<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    Form 10-K

       (Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended September 30, 2002


                                       OR


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




                 For the transition period from ______ to ______

                         Commission file number: 1-14897



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


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


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


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

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

                                      None

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


                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)


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


<PAGE>

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant`s  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /

     The  issuer`s  revenues for the fiscal year ended  September  30, 2002 were
$26,183,288.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant  on December 31, 2002 computed by reference to the closing price
of such stock on such date was approximately $6,243,507. The number of shares of
common stock, par value $.001 per share, outstanding as of February 21, 2003 was
12,508,852 shares.



                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

Forward Looking Statements:  This Report contains certain statements that may be
deemed  "forward-looking  statements"  within the  meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All  statements,  other than
statements of historical facts, that address activities,  events or developments
that the Company intends, expects, projects, believes or anticipates will or may
occur in the future are forward-looking statements. Such statements are based on
certain  assumptions and assessments  made by management of the Company in light
of its experience and its perception of historical trends,  current  conditions,
expected  future  developments  and other factors it believes to be appropriate.
The  forward-looking  statements  included in this Report are also  subject to a
number of  material  risks  and  uncertainties,  including  but not  limited  to
economic,  competitive,  governmental and  technological  factors  affecting the
Company`s operations,  markets, services and prices, and other factors discussed
in the  Company`s  filings  under  the  Securities  Act  and the  Exchange  Act.
Stockholders and prospective  investors are cautioned that such  forward-looking
statements are not  guarantees of future  performance  and that actual  results,
developments  and  business  decisions  may differ from those  envisaged by such
forward-looking statements.

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<PAGE>

                                     PART I

Item 1. Business

     A.B.  Watley  Group  Inc.  ("ABWG"  or the  "Company")  is a  publicly-held
financial  services holding company incorporated in the state of Delaware on May
15,  1996.  We  conduct  our  core  business activities through our subsidiaries
A.B.Watley,  Inc.  ("A.B. Watley"), a U.S. registered broker-dealer that engages
in direct-access trading, proprietary trading of U.S. equities and institutional
sales  and Integrated Clearing Solutions, Inc. ("Integrated"), a U.S. registered
broker-dealer  that  engages in mutual fund sales to institutional customers. We
provide  direct-access  trading  capabilities  and  related  software  to  both
individual  as  well  as  institutional customers. As of September 30, 2002, the
brokerage  firms  had  approximately  4,000  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  II,
Ultimate  Trader III,  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. We
continue  to evaluate  acquisitions  that might  increase  cash flow and enhance
economies of scale within our existing infrastructure.

     On  November  2,  2001,  the  Company  acquired  certain  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.  The Company
acquired  these  assets  for  1.875  million  shares  of its  Common  Stock.  In
connection with the acquisition of On-Site,  the Company also assumed up to $1.8
million in  liabilities  of On-Site  owed to the Class B members of the LLC.  On
March 19, 2002, the Company  reclaimed 361,944 shares of Common Stock being held
in escrow in  connection  with the On-Site  acquisition  and assumed  additional
obligations  of  $1,050,000  in excess of the  $1,800,000  that the  Company had
originally agreed to assume.

     The LLC was  formed as a means for  registered  professionals  to engage in
proprietary trading utilizing the LLC`s funds. Such registered professionals are
Class B members of the LLC, while the Company is 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,  the Company  notified  the Class B
members  that it had  elected to cease the  proprietary  trading  business  as a
result of  declining  revenues.  The  Company  continues  to operate the On-Site
retail business,  however the customer base has deteriorated significantly since
its acquisition and revenues from operations have declined.  Management believes
that the  deterioration  is  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

                                        3
<PAGE>

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.

     The growth of discount  brokerage  firms and the increasing  utilization of
the  Internet  to  access  a wide  range  of  financial  services  underscore  a
fundamental  shift in  market  demographics.  This  shift  has  altered  the way
consumers manage their personal  financial  assets.  Based on industry  research
reports and the rapid  consumer  acceptance of online  transactions,  we believe
consumers are increasingly  taking direct control over their personal  financial
affairs, not only because they are now able to do so, but also because they find
it more  convenient and less  expensive  than relying on  traditional  financial
intermediaries.

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

     The direct access platform used by the Company is technologically  advanced
and highly  scalable.  Our services are delivered to our  customers  through (a)
Ultimate Trader II, a client server direct access  software  application and (b)
Watley Trader, a web-based direct-access platform.  Benefits of the products for
the retail market include:


<TABLE>
<CAPTION>
<S>                                                     <C>
     o    Direct Access to Exchanges & ECNs             o    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    Superior Speed of Execution                   o    Client-server   order   execution  model
                                                             substantially   reduces   time   elapsed
                                                             between investor order entry and receipt
                                                             of order by exchange/ECN.

     o    Order Routing Discretion                      o    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                          o    Enables  access  to  complete  range  of
                                                             bid/ask,  volume  and  market  depth for
                                                             variety of execution markets.



     o    Realtime Data Analytics                       o    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                     o    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.
</TABLE>

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<PAGE>

Client Services

     Client  services for all levels of our online service,  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 8:00 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.

     In  order  to  provide   professional   and  efficient  client  support  we
implemented and use Client Relationship  Management (CRM) and Computer Telephony
Integration  (CTI) software.  CRM databases are updated with each client contact
to track client  service  calls.  A separate  internal  database  tracks trading
patterns, changes in customer balances and compliance issues. Both databases are
used to generate  periodic  reports for management.  Client Services  associates
access the latest  product and  account  information  through  CRM and  customer
account databases.

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 A.B. Watley uses
is designed to compare  the A.B.  Watley  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

     The  Company  takes  proprietary  positions  through  the  trading  of U.S.
equities in an attempt to realize  gains.  Our  proprietary  trading  activities
require the commitment of capital and create an opportunity for profits and risk
of loss due to trading  strategies  and  market  fluctuations.  Buying  power is
available to traders to the extent that the  aggregation of all positions in all
of the Company`s accounts are within A.B. Watley`s Net Capital requirements.

     Trading  profits or losses depend upon,  among other things,  the skills of
traders, the capital allocated to securities positions,  the financial condition
and  business  prospects  of  particular  issuers  and  general  trends  in  the
securities  markets.  The amount of capital  allocated to a particular trader is
based on the trader`s  experience and performance as well as our risk management
policies. Customer funds are not used to fund proprietary trading activities.

     We believe that our trading  capability is a key ingredient to our success.
While this business can earn attractive  returns,  there is also the possibility
of incurring significant trading losses in periods of market turbulence. We seek
to balance our ability to profit from  trading  positions  with our  exposure to
potential  losses.  Our risk  management  includes  input from all levels of the
Company including our traders as well as management.

Institutional Sales

     Our institutional sales and trading desk specializes in facilitating and/or
executing   large-block   transactions  in  equity   securities,   and  services
institutional  clients. These services are provided to clients who often require
that their purchases or sales of

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<PAGE>

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 include mutual and pension
funds, insurance companies,  banks,  corporations and independent fund and money
managers.

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") and Bank of New
York ("BONY") for institutional accounts.

     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 30 days written notice for BONY. 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.

     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 the Company. 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.;  Quick &
Reilly, Inc.; TD Waterhouse Investor Services, Inc.; Fidelity Brokerage Services
LLC;  and  Ameritrade,  Inc.;  We also face  competition  for clients  from full
commission brokerage firms,  including Merrill Lynch & Co., Inc.; Morgan Stanley
DW  Inc.;  UBS  PaineWebber  Inc.;  and  Smith  Barney,  as  well  as  financial
institutions and mutual funds.

Securities Regulation

     A.B.  Watley,  and Integrated  (collectively,  the "B-D  Subsidiaries") are
broker-dealers  registered  with the SEC and NASD and  licensed in the states in
which they do business.

     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.

     In addition,  significant changes in the B-D Subsidiaries` 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.

     All marketing activities by the B-D Subsidiaries 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 A.B. Watley
and Integrated.  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  either of the B-D  Subsidiaries  fails to  maintain  the  required  net
capital,  such  subsidiary  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 the Subsidiary`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 the B-D Subsidiaries,  which could
limit our  ability to pay  dividends,  repay debt and  repurchase  shares of our
outstanding stock.

     During the year ended  September  30,  2002,  A.B.  Watley had Net  Capital
deficiencies which were subsequently cured.

Personnel

     As  of  December 31, 2002, we employed a total of 48 persons, of whom 5 are
engaged  in  executive  management,  16  in trading activities, 6 in information
technology, 8 in client service, 3 in sales and marketing, and 10 administration
and  back  office  personnel.  We  believe  our relations with our employees are
generally  good  and  we have no collective bargaining agreements with any labor
unions.  During the fiscal year ended September 30, 2002 the company completed a
reduction  in  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 A.B. Watley obligating
them to adhere to our supervisory procedures and not to solicit customers in the
event  of   termination   of  employment.   Our   agreements   with   registered
representatives do not obligate these  representatives to be associated with the
Company for any length of time.

     The Company`s  proprietary  trading  activities are primarily  performed by
registered representatives who receive a portion of their trading profits, after
deductions for trading expenses.  They are outside contractors,  not entitled to
participation in any benefits plans of the Company.


Investment Considerations and Risk Factors

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

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

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

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


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

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

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


                                        6
<PAGE>

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

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

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

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

     Like other  securities  and  securities-related  businesses,  we are highly
dependent on information  processing  and  telecommunications  systems.  We face
operational  risks arising from potential  mistakes made in the  confirmation or
settlement of transactions or from the failure to properly  record,  evaluate or
account for transactions.  Our business is highly dependent on our ability,  and
the  ability  of  our  clearing firms, to process, on a daily basis, a large and
growing  number  of  transactions  across  numerous  and  diverse  markets.
Consequently,  we  and  our  clearing  firms  rely  heavily  on  our  respective
financial,  accounting, telecommunications and other data processing systems. If
any  of  these  systems  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.

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

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

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

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

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

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

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

                                        7
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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


                                        8
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                        9
<PAGE>

information  provided,  price and  reliability  of the trading  systems which we
utilize.  Our  competitors may have greater  financial,  technical and marketing
resources  than the  Company.  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.;  Quick &
Reilly, Inc.; TD Waterhouse Investor Services, Inc.; Fidelity Brokerage Services
LLC;  and  Ameritrade,  Inc.;  We also face  competition  for clients  from full
commission brokerage firms,  including Merrill Lynch & Co., Inc.; Morgan Stanley
DW  Inc.;  UBS  PaineWebber  Inc.;  and  Smith  Barney,  as  well  as  financial
institutions and mutual funds.

Securities Regulation

     A.B.  Watley,  and Integrated  (collectively,  the "B-D  Subsidiaries") are
broker-dealers  registered  with the SEC and NASD and  licensed in the states in
which they do business.

     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.

     In addition,  significant changes in the B-D Subsidiaries` 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.

     All marketing activities by the B-D Subsidiaries 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 A.B. Watley
and Integrated.  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  either of the B-D  Subsidiaries  fails to  maintain  the  required  net
capital,  such  subsidiary  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 the Subsidiary`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 the B-D Subsidiaries,  which could
limit our  ability to pay  dividends,  repay debt and  repurchase  shares of our
outstanding stock.

     During the year ended  September  30,  2002,  A.B.  Watley had Net  Capital
deficiencies which were subsequently cured.

Personnel

     As of December 31, 2002,  we employed a total of 48 persons,  of whom 5 are
engaged in executive  management,  16 in trading  activities,  6 in  information
technology, 8 in client service, 3 in sales and marketing, and 10 administration
and back office

                                       10
<PAGE>

personnel. We believe our relations with our employees are generally good and we
have no  collective  bargaining  agreements  with any labor  unions.  During the
fiscal year ended September 30, 2002 the company completed a reduction in 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 A.B. Watley obligating
them to adhere to our supervisory procedures and not to solicit customers in the
event  of   termination   of  employment.   Our   agreements   with   registered
representatives do not obligate these  representatives to be associated with the
Company for any length of time.

     The Company`s  proprietary  trading  activities are primarily  performed by
registered representatives who receive a portion of their trading profits, after
deductions for trading expenses.  They are outside contractors,  not entitled to
participation in any benefits plans of the Company.

Investment Considerations and Risk Factors

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

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

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

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


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

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

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


                                        11
<PAGE>

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

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

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

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

     Like other  securities  and  securities-related  businesses,  we are highly
dependent on information  processing  and  telecommunications  systems.  We face
operational  risks arising from potential  mistakes made in the  confirmation or
settlement of transactions or from the failure to properly  record,  evaluate or
account for transactions.  Our business is highly dependent on our ability,  and
the  ability  of  our  clearing firms, to process, on a daily basis, a large and
growing  number  of  transactions  across  numerous  and  diverse  markets.
Consequently,  we  and  our  clearing  firms  rely  heavily  on  our  respective
financial,  accounting, telecommunications and other data processing systems. If
any  of  these  systems  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.

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

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

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

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

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

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

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

                                        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 other regulatory and self-regulatory organizations; and
     o    changes in the  interpretation  or  enforcement  of existing  laws and
          rules.

