, 2002,  accrued  interest  payable related to the above notes
payable  to  officers  totaled  $637,000.  The notes  payable  to  officers  are
subordinated  to the lines of credit  granted by the  holders  of the  company`s
Preferred Stock.

     In September 2002, in  consideration of the forgiveness of notes payable to
officers  aggregating  $2,400,000,  the  Company  issued  warrants  to  purchase
1,479,486 and 923,145 shares of Common Stock to officers,  exercisable at $0 and
$1.80 per share respectively.  The warrants are immediately exercisable and will
expire in September 2007.

b) Loans Payable - Other
   ---------------------

     In February 2002, one of the Company`s lenders notified the Company that it
was  accelerating  its  remaining  loan balance of  approximately  $350,000 on a
$400,000  loan  originally  made to the Company.  As of June 30, 2002,  the loan
balance was approximately $173,000.  Subsequently,  the lender agreed to rescind
the notice of  acceleration  in return for a prepayment of $150,000 and security
interest in the Company`s proprietary software. The $150,000 payment was made in
August 2002.

     In March 2002,  one of the holders of the Company`s  Preferred  Stock led a
group that granted a line of credit of  $2,500,000  to the  Company.  Borrowings
under the line of credit are payable on demand after June 18, 2002, and interest
is payable at 10% per annum.  The proceeds of the loans will be used for working
capital purposes.  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
$.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 $.918 a share. The fair value of
the warrants was recorded as interest  expense.  In April 2002 and May 2002, the
line of credit was increased to $2,700,000 and $4,350,000,  respectively.  As of
June 30, 2002, the Company has borrowed  $4,350,000 under this  commitment.  The
line of credit is collateralized by certain assets of the Company.

     In April 2002,  $2,150,000 of notes-payable to officers was assigned to one
of the  Company`s  clearing  brokers.  Interest  is payable at a rate of 10% per
annum.  The loans  expire  through  March  2003.  In July 2002,  this amount was
subsequently forgiven as part of the sale of the Company`s software.

9.   Commitments and Contingencies

Late Filings
------------

The  Company  did  not  file  required  reports  with the SEC on a timely basis.
Specifically,  the  quarterly  reports on Form 10-Q for the quarters ended March
31,  2002,  June  30,  2002, and December 31, 2002 and the annual report on Form
10-K  for  the  year  ended  September 30, 2002 were filed in April of 2003. The
Company`s  financial statements do not reflect a reserve for any potential fines
or  penalties  that  may  result  from  such  late  filings.

Lease Agreement
---------------

     The company has entered  into  certain  lease  agreements  for office space
under  non-cancelable  operating  lease  agreements that expire at various dates
through June 2009. The leases contain  various rent  escalation  provisions.  In
addition,  the Company has operating leases and capital leases for furniture and
computer equipment that expire at various dates through October 2005.

                                      -11-
<PAGE>
     The aggregate minimum future rental payments required are as follows:

<TABLE>
<CAPTION>
          Fiscal Year Ended      Operating Leases      Capital Leases              Total
                                 ----------------      --------------         -----------
<S>                                   <C>                 <C>                 <C>
                       2003           $ 1,466,075         $ 1,896,924         $ 3,362,999
                       2004             1,151,277                   -           1,151,277
                       2005               925,694                   -             925,694
                       2006               939,764                   -             939,764
                       2007               938,272                   -             938,272
                 Thereafter             1,641,974                   -           1,641,974
                                 ----------------      --------------         -----------
                                      $ 7,063,056         $ 1,896,924         $ 8,959,980
                                  ===============       =============         ===========
</TABLE>


     The Company is in default of making the  minimum  payments  required  under
certain of its  capital  lease  agreements.  The  Company  is in the  process of
negotiating  settlements  with  such  vendors  which is not  expected  to have a
material effect on the Condensed Consolidated Financial Statements.

Litigation
----------

     The Company is a party to various suits alleging breach of contract (i) due
to non-payment for services or goods provided, and (ii) the minority interest of
the Class B members of the LLC.  The  Company is  defending  these suits and has
commenced settlement negotiations as to certain of such suits.

     In addition,  a suit has been brought by Akro Investicni  Spolecnost,  A.S.
and Bozena Konvalinkova, as Czech Receiver of Private Investors, as against A.B.
Watley.  The  plaintiffs  allege  violations  of New York common law and federal
securities  law by  A.B.  Watley  arising  from  an  agreement  between  Private
Investors,  a Czech broker-dealer,  and A.B. Watley.  Plaintiffs seek damages of
$31,400,000  (of which  approximately  $950,000  is  alleged  to  represent  the
damages)  plus  punitive  damages.  The Company  believes  it has a  meritorious
defense  against this suit and intends to fight it vigorously and although there
can be no  assurance,  the  Company  believes  the  majority  of the  claims  if
successful,  will be substantially less than the amount of the damage claims and
will be covered by insurance.

     In the opinion of management,  after consultation with independent counsel,
the  Company  is  unable to  predict  the  ultimate  outcome  of these  matters;
accordingly,   no  adjustment  has  been  made  in  the  accompanying  condensed
consolidated financial statements for any potential losses.

10.  Sale of Software

     In April  2002,  the  Company  agreed  to  grant  E*TRADE  a  non-exclusive
perpetual license of the Company`s  proprietary software for a one-time flat fee
of $5,000,000,  payable in cash ($2.6 million) and E*TRADE stock ($2.4 million).
The Company has  subsequently  received the $2,6000,000  million in cash and the
474,500 shares of E*TRADE stock. All of the E*trade stock has been sold with the
proceeds used for working capital  purposes.  Of the total proceeds,  $3,809,000
has  been  recorded  in  the  Condensed   Consolidated  Statement  of  Financial
Condition, as a reduction of property and equipment in accordance with Statement
of  Position  98-1,  Accounting  for Costs of  Computer  Software  Developed  or
Obtained for Internal Use. The remaining  balance of proceeds of $1,191,000  has
been recorded in the Condensed  Consolidated  Statement of Operations as Sale of
Software Income.

