U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                   (Mark One)

                   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    FOR FISCAL YEAR ENDED: SEPTEMBER 30, 2004

                                       OR

                 [ ] TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)

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

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

Issuer's telephone number:          (212) 500-6500
                           -----------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:  None
                                                                ----------------
Name of each Exchange on Which Registered:  None
                                            ------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
                                                   Common Stock, $.001 par value
                                                   -----------------------------

      Check  whether  the issuer (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the issuer was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ___

      Check if there is no disclosure  of delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

      State issuer's revenues for its most recent fiscal year. $9,515,055

      State the  aggregate  market  value of the  voting and  non-voting  common
equity held by  non-affiliates  computed by  reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days.

      As of December 15, 2004 there were 8,965,452 issued and outstanding shares
of our common  stock,  $.001 par value,  held by  non-affiliates.  The aggregate
value  of the  securities  held by  non-affiliates  on  December  15,  2004  was
$1,344,818  based on the average closing bid and asked price of our common stock
on December 15, 2004, which was $.15 per share.

      State the number of shares  outstanding of each of the issuer's classes of
common  equity,  as of the  latest  practicable  date.  20,462,138  shares as of
December 15, 2004.

      Transitional Small Business Disclosure Format (check one):

      Yes             No    X
         ----------     ----------

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable

<PAGE>

                                TABLE OF CONTENTS
Item Number and Caption                                                     Page

Forward Looking Statements .................................................   3

PART 1

    Item 1.  Description of Business .......................................   3

    Item 2:  Description of Property .......................................  17

    Item 3.  Legal Proceedings .............................................  17

    Item 4.  Submission of Matters to Vote of Security Holders .............  21

PART II

    Item 5.  Market for Common Equity, Related Stockholder Matters and
             Small Business Issuer Purchases of Equity Securities...........  21

    Item 6.  Management's Discussion and Analysis of Financial Condition and
             Results of Operations..........................................  29

    Item 7.  Financial Statements ..........................................  34

    Item 8.  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure ...........................  53

    Item 8A.  Controls and Procedure .......................................  53

    Item 8B.  Other Information ............................................  53

PART III

    Item 9.  Directors, Executive Officers, Promoters and Control Person;
             Compliance with Section 16(a) of the Exchange Act .............  53

    Item 10. Executive Compensation ........................................  55

    Item 11. Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters ....................  57

    Item 12. Certain Relationships and Related Transactions ................  60

    Item 13. Exhibits, List and Reports on Form 8-K ........................  62

    Item 14. Principal Accountant Fees and Services ........................  65



                                       2
<PAGE>

                           FORWARD-LOOKING STATEMENTS

      Except for historical  information,  this report contains  forward-looking
statements  within the meaning of Section 21E of the Securities  Exchange Act of
1934.  Such   forward-looking   statements   involve  risks  and  uncertainties,
including,  among other  things,  statements  regarding  our business  strategy,
future  revenues  and  anticipated  costs  and  expenses.  Such  forward-looking
statements  include,   among  others,   those  statements  including  the  words
"expects," "anticipates," "intends," "believes" and similar language. Our actual
results may differ  significantly  from those  projected in the  forward-looking
statements.  Factors that might cause or contribute to such differences include,
but are not limited to, those discussed in the sections "Management's Discussion
and Analysis of Financial  Condition and Results of Operations"  and "Business".
You are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this report.  We undertake no  obligation  to
publicly  release any  revisions to the  forward-looking  statements  or reflect
events or circumstances taking place after the date of this document.

                                     PART I

                        ITEM 1. DESCRIPTION OF BUSINESS

General

A.B.  Watley  Group  Inc.  (the  "Company,  "we",  or "us")  is a  publicly-held
financial services holding company  incorporated in the state of Delaware on May
15, 1996. We presently  conduct our business  activities  primarily  through our
subsidiary  A.B. Watley Direct,  Inc.  ("Direct").  Direct is a U.S.  registered
broker-dealer  that engages in  direct-access  and web-based  online trading for
retail  customers.  Direct also provides  execution  services for  institutional
customers.  A  former  operating  subsidiary,  A.B.  Watley,  Inc.,  also a U.S.
registered  broker-dealer,  ceased operations in January 2004. In February 2004,
A.B. Watley,  Inc. withdrew its registration as a broker-dealer.  Another former
operating subsidiary,  A.B. Watley Futures,  Inc., an introducing  broker-dealer
registered with the National Futures Association which conducted futures trading
activity for customers, was sold by us on June 30, 2004.

As of December 20,  2004,  Direct had  approximately  3,300  customers.  We have
historically  devoted  significant  resources to the  development of proprietary
software. However, in July 2002, our business activities were reorganized and we
sold our software programs know as Ultimate Trader and Watley Trader,  including
all related intellectual property rights, to a subsidiary of one of our clearing
brokers.  We no longer consider software  licensing to be a core revenue source.
The sale of the software  programs  provided us with working capital and reduced
our expense  base.  Pursuant to the terms of the sale,  we maintain a perpetual,
non-exclusive license to use and sublicense the software.

To respond to our  liquidity  and capital  resource  needs,  we have  instituted
various cost cutting initiatives and raised additional capital. Our cost cutting
initiatives include reductions in workforce,  reductions in capital expenditures
and renegotiation of clearing corporation agreements at more favorable rates.

On-Site Acquisition

On October 1, 2001,  we acquired the customer  lists and certain other assets of
On-Site Trading, Inc. ("On-Site") and assumed up to $1.8 million in liabilities.
This  acquisition  included  On-Site's  client  base  including  1,700  accounts
representing  client assets  (account  balances and  securities) of $84 million,
On-Site Trading LLC (the "LLC"),  two branches owned by On-Site,  and agreements
with 12 non-business  branch  locations.  LLC, a  broker-dealer  subsidiary (the
proprietary  trading  business) was  subsequently  renamed ABW Trading,  LLC. We
acquired  these  assets  for  1.875  million  shares  of our  common  stock.  In
connection with the  acquisition of On-Site,  we also assumed up to $1.8 million
in  liabilities  of On-Site owed to the Class B Members of the LLC. We reclaimed
175,000 shares of common stock in connection  with the On-Site  acquisition  and
assumed additional obligations of $1,050,000 in excess of the $1,800,000 that we
had originally agreed to assume.



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<PAGE>

The  LLC was  formed  as a means  for  registered  professionals  to  engage  in
proprietary  trading  utilizing the LLC's funds.  Such registered  professionals
were Class B members of the LLC, while we were the Class A member. The LLC was a
registered  broker-dealer  and a  member  of the  Philadelphia  Stock  Exchange,
operated in 12 states and engaged exclusively in proprietary trading and did not
conduct business with the public.  An initial capital  contribution was required
to become a Class B member. On May 9, 2002, we notified the Class B members that
we had  elected  to cease  the  proprietary  trading  business  as a  result  of
declining revenues. We continued to operate the On-Site retail business, however
the customer  base had  deteriorated  significantly  since the  acquisition  and
revenues   from   operations   had  declined.   Management   believes  that  the
deterioration  was  attributable  to many  factors  including  weakening  market
conditions,  as well as the loss and closing of branch  operations.  On June 18,
2002,  the LLC  withdrew  its broker  dealer  registration  and  ceased  trading
activities.

Online Brokerage Services

Our industry has  experienced a series of changes led by  electronic  and online
commerce.  These changes have created  significant  market  opportunities for us
along with other similar brokerage firms.  Favorable market trends have resulted
from the following:

      o     growing market acceptance of online brokerage services;

      o     pronounced market segmentation;

      o     a complementary regulatory environment; and

      o     disparity  in the  scalability  and  quality  of  competing  trading
            technologies.

Historically,  individual  investors  accessed  the  financial  markets  through
full-commission  brokers,  who offered investment advice and placed trades. With
deregulation  of brokerage  commissions in 1975 and the resulting  unbundling of
brokerage  services,  investors  began  to  realize  that  they  could  separate
financial  advisory  services from  securities  trading.  This brought about the
advent and subsequent  proliferation of discount brokerage firms, which provided
an alternative investment approach by completing trades at a reduced cost.

The  emergence of  electronic  brokerage  services has provided  investors  with
further   access  to  unbundled   services  and  costs   typically   charged  by
full-commission  and  traditional  discount  brokerage  firms.  Further,   while
full-commission  and  discount  brokerage  firms  are able to  offer  electronic
trading  services,  their  continued  reliance on personnel,  branch offices and
associated  infrastructure  prevents  them  from  capturing  the same  operating
efficiencies that are achievable by electronic trading.

We conduct our brokerage activities through a global communications  network and
sophisticated  computerized  information  systems  over  which  we  receive  and
transmit current market information.

Our services are delivered to our customers  through  Ultimate  Trader, a client
server  direct  access  software  application  and Watley  Trader,  a  web-based
direct-access platform. Benefits of the products for the retail market include:



                                       4
<PAGE>

o  Direct Access to Exchanges & ECNs    Allows      investors     to     execute
                                        independently   of  third  party  market
                                        makers  for more  efficient  executions.
                                        Provides   ability  to  act  as  "market
                                        maker"   on   par   with   institutional
                                        traders.

o  Order Routing Discretion             Enables investors to actively  determine
                                        venue for order  execution among variety
                                        of alternatives (Island, Instinet, other
                                        ECNs,  NASDAQ,  specific  market makers,
                                        NYSE DOT, our Company block trade desk).
                                        Provides critical added ability to trade
                                        at the best price.

o  NASDAQ Level II Data                 Enables  access  to  complete  range  of
                                        bid/ask,  volume  and  market  depth for
                                        variety of execution markets.

o  Realtime Data Analytics              Provides best  available  retail package
                                        of real  time,  streaming  market  data,
                                        charts  and  technical  analysis.   This
                                        suite  of  content  includes   intra-day
                                        charting,   a  variety   of   analytical
                                        studies  (e.g.,  RSI,  moving  averages,
                                        MACD),  time  and  sales,  option  quote
                                        chains,  regional  exchange  quotes  and
                                        news.

o  High Utilization Capacity            Affords access to technology platform by
                                        entire   client  base  on   simultaneous
                                        basis.  Critical given  consistent  high
                                        level  of  concurrent   utilization  and
                                        spikes  in  utilization  due  to  highly
                                        volatile market  movements and shifts in
                                        market liquidity.

Client Services

Client  services  for all  levels of our  online  services,  including  trading,
administrative,  and technical support, are among our highest priorities.  Based
on our  experience  in the industry and based on client  feedback,  providing an
effective client service team to handle client needs is critical to our success.
Our client  service  department  helps clients get online,  handles  product and
services  inquiries and addresses  all  brokerage and technical  questions.  The
client  service   department  also  conducts   various  surveys  to  verify  the
satisfaction  of our  clients  and to learn more about  client  preferences  and
requirements.

We provide live client  support from Monday  through Friday between the hours of
7:00 AM and 6:30 PM EST. Our client services  department  operates on a one-stop
shopping  basis,  meaning that clients do not typically  have to be  transferred
between  departments to receive answers to their various  inquiries.  All of our
Client  Service  personnel are registered  representatives  and are available to
accept  and  execute  client  orders,  research  past  trades,  discuss  account
information,  and  provide  detailed  technical  support.  A separate  technical
support team helps  clients with  potentially  serious or  persistent  technical
issues.



                                       5
<PAGE>

Account Security

We use a combination of proprietary and industry  standard  security measures to
protect our clients` assets.  Clients are assigned unique account numbers,  user
identifications  and  passwords  that  must be used each time they log on to the
system. In accordance with standard industry practices, telephone orders require
authentication via personal identification number/password and/or other personal
information.  In  addition,  the trade  processing  system we use is designed to
compare our accounts database with the clearing firm's account  information on a
daily basis to detect any discrepancies.

We rely on  encryption  and  authentication  technology,  including  public  key
cryptography technology licensed from other parties, to provide the security and
authentication necessary to effect the secure exchange of information.

Proprietary Trading

Prior to February  2004, we took  proprietary  positions  through the trading of
U.S. equities in an attempt to realize gains. Our proprietary trading activities
required the  commitment of capital and created an  opportunity  for profits and
risk of loss due to trading  strategies and market  fluctuations.  We ceased all
proprietary trading activity in January 2004.

Institutional Sales

Our  institutional  sales and  trading  desk  specializes  in  facilitating  and
executing   large-block   transactions   in  equity   securities  and  servicing
institutional  clients. These services are provided to clients who often require
that their purchases or sales of large positions remain anonymous,  with average
trades  ranging in the  10,000 to 100,000  share  size.  We match  institutional
buyers and  sellers  to  minimize  the  impact on the market and to prevent  our
client's  positions from being disclosed to competing firms.  Our  institutional
sales clients primarily include hedge funds, corporations and independent funds.

Operations, Clearing and Order Processing

We do not hold  client  funds or  securities,  nor do we  generally  execute and
directly process either our own or our clients` securities  transactions.  Since
October 1996, we have cleared all  transactions  for retail clients,  on a fully
disclosed basis, with Penson Financial Services, Inc. ("Penson").  Institutional
accounts are cleared through Sterne Agee Capital Markets, Inc. ("Sterne")

Our  agreements  with such clearing  brokers  provide that the clearing  brokers
process all  securities  transactions  for our  account and the  accounts of our
clients for a fee.  Services of the clearing  brokers include billing and credit
control and receipt, custody and delivery of securities,  for which we pay a per
ticket charge.  We have agreed to indemnify our clearing brokers for losses they
may sustain from customer accounts  introduced by us, which could be material in
amount. Our clearing  agreements may be terminated by either party, upon 60 days
written notice for Penson,  and 120 days written notice for Sterne. We depend on
the operational capacity and the ability of the clearing brokers for the orderly
processing of transactions.  As a result of engaging the processing  services of
clearing  brokers,  we are exempt from certain reserve  requirements  imposed by
federal securities laws.



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<PAGE>

Clients' securities  transactions are effected on either a cash or margin basis.
In  connection  with margin  transactions,  credit is  extended by the  clearing
broker  to a  client,  collateralized  by  securities  and cash in the  client's
account,  for a portion of the purchase price. The client is charged interest by
the clearing broker for margin financing.  We receive a portion of such interest
from the clearing brokers.

Margin  lending is subject to the margin  rules of the Board of Governors of the
Federal  Reserve  System.  Margin  lending  subjects  us to the risk of a market
decline  that  would  reduce  the value of the  collateral  below  the  client's
indebtedness  before the collateral can be sold. Under applicable  rules, in the
event of a decline in the market value of the  securities  in a margin  account,
the client is required to deposit additional securities or cash in the account.

Marketing and Advertising

In connection with our cost-cutting  initiatives,  we have significantly reduced
our marketing and advertising expenditures.

Competition

The market for electronic  brokerage  services is highly competitive and rapidly
changing.  We believe that we compete on the basis of speed of order  execution,
processing and confirmation,  quality of client service, ease of use, amount and
timeliness of information provided, price and reliability of the trading systems
which we utilize.  Our  competitors  may have greater  financial,  technical and
marketing  resources  than us. We expect  that our  ability to  compete  will be
affected by our ability to introduce new services and  enhancements  to existing
services into the market on a timely basis.

We believe our competition consists of large and small brokerage firms utilizing
the Internet to transact retail brokerage business.  Among these competitors are
E*TRADE  Securities  LLC.;  Charles Schwab & Co.,  Inc.; TD Waterhouse  Investor
Services,  Inc.;  Fidelity Brokerage Services LLC; and Ameritrade,  Inc. We also
face competition for clients from full commission brokerage firms.

Securities Regulation

Direct is a broker-dealer registered with the Securities and Exchange Commission
("SEC") and National  Association of Securities Dealers ("NASD") and licensed in
the states in which it does  business.  Direct is licensed in  forty-seven  (47)
states with approvals pending in Alabama, Nebraska and New Hampshire.

The securities industry in the United States is subject to extensive  regulation
under federal and state laws. In addition,  the SEC, NASD, other self-regulatory
organizations, such as the various stock exchanges, and other regulatory bodies,
such as state securities commissions, require strict compliance with their rules
and  regulations.  As a matter of public policy,  regulatory  bodies are charged
with  safeguarding  the integrity of the securities and other financial  markets
and with protecting the interests of clients participating in those markets, and
not with protecting the interests of our stockholders.

Broker-dealers are subject to regulations covering all aspects of the securities
business, including sales methods, trade practices among broker-dealers, use and
safekeeping of clients funds and securities,  capital structure,  record keeping
and the conduct of directors,  officers and employees.  Because of the number of
complaints by online traders,  the SEC, NASD and other regulatory  organizations
may adopt more stringent regulations for online firms and their practices. If we
fail to comply with any laws, rules or regulations we could be censured,  fined,
suspended, or expelled.



                                       7
<PAGE>

In addition,  significant  changes in Direct's  current  business or  practices,
require NASD and other regulatory approval.

To expand our services internationally,  we would have to comply with regulatory
controls of each specific  country in which we conduct  business.  The brokerage
industry in many foreign countries is heavily regulated.  The varying compliance
requirements of these different  regulatory  jurisdictions and other factors may
limit our ability to expand internationally.  We presently do not have any plans
to expand internationally.

All  marketing  activities  by Direct are  regulated  by the NASD.  The NASD can
impose penalties,  including censure,  fine, suspension of all advertising,  the
issuance  of  cease-and-desist  orders  or  the  suspension  or  expulsion  of a
broker-dealer  and its  officers  or  employees  for  violations  of the  NASD`s
advertising regulations.

Net Capital Requirements

The SEC,  NASD and  various  other  regulatory  agencies  have  stringent  rules
requiring  the  maintenance  of  specific  levels of net  capital by  securities
brokers,  including the SEC`s Uniform Net Capital Rule which governs Direct. Net
capital is defined as assets minus liabilities, plus other allowable credits and
qualifying  subordinated  borrowings less mandatory  deductions that result from
excluding  assets that are not readily  convertible  into cash and from  valuing
other assets,  such as a firm`s positions in securities,  conservatively.  Among
these  deductions  are  adjustments in the market value of securities to reflect
the possibility of adverse market movement prior to disposition.

If Direct fails to maintain  the required net capital,  Direct may be subject to
suspension or revocation of  registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies, which ultimately could require Direct's
liquidation.  In addition,  a change in the net capital rules, the imposition of
new rules, a significant  operating  loss, or any unusually large charge against
net capital could limit our operations that require the intensive use of capital
and could limit our ability to expand our  business.  The net capital rules also
could  restrict our ability to withdraw  capital from Direct,  which could limit
our  ability  to  pay  dividends,  repay  debt  and  repurchase  shares  of  our
outstanding stock.

Personnel

As of December 20, 2004 we employed a total of 14 persons, of whom 2 are engaged
in executive management,  2 are engaged in information technology, 5 are engaged
in  client  services  and 2 are  engaged  in sales  and  marketing.  The other 3
employees perform  administrative and back office work. We believe our relations
with our  employees  are  generally  good and we have no  collective  bargaining
agreements  with any labor unions.  During the fiscal years ended  September 30,
2004 and 2003 we completed a reduction in our work force.

Our registered representatives are required to take examinations administered by
the NASD and state  authorities  to be qualified to transact  business,  and are
required  to enter  into  agreements  with us  obligating  them to adhere to our
supervisory  procedures.  Our agreements with registered  representatives do not
obligate these representatives to be associated with us for any length of time.

Financing Transactions

In July  2004,  holders  of 70 shares  of our  Series A  Redeemable  Convertible
Preferred Stock exchanged their preferred stock including dividends and interest
for warrants to purchase  780,342 shares of our common stock. The exercise price
for each of the common  shares to be received  upon  exercise of the warrants is
$.01. The warrants have a term of 10 years and expire in June 2014.



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<PAGE>

In July 2004,  we sold  5,000,000  shares of common  stock for  $2,000,000  in a
private  placement  transaction.  As at  December  20,  2004  we  have  received
$1,000,000 towards the purchase of the shares,  with the remaining balance to be
received in quarterly installments through April 1, 2005.

In July 2004, we and an affiliate of our clearing broker reached an agreement to
exchange notes payable,  including accrued interest, in the amount of $2,621,815
in return for warrants to purchase  1,000,000  shares of our common  stock.  The
exercise price for each of the common shares to be received upon exercise of the
warrants is $.19. In addition we agreed to amend an existing warrant  agreement,
for 1,000,000  shares of our common stock,  held by the  noteholder to reflect a
decrease in the exercise  price from $.918 to $.01.  The warrants have a term of
seven years.

In June 2004, certain  noteholders  agreed to exchange notes payable,  including
accrued  interest,  in the amount of $1,102,500 for warrants to purchase 987,771
shares of our common  stock.  The exercise  price for each of the common  shares
received  upon  exercise of the warrants is $.01.  The  warrants  have a term of
seven years.

In June  2004,  holders of 560  shares of our  Series A  Redeemable  Convertible
Preferred  Stock  exchanged  their  preferred  stock for  warrants  to  purchase
5,462,387  shares of our common stock. The exercise price for each of the common
shares to be received upon exercise of the warrants is $.01. The warrants have a
term of seven years and expire in June 2011.

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

On October 8, 2003,  we borrowed  $150,000 from a third party lender at the rate
of 12%  per  annum  and  issued  250,000  shares  of  our  common  stock,  which
represented a finance charge of $87,500.  The loan was payable in fourteen equal
monthly  installments.  As of April 30,  2004,  we repaid the loan,  and accrued
interest,   through  $21,000  in  cash  payments  and  offset  $139,150  against
commissions owed to us by the lender.

On January 15, 2003, we entered into a Secured Demand Note Collateral  Agreement
(the "SDN"), whereby a subordinated lender agreed to deposit $5,000,000 worth of
collateral  in accounts to be held by us to secure a  subordinated  loan for the
same amount. The loan, which bore interest at the rate of 7% per annum, had been
approved by the NASD and was included for the purposes of computing  net capital
under Rule 15c3-1. During the term of the SDN, we liquidated  approximately $2.4
million  of the  SDN  Collateral.  This  cash  was  used  by us to  support  our
operations.  In  connection  with the SDN,  we issued  warrants to the lender to
purchase  500,000 shares of our common stock at a price of $.75 per share at any
time  through  January  15,  2008.  In March  2004,  the  holder of the SDN (the
"Noteholder")   demanded  repayment  of  the  note  and  commenced   arbitration
proceedings.  In April 2004, the parties agreed to discontinue  the  arbitration
without  prejudice  pursuant to a  settlement  agreement  that  provided for the
repayment of  approximately  $2.9 million of principal  and interest  (which was
repaid in April  2004) of the $5 million  outstanding  principal  balance of the
secured demand note. On June 4, 2004 the Noteholder  sent us a notice of default
alleging that we did not meet certain of our obligations  under the terms of the
settlement,  including making payment on the balance of the note. As of December
20, 2004, $2,441,260 in principal remained due and outstanding on the note. (See
"Legal Proceedings").



                                       9
<PAGE>

In July 2002, we sold our software  programs known as Ultimate Trader and Watley
Trader,  including all related intellectual  property, to a subsidiary of one of
our clearing  brokers.  In consideration  for the software,  our clearing broker
agreed to forgive  $2,716,720  (including  interest of $566,720) of indebtedness
owed by us to the clearing broker.

