FORM 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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


                 For the quarterly period ended: March 31, 2004
                                                 --------------

                                       OR

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


                 For the transition period from _____ to ______


                         Commission file number: 1-14897


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


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


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


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


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

                                      None

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

                         Common Stock, $0.001 par value

                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes [X]  No [  ].

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest  practicable  date:  As of July 23,  2004,  there were
13,137,138 shares of the Common Stock, par value $.001 per share, outstanding.


<PAGE>

                             A.B. Watley Group Inc.

Index

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

             Condensed Consolidated Statements of Financial Condition

                               As of March 31, 2004 (Unaudited) and September 30, 2003..................................3

             Condensed Consolidated Statements of Operations

                               For the Three Months and Six Months Ended March 31, 2004 and 2003 (Unaudited)............4

             Condensed Consolidated Statements of Cash Flows

                               For the Three Months and Six Months Ended March 31, 2004 and 2003 (Unaudited)............5

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

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

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

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


PART II-- OTHER INFORMATION

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

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

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

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

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

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

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

Certifications
</TABLE>

                                       2
<PAGE>

PART I -- FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                             A.B. WATLEY GROUP INC.

            CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                                      MARCH 31, 2004       SEPTEMBER 30,
                                                                                       (Unaudited)              2003
                                                                                       ------------        ------------
<S>                                                                                   <C>                  <C>
ASSETS:

Cash and cash equivalents                                                              $     67,964        $     41,296
Receivables from clearing brokers                                                           242,104             223,556
Securities owned, at market value                                                                --           1,309,145
Property and equipment, net of accumulated depreciation
          of $6,772,420 and $6,574,033                                                      476,154           1,698,062
Loans receivable from related party                                                         258,227             272,727
Secured demand note                                                                       3,202,000           3,202,000
Security deposits                                                                           145,000             175,000
Other assets                                                                                 64,500              19,894
                                                                                       ------------        ------------

TOTAL ASSETS                                                                           $  4,455,949        $  6,941,680
                                                                                       ============        ============

LIABILITIES AND STOCKHOLDERS' DEFICIT:

Accounts payable and accrued liabilities                                                 10,228,559           9,769,760
Accrued liabilities to LLC Class B Members                                                1,955,253           2,000,253
Payable to clearing broker                                                                  597,292           1,597,767
Securities sold not yet purchased                                                                --              28,010
Notes payable to former officer                                                             700,000             700,000
Notes payable - other                                                                     3,577,695           3,082,826
Subordinated borrowings                                                                   4,954,379           4,863,138
Subordinated borrowings - other                                                             350,000             350,000
Subordinated borrowings from officer                                                        180,000             180,000
                                                                                       ------------        ------------
                                                                                         22,543,178          22,571,754
                                                                                       ------------        ------------

Series A Redeemable Convertible Preferred Stock $0.01 par value, 690 shares
   authorized and 630 issued and outstanding at March 31, 2004 and September 30,
   2003, respectively, and accrued dividends and
   interest (liquidation preference  - $6,300,000)                                        6,867,001           6,867,001
                                                                                       ------------        ------------

STOCKHOLDERS' DEFICIT:

Preferred Stock, $0.001 par value, 1,000,000 shares authorized and none
   issued and outstanding at March 31, 2004 and September 30, 2003                               --                  --
Common stock, $0.001 par value, 50,000,000 and 20,000,000 shares
   authorized at March 31, 2004 and September 30, 2003, respectively and
   13,137,138 and 12,787,139 issued and outstanding at March 31, 2004 and
   September 30, 2003, respectively                                                          13,137              12,787
Additional paid-in capital                                                               47,198,758          47,111,608
Option costs                                                                                 (4,662)            (13,996)
Accumulated deficit                                                                     (72,161,463)        (69,607,474)
                                                                                       ------------        ------------
TOTAL STOCKHOLDERS' DEFICIT                                                             (24,954,230)        (22,497,075)
                                                                                       ------------        ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                            $  4,455,949        $  6,941,680
                                                                                       ============        ============
</TABLE>


                                       3
<PAGE>


                             A.B. WATLEY GROUP INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED MARCH 31,   SIX MONTHS ENDED MARCH 31,
                                                   ---------------------------   ---------------------------
                                                       2004           2003           2004           2003
                                                   ------------   ------------   ------------   ------------
REVENUES:
<S>                                                <C>            <C>            <C>            <C>
Commissions                                        $  1,752,534   $  1,214,697   $  3,049,468   $  2,692,673
Data service fees                                        24,445        100,865         64,361        262,355
Principal transactions                                  891,421      2,009,365      2,356,633      3,954,671
Interest income and other income                        299,905        169,789        590,631        764,717
                                                   ------------   ------------   ------------   ------------
TOTAL REVENUES                                        2,968,305      3,494,716      6,061,093      7,674,416

Interest expense                                        327,792        277,629        600,273        424,522
                                                   ------------   ------------   ------------   ------------
NET REVENUES                                          2,640,513      3,217,087      5,460,820      7,249,894
                                                   ------------   ------------   ------------   ------------

EXPENSES AND OTHER CHARGES:

Commissions, floor brokerage and clearing charges     1,304,732      1,536,972      2,478,419      2,552,188
Employee compensation and related costs               1,223,332      2,057,244      2,594,465      3,865,029
Communications                                          107,862        542,478        325,721        824,926
Business development                                    (22,560)       106,550         79,330        128,249
Professional services                                    33,237        599,706        273,571        998,730
Occupancy and equipment costs                           308,983        349,510        666,980      1,441,049
Depreciation and amortization                            97,868        504,319        198,387      1,003,726
Other expenses                                          159,710        841,429        374,414      1,347,658
Abandonment of leasehold improvements                 1,023,522             --      1,023,522             --
Loss on investments                                          --             --             --         84,287
                                                   ------------   ------------   ------------   ------------
TOTAL EXPENSES                                        4,236,686      6,538,208      8,014,809     12,245,842
                                                   ------------   ------------   ------------   ------------
NET LOSS                                           $ (1,596,173)  $ (3,321,121)  $ (2,553,989)  $ (4,995,948)

