<PAGE>

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                For the quarterly period ended: December 31, 2002
                                                -----------------

                                       OR

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

                         Commission file number: 1-14897


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


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


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


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

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

                                      None

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

                         Common Stock, $0.001 par value

                                (Title of Class)

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

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



<PAGE>




                             A.B. Watley Group Inc.


<TABLE>
<CAPTION>
Index

PART I-- FINANCIAL INFORMATION                                                                              Page

           Item 1. Financial Statements

            Consolidated Statements of Financial Condition
<S>                                                                                                          <C>
                           As of December 31, 2002 (Unaudited) and September 30, 2002 ...................     3

            Consolidated Statements of Operations

                           For the Three Months Ended December 31, 2002 and 2001 (Unaudited) ............     4

            Consolidated Statements of Cash Flows

                           For the Three Months Ended December 31, 2002 and 2001 (Unaudited) ............     5

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


            Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations    11


            Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........................    13


            Item 4. Controls and Procedures .............................................................    14

PART II-- OTHER INFORMATION

            Item 1. Legal Proceedings ...................................................................    15

            Item 2. Changes in Securities ...............................................................    16

            Item 3. Default on Senior Securities ........................................................    16

            Item 4. Submission of Matters to a Vote of Security Holders .................................    16

            Item 5. Other Information ...................................................................    16

            Item 6. Exhibits and Reports on Form 8-K ....................................................    16

Signatures ..............................................................................................    17


Certifications ..........................................................................................    18
</TABLE>

                                      -2-
<PAGE>

PART I -- FINANCIAL INFORMATION
Item 1.  Financial Statements


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


<TABLE>
<CAPTION>
                                                                                December 31,         September 30,
                                                                                    2002                  2002
                                                                                ------------         ------------
                                                                                 (Unaudited)
Assets:
<S>                                                                                      <C>                  <C>
Cash and cash equivalents                                                       $    830,476         $    213,766
Restricted cash                                                                       63,091              292,565
Receivables from clearing brokers                                                  1,257,887            1,028,588
Securities owned at market value                                                       2,006            2,145,472
Property and equipment, net of accumulated depreciation
          of $5,816,842 and $5,317,435                                             2,390,303            2,889,711
Loans receivable from related party                                                  258,226              258,226
Security deposits                                                                    129,296              132,001
Other assets                                                                         103,624               76,291
                                                                                 ------------         ------------
Total Assets                                                                    $  5,034,909         $  7,036,620
                                                                                 ============         ============

Liabilities and Stockholders` Equity:
Accounts payable and accrued liabilities                                            7,849,260            8,409,141
Accrued liabilities to LLC Class B Members                                          2,492,272            2,492,310
Notes payable                                                                       3,332,826            3,282,826
Notes payable to former officers                                                      700,000              700,000
Lease obligations and other                                                         1,316,788            1,524,195
Subordinated borrowings                                                               350,000              350,000
Subordinated borrowings from officer                                                  180,000              180,000
                                                                                 ------------         ------------
                                                                                   16,221,146           16,938,472
                                                                                 ------------         ------------


Series A Redeemable Convertible Preferred Stock $0.01 par value, 690 shares
     authorized and 630 issued and outstanding at December 31, 2002 and
     September 30, 2002, respectively, and accrued dividends
     (liquidation preference  - $6,300,000)                                        7,402,094            6,926,487
                                                                                 ------------         ------------

Stockholders` Deficit:
Preferred Stock $0.01 par value, 1,000,000 shares authorized and
     none issued and outstanding at December 31, 2002 and September 30, 2002               --                   --
Common stock, $0.001 par value, 20,000,000 shares authorized at December 31, 2002 and
   September 30, 2002 and 12,508,852 issued and outstanding at December 31, 2002 and
   September 30, 2002                                                                  12,509               12,509
Additional paid-in capital                                                         45,725,069           45,819,569
Option costs                                                                          (23,329)            (32,663)
Accumulated deficit                                                               (64,302,580)        (62,627,754)
                                                                                 ------------         ------------
Total Stockholders` Deficit                                                       (18,588,331)        (16,828,339)
                                                                                 ------------         ------------