In April 2002, we granted a non-exclusive  perpetual  license of our proprietary
software  to  E*Trade  for a one  time-time  flat fee of  $5,000,000,  which was
payable in cash ($2.6  million) and E*Trade  stock ($2.4  million).  The E*Trade
stock was subsequently sold for cash.

In March  2002,  one of the  holders  of our  Preferred  Stock led a group  that
granted a line of  credit  of  $4,200,000  to us.  Borrowings  under the line of
credit are payable on demand 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 our common stock at an exercise
price of $.918 a share in  connection  with the loan  facility  and a consultant
retained by a member of the group was also granted  warrants to purchase  50,000
shares of our common stock at an exercise price of $.918 a share. The fair value
of the warrants were amortized and recorded as interest expense.

In February  2002, we borrowed  $200,000 from a former  officer of ours,  due on
demand. We also borrowed $500,000 from the same party in October 2001.  Interest
of 10% was  payable  on both  loans.  As of  December  20,  2004,  we have  made
approximately $75,000 in payments to the former officer.

In February 2002, we borrowed  $200,000 from a third party with interest payable
thereon at 10%. During fiscal 2003, the loan was repaid in full.

On November 29, 2001, we entered into a Series A Convertible  Preferred Purchase
Agreement whereby we issued 630 shares of Series A Convertible  Preferred Stock,
par value $.01  ("Preferred  Stock") in a private  placement  in which we raised
$6,300,000 on an aggregate  basis.  Each share was convertible into 3,390 shares
of our common stock at an exercise  price of $2.95 per share.  The purchasers of
the Preferred Stock also were issued warrants, expiring in 5 years from the date
of issuance,  to purchase an additional  1,629,069 shares of our common stock at
an  exercise  price  of  $2.95.  Pursuant  to the  Purchase  Agreement  and  the
Registration Rights Agreement (the "Registration  Agreement"),  we were required
to  file a  registration  statement  (the  "Registration  Statement")  with  the
Securities and Exchange  Commission  registering for resale the 2,135,700 shares
of common stock issuable upon the  conversion of the shares of Preferred  Stock,
and the 1,629,069 upon the exercise of the related  warrants.  We were unable to
file the Registration  Statement within the required time frame. As a result, we
were 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 accrued to each holder of Preferred Stock and was added
to the  liquidation  preference  amount  until  cured.  As of June 30,  2003 the
holders of the Preferred  Stock executed an agreement  which waived their rights
to all penalties through July 31, 2004.  Penalties accrued through June 30, 2003
in the amount of $1,070,593  were  reversed and recorded as  additional  paid in
capital.  During June and July 2004 all of the  outstanding  Preferred Stock and
accumulated dividends were exchanged for warrants.

Investment Considerations and Risk Factors

The following risk factors should be carefully considered when evaluating us and
considering an investment in our securities.



                                       10
<PAGE>

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  anticipated
capital and liquidity  needs.  To the extent that capital is raised  through the
sale of equity or convertible debt securities,  the issuance of these securities
could  result in dilution to our  stockholders.  If we are unable to obtain such
financing,  make  sufficient  improvement  in our  operating  results  or find a
strategic  partner  our ability to operate our  business  will be  significantly
diminished.

PERIODS OF DECLINING SECURITIES PRICES, DECREASING TRADE VOLUMES, OR UNCERTAINTY
IN THE PUBLIC EQUITY MARKETS MAY ADVERSELY AFFECT OUR REVENUES.

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

WE MAY NOT BE ABLE TO ADAPT WITH RAPID TECHNOLOGICAL  CHANGE IN A COST EFFECTIVE
MANNER,  WHICH  COULD  MATERIALLY  ADVERSELY  IMPACT  OUR  BUSINESS,   FINANCIAL
CONDITION AND OPERATING RESULTS.

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

      o     use new technologies effectively;

      o     adapt services and products to evolving industry standards; or

      o     develop,  introduce and market service and product  enhancements  or
            new services and products.

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

OPERATIONAL RISKS MAY DISRUPT OUR BUSINESS OR LIMIT OUR GROWTH.

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



                                       11
<PAGE>

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.

THE  SECURITIES  INDUSTRY IN WHICH WE OPERATE IS HEAVILY  REGULATED  BY THE SEC,
STATE  REGULATORS,  AND THE 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.



                                       12
<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

      o     other regulatory and self-regulatory organizations; and

      o     changes in the  interpretation  or  enforcement of existing laws and
            rules.

THE FAILURE TO REMAIN IN  COMPLIANCE  WITH THE NET CAPITAL RULE WOULD  ADVERSELY
AFFECT OUR ABILITY TO CONTINUE TO OPERATE AS A BROKER-DEALER.

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

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

Direct is presently in compliance with its net capital  requirements.  There can
be no  assurance,  however,  that it will not fall  below  minimum  net  capital
requirements in the future.

THE FAILURE OF  BROKERAGE  CUSTOMERS  TO MEET THEIR  MARGIN  REQUIREMENTS  COULD
RESULT IN SIGNIFICANT LIABILITIES.

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

WE MAY BE 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.



                                       13
<PAGE>

OUR FUTURE SUCCESS IS DEPENDENT ON THE PERFORMANCE AND CONTINUED  SERVICE OF OUR
KEY EMPLOYEES AND OUR ABILITY TO ATTRACT AND RETAIN SKILLED PERSONNEL.  THE LOSS
OF ANY  OF OUR  KEY  EMPLOYEES  COULD  HAVE A  MATERIAL  ADVERSE  EFFECT  ON OUR
OPERATIONS.

We believe that our success  depends to a significant  extent on the efforts and
abilities of certain of our management  personnel,  in particular those of Steve
Malin, our Chairman,  and Robert Malin, our Vice Chairman. The loss of either of
these persons could have a material  adverse effect on our business,  prospects,
operating  results,  and financial  condition.  We do not presently have key man
life insurance policies and do not intend to obtain any unless required to do so
under  future  financing  arrangements.  There  can be no  assurance  that  such
policies will be available to us on  commercially  reasonable  terms, if at all.
Additionally,  our ability to realize our business plan could be  jeopardized if
any  members of our senior  management  become  incapable  of  fulfilling  their
obligations to us and a capable successor is not found on a timely basis.  There
can however be no assurance  that, in such event,  we will be able to locate and
retain a capable successor to any member of management.

OUR COMPETITORS HAVE GREATER  FINANCIAL AND HUMAN RESOURCES THAN WE DO. THIS MAY
GIVE THEM A COMPETITIVE ADVANTAGE.

The market for electronic  brokerage  services is highly competitive and rapidly
changing.  We believe that we compete on the basis of speed of order  execution,
processing and confirmation,  quality of client service, ease of use, amount and
timeliness of information provided, price and reliability of the trading systems
which we utilize.  Our  competitors  may have greater  financial,  technical and
marketing  resources  than we do. We expect that our ability to compete  will be
affected by our ability to introduce new services and  enhancements  to existing
services into the market on a timely basis.

We believe our competition consists of large and small brokerage firms utilizing
the Internet to transact retail brokerage business.  Among these competitors are
E*TRADE  Securities  LLC.;  Charles Schwab & Co.,  Inc.; TD Waterhouse  Investor
Services,  Inc.; Fidelity Brokerage Services LLC; and Ameritrade,  Inc.; We also
face competition for clients from full commission brokerage firms.

WE DO NOT  INTEND TO PAY  DIVIDENDS  ON OUR  COMMON  STOCK  FOR THE  FORESEEABLE
FUTURE.

We have never paid any cash dividends on our common stock, nor do we contemplate
or  anticipate  paying any  dividends  upon our common stock in the  foreseeable
future.

WE NEED ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE AND, IF AVAILABLE, MIGHT
ONLY BE AVAILABLE ON UNFAVORABLE TERMS.

We have principally funded our operations through sales of our equity securities
and loans  from  affiliated  parties.  We expect  to raise  funds in the  future
through  sales of our debt or equity  securities  and  through  loans until such
time, if ever, as we are able to operate  profitably.  There can be no assurance
given that we will be able to obtain  funds in such  manner or on terms that are
beneficial to us. Our inability to obtain needed funding can be expected to have
a  material  adverse  effect  on our  operations  and  our  ability  to  achieve
profitability.



                                       14
<PAGE>

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT AND EXPECT TO CONTINUE TO
INCUR LOSSES UNTIL WE ESTABLISH PROFITABLE BUSINESS OPERATIONS. THIS COULD DRIVE
THE PRICE OF OUR STOCK DOWN.

We incurred a net loss of $4,536,109  for the year ended  September 30, 2004. As
at September 30, 2004, we had an accumulated  deficit in the aggregate amount of
$74,143,583.  We expect to incur additional operating losses for the foreseeable
future unless and until we are able to establish profitable business operations.
If we fail to do so and  continue to incur  losses the price of our common stock
can be expected to fall.

WE RECEIVED AN OPINION FROM OUR AUDITOR WHICH RAISES DOUBTS ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.

The  Report of our  Independent  Registered  Public  Accounting  Firm,  Marcum &
Kliegman  LLP,  dated  December  3,  2004  contains  an  explanatory   paragraph
respecting  our  ability  to  continue  as a  going  concern.  We  will  require
additional funds in the future, and there can be no assurance that any Report of
an  Independent  Registered  Public  Accounting  Firm  on our  future  financial
statements will not include a similar explanatory  paragraph if we are unable to
raise sufficient funds or generate  sufficient cash from operations to cover the
cost  of  our  operations.  The  existence  of  the  explanatory  paragraph  may
materially  adversely  affect our relationship  with  prospective  customers and
suppliers,  and therefore could have a material  adverse effect on our business,
financial condition and results of operations.

SALES OF SHARES  ELIGIBLE FOR FUTURE SALE COULD DEPRESS THE MARKET PRICE FOR OUR
COMMON STOCK.

We presently have issued and outstanding  20,462,138 shares of our common stock,
options to purchase  9,535,250 shares of our common stock at an average exercise
price of $.23 per share,  and  warrants  to  purchase  12,708,675  shares of our
common stock at an average exercise price of $.29 per share.  With the exception
of shares held by affiliates which may be subject to resale limitations, most of
our issued and outstanding shares of common stock are eligible to be sold at any
time.  Market sales of large amounts of our common  stock,  or the potential for
those  sales  even if  they do not  actually  occur,  may  have  the  effect  of
depressing  the market price of our common  stock.  In  addition,  if our future
financing  needs  require  us to issue  additional  shares  of  common  stock or
securities  convertible  into common stock, the supply of common stock available
for resale could be increased which could stimulate  trading  activity and cause
the market  price of our common  stock to drop,  even if our  business  is doing
well.

THERE IS A LIMITED  PUBLIC  MARKET FOR OUR COMMON  STOCK.  UNLESS SUCH MARKET IS
EXPANDED YOU MAY HAVE DIFFICULTY SELLING SHARES OF OUR COMMON STOCK.

Presently,  there is only a limited and  sporadic  public  market for our common
stock.  There can be no assurance that an active and more reliable public market
will develop in the future or, if developed, that such market will be sustained.
Purchasers  of shares of our common stock may,  therefore,  have  difficulty  in
reselling  such  shares.  As a  result,  investors  may  find it  impossible  to
liquidate  their  investment in us should they desire to do so. Our common stock
is currently  traded in the  over-the-counter  market and quoted on the Bulletin
Board.  Accordingly  an investor may find it more  difficult to dispose of or to
obtain accurate quotations of prices for our common stock than would be the case
if our common stock were quoted on Nasdaq or an exchange.  Irrespective of where
our common stock is traded, there can be no assurance that the public market for
our common stock will become more active or liquid in the future.

Market  transactions  in our common stock are subject to the "Penny Stock Rules"
of the Securities and Exchange Act of 1934,  which are discussed in more detail,
below.  These rules could make it difficult  to trade our common  stock  because
compliance with them can delay or preclude  certain trading  transactions.  This
could have an adverse effect on the ability of an investor to sell any shares of
our common stock.


                                       15
<PAGE>

THE PENNY STOCK RULES APPLY TO OUR COMMON STOCK. THIS MAY MAKE IT MORE DIFFICULT
FOR HOLDERS OF OUR COMMON STOCK TO RESELL THEIR SHARES.

At the  present  time our common  stock is trading  on the OTC  Bulletin  Board.
Although  dealer  prices  for our common  stock are  listed on the OTC  Bulletin
Board, trading in our common stock has been sporadic and limited.

The Securities  Enforcement and Penny Stock Reform Act of 1990 requires  special
disclosure  relating to the market for penny stocks in connection with trades in
any stock defined as a "penny stock".  Commission regulations generally define a
penny stock to be an equity  security that has a market price of less that $5.00
per  share  and is not  listed  on  Nasdaq  or a  major  stock  exchange.  These
regulations subject all broker-dealer  transactions involving such securities to
the  special  "Penny  Stock  Rules"  set forth in Rule  15g-9 of the  Securities
Exchange  Act of 1934 (the "34 Act").  The  current  market  price of our common
stock is  substantially  less that $5 per share and such stock can, for at least
the foreseeable future, be expected to continue to trade in the over-the-counter
market at a per share market price of substantially  less than $5.  Accordingly,
any broker-dealer  sales of our shares will be subject to the Penny Stock Rules.
These Rules affect the ability of broker-dealers to sell our securities and also
may affect the ability of purchasers of our common stock to sell their shares in
the secondary market.

The Penny  Stock  Rules also  impose  special  sales  practice  requirements  on
broker-dealers  who sell  securities  to persons  other  than their  established
customers or "Accredited  Investors." Among other things,  the Penny Stock Rules
require that a broker-dealer make a special suitability determination respecting
the purchaser and receive the purchaser's  written  agreement to the transaction
prior  to  the  sale.  In  addition,  the  Penny  Stock  Rules  require  that  a
broker-dealer deliver, prior to any transaction,  a disclosure schedule prepared
in accordance  with the  requirements  of the  Commission  relating to the penny
stock market. Finally,  monthly statements have to be sent to any holder of such
penny stocks disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Accordingly,  for
so long as the Penny Stock Rules are  applicable to our common stock,  it may be
difficult to trade such stock  because  compliance  with such Rules can delay or
preclude certain trading transactions.  This could have an adverse effect on the
liquidity and price of our common stock.

OUR COMMON STOCK HAS  EXPERIENCED,  AND IS EXPECTED TO  EXPERIENCE,  SIGNIFICANT
PRICE AND VOLUME VOLATILITY,  WHICH SUBSTANTIALLY  INCREASES THE RISK OF LOSS TO
PERSONS OWNING OUR COMMON STOCK.

Due to the  limited  trading  market for our common  stock,  and  because of the
possible  price  volatility,  investors  may not be able to sell  their  Company
shares when they desire to do so. Through the twelve months ended  September 30,
2004, our stock price ranged from a high of $.45 to a low of $.13 per share. The
inability  to sell  shares  in a  rapidly  declining  market  may  substantially
increase the risk of loss because of such  illiquidity and because the price for
our common stock may suffer greater declines because of its price volatility.


                                       16
<PAGE>

                         ITEM 2. DESCRIPTION OF PROPERTY

Until June 30, 2004 our  principal  offices were located at 40 Wall Street,  New
York, NY, where we occupied  approximately  28,500 square feet at an annual cost
of approximately  $920,000 per year, plus  escalations.  The initial term of the
lease for such office space was set to expire in June 2009. On January 16, 2003,
we entered into a sixteen-month  lease agreement for approximately  2,750 square
feet in San  Francisco,  California,  at an annual cost of $114,000.  This lease
agreement  was  terminated  as of November  30, 2003.  On December 15, 2002,  we
entered into an eighteen-month  lease agreement for  approximately  2,568 square
feet in  Melville,  NY, at an annual  cost of $68,078.  We no longer  occupy the
Melville  property  and the  landlord,  W.B.  Wood & Co.  Inc.,  has  obtained a
judgment in the amount of $17,019  against us.  Accordingly,  the Melville lease
has been terminated. See Item 3 "Legal Proceedings".

Our landlord at the 40 Wall Street location,  40 Wall Street, LLC, commenced two
separate  landlord/tenant  proceedings  seeking  money  judgments  and orders of
eviction  against us. Both  proceedings  have been settled  whereby we vacated a
portion of the premises in March 2004 and vacated the  remaining  portion of the
premises in June 2004. The landlord  reserved the right to seek a money judgment
for all rent arrears (a  provision  has been  provided  for in our  consolidated
financial  statements)  after  we  vacated  the  premises.  See  Item  3  "Legal
Proceedings".

We presently  occupy  approximately  8,500  square feet at 90 Park Avenue,  26th
Floor,  New York, NY 10016 pursuant to an arrangement we have with RFM Advisors,
LLC, the lessee of the space. The term of the lease expires on May 31, 2014. RFM
Advisors LLC is a New York  limited  liability  corporation  owned by Robert and
Steven  Malin.  AB  Watley  Direct  Inc.  has  guaranteed  the full  and  timely
performance of all  obligations  of RFM Advisors LLC under the lease.  The lease
provides  for the  payment of an annual  base  rental,  together  with  lessee's
proportionate  share of building  operating  expenses  including taxes. The base
annual  rental for years 1 through 3, 4 through 6, and 7 through 10 is $366,376,
$  411,056,  and  $464,672,  respectively.  Under  the  arrangement,  we  occupy
approximately  95% of the  leased  space and pay a  proportionate  amount of the
lease payments.

                            ITEM 3. 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 are, and may become,  a party to legal
proceedings or arbitration. Except as described below, we are not a party to any
material legal proceedings or arbitrations.

In Summer 2004, we learned that the Securities and Exchange Commission staff was
conducting  a formal  order  investigation.  While  the  exact  scope of the SEC
investigation  is uncertain,  it appears that the  Commission  is  investigating
trading  activities  that may have occurred on our premises.  We, along with our
Vice Chairman,  and the Chief Compliance Officer of our subsidiary,  A.B. Watley
Direct,  Inc.,  have been  subpoenaed by the  Commission in connection  with the
investigation.  We have produced documents. The Chief Compliance Officer of A.B.
Watley Direct,  Inc. has produced  documents and has provided  testimony.  It is
anticipated that the Vice Chairman and others will provide testimony in 2005. We
and our officers, directors and subsidiaries will continue to cooperate with the
Commission's investigation. At this time, we are unable to determine the outcome
of the investigation.



                                       17
<PAGE>

We are a defendant in an action titled Michael Fielman v. A.B. Watley,  Inc. and
A.B.  Watley Group Inc., that was filed in the Supreme Court of the State of New
York, County of Nassau, Index No. 012082/02.  This is an action for unpaid wages
seeking $28,657, plus statutory damages, costs, and attorneys' fees. This matter
has been  settled in the amount of $34,658  payable on an  installment  basis of
eight  (8)  months  (a  provision  has  been  provided  for in our  consolidated
financial statements). We are in default of our settlement agreement.

We were a defendant in an action  titled  General  Electric  Capital  Corp.,  as
Assignee of Sun  Microsystems,  Inc. v. A.B.  Watley Group Inc.  f/k/a  Internet
Financial Services,  Inc., Supreme Court of the State of New York, County of New
York,  Index No.  117675/02.  This was a breach of contract action in connection
with the lease of equipment,  which sought compensatory damages of $195,356 plus
interest,  costs and  attorney's  fees (a provision has been provided for in our
consolidated financial statements). In November 2004, we settled this matter for
$30,000, full payment of which has been made.

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

We are defendant in an action titled Hyperfeed Technologies, Inc. v. A.B. Watley
Group Inc.,  filed in the Supreme Court of the State of New York,  County of New
York,  Index No.  111538/03.  Plaintiff  has obtained a consent  judgment  order
against A.B.  Watley Group Inc. in the amount of $180,503 (a provision  has been
provided for in our consolidated financial statements).  Currently, Plaintiff is
conducting post-judgment discovery.

We are respondent in an  arbitration  filed in or about July 2003 titled John W.
Donavan and Bettina H. Wolff v. A.B. Watley,  Inc. Claimants are seeking damages
of approximately  $94,800 relating to the suitability of Claimants'  investments
(a provision has been provided for in our  consolidated  financial  statements).
The Company denies all wrongdoing in connection with this matter  asserting that
it acted in accordance with its customer agreement as well as applicable federal
securities law. The parties have settled this matter in its entirety.

We are  respondent in an arbitration  titled Steven  Messina,  Brian Kelly,  and
Thomas Messina v. A.B. Watley,  Inc., NASD  Arbitration No. 02-04649.  Claimants
filed this claim against A.B.  Watley,  Inc. in August 2002 seeking  damages for
unpaid commissions of approximately  $147,000 (a provision has been provided for
in our  consolidated  financial  statements)  plus  legal  fees and costs in the
amount of $4,025 for  arbitration  fees and  disbursements.  A.B.  Watley,  Inc.
denies all wrongdoing in connection with this matter, and has counterclaimed for
$608,000  against  Claimants  for breach of contract and  fiduciary  duty.  A.B.
Watley,  Inc.  intends  to  vigorously  defend  this  matter and  prosecute  its
counterclaim.

We are defendant in an action titled Pentech  Financial  Services,  Inc. v. A.B.
Watley Group Inc.,  Supreme Court of the State of New York,  County of New York,
Index No.  02-126759.  Plaintiff has filed a complaint against A.B. Watley Group
Inc. for an alleged  breach of a lease  agreement.  On May 28,  2003,  Plaintiff
obtained a judgment in the amount of $465,584 plus interest  accrued  thereon (a
provision has been provided for in our consolidated financial statements).  A.B.
Watley Group Inc.  executed a settlement  agreement  with  Plaintiff for a total
settlement of $522,584 payable on an installment  basis. As of February 24, 2004
A.B. Watley Group Inc. is in default of the settlement agreement.


                                       18
<PAGE>

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

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

We are defendant in an action titled  Siemens  Financial  Services,  Inc.  f/k/a
Siemens Credit Corporation v. A.B. Watley Group Inc., Supreme Court of the State
of New York,  County  of New York,  Index  No.  603769/2002.  Plaintiff  filed a
complaint  alleging  breach of contract.  Plaintiff has a judgment  against A.B.
Watley Group Inc. in the amount of $179,883 with interest  accrued  thereon from
July 10, 2003 (a provision has been provided for in our  consolidated  financial
statements). Plaintiff is presently conducting post-judgment discovery.

We are respondent in an arbitration titled Jeffrey Spittel v. A.B. Watley, Inc.,
NASD Arbitration No. 03-08076.  Claimant has submitted this claim to arbitration
claiming  breach of contract,  respondeat  superior,  and  misappropriation  and
conversion, in the amount of $7,500 plus punitive damages, costs,  disbursements
and reasonable attorneys' fees. A.B. Watley, Inc. filed an answer on January 12,
2004. A hearing had been scheduled for November 23-24, 2004 in New York, but was
adjourned at the Claimants request.  The NASD has not advised the parties of the
rescheduled  hearing date. A.B. Watley, Inc. denies all wrongdoing in connection
with this matter and intends to vigorously defend this matter.