Preferred stock dividends                                    --        (94,500)            --       (189,000)
                                                   ------------   ------------   ------------   ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS         $ (1,596,173)  $ (3,415,621)  $ (2,553,989)  $ (5,184,948)
                                                   ============   ============   ============   ============

BASIC AND DILUTED LOSS PER COMMON SHARE            $      (0.12)  $      (0.27)  $      (0.20)  $      (0.41)
                                                   ============   ============   ============   ============

Weighted average shares outstanding                  12,917,694     12,508,852     12,851,698     12,508,852
                                                   ============   ============   ============   ============
</TABLE>

                                       4
<PAGE>

                             A.B. WATLEY GROUP INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            FOR THE SIX MONTHS ENDED MARCH 31,
                                                                            ----------------------------------
                                                                                    2004          2003
                                                                                -----------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                             <C>           <C>
Net loss                                                                        $(2,553,989)  $(4,995,948)
Adjustments to reconcile net loss to net cash (used in)
  provided by operating activities:
    Non-cash compensation and service costs
      Options costs                                                                   9,334        16,334
      Amortization of debt discount in connection with
         issuance of warrants and subordinated debt                                  91,241        45,620
      Amortization of finance charge in connection with
         notes payable                                                               37,500            --
      Penalties - preferred stock                                                        --       759,107
      Depreciation and amortization                                                 198,386     1,003,726
      Loss on abandonment of leasehold improvements                               1,023,522            --
    Changes in assets and liabilities:
    (Increase) decrease in operating assets:
       Restricted cash                                                                   --       292,565
       Receivables from clearing brokers                                            (18,547)      134,967
       Securities owned                                                           1,309,145     2,042,251
       Loans receivable from related party                                           14,500            --
       Security deposits                                                             30,000       (27,295)
       Other assets                                                                   5,394       (80,539)
    Increase (decrease) in operating liabilities:
       Accounts payable and accrued liabilities                                     458,798       929,661
       Payable to clearing broker                                                (1,000,475)           --
       Securities sold, not yet purchased                                           (28,010)           --
                                                                                -----------   -----------
    Net cash (used in) provided by operating activities                            (423,201)      120,449
                                                                                -----------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                                      --       (64,949)
                                                                                -----------   -----------
    Net cash provided by (used in) investing activities                                  --       (64,949)
                                                                                -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan
Proceeds from notes payable - other                                               1,950,000       250,000
Repayment of notes payable - other                                               (1,455,131)     (450,000)
Capital distribution to LLC Class B members                                         (45,000)      (35,038)
                                                                                -----------   -----------
    Net cash provided by (used in) financing activities                             449,869      (235,038)
                                                                                -----------   -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 26,668      (179,538)
Cash and cash equivalents at beginning of period                                     41,296       213,766
                                                                                -----------   -----------
Cash and cash equivalents at end of period                                      $    67,964   $    34,228
                                                                                ===========   ===========

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES
  AND DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid for:
      Interest                                                                  $    17,500   $   152,168
      Taxes                                                                              --            --

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES AND DISCLOSURE OF
    CASH FLOW INFORMATION:
Preferred stock dividends                                                                --   $   189,000
Issuance of secured demand note                                                          --   $ 5,000,000
Issuance of subordinated borrowing                                                       --   $ 5,000,000
Debt discount in connection with issuance of warrants and subordinated debt              --   $   273,723
Settlements of minority interests                                                        --   $    87,019
Issuance of common stock for financing charge in connection with notes payable  $    87,500            --
</TABLE>


                                       5
<PAGE>

                             A.B. WATLEY GROUP INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)


1.    ORGANIZATION AND BUSINESS

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

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

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

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


2.    BASIS OF PRESENTATION

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

      The condensed  consolidated  financial  statements include the accounts of
ABWG and its wholly owned subsidiaries.  All significant  intercompany  balances
and transactions  have been  eliminated.  Certain prior period amounts have been
reclassified to conform to the current period's presentation. The preparation of
the financial  statements in  conformity  with GAAP requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

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


                                       6
<PAGE>

Equity-Based Compensation

      As  permitted  by FASB  Statement  No.  123,  Accounting  for Stock  Based
Compensation  ("FAS  123"),  which  establishes  a fair  value  based  method of
accounting  for  equity-based  compensation  plans,  the  Company has elected to
follow  Accounting  Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25") for recognizing  equity-based  compensation  expense for
financial  statement  purposes.   Under  APB  25,  no  compensation  expense  is
recognized  at the time of option  grant if the  exercise  price of the employee
stock  option  is fixed and  equals  or  exceeds  the fair  market  value of the
underlying  common  stock on the day of grant  and the  number  of  shares to be
issued pursuant to the exercise of such options are known and fixed at the grant
date.

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

      The following table summarizes relevant information as to reported results
under the Company's  intrinsic value method of accounting for stock awards, with
supplemental  information as if the fair value recognition provisions of FAS 123
had been  applied for the three and six month  periods  ended March 31, 2004 and
2003 as follows:

<TABLE>
<CAPTION>
                                THREE MONTHS ENDED MARCH 31,           SIX MONTHS ENDED MARCH 31,
                              --------------------------------      --------------------------------
                                  2004                2003               2004              2003
                              -------------      -------------      -------------      -------------
<S>                           <C>                <C>                <C>                <C>
NET LOSS                      $  (1,596,173)     $  (3,415,621)     $  (2,553,989)     $  (5,184,948)
STOCK-BASED EMPLOYEE
COMPENSATION COST, NET
OF TAX EFFECT, UNDER
FAIR VALUE ACCOUNTING               139,256            134,857            157,579            214,560
                              -------------      -------------      -------------      -------------
PRO FORMA NET LOSS UNDER
FAIR VALUE METHOD             $  (1,735,429)     $  (3,550,478)     $  (2,711,568)     $  (5,399,508)
                              -------------      -------------      -------------      -------------
LOSS PER SHARE
BASIC AND DILUTED             $       (0.12)     $       (0.27)     $       (0.20)     $       (0.41)
PER SHARE STOCK-BASED
EMPLOYEE COMPENSATION
COST, NET OF TAX EFFECT,
UNDER FAIR VALUE
ACCOUNTING                             0.01               0.01               0.01               0.02
                              -------------      -------------      -------------      -------------
PRO FORMA LOSS PER
SHARE - BASIC AND DILUTED     $       (0.13)     $       (0.28)     $       (0.21)     $       (0.43)
                              -------------      -------------      -------------      -------------
</TABLE>

      There were 2,000,000  options  granted during the three months ended March
31,  2004.  As of March 31,  2004 and 2003 there were  4,692,700  and  3,579,387
options outstanding, respectively.