Total Liabilities and Stockholders` Deficit                                      $  5,034,909         $  7,036,620
                                                                                 ============         ============

</TABLE>

                 See notes to consolidated financial statements

                                      -3-
<PAGE>



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


<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                                  December 31,
                                                                                  ------------
                                                                            2002                 2001
                                                                        ------------         ------------
Revenues:
<S>                                                                       <C>                  <C>
Commissions                                                               $1,477,976           $6,963,713
Data service fees                                                             16,897              136,333
Principal transactions                                                     1,945,306              367,360
Interest income                                                               35,698              582,894
Other income                                                                 703,823              238,401
                                                                        ------------         ------------
Total revenues                                                             4,179,700            8,288,701

Interest expense                                                             146,893              884,494
Interest expense - related parties                                              --                132,216
                                                                        ------------         ------------
Net revenues                                                               4,032,807            7,271,991
                                                                        ------------         ------------

Expenses and other charges:
Commissions, floor brokerage and clearing charges                          1,015,216            4,343,278
Employee compensation and related costs                                    1,807,785            3,376,391
Communications                                                               282,448              847,499
Business development                                                          21,699              262,343
Professional services                                                        399,024              454,913
Occupancy and equipment costs                                              1,091,539            1,779,373
Depreciation and amortization                                                499,407            2,218,979
Other expenses                                                               506,229              540,707
Loss on investments                                                           84,287                 --
Minority interest applicable to LLC Class B members                             --               (396,503)
                                                                        ------------         ------------
Total expenses                                                             5,707,634           13,426,980
                                                                        ------------         ------------

Loss before income taxes and extraordinary item                           (1,674,827)          (6,154,989)
Income tax provision                                                            --                 (2,634)
                                                                        ------------         ------------
Loss before extraordinary item                                            (1,674,827)          (6,157,623)
Extraordinary loss on extinguishment of debt                                    --               (250,000)
                                                                        ------------         ------------
Net loss                                                                $ (1,674,827)        $ (6,407,623)
                                                                        ============         ============
Basic and diluted loss per common share:

Loss before extraordinary item                                          $ (1,674,827)        $ (6,157,623)
       Deemed dividend to preferred shareholders - beneficial conversion                       (1,639,797)
       Deemed dividend to preferred shareholders - accretion of redemption                           -
       Preferred stock dividends                                             (94,500)             (78,750)
                                                                        ------------         ------------
Loss before extraordinary item attributable to common shareholders        (1,769,327)          (7,876,170)
       Extraordinary loss on extinguishment of debt                                              (250,000)
                                                                        ------------         ------------
Net loss attributable to common shareholders                            $ (1,769,327)        $ (8,126,170)
                                                                        ============         ============


Loss before extraordinary item                                          $      (0.14)        $      (0.66)
Extraordinary item                                                      $          -         $      (0.02)
Basic and diluted loss per share                                        $      (0.14)        $      (0.68)

Weighted average shares outstanding                                       12,508,852           11,966,125


</TABLE>

                 See notes to consolidated financial statements

                                      -4-
<PAGE>



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

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                     December 31,
                                                                                   --------------
                                                                               2002                2001
                                                                           -----------         -----------
Cash flows used in operating activities:
<S>                                                                        <C>                 <C>
Net loss                                                                   ($1,674,827)        ($6,407,623)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
    Non-cash compensation and service costs                                      9,334             558,915
    Options costs                                                                 --                46,265
    Penanties-preferred stock                                                  381,107                --
    Software license fees received                                                --                77,573
    Minority interest applicable to LLC Class B
    Members                                                                       --              (396,503)
    Depreciation and amortization                                              499,408           2,218,979
    Loss on extinguishment of debt                                                --               250,000
    Changes in assets and liabilities:
    (Increase) decrease in operating assets:
        Restricted cash                                                        229,474              (9,504)
        Receivables from clearing brokers                                     (229,299)         (1,764,393)
        Securities owned                                                     2,143,466           1,827,844
        Loans receivable from related party                                       --               (70,500)
        Security deposits                                                        2,705              (9,012)
        Other assets                                                           (27,332)            209,588
    Increase (decrease) in operating liabilities:
        Accounts payable and accrued liabilities                              (559,881)            493,657
        Securities sold, not yet purchased                                        --            (1,004,447)
        Lease obligations and other                                           (207,407)              9,514
                                                                           -----------         -----------
    Net cash provided by (used in) operating activities                    $   566,748         ($3,969,647)
                                                                           -----------         -----------

