<PAGE>

                                  United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-QSB

              (Mark One)

              (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1999
                                                 -------------

             ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                                  EXCHANGE ACT

               For the transition period from _____  to ______

                       Commission file number: 1-14897

                        Internet Financial Services Inc.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

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

                       40 Wall Street, New York, N.Y.10005
                    ---------------------------------------
                    (Address of principal executive offices)

                                 (212) 422-1100
                           ---------------------------
                           (Issuer's telephone number)

                           ---------------------------
(Former name, former address and former fiscal year, if changed since last
report)

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:

                                                          Outstanding at
              Class of Common Stock                         July 26, 1999
              ---------------------                         -------------

                   $.001 par value                              7,931,745

Transitional Small Business Disclosure Format (check one): YES [  ] NO [x]


<PAGE>





                        Internet Financial Services Inc.

Index

PART I - FINANCIAL INFORMATION                                        Page

    Item 1. Financial Statements.

       Consolidated Statements of Financial
              Condition June 30, 1999 (Unaudited) and
              September 30, 1998                                               3

       Consolidated Statements of Operations
              Three months and nine months ended
              June 30, 1999 and 1998 (Unaudited)                               4

       Consolidated Statements of Cash Flows
              Nine months ended June 30, 1999
              and 1998 (Unaudited)                                             5

       Notes to Consolidated Financial Statements                              6

        Item 2. Management's Discussion and Analysis
        of Financial Condition and Results of Operations                       8

PART II - OTHER INFORMATION

    Item 2. Changes in Securities.                                            13

    Item 6. Exhibits and Reports on Form 8-K.                                 13

Signatures                                                                    14

                                       2

<PAGE>


                        Internet Financial Services Inc.
                 Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                June 30,1999    September 30, 1998
                                                                                (unaudited)

<S>                                                                             <C>             <C>
Assets
Cash and cash equivalents                                                       $ 13,125,953       $    970,308
Restricted cash                                                                      507,884               --
Securities owned at market value                                                     525,021            104,518
Receivables from clearing brokers                                                    349,401            531,835
Property and equipment at cost, net of accumulated depreciation
  of $981,656 and $530,892 at June 30, 1999 and
  September 30, 1998, respectively                                                 6,502,421          3,650,743
Loans receivable from related party                                                  120,346            115,711
Deferred offering costs                                                               22,917             75,235
Other assets                                                                         525,569             91,107
                                                                                ------------       ------------

Total assets                                                                    $ 21,679,512       $  5,539,457
                                                                                ============       ============


Liabilities and stockholders' equity
Liabilities:
  Subordinated borrowings                                                       $    180,000       $    180,000
  Subordinated borrowings from officer                                               350,000            350,000
  Securities, sold not yet purchased                                                 147,184             19,137
  Notes payable                                                                      400,000            250,000
  Bank loan                                                                           50,000             80,000
  Deferred rent incentives                                                           771,808            803,968
  Accounts payable and accrued liabilities                                         2,954,083          2,101,933
  Other liabilities                                                                  200.270               --
                                                                                ------------       ------------

Total liabilities                                                                  5,053,345          3,785,038
                                                                                ============       ============


Stockholders' equity:

Common stock, $.001 par value, 20,000,000 and 10,000,000 shares authorized at
  June 30, 1999 and September 30, 1998, respectively. 7,931,745 and 5,137,500
  issued and outstanding at June 30, 1999
  and September 30, 1998, respectively                                                 7,932              5,138
Additional paid-in capital                                                        18,653,722          3,758,333
Option costs, net                                                                   (128,334)          (100,292)
Subscriptions receivable                                                                --               (4,999)
Accumulated deficit                                                               (1,907,153)        (1,903,761)
                                                                                ------------        ------------

Total stockholders' equity                                                        16,626,167          1,754,419
                                                                                ------------       -------------

Total liabilities and stockholders' equity                                      $ 21,679,512       $  5,539,457
                                                                                ============       ============
</TABLE>