      As of March 31, 2004 and 2003,  the Company had  warrants  outstanding  of
7,037,036, with exercise prices ranging between $0.00 and $19.47 and expirations
extending through March 2012.

Loss Per Share

      Basic loss per share was  computed  using the weighted  average  number of
outstanding common shares. Diluted per share amounts when applicable include the
effect of  dilutive  common  stock  equivalents  from the  assumed  exercise  of
options,  warrants  and the  convertible  preferred  stock.  Dilutive  per share
amounts are computed  excluding common stock  equivalents  since their inclusion
would  be  anti-dilutive.  Total  shares  issuable  upon the  exercise  of stock
options,  warrants and the conversion of preferred stock for the as of March 31,
2004 and 2003 were 15,400,954 and 13,342,641, respectively.


                                       7
<PAGE>

3.    GOING CONCERN

      The Company has  continued to incur  consolidated  net losses and negative
cash flows from operations.  Additionally,  the Company has significant deficits
in  both  working  capital  and  stockholders`   equity.   These  factors  raise
substantial  doubt about the Company`s  ability to continue as a going  concern.
The financial  statements do not include any adjustments  that might result from
the outcome of this  uncertainty.  As a result,  management  of ABWG may seek to
raise  additional  capital from time to time to fund operations  through private
placements of equity or debt instruments.  There can be no assurance that any of
these alternatives will be successful.

4.    NET CAPITAL REQUIREMENTS

      Direct is subject to the SEC's  Uniform Net Capital Rule ("Rule  15c3-1").
In accordance with this rule, Direct is required to maintain defined minimum net
capital  equal to the greater of $5,000 or 6-2/3% of aggregate  indebtedness  as
defined.  As of March 31,  2004,  Direct had net  capital  of $42,015  which was
$30,435 in excess of its minimum requirement.

      AB Watley  Futures  is  subject to minimum  net  capital  requirements  of
several regulatory  organizations,  the most restrictive of which is the greater
of $30,000 or 4% of its "funds required to be segregated and secured",  as these
terms are defined.  As of March 31, 2004,  ABW Futures had net capital  $32,065,
which was $2,065 in excess of the minimum requirement.

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

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

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

      The Company seeks to control the risks associated with these activities by
reviewing the credit  standing of each customer and  counterparty  with which it
does business. Further, working with the clearing brokers, it requires customers
to maintain margin collateral in compliance with various regulatory and internal
company policy  guidelines.  The clearing brokers monitor required margin levels
daily and, pursuant to such guidelines,  request customers to deposit additional
collateral or reduce securities positions when necessary. The Company's exposure
to these risks becomes magnified in volatile markets.  As of March 31, 2004, the
Company  has  provided a reserve for  uncollectible  receivables  from  clearing
brokers in the amount of $1,012,735.

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

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


                                       8
<PAGE>

6.    REDEEMABLE CONVERTIBLE PREFERRED STOCK

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

      Pursuant to the Purchase  Agreement and the Registration  Rights Agreement
(the "Registration Agreement"),  the Company was required to file a registration
statement  (the  "Registration  Statement")  with the  Securities  and  Exchange
Commission  registering for resale the 2,135,700 shares of Common Stock issuable
upon the conversion of the shares of Preferred  Stock,  and the 1,629,069 shares
of Common Stock subject to purchase  upon exercise of the warrants.  The Company
has not yet  filed a  Registration  Statement  and  will not be able to have the
Registration  Statement filed and declared effective within the period required.
A penalty of 2% of the liquidation  preference  value of the Preferred Stock for
each thirty-day period accrues to each holder of Preferred Stock and is added to
the liquidation  preference  amount until cured. In June 2003 the holders of the
Preferred  Stock  executed an agreement  which waived their rights to penalties,
dividends  and stock  issuances  during the period June 1, 2003  through May 31,
2004. For the year ended September 30, 2003,  penalties accrued through June 30,
2003 in the amount of  $1,070,593  were  reversed  and  recorded  as  additional
paid-in-capital.

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

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

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

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

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

      As of March 31, 2004 and  September 30, 2003,  the dilutive  effect of the
conversion of preferred stock would result in the issuance of 3,671,218 shares.

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

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

      The impact of the preferred stock  conversion and the issuance of warrants
was to  decrease  Series  A  Preferred  Stock  by  $6,867,001  and  to  increase
Additional Paid-in Capital the same amount.


                                       9
<PAGE>

7.    NOTES AND LOANS PAYABLE

      The Company's  outstanding  obligation under notes and loans payable as of
March 31, 2004 and September 30, 2003 was as follows:


                                         March 31, 2004   September 30, 2003
                                         --------------   ------------------
Borrowings under line of credit            $3,082,826         $3,082,826
Notes payable to former officer               700,000            700,000
Loans payable - other                         494,869                 --
                                           ----------         ----------
                                           $4,277,695         $3,782,826
                                           ==========         ==========


      On December 23, 2003, the Company  borrowed  $1,800,000 from a third party
at the rate of 20% per  annum.  On  January  16,  2004 the  Company  repaid  the
$1,800,000. Subsequently, during January and February 2004, the Company borrowed
an additional $369,869 from the same third party at the rate of 20% per annum.