Cash flows from (used in) investing activities:
Purchases of property and equipment, net                                          --              (115,419)
                                                                           -----------         -----------
    Net cash used in investing activities                                         --              (115,419)
                                                                           -----------         -----------

Cash flows from financing activities:
Proceeds from sale of preferred stock                                             --             3,324,291
Proceeds of notes payable                                                      250,000                --
Repayment of notes payable                                                    (200,000)           (185,983)
Proceeds from notes payable to former officer                                     --               700,000
Payment of capital lease obligations                                              --              (168,289)
Capital (distribution to) contribution by LLC Class B
members                                                                            (38)            232,914
                                                                           -----------         -----------
    Net cash provided by financing activities                                   49,962           3,902,933
                                                                           -----------         -----------

Net increase (decrease) in cash and cash equivalents                           616,710            (182,311)
Cash and cash equivalents at beginning of period                               213,766             508,053
                                                                           -----------         -----------
Cash and cash equivalents at end of period                                 $   830,476         $   325,742
                                                                           ===========         ===========
Supplemental non-cash financing activities
and disclosure of cash flow information:

Exchange of subordinated debt for preferred stock                                 --           $ 2,750,000
                                                                           -----------         -----------
Cash paid for:
               Interest                                                    $    52,268         $   132,655
                                                                           -----------         -----------
               Taxes                                                              --           $     2,634
                                                                           -----------         -----------
</TABLE>
                 See notes to consolidated financial statements

                                      -5-
<PAGE>

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



1.   Organization and Business

     A.B.  Watley  Group  Inc.  ("ABWG"  or  the  "Company")  is a  U.S.  public
corporation.  The Company  conducts  business  primarily  through its  principal
subsidiaries,   A.B.  Watley,  Inc.  ("A.B.  Watley")  and  Integrated  Clearing
Solutions, Inc. ("Integrated").

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


2.   Basis of Presentation

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of America  (GAAP) and reflect all normal  recurring  adjustments
which are, in the opinion of management,  necessary for a fair  presentation  of
the  results  for the  interim  periods  presented.  Pursuant  to the  rules and
regulations  of the  SEC,  certain  footnote  disclosures,  which  are  normally
required  under  GAAP,  have  been  omitted.   It  is  recommended   that  these
consolidated  financial  statements  be read in  conjunction  with  the  audited
consolidated  financial  statements  included in the Company`s  Annual Report on
Form 10-K for the year ended  September 30, 2002.  The results of operations for
any interim period are not necessarily indicative of results for the full year.

     The 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.


3.   Liquidity and Capital Resources

     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.



4.   Net Capital Requirements

     A.B.  Watley and  Integrated  are subject to the SEC`s  Uniform Net Capital
Rule ("Rule  15c3-1").  In accordance with this rule, A.B. Watley is required to
maintain  defined  minimum  net  capital to the greater of $100,000 or 6-2/3% of
aggregate  indebtedness as defined.  Integrated is required to maintain  minimum
net capital of $5,000 or 6-2/3% of aggregate indebtedness as defined.

     As of December 31, 2002, A.B. Watley and Integrated`s net capital in excess
of minimum requirements was $81,131 and $13,400, respectively.


                                      -6-
<PAGE>

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  has agreed to  indemnify  its  clearing
brokers for losses that the  clearing  brokers  may  sustain  from the  customer
accounts  introduced  by the Company and  maintains  deposits with such clearing
brokers to collateralize  such  indemnification  obligations.  Such deposits are
reflected on the consolidated statement of financial condition, net of unsecured
customer receivables for which the Company is ultimately responsible.

     The  Company,  through  its  clearing  brokers,  seeks to control the risks
associated  with these  activities  by requiring  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.