                                        3

<PAGE>

                        Internet Financial Services Inc.
                      Consolidated Statements of Operations
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              Three Months Ended            Nine Months Ended
                                                                            June 30,       June 30,      June 30,        June 30,
                                                                              1999           1998          1999            1998
                                                                          ------------   ------------  ------------    ------------
<S>                                                                       <C>            <C>           <C>             <C>
Revenues:
     Commissions                                                          $  5,071,746   $  2,154,029  $ 11,262,118    $  5,129,001
     Data service revenues                                                     485,037        187,138     1,052,509         459,198
     Principal transactions                                                    692,112        187,644     1,791,906         578,725
     Interest and other income                                                 208,580         75,540       325,319         140,185
     Interest income - related party                                             1,545          1,545         4,635           4,635
                                                                          ------------   ------------  ------------    ------------

Total revenues                                                               6,459,020      2,605,896    14,436,487       6,311,744

    Interest expense                                                            85,382         79,403       280,939         153,301
    Interest expense - related party                                             3,750          3,750        11,250          11,250
                                                                          ------------   ------------  ------------    ------------

Net revenues                                                                 6,369,888      2,522,743    14,144,298       6,147,193
                                                                          ------------   ------------  ------------    ------------

Expenses:
     Commissions, floor brokerage, and clearing charges                      2,210,789        929,086     5,343,869       2,420,149
     Employee compensation and related costs                                 1,546,519        590,339     3,610,311       1,480,968
     Communications                                                            348,020        219,443       887,925         563,781
     Business development                                                      584,895        232,744     1,007,037         833,170
     Professional services                                                     522,968        320,607     1,065,449         700,235
     Occupancy and equipment costs                                             506,577        114,660     1,178,447         277,608
     Depreciation and amortization                                             173,035        103,291       433,437         257,951
     Other expenses                                                            157,935         81,363       429,932         218,119
                                                                          ------------   ------------  ------------    ------------

Total expenses                                                               6,050,738      2,591,533    13,956,407       6,751,981
                                                                          ------------   ------------  ------------    ------------

Income (loss) before income tax and
          extraordinary loss on early extinguishment of debt                   319,150        (68,790)      187,891        (604,788)
Income tax provision                                                             5,858          3,191        14,158           9,573
                                                                          ------------   ------------  ------------    ------------

Income (loss) before extraordinary loss on early extinguishment of debt        313,292        (71,981)      173,733        (614,361)
Extraordinary loss on early extinguishment of debt                             177,125           --         177,125            --
                                                                          ------------   ------------  ------------    ------------

Net income (Loss)                                                              136,167        (71,981)       (3,392)       (614,361)
                                                                          ============   ============  ============    ============


Basic earnings before extraordinary item per common share                 $       0.04   $      (0.01) $       0.03    $      (0.12)
Diluted earnings before extraordinary item per common share               $       0.04   $      (0.01) $       0.03    $      (0.12)

Basic loss in early extinguishment of debt  $      (0.02)  $        --   $      (0.03)   $         --
Diluted loss in early extinguishment of debt                              $      (0.02)  $        --   $      (0.03)   $         --

Basic earnings per common share                                           $       0.02   $      (0.01)         --      $      (0.12)
Diluted earnings per common share                                         $       0.02   $      (0.01)         --      $      (0.12)

Weighted average shares outstanding - basic                                  7,390,536      5,201,660     6,105,221       5,175,459
Weighted average shares outstanding - diluted                                7,996,413      5,201,660     6,485,100       5,175,459
</TABLE>

                                       4

<PAGE>

                        Internet Financial Services Inc.
                      Consolidated Statements of Cash Flow
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  Nine Months Ended
                                                                  -----------------
                                                            June 30,1999    June 30, 1998
                                                            ------------    -------------
<S>                                                         <C>             <C>
Cash flows from operating activities
Net loss                                                    $     (3,392)   $   (614,361)
Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
      Depreciation and amortization                              433,437         257,951
      Amortization of option costs                               144,752         154,850
      Amortization of option costs-early extinguishment
           of debt                                               172,125            --
      Subscriptions receivable                                     4,999            --
      Changes in assets and liabilities:
      (Increase) decrease in operating assets:
          Restricted cash                                       (507,884)        113,569
          Securities owned                                      (420,503)       (100,958)
          Receivables from clearing brokers                      182,434        (395,070)
          Accounts receivble                                        --          (275,940)
          Loans receivable from related party                     (4,635)         11,464
          Other assets                                          (386,286)        (24,015)
      Increase (decrease) in operating liabilities:
          Secuities sold, not yet purchased                      128,047          42,362
          Accounts payable and accrued liabilities               552,552         783,314
          Other liabilities                                      200,270            --
                                                            ------------    ------------