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

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

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

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

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

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

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

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

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

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


                                        13
<PAGE>

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

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

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

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

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

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

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

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

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

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


Item 2. Properties

     Our principal offices are located at 40 Wall Street, New York, NY, where we
occupy  approximately  28,500  square  feet at an annual  cost of  approximately
$963,000  per year , plus  escalations.  The initial  term of the lease for such
office space expires in June 2009. On December 6, 2002, the Company entered into
a  sixteen-month  lease  agreement  for  approximately  3,200 square feet in San
Francisco,  CA, at an annual cost of $114,000. On December 15, 2002, the Company
entered into an eighteen-month  lease agreement for  approximately  2,568 square
feet in Melville, NY, at an annual cost of $68,078.

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, 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.

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

     In addition,  a suit has been brought by Akro Investicni  Spolecnost,  A.S.
and Bozena Konvalinkova, as Czech Receiver of Private Investors, as against A.B.
Watley.  The  plaintiffs  allege  violations  of New York common law and federal
securities  law by  A.B.  Watley  arising  from  an  agreement  between  Private
Investors,  a Czech broker-dealer,  and A.B. Watley.  Plaintiffs seek damages of
$31,400,000  (of which  approximately  $950,000  is  alleged  to  represent  the
damages,  and the balance represents  punitive damages.) The Company believes it
has a meritorious  defense against this suit and intends to fight it vigorously.
We are a defendant in four  actions  relating to the lease of equipment in which
the  plaintiffs  have  asserted  breach of contract and damages in the aggregate
amount of approximately  $683,000.  Three of such actions are pending before the
Supreme Court of New York,  NY, and the remaining  action is pending  before the
District Court, 4th Judicial District, Hennepin County, MN.

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

     No matters  were  submitted to a vote of our  security  holders  during the
fiscal year ended September 30, 2002.


                                       15
<PAGE>




                                     PART II

Item 5. Market for Registrant`s Common Equity and Related Stockholder Matters

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

     (a)  Trading in the Company`s  shares of Common Stock presently takes place
          on the Over-the-Counter Market under the symbol ABWG

     The  following  table sets forth the range of high and low sales prices for
the Company`s Common Stock for the last two fiscal years:


         Fiscal 2002:                  High                Low
         ---------------              ------              -----
         10/1/01 - 12/31/01           $4.85              $2.00
         1/01/02 - 3/31/02            $2.25              $0.66
         4/01/02 - 6/30/02            $1.15              $0.06
         7/01/02 - 9/30/02            $0.45              $0.10



          Fiscal 2001:                  High                Low
          ---------------              ------              -----
          10/1/00 - 12/31/00           $15.13              $4.56
          1/01/01 - 3/31/01            $10.25              $5.25
          4/01/01 - 6/30/01            $14.30              $4.94
          7/01/01 - 9/30/01             $7.93              $2.80



     (b)  The number of record holders, exclusive of holders for whom shares are
          being held in the name of brokerage houses and clearing  agencies,  of
          the Company`s Common Stock was 79 on December 12, 2002.

     (c)  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.

                                       16
<PAGE>


Item 6.  Selected Financial Data

         Income Statement Data

<TABLE>
<CAPTION>
                                                                       Years ended
--------------------------------------------------------------------------------------------------------------------------
                                           Sept. 30, 2002  Sept. 30, 2001  Sept. 30, 2000   Sept. 30, 1999  Sept. 30, 1998
--------------------------------------------------------------------------------------------------------------------------
   Revenues:
<S>                                          <C>             <C>             <C>             <C>              <C>
Commissions                                  15,900,261      18,887,752      32,968,193      16,198,858       7,403,059
Data service fees                               462,469       1,297,117       2,015,396       1,640,123         661,236
Principal transactions                        2,533,998       3,196,844       5,689,695       2,456,874         901,889
Sale of software                              3,908,308
Interest and other income                     3,378,252       2,084,009       2,073,190         685,578         146,704
Interest income-related party                        --           6,180           6,180           6,180           6,380
                                           -------------    -------------   ------------    ------------    -------------
              Total revenues                 26,183,288      25,471,902      42,752,654      20,987,613       9,119,268
                                           -------------    -------------   ------------    ------------    -------------

Interest expense                              2,678,712         852,967         373,354         333,457         244,322
Interest expense to officer                     392,841         398,117          71,417          15,000          15,000
                                           -------------    -------------   ------------    ------------    -------------
               Net revenues                  23,111,735      24,220,818      42,307,883      20,639,156       8,859,946
                                           -------------    -------------   ------------    ------------    -------------

   Expenses:
Commission, floor brokerage and clearing     11,639,652      10,572,220      20,605,576       7,967,765       3,425,725
charges
Employee compensation and related costs      10,674,346      12,686,615      11,802,131       5,306,590       2,247,963
Loss on impairment of intangibles             7,870,110
Minority interests                             (899,869)
Other expenses                               22,620,097      21,253,846      19,436,768       7,956,784       3,805,903
Loss on investments                                  --         703,614         256,386              --              --
                                           -------------    -------------   ------------    ------------    -------------
Total expenses                               51,904,336      45,216,295      52,100,861      21,231,139       9,479,591
                                           -------------    -------------   ------------    ------------    -------------

Loss before income tax and extraordinary    (28,792,601)    (20,995,477)     (9,792,978)       (591,983)       (619,645)
loss on early extinguishments of debt
Income tax provision                             (8,725)        (28,697)        (53,913)        (32,494)        (12,765)
                                           -------------    -------------   ------------    ------------    -------------
Loss before extraordinary loss on early     (28,801,326)    (21,024,174)     (9,846,891)       (624,477)       (632,410)
extinguishments of debt
Extraordinary loss on early                    (250,000)             --              --        (177,125)             --
extinguishment of debt
                                           -------------    -------------   ------------    ------------    -------------
Net loss                                   $(29,051,326)   $(21,024,174)   $ (9,846,891)   $   (801,602)   $   (632,410)
                                           =============    =============   ============    ============    =============

Basic and diluted earnings before          $      (2.62)   $      (2.13)   $      (1.21)   $      (0.09)   $      (0.12)
extraordinary item per common share
Basic and diluted earnings per common      $      (2.64)   $      (2.13)   $      (1.21)   $      (0.11)   $      (0.12)
share
Weighted average shares outstanding -         12,508,852      9,888,597       8,122,393       7,136,434       5,171,182
basic and diluted

Balance Sheet and Other Operating Data:
Total Assets                               $  7,036,620    $ 21,532,676    $ 29,032,644    $ 23,244,954    $  5,539,457
Property and Equipment, net of             $  2,889,711    $ 14,806,945    $ 18,523,320    $ 10,852,956    $  3,650,743
accumulated depreciation
Long term obligations and redeemable       $  6,926,487    $  5,664,775    $  6,071,129    $  2,261,593    $    530,000
preferred stock
Stockholders` (deficit) equity             ($16,828,339)   $  2,945,432    $ 12,177,786    $ 15,842,987    $  1,754,419
Basic and diluted earnings before          $      (2.62)   $      (2.13)   $      (1.21)   $      (0.09)   $      (0.12)
extraordinary item per common share
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       17
<PAGE>

<TABLE>
<CAPTION>
(In millions except per share data)
Year Ended September 30,                        First Quarter     Second Quarter   Third Quarter     Fourth Quarter   Full Year
---------------------------------------------------------------------------------------------------------------------------------
2002
<S>                                                 <C>              <C>               <C>              <C>              <C>
Revenues                                            $8,289           $6,598            $5,320           $5,976           $26,183
Net revenues                                         7,272            5,120             4,888            5,832            23,112
Loss before extraordinary item                     (6,158)         (14,492)           (6,636)          (1,515)          (28,801)
Net (loss)                                         (6,408)         (14,492)           (6,636)          (1,515)          (29,051)
Loss  before   extraordinary   item  per            (0.63)           (1.22)            (0.59)           (0.18)            (2.62)
share
Basic and diluted earnings per share                (0.65)           (1.22)            (0.59)           (0.18)            (2.64)
---------------------------------------------------------------------------------------------------------------------------------
2001
Revenues                                            $8,222           $7,163            $5,506           $4,581           $25,472
Net revenue                                          8,025            6,923             5,212            4,061            24,221
Loss from operations                               (2,135)          (4,575)           (6,031)          (7,551)          (20,292)
Net (loss)                                         (2,250)          (4,609)           (6,607)          (7,558)          (21,024)
Basic and diluted earnings per share                (0.26)           (0.52)            (0.61)           (0.74)            (2.13)
</TABLE>


Item 7. Management`s  Discussion and Analysis of Financial Condition and Results
        of Operations.

     The  following  discussion  of  the  financial  condition  and  results  of
operations of the Company  should be read in conjunction  with the  consolidated
financial statements and notes thereto appearing elsewhere herein.

Results of Operations

Fiscal year ended September 30, 2002 compared to fiscal year ended September 30,
2001

     Total  revenues for fiscal 2002 were  $26,183,288,  an increase of 2.79% as
compared to revenues of $25,471,902 for fiscal 2001.

     Revenues  from  commissions  decreased  by  $2,987,491,   or  15.82%,  from
$18,887,752  for fiscal 2001 to  $15,900,261  for fiscal 2002 due primarily to a
decrease  of  UltimateTrader  accounts,  as well as a  significant  decrease  in
overall trading  activity by on-line  traders due to adverse market  conditions,
increased  competition  and pricing  pressure.  The decrease in Ultimate  Trader
commissions,  net of rebates in listed equities, over the counter securities and
options was  $9,749,019 as compared to fiscal 2001.  This decrease was partially
offset by the  retail  accounts  acquired  in the  On-Site  acquisition  and the
commissions collected from the Class B Members in the LLC of $6,761,528.

     Data service revenues decreased by $834,648, or 64.35%, from $1,297,117 for
fiscal 2001 to $462,469 for fiscal 2002 due to the increasing number of accounts
migrating to Ultimate Trader II 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 II.

     Revenues from principal transactions decreased by $662,846, or 20.73%, from
$3,196,844 for fiscal 2001 to $2,533,998  for fiscal 2002,  mainly as a function
of lower volume of business conducted by the institutional sales division due to
adverse  market   conditions  and  unusually  high  employee   turnover  in  the
institutional  sales  division.  As a result of these factors,  revenue from our
institutional  sales  division  decreased  $1,577,372  from the  previous  year.
Included in principle  transactions  for fiscal year 2002 are losses incurred by
the Class B minority  interest  members of the LLC of $740,585.  These decreases
were  partially  offset by an increase in trading  profits from the  proprietary
trading division of $1,655,111.

     Interest  and other income  increased  from  $2,084,009  for fiscal 2001 to
$3,378,252 for fiscal 2002. This increase is largely due to the increased margin
interest  and  interest  earned on the  additional  accounts  acquired  from the
On-Site retail  accounts and interest income earned in the LLC. Also included in
interest income and other income for fiscal 2002 are one-time  settlements  with
venders  of  $507,472  and a World  Trade  Center  Business  Recovery  Grant  of
$150,000.

     Interest expense increased from $852,967 for fiscal 2001 to $ 2,678,712 for
fiscal 2002 as a result of  increased  borrowings  during the year.  The Company
issued warrants in connection  with the  borrowings.  The value of such warrants
were  amortized  over the term of the loan as a component  of interest  expense.
Interest  expense  relating  to the  amortization  of  the  warrants  issued  in
connection  of the  financing  during  the year  ended  September  30,  2002 was
approximately $1,600,000.

     Interest expense - related party decreased by $5,276 or 1.33% from $398,117
for fiscal 2001 to $392,841 for fiscal 2002.

     As a result of the  foregoing,  net revenues  decreased by  $1,109,083,  or
4.58%,  from $24,220,818 for fiscal 2001 to $23,111,735 for fiscal 2002.  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.

                                       18
<PAGE>

     Total  expenses  increased by $6,688,041 or 14.79%,  from  $45,216,295  for
fiscal 2001 to $51,904,336 for fiscal 2002.

     Commissions, floor brokerage and clearing charges represent payments to our
clearing and floor brokers who  facilitate our clients`  transactions,  payments
for data and software from third party  venders and payouts to our  non-business
branch  locations.   These  expenses  increased   $1,467,762  or  13.97%,   from
$10,572,220  for fiscal 2001 to  $12,048,982  for fiscal 2002.  This increase is
largely due to the acquisition of the On-Site accounts with a lower gross margin
than our historical  online client business.  This increase was partially offset
by our lower  volumes in our  institutional  sales  division.  In addition,  our
online software licenses fees and data services fees decreased.

     Employment  compensation  and related  costs  decreased  by  $2,012,269  or
15.86%,  from  $12,686,615  for fiscal  2001 to  $10,674,346  for  fiscal  2002,
primarily  due  to  headcount   reductions  in  administrative   and  management
personnel. Employee compensation also decreased due to the lower trading profits
generated by the institutional sales division for fiscal year 2002.

     Communications expense increased by $672,897 or 30.45%, from $2,210,056 for
fiscal 2001 to $2,882,953  for fiscal 2002.  This increase was due to the adding
of a back up site as well as the increased data and communication costs relating
to the On-Site branch locations.