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 issueable
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.  As of  December  31,  2002,
liquidated  damages  of  approximately  $692,594  were  accrued to the preferred
holders.

     The Preferred Stock includes a liquidation  preference of $10,000 per share
and bears a cumulative dividend at an initial 6% annual rate, which increases to
a 15%  annual  rate after  eighteen  months,  payable  twice a year in shares of
Common Stock.  For the  three-month  periods  ended  December 31, 2002 and 2001,
dividends of $94,500 and $78,750 were accrued for the Preferred Stock.

     The holders of Preferred  Stock may elect to convert  their shares into the
Company`s  Common Stock at any time,  just as they may choose to exercise  their
related warrants at any time. The holders of Preferred Stock also have the right
to require  the Company to redeem all of the  Preferred  Stock for cash equal to
the  greater of the  liquidation  preference  amount plus any accrued but unpaid
dividends  and  penalties or the  aggregate of the market value of the shares of
the  Common  Stock  into  which  such  shares  of the  Preferred  Stock are then
convertible,  upon certain triggering events, as defined in the Agreement.  Such
triggering events have occurred. The holders of the Preferred Stock waived their
Redemption Right through September 30, 2002.  Although,  the waiver has not been
amended or extended,  to date,  no  redemption  notice has been  received by the
Company from any of its Preferred Stockholders.

     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.  The premium of $250,000 was recorded as an extraordinary  loss on the
extinguishment of debt in December 2001. The discount  associated with the value
of the warrants was accreted over a ten-month period through September 30, 2002,
the date the redemption waiver expired.

     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  consolidated  statement 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.
                                      -7-
<PAGE>



7.   Notes and Loans Payable

     The Company`s  outstanding  obligation  under notes and loans payable as of
December 31, 2002 and September 30, 2002 was as follows:


                                        December 31,     September 30,
                                           2002              2002
                                        ----------        ----------
Borrowings under line of credit         $3,082,826        $3,082,826
Notes payable to former officers           700,000           700,000
Loans payable - other                      250,000           200,000
                                        ----------        ----------
                                        $4,032,826        $3,982,826
                                        ==========        ==========

     As of December 31, 2002 and  September  30, 2002,  interest  payable on the
Company`s  borrowing  was  $373,000  and  $275,000,  respectively.  The  Company
recognized interest expense of $108,071 and $128,465 for the three month periods
ending  December  31,  2002  and  2001,  respectively.

     On December 31, 2002, the Company borrowed $250,000 from a third party. The
associated  promissory  note  bears  interest  at 15% per annum and  matures  on
January 14, 2003.

     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 loan is
collateralized by the assets of the Company as defined in the loan agreement.

     In February  2002, the Company  borrowed  $200,000 from a former officer of
the Company,  due on demand.  The Company also  borrowed  $500,000 from the same
party in October 2001 with a stated maturity of October 1, 2002. Both notes bear
interest at 10% per annum. The loan due in October 2002 has not been repaid.

     In February  2002,  the Company  borrowed  $200,000 from a third party with
interest payable at 10% per annum. The loan matured on October 26, 2002.

     In August 30, 2001,  the Company  obtained a  $2,500,000  loan (the "Senior
Subordinated  Demand  Note")  bearing  interest  at an annual  rate of 6% due on
demand.  The loan was redeemed and converted to Series A  Convertible  Preferred
Stock (see Note 6) on November 29, 2001.

     In January 1999,  the Company  borrowed  $400,000  from New York  Community
Investment  Company,  L.L.C.  ("NYCIC").  At  September  30,  2002,  the loan of
$360,000 was repaid in full.