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

      In March 2002, one of the holders of the Company's  Preferred  Stock led a
group that granted a line of credit of  $4,200,000  to the  Company.  Borrowings
under  the line of credit  are  payable  on demand  after  June 18,  2002,  with
interest  payable  at 10%.  The  proceeds  of the loans  were  used for  working
capital.  Additionally, one member of the group was granted warrants to purchase
1,000,000  shares of the Company's Common Stock at an exercise price of $0.918 a
share in connection with the loan facility and a consultant retained by a member
of the  group  was also  granted  warrants  to  purchase  50,000  shares  of the
Company's Common Stock at an exercise price of $0.918 a share. The fair value of
the warrants were  amortized and recorded as interest  expense.  As of March 31,
2004,  the  Company  has  borrowed  $3,082,826  under this  commitment,  and has
recorded  accrued interest payable of $667,424.  The loan is  collateralized  by
certain assets of the Company as defined in the loan agreement.

      In June  2004,  certain  note  holders  agreed to forgive  notes  payable,
including accrued  interest,  in the amount of $1,086,548 in return for warrants
to purchase  987,771  shares of common stock of the Company.  The exercise price
for each of the common  shares to be received  upon  exercise of the warrants is
$0.01. The warrants have a term of seven years.

      In July 2004, the Company and certain note holders reached an agreement to
forgive notes payable,  including accrued interest,  in the amount of $2,621,815
in return for  warrants  to  purchase  1,000,000  shares of common  stock of the
Company.  The exercise  price for each of the common  shares to be received upon
exercise of the warrants is $0.91.  In addition  the Company  agreed to amend an
existing warrant agreement, for 1,000,000 shares of common stock of the Company,
held by the note holder to reflect a decrease in the  exercise  price from $0.91
to $0.01.  The warrants will have a term of seven years.  There was no financial
statement impact for the amendment to the warrant exercise price.

      The impact of the  forgiveness  of the notes  payable and the  issuance of
warrants was to decrease Notes Payable by $3,082,826 and to increase Additional
Paid-in Capital the same amount.

8.    SECURED DEMAND NOTE AND SUBORDINATED BORROWINGS

Secured Demand Note

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

      During  the  term  of  the  SDN,  the  Company  liquidated   approximately
$1,798,000 of the SDN  Collateral.  This cash was used by the Company to support
its  operations.  This  transaction is reflected in the  accompanying  Condensed
Consolidated  Statements of Financial  Condition as a reduction of the principal
amount of the SDN.


                                       10
<PAGE>

Subordinated Borrowings

      At March 31, 2004  subordinated  borrowings  consisted  of  $5,530,000  of
subordinated  notes payable to general  creditors,  of which $5,000,000  bearing
interest  at 7% is due on June  30,  2004,  $200,000  bearing  interest  at 15%,
$150,000  bearing  interest at 13%, and the balance of $180,000 bearing interest
at 12% are due on October  31,  2006.  In  connection  with the  issuance of the
$5,000,000  subordinated  borrowing the Company issued warrants to the lender to
purchase 500,000 shares of ABWG common stock at $0.75.

      The Company  recorded a debt  discount in the amount of $273,724  which is
amortized to interest expense over the life of the subordinated  loan.  Interest
expense  relating to the  warrants  was $45,621 for the quarter  ended March 31,
2004.  At  March  31,  2004,  the  unamortized  debt  discount  related  to  the
subordinated  loan amounted to $45,621.  On January 22, 2004, the NASD rescinded
its  approval  of the  Subordinated  Borrowing  Agreement.  A.B.  Watley  ceased
operations  in  January  2004.  In  February  2004,  A.B.  Watley  withdrew  its
registration as a broker/dealer.  To the extent  borrowings are required for the
Company's continued compliance with minimum net capital  requirements,  they may
not be repaid. Of the total subordinated borrowings, $180,000 is from an officer
and  shareholder  of ABWG.  On September  29, 2003,  subordinated  borrowings of
$530,000  bearing  interest at 12% to 15% per annum were converted to equity for
net capital  purposes.  Interest expense of approximately  $105,000 and $105,000
was incurred on subordinated  borrowings during the quarter ended March 31, 2004
and 2003, respectively.

      SUBORDINATED BORROWINGS AS OF MARCH 31, 2004 AND SEPTEMBER 30, 2003 ARE AS
FOLLOWS:

    MARCH 31, 2004    SEPTEMBER 30, 2003     INTEREST RATE        MATURITY
  -----------------   ------------------     -------------    ----------------
      $ 5,000,000         $5,000,000              7%           JUNE   30, 2004
      $   125,000           $125,000             12%          OCTOBER 31, 2006
      $    55,000            $55,000              0%          OCTOBER 31, 2006
      $   200,000           $200,000             15%          OCTOBER 31, 2006
      $   150,000           $150,000             13%          OCTOBER 30, 2006
  ------------------    -----------------
      $ 5,530,000         $5,530,000
  ==================    =================

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

9.    COMMITMENTS AND CONTINGENCIES

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

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

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


                                       11
<PAGE>


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

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

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

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

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

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

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

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


                                       12
<PAGE>

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

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

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

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

      We are  defendant  in an action  titled Lehr  Construction  Corp.  v. A.B.
Watley Group,  Inc.,  Supreme Court of New York,  County of New York,  Index No.
600276/02,  filed November 12, 2003.  This action is for damages  arising out of
the alleged  breach of a  construction  contract.  Plaintiff  sought  damages of
approximately  $233,794.  On March 6, 2003, the parties  reached a settlement in
which the Company  consented to a judgment in the amount of  $295,857,  less any
payments made by A.B. Watley Group Inc., and the parties  simultaneously entered
into a  Forbearance  Agreement  (the  "Agreement"),  which  set  forth a payment
schedule  for A.B.  Watley  Group Inc.  A.B.  Watley Group Inc. has paid $65,000
towards the Judgment.  On December 17, 2003,  Plaintiff issued A.B. Watley Group
Inc. a Notice of Default under the Agreement,  which A.B.  Watley Group Inc. has
failed to cure.  Under the Agreement,  Plaintiff may execute on the  outstanding
balance  of the  judgment  in the  amount of  $179,917,  (a  provision  has been
provided in the financial  statements)  without  further  notice to A.B.  Watley
Group Inc.  Plaintiff has taken efforts to seek  information to collect upon the
judgment.