11.  Subsequent Event

     In July 2002,  the Company  sold its  software  programs  known as Ultimate
Trader II, Ultimate Trader III, Watley Trader and related intellectual property,
to an affiliate  of  one  of  its  clearing  brokers.  The  sale  included  all
proprietary software that displays market quotation, news, and other information
analysis;  order entry  including the  initiation  and  transmission  of trading
orders and position  management and any applications  that provide real time and
historical market prices. In consideration for the trading technology  software,
the Company`s clearing broker,  agreed to forgive $2,716,720 (including interest
of $566,720) of indebtedness owed by the Company to the clearing broker that had
previously  been assigned to the clearing  broker by the  Company`s  officers in
April  2002.  As  part  of the  agreement,  the  Company  obtained  a  perpetual
nonexclusive,  license to continue to use the  software,


                                      -12-
<PAGE>

including  the  right  to  sublicense  the  software.  Under  the  terms  of the
agreement,  the Company was granted the right to use the  software  royalty free
until July 31,  2005,  and for a nominal per user per month fee  thereafter,  as
defined.  The Company also received a more favorable clearing  agreement,  which
will remain in effect until July 31, 2007.  The asset  purchase  agreement  also
provides for a future reduction of indebtedness of approximately $2,100,000 from
its clearing broker  provided that over a 36-month  period  beginning after July
31, 2002, that the Company has paid its clearing  broker  $5,000,000 in clearing
fees or raised at least  $4,000,000 in new equity capital.  In order for the new
capital to be considered  towards the reduction in  indebtedness,  the agreement
requires that there be no cash payments or mandatory  redemptions  affecting the
principal  amount prior to 18-months  after July 31, 2002.  In the September 30,
2002  financial  statements,  all of the proceeds from the sale of software have
been recorded in the Condensed  Consolidated  Statement of Operations as Sale of
Software Income.

     In January 2003, the Company entered into two office space leases requiring
security  deposits of  approximately  $21,000  and  aggregate  minimum  rents of
$15,173 payable monthly. The lease expires in 2004.

     On January 15, 2003,  A.B.  Watley Inc.  entered into a secured demand note
agreement for  $5,000,000  with a maturity date of June 30, 2004. The loan bears
an annual interest rate of 7% per annum payable monthly.  In connection with the
agreement,  the Company  issued  warrants to purchase  500,000  shares of Common
Stock at $0.75 per share.  The warrants  are  immediately  exercisable  and will
expire in January  2008.  The loan has been approved by NASD and is included for
the  purposes of  computing  net capital  under Rule  15c3-1.  The holder of the
secured  demand  note has the option to  convert  all the  collateral  into A.B.
Watley stock within five business days after the  thirteen-month  anniversary of
the date of the  issuance of the note at a discount  of 5% of the average  price
per share based on the 10-day  period prior to  conversion.  The holder may also
elect to convert the collateral within 5 business days after 18 months at $1.80.
In no event shall the conversion result in the holder of the secured demand note
owning more than 15% of A.B. Watley stock.

12.  Accounting Developments

     The following  pronouncements have been issued by the Financial  Accounting
Standards Board ("FASB").

     SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets"  supercedes  SFAS No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This statement  principally
addresses  implementation  issues of SFAS No. 121, including developing a single
accounting model for long-lived assets to be disposed of by sale. The provisions
of this Statement are effective for financial statements issued for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years,  with early  application  encouraged.  The  provisions of this  Statement
generally are to be applied prospectively.

     SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of
FASB  Statement No. 13, and Technical  Corrections  as of April 2002"  primarily
provides guidance for reporting gains and losses from extinguishment of debt and
sale-leaseback  transactions.  The provisions of this Statement shall be applied
in fiscal years beginning after May 15, 2002 with early adoption encouraged.

     SFAS No.  146,  "Accounting  for Costs  Associated  with  Exit or  Disposal
Activities". This standard required companies to recognize costs associates with
exit or disposal  activities when they are incurred rather than at the date of a
commitment  to an exit or disposal  plan.  SFAS No. 146  replaces  the  existing
guidance  provided by EITF Issue No. 94-3,  "Liability  Recognition  for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain  Costs  incurred  in a  Restructuring)."  SFAS No.  146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.

     Management   does  not   believe   that  the   adoption  of  any  of  these
pronouncements  will  have  a  material  effect  on the  condensed  consolidated
financial statements.

                                      -13-
<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. The results of operations for interim  periods are not necessarily
indicative of the results for the entire fiscal year.

Results of Operations

Three  Months  Ended  June  30, 2002 Compared to the Three Months Ended June 30,
2001

     Revenues.  Total  revenues  for  the  quarter  ended  June  30,  2002  were
$5,320,384 a decrease of 3.38%,  as compared to revenues of  $5,506,288  for the
quarter ended June 30, 2001. Revenues from commissions decreased from $4,125,864
for the quarter ended June 30, 2001,  to  $2,441,796  for the quarter ended June
30, 2002. Overall trading volume has significantly decreased and the Company has
lost customers in its direct access business. Data service revenues decreased by
$152,075 or 55.54%,  from  $273,797  for the  quarter  ended June 30,  2001,  to
$121,722 for the quarter ended June 30, 2002,  due to the migration of customers
from third party software to the Company`s proprietary software,  UltimateTrader
II for which no fees are charged. Revenues from principal transactions decreased
by $345,438 or 68.97%,  from  $500,871 for the quarter  ended June 30, 2001,  to
$155,433 for the quarter ended June 30, 2002,  mainly as a function of the lower
volume of  business  related  to  institutional  sales and  losses  incurred  by
minority  interests  in LLC.  Interest and other  income  increased  $804,677 or
132.84% from $605,756 for the quarter ended June 30, 2001, to $1,410,433 for the
quarter  ended June 30,  2002.  This  increase is largely  due to the  increased
margin interest and interest earned on the additional  retail accounts  acquired
from On-Site and interest  income  earned in the LLC.  Also included in interest
income and other  income is a World  Trade  Center  Business  Recovery  Grant of
$150,000.