     Business development costs consist of television,  radio, on-line and print
advertising to obtain new clients.  These expenses  decreased by $1,859,703,  or
79.28%,  from  $2,345,696  for fiscal  2001 to  $485,993  for fiscal  2002 as we
decreased our planned advertising and promotional efforts.

     Professional  fees decreased from  $3,698,724 for fiscal 2001 to $3,679,184
for fiscal 2002. Accounting and legal fees increased $2,194,569. The increase in
accounting fees relates to the due diligence and the additional work relating to
the  On-Site  acquisition.  Legal  fees  increased  largely  due to the  On-site
acquisition,  the issuance of Series A Preferred Stock,  the software  licensing
agreement with E*Trade and the sale of the software to our clearing  broker.  In
addition,  legal costs were  incurred  for the settling of vendor  claims.  This
increase in legal and  accounting  fees was offset by a decrease  in  consulting
fees of $2,214,109  from fiscal year 2001,  primarily as a result of our sale of
software,  as external  software  consultants were no longer utilized to develop
and maintain such software.

     Occupancy  and  equipment  costs  decreased  by  $464,759  or  7.37%,  from
$6,309,997  for fiscal 2001 to  $5,845,238  for fiscal  2002.  Rent for the year
increased  $494,916  largely due to the  acquisition  of the On-Site  offices in
Great Neck,  New York and Boca Raton,  Florida.  The office  rent  increase  was
largely offset by a $470,787  decrease  relating to the settlement  with certain
leasing  companies and the expiration of some leases during fiscal year 2002. In
addition, during fiscal year 2002 many of the Company`s software maintenance and
support  contracts expired resulting in a decrease of $488,888 from the previous
year.

     Depreciation  and  amortization   increased  by  $394,411  or  7.17%,  from
$5,499,922  for fiscal 2001 to  $5,894,333  for fiscal  2002.  This  increase is
largely  due to  the  amortization  of  the  intangibles  relating  the  On-site
acquisition  of  $715,000  net of a  decrease  in  amortization  of  capitalized
software due to the sale of the software of approximately $540,000.

     Other expenses increased by $492,300 or 41.39%,  from $1,189,451 for fiscal
2001 to  $1,681,751  for  fiscal  2002 due to the 2%  penalty  of  approximately
$311,000  for not  filing  a  registration  statement  in  accordance  with  the
Preferred Stock agreement.

     Loss on  impairment of  $7,870,110  represents  the write off of intangible
assets  (customer  lists)  obtained in the  On-Site  acquisition.  The  acquired
customer base deteriorated  significantly which resulted in decreases in On-site
revenues and operating cash flows.  This  deterioration  is attributable to many
causes including weakening market conditions, as well as the loss and closing of
branch operations,  which resulted in a permanent impairment in the value of the
customer base acquired.

     The abandonment of leasehold  improvements of $1,741,315  primarily relates
to the surrender and  termination of the 25th and 28th floor office leases at 40
Wall Street that occurred in August 2002.  These leases were  terminated as part
of our overall cost cutting initiatives. In addition, we abandoned leaseholds in
offices formerly used by On-Site.

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

     As a consequence of the  foregoing,  our operating loss before income taxes
and extraordinary items increased from $20,995,477 for fiscal 2001, to a loss of
$28,792,601 for fiscal 2002.

     The income tax provision  decreased  from $28,697 for fiscal 2001 to $8,725
for fiscal 2002.


                                       19
<PAGE>

     We had an extraordinary loss on extinguishment of debt of $250,000 relating
to the early  extinguishment of the $2.5 million Senior  Subordinate Demand Note
that was exchanged  for  $2,750,000  of Preferred  Stock in accordance  with the
Senior Subordinated Demand Note agreement.

     During the year ended  September  30,  2002,  we had a deemed  dividend  to
preferred stockholders for beneficial conversion and accretion of the redemption
feature of $1,639,797 and $1,959,617  respectively  as well as a preferred stock
dividend of $315,000. As a consequence of the foregoing,  our net loss increased
from  $21,024,174  in fiscal year ended 2001 to $32,965,740 in fiscal year ended
2002.

Fiscal year ended September 30, 2001 compared to fiscal year ended September 30,
2000

     Total revenues for fiscal 2001 were  $25,471,902,  a decrease of 40.42%, as
compared to revenues of $42,752,654 for fiscal 2000.

     Revenues  from  commissions  decreased  by  $14,080,441,  or  42.71%,  from
$32,968,193  for fiscal 2000 to  $18,887,752  for fiscal 2001 due primarily to a
decrease of 2,831 UltimateTrader accounts or 48.94% of such accounts, as well as
a  significant  decrease in overall  trading  activity by on line traders due to
adverse market conditions,  increased  competition and pricing pressure.  During
fiscal  2001,  the  Company`s  online   brokerage   division  had  total  billed
transactions  of 883,454 and  average  billed  transactions  of 3,577 per day, a
decrease of 40.00% compared to an average daily billed transaction rate of 5,966
per day during fiscal 2000 totaling 1,509,448 billed transactions.

     Data service revenues decreased by $718,279, or 35.64%, from $2,015,396 for
fiscal  2000 to  $1,297,117  for  fiscal  2001 due to the  increasing  number of
accounts migrated to  UltimateTrader  II 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 UltimateTrader II.

     Revenues from principal  transactions  decreased by $2,492,851,  or 43.81%,
from  $5,689,695  for fiscal 2000 to  $3,196,844  for fiscal  2001,  mainly as a
function of lower  volume of  business  conducted  by both the online  brokerage
division`s trading desk and the third-market institutional sales division due to
adverse market conditions.

     Interest  and other income  increased  from  $2,079,370  for fiscal 2000 to
$2,090,189 due to the introduction of a minimum charge for all customers,  which
was offset by lower interest income.

     Interest  expense  increased  from $373,354 for fiscal 2000 to $852,967 for
fiscal 2001 as a result of increased borrowings.

     Interest  expense - related  party  increased  by  $326,700  as a result of
additional  borrowings  from related parties during the year.

     As  a  result  of  the foregoing, net revenues decreased by $18,087,065, or
42.75%,  from $42,307,883 for fiscal 2000 to $24,220,818 for fiscal 2001. 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 $6,884,566 or 13.21%,  from  $52,100,861  for
fiscal 2000 to $45,216,295 for fiscal 2001.

     Commissions, floor brokerage and clearing charges represent payments to our
clearing and floor brokers who facilitate our clients` transactions. As a result
of a  significant  decrease  in the volume of business  conducted  by our online
trading  accounts,  such  expenses  decreased by  $10,033,356,  or 48.69%,  from
$20,605,576 for fiscal 2000 to $10,572,220 for fiscal 2001.

     Employment  compensation  and related costs increased by $884,484 or 7.49%,
from $11,802,131 for fiscal 2000 to $12,686,615 for fiscal 2001, due to expenses
for software  developers that were working on capitalized  software  development
projects during fiscal 2000 but instead were working on the E*Trade  integration
and product  enhancements  and accordingly,  had their salaries  expensed during
fiscal 2001.

     Communications  expense increased by $332,347,  or 17.70%,  from $1,877,709
for fiscal 2000 to $2,210,056  for fiscal 2001 as a function of adding a back-up
site.

     Business development costs consist of television,  radio, on-line and print
advertising to obtain new clients.  These expenses  decreased by $6,223,504,  or
72.63%,  from  $8,569,200  for fiscal 2000 to $2,345,696  for fiscal 2001 as the
Company decreased its planned advertising and promotional efforts.


                                       20
<PAGE>

     Professional  fees increased from  $1,726,598 for fiscal 2000 to $3,698,724
for fiscal 2001 due to an increase of $2,124,232 for software  consultants,  the
use of an investor relations firm totaling  $230,000,  and the use of management
consultants totaling $369,083,  and was offset by decreases of $526,000 in legal
expenses and employee acquisition costs of approximately $427,000.

     Occupancy and  equipment  costs  increased by  $1,638,132  or 35.06%,  from
$4,671,865 for fiscal 2000 to $6,309,997  for fiscal 2001,  primarily due to the
expansion of our offices by an additional 15,277 square feet in New York and the
leasing of additional equipment to increase our capacity.

     Depreciation and  amortization  increased by $3,915,968,  or 247.23%,  from
$1,583,954   for  fiscal  2000  to  $5,499,922   for  fiscal  2001  due  to  the
implementation   of  our  direct  access   trading   platform  and  the  related
amortization of capitalized software, as well as the amortization of capitalized
lease obligations.

     Other expenses increased by $182,009, or 18.07%, from $1,007,442 for fiscal
2000 to $1,189,451 for fiscal 2001, due to additional administrative costs.


     A loss of  $703,614  was  recorded  in fiscal  year 2001 as a result of the
write off of our investments in a technology  company,  Gale Technologies,  Inc.
and Insider Financial Services Online, Ltd.

     As a consequence  of the  foregoing,  our  operating  loss  increased  from
$9,792,978 for fiscal 2000, to a loss of $20,995,477 for fiscal 2001.

     The income tax provision  decreased from $53,913 for fiscal 2000 to $28,697
for fiscal 2001.

     As a consequence of the foregoing,  our net loss increased from  $9,846,891
in fiscal year ended 2000 to $21,024,174 in fiscal year ended 2001.


Liquidity and Capital Resources

     For the year ended September 30, 2002, we incurred  consolidated  losses of
approximately  $33 million and used cash in our  operating  activities of nearly
$8.3 million.  These losses and use of cash are in addition to the approximately
$31  million of losses  and $21  million  of cash used in  operating  activities
during the two years ending  September 30, 2001.  The market  conditions  during
fiscal 2002 have been very  challenging for brokerage firms such as ABWG as well
as for the  brokerage  industry in  general.  Trading  volume has  significantly
decreased,  we have  lost  customers  in our core  direct  access  business  and
increased competition has put pricing and margin pressures on the Company.

     To respond to our liquidity  and capital  resource  needs,  the Company has
taken,  and is taking,  a variety of steps to offset the cash used in  operating
activities.  Such  steps  include  cost  cutting  initiatives,  the  pursuit  of
additional revenue producing  activities,  and the raising of funds or reduction
of  operating  liabilities  through  sale of assets and the issuance of debt and
equity securities.

     Our cost cutting initiatives include reductions in workforce, reductions in
capital expenditures,  and renegotiating clearing corporation agreements at more
favorable  rates.  We are pursuing  more  traditional  lines of business such as
fixed income and equity capital  markets as well as examining the feasibility of
expanding  our  existing  business to attract  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 debt or equity  offerings.  When the 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 the Company.

     The Company  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 Net Capital rule.

     The following is a summary of our significant financing activities:

     Licensing agreements and the sale of assets
     -------------------------------------------

     In April  2002,  we  granted a  non-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.


                                       21
<PAGE>

     In July 2002, we sold our software  programs  known as Ultimate  Trader II,
Ultimate  Trader III,  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 the  Company to the  clearing
broker.  In  addition,  the  asset  purchase  agreement  provides  for a  future
reduction of indebtedness to the clearing  broker of  approximately  $2,150,000,
contingent  upon the Company paying our clearing  broker  $5,000,000 in clearing
fees or raising at least $4,000,000 in new equity capital over a 36 month period
beginning after July 31, 2002.

     Issuance of debt obligations for cash
     -------------------------------------

     On August 30, 2001, we borrowed  $2,500,000 from SDS Merchant Fund, L.P. in
exchange  for our  issuance of a senior  subordinated  demand note (the  "Note")
bearing  interest  at an annual  rate of 6%, and the  issuance  of  warrants  to
purchase 67,824 shares of Common Stock at an exercise price of $3.686 per share.
Warrants to purchase  45,000 shares at an exercise  price of $3.686 per share of
Common  Stock were  issued to a  consultant  in  connection  with his efforts in
arranging this loan. Under the terms of the Senior  Subordinated Demand Note, we
were also committed to issue additional warrants to purchase our Common Stock at
the end of each month in which the Note was  outstanding.  A total of 243,673 of
such warrants were issued.  The Note was redeemed in November 2001 in connection
with our issuance of Series A Preferred Stock.

     During the year ended September 30, 2001, the Company  borrowed  $4,350,000
from officers of the Company at rates ranging from 7% to 10%. In September 2002,
we issued warrants to purchase 1,479,486 and 923,145 shares of our Common Stock,
exercisable at $0 and $1.80, respectively,  in consideration for the forgiveness
of $2,400,000 of such borrowings. The balance of the borrowing was repaid during
the year ended September 30, 2002.

     We borrowed  $700,000 from a former  officer of the Company during the year
ended  September 30, 2002. The borrowings are due on demand and bear interest at
10%.

     In March 2002,  a group  which  included a holder of our Series A Preferred
Stock and one of our clearing  brokers  granted the Company a $2,500,000 line of
credit,  increased  in April  2002 and May 2002 to  $2,700,000  and  $4,350,000,
respectively.  At September 30, 2002, our borrowings  under the line amounted to
$3,082,826.

     Issuance of equity instruments in satisfaction of debt obligation
     -----------------------------------------------------------------

     In September 2002, in  consideration of the forgiveness of notes payable to
officers  aggregating  $2,400,000,  we issued warrants to purchase 1,479,486 and
923,145  shares of Common Stock to officers,  exercisable at $0.00 and $1.80 per
share, respectively.