Net cash provided (used in) by operating activities              495,916         (46,834)
                                                            ------------    ------------

Cash flows used in investing activities
Purchases of property and equipment, net                      (2,882,205)       (982,590)
                                                            ------------    ------------

Cash flows from financing activities
Proceeds from sale of common stock, net                       14,367,116         990,869
Proceeds from exercised stock options                              2,500            --
Proceeds from subscriptions receivable                              --              --
Proceeds from notes payable                                      150,000         250,000
Deferred offering costs                                           52,318            --
Repayment of bank loan                                           (30,000)        (30,000)
                                                            ------------    ------------

Net cash provided by financing activities                     14,541,934       1,210,869
                                                            ------------    ------------

Net increase in cash and cash equivalents                     12,155,645         181,445
Cash and cash equivalents at beginning of period                 970,308         702,693
                                                            ------------    ------------

Cash and cash equivalents at end of period                  $ 13,125,953    $    884,138
                                                            ============    ============


Supplemental non-cash investing and financing activities
      and disclosure of cash flow information
Accounts payable for purchases of property and equipment    $    348,298    $    353,494
Issuance of non-employee stock options                            16,000    $     67,876
Cash paid for:
      Interest                                              $    149,854    $     62,202
      Taxes                                                 $      5,858    $      3,612
</TABLE>


                                        5

<PAGE>

                        Internet Financial Services Inc.

                   Notes to Consolidated Financial Statements

                                   (UNAUDITED)

1. Organization and Basis of Presentation

Internet Financial Services Inc. ("IFSI" or the "Company") conducts business
primarily through its principal subsidiary, A.B. Watley, Inc. ("A.B. Watley").
A.B. Watley is a registered broker-dealer under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.

A.B. Watley is an introducing broker-dealer which conducts business in
electronic trading, information and brokerage services, as well as institutional
block trading. A.B. Watley clears all transactions through two clearing brokers
on a fully disclosed basis. Accordingly, A.B. Watley is exempt from the
Securities and Exchange Commission's ("SEC") Rule 15c3-3.

IFSI is a Delaware corporation organized on May 15, 1996. During its fiscal year
ended September 30, 1997, all of the shares of capital stock of A.B. Watley were
acquired by IFSI. Since IFSI and A.B. Watley were under common control, the
acquisition has been accounted for under Accounting Interpretations of the
Accounting Principles Board Opinion No. 16, "Transfers and Exchanges Between
Companies Under Common Control," which requires the assets and liabilities so
transferred to be accounted for at historical cost in a manner similar to that
used in pooling of interests accounting. IFSI issued 431,538 shares of its
common stock in consideration for the 99 shares of A.B. Watley; additionally,
the operating results of IFSI reflect the operating results of A.B. Watley for
the years presented.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended September 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
September 30, 1998 included in the Company's Form SB-2 Registration Statement.

2. Net Capital Requirement

A.B. Watley is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Net
Capital Rule") which requires A.B. Watley to maintain minimum net capital such
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. The Net Capital Rule also requires that equity capital may
not be withdrawn or cash dividends paid if A.B. Watley's resulting net capital
ratio would exceed 10 to 1. At June 30, 1999, A.B. Watley had net capital, as
defined, of $3,957,446 which was $3,857,446 in excess of its required net
capital of $100,000. The aggregate indebtedness to net capital ratio was .35 to
1.

                                        6


<PAGE>

                        Internet Financial Services Inc.