     Interest  expense  increased  from  $182,319 for the quarter ended June 30,
2001 to $304,263,  for the quarter ended June 30, 2002, as a result of increased
borrowings in connection with lines of credit.

     As a result of the foregoing,  net revenues  decreased by $323,600 or 6.2%,
from  $5,212,096  for the quarter  ended June 30, 2001, to  $4,888,496,  for the
quarter  ended June 30,  2002.  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 decreased by $289,144 or 2.45%, from $11,813,987,
for the quarter ended June 30, 2001, to  $11,524,843  for the quarter ended June
30, 2002. Commissions,  floor brokerage, and clearing charges represent payments
to our  clearing and floor  brokers who  facilitate  our clients`  transactions,
payments  for data and  software  from third party  vendors,  and payouts to non
business branch locations.  These expenses  decreased by $719,011 or 27.3%, from
$2,633,426  for the quarter  ended June 30, 2001 to  $1,914,415  for the quarter
ended  June 30,  2002  primarily  due to closing  of the  On-Site  business . In
addition,  our online  software  licenses fees and data services fees decreased.
Employee  compensation and related costs decreased by $616,493,  or 21.31%, from
$2,893,108  for the quarter ended June 30, 2001,  to $2,276,615  for the quarter
ended  June  30,  2002,  principally  due to the  reduction  in  the  number  of
employees.

     Communications  expense increased by $444,304 or 90.71%,  from $489,803 for
the quarter  ended June 30, 2001,  to $934,107,  for the quarter  ended June 30,
2002, as a function of adding a back-up site, as well as data and  communication
costs relating to the On-Site branch locations.

     Business  development costs consist of advertising costs, which have mostly
been for print,  media and trade  shows to obtain new  clients.  These  expenses
decreased by $515,189,  or 96.90%,  from $531,698 for the quarter ended June 30,
2001, to $16,509,  for the quarter ended June 30, 2002, as the Company decreased
such expenditures as a part of its cost reduction program.

     Professional services decreased by $394,793, or 27.46%, from $1,437,920 for
the quarter  ended June 30, 2001 to  $1,043,127  for the quarter  ended June 30,
2002, primarily related to decreased usage of external software consultants.

     Occupancy  and  equipment  costs  decreased  by $362,938,  or 23.29%,  from
$1,558,622  for  the  quarter ended June 30, 2001, to $1,195,684 for the quarter
ended  June  30,  2002,  primarily  due  to  penalties  associated  with  early
termination  of  leases.


                                      -14-
<PAGE>

     Depreciation  and  amortization   increased  by  $44,915,  or  3.13%,  from
$1,435,468  for the quarter  ended June 30, 2001 to  $1,480,383  for the quarter
ended June 30, 2002, due to the  implementation of our proprietary direct access
trading  platform and the related  amortization  of  capitalized  software,  the
amortization of capitalized leases, and the amortization of intangibles.

     Other expenses  increased by $124,519,  from $262,830 for the quarter ended
June  30,  2001 to  $387,349  for the  quarter  ended  June  30,  2002.  Loss on
impairment,  of  $2,146,000  represents  the  write  off  of  intangible  assets
(customer lists) acquired in the On-Site acquisition.

     The abandonment of leasehold  improvements of $618,028 primarily relates to
the surrender and termination of leases assumed in the On-Site acquisition.

     Minority interest of $487,374  represents the trading losses of the Class B
non-voting members of the LLC.

Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001

     Revenues.  Total  revenues  for the nine  months  ended June 30,  2002 were
$20,206,647; a decrease of 3.28%, as compared to revenues of $20,891,174 for the
nine  months  ended  June 30,  2001.  Revenues  from  commissions  decreased  by
$886,001, or 5.71%, from $15,527,928 for the nine months ended June 30, 2001, to
$14,641,927  for the nine months  ended June 30,  2002.  Data  service  revenues
decreased by $698,423, or 64.58%, from $1,081,482 for the nine months ended June
30,  2001,  to $383,059  for the nine  months  ended June 30,  2002,  due to the
migration of customers  from third party  software to the Company`s  proprietary
software,  Ultimate  Trader  II for  which no fees are  charged.  Revenues  from
principal  transactions  decreased by $1,480,366 or 56.15%,  from $2,636,557 for
the nine months ended June 30,  2001,  to  $1,156,191  for the nine months ended
June 30, 2002,  mainly as a function of the lower volumes of business related to
institutional  sales and losses incurred by minority  interests in LLC. Interest
and other income  increased  $1,189,263 or 72.29% from  $1,645,207  for the nine
months ended June 30,  2001,  to  $2,834,470  for the nine months ended June 30,
2002.

     Interest expense increased from $443,709 for the nine months ended June 30,
2001,  to  $2,538,506  for the nine months ended June 30,  2002,  as a result of
increased  borrowings in  connection  with lines of credit.  The Company  issued
warrants in connection with certain borrowings.  The value of such warrants were
amortized over the term of the loan as a component of interest expense. Interest
expense relating to the amortization of the warrants issued in connection of the
financing  during  the  nine-months   ended  June  30,  2002  was  approximately
$1,600,000.

     Expenses.   Total  expenses  increased  by  $10,957,323  or  32.61%,   from
$33,605,526 for the nine months ended June 30, 2001, to $44,562,849 for the nine
months ended June 30, 2002. Commissions,  floor brokerage,  and clearing charges
represent payments to our clearing and floor brokers who facilitate our clients`
transactions,  payments  for data and  software  from third party  vendors,  and
payouts to our branch  locations.  As a result of the  increase in the volume of
business due to the  acquisition  of On-Site  accounts with a lower gross margin
than our historical  online client base, these expenses  increased by $1,895,665
or  22.77%,  from  $8,325,695  for  the  nine  months  ended  June  30,  2001 to
$10,221,360,  for the nine months ended June 30, 2002. Employee compensation and
related costs  decreased by $446,303,  or 4.79%,  from  $9,314,660  for the nine
months ended June 30,  2001,  to  $8,868,357  for the nine months ended June 30,
2002.