     Issuance of equity for cash
     ---------------------------

     On September 6, 2000,  pursuant to an equity line provided by an investment
group, we drew down $3,000,000 and issued 333,333 shares of our Common Stock and
received net  proceeds of  $2,850,000.  The quantity of shares  issued was based
upon 94% of the volume  weighted  average  price of our Common  Stock for the 22
days prior to the draw.

     On April 2, 2001,  we sold  2,027,241  shares of Common  Stock in a private
placement offering.  The Common Stock was issued at $5.50 per share. The private
placement offering generated total net proceeds of $10,012,127.  In addition, we
issued  warrants  expiring April 1, 2004 to acquire 608,174 shares of our Common
Stock at an exercise price of $6.75 per share. We have registered the shares for
resale under the Securities Act of 1933, as amended.

     On  November  29,  2001,  we issued 630 shares of our Series A  Convertible
Preferred  Stock, at a price of $10,000 per share.  Each share is convertible at
any time into  3,390  shares of our Common  Stock.  Preferred  dividends  on the
Series A Preferred  Stock are cumulative at a rate of 6% per annum for the first
eighteen  months and 15%  thereafter.  The purchasers  were also issued Series A
warrants to purchase  1,601,460  shares of Common Stock at an exercise  price of
$2.95  per  share.  The  aggregate  purchase  price of the  Preferred  Stock and
warrants was $6.3 million,  of which $3.45  million was paid to us in cash,  and
$2.75  million was paid by the  forgiveness  of $2.5  million face amount of the
Company`s Senior  Subordinated  Demand Note issued in August of 2001, plus a 10%
premium upon exchange of such note pursuant to its terms.


     Cash Flows

     In  2002,  cash  used  by  operating  activities  during  fiscal  2002  was
$8,278,756.  We had a net loss of $29,051,326  and a decrease in securities sold
not yet  purchased  of  $3,731,128  which was largely  offset by a decreases  in
receivables from clearing brokers of $1,178,045,  securities owned of $2,748,940
and securities  deposits of  $1,312,479.  Other offsets  include  non-cash items
including  depreciation  and  amortization of $5,894,333,  loss on impairment of
intangibles  of  $7,870,110,  loss on  disposal  of  leasehold  improvements  of
$1,741,315 and the issuance of warrants of $1,390,569.


                                       22
<PAGE>

     Cash provided by investing  activities was  $4,138,384  during fiscal 2002.
The most  significant  sources of cash provided by investing  activities was the
proceeds from the sale of the software.

     Cash provided by financing  activities was  $3,846,085  during fiscal 2002.
Cash provided by financing  activities during fiscal 2002 consisted primarily of
proceeds from the sale of Preferred Stock of $3,324,291,  loans from officers of
$900,000,   and  notes  payable  of  $187,884.   In  addition,  we  had  capital
contributions  from and  distributions  to,  the Class B  members  of the LLC of
$446,307 and $1,012,397, respectively.

     Cash used by operating activities during fiscal 2001 was $15,818,426 We had
a net loss of  $21,024,174  and an  increase  from  other  assets  of  $324,319,
receivables from clearing  brokers of $1,174,624,  loans receivable from related
party of $129,126 and a decrease in accounts payable and accrued  liabilities of
$513,973 which was offset by an increase in other  liabilities  of $67,288,  and
non-cash items such as  depreciation  and  amortization  of $5,499,922,  loss on
investments of $703,614 and non-cash compensation/service costs of $779,162.

     Cash used in investing  activities was $1,759,660  during fiscal 2001. Uses
of cash in fiscal 2001 related to purchases of equipment, software and leasehold
improvements  made in our facility at 40 Wall Street of $1,759,660.  In addition
to the cash used in  investing  activities  during  the year  2001,  we  accrued
accounts  payable  relating to purchases  of property and  equipment of $198,348
during this period.

     Cash provided by financing  activities was $12,996,056  during fiscal 2001.
Cash provided by financing  activities during fiscal 2001 consisted primarily of
proceeds from the sale of Common Stock in a private equity offering of 2,027,241
shares at an  offering  price of $5.50,  employee  exercised  stock  options  of
$987,290,  loans  from  officers  of  approximately  $850,000,  and  a  loan  of
$2,500,000.  We used a  portion  of  these  proceeds  to pay  $790,935  in notes
payable, and $559,090 to pay obligations on capital leases.

     At September 30, 2002, A.B. Watley has $530,000 of outstanding subordinated
loans,  under agreements  approved by the NASD. These loans are included by A.B.
Watley for  purposes of  computing  its net capital  under the SEC`s net capital
rules. These borrowings by A.B. Watley consist of:

     o    a  $55,000  non-interest  bearing  loan and a  $125,000  loan  bearing
          interest at 12% from an officer and a stockholder.

     o    a  $200,000  loan,  bearing  interest  at an annual  rate of 15% and a
          $150,000 loan bearing interest at an annual rate of 13%, from a family
          member of a former executive officer of the Company


     A.B. Watley 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.

Net Operating Loss Carryforwards

     The Company has net operating loss carryforwards that represent accumulated
losses which may be utilized to reduce future taxable  income,  and thus our tax
liabilities  for future  periods.  Our net operating loss  carryforwards  expire
beginning  in the year 2013.  The  issuance  of  additional  equity  securities,
together with our recent  financings  and the IPO,  could result in an ownership
change and,  thus,  could limit our use of net operating  losses.  If we achieve
profitable operations,  any significant limitation on the utilization of our net
operating  losses  would have the effect of  increasing  our tax  liability  and
reducing net income and available cash reserves. The tax benefits related to the
net operating loss carryfowards have been fully reserved for on our consolidated
statements of financial condition.

Relevant Accounting Standards

     We generally  grant stock  options to  employees  and  consultants  with an
exercise  price not less  than the fair  market  value at the date of grant.  We
account for stock  option  grants to  employees in  accordance  with  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"
and,  accordingly,  recognize no  compensation  expense related to option grants
issued to  employees  at or above the fair market  value of the stock.  In cases
where we grant options to employees  below the fair market value of the stock at
the date of grant, the difference between the exercise price and the fair market
value is treated as  compensation  expense and amortized over the vesting period
of the option,  if any. Stock options  granted to consultants and others instead
of cash compensation are recorded based upon  management`s  estimate of the fair
value of the options or the related services  provided and recognized as expense
over the vesting period, if any.


                                       23
<PAGE>

     Pro  forma  information  regarding  net  income  (loss) is  required  under
Statement of Financial  Accounting  Standards  ("SFAS") No.123,  "Accounting for
Stock-Based  Compensation,"  and has been  determined as if we had accounted for
all stock option grants on the fair value method.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.  141,  "Business  Combinations"  and  SFAS  No.  142,  "Goodwill  and  Other
Intangible Assets". SFAS 141 requires all business combinations  initiated after
June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142,
intangible  assets with indefinite lives and goodwill will no longer be required
to  be  amortized.   Instead,  these  assets  will  be  evaluated  annually  for
impairment. We adopted the provisions of SFAS No. 142 at the beginning of fiscal
year 2002 in accounting for the acquisition of certain assets of On-Site.

     After our development of the Ultimate Trader II software was completed,  we
began to  market  the  software  to third  parties.  In  accordance  with  AICPA
Statement of Position  ("SOP") 98-1,  proceeds  received from the license of the
computer  software,  net of  direct  incremental  costs  of  marketing,  such as
commissions,  software reproduction costs, warranty and service obligations, and
installation  costs  are to be  applied  against  the  carrying  amount  of that
software.  No profit is to be  recognized  until  aggregate  net  proceeds  from
licenses and  amortization  have reduced the carrying  amount of the software to
zero. Subsequent proceeds are to be recognized in revenue as earned.

Recent Accounting Developments

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

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

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

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

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


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Our primary financial  instruments  subject to market risk at September 30,
2002  consist of equity  securities  obtained in exchange  for our granting of a
software license. The securities were sold in October 2002. In the normal course
of business we do not hold  significant  investments  in  securities.  We do not
believe  that these  instruments  are  subject to material  potential  near-term
losses in future earnings from reasonably  possible  near-term changes in market
rates or prices. We do not own derivative financial  instruments for speculative
or trading purposes. In the normal course of business,  our customers enter into
transactions  where the risk of  potential  loss due to market  fluctuations  or
failure to perform  exceeds the amount  reported  for the  transaction.  We have
established policies, procedures and internal processes governing our management
of market risk in the normal course of our business  operations.  We, along with
our  clearing  brokers,   continuously   monitor  our  exposure  to  market  and
counter-party  risk  through  the use of a variety of  financial,  position  and
credit exposure  reporting and control  procedures.  In addition,  we review the
creditworthiness  of each  customer  and/or  other  counter-party  with which we
conduct business. We are not currently exposed to any material currency exchange

                                       24
<PAGE>

risk because the risk is borne by international  customers and our international
licensees, and we do not hold any assets or incur any liabilities denominated in
foreign currency.

Item 8. Financial Statements and Supplementary Data

     The financial  statements  required by this Item are  enumerated in Item 14
and are found following page xxx of this Report.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

     On July 26,  2002,  Ernst & Young LLP  informed  us that it would no longer
serve as our  independent  auditors,  and submitted its letter of resignation to
us.

     The audit reports of Ernst & Young on our consolidated financial statements
as of and for the fiscal years ended  September 30, 2001 and September 30, 2000,
respectively,  did not contain any adverse opinion or disclaimer of opinion, nor
were they  qualified or modified as to  uncertainty,  audit scope or  accounting
principles.

     During  our  two  fiscal  years  ended   September  30,  2001,   and  2000,
respectively, and subsequent interim periods through the date of Ernst & Young`s
resignation  described above, there were no disagreements between us and Ernst &
Young on any matter of accounting  principles or practices,  financial statement
disclosure,  or auditing scope or procedures  which,  if not resolved to Ernst &
Young`s  satisfaction,  would have caused Ernst & Young to make reference to the
subject  matter  of the  disagreement  in  connection  with its  reports  on our
consolidated financial statements for such years.

     In a letter to our Board of Directors,  Ernst & Young  stated:  "We believe
the Company`s Finance and Accounting  department has insufficient  resources and
expertise  to ensure  timely and  accurate  filing of  requisite  financial  and
regulatory  information."  We believe that we are  addressing  those concerns by
addressed  these  concerns by hiring a  consultant  as interim  Chief  Financial
Officer and are taking additional steps to ensure timely filings in the future.

     On October 8, 2002, we filed an amendment to our Current Report on Form 8-K
relating to the resignation of Ernst & Young as our independent auditors for the
purpose of including a letter,  dated August 5, 2002,  from Ernst & Young to the
Securities  Exchange  Commission pursuant to Item 304(a) of Regulation S-K under
the Securities Act of 1933, as amended.

     On August 28, 2002, we engaged Israeloff, Trattner & Co. P.C. ("Israeloff")
as our independent public accountants.  On October 10, 2002,  Israeloff resigned
as our independent public accountants.

     Israeloff  did not issue a report  on the  Company`s  financial  statements
during our two most recent fiscal years and any  subsequent  interim period 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  new
independent public accountants.


                                       25
<PAGE>



                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company`s  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the after the close of the fiscal year ended September 30, 2002. Such
information is hereby incorporated by reference.

Item 11. Executive Compensation

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company`s  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the after the close of the fiscal year ended September 30, 2002. Such
information is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company`s  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the after the close of the fiscal year ended September 30, 2002. Such
information is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions

     Information  concerning  the  directors  and  officers  of the  Company  is
contained  in the  Company`s  definitive  Proxy  Statement  to be filed with the
Securities and Exchange  Commission pursuant to Regulation 14A no later than 120
days after the after the close of the fiscal year ended September 30, 2002. Such
information is hereby incorporated by reference.

Item 14. Controls and Procedures

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



                                       26
<PAGE>



                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)  Documents filed as part of this report:

     1. Financial Statements:

          Consolidated  Financial  Statements  of A.B.  Watley  Group  Inc.  and
          subsidiaries

     Report of Independent Auditors

     Consolidated  Statements of Financial  Condition--Years ended September 30,
     2002 and 2001, Consolidated Statements of Operations--Years ended September
     30,  2002,   2001  and  2000,   Consolidated   Statements   of  Changes  in
     Stockholders`  Equity--Years  ended  September  30,  2002,  2001 and  2000,
     Consolidated Statements of Cash Flows--Years ended September 30, 2002, 2001
     and 2000, Notes to Consolidated Financial Statements

     2. Financial Statement Schedules:

          Financial  Statement  schedules have been omitted because the required
          information is inapplicable or because the information is presented in
          the financial statements or related notes.

     (b) Reports on Form 8-K:

     The Company filed a Form 8-K Current Report on August 2, 2002 reporting the
     resignation of Ernst & Young LLP as the Company`s independent auditors. The
     Company amended this report on August 8, 2002.

     The Company  filed a Form 8-K Current  Report on August 29, 2002  reporting
     the  appointment  of  Israeloff,  Trattner  & Co.,  P.C.  as the  Company`s
     independent auditors.