      We are defendant in an action titled A.B.  Watley  Group,  LLC/  Martinez,
2-4173-03-36  Section 806  Sarbanes-Oxley  Act of 2002,  filed June 18, 2003. On
July 11, 2003, the U.S. Department of Labor ("DOL") gave the Company notice that
John Martinez,  a former Financial and Operations Principal for the Company, had
filed a Complaint  against the Company under  Section 806 of the  Sarbanes-Oxley
Act of 2002 (the "Act").  The Complaint alleges that the Company  terminated Mr.
Martinez  in  violation  of the Act for  raising  net-capital  issues  with  the
National  Association of Securities  Dealers,  Inc. - a private  self-regulatory
organization.  The Complaint  seeks:  (i) Mr.  Martinez' base pay (at the annual
rate of $150,000 per annum) for the period from March 14, 2003 through  April 7,
2003;  (ii) the  difference  between his current  base pay with his new employer
($130,000)  and his base pay at the  Company  for a  reasonable  period of time;
(iii)  relocation  costs  incurred in obtaining  new  employment  in  Baltimore,
Maryland;  (iv) litigation costs; (v) his commuting costs during the time period
April 7,  2003  until  the  unspecified  time of his  relocation  in  Baltimore,
Maryland;  (vi)  interest  on the  monies  due him;  and  (vii)  any  additional
compensation  deemed  appropriate  by the DOL.  On July 30,  2003,  the  Company
responded to the complaint and submitted its response and evidentiary  materials
to the DOL. The Response denies all liability and raised several defenses to the
Complaint.  On March 9, 2004,  the DOL gave  notice  that it had  completed  its
investigation and dismissed the complaint. Mr. Martinez subsequently requested a
hearing on the  determinations  made by the DOL. The DOL has  scheduled a formal
hearing on the merits of Mr.  Martinez'  complaint  for  August  17,  2004.  The
Company intends to vigorously defend this matter.

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


                                       13
<PAGE>


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

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

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

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

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

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

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


                                       14
<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. We are not currently involved in any proceeding by a governmental agency
or  self-regulatory  organization,  the  outcome of which is  expected to have a
material  adverse effect on our business.  There can be no assurance that one or
more future  disciplinary  actions,  if decided  adversely  us, would not have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

10.   INCOME TAXES

      The Company has net  operating  loss  carryforwards  ("NOL's") for federal
income tax purposes  approximating  $69,000,000  as of March 31, 2004. The NOL's
are scheduled to expire no sooner than September 30, 2013.

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

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

      The  following  discussion  of the  financial  condition  and  results  of
operations of the Company  should be read in conjunction  with the  consolidated
financial  statements and notes thereto  included in the Company's Annual Report
on Form 10-K and this Form 10-QSB. The results of operations for interim periods
are not necessarily indicative of the results for the entire fiscal year.

FORWARD LOOKING STATEMENTS

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

RESULTS OF OPERATIONS

THREE MONTHS  ENDED MARCH 31, 2004  COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2003

      REVENUES.  Total  revenues  for the  quarter  ended  March  31,  2004 were
$2,968,305  a  decrease  of  $526,411  or 15.1%,  as  compared  to  revenues  of
$3,494,716,  for the quarter ended March 31, 2003. Components of the decrease in
revenues are as follows:

      Commissions:  For the three-month  period ending March 31, 2004, we earned
commission  revenues of $1,752,534  representing a $537,837 or 44.3% increase as
compared to commission  revenues of $1,214,697 for the  corresponding  period in
2003.  This increase in commission  revenues  resulted  from  increased  trading
volumes and the conversion of certain of our former traders to customers.

      Data Service Fees: Our revenues from data service fees for the three-month
period  ending  March 31, 2004 were $24,445 as compared to the March 31, 2003 of
$100,865  representing a decrease of $76,420 or 75.8%.  This decrease was due to
customers moving from third party software to the Ultimate Trader software.


                                       15
<PAGE>


      Revenues from Principal  Transactions:  Revenues from proprietary security
transactions  decreased  by 55.6%.  We earned  $891,421  from such  transactions
during the  three-month  period  ending March 31, 2004 as compared to $2,009,365
for the  three-month  period  ending March 31, 2003.  This  decrease in revenues
resulted from  reductions in proprietary  trading volumes and,  ultimately,  the
discontinuance of proprietary trading in February 2004.

      Interest and Other Income:  Interest and Other Income for the  three-month
period  ending  March 31,  2004 was  $299,905  representing  a $130,116 or 76.6%
increase as compared to $169,789  for the  three-month  period  ending March 31,
2003.

      Interest Expense:  Interest expense for March 31, 2004 and March 31, 2003,
respectively,  were  $327,792 and  $277,629.  This  increase of $50,163 or 18.1%
resulted from an increase in subordinated loans and company borrowings.

      Net Revenues:  As a result of the  foregoing,  for the quarter ended March
31, 2004 total net revenues were $2,640,513  compared to the quarter ended March
31, 2003 of $3,217,087,  net revenues decreased by $576,574 or 17.9%.  Customers
in the United States  generated the majority of revenues and no single  customer
or group of customers accounted for 10% or more of our revenues.

      EXPENSES.  Total  expenses  for the  quarter  ended  March  31,  2004 were
$4,236,686,  a  $2,301,522  or 35.2%  decrease  compared  to total  expenses  of
$6,538,208 for the three-month  period ending March 31, 2003.  Components of the
decrease in expenses are as follows:

      Commissions,  Floor  Brokerage and Clearing  Charges:  For the three-month
periods  ending  March 31, 2004 and March 31, 2003 we  incurred  $1,304,732  and
$1,536,972 of Commissions,  Floor Brokerage and Clearing Charges,  respectively.
This $232,240,  or 15.1%,  decrease in costs represent favorable cost reductions
and reductions  proprietary trading activity for payments to our clearing firms,
ECN'S and floor  brokers who  facilitate  securities  transactions  for both our
customers and our own proprietary accounts.