8.   Subordinated Borrowings

     Subordinated  borrowings as of December 31, 2002 and September 30, 2002 are
as follows:

December 31, 2002      September 30, 2002    Interest Rate  Scheduled Maturity
-----------------      ------------------    -------------  ------------------

          $125,000             $125,000            12%        October 31, 2003
           $55,000              $55,000             0%        October 31, 2003
          $200,000             $200,000            15%        October 31, 2003
          $150,000             $150,000            13%        October 31, 2003
-------------------    -----------------

          $530,000             $530,000
===================    =================


                                      -8-
<PAGE>


     Subordinated  borrowings are covered by agreements approved by the NASD and
are included by A.B.  Watley for purposes of computing net capital under the Net
Capital Rule. To the extent that such  subordinated  borrowings are required for
A.B. Watley`s continued compliance with minimum net capital  requirements,  they
may not be repaid.  The  subordinated  borrowings in the amounts of $125,000 and
$55,000 were originally scheduled to mature on October 31, 2002. Such borrowings
were renewed with a new maturity date of October 31, 2003.

     Of the total subordinated borrowings,  $180,000 and $350,000 as of December
31,  2002  and  September  30,  2002,  respectively,  are  from an  officer  and
stockholder of the Company, respectively.

9.   Commitments and Contingencies

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

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

Litigation
----------

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

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

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

10.  Income taxes

     The Company has net  operating  loss  carryforwards  ("NOL`s")  for federal
income tax purposes approximating $61,643,000 as of December 31, 2002. The NOL`s
are scheduled to expire no sooner than September 30, 2013.

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

11.  Subsequent Events

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

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

                                      -9-
<PAGE>

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

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


Results of Operations

Three Months Ended December 31, 2002 Compared to the Three months Ended December
31, 2001

     Revenues.  Total  revenues  for the quarter  ended  December  31, 2002 were
$4,179,700  - a decrease of 50%, as compared to revenues of  $8,288,701  for the
quarter ended December 31, 2001.

     Commissions. For the three-month period ending December 31, 2002, we earned
commission  revenues of  $1,477,976,  representing a 79% decrease as compared to
commission  revenues of $6,963,713 for the  corresponding  period in 2001.  This
$5,485,737  decrease  in  commission  revenues  resulted  from both  significant
reductions in overall trading volume and the loss of the On-Site  customers from
our direct access business that was acquired in October 2001.

     Data Service Fees. Our revenues from data service fees for the  three-month
period ending  December 31, 2002 also dropped  substantially  as compared to the
corresponding  period in 2001. The $16,897 of current period revenues represents
an 88% decrease  from the  three-month  period  ending  December 31, 2001.  This
decrease  was caused by the loss of  customers  and the  migration  of remaining
customers from third party software to the  UltimateTrader II software for which
no fees are charged.

     Revenues from Principal  Transactions.  Revenues from proprietary  security
transactions  increased by 430%.  We earned  $1,945,306  from such  transactions
during the  three-month  period ending December 31, 2002 as compared to $367,360
for the three-month period ending December 31, 2001.

     Interest  Income.  Interest  and for the three-month period ending December
31, 2002 was $35,698 representing a 94% decrease as compared to $582,894 for the
three-month  period ending December 31, 2001. The decrease was primarily due the
loss  of  additional accounts acquired from the On-Site retail accounts acquired
in  October  2001  that  had  generated  margin  interest  income.

     Other Income.  Other income of $703,823 for the  three-month  period ending
December 31, 2002 represents a $465,422 increase as compared to the three months
ended  December  31,  2001.Such  increase  primarily relates to settlements with
vendors  for  which  the  Company  was  the  beneficiary.

     Interest  Expense.  Interest  expense  decreased  from  $1,016,710  for the
three-months  ending  December 31, 2001 to $146,893 for the  three-months  ended
December 31, 2002. The value of the warrants issued in August 2001 in connection
with the  $2,500,000  borrowing  under the Senior  Subordinated  Demand Note was
recognized as interest expense prior to the Note`s conversion to Preferred Stock
in November  2001.  During the  three-month  period  ending  December  31, 2001,
$552,000 of such  interest  expense was  recognized.  Also  contributing  to the
decrease in interest expense was the conversion of debt to equity.

     Net  Revenues.  As a result of the  foregoing,  net  revenues  decreased by
$3,239,184 or 45%, from  $7,271,991  for the quarter ended December 31, 2001, to
$4,032,807  for the quarter  ended  December 31,  2002.  Customers in the United
States  generated  the majority of revenues  and no single  customer or group of
customers accounted for 10% or more of our revenues.