We are  defendant in an action  titled  Peter Wigger v. A.B.  Watley Group Inc.,
Supreme Court of the State of New York, County of New York, Index No. 604124/02.
Plaintiff filed a complaint alleging breach of a commission agreement and unpaid
wages due and owing.  Plaintiff  seeks  damages in the amount of  $398,750  plus
interest accrued  thereon.  Plaintiff has filed a motion for summary judgment on
his claims. On or about April 23, 2004, the parties reached a settlement,  which
contemplates a total payment of $174,000 to Plaintiff over the course of two (2)
years  (a  provision  has  been  provided  for  in  our  consolidated  financial
statements).  We have paid  $42,000 of this  amount.  However,  the  parties are
litigating whether we are in default of the settlement agreement.

We are defendant in an action  titled Lehr  Construction  Corp.  v. A.B.  Watley
Group Inc.,  Supreme Court of New York, County of New York, Index No. 600276/02.
This action is for damages  arising out of the alleged  breach of a construction
contract.  Plaintiff sought damages of approximately $233,794. On March 6, 2003,
the parties  reached a  settlement  in which we  consented  to a judgment in the
amount of $295,857, less any payments made by us, and the parties simultaneously
entered into a Forbearance Agreement, which set forth a payment schedule for us.
We have paid  $65,000  pursuant to the  Forbearance  Agreement.  On December 17,
2003,  Plaintiff issued us a Notice of Default under the Forbearance  Agreement,
which we have failed to cure.  Under the  Forbearance  Agreement,  Plaintiff may
execute on the  outstanding  balance of the  judgment  in the amount of $158,794
without  further  notice  to us (a  provision  has  been  provided  for  in  our
consolidated  financial   statements).   Plaintiff  has  made  efforts  to  seek
information to collect upon the judgment.


                                       19
<PAGE>

We were the defendant in an action titled A.B. Watley Group Inc./John  Martinez,
Case No.  2-4173-03-36  Section 806  Sarbanes-Oxley  Act Complaint.  On July 11,
2003, the U.S. Department of Labor ("DOL") gave us notice that John Martinez,  a
former  officer of ours,  had filed a complaint  against us under Section 806 of
the  Sarbanes-Oxley Act of 2002 (the "Act"). On March 9, 2004, the Department of
Labor gave notice that it had  completed  its  investigation  and  dismissed the
complaint.  Complainant  appealed.  This matter was settled  for  $20,000,  full
payment of which has been made.

We were the  respondent in an  arbitration  titled MCI Worldcom  Communications,
Inc. v. A.B. Watley Group Inc.,  JAMS  Arbitration,  Reference # 1410003356.  On
September  16,  2003,  claimant  filed this  arbitration  against us asserting a
breach of contract  claim in the amount of  $135,644.  On January 26,  2004,  we
submitted our answer  denying all material  allegations  and  asserting  several
affirmative  defenses.  On March 22, 2004,  the  Arbitrator  held a  Preliminary
Conference  and issued a  Preliminary  Hearing  Order  directing  the parties to
submit a brief addressing the  arbitrability of one of Claimant's claims and our
statute of limitations defense. On April 28, 2004, JAMS informed the parties the
Arbitrator  had resigned due to illness.  A new  Arbitrator  was assigned to the
matter, but we objected to the Arbitrator  appointment.  This matter was settled
for $30,000,  full payment of which has been made (a provision has been provided
for in our consolidated financial statements).

In  March  2003,  the  holder  of  our  $5  million  secured  demand  note  (the
"Noteholder") demanded repayment of the note. On March 31, 2003, we filed a NASD
Arbitration  Demand and a Statement  of Claim with the NASD  Dispute  Resolution
office.  The arbitration  sought to enforce the provisions of the secured demand
note agreement and to prevent premature withdrawal by the lender. In April 2004,
the parties agreed to discontinue the arbitration  without prejudice pursuant to
a settlement  agreement  that provided for the repayment of  approximately  $2.9
million  (which was repaid in April  2004) of the $5  million  original  secured
demand note. The remaining  principal  balance payable at September 30, 2004, as
set  forth  in  our  consolidated  financial  statements,  is  $2,441,260.   The
Noteholder  agreed  that  as  long  as we  were  not  in  default  of any of our
obligations under the settlement agreement,  not to commence any litigation with
respect to the  outstanding  balance  due on the  secured  demand  note prior to
December 20, 2004.  On June 4, 2004 the  Noteholder  sent us a notice of default
alleging that we did not meet certain of our obligations  under the terms of the
settlement  agreement.  On June 2004,  the note matured and we have not paid the
remaining balance or received an extension of the maturity date.

We are plaintiff in an action titled A.B. Watley Group Inc. v. John J. Amore, et
al.,  Supreme  Court of the  State of New York,  County  of New York,  Index No.
602993/03.  We have sued our former CEO who has filed a counterclaim against us.
We are unable at this time to provide a opinion  as to the likely  outcome,  nor
the potential expense to be incurred.

We are  defendant  in an action  titled John J. Amore v.  Steven  Malin and A.B.
Watley,  Inc., Supreme Court of the State of New York, County of New York, Index
No. 603833/03. Plaintiff filed a complaint alleging breach of a contract against
A.B. Watley,  Inc. seeking damages in the amount of $500,000 and slander against
Steven Malin, our Chairman, seeking damages in the amount of $5,000,000. We have
filed an answer  denying all  wrongdoing.  We deny all  wrongdoing in connection
with this matter and intend to vigorously defend this matter.

We were the respondent in an arbitration  titled William Frymer v. A.B.  Watley,
Inc., NASD  Arbitration No.  03-05524.  The claimant,  a former employee of ours
commenced this arbitration claiming breach of contract and violation of New York
labor  laws.  The  Claimant  sought  unpaid  salary  and bonus,  stock  options,
liquidated  damages and punitive damages.  The Parties agreed to a settlement of
$75,000,  which has been provided for in our consolidated  financial  statements
and subsequently paid in full.


                                       20
<PAGE>

On December 9, 2004, A.B.  Watley,  Inc. was notified of an award rendered by an
NASD arbitration panel against A.B. Watley, Inc. for compensatory damages in the
amount of  $811,927  (a  provision  has been  provided  for in our  consolidated
financial  statements)  to claimant,  James B. Fellus,  in the case  encaptioned
James B. Fellus vs. A.B.  Watley,  Inc. (NASD  Arbitration No.:  03-05526).  All
other relief sought by claimant  (including an award against A.B. Watley Direct,
Inc.  and/or A.B.  Watley  Group,  Inc.,  and for  attorneys  fees and  punitive
damages) was  expressly  denied.  The  arbitration  involved  claims by a former
employee of A.B.  Watley,  Inc. for alleged breach of contract (all other claims
having been withdrawn by the former  employee).  The amount  awarded  presumably
represented  damages for alleged non-payment of contractual salary. A.B. Watley,
Inc. intends to move to vacate the award by asserting,  among other things, that
the  panel   manifestly   disregarded  the  undisputed   facts  and  applicable,
well-settled law.

We are the  respondent in an action  titled Dover Limited et al v. A.B.  Watley,
Inc. et al., Index No.: 04 Civ. 7366.  Plaintiffs filed this complaint  against,
among others, us, our president, and two employees alleging six causes of action
sounding in  securities  fraud,  common law fraud,  conspiracy  to commit fraud,
breach  of  contract  and  breach of  implied  covenant  of good  faith and fair
dealing,  and negligent  misrepresentation.  Plaintiffs are seeking compensatory
damages of $2,994,598  plus punitive  damages of  $5,000,000,  including  costs,
interest and  attorney's  fees. We deny all  wrongdoing in connection  with this
matter and intend to vigorously defend this matter.

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

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

      No matter  was  submitted  during the  fourth  quarter of the fiscal  year
covered by this report to a vote of security holders.

                                    PART II

          ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
            AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

We currently  have  authorized  capital stock  consisting  of 50,000,000  common
shares,  $.001 par value, of which 20,462,138  shares are issued and outstanding
and  1,000,000  preferred  shares,  $.01 par value of which  none are issued and
outstanding.  690 of the  preferred  shares  have  been  designated  as Series A
Redeemable Convertible Preferred Stock.

From August 21, 2002 until  October 12, 2004 when our common  stock  returned to
trading on Over-the-Counter  Bulletin Board, our common stock traded on the pink
sheets  under the symbol ABWG.  From April 4, 2002  through  August 20, 2002 our
common stock was traded on the  Over-The-Counter  Bulletin  Board under the same
symbol.  From April 23, 1999 until May 19, 2000 our common  stock also traded on
the Boston Stock Exchange.  From April 11, 2000 through April 3, 2002 our common
stock traded on the NASDAQ National Market.  From April 23, 1999 until April 11,
2000 our common stock  traded on the NADSAQ  Small Cap Market.  Our common stock
traded under the symbol IFSX from April 23, 1999 until September 1, 1999 when it
was changed to ABWG in conjunction with our name change from Internet  Financial
Services, Inc. to A.B. Watley Group Inc.


                                       21
<PAGE>

The  following  table sets forth the range of high and low sales  prices for our
common stock for our last two completed fiscal years.

            Fiscal 2004:                High                  Low
          ------------------           ------                -----
          10/1/03 - 12/31/03           $0.35                 $0.15
          1/01/04 - 3/31/04            $0.37                 $0.18
          4/01/04 - 6/30/04            $0.35                 $0.19
          7/01/04 - 9/30/04            $0.27                 $0.16

             Fiscal 2003:               High                  Low
          ------------------           ------                -----
          10/1/02 - 12/31/02           $0.75                 $0.10
          1/01/03 - 3/31/03            $0.65                 $0.35
          4/01/03 - 6/30/03            $0.50                 $0.25
          7/01/03 - 9/30/03            $0.72                 $0.35

The number of record  holders,  exclusive  of holders  for whom shares are being
held in the name of brokerage houses and clearing agencies,  of our common stock
was 111 on December 21, 2004.

We have  never paid cash  dividends  on our  common  stock.  We do not expect to
declare or pay any dividends on our common stock in the foreseeable  future, but
instead intend to retain all earnings, if any, to invest in our operations.  The
payment of future  dividends is within the  discretion of our board of directors
and will depend upon our future earnings,  our capital  requirements,  financial
condition and other relevant factors.

RECENT SALES OF UNREGISTERED SECURITIES

In October 2004 we issued an aggregate of 400,000  shares of our common stock to
3 persons with respect to services rendered and a debt conversion.

Effective  August 9, 2004 we reached an agreement with legal counsel,  Sichenzia
Ross Ference LLP ("Sichenzia")  with respect to our outstanding  invoice to them
of  approximately  $141,000 (the  "Outstanding  Balance") as of June 30, 2004 (a
provision has been provided for in our consolidated financial  statements).  The
agreement  provides for the payment of the Outstanding  Balance in installments,
$90,000  of  which  has  been  paid  as at  December  20,  2004.  The  remaining
installments  are due on or before  December 31, 2004 ($10,000) and on or before
January 15, 2005  ($29,364).  As an alternative to the January 15, 2005 payment,
we can make payment of an aggregate of $41,364 in installments  over a period of
four months commencing  January 15, 2005. In consideration of the foregoing,  we
also issued an  aggregate of 550,000  shares of our common  stock to  designated
partners in Sichenzia.  Sichenzia has agreed that 450,000 of such shares will be
returned to us for cancellation in the event that we pay the Outstanding Balance
in full and o not any time prior thereto  allow the current  balance die to them
to exceed  $30,000  for a period  of more  than 45 days.  In the event we do not
satisfy these conditions,  Sichenzia can retain the 450,000 shares and apply the
sale proceeds against the Outstanding  Balance and any other sums then due by us
to them.


                                       22
<PAGE>

Effective  October 12, 2004 we retained  Sichenzia to represent us in the action
titled Dover Limited and Wendy Sui Cheng Yap v. A.B. Watley Inc.,  Robert Malin,
Keith Sorrentino,  John Coakley, Alain Assemi and John J. Amore (Case No.: 04 CV
7366) as filed in the United States  District  Court,  Southern  District of New
York. In connection therewith,  we paid Sichenzia an initial retainer of $10,000
and issued an aggregate of 1,000,000 shares of our common stock to Sichenzia. In
the event we pay all Sichenzia invoices related to this matter within 30 days of
issuance,  the 1,000,000 shares will be returned to us for  cancellation.  If we
fail to do so, the shares will be retained and the proceeds  from sales  thereof
will be applied to all of the  outstanding  and  current  balances  due by us to
them.  Any excess  will be applied to  additional  fees  incurred,  if any.  Any
remaining proceeds after that will be retained by the share recipients.

On  September  1, 2004 we granted  100,000  stock  options to a  consultant  for
services  rendered.  Each  option  has an  exercise  price of $.30 per share and
vested upon grant. The options expire 10 years from the date of grant.

In August 2004 we issued  175,000 shares of our common stock to a former auditor
of ours in settlement of outstanding liabilities.

In August 2004 we issued an aggregate  of 550,000  shares of our common stock to
two designees of legal counsel in consideration of legal services.

In August 2004 we issued  200,000 shares of our common stock to legal counsel in
settlement of outstanding liabilities.

On July 29, 2004 we granted an aggregate of 4,775,000 stock options  pursuant to
our 2004 Stock Option Plan to 13 persons.  Each option has an exercise  price of
$.20 per share and vests over a period of two years.  1/3 of the options  vested
on the date of grant  with 1/3 of the  options  vesting on each of the first and
second  anniversaries of the date of grant.  Notwithstanding  the forgoing,  the
options vest immediately  upon a change in control.  The options expire 10 years
from the date of grant.

In July 2004, we and holders of 70 shares of our Series A Redeemable Convertible
Preferred  Stock  reached an agreement  to exchange  their  preferred  stock for
warrants to purchase 780,342 shares of our common stock.

In July 2004, we and an affiliate of our clearing broker reached an agreement to
forgive notes payable,  including accrued interest,  in the amount of $2,725,321
in exchange for warrants to purchase  1,000,000  shares of our common stock. The
exercise price for each of the common shares to be received upon exercise of the
warrants is $.918. In addition we agreed to amend an existing warrant agreement,
for  1,000,000  shares of our common stock held by the  noteholder  to reflect a
decrease in the exercise  price from $.918 to $.01.  The warrants have a term of
seven years.


                                       23
<PAGE>

In July 2004,  we sold  5,000,000  shares of common  stock for  $2,000,000  in a
private placement  transaction to two persons.  As of December 20, 2004, we have
received  $1,000,000  towards the  purchase of the  shares,  with the  remaining
balance to be received in  quarterly  installments  through  April 1, 2005.  The
sales made pursuant to the private placement offering were private  transactions
without registration in reliance on the exemption provided by Section 4(2), Rule
506 of Regulation D and Regulation S of the Securities Act of 1933, as amended.

During the period August 30, 2001 through June 3, 2004 we issued an aggregate of
12,708,675  warrants to 15 persons,  each  exercisable  for the  purchase of one
share of our common stock at exercise prices ranging from $0 to $3.69 per share.
The  average  exercise  price is $.29 per share.  The  warrants  expire on dates
ranging from August 30, 2006 through and including June 2, 2011.

In June  2004,  holders of 560  shares of our  Series A  Redeemable  Convertible
Preferred Stock (the "Holders")  exchanged their preferred stock for warrants to
purchase  5,462,387  shares of our common  stock.  The  exercise  price for each
warrant  is $.01.  The  warrants  have a term of seven  years and expire in June
2011.

In June 2004, certain of our noteholders  reached an agreement to exchange notes
payable,  including accrued interest  thereon,  in the amount of $1,102,500 into
warrants to purchase  987,771 shares of our common stock. The exercise price for
each of the warrants is $.01. The warrants have a term of seven years, expire in
June 2011 and entitle the  holders to cash and stock  dividends  in the event we
declare such.

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

On January 15, 2004 we granted an aggregate of 2,000,000 stock options  pursuant
to our 2003 Stock  Option  Plan to four  employees.  Each option has an exercise
price of $.20 per share.  1,000,000 of the options vested upon grant. 250,000 of
the options vest on each of the first, second, third and fourth anniversaries of
the date of grant. The options expire 10 years from the date of grant.

Except  as  otherwise  provided,  all of the  foregoing  issuances  were made in
reliance on Section 4(2) of the Securities Act of 1933, as amended.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

We granted  options to  purchase  shares of our common  stock to our  employees,
officers,  directors and consultants. The following table summarizes information
regarding our stock option plans as of December 20, 2004.


                                       24
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Plan category                     Number of shares to be        Weighted-average           Number of options
                                  issued upon exercise of       exercise price of          remaining available for
                                  outstanding options           outstanding options        future issuance under
                                                                                           equity compensation
                                  (a)                                                      plans (excluding
                                                                (b)                        securities reflected in
                                                                                           column (a))
                                                                                           (c)
--------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                           <C>                        <C>
Equity compensation plans         2,035,250(1)                  $.36                       3,220,977(3)
approved by security holders
--------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not     4,875,000(2)                  $.20                       1,625,000
approved by security holders
--------------------------------------------------------------------------------------------------------------------------
Total                             6,910,250                                                4,845,977
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

      (1)   Includes  35,250 shares  underlying  35,250 options issued under the
            2000 Stock Option Plan and  2,000,000  shares  underlying  2,000,000
            options issued under the 2003 Stock Option Plan.

      (2)   Represents shares issuable upon exercise of 4,875,000 options issued
            under the 2004 Stock  Option  Plan.  Excludes  2,625,000  options to
            purchase  2,625,000  shares  issued  outside of equity  compensation
            plans.

      (3)   Represents  331,500;   536,527;   788,200;   and  1,564,750  options
            remaining  available for future issuance under the 1997,  1998, 1999
            and 2000 Stock Option Plans, respectively.

STOCK OPTION PLANS

1997, 1998 and 1999 Stock Option Plans

On January 27, 1997,  our board of directors and  stockholders  adopted our 1997
Stock Option Plan, on March 16, 1998,  our board of directors  and  stockholders
adopted our 1998 Stock  Option Plan and on November 1, 1999 and March 14,  2000,
our board of directors and  stockholders,  respectively,  adopted our 1999 Stock
Option  Plan.  We reserved  400,000  shares of common  stock for  issuance  upon
exercise of options  granted  from time to time under the 1997 stock option plan
and 800,000 shares of common stock for issuance upon exercise of options granted
from time to time under each of the 1998 and 1999 stock option plans.  The 1997,
1998 and 1999 Stock  Option  Plans are  intended  to assist us in  securing  and
retaining  key  employees,   directors  and  consultants  by  allowing  them  to
participate  in our  ownership  and growth  through the grant of  incentive  and
non-qualified options.

Under each of the stock option plans we may grant  incentive  stock options only
to key employees and employee directors,  or we may grant non-qualified  options
to our employees,  officers,  directors and consultants.  Each of the 1997, 1998
and 1999 Stock Option Plans are presently  administered directly by our board of
directors.  The 1997  Stock  Option  Plan  may be  administered  by a  committee
appointed by our board, consisting of from one to three directors.

Subject to the provisions of each of the stock option plans, either the board or
the committee,  if applicable,  will  determine who shall receive  options,  the
number of shares of common  stock that may be purchased  under the options,  the
time and manner of exercise of options and exercise prices.  The term of options
granted  under each of the stock  option  plans may not exceed ten years or five
years for an incentive  stock option granted to an optionee owning more than 10%
of our voting stock.  The exercise  price for  incentive  stock options shall be
equal to or  greater  than 100% of the fair  market  value of the  shares of the
common stock at the time granted;  provided that incentive stock options granted
to a 10% holder of our voting stock shall be  exercisable at a price equal to or
greater  than 110% of the fair market  value of the common  stock on the date of
the grant. The exercise price for non-qualified  options are set by the board or
the committee,  in its  discretion.  The exercise price of options granted under
each of these plans may be payable in cash or, with the approval of the board or
the  committee,  by delivery of shares or by a  combination  of cash and shares.
Shares of common stock  received upon exercise of options  granted under each of
the plans will be subject to restrictions on sale or transfer.


                                       25
<PAGE>

As of December  20,  2004,  we have issued  options to purchase an  aggregate of
2,233,950  shares of common stock under our 1997,  1998,  and 1999 Stock Options
Plans at an exercise  price  ranging from $.10 to $21.50 per share.  All of such
issuances involved grants of non-qualified  stock options.  271,300 options were
issued  under the 1997 Stock  Option Plan,  68,500 of which were  exercised  and
202,800 of which were  forfeited.  794,650  options  were issued  under the 1998
Stock Option  Plan,  263,473 of which were  exercised  and 531,177 of which were
forfeited.  540,500 options were issued under the 1999 Stock Option Plan, 11,800
of which were exercised and 528,700 of which were forfeited.

2000 Stock Option Plan

On October 24, 2000 and July 17, 2001, our board of directors, and stockholders,
respectively,  adopted our 2000 Stock Option Plan.  We have  reserved  1,600,000
shares of common stock for issuance upon  exercise of options  granted from time
to time under the 2000 Stock Option Plan. The 2000 stock option plan is intended
to assist us in securing and retaining key employees,  directors and consultants
by allowing them to participate in our ownership and growth through the grant of
incentive and non-qualified options.

Under the 2000 Stock Option Plan we may grant  incentive  stock  options only to
key employees and employee directors,  or we may grant non-qualified  options to
our employees,  officers,  directors and consultants. The 2000 Stock Option Plan
is administered directly by our board of directors.

Subject to the  provisions of the 2000 Stock Option Plan,  the board  determines
who shall  receive  options,  the  number of shares of common  stock that may be
purchased  under the  options,  the time and manner of  exercise  of options and
exercise  prices.  The term of options  granted under the 2000 Stock Option Plan
may not exceed ten years or five years for an incentive  stock option granted to
an optionee  owning more than 10% of our voting  stock.  The exercise  price for
incentive  stock  options  is equal to or greater  than 100% of the fair  market
value of the  shares of the  common  stock at the time  granted;  provided  that
incentive  stock  options  granted to a 10% holder of our voting  stock shall be
exercisable at a price equal to or greater than 110% of the fair market value of
the common stock on the date of the grant. The exercise price for  non-qualified
options  is set by the  board,  in its  discretion.  The  exercise  price may be
payable in cash or, with the approval of the board,  by delivery of shares or by
a combination of cash and shares.  Shares of common stock received upon exercise
of options  granted under the 2000 Stock Option Plan are subject to restrictions
on sale or transfer.

As of  December  20, 2004 we have issued  options to  purchase an  aggregate  of
627,500  shares of common  stock  under our 2000 Stock  Option  Plan at exercise
prices ranging from $6.00 to $12.23.  All of such issuances  involved  grants of
non-qualified stock options.  None of the issued options have been exercised and
592,250 of these options have been forfeited.

2003 Stock Option Plan

Our board of directors and  stockholders  have approved the 2003 Employee  Stock
Option Plan (the "2003 Plan") and  authorized  2,000,000  shares of common stock
for issuance thereunder. The following is a summary of principal features of the
2003 Plan.