      Employee Compensation and Related Costs: Employee Compensation and Related
Costs of $1,223,332 for the three-month  period ending March 31, 2004 reflects a
$833,912 or 40.5%  decrease as compared to  $2,057,244  incurred  for such costs
during  the  three-month   period  ending  March  31,  2003.  This  decrease  is
attributable  to both the  reduction  in the  number of  employees  and to lower
compensation  paid to the  proprietary  trading  division as a result of reduced
trading gains from principal transactions.

      Communications:  Communications  expense for the three-month period ending
March 31, 2004  amounted to $107,862,  a 80.1%  decrease as compared to $542,478
for the  three-month  period ending March 31, 2003.  This  $434,616  decrease is
largely due to the consolidation of various data lines and obtaining competitive
pricing with new vendors.

      Business Development: Our Business Development costs decreased $129,110 to
$(22,560) for the three months ending March 31, 2004 from $106,550 for the three
months  ending March 31,  2003.  This  decrease was due to reducing  advertising
costs and less travel expense for marketing purposes.

      Professional  Services:  Professional Services primarily consists of legal
and  accounting  costs  in  addition  to the  cost  of  external  administrative
consultants.  For the three-month period ending March 31, 2004, our professional
services amounted to $33,327 as compared to $599,706 for the three-month  period
ending  March 31,  2003,  representing  a decrease of  $566,469  or 94.5%.  This
decrease  was  primarily  the  result of  reduced  audit  and  legal  fees and a
favorable settlement of an outstanding balance with former legal counsel.

      Occupancy  and  Equipment:  The costs for  Occupancy and Equipment for the
three-month  period ending March 31, 2004 were $308,983 a decrease of $40,527 or
11.6% compared to the three-month period ending March 31, 2003 of $349,510. Such
costs,  primarily consisting of lease costs for both office space and equipment,
have  decreased  due to  terminated  leases as part of our overall  cost cutting
initiatives.

      Depreciation and Amortization:  Depreciation and Amortization decreased by
$406,451 or 80.6% when comparing $97,868 for the three-month period ending March
31, 2004 to $504,319 for the three-months  ending March 31, 2003,  primarily due
to the disposal of assets subject to such depreciation and amortization.

      Other  Expenses:  For the  three-month  period  ending March 31, 2004,  we
incurred  $159,710 of Other  Expenses,  as  compared  to $841,429  for the three
month-period  ending March 31,  2003.  Other  expenses  decreased by $681,719 or
81.0%  primarily  due to the  holders of our Series A  Preferred  Stock  waiving
rights to penalties and our overall cost cutting initiatives.


                                       16
<PAGE>


      Preferred Stock  Dividends:  For the  three-month  period ending March 31,
2004, we incurred $-0- of Preferred Stock Dividends,  as compared to $94,500 for
the  three-month  period ending March 31, 2003. On June 1, 2003,  the Holders of
the Preferred Stock waived their rights to dividends thorough May 31, 2004.

      Abandonment of Leasehold  Improvements:  In connection  with the Company's
relocation  of its  headquarters  from 40 Wall Street,  New York,  NY to 90 Park
Avenue,  New York. NY, the Company abandoned  leasehold  improvements with a net
book value of $1,023,522 which, in turn, were written-off.

      Net Loss: As a result of the foregoing factors,  our Net Loss decreased by
53.3%,  comparing $1,596,173 for the three-month period ending March 31, 2004 to
$3,415,621 for the three-month period ending March 31, 2003.

SIX MONTHS ENDED MARCH 31, 2004 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2003

      REVENUES.  Total  revenues  for the six months  ended  March 31, 2004 were
$6,061,093 a decrease of 21.0%,  as compared to revenues of  $7,674,416  for the
six months ended March 31, 2003.  Components  of the decrease in revenues are as
follows:

      Commissions:  For the  six-month  period  ending March 31, 2004, we earned
commission  revenues of $3,049,468  representing a $356,795 or 13.3% increase as
compared to commission  revenues of $2,692,673 for the  corresponding  period in
2003.  This increase in commission  revenues  resulted  from  increased  trading
volumes and the conversion of certain of our former traders to customers.

      Data Service  Fees:  Our revenues from data service fees for the six-month
period  ending  March 31, 2004 were $64,361 as compared to the March 31, 2003 of
$262,355  representing  a decrease of 75.5%.  This decrease was due to customers
moving from third party software to the Ultimate Trader software.

      Revenues from Principal  Transactions:  Revenues from proprietary security
transactions  decreased by 40.4%. We earned  $2,356,633  from such  transactions
during the six-month  period ending March 31, 2004 as compared to $3,954,671 for
the six-month  period ending March 31, 2003. This decrease in revenues  resulted
from   reductions  in  proprietary   trading   volumes  and,   ultimately,   the
discontinuance of proprietary trading in February 2004.

      Interest and Other  Income:  Interest  and Other Income for the  six-month
period  ending  March 31,  2004 was  $590,631  representing  a $174,086 or 22.8%
decrease as compared to $764,717 for the six-month period ending March 31, 2003.

      Interest  Expense:  Interest expense for the six month periods ended March
31, 2004 and March 31, 2003,  respectively,  were  $600,273 and  $424,522.  This
increase of $175,751 or 41.4%  resulted from an increase in  subordinated  loans
and company borrowings.

      Net Revenues: As a result of the foregoing, for the six months ended March
31, 2004 total net revenues were  $5,460,820  compared to the  six-months  ended
March 31, 2003 of  $7,249,894,  net revenues  decreased by  $1,789,074 or 24.7%.
Customers in the United States  generated the majority of revenues and no single
customer or group of customers accounted for 10% or more of our revenues.

      EXPENSES.  Total  expenses  for the six months  ended  March 31, 2004 were
$8,014,809,  a  $4,231,033  or 34.6%  decrease  compared  to total  expenses  of
$12,245,842  for the six-month  period ending March 31, 2003.  Components of the
decrease in expenses are as follows:

      Commissions,  Floor  Brokerage  and Clearing  Charges:  For the  six-month
periods  ending  March 31, 2004 and March 31, 2003 we  incurred  $2,478,419  and
$2,552,188 of Commissions,  Floor Brokerage and Clearing Charges,  respectively.
This $73,769, or 2.9%, decrease in costs represent favorable cost reductions and
reductions  proprietary  trading  activity for  payments to our clearing  firms,
ECN'S and floor  brokers who  facilitate  securities  transactions  for both our
customers and our own proprietary accounts.