     Expenses.  Total  expenses  for the quarter  ended  December  31, 2002 were
$5,707,634 - a 57% decrease as compared to total expenses of $13,426,980 for the
three-month period ending December 31, 2001.

     Commissions,  Floor  Brokerage and Clearing  Charges:  For the  three-month
period ending December 31, 2002, we incurred  $1,015,216 of  Commissions,  Floor
Brokerage and Clearing Charges - a 77% decrease as compared to the corresponding
three-month  period in 2001. These costs represent  payments to our clearing and
floor brokers who facilitate  security  transactions  for both our customers and
our own  proprietary  accounts.  This  decrease  is largely due to the June 2002
closing of the On-Site  business  which had been  acquired in October  2001.  In
addition,  our institutional  sale division had lower volumes as compared to the
previous period.

                                      -10-
<PAGE>


     Employee  Compensation  and Related Costs.  Our Employee  Compensation  and
Related Costs of $1,807,785 for the three-month  period ending December 31, 2002
reflect a 46% decrease as compared to $3,376,391  incurred for such costs during
the  three-month  period ending December 31, 2001. This decrease is attributable
to both the reduction in the number of employees and to lower  compensation paid
to the institutional sales division as a result of declining profits.

     Communications.  Communications  expense for the three-month  period ending
December 31, 2002  amounted to $282,448,  a 67% decrease as compared to $847,499
for the  corresponding  period in 2001. This decrease is largely due to the June
2002 closing of the On-Site business.

     Business  Development.  As a  result  of  our  substantial  curtailment  of
promotional  expenditures,  our Business  Development  costs  decreased 92% from
$262,343 for the three months ending  December 31, 2002 to $21,699 for the three
months ending December 31, 2001.

     Professional  Services.  Professional  Services primarily consists of legal
and accounting costs in addition to the cost of external  software  consultants.
For the three-month  period ending December 31, 2002, our professional  services
amounted to $399,024 as compared to $454,913 for the  three-month  period ending
December 31, 2001 - a decrease of 12%.

     Occupancy and Equipment.  Occupancy and Equipment decreased $687,834 or 39%
from  $1,779,373  for  the  three-month  period  ending  December  31,  2001  to
$1,091,539  for the  three-month  period ending  December 31, 2002.  Such costs,
primarily consisting of lease costs for both office space and equipment, dropped
due to our August  2002  surrender  and  termination  of the 25th and 28th floor
office  leases at 40 Wall Street.  These leases were  terminated  as part of our
overall cost  cutting  initiatives.  In addition,  as part of the closing of the
On-Site  business in June 2002,  we no longer  have the branch  offices in Great
Neck, New York and Boca Raton, Florida.

     Depreciation and Amortization.  Depreciation and Amortization  decreased by
$1,719,572 or 77% when  comparing the  $2,218,979  for the  three-months  ending
December 31, 2002 to the $499,407 for the three-month period ending December 31,
2002,  primarily  due to the  disposal or  surrender  of assets  subject to such
depreciation  and  amortization.  We had sold  software to an  affiliate  of our
clearing broker and had written off intangible  assets recognized as a result of
the On-Site acquisition.  In addition, we had surrendered leasehold improvements
at our 40 Wall Street office and at former offices in Great Neck and Boca Raton

     Other  Expenses. For the  three-month  period ending December 31, 2002, we
incurred  $506,229 of Other  Expenses,  as  compared  to $540,707  for the three
month-period  ending December 31, 2001. Other expenses  decreased as part of our
overall cost cutting initiatives.

     Loss  before  Income  Taxes  and  Extraordinary  Item.  As a result  of the
aforementioned  factors,  our  Loss before Income Taxes and Extraordinary Item
decreased from $6,154,989 for the three-month period ending December 31, 2001 to
$1,674,827  for  the  three-month  period  ending  December  31,  2002.