     The Company filed a Form 8-K Current  Report on October 16, 2002  reporting
     the  resignation  of  Israeloff,  Trattner  & Co.,  P.C.  as the  Company`s
     independent auditors.

     The Company filed a Form 8-K Current  Report on October 25, 2002  reporting
     the  appointment  of Marcum &  Kliegman  LLP as the  Company`s  independent
     auditors.

     (c). Exhibits.
     -------------
<TABLE>
<CAPTION>
<S>        <C>
         Exhibit
         No.        Description
         ---        -----------

          3.1       Restated  Certificate  of  Incorporation  of the Company and
                    form of amendment thereto.*

          3.2       By-Laws of the Company, as amended.*

          4.1       Specimen Common Stock Certificate.*

          4.2       Form of Underwriter`s  Warrant Agreement,  including Form of
                    Warrant Certificate.*

          10.1      1997 Stock Option Plan.*

          10.2      Second Amended and Restated 1998 Stock Option Plan.*

          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.*

          10.4      Employment  Agreement  dated as of June 1, 1997  between the
                    Company  and  Harry  Simpson  and  Amendment  to  Employment
                    Agreement  dated  October 1, 1998  between  the  Company and
                    Harry Simpson.*

          10.5      Employment Agreement dated as of January 1, 1999 between the
                    Company and Robert Malin.*

          10.6      Employment  Agreement  dated as of June 1, 1997  between the
                    Company and Anthony G. Huston and  Amendment  to  Employment
                    Agreement  dated as of October 1, 1998  between  the Company
                    and Anthony G. Huston.*


                                       27
<PAGE>

          10.7      Employment  Agreement  dated as of March 1, 1998 between the
                    Company and Eric Steinberg.*

          10.8      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.*

          10.9      [Intentionally omitted.]

          10.10     [Intentionally omitted.]

          10.11     Co-Branding  Agreement  dated  October 11,  1996  between PC
                    Quote,Inc. and A.B. Watley, Inc., as amended.*

          10.12     Computer  Software License  Agreement dated December 8, 1996
                    between Townsend Analytics,  Ltd. and A.B. Watley,  Inc., as
                    amended.*

          10.13     Fully Disclosed Clearing Agreement dated October 3, 1996 and
                    Amendment  dated  June  8,  1998  between  Penson  Financial
                    Services,Inc. and A.B. Watley, Inc.*

          10.14     Fully Disclosed  Correspondent  Agreement dated November 18,
                    1996 between Weiss,  Peck & Greer,  L.L.C.  and A.B. Watley,
                    Inc.*

          10.15     License  Agreement dated as of October 1, 1998 between Ethos
                    Corporation and A.B. Watley, Inc.*

          10.16     Service  Marketing  Representative  Agreement  dated  as  of
                    January 29, 1998 between S&P ComStock, Inc. and A.B. Watley,
                    Inc.*

          10.17     Master  Lease  Agreement  dated  December  17, 1998  between
                    General Electric Capital Corporation and the Company.*

          10.18     Security  Agreement  dated December 17, 1998 between General
                    Electric Capital Corporation and the Company.*

          10.19     Letter of Credit  Agreement  dated December 17, 1998 between
                    General Electric Capital Corporation and the Company.*

          10.20     Loan  Agreement  dated  January  28,  1999  between New York
                    Community  Investment  Company L.L.C.,  the Company and A.B.
                    Watley, Inc.*

          10.21     Promissory Note of the Company and A.B.  Watley,  Inc. dated
                    January 28, 1999 issued to the New York Community Investment
                    Company L.L.C.*

          10.22     Security  Agreement  dated January 28, 1999 between New York
                    Community Investment Company L.L.C. and A.B. Watley, Inc.*

          10.23     Security  Agreement  dated January 28, 1999 between New York
                    Community Investment Company L.L.C. and the Company.*

          10.24     Objectivity  Master  License  and  Support  Agreement  dated
                    September 30, 1999 between Objectivity, Inc. and A.B. Watley
                    Group Inc. **

          10.25     Reseller  Network  License  Order  Form  dated May 26,  1999
                    between Database Consultants Inc. and A.B. Watley Group Inc.
                    **

          10.26     1999 Stock Option Plan.***

          10.27     Employment  Agreement  dated as of June 18, 1999 between the
                    Company and Joseph Ramos.

          10.28     Employment  Agreement  dated as of September 1, 1999 between
                    the Company and Peter Wigger.

          10.29     2000 Stock Option Plan.****

          10.30     Agreement,  dated November 1, 2001, by and among A.B. Watley
                    Group Inc. and On-Site Trading, Inc. *****

          10.31     Employment Agreement,  dated as of November 2, 2001, between
                    the Company and Gary Mednick.

          10.32     Series  A  Convertible Preferred Stock Purchase Agreement dated
                    November  2001  for the sale of 630 shares of Series A Redeemable
                    Convertible  Preferred  Stock

          10.33     Intentionally omitted.

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

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

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

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

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

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

          10.40     Asset  Purchase  Agreement entered into with Integrated Trading
                    Solutions,  Inc.  dated  July  2002.

          10.40A    License Agreement entered into Integrated Trading Solutions,
                    Inc dated July 2002.

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

          10.42     Equity  line entered into with investment group dated September
                    6,  2000  in  the  amount  of  $3,000,000.  *******

          10.43     Employment  Agreement entered with Steven Malin dated September
                    2002.

          10.44     Employment  Agreement entered with Robert Malin dated September
                    2002.

          10.45     Employment  Agreement  entered  with John Amore dated September
                    2002.

          10.46     Amendment to the Fully Disclosed Clearing Agreement between
                    Penson Financial Services, Inc. and A.B. Watley, Inc.

          10.47     Amended and Restated Promissory Note between A.B. Watley Group,
                    Inc. and Penson Financial Services, Inc. dated July 2002.

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

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

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

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

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

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

          **        Filed as an exhibit to the  Company`s  Annual Report on Form
                    10-KSB  for the year  ended  September  30,  1999 and hereby
                    incorporated by reference herein.

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

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

          *****     Filed as an exhibit to the Company`s  Current Report on Form
                    8-K filed on November 16, 2001.

          ******    Filed  as  an  exhibit  to the Company`s Quarterly Report on
                    Form  10-Q  for  the  quarter  ending  March  31,  2002.

          *******   Filed  as  an  exhibit  to the Company`s Quarterly Report on
                    Form  10-Q  for  the  quarter  ending  June  30,  2002.

                                       28
</TABLE>
<PAGE>







                             A.B. Watley Group Inc.
                        Consolidated Financial Statements
                  Years Ended September 30, 2002, 2001 and 2000

                                    Contents



<TABLE>
<CAPTION>
<S>                                                                                                <C>
Report of Independent Auditors                                                                     F-2
Report of Independent Auditors                                                                     F-3
Consolidated Statements of Financial Condition as of September 30, 2002 and 2001                   F-4
Consolidated Statements of Operations for the Years Ended September 30, 2002, 2001 and 2000        F-5
Consolidated Statements of Changes in Stockholders` Deficit for the Years Ended                    F-6
       September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended September 30, 2002, 2001 and 2000        F-7
Notes to Consolidated Financial Statements                                                         F-9
</TABLE>


<PAGE>

                          Independent Auditors` Report
                          ----------------------------


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

We have audited the  accompanying  balance sheet of A.B. Watley Group Inc. as of
September  30, 2002,  and the related  consolidated  statements  of  operations,
changes in  stockholders`  deficit,  and cash flows for the year ended September
30, 2002. 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 auditing standards  generally accepted
in the  United  States of  America.  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 financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of A.B. Watley Group Inc. as of
September 30, 2002, and the results of its operations and its cash flows for the
year  ended  September  30,  2002,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

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 net 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
January 15, 2003



                                       F-2


<PAGE>



Independent Auditors` Report
----------------------------




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To 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. (the "Company") as of September 30, 2001, and the
related consolidated statements of operations, changes in stockholders` equity
and cash flows for the years ended September 30, 2001 and 2000.  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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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
consolidated financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of A.B. Watley Group
Inc. as of September 30, 2001, and the consolidated results of its operations
and its cash flows for the years ended September 30, 2001 and 2000 in conformity
with accounting principles generally accepted in the United States.



                                                          /s/ Ernst & Young LLP

New York, New York
January 11, 2002







                                       F-3


<PAGE>

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


<TABLE>
<CAPTION>
                                                                                             September 30,      September 30,
                                                                                                 2002               2001
                                                                                             ------------       ------------
Assets:
<S>                                                                                          <C>                <C>
Cash and cash equivalents                                                                    $    213,766       $    508,053
Restricted cash                                                                                   292,565            500,334
Receivables from clearing brokers                                                               1,028,588          2,294,533
Securities owned at market value                                                                2,145,472            343,434
Property and equipment, net of accumulated depreciation
         of $5,317,435 and $8,659,868                                                           2,889,711         14,806,945
Loans receivable from related party                                                               258,226            257,197
Security deposits                                                                                 132,001          1,444,480
Other assets                                                                                       76,291          1,377,700
                                                                                             ------------       ------------
Total Assets                                                                                 $  7,036,620       $ 21,532,676
                                                                                             ============       ============

Liabilities and Stockholders` (Deficit) Equity:
Accounts payable and accrued liabilities                                                        8,409,141          8,514,557
Accrued liabilities to LLC Class B Members                                                      2,492,310                 --
Securities sold not yet purchased                                                                      --            372,545
Notes payable to officers                                                                         700,000          4,350,000
Notes payable - other                                                                           3,282,826          3,437,323
Subordinated borrowings - other                                                                   350,000            350,000
Subordinated borrowings from officer                                                              180,000            180,000
Lease obligations                                                                               1,524,195          1,396,060
                                                                                             ------------       ------------
                                                                                               16,938,472         18,600,485
                                                                                             ------------       ------------


Series A Redeemable Convertible Preferred Stock $0.01 par value, 690 shares authorized
  and 630 and 0 issued and outstanding at September 30, 2002 and 2001, respectively and
  accrued dividends (liquidation preference  - $6,300,000)                                      6,926,487                 --
                                                                                             ------------       ------------

Stockholders` (Deficit) Equity:
Preferred Stock $0.01 par value, 1,000,000 shares authorized and none issued and
   outstanding at September 30, 2002 and September 30, 2001                                            --                 --
Common Stock, $0.001 par value, 20,000,000 shares authorized at September 30, 2002
   and September 30, 2001, respectively, 12,508,852 and 10,995,796 issued
   and outstanding at September 30, 2002 and September 30, 2001                                    12,509             10,996
Additional paid-in capital                                                                     45,819,569         37,224,984
Option costs                                                                                      (32,663)          (267,798)
Deferred compensation costs                                                                            --           (459,563)
Accumulated deficit                                                                           (62,627,754)       (33,576,428)
                                                                                             ------------       ------------
Total Stockholders` (Deficit) Equity                                                          (16,828,339)         2,932,191
                                                                                             ------------       ------------
Total Liabilities and Stockholders` (Deficit) Equity                                         $  7,036,620       $ 21,532,676
                                                                                             ============       ============
</TABLE>

                See notes to consolidated financial statements.

                                       F-4


<PAGE>


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



<TABLE>
<CAPTION>
                                                                                              Years Ended
                                                                           --------------------------------------------------
                                                                           September 30,      September 30,      September 30,
                                                                               2002               2001               2000
                                                                           ------------       ------------       ------------
Revenues:
<S>                                                                         <C>                <C>                <C>
Commissions                                                                 $15,900,261        $18,887,752        $32,968,193
Data service fees                                                               462,469          1,297,117          2,015,396
Principal transactions                                                        2,533,998          3,196,844          5,689,695
Sale of software income                                                       3,908,308                 --                 --
Interest and other income                                                     3,378,252          2,084,009          2,073,190
Interest income - related parties                                                    --              6,180              6,180
                                                                           ------------       ------------       ------------
Total revenues                                                               26,183,288         25,471,902         42,752,654

Interest expense                                                              2,678,712            852,967            373,354
Interest expense - related parties                                              392,841            398,117             71,417
                                                                           ------------       ------------       ------------
Net revenues                                                                 23,111,735         24,220,818         42,307,883

Expenses and other charges:
Commissions, floor brokerage, and clearing charges                           12,048,982         10,572,220         20,605,576
Employee compensation and related costs                                      10,674,346         12,686,615         11,802,131
Communications                                                                2,882,953          2,210,056          1,877,709
Business development                                                            485,993          2,345,696          8,569,200
Professional services                                                         3,679,184          3,698,724          1,726,598
Occupancy and equipment costs                                                 5,845,238          6,309,997          4,671,865
Depreciation and amortization                                                 5,894,333          5,499,922          1,583,954
Other expenses                                                                1,681,751          1,189,451          1,007,442
Loss on impairment of intangibles                                             7,870,110                 --                 --
Loss on investments                                                                  --            703,614            256,386
Abandonment of leasehold improvements                                         1,741,315                 --                 --
Minority interest applicable to LLC Class B members                            (899,869)                --                 --
                                                                           ------------       ------------       ------------
Total expenses                                                               51,904,336         45,216,295         52,100,861
                                                                           ------------       ------------       ------------

Loss before income taxes and extraordinary item                             (28,792,601)       (20,995,477)        (9,792,978)
Income tax provision                                                              8,725             28,697             53,913
                                                                           ------------       ------------       ------------

Loss before extraordinary item                                              (28,801,326)       (21,024,174)        (9,846,891)
Extraordinary loss on extinguishment of debt                                   (250,000)                --                 --
                                                                           ------------       ------------       ------------
Net loss                                                                    (29,051,326)       (21,024,174)        (9,846,891)
                                                                           ============       ============       ============
Basic and diluted loss per common share:

Loss before extraordinary item                                            $ (28,801,326)     $ (21,024,174)      $ (9,846,891)
       Deemed dividend to preferred shareholders - beneficial conversion     (1,639,797)
       Deemed dividend to preferred shareholders - accretion of redemption   (1,959,617)
       Preferred stock dividends                                               (315,000)
                                                                           ------------      -------------       ------------
Loss before extraordinary item attributable to common shareholders          (32,715,740)       (21,024,174)        (9,846,891)
       Extraordinary loss on extinguishment of debt                            (250,000)
                                                                           ------------      -------------       ------------
Net loss attributable to common shareholders                              $ (32,965,740)     $ (21,024,174)      $ (9,846,891)
                                                                           ============      =============       ============


Loss before extraordinary item                                           $        (2.62)     $       (2.13)      $      (1.21)
Extraordinary item                                                       $        (0.02)     $           -       $          -
Basic and diluted loss per share                                         $        (2.64)     $       (2.13)      $      (1.21)

Weighted average shares outstanding                                          12,508,852          9,888,597          8,122,393

</TABLE>


See notes to consolidated financial statements.