                   Notes to Consolidated Financial Statements

                                   (UNAUDITED)

3. Capital Stock

On January 14, 1999, the Board of Directors agreed to amend the Company's
certificate of incorporation to increase the authorized number of shares of
common stock to 20,000,000, and to authorize and delineate the terms under which
preferred stock may be issued. In addition, the Board agreed to issue, subject
to the effectiveness of the Company's initial public offering (the "IPO"),
70,771 additional shares of common stock for nominal additional consideration to
certain stockholders who purchased private placement shares during the year
ended September 30, 1998.

During January 1999, the Board of Directors approved the issuance of 221,500
shares of the Company's common stock in a private placement offering. The common
stock was issued at a price of $4.80 per share and was restricted with regard to
sale or disposition for a period of one year. This private placement offering
generated total gross proceeds of $1,063,200 and after related legal and filing
expenses of $13,200, the net proceeds were $1,050,000. Two employees of the
Company purchased an aggregate of 102,000 shares as part of this offering.

On April 23, 1999, 2,300,000 shares of the Company's common stock (including
300,000 shares to cover over-allotments) were sold in the IPO. The net proceeds
from the offering of approximately $13,250,000 will be used primarily to reduce
outstanding indebtedness, expand sales and marketing, expand and upgrade the
Company's computing, physical, and personnel infrastructure and for working
capital and general corporate matters.

4. Stock Options

On March 24, 1999, the Company amended its 1998 Stock Option Plan to increase
the number of shares covered thereunder to 800,000 shares. In addition, the
Company agreed to issue, as of the effective date of its IPO, options covering
an aggregate of 224,750 shares to certain employees at an exercise price of
$7.00 per share.

5. Earnings Per Share

In calculating diluted earnings per common share for the three month period
ending June 30, 1999, the Company assumed the average fair value of its common
stock for the period April 1, to April 20, 1999 to be $7.00 per share and for
the period April 21, 1999 to June 30, 1999, the Company calculated an average
market price based on the daily closing market price. Since the Company
recognized a net loss in the three month period ending June 30, 1998, and the
nine month periods ending June 30, 1999 and June 30, 1998, diluted earnings per
common share is the same as basic earnings per common share.

6. Extraordinary Item

On April 29, 1999, the Company prepaid a $500,000 loan from New York Small
Business Venture Fund LLC bearing an interest rate of 12% from the proceeds of
the IPO. Accordingly, the Company recorded an extraordinary loss of $177,125
($0.02 per share) related to the early retirement of debt. The extraordinary
loss was comprised of a $5,000 prepayment penalty and unamortized option costs
of $172,125. There was no tax benefit recognized for the extraordinary item
because of the Company's net operating losses.

                                        7


<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Registration Statement on
Form SB-2. The results of operations for the three and nine months ended June
30, 1999 are not necessarily indicative of the results for the entire fiscal
year ending September 30, 1999.

Results of Operations

Quarter ended June 30, 1999 compared to the quarter ended June 30, 1998

NET REVENUES. Total revenues for the quarter ending June 30, 1999 were
$6,459,020, an increase of 147.9%, as compared to revenues of $2,605,896 for the
quarter ending June 30, 1998. Revenues from commissions increased by $2,917,717,
or 135.5% from $2,154,029, for the June 1998 quarter to $5,071,746 for the June
1999 quarter due primarily to the significantly increased number of online
trades executed as well as due to the growth in our third market institutional
sales division. During the quarter ending June 30, 1999, the Company's online
brokerage division had total billed transactions of 210,479 and average billed
transactions of 3,395 per day, an increase of 317.2% compared to an average
daily billed transaction rate of 788 per day during the June 1998 quarter
totaling 50,439 billed transactions. Data Service revenues increased by
$297,899, or 159.2% from $187,138 for the June 1998 quarter to $485,037 for the
quarter ending June 30, 1999 due to the increase in the number of online
accounts. Revenues from principal transactions increased by $504,468, or 268.8%
from $187,644 for the June 1998 quarter to $692,112 for the quarter ending June
30, 1999, mainly as a function of the significantly higher volumes of business
conducted by both the online brokerage division's trading desk and the
third-market institutional sales division. Interest and other income increased
from $75,540 for the June 1998 quarter to $208,581 for the ending June 30, 1999.