Liquidity and Capital Resources

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

     Trading  volume  has  significantly  decreased  and the  Company  has  lost
customers in its direct access business. To respond to its liquidity and capital
resource  needs  management  has  implemented  various cost cutting  initiatives
including  renegotiating  its clearing  agreements at more favorable  rates, the
restructuring of its software  license with E*Trade Group,  Inc. and the sale of
its software programs known as Ultimate Trader II and Watley Trader. The Company
is also looking into more traditional lines of business such as fixed income and
equity capital  markets,  as well as, the  feasibility of expanding its existing
business to attract  active  traders and hedge funds.  As a further fund raising
alternative  the  management of ABWG may seek to raise  additional  capital from
time to time to fund  operations  through  private  placements of equity or debt
instruments.  There can be no assurance that any of these  alternatives  will be
successful.

                                      -11-
<PAGE>

     Cash  provided  by  operating  activities  during  the three  months  ended
December  31,  2002 was  $566,748,  as compared  to cash  utilized by  operating
activities of $3,969,647 for the three months ended December 31, 2001.  Cash was
principally  provided by decrease in securities  owned of  $2,143,466.  Cash was
principally  used to fund  the net  loss of  $1,293,720  net of  non-cash  items
including    depreciation    and   amortization   of   $499,408   and   non-cash
compensation/service  costs  of  $9,334.  In  addition,  cash  was used to lower
liabilities for accounts payable, accrued liabilities,  and lease obligations by
$767,288.

     No cash was provided by investing  activities during the three months ended
December 31, 2002,  compared to cash used in  investing  activities  of $115,419
during the three months ended December 31, 2001.

     Cash provided by financing  activities  was $49,962 during the three months
ended  December 31, 2002  compared to  $3,905,933  during the three months ended
December 31, 2001. Cash provided by financing activities during the three months
ended December 31, 2002,  principally consisted of a net increase in outstanding
notes payable.


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.  We are unable to determine the  availability  of these
net  operating  losses  since this  availability  is dependent  upon  profitable
operations, which we have not achieved in recent periods.


Relevant Accounting Standards

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

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

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

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

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

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

                                      -12-
<PAGE>

Forward Looking Statements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Investment Considerations and Risk Factors

     The  following  factors  and  other  information  in  this Form 10-K should
carefully  be  considered  when  evaluating  the  Company  and  its  stock.

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

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

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


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

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

     Traditional and online financial  services  industries are characterized by
rapid  technological  change,  changes in customer  requirements,  frequent  new
service  and  product  introductions  and  enhancements  and  evolving  industry
standards. Our future success will depend on our ability to enhance our existing
services and  products.  We must also  develop new  services  and products  that
address the  increasingly  sophisticated  and varied needs of our  customers and
prospective  customers.  We must respond to technological

                                      -13-
<PAGE>

advances  and  evolving  industry  standards  and  practices  on  a  timely  and
cost-effective  basis.  The development and enhancement of services and products
entails significant technical and financial risks. We may fail to

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

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

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

     Like other  securities  and  securities-related  businesses,  we are highly
dependent on information  processing  and  telecommunications  systems.  We face
operational  risks arising from potential  mistakes made in the  confirmation or
settlement of transactions or from the failure to properly  record,  evaluate or
account for transactions.  Our business is highly dependent on our ability,  and
the ability of our clearing  firms,  to process,  on a daily basis,  a large and
growing   number  of   transactions   across   numerous  and  diverse   markets.
Consequently,  we  and  our  clearing  firms  rely  heavily  on  our  respective
financial, accounting,  telecommunications and other data processing systems. If
any of these systems were to not operate  properly or become  unavailable due to
problems with our physical  infrastructure,  we could suffer  financial  loss, a
disruption of our business,  liability to clients,  regulatory  intervention  or
reputational  damage.  In  addition,  we are aware that other  companies  in our
industry have had problems due to high volume of telephone  and e-mail  customer
inquiries  that has at times  strained the capacity of their  telecommunications
systems and customer service staffs,  and has also led to temporary  disruptions
in website  service.  Thus,  any  inability  of systems used to  accommodate  an
increasing  volume of transactions  and customer  inquiries could also constrain
our ability to expand our businesses and could damage our reputation.

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

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

     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.

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

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

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

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

                                      -14-
<PAGE>

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

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

     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.