     Communications  expense increased by $1,129,712 or 73.48%,  from $1,537,397
for the nine months  ended June 30,  2001,  to  $2,667,109,  for the nine months
ended  June 30,  2002,  as a  function  of  adding a  back-up  site,  as well as
communication costs relating to the On-Site branch locations.

     Business  development costs consist of advertising costs, which have mostly
been for print,  media and trade  shows to obtain new  clients.  These  expenses
decreased by $1,560,133,  or 78.47%,  from  $1,988,220 for the nine months ended
June 30,  2001,  to $428,087,  for the nine months  ended June 30, 2002,  as the
Company decreased such expenditures as a part of its cost reduction program.

     Professional services decreased $207,536, or 8.07%, from $2,571,164 for the
nine months ended June 30, 2001 to $2,363,628 for the nine months ended June 30,
2002, primarily due to decreased usage of external software consultants.


                                      -15-
<PAGE>

     Occupancy and equipment  costs  increased by  $1,383,155,  or 31.22%,  from
$4,430,818  for  the nine months ended June 30, 2001, to $5,813,973 for the nine
months  ended  June  30,  2002, primarily due to penalties associated with early
termination  of  leases.

     Depreciation  and  amortization  increased by  $1,197,640  or 29.96%,  from
$3,997,009  for the nine months ended June 30, 2001 to  $5,194,649  for the nine
months ended June 30, 2002, due to the  implementation of our proprietary direct
access trading  platform and the related  amortization of capitalized  software,
the amortization of capitalized leases and the amortization of intangibles.

     Other  expenses  increased  by $680,468  from  $736,949 for the nine months
ended June 30, 2001 to $1,417,417 for the nine months ended June 30, 2002.  Loss
on impairment,  of $7,870,110 represents the write off of intangible assets (the
customer lists) acquired in the On-Site acquisition.

     The abandonment of leasehold  improvements of $618,028 primarily relates to
the surrender and termination of leases assumed in the On-Site acquisition.

     Minority interest of $899,869  represents the trading losses of the Class B
non-voting members of the LLC.


Liquidity and Capital Resources

     As indicated by the accompanying unaudited condensed consolidated financial
statements,  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.

     Trading  volume  has  significantly  decreased  and the  Company  has  lost
customers in its direct access business. To respond to its liquidity and capital
resource  needs  management  has  implemented  various cost cutting  initiatives
including  renegotiating  its clearing  agreements at more favorable  rates, the
restructuring of its software  license with E*Trade Group,  Inc. and the sale of
its software programs known as Ultimate Trader II and Watley Trader. The Company
is also looking into more traditional lines of business such as fixed income and
equity capital  markets,  as well as, the  feasibility of expanding its existing
business to attract  active  traders and hedge funds.  As a further fund raising
alternative  the  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.

     Cash used in  operating  activities  during the nine months  ended June 30,
2002 was  $9,440,198 as compared to  $10,665,724  for the nine months ended June
30, 2001. Cash was  principally  used to fund the net loss of $27,536,449 net of
non-cash items including  depreciation and  amortization of $5,328,023,  loss on
impairment of intangibles of  $7,870,110,  penalties  related to the issuance of
preferred stock of $311,487,  non-cash  compensation/service  costs of $200,568,
option costs of $225,801, minority interest of $899,869, issuance of warrants of
$1,390,569,   write-off   of   leasehold   improvements   of  $618,028  and  the
extraordinary loss on extinguishment of debt of $250,000. In addition,  cash was
impacted by the  decrease in other  assets of  $439,295,  a decrease in security
deposits  of  $1,297,104,  a decrease  in  securities  owned of  $4,880,475,  an
increase in  receivables  from clearing  brokers of  $1,242,901,  an increase in
accounts  payable and accrued  liabilities  of $2,323,822  and a decrease in the
liability for securities sold, not yet purchased of $3,720,537.

     Cash provided by investing activities was $1,554,412 during the nine months
ended June 30, 2002, compared to cash used in investing activities of $1,739,541
during the nine months ended June 30, 2001.  Cash flows provided during the nine
months ended June 30, 2002, related to the sale of software.

     Cash provided by financing activities was $7,444,614 during the nine months
ended June 30, 2002  compared to  $10,580,484  during the nine months ended June
30, 2001.  Cash  provided by financing  activities  during the nine months ended
June 30, 2002,


                                      -16-
<PAGE>

principally  consisted  of net  proceeds  from  the sale of  Preferred  Stock of
$3,324,291,  notes  payable to officers of $900,000 and notes  payable-other  of
$3,779,686.

Net Operating Loss Carryforwards

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












                                      -17-
<PAGE>

Relevant Accounting Standards

     SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets"  supercedes  SFAS No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This statement  principally
addresses  implementation  issues of SFAS No. 121, including developing a single
accounting model for long-lived assets to be disposed of by sale. The provisions
of this Statement are effective for financial statements issued for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years,  with early  application  encouraged.  The  provisions of this  Statement
generally are to be applied prospectively.

     SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of
FASB  Statement No. 13, and Technical  Corrections  as of April 2002"  primarily
provides guidance for reporting gains and losses from extinguishment of debt and
sale-leaseback transactions.  The provisions of this Statement are effective for
financial  statements  issued for fiscal years beginning after May 15, 2002 with
early adoption encouraged.

     SFAS No.  146,  "Accounting  for Costs  Associated  with  Exit or  Disposal
Activities". This standard required companies to recognize costs associates with
exit or disposal  activities when they are incurred rather than at the date of a
commitment  to an exit or disposal  plan.  SFAS No. 146  replaces  the  existing
guidance  provided by EITF Issue No. 94-3,  "Liability  Recognition  for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain  Costs  incurred  in a  Restructuring)."  SFAS No.  146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.

     SFAS No. 148,  "Accounting  for  Stock-Based  Compensation - Transition and
Disclosure  - an  amendment  of FASB  Statement  No. 123"  provides  alternative
methods of transition  for a voluntary  change to the fair value based method of
accounting  for  stock-based  employee  compensation.  The  provisions  of  this
Statement are effective for fiscal years beginning after December 15, 2003.