Interest expense increased from $83,153 for the June 1998 quarter to $89,132 for
the June 1999 quarter as result of increased borrowings.

As a result of the foregoing, net revenues increased by $3,847,145 or 152.5%,
from $2,522,743 for the June 1998 quarter to $6,369,888 for the quarter ending
June 30, 1999. 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.

EXPENSES EXCLUDING INTEREST. Total expenses increased by $3,459,205, or 133.5%,
from $2,591,533 for the June 1998 quarter to $6,050,738 for the quarter ending
June 30, 1999. Commissions, floor brokerage and clearing charges represent
payments to our clearing and floor brokers and to certain employees who
facilitate our clients' transactions. As a result of the large increase in the
volume of business conducted by our online clients, such expenses increased by
$1,281,703, or 138.0%, from $929,086 for the June 1999 quarter to $2,210,789 for
the quarter ending June 30, 1999. Employment compensation and related costs
increased by $956,180, or 162.0%, from $590,339 for the June 1998 quarter to
$1,546,519 for the quarter ending June 30, 1999, largely due to the hiring of 32
new employees to service the growth in our client base. Communications expense
increased by $128,577, or 58.6%, from $219,443 for the June 1998 quarter to
$348,020 for the quarter ending June 30, 1999 as a function of the growth in our
online client base. We expect that the foregoing expenses will continue to
increase as we expand our client base.

Business development costs consist of advertising costs to obtain new clients,
which have mostly been for print and media advertising. These expenses increased
by $352,151, or 151.3%, from $232,744 for the June 1998 quarter to $584,895 for
the quarter ending June 30, 1999 as the Company increased its planned
advertising and promotional efforts.

                                       8
<PAGE>

Professional services increased from $320,607 for the June 1998 quarter to
$522,968 for the quarter ending June 30, 1999. Occupancy and equipment costs
increased by $391,917, or 341.8%, from $114,660 for the June 1998 quarter to
$506,577 for the quarter ending June 30,1999, primarily due to the relocation of
our offices to a new, 18,000 square foot facility and the leasing of additional
equipment to increase our capacity and to facilitate the relocation efforts.
Depreciation and amortization increased by $69,744, or 67.5%, from $103,291 for
the June 1998 quarter to $173,035 for the quarter ending June 30, 1999 for
similar reasons. Other expenses increased by $76,572, or 94.1%, from $81,363 for
the June 1998 quarter to $157,935 for the quarter ending June 30, 1999 for the
same reasons.

The income tax provision increased from $3,191 for the June 1998 quarter to
$5,858 for the quarter ending June 30, 1999.

An extraordinary loss of $177,125 was recorded as a result of an early
retirement of debt. The extraordinary loss was comprised of a $5,000 prepayment
penalty and unamortized option costs of $172,125.

As a consequence of the foregoing, our operating results improved from a net
loss of $71,981 for the June 1998 quarter to net income of $136,167 for the
quarter ending June 30, 1999.

Nine months ended June 30, 1999 compared to nine months ended June 30, 1998

NET REVENUES. Total revenues for the nine months ended June 30, 1999 were
$14,436,487, an increase of $8,124,743, or 128.7% as compared to revenues of
$6,311,744 for the nine months ended June 30, 1998. Revenues from commissions
increased by $6,133,117, or 119.6% from $5,129,001 for the nine months ended
June 30, 1998 to $11,262,118, due primarily to the significantly increased
number of online trades executed as well as the growth in our third market
institutional sales division. During the nine months ending June 30, 1999, the
Company's online brokerage division had total billed transactions of 443,341 and
average billed transactions of 2,346 per day, an increase of 280.7% compared to
an average daily billed transaction rate of 616 per day during the nine months
ending June 30, 1998, totaling 116,465 billed transactions. Data service
revenues also increased by $593,311, or 129.2% from $459,198 for the nine months
ending June 30, 1998 to $1,052,509 for the nine months ending June 30, 1999, due
to the increase in the number of online accounts. Revenues from principal
transactions increased by $1,213,181, or 209.6% from $578,725 for the nine
months period ending June 30, 1998 to $1,791,906 for the nine months period
ending June 30, 1999, mainly as a function of the significantly higher volumes
of business conducted by both the online brokerage division's trading desk and
the third-market institutional sales division. Interest and other income
increased from $140,185 for the nine months period ending June 30, 1998 to
$325,319 for the nine months ending June 30, 1999.