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

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

     As of February 28, 2002,  March 31, 2002,  and April 30, 2002,  the Company
had a net capital  deficit as defined,  of $520,836,  $1,487,966,  and $637,141,
respectively, in violation of the Net Capital Rule. In addition, as of September
30, 2002, the Company had a net capital deficit of $301,523.  These deficiencies
were  cured  through   additional  funding  and  through  funds  generated  from
operations.  While the  Company is  presently  in  compliance  with net  capital
requirements,  there can be no assurance that we will not fall below minimum net
capital requirements in the future.

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

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

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

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

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

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


                                      -15-
<PAGE>

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

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

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

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

     All  of  the  foregoing   issuances  of  Common  Stock  are  likely  to  be
substantially  dilutive to the  outstanding  shares of Common Stock,  especially
where,  as  described  above,  the  shares of Common  Stock are  issued  without
additional  consideration.  Moreover,  any  increase  in the number of shares of
Common Stock we are required to issue resulting from  anti-dilution  protection,
penalties  or other  adjustments  to the  conversion  or exercise  prices of the
Series A  Preferred  Stock  and/or the  warrants  described  above will  further
increase  the  anticipated  dilution  to the  outstanding  holders of our Common
Stock.  We cannot predict  whether or how many  additional  shares of our Common
Stock will become issuable due to these provisions.

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

     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.

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

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

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



                                      -16-
<PAGE>


Item 4. Controls and Procedures

     During the quarter,  an evaluation was performed  under the supervision and
with the  participation  of the  Company`s  management,  including the Principal
Executive Officer and the Principal  Financial Officer,  of the effectiveness of
the design and operation of the Company`s  disclosure  controls and  procedures.
Based on that  evaluation,  the  Company`s  management,  including the Principal
Executive  Officer  and the  Principal  Financial  Officer,  concluded  that the
Company`s  disclosure  controls and procedures were effective as of December 31,
2002. There have been no significant  changes in the Company`s internal controls
or in other factors that could significantly affect internal controls subsequent
to December 31, 2002.


Part II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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

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

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

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

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

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

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

                                      -17-
<PAGE>

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

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

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

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

Item 2. Changes in Securities
        None.

Item 3. Default upon Senior Securities

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

     Pursuant to the Purchase  Agreement and the  Registration  Rights Agreement
(the "Registration Agreement"),  the Company was required to file a registration
statement  (the  "Registration  Statement")  with the  Securities  and  Exchange
Commission  registering  for resale the shares of Common Stock issuable upon the
conversion of the shares of Preferred  Stock in the amount of 2,135,700  shares,
and 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  December  31, 2002,
liquidated  damages  of approximately $692,594 has been accrued to the preferred
holders.

Item 4.  Submission of Matters to a Vote of Security Holders
None.

Item 5.  Other Information
None.

                                      -18-
<PAGE>


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

     (a)  Exhibits

          99.1 Certification  by John J. Amore, Chief Executive Officer pursuant
               to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
               the  Sarbanes-Oxley  Act  of  2002.

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

     (b)  Reports
               None.







                                      -19-
<PAGE>




                                   SIGNATURES

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

Date: April 15, 2003

                                  A.B. WATLEY GROUP INC.
                                       (Registrant)

                                  By: /s/ John J. Amore
                                      --------------------------------
                                          John J. Amore
                                          Chief Executive Officer

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





                                      -20-
<PAGE>
                                  CERTIFICATION

I, John J. Amore, the Chief Executive Officer, certify that:

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

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

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

4.   The  registrant`s  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;
          b) evaluated the effectiveness of the registrant`s disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     quarterly report (the "Evaluation Date"); and
          c)  presented  in this  quarterly  report  our  conclusions  about the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date.

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

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

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


                                      -21-
<PAGE>
                                  CERTIFICATION

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

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

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

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

4.   The  registrant`s  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;
          b) evaluated the effectiveness of the registrant`s disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     quarterly report (the "Evaluation Date"); and
          c)  presented  in this  quarterly  report  our  conclusions  about the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date.

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

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

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


                                      -22-
<PAGE>