      Employee Compensation and Related Costs: Employee Compensation and Related
Costs of $2,594,465  for the  six-month  period ending March 31, 2004 reflects a
32.9%  decrease as compared to  $3,865,029  incurred  for such costs  during the
six-month period ending March 31, 2003. This $1,270,564 decrease is attributable
to both the reduction in the number of employees and to lower  compensation paid
to the  proprietary  trading  division as a result of reduced trading gains from
principal transactions.


                                       17
<PAGE>


      Communications:  Communications  expense for the  six-month  period ending
March 31, 2004  amounted to $325,721,  a 60.5%  decrease as compared to $824,926
for the  six-month  period  ending March 31,  2003.  This  $499,205  decrease is
largely due to the consolidation of various data lines and obtaining competitive
pricing with new vendors.

      Business Development:  Our Business Development costs decreased $48,919 to
$79,330  for the six months  ending  March 31,  2004 from  $128,249  for the six
months  ending March 31,  2003.  This  decrease was due to reducing  advertising
costs and less travel expense for marketing purposes.

      Professional  Services:  Professional Services primarily consists of legal
and  accounting  costs  in  addition  to the  cost  of  external  administrative
consultants.  For the six-month  period ending March 31, 2004, our  professional
services  amounted to $273,571 as compared to $998,730 for the six-month  period
ending  March 31,  2003,  representing  a decrease of  $725,159  or 72.6%.  This
decrease  was  primarily  the  result of  reduced  audit  and  legal  fees and a
favorable settlement of an outstanding balance with former legal counsel.

      Occupancy  and  Equipment:  The costs for  Occupancy and Equipment for the
six-month  period  ending March 31, 2004 were $666,980 a decrease of $774,069 or
53.7% compared to the six-month period ending March 31, 2003 of $1,441,049. Such
costs,  primarily consisting of lease costs for both office space and equipment,
have  decreased  due to  terminated  leases as part of our overall  cost cutting
initiatives.

      Depreciation and Amortization:  Depreciation and Amortization decreased by
$805,339 or 80.2% when comparing  $198,387 for the six-month period ending March
31, 2004 to $1,003,726 for the six-months  ending March 31, 2003,  primarily due
to the disposal of assets subject to such depreciation and amortization.

      Other  Expenses:  For the  six-month  period  ending  March 31,  2004,  we
incurred  $374,414 of Other  Expenses,  as compared  to  $1,347,658  for the six
month-period  ending  March  31,  2003.  Other  expenses  decreased  by 72.2% or
$973,244  primarily  due to the holders of our Series A Preferred  Stock waiving
rights to penalties and our overall cost cutting initiatives.

      Preferred Stock Dividends: For the six-month period ending March 31, 2004,
we incurred $-0- of Preferred Stock  Dividends,  as compared to $189,000 for the
six-month  period  ending  March 31, 2003.  On June 1, 2003,  the Holders of the
Preferred Stock waived their rights to dividends thorough May 31, 2004.

      Abandonment  of  Leasehold  Improvements:  In  connection  with  Company's
relocation  of its  headquarters  from 40 Wall Street,  New York,  NY to 90 Park
Avenue,  New York. NY, the Company abandoned  leasehold  improvements with a net
book value of $1,023,522 which, in turn, were written-off.

      Net  Loss:  As a  result  of the  fore-mentioned  factors,  our  Net  Loss
decreased by 50.7%,  comparing  $2,553,989 for the six-month period ending March
31, 2004 to $5,184,948 for the six-month period ending March 31, 2003.

GOING CONCERN

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


                                       18
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

      Cash  utilized in operating  activities  during the six months ended March
31, 2004 was $423,201,  as compared to cash provided by operating  activities of
$120,449 for the six months ended March 31, 2003. Cash was  principally  used to
fund the net loss of $2,553,989,  net of non-cash items  including  depreciation
and  amortization  of  $198,386,   abandonment  of  leasehold   improvements  of
$1,023,522,  debt discount in  connection  with issuance of warrants of $91,241,
Financing  charge in  connection  with Common stock issued with notes payable of
$87,500, and non-cash  compensation/service  costs of $9,334. In addition,  cash
was provided by decreases in securities  owned of $1,309,145,  loans  receivable
from related party of $14,500, security deposits of $30,000, offset by increases
in  receivables  from  clearing  brokers of $18,547 and other assets of $44,606.
Cash was provided by an increase in accounts payable and accrued  liabilities of
$458,798,  offset by decreases in payable to clearing  broker of $1,000,475  and
securities sold, not yet purchased of $28,010.

      Cash provided by financing  activities was $449,869  during the six months
ended March 31, 2004 compared to cash used in the amount of $235,038  during the
six months ended March 31, 2003.  Cash provided by financing  activities  during
the six months ended March 31,  2004,  principally  consisted  of proceeds  from
notes payable of  $1,950,000,  offset by payments of notes payable of $1,455,131
and capital distribution to LLC Class B members of $45,000.

NET OPERATING LOSS CARRYFORWARDS

      The  Company's net operating  loss  carryforwards  are scheduled to expire
beginning  in the year 2013.  The  issuance  of  additional  equity  securities,
together  with the Company's  recent  financing  and public  offering,  could be
deemed to result in an  ownership  change  and thus  could  limit our use of the
Company's net operating losses. If the Company achieves  profitable  operations,
any significant  limitation on the utilization of our net operating losses would
have the effect of  increasing  our tax  liability  and  reducing net income and
available cash reserves.