     Management   does  not   believe   that  the   adoption  of  any  of  these
pronouncements   had,  or  will  have,  a  material   effect  on  the  Company`s
consolidated financial statements.

Forward Looking Statements

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

     Our  primary  financial  instruments  are cash in banks  and  money  market
instruments.  We do not believe that these  instruments  are subject to material
potential near-term losses in future earnings from reasonably possible near-term
changes  in  market  rates  or  prices.  We do  not  have  derivative  financial
instruments  for  speculative  or  trading  purposes.  In the  normal  course of
business, our customers enter into transactions where the risk of potential loss
due to market fluctuations or failure to perform exceeds the amount reported for
the transaction. We have established policies, procedures and internal processes
governing  our  management  of market risk in the normal  course of our business
operations.  We,  along with 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.


                                      -18-
<PAGE>
     Risk Factors

     You should carefully  consider the following  factors and other information
in this Form 10-Q when considering the Company and its stock.

     If  we  are  unable  to  continue  cost  cutting  and  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.

     We are implementing cost cutting and revenue  generation  initiatives,  and
exploring strategic business combinations.  We also will need to find additional
funding  sources at rates and terms  acceptable  to us to meet our  capital  and
liquidity  needs for the  remainder  of the year.  To the extent that capital is
raised through the sale of equity or convertible debt  securities,  the issuance
of these  securities  could  result in dilution to our  stockholders.  If we are
unable to obtain such financing,  make  sufficient  improvement in our operating
results or find a strategic  partner our ability to operate our business will be
significantly diminished.

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

     Our future  revenues  are likely to be lower  during  periods of  declining
securities prices or reduced  securities market activity The public markets have
historically  experienced significant volatility not only in the number and size
of share  offerings,  but also in the secondary market trading volume and prices
of newly issued  securities.  Activity in the private equity markets  frequently
reflects  the trends in the  public  markets.  As a result,  our  revenues  from
brokerage  activities may also be adversely affected during periods of declining
prices or reduced activity in the public markets.

     We may not be able to  adapt  with  rapid  technological  change  in a cost
effective  manner,  which  could  materially  adversely  impact  the  business,
financial  condition  and  operating  results.

     Traditional and online financial  services  industries are characterized by
rapid  technological  change,  changes in customer  requirements,  frequent  new
service  and  product  introductions  and  enhancements  and  evolving  industry
standards. Our future success will depend on our ability to enhance our existing
services and  products.  We must also  develop new  services  and products  that
address the  increasingly  sophisticated  and varied needs of our  customers and
prospective  customers.  We must respond to technological  advances and evolving
industry  standards  and  practices on a timely and  cost-effective  basis.  The
development  and  enhancement  of  services  and  products  entails  significant
technical and financial risks. We may fail to

     o    use new technologies effectively;
     o    adapt services and products to evolving industry standards; or
     o    develop,  introduce and market service and product enhancements or new
          services and products.

     In addition, we may experience difficulties that could delay or prevent the
successful development,  introduction or marketing of our services and products,
and our new service and product  enhancements may not achieve market acceptance.
If we encounter these problems, our business,  financial condition and operating
results may be materially adversely affected.

     Operational risks may disrupt our business or limit our growth.

     Like other  securities  and  securities-related  businesses,  we are highly
dependent  on  information  processing  and  telecommunications systems. We face
operational  risks  arising  from potential mistakes made in the confirmation or
settlement  of  transactions or from the failure to properly record, evaluate or
account  for  transactions. Our business is highly dependent on our ability, and
the  ability  of  our  clearing firms, to process, on a daily basis, a large and
growing  number  of  transactions  across  numerous  and  diverse  markets.
Consequently,  we  and  our  clearing  firms  rely  heavily  on  our  respective
financial,  accounting, telecommunications and other data processing systems. If
any  of  these  systems  fail  to  operate properly or become unavailable due to
problems  with  our  physical  infrastructure, we could suffer financial loss, a
disruption  of  our  business,  liability to clients, regulatory intervention or
reputational  damage.  In  addition,  we  are  aware that other companies in our
industry  have  had problems due to high volume of telephone and e-mail customer
inquiries  that  has  at times strained the capacity of their telecommunications
systems  and  customer service staffs, and has also led to temporary disruptions
in  website  service.  Thus,  any  inability  of  systems used to accommodate an
increasing  volume  of  transactions and customer inquiries could also constrain
our  ability  to  expand  our  businesses  and  could  damage  our  reputation.

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

                                      -19-
<PAGE>

     There  have been a number of highly  publicized  cases  involving  fraud or
other  misconduct  by employees  in the  financial  services  industry in recent
years, and we run the risk that employee  misconduct could occur.  Misconduct by
employees could bind us to transactions that exceed authorized limits or present
unacceptable risks, or hide from us unauthorized or unsuccessful activities.  In
either case, this type of conduct could result in unknown and unmanaged risks or
losses.  Employee misconduct could also involve the improper use of confidential
information, which could result in regulatory sanctions and serious reputational
harm.  It  is  not  always  possible  to  deter  employee  misconduct,  and  the
precautions  we take to prevent and detect this activity may not be effective in
all cases.

     The  securities  industry  in  which we 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.

     The  securities  industry  in the United  States is  subject  to  extensive
regulation  under both  federal  and state laws.  Broker-dealers  are subject to
regulations covering all aspects of the securities business, including:

     o    sales methods;
     o    trade practices among broker-dealers;
     o    use and safekeeping of customers` funds and securities;
     o    capital structure;
     o    record keeping;
     o    conduct of directors, officers, and employees; and
     o    supervision of employees, particularly those in branch offices.

     The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities  markets,  rather than  protection of
creditors and stockholders of broker-dealers.