General

Under the  Plan,  options  may be  granted  which are  intended  to  qualify  as
Incentive Stock Options  ("ISOs") under Section 422 of the Internal Revenue Code
of 1986 (the  "Code")  or which are not  ("Non-ISOs")  intended  to  qualify  as
Incentive Stock Options thereunder.


                                       26
<PAGE>

The 2003 Plan and the right of  participants  to make  purchases  thereunder are
intended to qualify as an "employee  stock  purchase  plan" under Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The 2003 Plan is not
a qualified  deferred  compensation  plan under  Section  401(a) of the Internal
Revenue Code and is not subject to the  provisions  of the  Employee  Retirement
Income Security Act of 1974 ("ERISA").

Purpose

The primary purpose of the 2003 Plan is to attract and retain the best available
personnel  for us in  order  to  promote  the  success  of our  business  and to
facilitate the ownership of our stock by employees.

Administration

The 2003  Plan is  administered  by our  board  of  directors,  as the  board of
directors may be composed from time to time.  Notwithstanding the foregoing, the
board of directors may at any time, or from time to time, appoint a committee of
at least two members of the board of  directors,  and delegate to the  committee
the authority of the board of directors to administer the 2003 Plan.

Members of the board of directors  who are eligible  employees  are permitted to
participate  in the 2003 Plan,  provided that any such  eligible  member may not
vote on any matter affecting the administration of the 2003 Plan or the grant of
any option  pursuant to it, or serve on a committee  appointed to administer the
2003 Plan. In the event that any member of the board of directors is at any time
not a  "disinterested  person",  as defined in Rule  16b-3(c)(3)(i)  promulgated
pursuant  to the  Securities  Exchange  Act of 1934,  the 2003 Plan shall not be
administered  by the  board  of  directors,  and may only by  administered  by a
committee, all the members of which are disinterested persons, as so defined.

Eligibility

Under the 2003 Plan,  options  may be granted  to our key  employees,  officers,
directors or consultants, as provided in the 2003 Plan.

Terms of Options

The terms of each  option  granted  under the 2003 Plan are  contained  in stock
option  agreements  between us and the optionee and such terms are determined by
the  board of  directors  consistent  with  the  provisions  of the  2003  Plan,
including the following:

Purchase  Price.  The purchase  price of the common  shares  subject to each ISO
shall not be less than the fair  market  value (as set forth in the 2003  Option
Plan),  or in the case of the grant of an ISO to a  principal  stockholder,  not
less  that  110% of fair  market  value of such  common  shares at the time such
Option is  granted.  The  purchase  price of the common  shares  subject to each
Non-ISO is  determined  at the time such Option is granted,  but in no case less
than 85% of the fair market value of such common  shares at the time such option
is granted.

Vesting.  The  dates  on  which  each  option  (or  portion  thereof)  shall  be
exercisable and the conditions precedent to such exercise,  if any, are fixed by
the board of directors, in its discretion, at the time such option is granted.

Expiration. The expiration of each option is fixed by the board of directors, in
its discretion,  at the time such option is granted;  however,  unless otherwise
determined  by the board of  directors  at the time such option is  granted,  an
option is exercisable for ten (10) years after the date on which it was granted.
Each option is subject to earlier  termination as expressly provided in the 2003
Plan or as determined by the board of directors, in its discretion,  at the time
such option is granted.


                                       27
<PAGE>

Transferability.  No  option  is  transferable,  except  by will or the  laws of
descent and distribution, and any option may be exercised during the lifetime of
the optionee  only by him. No option  granted  under the 2003 Plan is subject to
execution, attachment or other process.

Option Adjustments. The aggregate number and class of shares as to which options
may be granted under the 2003 Plan,  the number and class shares covered by each
outstanding  option and the exercise  price per share thereof (but not the total
price), and all such options, are each proportionately adjusted for any increase
or  decrease  in the number of issued  common  shares  resulting  from  split-up
spin-off  or  consolidation  of shares  or any like  capital  adjustment  or the
payment of any stock dividend.

Except as  otherwise  provided in the 2003 Plan,  any option  granted  hereunder
shall terminate in the event we engage in a merger,  consolidation,  acquisition
of property or stock,  separation,  reorganization or liquidation.  However, the
optionee  shall  have the right  immediately  prior to any such  transaction  to
exercise his option in whole or in part notwithstanding any otherwise applicable
vesting requirements.

Termination,  Modification And Amendment.  The 2003 Option Plan (but not options
previously granted under the Plan) terminates ten (10) years from the earlier of
the date of its adoption by the board of directors or the date on which the 2003
Plan was  approved by the  affirmative  vote of the holders of a majority of our
outstanding  shares of capital  stock  entitled to vote  thereon,  and no option
shall be granted after termination of the Plan. Subject to certain restrictions,
the 2003 Plan may at any time be terminated and from time to time be modified or
amended by the affirmative  vote of the holders of a majority of the outstanding
shares of our capital stock present,  or represented,  and entitled to vote at a
meeting  duly  held in  accordance  with  the  applicable  laws of the  State of
Delaware.

As of  December  20, 2004 we have issued  options to  purchase an  aggregate  of
2,000,000 shares of our common stock under our 2003 Stock Option Plan, each with
an exercise price of $.20 per share.  All of such issuances  involved  grants of
non-qualified stock options.  1,000,000 of these options have vested but none of
them have been exercised.

2004 Stock Option Plan

On July 29, 2004 our board of  directors  adopted our 2004  Non-Statutory  Stock
Option  Plan (the  "2004  Plan").  We are  authorized  to issue up to  6,500,000
options  under the 2004 Plan and have received a like number of shares of common
stock for  issuance  upon  exercise  of  options  issuable  under the 2004 Plan.
Eligible  participants  under  the 2004  Plan  include  employees,  non-employee
directors,  consultants and advisors. The 2004 Plan is presently administered by
our board of directors but may, in the future,  be  administered  by a committee
formed for that purpose. Each option granted under the 2004 Plan is evidenced by
a stock option  agreement  which  specifies,  among other things,  the number of
shares of common  stock as to which any option is  granted,  the  period  during
which the option is exercisable  and the option price per share.  As of December
20, 2004 we have issued an aggregate of 4,875,000  stock  options under the 2004
Plan to purchase a like number of shares of our common stock, 4,775,000 of which
have an  exercise  price of $.20 per share and 100,000 of which have an exercise
price of $.30 per share.


                                       28
<PAGE>

Other Option Issuances

During  the  period  September  9, 2002  through  August  31,  2003 we issued an
aggregate of 2,625,000  non-statutory options to three persons outside of any of
our stock option  plans.  All of the options have a ten year term.  2,100,000 of
the  options  have an exercise  price of $.10 per share,  500,000 of the options
have an  exercise  price of $.35 per share and  25,000  of the  options  have an
exercise price of $2.8984 per share.

As of September 30, 2004 there were 9,535,250 options outstanding.

            ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

The following  discussion  of our financial  condition and results of operations
should be read in conjunction  with the  consolidated  financial  statements and
notes thereto appearing in Item 7. of this report.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED  SEPTEMBER  30, 2004 ("FISCAL  2004")  COMPARED TO FISCAL YEAR
ENDED SEPTEMBER 30, 2003 ("FISCAL 2003")

Total revenues for fiscal 2004 were  $9,515,055,  a decrease of  $5,733,827,  or
37.6%  as  compared  to  revenues  of  $15,248,882  for  fiscal  2003.  This  is
attributable to the following factors:

Commissions:  Revenues  from  commissions  increased by $41,177,  or 0.7%,  from
$5,690,227 for fiscal 2003 to $5,731,404  for fiscal 2004 as retail  commissions
were comparable during these fiscal years.

Data  Service  Fees:  Data service fees  decreased  by $50,882,  or 50.0%,  from
$101,821 for fiscal 2003 to $50,939 for fiscal 2004 due to the increasing number
of accounts  migrating to Ultimate Trader from other licensed software providers
available  through our services.  We charge our customers a data service fee for
using other software providers and do not charge for Ultimate Trader.

Principal  Transactions:  Revenues  from  principal  transactions  decreased  by
$5,492,285,  or 70.0%,  from $7,848,918 for fiscal 2003 to $2,356,633 for fiscal
2004.  We ceased  proprietary  trading in January  2004 and no longer  engage in
principal trading.

Interest and Other  Income:  Interest and other income  decreased by $231,837 or
14.4%,  from  $1,607,916  for fiscal 2003 to  $1,376,079  for fiscal 2004.  This
decrease is largely due to a one-time  business  recovery grant of approximately
$312,000 received in fiscal 2003.

Interest  Expense:  Interest expense increased by $73,460 or 8.8%, from $834,184
for fiscal 2003 to $907,644 for fiscal 2004 as a result of increased  borrowings
during the year. The increase in interest  expense  resulted from an increase in
our borrowings.

Net  Revenues:  As  a  result  of  the  foregoing,  net  revenues  decreased  by
$5,807,287,  or 40.3%, from $14,414,698 for fiscal 2003 to $8,607,411 for fiscal
2004.  Nearly all of our revenues were generated by clients in the United States
and no  single  group  of  related  clients  accounted  for  10% or  more of our
revenues.

Total expenses  decreased by $8,250,898 or 38.6%,  from  $21,394,418  for fiscal
2003 to  $13,143,520  for fiscal 2004.  This is  attributable  to the  following
factors:


                                       29
<PAGE>

Commissions,  Floor Brokerage and Clearing Charges: Commissions, floor brokerage
and clearing  charges  represent  payments to our clearing and floor brokers who
facilitate our clients`  transactions.  These expenses  decreased  $1,515,374 or
26.2%,  from  $5,793,530 for fiscal 2003 to $4,278,156 for fiscal 2004. This was
primarily due to the discontinuance of proprietary trading.

Employee Compensation and Related Costs: Employee compensation and related costs
decreased by $3,909,480 or 45.6%,  from $8,570,003 for fiscal 2003 to $4,660,523
for fiscal 2004.  This  decrease is  attributable  to both the  reduction in the
number of  administrative  personnel and the elimination of compensation paid to
proprietary traders, as we no longer engage in proprietary trading.

Communications:  Communications  expense  decreased  by $554,594 or 47.5%,  from
$1,168,418 for fiscal 2003 to $613,824,  for fiscal 2004.  This decrease was due
to canceling certain data lines and renegotiating new rates with our vendors.

Business Development:  Business development costs consist primarily of attending
and exhibiting at trade shows to obtain new clients. These expenses decreased by
$105,656, or 36.2%, from $291,868 for fiscal 2003 to $186,212 for fiscal 2004 as
we decreased our advertising and  promotional  efforts due to limited  financial
resources.

Professional  Fees:  Professional fees consist primarily of legal and accounting
costs in addition  to external  administrative  consultants.  Professional  fees
decreased  by $54,699 or 6.6%,  from  $829,139  for fiscal 2003 to $774,440  for
fiscal 2004. Fees for audit and quarterly reviews have decreased due to improved
efficiencies in financial  reporting but were partially offset by legal fees for
outstanding  litigation  and the  exchange  of  preferred  stock  and  debt  for
warrants.

Occupancy and Equipment:  Occupancy and equipment costs decreased by $898,020 or
43.5%,  from  $2,063,645 for fiscal 2003 to $1,165,625 for fiscal 2004. Rent for
fiscal 2004 decreased due to a settlement with our previous  landlord at 40 Wall
Street,  New York, NY which resulted in our surrendering the 26th floor and part
of the 27th floor in March 2004, which we had previously  occupied.  We continue
to accrue rent on the portion of the 27th Floor we vacated in June 2004 although
we no longer occupy any space at 40 Wall Street, New York, NY after we relocated
to 90 Park Avenue,  New York,  NY. The 40 Wall Street leases were  terminated as
part of our overall cost cutting initiatives.

Depreciation  and  Amortization:  Depreciation  and  amortization  decreased  by
$966,054 or 76.9%,  from  $1,256,599 for fiscal 2003 to $290,545 for fiscal 2004
primarily  due  to  the  disposal  or  surrender  of  assets   subject  to  such
depreciation and amortization.

Other Expenses:  Other expenses  decreased by $860,431 or 60.4%, from $1,423,948
for fiscal 2003 to $563,517  for fiscal  2004.  This  decrease is a reduction in
general operating expenses as part of our overall cost cutting initiatives.

Abandonment  of Leasehold  Improvements:  For fiscal 2004,  the  abandonment  of
leasehold  improvements  of  $610,678  primarily  relates to the  surrender  and
termination  of the 26th and 27th floors  office  leases at 40 Wall Street,  New
York, NY, that occurred in March and June 2004.  These leases were terminated as
part of our  overall  cost  cutting  initiatives.  There was no  abandonment  of
leasehold improvements for fiscal 2003.

Loss on  Investments:  Loss on investments of $84,287 for fiscal 2003 represents
the loss of the value of the stock acquired from E*Trade in April 2002.


                                       30
<PAGE>

Minority  Interest  applicable  to  LLC  Class  B  Members:   Minority  interest
applicable  to LLC Class B Members for fiscal 2003 was $87,019 was primarily for
the settlement of liabilities.

Net Loss: As a consequence  of the  foregoing,  our operating loss before income
taxes and extraordinary items decreased  $2,443,611 or 35.0% from $6,979,720 for
fiscal 2003, to a loss of $4,536,109 for fiscal 2004.

Preferred  Stock  Dividends:  During fiscal 2003, we had preferred  dividends of
$252,000.  There were no  dividends on  Preferred  Stock for fiscal 2004.  As of
September  30, 2004,  all of the  preferred  stock was exchanged for warrants to
purchase shares of our common stock.

Net Loss Applicable to Common  Stockholders:  As a consequence of the foregoing,
our net loss  applicable to common  shareholders  decreased  $2,695,611 or 37.3%
from $7,231,720 in fiscal 2003 to $4,536,109 in fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

To respond to our liquidity and capital  resource needs, we have taken,  and are
taking, a variety of steps to offset the cash used in operating activities. Such
steps include the sale of five million shares of ABWG commons stock in July 2004
for $2  million  over two  years,  cost  cutting  initiatives,  the  pursuit  of
additional revenue producing  activities,  and efforts to raise additional funds
through the issuance of debt or equity securities.

Our cost cutting initiatives include reductions in workforce,  office relocation
to less costly facilities and closures of branch offices,  reductions in capital
expenditures,   and  renegotiating   clearing  corporation  agreements  at  more
favorable  rates. We are pursuing more traditional  lines of business  including
attracting  active  traders  and hedge  funds.  However,  in order to expand our
business,  respond to competitive  pressures and expand into additional products
and services,  we have needed to raise  additional funds through the issuance of
debt or the sale of common stock.  When funds are raised through the issuance of
equity  securities or financial  instruments  that are  convertible  into equity
securities, our existing shareholders may experience dilution in their ownership
percentage  or book  value.  In  addition,  such  securities  may  have  rights,
preferences  and privileges  senior to those of the holders of our Common Stock.
There can be no assurances that the additional  financing will be available when
needed and on terms satisfactory to us.

We may not be able to receive  distributions  from its  regulated  broker-dealer
subsidiaries  due to capital  withdrawal  restrictions  placed on the  regulated
entities by the SEC's Uniform Net Capital rule.

For the year ended September 30, 2004 ("fiscal 2004"), we incurred  consolidated
losses of approximately  $4.5 million and used cash in our operating  activities
of approximately  $1.5 million.  These losses and use of cash are in addition to
the  approximately  $7.0  million  of losses  and $1.5  million  of cash used in
operating  activities  during the year ended September 30, 2003 ("fiscal 2003").
The market  conditions  during fiscal 2004 continue to be very  challenging  for
brokerage firms such as Direct as well as for the brokerage industry in general.
Increased competition has put pricing and margin pressures on us.

There was no cash provided by investing activities during fiscal 2004. Cash used
in investing  activities was $64,950  during fiscal 2003.  The most  significant
uses of cash  used in  investing  activities  were  purchases  of  property  and
equipment.


                                       31
<PAGE>

Cash provided by financing  activities was $1,659,367  during fiscal 2004.  Cash
provided by investing activities consisted of $735,891 of payments received from
the sale of five million shares of ABWG common stock. Cash provided by financing
activities  during  fiscal 2004 also  included  proceeds  from notes  payable of
$2,319,869 and proceeds from secured demand note  receivable of $643,260  offset
by payments of notes  payable of $150,000,  notes  payable - other of $1,800,000
and capital  distributions  to LLC Class B Members of $89,653.  Cash provided by
financing  activities was $1,392,962 during fiscal 2003 and consisted  primarily
of net  proceeds  from the  secured  demand  note of  $1,798,000  offset  by net
payments of notes payable of $200,000 and  distributions  to the Class B Members
of the LLC of $205,038.

Subordinated borrowings as of September 30, 2004 and 2003 were as follows:

   September 30, 2004    September 30, 2003    Interest Rate    Maturity
   ------------------    ------------------    -------------    ----------------
           $2,441,260            $5,000,000          7%         Matured
              125,000               125,000         12%         October 31, 2006
               55,000                55,000          0%         October 31, 2006
              200,000               200,000         15%         October 31, 2006
              150,000               150,000         13%         October 31, 2006
           ----------            ----------
           $2,971,260            $5,530,000
           ==========            ==========

Direct is currently required to maintain minimum net capital such that the ratio
of aggregate  indebtedness to net capital both as defined shall not exceed 15 to
1 under the SEC`s net capital rule. Such rule also prohibits  "equity  capital",
including the  subordinated  loans,  from being withdrawn or cash dividends from
being paid if our net  capital  ratio  would  exceed 10 to 1 or if we would have
less than our minimum  required net capital.  Accordingly,  our ability to repay
the subordinated loans may be restricted under the net capital rule.

RECENT ACCOUNTING DEVELOPMENTS

In  January   2003,   the  FASB  issued   Interpretation   No.  46  ("FIN  46"),
"Consolidation of Variable Interest Entities,  an Interpretation of ARB No. 51."
FIN 46 requires  certain  variable  interest  entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional financial support from other parties. FIN 46 is effective for all new
variable  interest  entities  created or acquired  after  January 31, 2003.  The
consolidation  requirements  apply to older entities in the first fiscal year or
interim period  beginning after June 15, 2003.  However,  in December 2003, FASB
deferred the latest date by which all public entities, which meet the definition
of small business issuer under SEC Regulation S-B ("Public SBs"), must apply FIN
46 to the first  interim or annual  reporting  period  ended after  December 15,
2004. We adopted the above  pronouncement  during the current year and there was
no material effect on our consolidated financial statements.

OFF BALANCE SHEET ARRANGEMENTS

LEASES

As of September 30, 2004, we had off balance sheet  arrangements  related to its
lease obligations. We are obligated under such lease arrangements for $6,437,012
through June 2014.


                                       32
<PAGE>

CLEARING AGREEMENTS

Pursuant to clearance  arrangements,  the clearing and depository operations for
us and our  customers'  securities  transactions  are  provided by two  clearing
broker-dealers.   We  earn   commissions  as  an  introducing   broker  for  the
transactions  of its customers.  In the normal course of business,  our customer
activities  involve the execution and settlement of various customer  securities
transactions.  These activities may expose us to  off-balance-sheet  risk in the
event  the  customer  or other  broker  is  unable  to  fulfill  its  contracted
obligations and we have to purchase or sell the security underlying the contract
at a loss.  Our customer  securities  are  transacted on either a cash or margin
basis.  In margin  transactions,  the clearing  broker extends the credit to our
customer,  subject to various regulatory margin requirements,  collateralized by
cash and  securities in the  customers'  accounts.  However,  we are required to
contact the customer and to either obtain  additional  collateral or to sell the
customer's  position if such collateral in not  forthcoming.  We are responsible
for any losses on such margin  loans,  and has agreed to indemnify  its clearing
brokers for losses that the  clearing  brokers  may  sustain  from the  customer
accounts introduced by us.

CRITICAL ACCOUNTING POLICIES AND PROCEDURES

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated  financial statements,  which have been prepared
in  accordance  with  accounting  principles  generally  accepted  in the United
States.  The  preparation of these  financial  statements  requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and  expenses,  and the related  disclosure  of  contingent  assets and
liabilities  (see Note 2 to the consolidated  financials.  The discussion of our
financial condition and results of operations should be read in conjunction with
the consolidated  financial  statements and notes thereto appearing elsewhere in
this report.

ACCOUNTS RECEIVABLE

Accounts  receivable  consist  primarily  of  amounts  due to us from our normal
business  activities.  We maintain an allowance for doubtful accounts to reflect
the expected  uncollectibility  of accounts  receivable based on past collection
history and specific risks identified among uncollected accounts.

SECURITIES TRANSACTIONS, REVENUE, AND RELATED EXPENSES

Securities transactions and related revenue and expenses, including commissions,
revenues and expenses, are recorded on a trade date basis. Data service revenues
are recorded as the services are provided.


                                       33
<PAGE>

                          ITEM 7. FINANCIAL STATEMENTS

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                         Page
<S>                                                                                                     <C>
Report of Independent Registered Public Accounting Firm - Marcum & Kleigman LLP..........................35

Consolidated Statement of Financial Condition as of September 30, 2004 ..................................36

Consolidated Statements of Operations for the Years ended September 30, 2004 and
          September 30, 2003.............................................................................37

Consolidated Statements of Changes in Stockholders' Deficit for the Years
       ended September 30, 2004 and September 30, 2003 ..................................................38

Consolidated Statements of Cash Flows for the Years ended September 30, 2004 and
       September 30, 2003 ...............................................................................39

Notes to Consolidated Financial Statements...............................................................40-52
</TABLE>


                                       34
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of A.B. Watley Group Inc.:

We have audited the accompanying  consolidated  statement of financial condition
of A.B. Watley Group Inc. as of September 30, 2004, and the related consolidated
statements of operations,  changes in stockholders`  deficit, and cash flows for
the years ended  September 30, 2004 and September 30, 2003.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

We  conducted  our audit in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of A.B. Watley Group
Inc. as of September 30, 2004,  and the results of its  operations  and its cash
flows  for the  year  ended  September  30,  2004 and  September  30,  2003,  in
conformity with U.S. generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from  operations,  has a working capital  deficiency and has negative cash flows
from operations that raise  substantial doubt about its ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2. The consolidated  financial statements do not include any adjustments
that might result from the outcome of this uncertainty.