Interest expense increased from $164,551 for the nine months ended June 30, 1998
to $292,189 for the nine months ending June 30, 1999 primarily as a result of
increased borrowings.

As a result of the foregoing, net revenues increased by $7,997,105, or 130.1%,
from $6,147,193 for the nine months ending June 30, 1998 to $14,144,298 for the
nine months period ending June 30, 1999. Nearly all of our revenues were
generated by clients in the United States and no single client or group of
related clients accounted for 10% or more of our revenues.

EXPENSES EXCLUDING INTEREST. Total expenses increased by $7,204,426, or 106.7%
from $6,751,981 for the nine months ending June 30, 1998 to $13,956,407 for the
nine months ending June 30, 1999. Commissions, floor brokerage and clearing
charges represent payments to our clearing and floor brokers and to certain
employees who facilitate our clients' transactions. As a result of the large
increase in the volume of business conducted by our online clients, such
expenses increased by $2,923,720, or 120.8% from $2,420,149 for the nine months
ending June 30, 1998 to $5,343,869 for the nine months ending June 30, 1999.
Employment compensation and related costs increased by $2,129,343, or 143.7%,
from $1,480,968 for the nine months ending June 30, 1998 to $3,610,311 for the
nine months ending June 30, 1999, largely due to the hiring of 58 new employees
to service the growth in our client base. Communications expense increased by
$324,144, or 57.5%, from $563,781 for the nine months ending June 30, 1998 to
$887,925 for the nine months ending June 30, 1999 as a function of the growth in
our online client base. We expect that the foregoing expenses will continue to
increase as we expand our client base.





                                       9
<PAGE>

Business development costs consist of advertising costs to obtain new clients,
which costs have mostly been for print and media advertising. These expenses
increased by $173,867, or 20.9% from $833,170 for the nine months ending June
30, 1998 to $1,007,037 for the nine months ending June 30, 1999 as the Company
increased its planned advertising and promotional efforts.

Professional services increased from $700,235 for the nine months ended June 30,
1998 to $1,065,449 for the nine months ending June 30, 1999. Occupancy and
equipment costs increased by $900,839, or 324.5%, from $277,608 for the nine
months ending June 30, 1998 to $1,178,447 for the nine months ending June 30,
1999, primarily due to the relocation of our offices to a new 18,000 square foot
facility and the leasing of additional equipment to increase our capacity and to
facilitate the relocation efforts. Depreciation and amortization increased by
$175,486, or 68.0%, from $257,951 for the nine months ending June 30, 1998 to
$433,437 for the nine months ending June 30, 1999 for similar reasons. Other
expenses increased by $211,814, or 97.1%, from $218,119 for the nine months
ending June 30, 1998 to $429,932 for the nine months ending June 30, 1999 for
the same reasons.

The income tax provision increased from $9,573 for the nine months ended June
30, 1998 to $14,158 for the nine months ending June 30, 1999.

An extraordinary loss of $177,125 was recorded as a result of an early
retirement of debt. The extraordinary loss was comprised of a $5,000 prepayment
penalty and unamortized option costs of $172,125.

As a consequence of the foregoing, our operating results improved from a net
loss of $614,361 for the nine months ending June 30, 1998 to a net loss of
$3,392 for the nine months ending June 30, 1999.

Liquidity and Capital Resources

Our capital requirements have historically exceeded our cash flow from
operations as we have been building our business. As a result, we have depended
upon sales of our common stock and borrowings from officers, directors and
stockholders and third parties to finance our working capital requirements.

