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WEB STREET INC
424B4, 1999-11-17
BUSINESS SERVICES, NEC

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		Per Share		Total
Offering price		$11.00		$41,250,000
Underwriting discount		$  0.77		$   2,887,500
Proceeds, before expenses, to Web Street		$10.23		$38,362,500

[Bar graphs showing quarterly growth in number of customer accounts and total trades in 1998 and 1999]
Number of customer accounts (At Quarter End)(1)		Total Trades per Quarter
1998 Q1: 5,600		1998 Q1: 20,100
1998 Q2: 17,400		1998 Q2: 52,500
1998 Q3: 31,500		1998 Q3: 82,700
1998 Q4: 41,300		1998 Q4: 136,200
1999 Q1: 54,500		1999 Q1: 187,200
1999 Q2: 66,600		1999 Q2: 253,400
1999 Q3: 73,000		1999 Q3: 264,000

(1)

Represents open accounts, regardless of whether there have ever been any funds or securities in the account.

		Page
Prospectus Summary		1
Risk Factors		5
Cautionary Note Regarding Forward-Looking      Statements		18
Cautionary Note Regarding Statistical Data		18
Use of Proceeds		19
Dividend Policy		19
Capitalization		20
Dilution		21
Selected Consolidated Financial and Other      Data		22
Management’s Discussion and Analysis of      Financial Condition and Results of      Operations		23

		Page
Business		33
Regulation and Supervision		48
Management		51
Certain Transactions		59
Principal and Selling Stockholders		60
Description of Capital Stock		62
Shares Eligible for Future Sale		65
Underwriting		67
Legal Matters		69
Experts		69
Where You Can Find More Information		70
Index to Consolidated Financial Statements		F-1

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track stock quotes that automatically update in real time as the market moves;

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view up-to-date news and financial market headlines;

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buy and sell securities, including stocks and options;

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receive quick confirmation of executed trades; and

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check securities positions and account balances that are updated in real time to reflect just-completed trades.

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our customer accounts increased 132% to 73,000 at September 30, 1999 from 31,500 at September 30, 1998;

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our average trades per day increased 219% to 4,124 for the quarter ended September 30, 1999 from 1,293 for the comparable period in 1998; and

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our total revenues increased 293% to $17.2 million for the nine months ended September 1999 from $4.4 million for the comparable period in 1998.

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Barron ’s gave us its highest rating, four stars, in 1999 and 1998, emphasizing that we have a dynamic site where research and trading are easily accessible;

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SmartMoney rated us one of the top three overall online brokerage firms in 1999 and 1998, due to our low commissions, 24-hour service, rapid technical support, free real-time quotes and instantaneously updated online account information; and

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Time Digital rated us the third best online discount brokerage service in 1999, noting that our trading pit allows investors to monitor stock, fund and option activity, check balances and positions and execute trades all from a single screen.

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the number of U.S. online brokerage accounts is projected to be 5.4 million at the end of 1999 and to grow to over 20.4 million by the end of 2003;

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the value of assets held by customers in accounts with online brokerage firms is projected to be $374 billion in the U.S. at the end of 1999 and to grow to over $3 trillion by the end of 2003; and

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the number of European online brokerage accounts is projected to grow from 400,000 at the end of 1998 to 8.3 million by the end of 2002.

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expand brand awareness and customer base;

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increase global market presence;

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facilitate trading in world markets through our Unified Global Brokerage Accounts;

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enhance services to encourage increased customer account balances;

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maintain and enhance advanced technological capabilities;

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offer a broad array of financial services; and

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pursue acquisitions, joint ventures and partnerships.

Common stock offered by Web Street		3,750,000 shares
Common stock to be outstanding after this offering		25,176,521 shares
Use of proceeds		To market our services, to build a separate data center and for working capital and general corporate purposes, possibly including development or acquisition of self- clearing operations and funding of acquisitions of other businesses.
Proposed Nasdaq National Market symbol		WEBS

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2,819,501 shares of common stock issuable upon the exercise of warrants currently outstanding at a weighted average exercise price of $11.57 per share;

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2,062,370 shares of common stock issuable upon the exercise of stock options currently outstanding at a weighted average exercise price of $4.43 per share;

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2,517,652 shares of common stock reserved for grants that we may make in the future under our stock incentive plan; and

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1,000,000 shares of common stock reserved for issuance under our employee stock purchase plan.

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reflects the conversion of each outstanding share of our preferred stock into four shares of our common stock, which will occur upon the consummation of this offering;

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reflects a three-for-two split of our outstanding common and preferred stock which we completed in July 1999; and

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assumes that the underwriters will not exercise their option to purchase additional shares of common stock to cover any over-allotments and that no other person will exercise any other outstanding option or warrant.

		Period from September 3, 1996, our inception, to December 31, 1996			Year Ended December 31,						Nine Months Ended September 30,
					1997			1998			1998			1999
											(unaudited)
					(in thousands, except share and per share data and Other Data)
Statement of Operations Data:
Revenues		$             —			$             329			$             7,891			$             4,366			$           17,163
Cost of services		—			498			5,116			2,720			10,114
Operating expenses		116			3,098			14,593			8,791			11,041
Net loss		$           (116	)		$         (3,267	)		$         (11,818	)		$           (7,145	)		$           (3,992	)
Basic and diluted net loss per           common share		$         (0.01	)		$           (0.25	)		$             (0.71)			$             (0.43	)		$             (0.19	)
Shares used in computing basic           and diluted net loss per           common share		12,308,862			12,872,442			16,740,600			16,569,700			20,550,308
Other Data:
Total trades		N/A			11,500			291,500			155,300			704,600
Average trades per day		N/A			100			1,200			800			3,700
Total customer accounts(1)(2)		N/A			1,100			41,300			31,500			73,000
Total customer assets(1)		N/A			$16,082,900			$231,558,200			$156,307,300			$519,029,300
Total employees(1)		6			14			65			76			119

(1)	As of the end of each of the periods presented.