                                        /s/ Marcum & Kliegman LLP
                                        ----------------------------------------
                                        Marcum & Kliegman LLP

New York, New York

December 3, 2004


                                       35
<PAGE>

                             A.B. Watley Group Inc.
                  Consolidated Statement of Financial Condition
                               September 30, 2004

<TABLE>
<CAPTION>
<S>                                                                                 <C>
ASSETS:

Cash and cash equivalents                                                           $    182,929
Receivables from clearing brokers                                                        314,374
Loans receivable from related party                                                      258,227
Other assets                                                                              22,600
                                                                                    ------------
TOTAL ASSETS                                                                        $    778,130
                                                                                    ============

LIABILITIES AND STOCKHOLDERS' DEFICIT:
Accounts payable and accrued liabilities                                               9,854,571
Accrued liabilities to LLC Class B Members                                             1,910,600
Payable to clearing broker                                                               135,412
Notes payable to former officer                                                          700,000
Notes payable - other                                                                    369,869
Subordinated borrowings                                                                2,791,260
Subordinated borrowings from officer                                                     180,000
                                                                                    ------------

                                                                                      15,941,712
                                                                                    ------------

STOCKHOLDERS' DEFICIT:
Series A Redeemable Convertible Preferred Stock, $0.001 par value, 1,000,000
   shares authorized and none issued and outstanding                                          --
Common stock, $0.001 par value, 50,000,000 authorized and 19,062,138 issued and
   outstanding                                                                            19,062
Additional paid-in capital                                                            60,326,668
Subscription receivable                                                               (1,264,109)
Deferred compensation                                                                   (101,620)
Accumulated deficit                                                                  (74,143,583)
                                                                                    ------------
TOTAL STOCKHOLDERS' DEFICIT                                                         ($15,163,582)
                                                                                    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                         $    778,130
                                                                                    ============
</TABLE>

                 See notes to consolidated financial statements.





                                       36
<PAGE>

                             A.B. Watley Group Inc.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                             Years Ended September 30,
                                                          ------------------------------
                                                              2004               2003
                                                          ------------      ------------
<S>                                                       <C>               <C>
REVENUES:

Commissions                                               $  5,731,404      $  5,690,227

Data service fees                                               50,939           101,821

Principal transactions                                       2,356,633         7,848,918

Interest and other income                                    1,376,079         1,607,916
                                                          ------------      ------------

TOTAL REVENUES                                               9,515,055        15,248,882

Interest expense                                               907,644           834,184
                                                          ------------      ------------

NET REVENUES                                                 8,607,411        14,414,698
                                                          ------------      ------------

EXPENSES AND OTHER CHARGES:

Commissions, floor brokerage and clearing charges            4,278,156         5,793,530

Employee compensation and related costs                      4,660,523         8,570,003

Communications                                                 613,824         1,168,418

Business development                                           186,212           291,868

Professional fees                                              774,440           829,139

Occupancy and equipment                                      1,165,625         2,063,645

Depreciation and amortization                                  290,545         1,256,599

Other expenses                                                 563,517         1,423,948

Loss on  abandonment of leasehold  improvements,  net
of deferred rent incentives                                    610,678                --

Loss on investments                                                 --            84,287

Minority interest applicable to LLC Class B members                 --           (87,019)
                                                          ------------      ------------

TOTAL EXPENSES                                              13,143,520        21,394,418
                                                          ------------      ------------

NET LOSS                                                  ($ 4,536,109)     ($ 6,979,720)

Preferred stock dividends                                           --          (252,000)
                                                          ------------      ------------

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS                ($ 4,536,109)     ($ 7,231,720)
                                                          ============      ============

BASIC AND DILUTED LOSS PER COMMON SHARE                   $      (0.31)     $      (0.57)
                                                          ============      ============

Weighted average shares outstanding                         14,459,535        12,578,995
                                                          ============      ============
</TABLE>

                 See notes to consolidated financial statements





                                       37
<PAGE>

                             A.B. Watley Group Inc.
                  Statement of Changes in Stockholders' Deficit

<TABLE>
<CAPTION>
                                                 ADDITIONAL
                                                  PAID-IN      DEFERRED   SUBSCRIPTION  UNAMORTIZED  ACCUMULATED
                           COMMON STOCK ISSUED    CAPITAL    COMPENSATION  RECEIVABLE   OPTION COSTS   DEFICIT        TOTAL
                           -------------------  ------------   ---------   -----------   --------   ------------   ------------
                                         PAR
                             SHARES     VALUE
                           ---------   -------
<S>                        <C>         <C>      <C>            <C>         <C>           <C>        <C>            <C>
Balance at September 30,
  2002                     12,508,852  $12,509  $ 45,819,569          --            --   ($32,663)  ($62,627,754)  ($16,828,339)

Dividends accrued on
preferred stock                    --       --      (252,000)         --            --         --             --       (252,000)

Stock issued in On-Site
  settlement                  278,286      278       199,722          --            --         --             --        200,000

Amortization of warrants
  issued in connection
  with subordinated
  borrowings                       --       --       273,724          --            --         --             --        273,724

Preferred stock penalties
  waived                           --       --     1,070,593          --            --         --             --      1,070,593

Option costs - net                 --       --            --          --            --     18,667             --         18,667

Net loss                           --       --            --          --            --         --     (6,979,720)    (6,979,720)
                           ----------  -------  ------------   ---------   -----------   --------   ------------   ------------

Balance at September 30,
  2003                     12,787,138  $12,787  $ 47,111,608          --            --   ($13,996)  ($69,607,474)  ($22,497,075)
                           ==========  =======  ============   =========   ===========   ========   ============   ============

Options issued to
  consultant                       --       --  $    179,078   ($101,620)           --         --             --   $     77,458

Common stock issued in
  settlement of accounts
  payable                     175,000      175       260,760          --            --         --             --        260,935

Sale of common stock        5,000,000    5,000     1,995,000          --    (1,264,109)        --             --        735,891
Common stock issued in
  connection with
  financing                   250,000      250        87,250          --            --         --             --         87,500

Adjustment for shares in
  On-Site transaction         100,000      100          (100)         --            --         --             --             --

Exchange of notes payable
  for warrants                     --       --     3,826,821          --            --         --             --      3,826,821

Exchange of Series A
  Redeemable Preferred
  Stock for warrants               --       --     6,867,001          --            --         --             --      6,867,001

Option cost - net                  --       --            --          --            --     13,996             --         13,996

Shares issued as
  collateral for accounts
  payable                     750,000      750          (750)         --            --         --             --             --

Net loss                           --       --            --          --            --         --     (4,536,109)    (4,536,109)

                           ----------  -------  ------------   ---------   -----------   --------   ------------   ------------
Balance at September 30,
  2004                     19,062,138  $19,062  $ 60,326,668   ($101,620)  ($1,264,109)        --   ($74,143,583)  ($15,163,582)
                           ==========  =======  ============   =========   ===========   ========   ============   ============
</TABLE>

                 See notes to consolidated financial statements.


                                       38
<PAGE>

                             A.B. Watley Group Inc.
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                 For the Years Ended September 30,
                                                                                      2004               2003
                                                                                  -----------        -----------
<S>                                                                               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss                                                                          ($4,536,109)       ($6,979,720)

Adjustments to reconcile net loss to net cash used in operating activities:
   Non-cash compensation and service costs
     Options costs                                                                     13,996             18,667
     Amortization of debt discount in connection with
        issuance of warrants and subordinated debt                                    136,862            136,862
     Amortization of finance charge in connection with
        notes payable                                                                  87,500                 --
     Penalties - preferred stock                                                           --            759,107
     Deferred compensation costs                                                       77,458                 --
     Minority interest applicable to LLC Class B members                                   --            (87,019)
     Depreciation and amortization                                                    290,545          1,256,599
     Loss on abandonment of leasehold improvements                                  1,407,518                 --
     Write-off of deferred rent incentives                                           (796,840)                --
   Changes in assets and liabilities:
   (Increase) decrease in operating assets:
       Restricted cash                                                                     --            292,565
       Receivables from clearing brokers                                              (90,818)           805,032
       Securities owned                                                             1,309,145            836,327
       Loans receivable from related party                                             14,500            (14,501)
       Security deposits                                                              175,000            (42,999)
       Other assets                                                                    (2,706)            56,397
   Increase (decrease) in operating liabilities:
       Accounts payable and accrued liabilities                                     1,886,580           (163,576)
       Payable to clearing broker                                                  (1,462,355)         1,597,767
       Securities sold, not yet purchased                                             (28,010)            28,010
                                                                                  -----------        -----------

   Net cash used in operating activities                                           (1,517,734)        (1,500,482)
                                                                                  -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment                                                        --            (64,950)
                                                                                  -----------        -----------
   Net cash provided by (used in) investing activities                                     --            (64,950)
                                                                                  -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from notes payable - other                                                 2,319,869            250,000
Repayment of notes payable - other                                                 (1,800,000)          (450,000)
Repayment of notes payable                                                           (150,000)                --
Proceeds from secured demand note receivable                                          643,260          1,798,000
Capital distribution to LLC Class B members                                           (89,653)          (205,038)
Sale of common stock                                                                  735,891                 --
                                                                                  -----------        -----------
   Net cash provided by financing activities                                        1,659,367          1,392,962
                                                                                  -----------        -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              $   141,633        ($  172,470)

Cash and cash equivalents at beginning of period                                       41,296            213,766
                                                                                  -----------        -----------
Cash and cash equivalents at end of period                                        $   182,929        $    41,296
                                                                                  ===========        ===========

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

    Cash paid for:
      Interest                                                                    $    97,467        $   303,385
      Taxes                                                                                --                 --

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

Subscription receivable for sale of common stock                                  $ 1,264,109                 --
Issuance of warrants to consultant                                                $   179,078                 --
Conversion of Series A Preferred Stock for warrants                               $ 6,867,001                 --
Issuance of stock in payment of liability                                         $   260,935                 --
Liquidation of secured demand note                                                $ 2,616,767                 --
Exchange of notes payable for warrants - principal and interest                   $ 3,826,821                 --
Forgiveness of penalties on preferred stock                                                --        $ 1,070,593
Preferred stock dividends                                                                  --        $   252,000
Issuance of secured demand note                                                            --        $ 5,000,000
Issuance of subordinated borrowing                                                         --        $ 5,000,000
Debt discount in connection with issuance of warrants and subordinated debt                --        $   273,724
Settlements of minority interests                                                          --        $    87,019
Issuance of stock in payment of liability to On-Site                                       --        $   200,000
</TABLE>

                 See notes to consolidated financial statements.


                                       39
<PAGE>

                             A.B. Watley Group Inc.
                   Notes to Consolidated Financial Statements

1. Organization and Business

      A.B.  Watley  Group  Inc.  ("ABWG"  or the  "Company")  is a  U.S.  public
corporation  organized as a Delaware  corporation on May 15, 1996 under the name
Internet Financial Services, Inc. On August 27, 1999 we changed our name to A.B.
Watley  Group Inc. We  presently  conduct  our  business  primarily  through our
subsidiary  A.B.  Watley  Direct,  Inc.  ("Direct").   Direct  is  a  registered
broker-dealer with the Securities and Exchange  Commission,  and a member of the
National  Association  of  Securities  Dealers,  Inc.  Direct is an  introducing
broker-dealer,  conducting  business  in  electronic  trading,  information  and
brokerage  services and  institutional  trading.  Direct clears all transactions
through  clearing  brokers on a fully disclosed  basis.  Accordingly,  Direct is
exempt from Rule 15c3-3 of the Securities and Exchange Act of 1934.

      Until June 30, 2004 when the Company sold its then wholly owned subsidiary
A.B.  Watley Futures Corp.  ("ABW  Futures") to a third party,  the Company also
operated  through ABW Futures.  While owned by the  Company,  ABW Futures was an
introducing  broker/dealer registered with the National Futures Association that
conducted futures trading activity for customers. ABW Futures cleared all of its
business through clearing brokers on a fully disclosed basis.

      Until January 2004,  when it ceased  operations as a result of net capital
deficiencies the Company also operated an introducing  broker-dealer through its
wholly owned subsidiary,  A.B. Watley,  Inc. In February 2004, A.B. Watley, Inc.
withdrew its registration as a broker-dealer.

      On April 3, 2002,  the Company  received a  determination  letter from the
NASD  Listing  Qualifications  Panel that the  Company's  request for  continued
listing on the NASD National Market was denied.  In accordance with such denial,
the Company's  Common Stock was delisted from the NASDAQ Stock Market  effective
with the open of business,  April 4, 2002 (the "Delisting Date"). On October 12,
2004 the Company was relisted on the OTC Bulletin Board.

2. Going Concern

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

      To respond to its  liquidity and capital  resource  needs  management  has
implemented  various cost  cutting  initiatives.  Management  plans also include
raising  additional capital from time to time to fund operations through private
placements of equity or debt instruments.  There can be no assurance that any of
these alternatives will be successful.

3. Basis of Presentation

      The consolidated financial statements include the accounts of ABWG and its
wholly  owned   subsidiaries.   All   significant   intercompany   balances  and
transactions   have  been   eliminated.   Certain  prior  year  amounts  reflect
reclassifications to conform to the current year's presentations.

Cash and Cash Equivalents

      Cash and cash equivalents  include highly liquid instruments with original
maturities of less than three months held by one global financial institution.

Securities Transactions, Revenues, and Related Expenses

      Securities  transactions  and related  revenues  and  expenses,  including
commissions,  revenues and  expenses,  are recorded on a trade date basis.  Data
service revenues are recorded as the services are provided.

Securities owned and Securities Sold, Not Yet Purchased

      Securities  owned and  securities  sold,  not yet  purchased are stated at
market or fair values,  with resulting  unrealized gains and losses reflected in
the statement of  operations.  Market value is generally  based on listed market
prices.  If listed market prices are  unattainable,  fair values are  determined
based on other relevant factors including broker or dealer price quotes.  During
January  2004,  the  Company  ceased  its  proprietary  trading  activities  and
liquidated  its  open  positions.  As of  September  30,  2004,  there  were  no
securities owned or securities sold, not yet purchased.

Equipment and Leasehold Improvements

      Computer  equipment,  software,  and furniture and fixtures are carried at
cost and depreciated or amortized on a straight-line  basis over their estimated
useful lives,  generally three to five years. Leasehold improvements are carried
at cost and are amortized on a  straight-line  basis over the lesser of the life
of the improvement or the term of the lease.


                                       40
<PAGE>

Accounts Payable and Accrued Liabilities

      Accounts payable and accrued liabilities is comprised of the following:

                                                                 September 30,
                                                                      2004
                                                                  ----------
        Commissions, floor brokerage and clearing costs           $1,809,805
        Communications                                             1,533,294
        Information technology                                     1,236,425
        Occupancy, equipment and leases                            1,133,243
        Employee compensation and related costs                    1,089,776
        Professional fees                                            978,933
        Legal                                                        600,000
        Accrued interest                                             429,516
        Business development                                          87,690
        Other                                                        955,889
                                                                  ----------
                                                                  $9,254,571
                                                                  ==========

Use of Estimates:

      The  preparation of the  consolidated  financial  statements in conformity
with accounting  principles  generally  accepted in the United States of America
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  consolidated  financial  statements  and  the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results could differ from those estimates.

Equity-Based Compensation

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

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

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

                                                     YEAR ENDED SEPTEMBER 30,
                                                 ------------------------------
                                                     2004               2003
                                                 -----------        -----------
    Net loss                                     ($4,536,109)       ($6,979,720)
    Stock-based employee compensation
      cost, net of tax effect, under
      fair value accounting                          335,951            313,811
                                                 -----------        -----------
    Pro forma net loss under
      Fair Value Method                          ($4,872,060)       ($7,293,531)
                                                 -----------        -----------
    Loss per share basic and diluted                  ($0.31)            ($0.55)

    Per share stock-based employee
      compensation cost, net of tax
      effect, under fair value accounting               0.02               0.02
                                                 -----------        -----------
    Pro forma loss per share - basic and
      diluted                                         ($0.33)            ($0.57)
                                                 ===========        ===========


                                       41
<PAGE>

Loss Per Share

      Basic loss per share was  computed  using the weighted  average  number of
outstanding common shares. Diluted per share amounts when applicable include the
effect of  dilutive  common  stock  equivalents  from the  assumed  exercise  of
options,  warrants  and the  convertible  preferred  stock.  Dilutive  per share
amounts are computed  excluding common stock  equivalents  since their inclusion
would be  anti-dilutive.  Total  shares  issuable  upon the exercise of options,
warrants and the conversion of preferred stock for the years ended September 30,
2004 and 2003 were 22,243,925 and 13,494,505 respectively.

Fair Value of Financial Instruments:

      Substantially  all of the Company's  financial  instruments are carried at
fair value or at amounts approximating fair value.

Business Development:

      The  Company  expenses  all  promotional  costs as  incurred.  Advertising
production  costs are expensed when the initial  advertisement  is run. Costs of
advertising  are  expensed  as the  services  are  received.  Substantially  all
business  development costs relate to trade show attendance and exhibits.  There
was no advertising expense for the years ended September 30, 2004 and 2003.

Income Taxes:

      Income  taxes are  accounted  for under  the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

Interest and Other Income:

      Included in interest  and other income for the years ended  September  30,
2004 and  September  30,  2003  are  $132,376  and  $105,110  respectively,  for
settlements with vendors for which the Company was the beneficiary.

Accounting Developments:

      In  January   2003,  as  revised  in  December   2003,   the  FASB  issued
Interpretation  No. 46 ("FIN46"),  "Consolidation of Variable Interest Entities,
an  Interpretation  of ARB No. 51." FIN 46 requires  certain  variable  interest
entities  to be  consolidated  by the primary  beneficiary  of the entity if the
equity investors in the entity do not have the  characteristics of a controlling
financial  interest or do not have  sufficient  equity at risk for the entity to
finance its activities  without additional  subordinated  financial support from
other  parties.  FIN 46 is  effective  for all new  variable  interest  entities
created or acquired  after January 31, 2003.  For variable  entities  created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period  beginning  after March 15, 2004. The Company
adopted  the  above  pronouncement  during  the  current  year and  there was no
material effect on the Company's consolidated financial statements.

4. Net Capital Requirement

      Direct is subject to the SEC`s  Uniform Net Capital Rule ("Rule  15c3-1").
In accordance with this rule, Direct is required to maintain minimum net capital
equal to the greater of $5,000 or 6-2/3% of aggregate  indebtedness  as defined.
As of September 30, 2004, Direct had net capital of $40,118 which was $10,813 in
excess of its minimum requirement of $29,305.

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

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

      The Company seeks to control the risks associated with these activities by
reviewing the credit  standing of each customer and  counterparty  with which it
does business. Further, working with the clearing brokers, it requires customers
to maintain margin collateral in compliance with various regulatory and internal
company policy  guidelines.  The clearing brokers monitor required margin levels
daily and, pursuant to such guidelines,  request customers to deposit additional
collateral or reduce securities positions when necessary. The Company's exposure
to these risks becomes magnified in volatile markets.  As of September 30, 2004,
the Company has provided a reserve for  uncollectible  receivables from clearing
brokers in the amount of  $1,166,777.  Total bad debt  expense  incurred  by the
Company which is included in commissions,  floor brokerage, and clearing charges
in the Consolidated  Statement of Operations amounted to approximately  $274,000
and $343,000 during the years ended September 30, 2004 and 2003, respectively.


                                       42
<PAGE>

      The Company at times maintained  positions in equity  securities on both a
long and short basis. While long positions  represent the Company's ownership of
securities,  short positions represent obligations of the Company.  Accordingly,
both long and short  positions  may result in gains or losses to the  Company as
market  values  of  securities  fluctuate.  The  Company  no longer  engages  in
proprietary trading.

6. Equipment and Leasehold Improvements

      In connection with the Company's  relocation of its corporate offices from
40 Wall Street, New York, NY to 90 Park Avenue, New York, NY in fiscal 2004, the
Company  abandoned  leasehold  improvements  with a net book value of $1,407,518
which was  partially  offset by a  write-off  of  deferred  rent  incentives  of
$796,840,  resulting in a net expense of $610,678. As of September 30, 2004, all
of the Company's equipment and leasehold improvements were written off.

      Depreciation  and  amortization  expense for the years ended September 30,
2004 and 2003 was $290,545 and $1,256,599, respectively.

7. Acquisition of On-Site Trading, Inc.

      In an  effort  to  increase  its  customer  base  and to  achieve  greater
economies of scale,  the Company  entered into an Asset Purchase  Agreement (the
"Asset Purchase Agreement") with On-Site Trading, Inc.  ("On-Site").  On October
1, 2001,  the Company  acquired the  customer  lists and certain  other  On-Site
assets and liabilities (the retail business), including its 100% voting interest
in On-Site Trading LLC, a  broker-dealer  subsidiary  (the  proprietary  trading
business)  which  was   subsequently   renamed  ABW  TRADING,   LLC.  Since  the
acquisition,  the retail business and proprietary trading business have operated
as one  reporting  unit.  The  acquisition  was accounted for under the purchase
method of accounting. Pursuant to the terms of the Asset Purchase Agreement, the
Company  issued  1,875,000  shares,  which was later  reduced  by 175,000 of its
Common Stock to On-Site.

      On May 9, 2002,  the Company  notified the LLC Class B members that it had
elected to cease the proprietary  trading  business's  operations as a result of
declining   revenues.   On  June  18,  2002,  LLC  withdrew  its  broker  dealer
registration  and  therefore  was unable to  continue  trading  activities.  The
remaining  liability  to the LLC Class B members as of  September  30,  2004 was
$1,910,600  and  is  included  in the  accompanying  Consolidated  Statement  of
Financial Condition as "Accrued Liabilities to LLC Class B Members".

8. Series A 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 was convertible  into 3,390 shares of the Company's  Common
Stock at an exercise price of $2.95.  The purchasers of the Preferred Stock were
issued warrants,  expiring in 5 years from the date of issuance,  to purchase an
additional 1,629,069 shares of Common Stock at an exercise price of $2.95.

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

      The Preferred Stock included a liquidation preference of $10,000 per share
and bore a cumulative  dividend at an initial 6% annual rate, which increased to
a 15%  annual  rate after  eighteen  months,  payable  twice a year in shares of
Common  Stock.  In June 2003 the  holders of the  Preferred  Stock  executed  an
agreement which waived their rights to penalties, dividends and stock issuances.

      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 holders of the Preferred  Stock were not subject to any limitations on
the  number  of  conversions  of  Preferred  Stock  or  subsequent  sales of the
corresponding  Common Stock that they could 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.


                                       43
<PAGE>

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

      In July  2004,  holders  of  remaining  70 shares of the  Preferred  Stock
outstanding  recorded at $858,376  including  dividends and interest,  agreed to
exchange  their  preferred  stock into  warrants to purchase  780,342  shares of
common  stock of the  Company.  As of  September  30,  2004,  the  impact of the
preferred stock conversion and the issuance of warrants was to decrease Series A
Preferred  Stock by $858,376 and to increase  Additional  Paid-in Capital by the
same amount.

9. Notes and Loans Payable

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

Notes Payable - Former Officer

                                                      Principal         Interest
         Effective Date         Maturity Date           Amount            rate
         --------------         -------------         ---------         --------
         October 1, 2001          On Demand            $500,000            10%
         February 2, 2002         On Demand             200,000            10%
                                                       --------
                                                       $700,000
                                                       ========

      As of September 30, 2004, accrued interest on these notes payable - former
officer amounted to $218,472,  which is included in accounts payable and accrued
liabilities in the accompanying Consolidated Statement of Financial Condition.

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

      On December 23, 2003, the Company  borrowed  $1,800,000 from a third party
at the rate of 20% per  annum.  On  January  16,  2004 the  Company  repaid  the
$1,800,000. Subsequently, during January and February 2004, the Company borrowed
an  additional  $369,969 from the same third party at the rate of 20% per annum.
The note is due on demand.  As of September  30,  2004,  $40,619 of interest has
accrued on this note and is included in Accounts Payable and Accrued Liabilities
in the accompanying Consolidated Statement of Financial Condition.