In December 1998, we obtained a $500,000 line of financing from General Electric
Capital Corporation which we use primarily for the purchase or leasing of
additional equipment and software. We are required to deliver to the lender a
letter of credit in the amount of 50% of any amount borrowed under this
financing. As of June 30, 1999, we borrowed approximately $311,208 under this
line of financing, which we used to purchase equipment. In connection with our
borrowing under this financing, we have granted the lender a security interest
in certain existing equipment as well as in all equipment purchased using funds
obtained under this financing.

In January 1999, we obtained a $400,000 loan from New York Community Investment
Company L.L.C., bearing interest at an annual rate of 12%, payable monthly. In
connection with this loan, we issued to the lender a $400,000 principal amount
promissory note and warrants to purchase 140,000 shares of our common stock at
an exercise price equal to the initial public offering price of our common
stock. We granted the lender a security interest in substantially all of our
assets to secure our obligations under the loan. We are using these funds for
marketing expenses and working capital.



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<PAGE>

In January 1999, we sold an aggregate of 221,500 shares of common stock to 12
investors in a private placement at a price of $4.80 per share for which we
received aggregate net proceeds of approximately $1,050,000. In connection with
this private placement:

o        Anthony Huston, our Executive Vice President purchased 50,000 shares at
         a price of $240,000;

o        Leon Ferguson, Senior Vice President, purchased 52,000 shares at a
         price of $249,600; and

o        Mark Chambre, who is now a director, purchased 15,000 shares at a price
         of $72,000.

On April 23, 1999 the Company consummated its initial public offering of common
stock. The Company sold 2,300,000 shares of at a gross offering price of $7 per
share, receiving net proceeds of approximately $13,250,000. The Company utilized
approximately $776,800 for the repayment of outstanding notes payable including
any accrued interest on these same notes payable. The Company also used
$2,245,000 for working capital. Most of the balance of approximately $10,167,770
has been invested in short-term money market funds. We will use the proceeds of
the initial public offering to expand our operations and finance our future
working capital requirements. Based upon our current plans and assumptions
relating to our business plan, we anticipate that the net proceeds of this
offering will satisfy our capital requirements for at least twelve months
following the closing. If our plans change or our assumptions prove to be
inaccurate, we may need to seek additional financing sooner than currently
anticipated or curtail our operations. We may seek additional debt or equity
financing to fund the cost of continued expansion. If we incur debt, we will
become subject to the risks that interest rates may fluctuate and cash flow may
be insufficient to make payments on the debt.

Cash provided by operating activities during the nine months ending June 30,
1999 was $495,916 as compared to cash used by operating activities during the
nine months ending June 30, 1998 of 46,834.

Cash used in investing activities was $2,882,205 during the nine months ended
June 30, 1999 compared to $982,590 during the nine months ending June 30, 1998.
Uses of cash in the nine months ending June 30, 1999 related to purchases of
equipment, software and leasehold improvements made in the Company's new
facility at 40 Wall Street. In addition to the cash used in investing activities
during the nine months ended June 30, 1999, the Company accrued accounts payable
relating to purchases of property and equipment and leasehold improvements of
$348,298 during this period.

Cash provided by financing activities was $14,541,934 during the nine months
ending June 30, 1999 compared to $1,210,869 during the nine months ended June
30, 1998. Cash provided by financing activities during the nine months ending
March 31, 1998 consisted primarily of proceeds from the sale of common stock.
Cash provided by financing activities during the nine months ending June 30,
1999 consisted primarily of proceeds from the sale of common stock in an initial
public offering of 2,300,000 shares at an offering price of $7.00.

Net Operating Loss Carryforwards

Our net operating loss carryforwards expire beginning in the year 2012. The
issuance of additional equity securities, together with our recent financing and
public offering, could result in an ownership change and thus could limit our
use of our prior 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. We are unable to determine the availability of these net
operating losses since this availability is dependent upon profitable
operations, which we have not achieved in periods prior to the most recent two
quarters.

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. In cases where we
grant 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, if
any. Stock options granted to consultants and others instead of cash
compensation are recorded based upon management's estimate of fair



                                       11
<PAGE>

value of the options or the related services provided and expensed over the
vesting period, if any.