                                       F-5


<PAGE>



                             A.B. Watley Group Inc.
             Statement of Changes in Stockholders` Equity (Deficit)

<TABLE>
<CAPTION>
                                    Common Stock Issued
                                    -------------------
                                   Shares     Par Value      Additional     Unamortized     Deferred      Accumulated     Total
                                                              Paid-in      Option Costs   Compensation      Deficit
                                                              Capital
                                ------------  ------------  ------------   ------------   ------------   ------------  ------------
<S>                                <C>              <C>      <C>              <C>                         <C>           <C>
Balance at September 30, 1999      7,931,745        $7,932   $18,661,749      ($121,331)            --    ($2,705,363)  $15,842,987
Issuance of common stock             866,345           866     6,091,127             --             --             --     6,091,993
Option cost - net                         --            --            --         28,000             --             --        28,000
Net loss                                  --            --            --             --             --     (9,846,891)   (9,846,891)
Other                                     --            --        61,697             --             --             --        61,697
                                ------------  ------------  ------------   ------------   ------------   ------------  ------------

Balance at September 30, 2000      8,798,090        $8,798   $24,814,573       ($93,331)            --   ($12,552,254)  $12,177,786
Issuance of common stock           2,197,706         2,198    10,997,219             --             --             --    10,999,417
Deferred stock based
   compensation                           --            --       555,182             --       (555,182)            --            --

Amortization deferred
   compensation                           --            --            --             --         95,619             --        95,619

Warrants issued to                        --            --       369,083             --             --             --       369,083
   non-employees
Option cost - net                         --            --       488,927      ($174,467)            --             --       314,460
Net loss                                  --            --            --             --             --    (21,024,174)  (21,024,174)
                                ------------  ------------  ------------   ------------   ------------   ------------  ------------
Balance at September 30, 2001     10,995,796       $10,996   $37,224,984      ($267,798)      (459,563)  ($33,576,428)   $2,932,191
Issuance of common stock
   -On-Site                        1,513,056         1,513     5,158,011             --             --             --     5,159,524
Amortization deferred                     --            --            --             --        459,563             --       459,563
   compensation
Deemed dividend preferred                 --            --     1,959,617             --             --             --     1,959,617
   stock - redemption feature
Accretion of deemed dividend
   preferred stock                        --            --    (1,959,617)            --             --             --    (1,959,617)
Forgiveness of receivables to
   related parties                        --            --       (39,000)            --             --             --       (39,000)
Forgiveness of notes payable
   to officers and related
   parties                                --            --     2,400,000             --             --             --     2,400,000
Dividends accrued on preferred
   stock                                  --            --      (315,000)            --             --             --      (315,000)
Warrants issued to consultants            --            --       184,894             --             --             --       184,894
Warrants issued to preferred
   stockholder in connection
   with credit line provided              --            --     1,045,367             --             --             --     1,045,367
Warrants issued in exchange
   for debt                               --            --            --             --             --             --            --
Amortization of bridge loan
   warrants                               --            --       349,447        202,467             --             --       551,914
Option cost-net                           --            --            --         32,668             --             --        32,668
Issuance costs related to
   preferred stock                        --            --      (189,134)            --             --             --      (189,134)
Net loss                                  --            --            --             --             --    (29,051,326)  (29,051,326)
                                ------------  ------------  ------------   ------------   ------------   ------------  ------------
Balance at September 30, 2002     12,508,852       $12,509   $45,819,569       ($32,663)  $         --   ($62,627,754) ($16,828,339)
                                ============  ============  ============   ============   ============   ============  ============
</TABLE>


                See notes to consolidated financial statements.

                                       F-6

<PAGE>




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

<TABLE>
<CAPTION>
                                                                 Years Ended
                                                ------------------------------------------------
                                                September 30,    September 30,      September 30,
                                                    2002              2001              2000
                                                ------------      ------------      ------------
Cash flows used in operating activities:
<S>                                             <C>               <C>                <C>
Net loss                                        $(29,051,326)     $(21,024,174)      $(9,846,891)
Adjustments to reconcile net loss to net
cash used in
   Operating activities:

        Non-cash compensation and service
        costs                                        459,563           779,162            94,697
        Options costs                                235,135                --                --
        Penalties-preferred stock                    311,487                --                --
        Issuance of warrants                       1,390,569                --                --
        Minority interest
        applicable to LLC Class
        B members                                   (899,869)               --                --
        Loss on investments                               --           703,614           256,386
        Depreciation and amortization              5,894,333         5,499,922         1,583,954
        Loss on impairment of intangibles          7,870,110                --                --
        Loss on extinguishment of debt               250,000                --                --
        Loss on disposal of leasehold
        improvements                               1,741,315                --                --
        Changes in assets and liabilities:
        (Increase) decrease in operating
        assets:
                 Restricted cash                     207,769            31,098           (17,679)
                 Receivables from clearing
                 brokers                           1,178,045        (1,174,624)         (493,621)
                 Securities owned                  2,748,940            47,727          (176,780)
                 Loans receivable from
                 related party                        (1,029)         (129,126)           (6,180)
                 Security deposits                 1,312,479            27,427                --
                 Other assets                        833,598          (324,319)       (1,037,957)
        Increase (decrease) in operating
        liabilities:
                 Accounts payable and
                 accrued liabilities                 843,118          (513,973)        3,523,449
                 Securities sold, not yet
                 purchased                        (3,731,128)          191,552           124,801
                 Leasehold
                 obligations                         128,135            67,288           535,275
                                                ------------      ------------      ------------
Net cash used in operating activities             (8,278,756)      (15,818,426)       (5,460,546)
                                                ------------      ------------      ------------

Cash flows provided by (used in)
investing activities:
Purchases of property and equipment                 (261,930)       (1,759,660)       (8,732,590)
Proceeds of sale of
software license                                   4,400,314                --                --
Purchase of investments                                   --                --          (875,000)
                                                ------------      ------------      ------------
Net cash provided by (used in) investing
activities                                         4,138,384        (1,759,660)       (9,607,590)
                                                ------------      ------------      ------------

Cash flows from financing activities:
Proceeds from sale of common stock                        --        10,012,127         2,850,000
Proceeds from sale of preferred stock              3,324,291                --                --
Proceeds from exercised stock options                     --           987,290         1,281,993
Proceeds from exercised stock warrants                    --                --         1,960,000
Proceeds of notes payable                            187,884         2,500,000                --
Payments of notes payable                                 --          (790,938)         (485,487)
Proceeds from notes payable to officer               900,000           850,000         3,500,000
Payment of capital lease obligations                      --          (559,090)         (257,852)
Proceeds from obligations under capital
leases                                                    --                --         2,047,410
Capital distribution to LLC Class B members       (1,012,397)               --                --
Capital contribution by LLC Class B members          446,307                --                --
Repayment of bank loan                                    --            (3,333)          (36,667)
                                                ------------      ------------      ------------
Net cash provided by financing activities          3,846,085        12,996,056        10,859,397
                                                ------------      ------------      ------------

Net decrease in cash and cash equivalents           (294,287)       (4,582,030)       (4,208,739)
Cash and cash equivalents at beginning of
period                                               508,053         5,090,083         9,298,822
                                                ------------      ------------      ------------
Cash and cash equivalents at end of period          $213,766          $508,053        $5,090,083
                                                ============      ============      ============

See notes to consolidated financial statements.

</TABLE>
                                      F-7


<PAGE>

                             A.B. Watley Group Inc.

                      Consolidated Statements of Cash Flows
                                   (continued)

<TABLE>
<CAPTION>
                                                                              Years Ended
                                                            ----------------------------------------
                                                            September 30,    September 30, September 30,
                                                                2002             2001         2000
                                                            ------------     ------------   --------
Supplemental non-cash financing activities
     and disclosure of cash flow information:
<S>                                                         <C>              <C>            <C>
Exchange of  property and equipment in payment of
operating expenses                                          $         --     $    198,348   $625,870
                                                            ============     ============   ========
Issuance of notes payable in payment of operating
expenses                                                    $    225,714     $         --   $     --
                                                            ============     ============   ========
Discharge of note payable in exchange for software          $  2,150,000     $         --   $     --
                                                            ============     ============   ========
Accrual of Preferred stock dividends                        $    315,000     $         --   $     --
                                                            ============     ============   ========
Exchange of subordinated debt for preferred stock           $  2,500,000     $         --   $     --
                                                            ============     ============   ========
Deemed dividend to preferred shareholders -beneficial
conversion                                                  $  1,639,797     $         --   $     --
                                                            ============     ============   ========
Deemed dividend to preferred shareholders -accretion of
redemption feature                                          $  1,959,617     $         --   $     --
                                                            ============     ============   ========
Net assets of On-Site acquired by the issuance of
common stock                                                $  5,703,000     $         --   $     --
                                                            ============     ============   ========

Issuance of warrants in forgiveness of debt                 $  2,400,000     $         --   $     --
                                                            ============     ============   ========

Discharge of debt in exchange for software                  $  1,268,015     $         --   $     --
                                                            ============     ============   ========

Cash paid for:

               Interest                                     $    366,841     $    539,627   $316,800
                                                            ============     ============   ========
               Taxes                                        $         --     $     15,456   $ 40,425
                                                            ============     ============   ========
</TABLE>


                See notes to consolidated financial statements.


                                       F-8

<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.  The Company  conducts  business  primarily  through its  principal
subsidiaries,  A.B. Watley, Inc. ("A.B. Watley"), Integrated Clearing Solutions,
Inc.  ("Integrated")  and ABW TRADING,  LLC ("LLC")  operating as one integrated
business  segment.  LLC ceased  operations on June 18, 2002.  ABWG is a Delaware
corporation organized on May 15, 1996.

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

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

     On April 3, 2002, the Company received a determination letter from the NASD
Listing Qualifications Panel that the Company`s request for continued listing on
the 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").



2. Liquidity and Capital Resources

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


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

<PAGE>

3. Basis of Presentation

     The consolidated  financial statements include the accounts of ABWG and its
wholly-owned   subsidiaries.   All   significant   inter-company   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.



     Restricted Cash:
     ----------------

Restricted cash consists of cash on deposit at financial  institutions  securing
letters of credit and lines of credit.


     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.


     Property and Equipment:
     -----------------------

     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.


     Use of Estimates:
     -----------------

     The  preparation of the 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 financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.


     Stock Options:
     --------------

     The Company  accounts  for stock option  grants to employees in  accordance
with Accounting  Principles  Board Opinion ("APB") No.25,  "Accounting for Stock
Issued to  Employees".  In cases where the Company grants options below the fair
market  value of the  stock at the date of grant,  the  difference  between  the
strike  price and the fair market value is treated as  compensation  expense and
amortized  over the  vesting  period of the  option.  Stock  options  granted to
consultants  and others in lieu of cash  compensation  are  recorded  based upon
management`s  estimate  of fair  value of the  options or the  related  services
provided  and  expensed  in the same  period  and in the same  manner  as if the
Company had paid cash for the services instead of paying with or using the stock
options.


     Fair Value of Financial Instruments:
     ------------------------------------

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

<PAGE>


     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 advertising.


     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 is for the year ended September 30, 2002
$507,472 for settlements with vendors for which the Company was the beneficiary.