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

      In July 2004, the Company and certain note holders reached an agreement to
forgive notes payable,  including accrued interest,  in the amount of $2,725,321
in exchange  for  warrants to purchase  1,000,000  shares of common stock of the
Company.  The exercise  price for each of the common  shares to be received upon
exercise of the warrants is $0.19.  In addition  the Company  agreed to amend an
existing warrant agreement, for 1,000,000 shares of common stock of the Company,
held by the note holder to reflect a decrease in the exercise  price from $0.918
to $0.01.  The warrants will have a term of seven years.  There was no financial
statement  impact for the amendment to the warrant exercise price. The impact of
the  forgiveness  of the notes  payable  and the  issuance  of  warrants  was to
decrease Notes Payable by $2,182,826,  decrease Accrued Liabilities, for accrued
interest, by $542,495 and to increase and to increase Additional Paid-in Capital
$2,725,321.

10. Secured Demand Note and Subordinated Borrowings

Secured Demand Note

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

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


                                       44
<PAGE>

Subordinated Borrowings

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

      The Company  recorded a debt discount in the amount of $273,724  which was
amortized to interest expense over the life of the subordinated  loan.  Interest
expense  relating  to the  warrants  was  $136,862  for each of the years  ended
September  30,  2004 and  September  30,  2003.  On January 22,  2004,  the NASD
rescinded its approval of the Subordinated Borrowing Agreement. A.B. Watley Inc.
ceased  operations in January 2004. In February 2004, A.B. Watley Inc.  withdrew
its  registration  as a  broker/dealer.  Of the total  subordinated  borrowings,
$180,000 is from an officer and shareholder of the Company.  Interest expense of
approximately  $328,000 and $316,000  was  incurred on  subordinated  borrowings
during the years ended September 30, 2004 and 2003, respectively.

      Subordinated borrowings as of September 30, 2004 and 2003 are as follows:

  September 30, 2004    September 30, 2003    Interest Rate        Maturity
  ------------------    ------------------    -------------    ----------------
         $ 2,441,260           $ 5,000,000          7%             Matured
             125,000               125,000         12%         October 31, 2006
              55,000                55,000          0%         October 31, 2006
             200,000               200,000         15%         October 31, 2006
             150,000               150,000         13%         October 31, 2006
  ------------------    ------------------
          $2,971,260           $ 5,530,000
  ==================    ==================

      In March 2003,  the holder of the $5 million  secured demand note demanded
repayment of the note.  In April 2004,  the parties  agreed to  discontinue  the
arbitration  without prejudice pursuant to a settlement  agreement that provided
for the repayment of approximately $2.9 million of principal and interest (which
was repaid in April 2004) of the $5 million outstanding principal of the secured
demand  note (see Legal  Proceedings).  In June 2004,  the note  matured and the
Company has not paid the remaining  balance and has not received an extension of
the  maturity  date.  As of  September  30,  2004,  principal  in the  amount of
$2,441,260 and accrued interest of $105,342 remains due and outstanding.

11. Stockholders' Deficit

      On October 8, 2003,  in  connection  with the issuance of a $150,000  note
payable from a third party  lender,  the Company  issued  250,000  shares of the
Company's  common stock,  which  represented a finance  charge of $87,500.  This
charge was amortized to interest expense over the life of the note. During April
2004,  the  Company  repaid  the loan and  accrued  interest  and the  remaining
unamortized  finance  charge was charged to interest  expense at this time.  The
impact of the  recordation  of this  finance  charge  was to  increase  Interest
Expense  by  $87,500  and to  increase  Common  Stock  by $250  and to  increase
Additional Paid-In Capital by $87,250.

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

      In July 2004, the Company and certain note holders reached an agreement to
forgive notes payable,  including accrued interest,  in the amount of $2,725,321
in return for  warrants  to  purchase  1,000,000  shares of common  stock of the
Company.  The exercise  price for each of the common  shares to be received upon
exercise of the warrants is $0.19.  In addition  the Company  agreed to amend an
existing warrant agreement, for 1,000,000 shares of common stock of the Company,
held by the note holder to reflect a decrease in the exercise  price from $0.918
to $0.01.  The warrants will have a term of seven years.  There was no financial
statement  impact for the amendment to the warrant exercise price. The impact of
the  forgiveness  of the notes  payable  and the  issuance  of  warrants  was to
decrease Notes Payable by $2,182,826,  decrease Accrued Liabilities, for accrued
interest, by $542,495 and to increase and to increase Additional Paid-in Capital
$2,725,321.

      As described in Note 8, Series A Redeemable  Convertible  Preferred Stock,
during June 2004 and July 2004,  the holders of the 630 shares of the  Preferred
Stock  outstanding  which was recorded at  $6,867,001  including  dividends  and
interest,  agreed to exchange their preferred stock into warrants to purchase an
aggregate of 6,242,729 shares of common stock of the Company. The exercise price
for each of the common  shares to be received  upon exercise of the warrants was
$0.01. The warrants have a term of seven years and expire in June and July 2011.
As of September 30, 2004, the impact of the preferred  stock  conversion and the
issuance  of warrants  was to  decrease  preferred  stock by  $6,867,001  and to
increase Additional Paid-in Capital by the same amount.


                                       45
<PAGE>

      In July  2004,  the  Company  sold  5,000,000  shares of common  stock for
$2,000,000 in a private  placement  transaction.  As of September 30, 2004,  the
Company has received  $735,891 in cash payments and rebate  commissions  applied
towards the purchase of the shares, with the remaining balance to be received in
installments  through April 1, 2005. As of September 30, 2004, the impact of the
sale of the common  stock was to increase  common  stock by $5,000,  to increase
Additional Paid-In Capital by $1,995,000 and to set up a contra-equity  account,
Subscription Receivable in the amount of $1,264,109.

      During July 2004, the Company issued 1,300,000 options to a consultant for
financial  services to be performed over the next two years.  The options vested
1/3 on the date of grant  and 1/3 on the one (1) year  anniversary  of the grant
and the remaining 1/3 on the second  (2)year  anniversary  of the grant.  At the
time of the grant of the options to the consultant,  the Company determined that
the fair value of the options was $179,078,  which is being  amortized  over the
service period.

      In August 2004,  the Company  issued 175,000 shares of its common stock to
settle  outstanding  vendor debt in the amount of  $260,935.  The impact of this
settlement was to decrease  Accounts Payable by $260,935,  increase Common Stock
by $175 and increase Additional Paid-In Capital by $260,760.

      Effective  August 9, 2004,  the Company  reached an  agreement  with their
legal counsel, Sichenzia Ross Friedman Ference LLP ("Sichenzia") with respect to
an outstanding  invoice to Sichenzia  which amounted to  approximately  $141,000
(the "Outstanding  Balance") as of June 30, 2004. The agreement provided for the
payment of the Outstanding Balance in various installments, of which $80,000 has
been paid as of November 8, 2004. The remaining installments are as follows: (i)
$10,000 is due on or before November 30,  2004,(ii)  $10,000 is due on or before
December  31,  2004,  and (iii) the  remaining  balance  of $29,365 is due on or
before January 15, 2005. As an alternative to the January 15, 2005 payment,  the
Company can make aggregate  payments of $41,365 in monthly  installments  over a
four-month period commencing January 31, 2005. In consideration of the foregoing
settlement, the Company issued an aggregate of 550,000 shares of common stock to
designated partners in Sichenzia.  Sichenzia agreed that 450,000 of these shares
will be  returned  to the  Company  in the  event  that  the  Company  pays  the
Outstanding  Balance  in full  and  does  not at any  time  prior  to the  share
surrender allow the current balance due to Sichenzia exceed $30,000 for a period
of more than 45 days.  In the event  that the  Company  does not  satisfy  these
conditions,  Sichenzia  can retain  the  450,000  shares and apply the  proceeds
received from the sale of these shares against the remaining Outstanding Balance
and/or  any other  sums then due by the  Company  to  Sichenzia.  The  remaining
100,000  shares of common  stock  issued to  Sichenzia  are  considered  to be a
financing charge for the settlement agreement and accordingly are not returnable
to the Company.

      As of September 30, 2004, the Company has issued a former attorney 200,000
shares of common stock of the Company as  collateral  for the timely  payment of
all amounts due under a  settlement  agreement  entered into between the Company
and their former legal counsel. The impact of this issuance of restricted common
stock as collateral was to increase Common Stock by $200 and decrease Additional
Paid-In Capital by the same amount.

      During  the  year  ended   September  30,  2004,   the  Company   recorded
amortization  of Option  Costs in the amount of  $13,996  which  resulted  in an
increase to Employee  Compensation and Related Costs by $13,996 and the increase
to  Unamortized  Option Costs by $13,996.  At September 30, 2004,  there were no
remaining Unamortized Option Costs.

      During the year ended  September 30, 2004, the Company  reclaimed  100,000
shares of common stock that had previously  been issued to On-Site.  The Company
is currently in the process of obtaining  this share  certificate  so that these
shares may be retired.

12. Commitments and Contingencies

Late Filings

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

Lease Agreements

      During the majority of the year ended  September  30, 2004,  the Company's
principal offices were located at 40 Wall Street, New York, NY at an annual cost
of approximately  $920,000 per year, plus  escalations.  The initial term of the
lease for such  office  space  expired  in June  2009.  The  Company's  previous
landlord,   40  Wall  Street,   LLC,  commenced  two  separate   landlord/tenant
proceedings  seeking money judgments and orders of eviction against the Company.
Both  proceedings have been settled whereby the Company vacated a portion of the
premises in March 2004 and the remaining  portion in June 2004.  The Company has
signed a confession of judgment for $609,441 and the landlord is seeking a money
judgment for all rent arrears (a provision has been provided in the consolidated
financial   statements).   In  connection  with  Company's   relocation  of  its
headquarters from 40 Wall Street,  New York, NY to 90 Park Avenue, New York, NY,
for  the  year  ended  September  30,  2004,  the  Company  abandoned  leasehold
improvements with a net book value of $1,407,518 which was partially offset by a
write-off of deferred rent incentives of $796,840, resulting in a net expense of
$610,678,  which is included in Loss on Abandonment  of Leasehold  Improvements,
Net of Deferred Rent Incentive, in the Consolidated Statement of Operations.

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


                                       46
<PAGE>

      The Company presently occupies  approximately 8,500 square feet at 90 Park
Avenue,  26th Floor,  New York,  NY 10016  pursuant to an  arrangement  with the
lessee, a related party  (principals) to the Company,  of the space. The term of
the lease expires on May 31, 2014. AB Watley Direct Inc. has guaranteed the full
and timely  performance of all  obligations  of the lessee under the lease.  The
lease provides for the payment of an annual base rental,  together with lessee's
proportionate  share of building  operating  expenses  including taxes. The base
annual  rental for years 1 through 3, 4 through 6, and 7 through 10 is $366,376,
$411,056,  and  $464,672,  respectively.  Under  the  arrangement,  the  Company
occupies  approximately 95% of the leased space and pays a proportionate  amount
of the lease payments.

The  aggregate  minimum  future  rental  payments,  including a provision  for a
portion of the lease payment associated with 40 Wall Street, are as follows:

                  Fiscal Year Ended
                        2005            $  889,642
                        2006               859,550
                        2007               858,057
                        2008               900,503
                        2009               773,003
                     Thereafter          2,156,257
                                        ----------
                                        $6,437,012
                                        ==========

Rent expense for the years ended  September 30, 2004 and 2003 was $1,013,027 and
$1,365,051, respectively.

Employment Agreements

      During the year ended  September 30, 2002,  the Company  entered into four
employment  agreements with certain key executives.  The terms of the agreements
ranged from two to four years and provided for annual  compensation of $850,000.
The  agreements  also  provided  for a  discretionary  bonuses  based  upon  the
performance  of the Company.  During the year ended  September 30, 2003,  two of
these executives employment were terminated.  The termination of these employers
is not  expected  to  have a  material  effect  on  the  consolidated  financial
statements.  Total  annual  compensation  under  the  two  remaining  employment
agreements is as follows:

                                             Annual
         Fiscal Year Ended               Compensation
         -----------------               ------------
         2005                                $350,000
         2006                                 330,000
                                             --------
                                             $680,000
                                             ========

Litigation

      The Company's 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,  the Company is, 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.

      In Summer  2004,  the Company  learned  that the  Securities  and Exchange
Commission  staff was conducting a formal order  investigation.  While the exact
scope of the SEC  investigation is uncertain,  it appears that the Commission is
investigating  trading  activities  that  may  have  occurred  on the  Company's
premises.  The Company,  along with its Vice Chairman,  and the Chief Compliance
Officer of its subsidiary,  A.B. Watley Direct,  Inc., has been supoenaed by the
Commission  in  connection  with the  investigation.  The Company  has  produced
documents. The Chief Compliance Officer of A.B. Watley Direct, Inc. has produced
documents and has provided  testimony.  It is anticipated that the Vice Chairman
and others  will  provide  testimony  in 2005.  The  Company  and its  officers,
directors  and  subsidiaries  will continue to cooperate  with the  Commission's
investigation.  At this time,  the Company is unable to determine the outcome of
the investigation.

      The Company is a defendant  in an action  titled  Michael  Fielman v. A.B.
Watley,  Inc. and A.B. Watley Group Inc., that was filed in the Supreme Court of
the State of New York, County of Nassau, Index No. 012082/02.  This is an action
for unpaid wages seeking $28,657, plus statutory damages,  costs, and attorneys'
fees.  This  matter has been  settled  in the  amount of  $34,658  payable on an
installment  basis of eight (8) months (a provision has been provided for in the
consolidated financial statements).  The Company is in default of the settlement
agreement.

      The Company is a defendant in an action titled  General  Electric  Capital
Corp.,  as Assignee of Sun  Microsystems,  Inc. v. A.B.  Watley Group Inc. f/k/a
Internet  Financial  Services,  Inc.,  Supreme  Court of the  State of New York,
County of New York, Index No. 117675/02. This was a breach of contract action in
connection  with the lease of equipment,  which sought  compensatory  damages of
$195,356 plus interest, costs and attorney's fees (a provision has been provided
for in the  consolidated  financial  statements).  In November 2004, the Company
settled this matter for $30,000, full payment of which has been made.


                                       47
<PAGE>

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

      The Company is defendant in an action titled Hyperfeed Technologies,  Inc.
v. A.B. Watley Group Inc.,  filed in the Supreme Court of the State of New York,
County of New York,  Index  No.  111538/03.  Plaintiff  has  obtained  a consent
judgment  order  against  A.B.  Watley  Group Inc.  in the amount of $180,503 (a
provision  has been  provided  for in our  consolidated  financial  statements).
Currently, Plaintiff is conducting post-judgment discovery.

      The Company is  respondent in an  arbitration  filed in or about July 2003
titled John W. Donavan and Bettina H. Wolff v. A.B. Watley,  Inc.  Claimants are
seeking  damages  of  approximately  $94,800  relating  to  the  suitability  of
Claimants'  investments  (a provision has been provided for in the  consolidated
financial statements). The Company denies all wrongdoing in connection with this
matter asserting that it acted in accordance with its customer agreement as well
as applicable  federal  securities  law. The parties have settled this matter in
its entirety.

      The Company is respondent in an arbitration  titled Steven Messina,  Brian
Kelly, and Thomas Messina v. A.B.  Watley,  Inc., NASD Arbitration No. 02-04649.
Claimants  filed this claim  against  A.B.  Watley,  Inc. in August 2002 seeking
damages for unpaid  commissions of approximately  $147,000 (a provision has been
provided for in the consolidated financial statements) plus legal fees and costs
in the amount of $4,025 for arbitration  fees and  disbursements.  A.B.  Watley,
Inc.   denies  all   wrongdoing  in  connection   with  this  matter,   and  has
counterclaimed  for  $608,000  against  Claimants  for  breach of  contract  and
fiduciary duty. A.B. Watley,  Inc. intends to vigorously  defend this matter and
prosecute its counterclaim.

      The Company is defendant in an action titled Pentech  Financial  Services,
Inc. v. A.B. Watley Group Inc.,  Supreme Court of the State of New York,  County
of New York, Index No.  02-126759.  Plaintiff has filed a complaint against A.B.
Watley Group Inc. for an alleged breach of a lease  agreement.  On May 28, 2003,
Plaintiff  obtained a judgment in the amount of $465,584 plus  interest  accrued
thereon  (a  provision  has  been  provided  for in the  consolidated  financial
statements).  A.B.  Watley  Group Inc.  executed  a  settlement  agreement  with
Plaintiff for a total settlement of $522,584 payable on an installment basis. As
of February  24,  2004 A.B.  Watley  Group Inc. is in default of the  settlement
agreement.

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

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

      The Company is defendant in an action titled Siemens  Financial  Services,
Inc. f/k/a Siemens Credit  Corporation v. A.B. Watley Group Inc.,  Supreme Court
of the State of New York, County of New York, Index No.  603769/2002.  Plaintiff
filed a complaint alleging breach of contract.  Plaintiff has a judgment against
A.B.  Watley Group Inc. in the amount of $179,883 with interest  accrued thereon
from  July 10,  2003 (a  provision  has been  provided  for in the  consolidated
financial   statements).   Plaintiff  is  presently   conducting   post-judgment
discovery.

      The Company is respondent in an arbitration titled Jeffrey Spittel v. A.B.
Watley,  Inc., NASD Arbitration No. 03-08076.  Claimant has submitted this claim
to  arbitration   claiming  breach  of  contract,   respondeat   superior,   and
misappropriation and conversion,  in the amount of $7,500 plus punitive damages,
costs,  disbursements and reasonable attorneys' fees. A.B. Watley, Inc. filed an
answer on January 12, 2004.  A hearing had been  scheduled  for November  23-24,
2004 in New York, but was adjourned at the Claimants  request.  The NASD has not
advised the parties of the rescheduled  hearing date. A.B.  Watley,  Inc. denies
all wrongdoing in connection  with this matter and intends to vigorously  defend
this matter.

      The Company is defendant in an action  titled Peter Wigger v. A.B.  Watley
Group Inc.,  Supreme Court of the State of New York,  County of New York,  Index
No.  604124/02.  Plaintiff  filed a complaint  alleging  breach of a  commission
agreement and unpaid wages due and owing.  Plaintiff seeks damages in the amount
of $398,750  plus  interest  accrued  thereon.  Plaintiff has filed a motion for
summary judgment on his claims.  On or about April 23, 2004, the parties reached
a settlement,  which  contemplates a total payment of $174,000 to Plaintiff over
the  course  of  two  (2)  years  (a  provision  has  been  provided  for in the
consolidated financial statements). The Company has paid $42,000 of this amount.
However,  the  parties are  litigating  whether the Company is in default of the
settlement agreement.


                                       48
<PAGE>

      The Company is defendant in an action  titled Lehr  Construction  Corp. v.
A.B. Watley Group Inc., Supreme Court of New York, County of New York, Index No.
600276/02.  This  action is for damages  arising out of the alleged  breach of a
construction  contract.  Plaintiff sought damages of approximately  $233,794. On
March 6, 2003, the parties  reached a settlement in which the Company  consented
to a judgment in the amount of $295,857,  less any payments made by the Company,
and the parties simultaneously  entered into a Forbearance Agreement,  which set
forth a payment schedule for the Company.  The Company has paid $65,000 pursuant
to the Forbearance Agreement. On December 17, 2003, Plaintiff issued the Company
a Notice of Default  under the  Forbearance  Agreement,  which the  Company  has
failed to cure.  Under the Forbearance  Agreement,  Plaintiff may execute on the
outstanding  balance of the judgment in the amount of $158,794  without  further
notice to the Company (a provision  has been  provided  for in the  consolidated
financial statements). Plaintiff has made efforts to seek information to collect
upon the judgment.

      The Company  was the  defendant  in an action  titled  A.B.  Watley  Group
Inc./John  Martinez,  Case  No.  2-4173-03-36  Section  806  Sarbanes-Oxley  Act
Complaint. On July 11, 2003, the U.S. Department of Labor ("DOL") gave us notice
that John Martinez,  a former officer of ours, had filed a complaint  against us
under  Section 806 of the  Sarbanes-Oxley  Act of 2002 (the "Act").  On March 9,
2004,   the   Department  of  Labor  gave  notice  that  it  had  completed  its
investigation and dismissed the complaint. Complainant appealed. This matter was
settled for $20,000, full payment of which has been made.

      The Company  was the  respondent  in an  arbitration  titled MCI  Worldcom
Communications,  Inc. v. A.B. Watley Group Inc., JAMS  Arbitration,  Reference #
1410003356.  On September 16, 2003,  claimant filed this arbitration against the
Company  asserting  a breach of  contract  claim in the amount of  $135,644.  On
January  26,  2004,  the  Company  submitted  its answer  denying  all  material
allegations and asserting several affirmative  defenses.  On March 22, 2004, the
Arbitrator held a Preliminary  Conference and issued a Preliminary Hearing Order
directing the parties to submit a brief  addressing the  arbitrability of one of
Claimant's  claims and our statute of  limitations  defense.  On April 28, 2004,
JAMS  informed the parties the  Arbitrator  had  resigned due to illness.  A new
Arbitrator  was  assigned  to the  matter,  but we  objected  to the  Arbitrator
appointment. This matter was settled for $30,000, full payment of which has been
made  (a  provision  has  been  provided  for  in  the  consolidated   financial
statements).

      In March  2003,  the holder of our $5  million  secured  demand  note (the
"Noteholder")  demanded  repayment of the note.  On March 31, 2003,  the Company
filed a NASD  Arbitration  Demand and a Statement of Claim with the NASD Dispute
Resolution  office.  The  arbitration  sought to enforce the  provisions  of the
secured demand note agreement and to prevent premature withdrawal by the lender.
In April  2004,  the  parties  agreed to  discontinue  the  arbitration  without
prejudice pursuant to a settlement  agreement that provided for the repayment of
approximately  $2.9  million  (which was repaid in April 2004) of the $5 million
original  secured demand note. The remaining  principal  balance  payable in the
consolidated  financial statements is $2,441,260.  The Noteholder agreed that as
long as the  Company  was not in  default  of any of its  obligations  under the
settlement  agreement,  not to  commence  any  litigation  with  respect  to the
outstanding  balance due on the secured  demand note prior to December 20, 2004.
On June 4, 2004 the  Noteholder  sent the  Company a notice of default  alleging
that  it did  not  meet  certain  of its  obligations  under  the  terms  of the
settlement  agreement.  On June 2004,  the note  matured and the Company has not
paid the remaining balance or received an extension of the maturity date.

      The Company is  plaintiff  in an action  titled A.B.  Watley Group Inc. v.
John J. Amore,  et al.,  Supreme  Court of the State of New York,  County of New
York, Index No.  602993/03.  The Company has sued its former CEO who has filed a
counterclaim  against the Company. The Company is unable at this time to provide
a opinion as to the likely outcome, nor the potential expense to be incurred.