Pro forma information regarding net income (loss) is required under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if we had accounted for all the 1998
and 1997 stock option grants on the fair value method.

We account for income taxes under the provisions of SFAS No. 109, "Accounting
for Income Taxes." We recognize the current and deferred tax consequences of all
transactions that have been recognized in the financial statements, using the
provisions of enacted tax laws. Deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for tax
loss carryforwards, if in the opinion of our management, it is more likely than
not that the deferred tax asset will be realized. SFAS No. 109 requires
companies to set up a valuation allowance for the component of net deferred tax
assets which does not meet the more likely than not criteria for realization. We
have established this valuation allowance for our deferred tax assets.

In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." The new rules are effective for both interim and annual financial
statements for the periods ending after December 15, 1997. SFAS No. 128
supersedes APB No. 15 to conform earnings per share with international standards
as well as to simplify the complexity of the computation under APB No. 15. The
previous primary earnings per share calculation is replaced with a basic
earnings per share calculation. The basic earnings per share differs from the
primary earnings per share calculation in that the basic earnings per share does
not include any potentially dilutive securities. Fully dilutive earnings per
share is replaced with diluted earnings per share and should be disclosed
regardless of dilutive impact of basic earnings per share. Accordingly, we have
adopted SFAS No. 128 effective September 30, 1998.

Year 2000 Issues

We have devised a plan and have substantially completed a review and assessment
of all hardware and software and believe that our hardware and software are
substantially year 2000 compliant so that the computer programs do not cease
functioning because of an inability to process on a date occurring from and
after January 1, 2000. Our review has not revealed any year 2000 issues that
cannot be remediated in a timely manner. We do not believe that any remediation
costs will be material.

We are highly dependent upon third-party financial information vendors,
telecommunications suppliers and our clearing brokers. We have sent letters to a
number of our vendors requesting assurances of their compliance. Such third
parties have generally advised us that their review of their operating systems
indicate that their operating systems are year 2000 compliant or will be year
2000 compliant in a timely manner. We are currently developing a contingency
plan if any third parties with which we do business have any material year 2000
compliance problems.

We would be materially adversely affected if there are any failures or
interruptions in service resulting from the inability of our computing systems
or any third-party's systems to recognize the year 2000. Moreover, since our
evaluation of these issues is continuing, we may discover additional issues
which could present a material risk of disruption to our operations.

Forward Looking Statements

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


                                       12
<PAGE>

PART II - OTHER INFORMATION

Item 2. Changes in Securities.

On April 20, 1999, the Securities and Exchange Commission declared the Company's
Registration Statement on Form SB-2 (Reg. No. 333-71783) [the "Registration
Statement"] effective.

The Company incurred the following expenses in connection with the Offering:

    Underwriting discounts and commissions                       $1,495,000
    Finders' fees                                                        $0
    Expenses paid to or for underwriters                           $448,000
    Other expenses                                                 $842,215
                                                                 ----------

    Total expenses                                               $2,785,215

From the effective date of the Registration Statement through the date hereof,
the Company (i) repaid indebtedness of approximately $776,800; (ii) used
$2,245,000 for working capital; and (iii) invested most of the balance of
approximately $10,167,770 in short-term money market funds. All of such payments
were made to third parties, except for the repayment of indebtedness of $100,000
to the father of Eric Steinberg, an Executive Vice President of the Company.

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

          (a) The following exhibit was filed as part of this report:

              Exhibit 11. Calculation of basic and diluted earnings per share

          (b) No reports on Form 8-K were filed during the quarter ended
              June 30, 1999.



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<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: August 13, 1999

                                  INTERNET FINANCIAL SERVICES INC.
                                  --------------------------------
                                            (Registrant)

                                      By: /s/ Steven Malin
                                         ---------------------------------------
                                              Steven Malin
                                              Chairman, Chief Executive Officer

                                      By: /s/ Harry Simpson
                                         ---------------------------------------
                                              Harry Simpson
                                              President, Chief Operating Officer

                                      By: /s/ Joseph M. Ramos, Jr.
                                         ---------------------------------------
                                              Joseph  M. Ramos, Jr.
                                              Chief Financial Officer



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