     Uncertainty  regarding the application of these laws and other  regulations
to our business may  adversely  affect the viability  and  profitability  of our
business.  The SEC,  the NASD,  other  self-regulatory  organizations  and state
securities  commissions can censure,  fine, issue  cease-and-desist  orders,  or
suspend  or expel a  broker-dealer  or any of its  officers  or  employees.  Our
ability to comply with all applicable laws and rules is largely dependent on our
establishment  and maintenance of a compliance system to ensure such compliance,
as well as our ability to attract and retain qualified compliance personnel.  We
could be subject to disciplinary  or other actions due to claimed  noncompliance
in the future,  and the  imposition  of any  material  penalties or orders on us
could have a material  adverse  effect on our  business,  operating  results and
financial  condition.  In  addition,  it is possible  that  noncompliance  could
subject  us to future  civil  lawsuits,  the  outcome  of which  could  harm our
business.

     In  addition,  our mode of  operation  and  profitability  may be  directly
affected by:

     o    additional legislation;
     o    changes in rules promulgated by the SEC, state  regulators,  the NASD,
          and other regulatory and self-regulatory organizations; and
     o    changes in the  interpretation  or  enforcement  of existing  laws and
          rules.

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

     The SEC, the NASD and various  other  regulatory  agencies  have  stringent
rules with  respect to the  maintenance  of  specific  levels of net  capital by
securities  brokers,  including  the SEC`s  Uniform Net  Capital  Rule (the "Net
Capital Rule"). Net capital is the net worth of a broker or dealer (assets minus
liabilities), less certain deductions that result from excluding assets that are
not readily convertible into cash and from conservatively  valuing certain other
assets.  Failure to  maintain  the  required  net  capital may subject a firm to
suspension or revocation of  registration by the SEC and suspension or expulsion
by the NASD and other regulatory  bodies and ultimately could require the firm`s
liquidation.

     In addition, a change in the net capital rules, the imposition of new rules
or any unusually  large charge  against net capital could limit those aspects of
our contemplated  operations that require the intensive use of capital,  such as
trading activities and the financing of customer account balances. A significant
operating loss or any unusually large charge against net capital could adversely
affect our ability to operate and/or expand, which could have a material adverse
effect on our business, financial condition and operating results.

                                      -20-

<PAGE>

     As of February 28, 2002,  March 31, 2002,  and April 30, 2002,  the Company
had a net capital  deficit as defined,  of $520,836,  $1,487,966,  and $637,141,
respectively,  in violation of the Net Capital  Rule.  These  deficiencies  were
cured through  additional  funding and through funds generated from  operations.
While the Company is  presently  in  compliance  with net capital  requirements,
there  can be no  assurance  that we will not fall  below  minimum  net  capital
requirements in the future.

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

     The  brokerage  business,  by its  nature,  is subject to risks  related to
defaults by our customers in paying for securities  they have agreed to purchase
and delivering  securities  they have agreed to sell. Our clearing firm may make
margin loans to our customers in connection with their securities  transactions.
We are required by contract to indemnify that firm for, among other things,  any
loss or expense  incurred  due to defaults by our  customers in failing to repay
margin loans or to maintain  adequate  collateral  for those  loans.  We will be
subject to risks  inherent in extending  credit,  especially  during  periods of
volatile  markets or in connection  with the purchase of highly  volatile stocks
which could lead to a higher risk of customer defaults.

     We may be  obligated  to redeem our Series A Preferred  Stock at a point in
the  future,  which  could  impair our ability to raise additional capital as we
would  more  than  likely  not  be  able  to  repay  such  redemption.

     The  holders of our Series A  Preferred  Stock have the right to have their
shares  redeemed for cash equal to the greater of (i) the price we received when
we sold them the stock ($10,000 per share) plus any accrued and unpaid  dividend
payments and (ii) the  aggregate  value of the shares of Common Stock into which
such shares of Series A  Preferred  Stock are then  convertible  (based upon the
closing bid price), in any of the following situations:

     o    if our Common Stock is not tradable on the NYSE,  the AMEX, the NASDAQ
          National  Market or the  NASDAQ  SmallCap  market for a period of five
          consecutive days.
     o    if we fail to register with the Securities and Exchange Commission (or
          maintain such  registration of) the Common Stock into which the Series
          A Preferred Stock converts.
     o    if we fail to honor  requests  for  conversion,  or if we  notify  any
          holder  of  Series A  Preferred  Stock of our  intention  not to honor
          future requests for conversion.
     o    if the  holders of more than 30 percent of the  outstanding  shares of
          our Common Stock sell or exchange their stock.
     o    if we commit a material breach under, or otherwise  materially violate
          the terms of, the  transaction  documents  entered into in  connection
          with the issuance of the Series A Preferred Stock and the warrants.

     In April of 2002,  our Common  Stock was  delisted  from the  NASDAQ  Stock
Market.  In  addition,  we have not  registered  the Common Stock into which the
Series A Preferred Stock converts. We have not received a redemption notice from
any of the holders of our Series A Preferred  Stock.  Redemption of the Series A
Preferred  Stock in any  event  described  above  would  require  us to expend a
significant  amount of cash that  likely  will  exceed our  ability to make such
payment or raise additional capital.

     Our stockholders could experience  substantial  dilution as a result of the
issuance of and terms of our Series A Preferred Stock and the related warrants.

     The 630 shares of Series A  Preferred  Stock that were sold in the  private
placement are  initially  convertible  into  approximately  2,135,700  shares of
Common  Stock.  The  warrants  granted in  connection  with the sale of Series A
Preferred Stock are initially  exercisable for 1,629,069 shares of Common Stock,
at an exercise price of $2.95 per share.

     Under the terms of the Series A Preferred  Stock,  we are also obligated to
issue  additional  shares of Common Stock every six months to the holders of the
Series  A  Preferred  Stock  as  preferred  stock  dividends.  Initially,  these
dividends  will be  payable at the rate of six  percent  for the first 18 months
following  issuance of the Series A Preferred  Stock and fifteen  percent  after
that  initial  18 month  period.  The  number of shares of Common  Stock will be
determined  by dividing the dividend  payment by the market price for our Common
Stock on the day before  such  dividend  is payable.  Because  these  shares are
issueable  as a  dividend,  we  will  receive  no  additional  consideration  in
connection with their issuance.

     We may also be required to issue shares of Common Stock without  additional
consideration  in the  event  that we fail to  redeem  any  shares  of  Series A
Preferred Stock when required.