      The Company is defendant in an action titled John J. Amore v. Steven Malin
and A.B.  Watley,  Inc.,  Supreme Court of the State of New York,  County of New
York,  Index No.  603833/03.  Plaintiff  filed a complaint  alleging breach of a
contract against A.B. Watley, Inc. seeking damages in the amount of $500,000 and
slander  against Steven Malin,  our Chairman,  seeking  damages in the amount of
$5,000,000.  The Company has filed an answer denying all wrongdoing. The Company
denies all  wrongdoing in connection  with this matter and intends to vigorously
defend this matter.

      The Company was the respondent in an arbitration  titled William Frymer v.
A.B.  Watley,  Inc.,  NASD  Arbitration  No.  03-05524.  The claimant,  a former
employee of the Company,  commenced this arbitration claiming breach of contract
and  violation of New York labor laws.  The Claimant  sought  unpaid  salary and
bonus,  stock  options,  liquidated  damages and punitive  damages.  The Parties
agreed  to a  settlement  of  $75,000,  which  has  been  provided  for  in  the
consolidated financial statements and subsequently paid in full.

      On December 9, 2004, A.B.  Watley,  Inc. was notified of an award rendered
by an NASD arbitration panel against A.B. Watley, Inc. for compensatory  damages
in the amount of $811,927 (a provision has been provided for in the consolidated
financial  statements)  to claimant,  James B. Fellus,  in the case  encaptioned
James B. Fellus vs. A.B.  Watley,  Inc. (NASD  Arbitration No.:  03-05526).  All
other relief sought by claimant  (including an award against A.B. Watley Direct,
Inc.  and/or A.B.  Watley  Group,  Inc.,  and for  attorneys  fees and  punitive
damages) was  expressly  denied.  The  arbitration  involved  claims by a former
employee of A.B.  Watley,  Inc. for alleged breach of contract (all other claims
having been withdrawn by the former  employee).  The amount  awarded  presumably
represented  damages for alleged non-payment of contractual salary. A.B. Watley,
Inc. intends to move to vacate the award by asserting,  among other things, that
the  panel   manifestly   disregarded  the  undisputed   facts  and  applicable,
well-settled law.

      The Company is the  respondent  in an action titled Dover Limited et al v.
A.B.  Watley,  Inc.  et al.,  Index No.:  04 Civ.  7366.  Plaintiffs  filed this
complaint against,  among others, the Company, its president,  and two employees
alleging six causes of action  sounding in securities  fraud,  common law fraud,
conspiracy to commit fraud, breach of contract and breach of implied covenant of
good faith and fair dealing,  and negligent  misrepresentation.  Plaintiffs  are
seeking  compensatory damages of $2,994,598 plus punitive damages of $5,000,000,
including costs, interest and attorney's fees. The Company denies all wrongdoing
in connection with this matter and intends to vigorously defend this matter.


                                       49
<PAGE>

      Effective  August 9, 2004 we reached  an  agreement  with  legal  counsel,
Sichenzia  Ross  Friedman  Ference  LLP   ("Sichenzia")   with  respect  to  our
outstanding  invoice  to  them  of  approximately   $141,364  (the  "Outstanding
Balance")  as of June  30,  2004  (a  provision  has  been  provided  for in the
consolidated  financial  statements).  The agreement provides for the payment of
the Outstanding  Balance in  installments,  $90,000 of which has been paid as at
November 8, 2004. The remaining  installments  are due on or before December 31,
2004 ($10,000) and on or before January 15, 2005 ($29,364). As an alternative to
the January 15, 2005  payment,  the Company can make  payment of an aggregate of
$41,364 in  installments  over a period of four  months  commencing  January 31,
2005. In consideration of the foregoing, the Company also issued an aggregate of
550,000  shares  of our  common  stock  to  designated  partners  in  Sichenzia.
Sichenzia has agreed that 450,000 of such shares will be returned to the Company
for  cancellation in the event that it pays the Outstanding  Balance in full and
does not at any time prior  thereto  allow the  current  balance  due to them to
exceed  $30,000 for a period of more than 45 days. In the event the Company does
not satisfy these conditions,  Sichenzia can retain the 450,000 shares and apply
the sale proceeds against the Outstanding Balance and any other sums then due by
the Company to them.

      In addition to the  foregoing,  in the ordinary  course of  business,  the
Company and its 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.  Except as set forth herein,  the Company is not currently
involved  in  any  proceeding  by  a  governmental   agency  or  self-regulatory
organization,  the outcome of which could have a material  adverse effect on our
business.  There can be no assurance that one or more disciplinary  actions,  if
decided  adversely  against us, would not have a material  adverse effect on our
business, financial condition and results of operations.

13. Stock Options

      Under the  Company's  Stock  Option  Plans  (collectively,  the  "Plans"),
employees,  non-employee  directors,  officers,  and  consultants  are generally
granted options (both incentive stock options and nonqualified stock options) to
purchase  shares of  Common  Stock at prices  not less than the  estimated  fair
market value of the Common Stock on the date the option is granted.  The options
are  exercisable  at  either  the date of  grant,  in  ratable  installments  or
otherwise, generally over a period of one to three years from the date of grant.

The  options  generally  expire  within ten years  after the date of grant.  The
number of shares  delivered in the aggregate under the 2004,  2003,  2000, 1999,
1998 and 1997 Plans cannot  exceed  6,500,000,  2,000,000,  1,600,000,  800,000,
800,000 and 400,000 shares, respectively, (12,100,000 shares in total).

      A summary of the Company's stock option  activity and related  information
for the years ended September 30, 2004 and 2003 is as follows:

                                                                       Weighted
                                                                        Average
                                                      Number of        Exercise
                                                        Shares          Price
                                                      ----------        ------
          Outstanding at September 20, 2002            3,579,387        $ 2.12
              Granted                                    500,000        $ 0.35
              Exercised                                       --            --
              Forfeited                               (1,386,687)       $15.23
                                                      ----------        ------
          Outstanding at September 30, 2003            2,692,700        $ 6.37
              Granted                                  6,875,000        $ 0.20
              Exercised                                       --            --
              Forfeited                                  (32,450)       $ 8.58
                                                      ----------        ------
          Outstanding at September 30, 2004            9,535,250        $ 0.23
                                                      ----------        ------

          Exercisable at September 30, 2002            2,614,913        $ 0.39
          Exercisable at September 30, 2003            1,699,430        $ 6.94
          Exercisable at September 30, 2004            4,693,592        $ 0.27

      Included in the table above are  non-employee  option  grants of 1,400,000
and -0- shares for the years ended  September  30, 2004 and  September 30, 2003,
respectively.  Compensation expense related to these stock options for the years
ended September 30, 2004 and 2003 was $77,458 and $0, respectively.

      During the year ended  September  30, 2004 the Company  issued  options to
purchase  6,875,000  shares of its common stock to certain of its  employees and
consultants. The weighted average exercise price of the options awarded was $.20
and with an average expiration term of ten years. Additionally,  during the year
ended  September  30, 2004,  options to purchase  30,000 shares of the Company's
common  stock  were  voluntary   forfeited  and  2,450  were  forfeited  due  to
termination of employment.



                                       50
<PAGE>

      The weighted  average fair value of options granted during the years ended
September 30, 2004 and 2003, was $0.20 and $0.35,  respectively.  The fair value
of each option grant was estimated at the date of grant using the  Black-Scholes
option valuation model. The  Black-Scholes  option valuation model was developed
for use in  estimating  the fair value of traded  options  which have no vesting
restrictions  and are fully  transferable.  Because the Company's  stock options
have characteristics  significantly  different from those of traded options, and
because changes in the subjective  input  assumptions can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily  provide a reliable single measure of the fair value estimate of its
stock  options.  In  calculating  the fair  values  of the  stock  options,  the
following assumptions were used:

                                                  Years Ended September 30,
                                               2004 Grants       2003 Grants
                                               -----------      ------------
     Dividend yield                                 0%               0%
     Weighted average expected life:

        Employees:                                  10.0 years       10.0 years

        Non-employees                               10.0 years       --

     Weighted average risk-free interest rate       4.52%            4.21%

     Expected volatility                            416%             109%

      Additional  information  regarding options outstanding as of September 30,
2004 is as follows:

<TABLE>
<CAPTION>
                                            Options Outstanding                                    Options Exercisable
                                           ----------------------                               -------------------------
Range of                  Number of           Weighted Average      Weighted Average     Number Exercisable      Weighted Average
Exercisable Prices    Outstanding as of     Remaining Contractual    Exercise Price      as of 9/30/04           Exercise Price
                           9/30/04              Life in years
---------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                     <C>                   <C>                <C>                       <C>
$0.10 - $ 0.35             9,475,000               9.29                  $ 0.19             4,641,667                 $ 0.18
$2.90 - $ 6.13                45,000               6.68                  $ 4.33                36,675                 $ 4.66
$10.19 - $17.50               15,250               5.49                  $14.34                15,250                 $14.34
                           ---------                                                        ---------
                           9,535,250                                                        4,693,592
                           =========                                                        =========
</TABLE>

14. Stock Warrants

      A summary of the Company's  warrant  activity and related  information for
the year ended September 30, 2004 is as follows:

                                                  Number of          Range of
                                                   Shares        Exercise Prices
                                                 ----------      ---------------
        Outstanding at September 30, 2003         7,037,036        $0 - $19.47

        Issued in exchange for Series A
          Preferred Stock                         6,242,728           $.01

        Issued in exchange of debt                1,987,771           $.01

        Expired                                   (929,791)       $6.75 -$19.47

        Forfeited with exchange of Series A
          Preferred Stock                        (1,629,069)          $2.95
                                                 ----------
        Outstanding at September 30, 2004        12,708,675        $0 - $3.69
                                                 ----------

15. Income taxes

      The Company has no income tax  liability  for  Federal,  State,  and Local
income tax  purposes.  The  Company is subject  only to minimum  taxes  based on
capital  and the  provision  for  income  taxes  for  each of the  years  ending
September 20, 2004, and 2003 amounted to $0.

<TABLE>
<CAPTION>
                                                                       Years Ended September 30,
                                                                         2004             2003
                                                                        -----            -----

<S>                                                                     <C>              <C>
         Tax benefit at federal statutory rate                          (34.0%)          (34.0%)
         State taxes, net of federal tax effect                           0.1              0.1
         Increase in valuation allowance on deferred tax assets          33.9             33.9
         Other                                                            0.1              0.1
                                                                        -----            -----
         Effective tax rate                                               0.1%             0.1%
                                                                        =====            =====
</TABLE>


                                       51
<PAGE>

      Deferred  income taxes  reflect the tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes.  The effects of temporary
differences  that give rise to deferred  tax assets at September  30, 2004,  are
principally  the result of net operating  carryforwards.  At September 30, 2004,
the Company had a net operating loss carry forward for federal,  state and local
tax purposes of  approximately  $74,000,000  that will begin to expire no sooner
than September 30, 2013.

      In  assessing  the  realizability  of  deferred  tax  assets,   management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent  upon the generation of future taxable income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the reversal of deferred tax assets,  projected  future taxable income
and tax planning  strategies in making this assessment.  Based upon the level of
historical  taxable  income and  projections  for future taxable income over the
period for which the deferred tax assets are deductible,  management believes it
is more likely than not that the Company  will not realize the benefits of these
deductible  differences,  and thus a 100% valuation allowance of theses benefits
($29,600,000) was established. The valuation allowance increased by $3.6 million
from the year ended  September 30, 2003 as compared to the year ended  September
30, 2004. Certain of such net operating loss benefits may be limited as a result
of a change of control.

16. Subsequent Events

      Effective  October 12, 2004 we retained  Sichenzia  to represent us in the
action titled Dover Limited and Wendy Sui Cheng Yap v. A.B. Watley Inc.,  Robert
Malin, Keith Sorrentino, John Coakley, Alain Assemi and John J. Amore (Case No.:
04 CV 7366) as filed in the United States District Court,  Southern  District of
New York.  In connection  therewith,  we paid  Sichenzia an initial  retainer of
$10,000  and issued an  aggregate  of  1,000,000  shares of our common  stock to
designated  partners of Sichenzia.  In the event we pay all  Sichenzia  invoices
related to this matter within 30 days of issuance,  the 1,000,000 shares will be
returned  to us for  cancellation.  If we  fail  to do so,  the  shares  will be
retained  and the  proceeds  from  sales  thereof  will be applied to all of the
outstanding  and current  balances due by us to them. Any excess will be applied
to additional fees incurred,  if any. Any remaining  proceeds after that will be
retained by the share recipients.

      In October  2004 we issued an  aggregate  of 300,000  shares of our common
stock to three  persons  with respect to legal and other  services  rendered and
100,000  shares to an  affiliate  of our legal  counsel in return  for  services
provided in connection with a debt conversion.


                                       52
<PAGE>

            ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE

On October 10, 2002, Israeloff,  Trattner & Co., P.C.  ("Israeloff") resigned as
our Independent  Public Accounting Firm.  Israeloff did not issue any reports on
our financial statements and, therefore,  no report contained an adverse opinion
or disclaimer of opinion,  or was modified as to  uncertainty,  audit scope,  or
accounting principle.  Furthermore,  during the two most recent fiscal years and
any subsequent interim period, there were no disagreements with Israeloff within
the meaning of  Instruction 4 to Item 304 of Regulation S-B under the Securities
Exchange  Act of 1934 on any  matter  of  accounting  principles  or  practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements,  if not resolved to the  satisfaction  of  Israeloff,  would have
caused them to make  reference in  connection  with their opinion to the subject
matter of the disagreement in connection with any report they might have issued.

On October  21,  2002,  we  engaged  Marcum &  Kliegman  LLP as our  Independent
Registered  Public  Accounting  Firm.  Prior  to  such  appointment,  we  had no
discussions with Marcum & Kliegman LLP on any matter,  including but not limited
to:

      o     the application of accounting principles to a specified transaction,
            either  completed  or  proposed,  or the type of audit  opinion that
            might be rendered on our financial statements; or

      o     any matter that was either the subject matter of a disagreement or a
            reportable event.

                        ITEM 8A. CONTROLS AND PROCEDURES

      Our principal  executive and financial officer evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by
this report.  Based on this  evaluation,  our principal  executive and financial
officer concluded that our disclosure  controls and procedures are effective for
gathering,  analyzing and disclosing the information we are required to disclose
in the reports we file under the  Securities  Exchange  Act of 1934,  within the
time periods  specified in the Commission  rules and forms.  Such evaluation did
not identify any change in the year ended September 30, 2004 that has materially
affected or is reasonably  likely to materially affect our internal control over
financial reporting.

                           ITEM 8B. OTHER INFORMATION

      Not applicable.

                                    PART III

      ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS AND DIRECTORS

Directors  serve until the next annual meeting of the  stockholders  until their
successors  are  elected  or  appointed  and  qualified,  or until  their  prior
resignation or removal. Officers serve for such terms as determined by our board
of  directors.  Each  officer  holds office  until such  officer's  successor is
elected or appointed and qualified or until such officer's  earlier  resignation
or removal.  Steven  Malin and Robert  Malin,  our  Chairman  and Vice  Chairman
respectively, are brothers.


                                       53
<PAGE>

The following table sets forth certain information, as of December 20, 2004 with
respect to our directors and executive officers.

                                                                Date of Election
                                                                  or Appointment
Name             Positions Held                        Age         as Director
----             --------------                        ---         -----------
Steven Malin     Chairman of Board                      46          May 1996

Robert Malin     President, Vice Chairman of Board      39          May 1996

The  following  is a brief  account of the  business  experience  of each of our
directors and executive officers during the past five years or more.

Steven Malin co-founded the Company in May 1996 and has been our Chairman of the
Board since inception. Mr. Malin also served as Chief Executive Officer from May
1996 to September 2002. From August 1993 to December 1996, Mr. Malin served as a
consultant to the Company.  From 1987 to 1993, he was a Senior Foreign  Exchange
Options  Broker for Tullett and Tokyo  Forex,  Inc., a global  inter-bank  money
brokering firm with its primary offices  located in London,  New York and Tokyo.
Mr. Malin  attended the Fletcher  School of Law and Diplomacy from 1982 to 1984.
He received a bachelor of arts degree from Vassar College in 1980.

Robert Malin is a co-founder  of the Company and has served as a director  since
inception.  He has been associated with the Company since August 1993, initially
as General Securities Principal and director of day-to-day  operations and, most
recently,  serving as President. His earlier experience includes managing equity
trading, client services and brokerage operations.

BOARD OF DIRECTORS

      Our Board of Directors may  designate  from among its members an executive
committee  and one or  more  other  committees.  No such  committees  have  been
appointed  to date.  Accordingly,  we do not have an audit  committee  financial
expert.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

      During the fiscal year ended September 30, 2004 and the period  subsequent
thereto, based upon an examination of the public filings, required Forms 3, 4 or
5 filings were not made by Robert Malin,  Steven Malin,  Kentan Ltd.,  and Yanzu
Inc.  Messrs.  Steven and Robert  Malin have advised us that they intend to file
Forms 5 as soon as practicable.

CODE OF ETHICS

On December 1, 2004 we adopted a Code of Ethics  that  applies to our  principal
executive officer,  principal financial officer, principal accounting officer or
controller,  or  persons  performing  similar  functions.  A copy of our Code of
Ethics is being filed as an exhibit to this report. A copy of our Code of Ethics
will be provided to any person requesting same without charge. To request a copy
of our Code of Ethics  please make  written  request to our  President  c/o A.B.
Watley Group Inc. at 90 Park Avenue, New York, New York 10016.


                                       54
<PAGE>

                         ITEM 10. EXECUTIVE COMPENSATION

      The  following   table  sets  forth   information   concerning  the  total
compensation paid or accrued by us during the three fiscal years ended September
30, 2004 to (i) all individuals  that served as our chief  executive  officer or
acted in a similar  capacity  for us at any time  during the  fiscal  year ended
September 30, 2004 and (ii) all individuals that served as executive officers of
ours at any time during the fiscal year ended  September  30, 2004 that received
annual compensation during the fiscal year ended September 30, 2004 in excess of
$100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                               ANNUAL COMPENSATION                        AWARDS                         PAYOUTS
                               -------------------                        ------                         -------
                                                                                  LONG TERM
                                                                                 COMPENSATION
                                                                                 ------------
                                                                         RESTRICTED      SECURITIES
NAME AND                                              OTHER ANNUAL        STOCK         UNDERLYING        LTIP       ALL OTHER
PRINCIPAL                                             COMPENSATION        AWARDS         OPTIONS/        PAYOUTS      COMPEN-
POSITIONS        YEAR     SALARY ($)     BONUS ($)        ($)              ($)           SARS (#)          ($)       SATION ($)
-------------    ----     ----------     ---------        ---              ---           --------          ---       ----------
<S>              <C>         <C>           <C>            <C>              <C>         <C>                 <C>            <C>
Steven Malin,    2004        150,000            0          0                0           1,300,000(1)        0             0
Chairman         2003        150,000            0          0                0               0               0             0
                 2002         17,212            0          0                0             800,000           0             0

Robert Malin,    2004        201,461(2)         0          0                0           1,300,000           0             0
Vice Chairman,   2003        198,539(2)         0          0                0               0               0             0
President        2002         88,846            0          0                0           1,300,000           0             0
and Director


Gary Mednick,    2004        250,000            0          0                0               0               0             0
President        2003        250,000            0          0                0               0               0             0
A.B. Watley      2002        250,000       50,000          0                0              25,000           0             0
Direct, Inc.
</TABLE>

      (1)   Represents options issued to the wife of Steven Malin.

      (2)   $118,128  and $26,459 of this  amount for the years ended  September
            30, 2004 and 2003,  respectively,  was received in the capacity of a
            consultant.  Under  the  consulting  agreement  Mr.  Malin  provided
            general managerial and business development services.  The agreement
            had no term and was  cancelable  by the  Company  at any  time.  All
            amounts  paid to Mr.  Malin  under  the  consulting  agreement  were
            deducted  from the amount due under his  employment  agreement so he
            may not receive total compensation in excess in of that provided for
            in his employment agreement.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table contains information concerning options granted to executive
officers  named in the Summary  Compensation  Table during the fiscal year ended
September 30, 2004:


                                       55
<PAGE>

<TABLE>
<CAPTION>
                      NUMBER OF
                      SECURITIES        % OF TOTAL
                      UNDERLYING      OPTIONS GRANTED
                   OPTIONS GRANTED    TO EMPLOYEES IN     EXERCISE
     NAME                (#)            FISCAL YEAR      PRICE ($/SH)    EXPIRATION DATE
<S>                   <C>                  <C>               <C>          <C>
Steven Malin          1,300,000            23.7%             $.20         July 29, 2014
Robert Malin          1,300,000            23.7%             $.20         July 29, 2014
Gary Mednick              0                 N/A              N/A               N/A
</TABLE>

AGGREGATED  OPTION/SAR  EXERCISES  IN LAST  FISCAL  YEAR  AND  FISCAL  YEAR  END
OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                             Number of Securities
                                Shares                      Underlying Unexercised        Value of Unexercised
                               Acquired                          Options/SARs           In-the-Money Options/SARs
                                  On          Value          at Fiscal Year End (#)       at Fiscal Year End ($)
                               Exercise      Realized            Exercisable/                 Exercisable/
Name                              (#)          ($)               Unexercisable                Unexercisable
----------------               --------      --------            -------------                -------------
<S>                               <C>           <C>           <C>                            <C>
Steven Malin                      N/A           N/A            933,333/1,166,667             30,000/18,000

Robert Malin                      N/A           N/A           1,463,333/1,166,667            60,000/18,000

Gary Mednick                      N/A           N/A                25,000/0                        N/A
</TABLE>

LONG TERM INCENTIVE PLAN AWARDS

We made no  long-term  incentive  plan  awards to the named  executive  officers
during the fiscal year ended September 30, 2004.

EMPLOYMENT   CONTRACTS,   TERMINATION  OF  EMPLOYMENT,   AND   CHANGE-IN-CONTROL
ARRANGEMENTS

On September 9, 2002,  we entered into  three-year  employment  agreements  with
Steven Malin and Robert  Malin,  both of which are  automatically  renewable for
additional  one-year terms.  The employment  agreements  provide for annual base
compensation  of $150,000  for Steven  Malin and  $200,000  Robert  Malin.  Each
agreement provides for a discretionary bonus based upon our performance, payable
semi-annually,  as may be approved by our board of  directors  or a committee of
the board.

Each of the employment  agreements  requires the officer to devote his full time
and efforts to our  business  and contains  non-competition  and  non-disclosure
covenants of the officer for the term of his  employment and for a period of two
years thereafter.  Each employment  agreement provides that we may terminate the
agreement  for cause.  In  addition,  each  employment  agreement  provides  for
termination  by either party without cause upon at least 180 days written notice
prior to the end of the  original  term or any renewal  term.  In the event that
either Steven Malin or Robert Malin  terminate  their  employment  agreement for
good reason or we terminate the employment  agreement  without  cause,  then the
applicable officer is entitled to the following:


                                       56
<PAGE>

      o     annual base salary accrued and a prorated  annual bonus prior to the
            date of termination;

      o     annual  base  salary  multiplied  by the  greater  of two  (2)  (the
            "Applicable  Factor")  or  the  number  of  years  remaining  in the
            employee's employment agreement;

      o     annual bonus  multiplied by the greater of Applicable  Factor or the
            number of years remaining in the employee's employment agreement;

      o     continuing health benefits; and

      o     all  outstanding  options  and other  equity  shall  vest and become
            immediately exercisable.