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

RELEVANT ACCOUNTING STANDARDS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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


                                       19
<PAGE>

RISK FACTORS

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

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

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

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

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

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

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

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

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


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

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

ITEM 4. CONTROLS AND PROCEDURES

      During the quarter,  an evaluation was performed under the supervision and
with the  participation  of the  Company's  management,  including the Principal
Executive Officer and the Principal  Financial Officer,  of the effectiveness of
the design and operation of the Company's  disclosure  controls and  procedures.
Based on that  evaluation,  the  Company's  management,  including the Principal
Executive  Officer  and the  Principal  Financial  Officer,  concluded  that the
Company's  disclosure  controls and  procedures  were  effective as of March 31,
2004. There have been no significant  changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to March 31, 2004.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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


                                       20
<PAGE>


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

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

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

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

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

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

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

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


                                       21
<PAGE>


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

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

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

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

      We are  defendant  in an action  titled Lehr  Construction  Corp.  v. A.B.
Watley Group,  Inc.,  Supreme Court of New York,  County of New York,  Index No.
600276/02,  filed November 12, 2003.  This action is for damages  arising out of
the alleged  breach of a  construction  contract.  Plaintiff  sought  damages of
approximately  $233,794.  On March 6, 2003, the parties  reached a settlement in
which the Company  consented to a judgment in the amount of  $295,857,  less any
payments made by A.B. Watley Group Inc., and the parties  simultaneously entered
into a  Forbearance  Agreement  (the  "Agreement"),  which  set  forth a payment
schedule  for A.B.  Watley  Group Inc.  A.B.  Watley Group Inc. has paid $65,000
towards the Judgment.  On December 17, 2003,  Plaintiff issued A.B. Watley Group
Inc. a Notice of Default under the Agreement,  which A.B.  Watley Group Inc. has
failed to cure.  Under the Agreement,  Plaintiff may execute on the  outstanding
balance  of the  judgment  in the  amount of  $179,917,  (a  provision  has been
provided in the financial  statements)  without  further  notice to A.B.  Watley
Group Inc.  Plaintiff has taken efforts to seek  information to collect upon the
judgment.

      We are defendant in an action titled A.B.  Watley  Group,  LLC/  Martinez,
2-4173-03-36  Section 806  Sarbanes-Oxley  Act of 2002,  filed June 18, 2003. On
July 11, 2003, the U.S. Department of Labor ("DOL") gave the Company notice that
John Martinez,  a former Financial and Operations Principal for the Company, had
filed a Complaint  against the Company under  Section 806 of the  Sarbanes-Oxley
Act of 2002 (the "Act").  The Complaint alleges that the Company  terminated Mr.
Martinez  in  violation  of the Act for  raising  net-capital  issues  with  the
National  Association of Securities  Dealers,  Inc. - a private  self-regulatory
organization.  The Complaint  seeks:  (i) Mr.  Martinez' base pay (at the annual
rate of $150,000 per annum) for the period from March 14, 2003 through  April 7,
2003;  (ii) the  difference  between his current  base pay with his new employer
($130,000)  and his base pay at the  Company  for a  reasonable  period of time;
(iii)  relocation  costs  incurred in obtaining  new  employment  in  Baltimore,
Maryland;  (iv) litigation costs; (v) his commuting costs during the time period
April 7,  2003  until  the  unspecified  time of his  relocation  in  Baltimore,
Maryland;  (vi)  interest  on the  monies  due him;  and  (vii)  any  additional
compensation  deemed  appropriate  by the DOL.  On July 30,  2003,  the  Company
responded to the complaint and submitted its response and evidentiary  materials
to the DOL. The Response denies all liability and raised several defenses to the
Complaint.  On March 9, 2004,  the DOL gave  notice  that it had  completed  its
investigation and dismissed the complaint. Mr. Martinez subsequently requested a
hearing on the  determinations  made by the DOL. The DOL has  scheduled a formal
hearing on the merits of Mr.  Martinez'  complaint  for  August  17,  2004.  The
Company intends to vigorously defend this matter.


                                       22
<PAGE>


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

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

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

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

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

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

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

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


                                       23
<PAGE>


ITEM 2. CHANGES IN SECURITIES

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

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

ITEM 3. DEFAULT UPON SENIOR SECURITIES

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

      Pursuant to the Purchase  Agreement and the Registration  Rights Agreement
(the "Registration Agreement"),  the Company was required to file a registration
statement  (the  "Registration  Statement")  with the  Securities  and  Exchange
Commission  registering  for resale the shares of Common Stock issuable upon the
conversion of the shares of Preferred  Stock in the amount of 2,135,700  shares,
and upon the  exercise of warrants  to  purchase  shares of Common  Stock in the
amount  of  1,629,069.  As of the  date  hereof,  the  Company  has not  filed a
Registration  Statement and will not be able to have the Registration  Statement
filed and  declared  effective  within the  period  required.  As a result,  the
Company is in default of the Purchase Agreement and the Registration  Agreement.
A penalty of 2% of the liquidation  preference  value of the Preferred Stock for
each thirty-day period accrues to each holder of Preferred Stock and is added to
the liquidation  preference amount until cured. As of June 30, 2003,  liquidated
damages of approximately $692,594 has been accrued to the preferred holders.

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

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

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

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

      None.

ITEM 5. OTHER INFORMATION

      None.


                                       24
<PAGE>


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

      (a)   Exhibits

         10.1     Settlement  Agreement  dated June,  2004 by and between Penson
                  Financial Services, Inc., Integrated Trading Solutions,  Inc.,
                  A.B.  Watley Group Inc.,  A.B.  Watley,  Inc., and A.B. Watley
                  Direct, Inc.

         10.2     Warrant Agreement dated June, 2004, by and between A.B. Watley
                  Group Inc., Alan W. Steinberg  Limited  Partnership and Rivera
                  Enid Limited Partnership.

         10.3     Warrant Agreement dated June, 2004, by and between A.B. Watley
                  Group Inc., DMG Legacy Fund LLC, DMG Legacy Institutional Fund
                  LLC, DMG Legacy International Ltd. and SDS Merchant Fund, L.P.

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

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

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

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

      (b)   Reports on Form 8-K

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



                                       25
<PAGE>


                                    SIGNATURE

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


Signatures                          Title                       Date

/s/ STEVEN MALIN         Chairman of the Board and
-------------------      Principal Executive Officer         July 23, 2004
Steven Malin

/s/ ROBERT MALIN         Vice-Chairman, Principal
-------------------      Financial Officer and Director      July 23, 2004
Robert Malin


                                       26