     All  of  the  foregoing   issuances  of  Common  Stock  are  likely  to  be
substantially  dilutive to the  outstanding  shares of Common Stock,  especially
where,  as  described  above,  the  shares of Common  Stock are  issued  without
additional  consideration.  Moreover,  any  increase  in the number of shares of
Common Stock we are required to issue resulting from  anti-dilution  protection,
penalties  or other

                                      -21-
<PAGE>

adjustments to the conversion or exercise prices of the Series A Preferred Stock
and/or the  warrants  described  above will  further  increase  the  anticipated
dilution  to the  outstanding  holders of our Common  Stock.  We cannot  predict
whether or how many  additional  shares of our Common Stock will become issuable
due to these provisions.

     Any such dilution, potential dilution, or increase in dilution or potential
dilution, may result in a decrease in the value of the outstanding shares of our
Common  Stock.  Such a  decrease  in value,  the risk of  dilution,  any  actual
dilution,  or any increase in potential  dilution may cause our  stockholders to
sell their shares, which would contribute to a downward movement in the price of
our Common  Stock.  This  could  prevent us from  sustaining  a per share  price
sufficient  to enable us to  maintain  an active  trading  market on the  NASDAQ
National Market or SmallCap Market if our stock is re-listed.  In addition,  any
downward  pressure on the  trading  price of our Common  Stock  could  encourage
investors to engage in short sales, which would further contribute to a downward
pricing of our Common Stock.

     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.

     Our  charter  documents  require us to obtain the consent of the holders of
the Series A Preferred Stock before we may issue  securities that have senior or
equal rights as the Series A Preferred  Stock or take other actions with respect
to the Series A Preferred  Stock or  securities  that have fewer rights than the
Series A  Preferred  Stock.  We are also  required  to obtain the consent of the
holders  of the  Series  A  Preferred  Stock  before  we  amend  or  modify  our
certificate of  incorporation  or bylaws,  whether by merger,  consolidation  or
otherwise  to change  any of the  rights of the  holders  of Series A  Preferred
Stock.  While these obligations may deter a potential acquirer from completing a
transaction with us, they may also prevent us from taking corporate actions that
would be beneficial to the holders of our Common Stock and the Company,  such as
raising  capital to operate our business or maintain our  capitalization  or per
share price in attempts to maximize stockholder volume and liquidity.

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

We obtain  financial  information  from a number  of  third-party  suppliers  of
software  and  information  services.  We  believe  we have  available  to us at
comparable  cost a number of  alternative  sources  of supply of these  items of
software and information  services, to provide adequate replacements on a timely
basis, if arrangements with any of our current suppliers are abrogated.  We have
established a number of relationships with third-party suppliers of software and
information  services.  There can be no assurance that such  relationships  will
continue or that timely  replacement  of such  services will be available in the
future.

Item 4. Controls and Procedures

     During the quarter,  an evaluation was performed  under the supervision and
with the  participation  of the  Company`s  management,  including the Principal
Executive Officer and the Principal  Financial Officer,  of the effectiveness of
the design and operation of the Company`s  disclosure  controls and  procedures.
Based on that  evaluation,  the  Company`s  management,  including the Principal
Executive  Officer  and the  Principal  Financial  Officer,  concluded  that the
Company`s disclosure controls and procedures were effective as of June 30, 2002.
There have been no significant  changes in the Company`s internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
June 30, 2002.

                                      -22-
<PAGE>

Part II - OTHER INFORMATION

Item 1.  Legal Proceedings

     Our business involves substantial risks of liability, including exposure to
liability  under federal and state  securities laws in connection with claims by
dissatisfied clients for fraud, unauthorized trading,  churning,  mismanagement,
and breach of fiduciary duty, as well as in connection with the  underwriting or
distribution  of  securities.  In recent  years,  there  has been an  increasing
incidence of  litigation  involving the  securities  industry,  including  class
actions which generally seek rescission and substantial damages.

     In the ordinary  course of  business,  we and our  principals  are, and may
become, a party to legal proceedings or arbitration.  Except as described below,
the Company is not a party to any material legal proceedings or arbitrations.

     The Company is a party to various suits alleging breach of contract (i) due
to  non-payment  for  services  or goods  provided,  and  (ii) for the  minority
interest of the Class B members of theLLC.  The Company is defending these suits
and has commenced settlement negotiations as to certain of such suits.

     In addition,  a suit has been brought by Akro Investicni  Spolecnost,  A.S.
and Bozena Konvalinkova, as Czech Receiver of Private Investors, as against A.B.
Watley.  The  plaintiffs  allege  violations  of New York common law and federal
securities  law by  A.B.  Watley  arising  from  an  agreement  between  Private
Investors,  a Czech broker-dealer,  and A.B. Watley.  Plaintiffs seek damages of
$31,400,000  (of which  approximately  $950,000  is  alleged  to  represent  the
damages)  plus  punitive  damages.  The Company  believes  it has a  meritorious
defense  against this suit and intends to fight it vigorously and although there
can be no  assurance,  the  Company  believes  the  majority  of the  claims  if
successful,  will be substantially less than the amount of the damage claims and
will be covered by insurance.

     We are a defendant  in four  actions  relating to the lease of equipment in
which the  plaintiffs  have  asserted  breach of  contract  and  damages  in the
aggregate  amount of approximately  $683,000.  Three of such actions are pending
before the Supreme  Court of New York,  New York,  and the  remaining  action is
pending  before the District  Court,  4th Judicial  District,  Hennepin  County,
Minnesota.

     We are a defendant in an action  pending  before the  American  Arbitration
Association  ("AAA") in which the plaintiffs  have asserted  breach of fiduciary
duties.  The  plaintiff  in this  action  seeks an  accounting  and  unspecified
damages.

     We are a defendant in an action pending  before the AAA in connection  with
our failure to maintain a registration  statement in which the  plaintiffs  have
asserted breach of contract and damages in the amount of approximately $84,000.