     Internally Developed Software:
     ------------------------------

     The Company accounts for internally  developed  software in accordance with
the Statement of Position 98-1,  "Accounting for the Costs of Computer  Software
Developed or Obtained for Internal Use."  Proceeds  received from the license or
sale of the computer  software,  net of direct  incremental  costs of marketing,
such  as  commissions,   software   reproduction  costs,  warranty  and  service
obligations, and installation costs, will be applied against the carrying amount
of that software.  No profit will be recognized until aggregate net proceeds and
amortization  have  reduced  the  carrying  amount  of  the  software  to  zero.
Subsequent proceeds will be recognized in revenue as earned.

     Accounting Developments:
     ------------------------

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


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

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

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

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


<PAGE>

4.   Net Capital Requirement

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

     As of  September  30,  2002,  A.B.  Watley  had a net  capital  deficit  of
$301,523.  This  deficiency  was cured in October 2002.

     Integrated had $27,757 of net capital in excess of its minimum requirements
at September 30, 2002,

5.   Financial  Instruments  with Off Balance Sheet Risk and  Concentrations  of
     Credit Risk

     Pursuant to clearance  agreements,  the clearing and depository  operations
for the Company  and its  customers`  securities  transactions  are  provided by
clearing  broker-dealers.  The  Company  has agreed to  indemnify  its  clearing
brokers for losses that the  clearing  brokers  may  sustain  from the  customer
accounts introduced by the Company.  The Company,  through its clearing brokers,
seeks to  control  the risks  associated  with  these  activities  by  requiring
customers to maintain margin  collateral in compliance  with various  regulatory
and internal  company policy  guidelines.  The clearing brokers monitor required
margin  levels  daily and,  pursuant to such  guidelines,  request  customers to
deposit additional collateral or reduce securities positions when necessary.  As
of  September  30, 2002,  the Company has  provided a reserve for  uncollectible
receivables from clearing brokers in the amount of $750,000.

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

     Securities sold, but not yet purchased represent obligations of the Company
to deliver the  specified  security at a contracted  price and thereby  create a
liability  to  repurchase  the  security  in the  market at  prevailing  prices.
Accordingly,  these  transactions  result  in off  balance  sheet  risk,  as the
Company`s  ultimate  obligation to satisfy the sale of securities  sold, but not
yet  purchased  may exceed the amount  recognized  in the Statement of Financial
Condition.  Securities  positions are monitored on a daily basis to minimize the
risk of loss.

6.   Property and Equipment

                                                  September 30,  September 30,
                                                      2002           2001
                                                  ------------   ------------

Computer equipment                                $    751,836   $  5,654,754
Software                                             4,793,939     11,615,793
Furniture, fixtures and leasehold improvements       2,661,370      6,196,266
                                                  ------------   ------------
                                                     8,207,145     23,466,813
Less: Accumulated depreciation and amortization     (5,317,434)    (8,659,868)
                                                  ------------   ------------
Property and equipment, at cost, net              $  2,889,711   $ 14,806,945
                                                  ============   ============

     Depreciation  and  amortization  expense for the years ended  September 30,
2002, 2001, 2000 was $5,894,333, $5,499,922 and $1,583,954, respectively.

     As of September  30, 2002,  there is no equipment  purchased  under capital
lease  included in computer  equipment.  Included  in computer  equipment  as of
September 30, 2001, is equipment  purchased  under capital leases of $2,047,410,
which secured the capital lease obligations of $1,230,468.

     At  September  30,  2002 and 2001  substantially  all  software  represents
software  developed for internal use. For the years ended September 30, 2002 and
2001, the Company  amortized  $3,938,365 and $4,050,961 of capitalized  software
developed  for  internal  use.  During 2001,  the Company  began  marketing  its
internally  developed  software to third  parties.  During 2002,  the  Company`s
proprietary trading software was sold.


<PAGE>

7.   Sale of Software

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

     In July 2002,  the Company  sold its  software  programs  known as Ultimate
Trader II, Ultimate Trader III, Watley Trader and related intellectual property,
to an affiliate  of  one  of  its  clearing  brokers.  The  sale  included  all
proprietary software that displays market quotation, news, and other information
analysis;  order entry  including the  initiation  and  transmission  of trading
orders and position  management and any applications  that provide real time and
historical market prices. In consideration for the trading technology  software,
the Company`s clearing broker agreed to forgive $2,716,720  (including  interest
of $566,720) of indebtedness owed by the Company to the clearing broker. As part
of the  agreement,  the Company  obtained a perpetual  nonexclusive,  license to
continue to use the software,  including  the right to sublicense  the software.
Under the terms of the  agreement,  the Company was granted the right to use the
software  royalty free until July 31, 2005, and for a nominal per user per month
fee thereafter,  as defined. The Company also received a more favorable clearing
agreement,  which will remain in effect until July 31, 2007.  The asset purchase
agreement also provides for a future  reduction of indebtedness of approximately
$2,100,000  from its  clearing  broker  provided  that  over a  36-month  period
beginning  after July 31, 2002,  that the Company has paid its  clearing  broker
$5,000,000 in clearing fees or raised at least $4,000,000 in new equity capital.
In  order  for the  new  capital  to be  considered  towards  the  reduction  in
indebtedness, the agreement requires that there be no cash payments or mandatory
redemptions  affecting  the principal  amount prior to 18-months  after July 31,
2002.  All of the proceeds  from the sale of software  have been recorded in the
Consolidated Statement of Operations as Sale of Software Income.

8.   Acquisition of On-Site Trading, Inc.

     In an effort to increase its customer base and to achieve greater economies
of scale,  the Company  entered  into an Asset  Purchase  Agreement  (the "Asset
Purchase Agreement") with On-Site Trading, Inc. ("On-Site"). On October 1, 2001,
the Company  acquired the customer  lists and certain other  On-Site  assets and
liabilities (the retail business), including its 100% voting interest in On-Site
Trading LLC, a broker-dealer subsidiary (the proprietary trading business) which
was subsequently  renamed ABW TRADING,  LLC. Since the  acquisition,  the retail
business and proprietary  trading  business have operated as one reporting unit.
The  acquisition  was  accounted  for under the purchase  method of  accounting.
Pursuant  to the terms of the  Asset  Purchase  Agreement,  the  Company  issued
1,875,000  shares  (which was later  reduced by 361,944) of its Common  Stock to
On-Site.  Of these shares,  937,500 shares were delivered at closing and 106,806
shares ("Escrow  Shares") are being held in escrow to be released to the sellers
of On-Site  at a later  date.  The  remaining  468,750  shares are being held in
escrow  and are  deliverable  on a pro rata  basis  upon the  Company  achieving
certain  post-acquisition  levels of revenues as defined in the agreement. As of
September  30,  2002,  approximately  205,000 of such shares have been earned by
On-Site.

     The final  purchase  price  reflects the issuance of 1,513,056  shares at a
purchase  price of $3.41 per share.  The $3.41 per share price was determined by
calculating the weighted  average share price of the Company`s  Common Stock for
the 3 days  prior  and 3 days  subsequent  to the  date  of the  acquisition  of
On-Site.  The excess purchase price of $8,584,000 over the fair value of the net
liabilities  acquired of $2,881,000 was allocated to "Intangibles"  representing
the retail business customer lists acquired.

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

                                                                     Net Assets
                                                                      Acquired
Securities owned, at market value ........................           $ 4,551,000
Intangibles ..............................................             8,584,000
Other assets .............................................               265,000
                                                                     -----------
Total assets .............................................            13,400,000

Securities sold, but not yet purchased ...................             3,358,000
Other liabilities ........................................               381,000
Minority interest ........................................             3,958,000
                                                                     -----------
Total liabilities ........................................             7,697,000
                                                                     -----------
Net assets acquired ......................................           $ 5,703,000
                                                                     ===========

<PAGE>


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



                                                           For the twelve
                                                            months ended
                                                           September 30,
                                                                2001
                                                          ----------------
      Net revenues                                             $62,672,021
                                                          ================
      Net loss applicable to common stockholders              ($29,411,546)
                                                          ================

      Weighted average number of shares outstanding             11,401,653
                                                          ================

      Per share:
      Net loss applicable to common stockholders                    ($2.58)
                                                          ================

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

     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, 2002,  was
approximately  $2,492,310  and  is  included  in the  accompanying  Consolidated
Statement  of  Financial  Condition  as  "Accrued  Liabilities  to LLC  Class  B
Members".

     The Intangibles  associated with the acquisition  were being amortized on a
straight-line  basis over a period of thirty-six  months. The Company recognized
three months of  amortization  expense  approximating  $715,000  during the year
ended September 30, 2002.

     The Company continues to operate the retail business,  however the customer
base  deteriorated   significantly  since  its  acquisition  and  revenues  from
operations  have  declined.   Management  believes  that  the  deterioration  is
attributable to many causes including  weakening market  conditions,  as well as
the  loss  and  closing  of  branch  operations  that  resulted  in a  permanent
impairment in the value of the  intangibles  assets  acquired since the customer
list  acquired from On-Site has been  determined  to have minimal  future value.
Therefore, as of September 30, 2002, the Company recorded a charge to operations
of $7,870,110 to write off the remaining carrying value of Intangibles.  For the
quarters  ended December 31, 2001,  March 31, 2002,  June 30, 2002 and September
30,  2002  net  commissions  earned  from the  retail  business  were  $925,000,
$901,000, $228,000 and $88,000, respectively.


9.   Redeemable Convertible Preferred Stock

     On November 29,  2001,  the Company  entered into the Series A  Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement") to issue and sell,
in a private placement,  an aggregate of 630 (690 shares  authorized,  par value
$.01)  shares of Series A Redeemable  Convertible  Preferred  Stock  ("Preferred
Stock").  Each share is  convertible  into 3,390 shares of the Company`s

<PAGE>

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.

     The aggregate  purchase  price of the  Preferred  Stock and the warrants of
$6,300,000  was allocated to the Preferred  Stock with a value of $4,340,383 and
the  balance  of  $1,959,617  was  attributed  to the fair  market  value of the
warrants.  In connection  with this  transaction,  the Company issued  Preferred
Stock  and  received  cash  proceeds  of  $3,324,291  (net of issue  costs)  and
exchanged  a note  payable in the  amount of  $2,500,000  ("Senior  Subordinated
Demand Note") for $2,750,000 plus accrued interest.  The premium of $250,000 was
recorded  as an  extraordinary  loss on the  extinguishment  of debt in December
2001. The discount associated with the value of the warrants was accreted over a
ten-month  period through  September 30, 2002,  the date the  redemption  waiver
expired. As of September 30, 2002, the discount has been amortized in the amount
of $1,959,617.

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

     Pursuant to the Purchase  Agreement and the  Registration  Rights Agreement
(the "Registration Agreement"),  the Company was required to file a registration
statement  (the  "Registration  Statement")  with the  Securities  and  Exchange
Commission  registering for resale the shares of Common Stock issueable upon the
conversion of the shares of Preferred  Stock in the amount of 2,135,700  shares,
and the exercise of warrants to purchase shares of Common Stock in the amount of
1,629,069.  The Company has not yet filed a Registration  Statement and will not
be able to have the Registration  Statement filed and declared  effective within
the period required. A penalty of 2% of the liquidation  preference value of the
Preferred Stock for each  thirty-day  period accrues to each holder of Preferred
Stock and is added to the  liquidation  preference  amount  until  cured.  As of
September 30, 2002, liquidated damages of approximately $311,000 were accrued to
the preferred holders.

     The Preferred Stock includes a liquidation  preference of $10,000 per share
and bears a cumulative dividend at an initial 6% annual rate, which increases to
a 15%  annual  rate after  eighteen  months,  payable  twice a year in shares of
Common Stock. For the year ended September 30, 2002,  dividends of $315,000 were
accrued for the  Preferred  Stock.  The holders of Preferred  Stock may elect to
convert their shares into the Company`s  Common Stock at any time,  just as they
may choose to  exercise  their  related  warrants  at any time.  The  holders of
Preferred  Stock also have the right to require the Company to redeem all of the
Preferred  Stock for cash  equal to the  greater of the  liquidation  preference
amount plus any accrued but unpaid  dividends  and penalties or the aggregate of
the market value of the shares of the Common Stock into which such shares of the
Preferred Stock are then convertible, upon certain triggering events, as defined
in the  Agreement.  Since the  holders of the  Preferred  Stock may  require the
Company to redeem all of the  Preferred  Stock  upon the  occurrence  of certain
events, the Company has excluded the Preferred Stock from Stockholders`  Deficit
in the accompanying  Consolidated Statement of Financial Condition.  The holders
of the  Preferred  Stock have waived their  Redemption  Right and have agreed to
amend the  Certificate to provide that the Company has until  September 30, 2002
to (a) file the Registration Statement and (b) to be listed on any of the NASDAQ
National  Market,  the NASDAQ SmallCap  Market,  the OTC Bulletin Board, the New
York Stock Exchange,  Inc. or the American Stock Exchange,  Inc.  Although,  the
waiver has not been amended or extended,  to date, no redemption notice has been
received by the Company from any of its Preferred Stockholders.