In the event that  Steven  Malin or Robert  Malin is  terminated  within six (6)
months of a change of control  within the Company,  then the  Applicable  Factor
shall be three (3).

On October 1, 2001 we entered  into an  employment  agreement  with Gary Mednick
pursuant  to  which  Mr.   Mednick   agreed  to  serve  as  our  Executive  Vice
President-Business  Development. The agreement provided for a base annual salary
of $250,000, guaranteed bonus payments of $50,000, and stock options, the amount
of which was to be determined  based upon Company revenues during the employment
period.  The employment  agreement  expired on September 30, 2003. On October 1,
2003,  we entered into a month to month  verbal  employment  agreement  with Mr.
Mednick  whereunder  we pay Mr.  Mednick  an annual  salary of  $250,000.  Since
February  2004,  Mr.  Mednick has served as the president of A.B.  Watley Direct
Inc.

DIRECTORS' COMPENSATION

All directors are reimbursed for their reasonable expenses incurred in attending
meetings  of the  board  of  directors  and its  committees.  Directors  who are
employees receive no additional compensation for service as members of the board
of directors or committees.  Non-employee directors are compensated annually for
their  services at $1,000 and  granted  non-qualified  options to acquire  1,500
shares of our common stock at the end of each year of service.

REPORT ON REPRICING OF OPTIONS/SARS

      During the fiscal year ended September 30, 2004 we did not adjust or amend
the exercise price of any stock options or SARs issued to the named executives.

                ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                         OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of
our common stock as of December 20, 2004. The information in this table provides
the ownership information for:

      o     each person known by us to be the  beneficial  owner of more than 5%
            of our common stock;

      o     each of our directors;

      o     each of our executive officers; and

      o     our executive officers, directors and director nominees as a group.

The  percentages  in the table have been  calculated on the basis of treating as
outstanding for a particular  person, all shares of our common stock outstanding
on such date and all shares of our common  stock  issuable to such holder in the
event of  exercise  of  outstanding  options,  warrants,  rights  or  conversion
privileges  owned by such  person at said date which are  exercisable  within 60
days of such date. Except as otherwise indicated,  the persons listed below have
sole voting and investment  power with respect to all shares of our common stock
owned by them, except to the extent such power may be shared with a spouse.


                                       57
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Name and Address                                                             Number of Shares               Percentage
of Beneficial Owner                       Title of Class                    Beneficially Owned            Outstanding(1)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                                          <C>                             <C>
Steven Malin                       Common Stock, $.001 par value                3,783,702(2)(3)                 17.7%

-----------------------------------------------------------------------------------------------------------------------------
Penson Financial Services          Common Stock, $.001 par value                3,041,890(4)                    13.2%
Inc.

-----------------------------------------------------------------------------------------------------------------------------
Penson Worldwide Inc.              Common Stock, $.001 par value                3,041,890(4)                    13.2%

-----------------------------------------------------------------------------------------------------------------------------
Onsite Trading Inc.                Common Stock, $.001 par value                1,700,000                        8.3%
Liquidating Trust

-----------------------------------------------------------------------------------------------------------------------------
DMG Legacy International Ltd       Common Stock, $.001 par value                3,280,023(5)                     13.8%

-----------------------------------------------------------------------------------------------------------------------------
DMG Legacy Institutional           Common Stock, $.001 par value                3,280,023(5)                     13.8%
Fund LLC

-----------------------------------------------------------------------------------------------------------------------------
DMG Legacy Fund LLC                Common Stock, $.001 par value                3,280,023(5)                     13.8%

-----------------------------------------------------------------------------------------------------------------------------
SDS Merchant Fund, L.P.            Common Stock, $.001 par value                2,993,919(6)                     12.8%

-----------------------------------------------------------------------------------------------------------------------------
Robert Malin                       Common Stock, $.001 par value                3,370,933(2)(7)                  15.5%

-----------------------------------------------------------------------------------------------------------------------------
Eric Steinberg                     Common Stock, $.001 par value                1,586,815(8)                      7.4%

-----------------------------------------------------------------------------------------------------------------------------
Gary Mednick                       Common Stock, $.001 par value                1,725,000(9)                      8.4%

-----------------------------------------------------------------------------------------------------------------------------
Michael Picone                     Common Stock, $.001 par value                1,033,333(10)                     4.8%

-----------------------------------------------------------------------------------------------------------------------------
Linda Malin                        Common Stock, $.001 par value                2,207,400(2)(12)                 10.4%

-----------------------------------------------------------------------------------------------------------------------------
Kentan Ltd.                        Common Stock, $.001 par value                2,500,000                        12.2%

-----------------------------------------------------------------------------------------------------------------------------
Yanzu Inc.                         Common Stock, $.001 par value                2,500,000                        12.2%

-----------------------------------------------------------------------------------------------------------------------------
All Executive Officers and         Common Stock, $.001 par value                7,158,635(2)(3)(7)               33.2%
Directors as a Group
(2 persons)

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       58
<PAGE>

(1)   The  percentages  computed  in this  column of the  table  are based  upon
      20,462,138  shares of common stock issued and  outstanding on December 20,
      2004  plus the  number of  securities  that can be  acquired  by the named
      person or persons  within 60 days from December 20, 2004 upon the exercise
      of options, warrants, or convertible securities.

(2)   The number of shares beneficially owned by Steven,  Linda and Robert Malin
      include shares held in irrevocable  family and charitable trusts for which
      they are trustees. In addition,  the number of shares held by Robert Malin
      and Steven Malin includes  shares held by a family  partnership  for which
      Robert Malin and Steven Malin are general partners.

(3)   The number of shares  beneficially  owned by Steven Malin includes 933,333
      shares of common  stock  issuable  upon  exercise  of  options,  including
      433,333 options owned by his wife, but does not include  1,166,667  shares
      of common  stock  issuable  upon  exercise  of options  including  866,667
      options  owned by his wife  which are not  exercisable  within the next 60
      days.

(4)   The number of shares beneficially owned by Penson Financial Services, Inc.
      and  Penson  Worldwide,  Inc.  are  aggregated  since  such  entities  are
      affiliates and includes 2,682,798 shares of common stock issuable upon the
      exercise of currently exercisable warrants owned by Penson Worldwide Inc.

(5)   The number of shares beneficially owned by DMG Legacy  International Ltd.,
      DMG Legacy  Institutional  Fund LLC and DMG Legacy Fund LLC are aggregated
      since such entities are affiliates and includes 3,280,023 shares of common
      stock issuable upon the exercise of currently exercisable warrants.


                                       59
<PAGE>

(6)   The number of shares beneficially owned by SDS Merchant Fund, L.P. ("SDS")
      includes  2,993,919  shares of common stock  issuable upon the exercise of
      currently exercisable warrants.

(7)   The number of shares beneficially owned by Robert Malin includes 1,433,333
      shares of common stock  issuable  upon  exercise of presently  exercisable
      options but does not include  1,166,667  shares of common  stock  issuable
      upon  exercise  of options  which are not  exercisable  within the next 60
      days.

(8)   The  number  of  shares  beneficially  owned  by Eric  Steinberg  includes
      1,100,415 shares issuable upon exercise of outstanding warrants.

(9)   The number of shares  beneficially  owned by Gary Mednick  includes 25,000
      shares issuable upon outstanding stock options, and 1,700,000 shares owned
      by  Onsite  Trading  Inc.  Liquidity  Trust  an  entity  in which he is an
      affiliate.

(10)  The number of shares beneficially owned by Michael Picone includes 500,000
      shares  issuable upon exercise of stock options  issued in the name of Mr.
      Picone and 533,333  shares  issuable upon exercise of stock options issued
      in the name of Worth  Consulting  LLC, a company owned by Mr. Picone,  but
      does not include  866,667 shares of common stock issuable upon exercise of
      options  issued  in the  name  of  Worth  Consulting  LLC  which  are  not
      exercisable within the next 60 days.

(11)  The number of shares beneficially owned by Anthony Huston includes 444,444
      shares of common stock issuable upon exercise of outstanding warrants.

(12)  The number of shares  beneficially  owned by Linda Malin includes  857,772
      shares of common stock issuable upon exercise of outstanding warrants.

The  address  of all of the  foregoing  parties  is c/o our  company  at 90 Park
Avenue,  New York, NY 10016 except for On-Site Trading Inc.  Liquidating  Trust,
Inc. whose address is c/o Robinson Brog,  1345 Avenue of Americas,  New York, NY
10105,  SDS Merchant Fund,  L.P. whose address is c/o SDS Capital  Partners,  53
Forest Avenue,  2nd Floor, Old Greenwich,  Connecticut  06870 and each member of
the DMG Group,  whose  address is c/o DMG Advisors  LLC, 53 Forest  Avenue,  2nd
Floor, Old Greenwich, Connecticut 06870.

CHANGES IN CONTROL

Not Applicable.

             ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On September 1, 2004 we issued  100,000 stock options with an exercise  price of
$.30 per  share to Worth  Consulting  LLC  pursuant  to our  September  1,  2003
Consulting Agreement with Worth Consulting LLC.

On July 29, 2004 we issued  1,300,000  stock  options with an exercise  price of
$.20 per share to each of Robert Malin, Worth Consulting LLC, a company owned by
Michael  Picone,  and Pamela  Luteran,  the wife of Steven  Malin,  as retention
incentives and in consideration of services rendered.

In July 2004 we sold  2,500,000  shares  of common  stock at a price of $.40 per
share in a private placement to each of Kentan Ltd. and Yanzu Inc.


                                       60
<PAGE>

On June 3,  2004 we issued an  aggregate  of  1,682,798  common  stock  purchase
warrants  to Penson  Worldwide,  Inc.  in exchange  for  Preferred  Stock of the
Company.  1,000,000 of these  warrants have an exercise  price of $.19 per share
and 682,798 of these warrants have an exercise price of $.01 per share.

On June 3,  2004 we  issued  1,968,014;  1,172,431;  and  139,578  common  stock
purchase  warrants to DMG Legacy  International  Ltd., DMG Legacy  Institutional
Fund LLC and DMG Legacy Fund LLC, respectively,  in exchange for Preferred Stock
of the Company. All of the warrants have an exercise price of $.01 per share.

On September 1, 2003 we entered into a renewable one year  consulting  agreement
with Worth  Consulting  LLC, a company owned by Michael Picone which was renewed
for an additional  one year term  effective  September 1, 2004.  Pursuant to the
consulting  agreement,  Worth Consulting LLC provides us with general  financial
and operating services on a continual and regular basis. In consideration of the
consulting  services,  we agreed to pay Worth Consulting LLC annual compensation
of $250,000,  and 100,000 fully vested stock  options with an exercise  price of
$.30 per share each year the agreement is in effect, with the first issuance due
on September 1, 2004. The compensation payable to Worth Consulting LLC under the
agreement  is subject to  periodic  review  but under no  circumstances  can the
annual compensation be reduced below $250,000 per year.

On August 31, 2003 we issued  500,000  stock  options with an exercise  price of
$.35 per share to Michael  Picone  pursuant  to the  Termination  of  Employment
Agreement and General Release related to his 2002 employment agreement.

On December 2, 2002 we entered into a 4 year  employment  agreement with Michael
Picone to serve as an executive  officer.  The agreement provided for an initial
annual  base  salary of  $175,000,  a  guaranteed  annual  bonus of $25,000  and
participation  in a bonus  pool with  other  members  of senior  management.  It
further  provided  for the  issuance of 500,000  stock  options with an exercise
price of $.35 per share.  Effective August 31, 2003 the employment agreement was
terminated  pursuant  to a  Termination  of  Employment  Agreement  and  General
Release.

On September 9, 2002 we entered into a 3 year  employment  agreement with Steven
Malin  to  serve  as  an  executive  officer.  The  agreement  contains  renewal
provisions  and provides  for an initial  base salary of $150,000 per annum.  It
also provides for the issuance of 800,000 stock  options and  performance  based
bonus payments.

On September 9, 2002 we entered into a 3 year  employment  agreement with Robert
Malin  to  serve  as  an  executive  officer.  The  agreement  contains  renewal
provisions  and provides  for an initial  base salary of $200,000 per annum.  It
also provides for the issuance of 1,300,000 stock options and performance  based
bonus payments.

In September  2002,  in  consideration  of the  forgiveness  of notes payable to
Anthony  Huston,  Linda  Malin  and Eric  Steinberg,  former  officers  of ours,
aggregating  $2,400,000,  we issued  warrants to purchase  1,479,486 and 923,145
shares of common stock, exercisable at $0 and $1.80 per share, respectively. The
warrants expire in September 2007.

In April 2002,  $2,150,000  of notes payable to officers were assigned to Penson
Financial Services,  Inc.  ("Penson").  Interest was payable on these notes at a
rate of 10% per annum and the notes  matured  through  March 2003. In July 2002,
these amounts were subsequently  forgiven as part of the sale of our proprietary
software  programs  (the  "Software")  and  related  intellectual  property,  to
Integrated  Trading  Solutions,  Inc.  ("Integrated"),  an  affiliate of Penson,
pursuant to an Asset Purchase  Agreement dated July 31, 2002 (the  "Agreement").
Pursuant to the Agreement,  we sold to Integrated,  and Integrated purchased and
assumed from us all of the Software,  certain related intellectual  property and
contract  rights  and  certain  other  assets  in  exchange  for  the  following
consideration:


                                       61
<PAGE>

      o     an immediate reduction of $3,418,015 of debt owed by us to Penson;

      o     a contingent reduction of additional debt owed by us to Penson of up
            to $2,150,994  on the earlier of: (a) the date that Penson  receives
            no less than  $5,000,000  in revenues  under its clearing  agreement
            with us  (provided  that  such  revenues  are  received  during  the
            thirty-six  months after the closing date of the Agreement),  or (b)
            in the  event  that we  raise  at  least  $4,000,000  in new  equity
            capital, which may include forgiveness of various types of debt;

      o     the assumption of certain additional identified and to be identified
            liabilities of ours by Integrated;

      o     the  granting  of a license by  Integrated  to us that  allows us to
            utilize the Software at favorable  rates.  The license also provides
            for  us to  receive  a  percentage  of  future  royalties  from  the
            licensing of the Software; and

      o     an amendment to our clearing agreement with Penson.

                 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a)

EXHIBIT NO.                        DESCRIPTION

3.1           Restated  Certificate of  Incorporation of the Company and form of
              amendment thereto.(1)

3.2           By-Laws of the Company, as amended. (1)

4.1           Specimen Common Stock Certificate. (1)

4.2           Form of Underwriter's Warrant Agreement, including Form of Warrant
              Certificate. (1)

5             Opinion of Counsel

10.1          1997 Stock Option Plan. (1)

10.2          Second Amended and Restated 1998 Stock Option Plan. (1)

10.3          Employment  Agreement  dated as of May 1, 1997 between the Company
              and Steven Malin and Amendment to Employment Agreement dated as of
              October 1, 1998 between the Company and Steven Malin. (1)

10.4          Employment  Agreement  dated as of  January  1, 1999  between  the
              Company and Robert Malin. (1)

10.5          Office lease dated as of June 20, 1997 between 40 Wall Development
              Associates,  LLC,  as  Landlord  and the  Company  as  Tenant  for
              premises located at 40 Wall Street, New York, New York. (1)



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<PAGE>

10.6          Fully  Disclosed  Clearing  Agreement  dated  October  3, 1996 and
              Amendment  dated June 8, 1998 between Penson  Financial  Services,
              Inc. and A.B. Watley, Inc. (1)

10.7          Master Lease  Agreement  dated  December 17, 1998 between  General
              Electric Capital Corporation and the Company. (1)

10.8          Security   Agreement  dated  December  17,  1998  between  General
              Electric Capital Corporation and the Company. (1)

10.9          Letter of Credit Agreement dated December 17, 1998 between General
              Electric Capital Corporation and the Company. (1)

10.10         1999 Stock Option Plan.(2)

10.11         2000 Stock Option Plan. (3)

10.12         Agreement,  dated November 1, 2001, by and among A.B. Watley Group
              Inc. and On-Site Trading, Inc. (3)

10.13         Employment  Agreement,  dated as of November 2, 2001,  between the
              Company and Gary Mednick. (6)

10.14         Series A Convertible  Preferred  Stock  Purchase  Agreement  dated
              November  2001 for the sale of 630  shares of Series A  Redeemable
              Convertible Preferred Stock. (6)

10.15         Master   Subordination,   Waiver,   Release  and   Indemnification
              Agreement entered on March 27, 2002. (4)

10.16         Promissory  Note in the amount of $1,600,000  entered between A.B.
              Watley Group Inc. and Penson Financial Services,  Inc. dated March
              27, 2002. (4)

10.17         Promissory  Note in the amount of $900,000  entered  between  A.B.
              Watley  Group Inc. and DMG legacy  Institutional  Fund LLC and DMG
              Legacy Fund LLC dated March 27, 2002. (4)

10.18         First  Amendment to Promissory  Note entered  between A.B.  Watley
              Group LLC and Penson Financial Services Inc. dated April 2002. (4)

10.19         Second  Amendment to Promissory  Note entered  between A.B. Watley
              Group LLC and Penson Financial Services Inc. dated May 2002. (4)

10.20         Non-Exclusive  Perpetual  License of proprietary  software between
              E*Trade and the Company dated April 2002. (4)

10.21         Asset  Purchase  Agreement  entered into with  Integrated  Trading
              Solutions, Inc. dated July 2002. (6)

10.22         License Agreement entered into Integrated Trading  Solutions,  Inc
              dated July 2002. (6)



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<PAGE>

10.23         Senior  Subordinated  Demand Note  entered  into with SDS Merchant
              Fund, L.P.  whereby the Company  borrowed  $2,500,000 dated August
              30, 2001. (6)

10.24         Equity line entered into with investment  group dated September 6,
              2000 in the amount of $3,000,000. (5)

10.25         Employment  Agreement  entered with Steven  Malin dated  September
              2002. (6)

10.26         Employment  Agreement  entered with Robert  Malin dated  September
              2002. (6)

10.27         Amendment to the Fully Disclosed Clearing Agreement between Penson
              Financial Services, Inc. and A.B. Watley, Inc. (6)

10.28         Amended and Restated  Promissory  Note  between A.B.  Watley Group
              Inc. and Penson Financial Services, Inc. dated July 2002. (6)

10.29         First  Amendment  to  Master  Agreement  and  First  Amendment  to
              Software Security Agreement dated as of April 2002. (4)

10.30         Second Amendment to the Master Subordination,  Waiver, Release and
              Indemnification Agreement, dated as of May 2002. (4)

10.31         Third Amendment to the Master Subordination,  Waiver,  Release and
              Indemnification Agreement, dated as of May 2002. (4)

14            Code of Ethics (7)

21            Subsidiaries of Registrant.(7)

31.1          Rule  13(a) -  14(a)/15(d)  -  14(a)  Certification  of  Principal
              Executive Officer. (7)

31.2          Rule  13(a) -  14(a)/15(d)  -  14(a)  Certification  of  Principal
              Financial Officer. (7)

32.1          Rule 1350 Certification Chief Executive Officer. (7)

32.2          Rule 1350 Certification Chief Financial Officer. (7)

      (1)   Filed as an exhibit to the Company's  Registration Statement on Form
            SB-2 (File No.  333-71783)  and  hereby  incorporated  by  reference
            herein.

      (2)   Filed as an exhibit to the Company's  Registration Statement on Form
            S-8  (File No.  333-35340)  and  hereby  incorporated  by  reference
            herein.

      (3)   Filed as an exhibit to the Company's  Registration Statement on Form
            S-8 (File No.  333-  67014) and  hereby  incorporated  by  reference
            herein.

      (4)   Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q
            for the  quarter  ended March 31,  2002 and hereby  incorporated  by
            reference herein.

      (5)   Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q
            for the  quarter  ended  June 30,  2002 and hereby  incorporated  by
            reference herein.


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<PAGE>

      (6)   Filed as an exhibit to the Company's  Annual Report on Form 10-K for
            the year  ended  September  30,  2002  and  hereby  incorporated  by
            reference herein.

      (7)   Filed herewith.

(b) REPORTS ON FORM 8K

      None.

                ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees.

      The  aggregate  fees  billed to us by Marcum & Kliegman  LLP for  services
rendered during the fiscal years ended September 30, 2004 and 2003 are set forth
in the table below:

--------------------------------------------------------------------------------
Fee Category               Fiscal year ended           Fiscal year ended
                           September 30, 2004          September 30, 2003
--------------------------------------------------------------------------------
Audit fees (1)             $249,101                    $174,000
--------------------------------------------------------------------------------
Audit-related fees (2)     --                          $30,000
--------------------------------------------------------------------------------
Tax fees (3)               --                          --
--------------------------------------------------------------------------------
All other fees (4)         --                          --
--------------------------------------------------------------------------------
Total fees                 $249,101                    $204,000
--------------------------------------------------------------------------------

      (1)   Audit fees  consists  of fees  incurred  for  professional  services
            rendered for the audit of our consolidated financial statements, for
            reviews of our interim consolidated financial statements included in
            our  quarterly  reports  on Form  10-QSB and for  services  that are
            normally provided in connection with statutory or regulatory filings
            or engagements.

      (2)   Audit-related fees consists of fees billed for professional services
            that are  reasonably  related  to the  performance  of the  audit or
            review  of  our  consolidated  financial  statements,  but  are  not
            reported under "Audit fees."

      (3)   Tax fees consists of fees billed for professional  services relating
            to tax compliance, tax planning, and tax advice.

      (4)   All other fees consists of fees billed for all other services.

Audit Committee's Pre-Approval Practice.

      Insomuch  as we do not have an audit  committee,  our  board of  directors
performs the functions of an audit  committee.  Section 10A(i) of the Securities
Exchange Act of 1934 prohibits our auditors from  performing  audit services for
us as well as any services not  considered  to be "audit  services"  unless such
services  are  pre-approved  by the  board of  directors  (in lieu of the  audit
committee) or unless the services meet certain de minimis standards.


                                       65
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.


Date:  December 27, 2004                A.B. WATLEY GROUP INC.


                                        By: /s/ Robert Malin
                                            ------------------------------------
                                            Robert Malin,
                                            President

      In accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
              SIGNATURE                                     TITLE                                DATE


<S>                                          <C>                                          <C>
/s/ Robert Malin                             President, Vice Chairman, Principal          December 27, 2004
------------------------------------         Financial and Accounting Officer
Robert Malin


/s/ Steven Malin                             Chairman and Principal Executive Officer     December 27, 2004
------------------------------------
Steven Malin


Board of Directors


/s/ Robert Malin                             Director                                     December 27, 2004
------------------------------------
Robert Malin


/s/ Steven Malin                             Director                                     December 27, 2004
------------------------------------
Steven Malin
</TABLE>


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