     We are a  defendant  in a breach of  contract  action  pending  before  the
Supreme Court, Nassau County, New York arising out of an employment dispute. The
plaintiff in this action is seeking  compensatory damages of $93,000, as well as
liquidated  damages,  under New York`s  Labor  Law,  in the amount of 25% of the
compensatory damages.

     We are a defendant  in an action  pending  before the Supreme  Court of New
York,  New  York  in  connection  with a  construction  contract  in  which  the
plaintiffs have asserted breach of contract and damages in the aggregate  amount
of approximately $234,000.

     We are a defendant  in an action  pending  before the Supreme  Court of New
York,  New  York in  connection  with  an  advertising  contract  in  which  the
plaintiffs have asserted breach of contract and damages in the aggregate  amount
of approximately $29,000.

     We are a defendant in an action pending before the National  Association of
Securities  Dealers  ("NASD") in which the  claimants  have  asserted  breach of
contract and damages in the aggregate amount of approximately $147,000.

     There is one action  that  relates to  collection  of an  existing  account
payable  in which a judgment  has been  entered  against  the  Company  totaling
approximately $24,000.

                                      -23-
<PAGE>

     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.   The  Company  is  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 to
the Company, would not have a material adverse effect on the Company`s business,
financial condition and results of operations.

Item 2.  Changes in Securities

None.

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 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,  2002,  liquidated
damages of approximately $311,000 has been accrued to the preferred holders.

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

None.

Item 5.  Other Information

     The Company currently has authorized capital stock consisting of 20,000,000
common  shares,  $.001  par  value,  of  which  12,508,852 shares are issued and
outstanding and 1,000,000 preferred shares, $.001 par value, of which 630 Series
A Redeemable Convertible Preferred Stock are issued and outstanding. Since March
2002,  the  Company  issued warrants that may potentially require an issuance of
shares  greater  than  the  number  of  shares  that  the  Company  is currently
authorized  to issue. By issuing these securities, the Company has exhausted its
20,000,000  authorized  shares  of common stock and cannot meet any equity-based
obligations  entered  into  after March 2002 without shareholder approval for an
increase  in  the  number  of  authorized  shares.  The  Company intends to seek
approval  of  the  transactions that require the issuance of these warrants that
potentially  may require an issuance of shares greater than the number of shares
that  the  Company  is  currently authorized to issue as well as approval for an
increase  in the number of authorized shares of common stock of the Company from
20,000,000  to  50,000,000.


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

     (a)  Exhibits


          10.1 Master  Subordination,  Waiver,  Release  and  Indemnification
               Agreement  entered  on  March  27,  2002.

          10.2 Promissory  Note in the amount of $1,600,000 entered between A.B.
               Watley Group Inc. and Penson Financial Services, Inc. dated March
               27,  2002

          10.3 Promissory  Note  in  the amount of $900,000 entered between A.B.
               Watley  Group  Inc. and DMG legacy Institutional Fund LLC and DMG
               Legacy  Fund  LLC  dated  March  27,  2002

          10.4 First  Amendment  to  Promissory Note entered between A.B. Watley
               Group  LLC  and  Penson Financial Services Inc. dated April 2002.

          10.5 Second  Amendment  to Promissory Note entered between A.B. Watley
               Group  LLC  and  Penson  Financial  Services Inc. dated May 2002.

          10.6 Non-Exclusive  Perpetual  License of proprietary software between
               E*Trade  and  the  Company  dated  April  2002.

          10.7 First Amendment to Master Agreement and First Amendment to
               Software Security Agreement dated as of April 2002

          10.8 Second Amendment to the Master Subordination, Waiver, Release and
               Indemnification Agreement, dated as of May 2002.

          10.9 Third Amendment to the Master Subordination, Waiver, Release and
               Indemnification Agreement, dated as of May 2002.

          99.1 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.

          99.2 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
               None.

                                      -24-
<PAGE>

                                   SIGNATURES

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

Date: April 15, 2003

                                                  A.B. WATLEY GROUP INC.
                                                        (Registrant)

                                                   By: /s/ Steven Malin
                                                   --------------------
                                                           Steven Malin
                                                           Chairman

                                                   By: /s/ Robert Malin
                                                   --------------------
                                                           Robert Malin
                                                           Vice-Chairman


                                      -25-
<PAGE>
                                  CERTIFICATION

I, Steven Malin, the Principal Executive Officer, certify that:

1.   I have reviewed  this  quarterly  report on Form 10-Q of A.B.  Watley Group
     Inc.

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report.

4.   The  registrant`s  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
          a) designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;
          b) evaluated the effectiveness of the registrant`s disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     quarterly report (the "Evaluation Date"); and
          c)  presented  in this  quarterly  report  our  conclusions  about the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date.

5.   The registrant`s other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant`s  auditors  and the audit
     committee of  registrant`s  board of directors (or persons  performing  the
     equivalent functions):
          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the  registrant`s  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant`s auditors any material weaknesses in internal controls; and
          b) any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant`s  internal
     controls; and

6.   The  registrant`s  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



                                         /s/  Steven Malin
                                         ----------------------------------
                                         Principal Executive Officer
                                         Date:  April 15, 2003



                                      -26-
<PAGE>

                                  CERTIFICATION

I, Robert Malin, the Principal Financial Officer, certify that:

1.   I have reviewed  this  quarterly  report on Form 10-Q of A.B.  Watley Group
     Inc.

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report; and

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report.

4.   The  registrant`s  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
          a) designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;
          b) evaluated the effectiveness of the registrant`s disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     quarterly report (the "Evaluation Date"); and
          c)  presented  in this  quarterly  report  our  conclusions  about the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date.

5.   The registrant`s other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant`s  auditors  and the audit
     committee of  registrant`s  board of directors (or persons  performing  the
     equivalent functions):
          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the  registrant`s  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant`s auditors any material weaknesses in internal controls; and
          b) any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant`s  internal
     controls; and

6.   The  registrant`s  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



                                           /s/  Robert Malin
                                           ----------------------------------
                                           Principal Financial Officer
                                           Date:  April 15, 2003


                                      -27-
<PAGE>