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


10.  Notes and Loans Payable

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

     As of September 30, 2002 and 2001,  notes payable to officers  consisted of
the following:

                                     2002
                                     ----
                                              Principal            Interest
  Effective Date          Maturity Date         Amount               Rate
  --------------          -------------         ------               ----
    10/01/01                10/01/02           500,000                 10%
    02/02/02              On demand            200,000                 10%
                                           -----------
                                              $700,000
                                           ===========
<PAGE>


                                     2001
                                     ----
                                              Principal         Interest
 Effective Date          Maturity Date         Amount              Rate
 --------------          -------------         ------              ----
 11/30/00                   11/29/02          $300,000              7%
 02/25/01                   02/25/02           950,000             10%
 02/25/01                   02/25/02           950,000             10%
 02/25/01                   02/25/02           950,000             10%
 02/25/01                   02/25/02           950,000             10%
 03/16/01                   03/16/02           125,000             10%
 03/16/01                   03/16/02           125,000             10%
                                           -----------
                                            $4,350,000
                                           ===========

     The  outstanding  loans payable at September 30, 2002 were made to a person
who  is  no  longer  an  officer  of  the  Company.

     As of September 30, 2002 and 2001,  interest payable related to these notes
payable to officers was $70,000 and $283,679 respectively.  The notes payable to
officers are  subordinated  to the lines of credit granted by the holders of the
Company`s  Preferred Stock.  The note payable  scheduled to mature on October 1,
2002 has not been repaid and the maturity date has not been extended.

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

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

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

                                                 September 30,   September 30,
                                                     2002            2001
                                                  ----------      ----------
Line of Credit                                    $3,082,826      $       --
Loans Payable - other                                200,000         577,323
Senior Subordinated demand note                           --       2,500,000
New York Community Investment Company                     --         360,000
                                                  ----------      ----------
                                                  $3,282,826      $3,437,323
                                                  ==========      ==========

     In February  2002,  the Company  borrowed  $200,000 from a third party with
interest  payable at a rate of 10% per annum.  The loan has a stated maturity of
October 26, 2002.

     In March 2002,  one of the holders of the Company`s  Preferred  Stock led a
group that granted a line of credit of  $4,200,000  to the  Company.  Borrowings
under  the line of credit  are  payable  on demand  after  June 18,  2002,  with
interest  payable  at 10%.  The  proceeds  of the loans  were  used for  working
capital.  Additionally, one member of the group was granted warrants to purchase
1,000,000  shares of the Company`s  Common Stock at an exercise price of $.918 a
share in connection with the loan facility and a consultant retained by a member
of the  group  was also  granted  warrants  to  purchase  50,000  shares  of the
Company`s  Common Stock at an exercise price of $.918 a share. The fair value of
the warrants were  amortized and recorded as interest  expense.  As of September
30,  2002,  the Company has borrowed  $3,082,826  under this  commitment.  As of
September  30, 2002 the Company has accrued  interest  payable of $205,000.  The
loan is  collateralized  by the  assets of the  Company  as  defined in the loan
agreement.

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

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

     As of September 30, 2001,  the Company had notes payable of $577,323 to two
vendors  for the  purchase of software  licenses.  The loans were repaid  during
2002.


11.  Subordinated Borrowings

     Subordinated  borrowings are covered by agreements approved by the NASD and
are included by A.B.  Watley for purposes of computing net capital under the Net
Capital Rule. To the extent that such  subordinated  borrowings are required for
A.B. Watley`s continued compliance with minimum net capital  requirements,  they
may not be repaid. Of the total  subordinated  borrowings,  $180,000 and $55,000
for the year ended September 30, 2002 and September 30, 2001,  respectively,  is
from an officer and stockholder of the Company. For the year ended September 30,
2002,  2001 and 2000,  interest  expense on the  subordinated  loans amounted to
$64,500,  $62,825  and  $58,250,  respectively.  Subordinated  borrowings  as of
September 30, 2002 and 2001 are as follows:

September 30, 2002    September 30, 2001     Interest Rate        Maturity
------------------    ------------------     -------------        --------

          $125,000             $125,000          12%         October 31, 2002
           $55,000              $55,000           0%         October 31, 2002
          $200,000             $200,000          15%         October 31, 2003
          $150,000             $150,000          13%         October 31, 2003
-------------------    -----------------
          $530,000             $530,000
===================    =================


12. Commitments and Contingencies

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

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

Lease Agreements
----------------

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

     The aggregate minimum future rental payments required are as follows:

<TABLE>
<CAPTION>
              Fiscal Year Ended        Operating leases      Capital leases              Total
                                      -----------------     ---------------    ------------------
<S>                       <C>                <C>                  <C>                <C>
                          2003               $1,466,075           1,524,195          2,990,270
                          2004                1,151,277                   -          1,151,277
                          2005                  925,694                   -            925,694
                          2006                  939,764                   -            939,764
                          2007                  938,272                   -            938,272
                       Thereafter             1,641,974                   -          1,641,974
                                      -----------------     ---------------    ------------------
                                             $7,063,056          $1,524,195         $8,587,251
                                             ==========          ==========         ==========
</TABLE>

     The Company is in default of making the  minimum  payments  required  under
certain of its  capital  lease  agreements.  The  Company  is in the  process of
negotiating  settlements  with  such  vendors  which is not  expected  to have a
material effect on the consolidated financial statements.  During the year ended
September 30, 2002, $1,200,000 of security deposits held by a lessor was applied
to equipment rental payments in arrears. The total amount representing  interest
under these capital leases as of September 30, 2002 was $50,000.

Employment Agreements
---------------------

The  Company  has  entered  into four  employment  agreements  with  certain key
executives. The terms of the agreements range from two to four years and provide
for  annual  compensation  of  $850,000.  The  agreements  also  provide  for  a
discretionary bonus based upon the performance of the Company.


Litigation
----------


<PAGE>

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

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

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


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 2000, 1999, 1998 and 1997
Plans  cannot   exceed   1,600,000,   800,000,   800,000  and  400,000   shares,
respectively, (3,600,000 shares in total).

A summary of the Company`s stock option activity and related information for the
years ended September 30, 2002, 2001, and 2000 is as follows:

                                             Number      Weighted Avg.
                                           of Shares    Exercise Price
                                           ---------    --------------
Outstanding at September 30, 1999          1,362,450        5.94
   Granted                                   356,775       13.11
   Exercised                                (193,183)       6.68
   Forfeited                                (140,692)       8.45
                                          ----------       -----
Outstanding at September 30, 2000          1,385,350        9.90
   Granted                                 1,072,100        6.54
   Exercised                                (170,590)       5.79
   Forfeited                                (183,923)      10.21
                                          ----------       -----
Outstanding at September 20, 2001          2,102,937        9.68
   Granted                                 3,520,000        7.59
   Exercised                                      --          --
   Forfeited                              (2,043,550)        .13
                                          ----------       -----
Outstanding at September 30, 2002          3,579,387        2.12
                                          ==========       =====
   Exercisable at September 30, 2000         533,829        6.24
                                          ==========       =====
   Exercisable at September 30, 2001         759,058        8.10
                                          ==========       =====
   Exercisable at September 30, 2002       2,614,913        0.39
                                          ==========       =====

                                      F-18

<PAGE>

     Included in the table above are  non-employee  option  grants of 50,000 and
9,500 shares for the year ended September 2002 and September 30, 2001.

     During the years ended September 30, 2001,  certain  employees were granted
stock options with strike prices below fair market value. The difference between
the fair value of the Common Stock and the strike price equaled $555,182 and was
recorded as deferred  compensation  on the  consolidated  statement of financial
condition  and will be amortized  into  employee  compensation  expense over the
three year vesting period of the options.  Compensation expense related to these
options amounted to $459,564,  $95,619 and $61,697 for the years ended September
30, 2002, 2001 and 2000, respectively.

     The weighted  average fair value of options  granted during the years ended
September 30, 2002, 2001, and 2000 was $0.08,  $4.82 and $8.88 and 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:

<TABLE>
<CAPTION>
                                                                Years Ended
                                              2002 Grants       2001 Grants        2000 Grants
                                              -----------       -----------        -----------
<S>                                           <C>               <C>                <C>
Dividend yield                                0%                0%                 0%
Weighted average expected life:
          Employees                           5.0 years         4.0 years          4.5 years
          Non-employees                       --                0.1 years          0.2 years
Weighted average risk-free interest rate      3.88              5.17               6.10
Expected volatility                           50%               92%                79%
</TABLE>


     Pro  forma  information  regarding  net  income or loss is  required  under
Statement of Financial  Accounting  Standards  ("SFAS") No.123,  "Accounting for
Stock-Based  Compensation,"  and  has  been  determined  as if the  Company  had
accounted  for all the 2001 and  2000  stock  option  grants  on the fair  value
method. For purposes of the pro forma  information,  the fair values of the 2001
and 2000 option grants to employees are amortized over the vesting  period.  The
effects of applying SFAS No. 123 for  providing  pro-forma  disclosures  are not
likely to be representative of the effects on reported  pro-forma net income for
future years. The pro forma  information for the Years ended September 30, 2002,
and 2001 is as follows:


<TABLE>
<CAPTION>
                                                      Years Ended September 30,
                                                      -------------------------
                                           2002                2001                 2000
                                           ----                ----                 ----
<S>                                   <C>                  <C>                   <C>
Net loss as reported                  $(29,051,326)        $(21,024,174)         $(9,846,891)
Net loss pro forma                    $(29,698,476)        $(23,791,767)        $(11,704,931)
Net loss per share as reported              $(2.29)              $(2.13)              $(1.21)
Net loss per share pro forma                $(2.34)              $(2.41)              $(1.44)
</TABLE>


     Additional  information  regarding options  outstanding as of September 30,
2002 is as follows:


<PAGE>


<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 9/30/02        Exercise Price
                     9/30/02             Life in years
---------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>                        <C>             <C>                      <C>                  <C>
$0.10                  3,450,000                  9.95            $.10                     2,500,000            $.10
$2.90 -$6.13              45,000                  8.71            $4.33                    5,000                $6.13
$8.00 -$10.88             40,650                  7.84            $8.66                    35,858               $8.41
$16.00 -$21.50            43,737                  7.66            $18.20                   24,055               $18.20
                      ----------                                                           ----------
                       3,579,387                                                           2,614,913
                      ==========                                                           ==========
</TABLE>


14.  Stock Warrants

     At September  30, 2002 and 2001,  the Company had warrants  outstanding  of
6,500,036 and 1,126,738,  respectively,  with exercise prices ranging between $0
and $19 and expirations extending through February 2012.


15.  Income taxes

     The Company  has no income tax  liability  for  Federal,  State,  and Local
income tax purposes.  Income tax expense for the year ended  September 30, 2002,
2001, and 2000 consists solely of minimum taxes based on capital.  The provision
for  income  taxes for the years  ending  September  20,  2002,  2001,  and 2000
amounted to $8,725, $28,697, and $53,913, respectively.

<TABLE>
<CAPTION>
                                                                Years Ended September 30,
                                                          2002              2001             2000
                                                     ---------------    -------------    -------------
<S>                                                     <C>               <C>              <C>
Tax benefit at federal statutory rate                   (34.0%)           (34.0%)          (34.0%)
State taxes, net of federal tax effect                    0.1               0.1              0.4
Valuation allowance on deferred tax assets               33.9              33.9             34.1
Other                                                     0.1               0.1                0
                                                         ------            ------           ------
Effective tax rate                                        0.1%              0.1%             0.5%
                                                         ======            ======           ======
</TABLE>


     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, 2002,  are
principally  the result of net operating  carryforwards.  At September 30, 2002,
the Company had a net operating  loss  carryforward  for federal tax purposes of
approximately $60,343,000 that will 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 was established.

16.  Earnings Per Share

     Per share data is determined based on the weighted average number of common
shares outstanding each year. Since the Company recognized a net loss in each of
the years ended September 30, 2002,  2001, and 1999 diluted  earnings per common
share is the same as basic earnings per common share.


<PAGE>

17.  Subsequent Events

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

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



<PAGE>



                                   SIGNATURES


Date: April 15, 2003




     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.





       Signatures                          Title
       Date
       -------------------      ------------------------------
       /s/ STEVEN MALIN         Chairman of the Board
       April 15, 2003
       Steven Malin

       /s/ ROBERT MALIN         Vice-Chairman, Principal Accounting Officer,
       April 15, 2003           Principal Financial Officer and Director
       Robert Malin

       /s/ John Amore           Chief Executive Officer
       April 15, 2003
       John Amore




                                      F-22


<PAGE>



                                  CERTIFICATION

I, Steven Malin, certify that:

1.   I have reviewed this annual report on form 10-K of A.B. Watley Group Inc.

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

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

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

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

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



                                          /s/  STEVEN MALIN
                                          ----------------------------------
                                          Principal Executive Officer
                                          Date: April 15, 2003

                                      F-23


<PAGE>



                                  CERTIFICATION

I, Robert Malin, certify that:

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

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

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

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

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

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



                                              /s/  ROBERT MALIN
                                              ----------------------------------
                                              Principal Financial Officer
                                              Date: April 15, 2003

                                      F-24


<PAGE>



                                  EXHIBIT INDEX

Exhibit Page                                           Description
------------                                           -----------
Exhibit 99.1        Principal Executive Officer        Certification 906
Exhibit 99.2        Principal Financial Officer        Certification 906



                                      F-25


<PAGE>