(2)	Represents open accounts, regardless of whether there have ever been any funds or securities in the account.

								September 30, 1999
								Actual		As Adjusted
								(unaudited) (in thousands)
Balance Sheet Data:
Cash and cash equivalents								$1,731		$38,787
Total assets								7,654		44,710
Total liabilities								3,201		3,201
Total stockholders’ equity								4,453		41,509

We have a limited operating history, have incurred losses since our founding and may not achieve future profitability.

We have had negative cash flows from operations and may not be able to secure additional financing if we need it in the future.

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support our planned rapid growth;

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develop new or enhanced services and technologies;

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increase our marketing efforts;

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acquire complementary businesses or technologies;

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respond to anticipated capital requirements; and

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respond to competitive pressures or unanticipated requirements.

We may not be able to develop and increase public recognition of our Web Street brand.

If U.S. Clearing Corporation fails to accurately clear our customers ’ trades in a timely manner, our business would be harmed.

Our business may be adversely affected by the expiration of our clearing agreement in April 2000.

If we become self-clearing, we will be subject to many new risks which could impair our business.

We expect to receive decreased payments related to order flow, which may adversely affect our ability to offer commission-free trades on particular over-the-counter orders and our per trade revenues and profit margins.

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the SEC ’s enactment of order handling rules which have reduced market-makers’ spreads and correspondingly their profits;

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the emergence of electronic communication networks, which enable securities trading without the use of market makers; and

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the proposed quotation of stock prices in decimals, which could further reduce spreads.

We may not be able to manage our growth effectively or budget adequately for costs associated with our growth.

We may not be able to hire and retain additional qualified personnel to support our growth.

Our operations may be disrupted by technological problems.

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a hardware or software error, failure or crash;

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a power or telecommunications failure;

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human error; or

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a fire, flood or other natural disaster.

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We, along with the rest of the securities industry, depend heavily on the systems of the securities exchanges and Nasdaq. If these organizations do not remedy their own year 2000 problems in a timely fashion, trading of securities could be halted or delayed.

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Any failure due to year 2000 problems of the computer systems operated by U.S. Clearing or Automatic Data Processing, Inc., which processes data and maintains electronic files regarding our customers’ accounts for U.S. Clearing, could interfere with our customers’ ability to trade and result in trade processing errors.

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Any failure due to year 2000 problems of the systems of utility companies, online or internet service providers, our content providers or other parties upon which we depend could interfere with our customers’ ability to trade online and access critical market information.

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Uncertainty about the year 2000 problem generally may cause investors and lenders to reduce the level of their market and lending activities temporarily as they assess the effectiveness of our, their and others’ year 2000 compliance efforts. As a result, we may experience a downturn in customer and general market activity for a period of time before and after January 1, 2000.

Our current services may become obsolete and unmarketable if we are not able to respond adequately to rapidly changing technology and customer demands.

We may not be successful in pursuing new business opportunities, and we may not be able to compete successfully in any new business areas.

Our growth could be impaired if we are not able to develop and maintain the relationships we need to implement our international strategy.

We may be subject to liability if we fail to comply with applicable foreign regulatory requirements; there is uncertainty regarding these requirements.

Our growth could be impaired if we do not successfully handle other risks associated with international business.

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less-developed technological infrastructures, resulting in lower customer acceptance of, or access to, electronic channels;

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less-developed automation in exchanges, depositories and clearing houses and systems;

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fluctuations in currency exchange rates;

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changes in regulatory requirements, tariffs and other trade barriers;

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potentially adverse tax consequences; and

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inadequate protection for intellectual property rights.

If we are unable to provide our customers with critical market information because we fail to maintain our relationships with third-party providers of this content, our reputation could be harmed and we could lose customers.

We could be subject to legal claims and our business could be harmed if there are breaches of our security or misappropriation of our customers’ personal information.

We could lose our competitive advantages if we are not able to protect our proprietary technology and intellectual property rights against infringement, and any related litigation could be time consuming and costly.

Our growth may be impaired and our current business may suffer if we do not successfully address risks associated with acquisitions.

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difficulties in integrating acquired operations, technologies, services and personnel with our existing operations and personnel;

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difficulties in meeting operating expectations for acquired businesses, services and technologies;

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failure to obtain required regulatory approvals;

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disruption of our ongoing business;

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errors or missed opportunities resulting from inexperience in new business areas;

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diversion of management’s attention from other business concerns;

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adverse impact on earnings of amortization or write-offs of acquired goodwill and other intangible assets;

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issuances of equity securities, which may be dilutive to existing stockholders, to pay for acquisitions; and

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potential loss of key employees and/or customers of acquired companies.

We may suffer losses if we fail to manage effectively our customer credit risks.

If we fail to comply with net capital requirements, our business activities could be limited or prohibited.

We may be subject to legal claims in connection with the content we distribute.

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

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fraudulent internet trading, which could involve fraudulent access to legitimate customer accounts or the use of a false identity to open an account; or

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the use of forged or counterfeit checks for payment.

The loss of members of our senior management or systems development teams could adversely affect our business.

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our senior management team, led by Joseph J. Fox, our co-chairman of the board and chief executive officer, and Avi Fox, our co-chairman of the board and president; and

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our systems development team, led by William J. Mania, our chief technology officer.

If the use of the internet does not continue to grow or its growth cannot be supported by its infrastructure, the growth in usage of our online services could be impaired.

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inadequate network infrastructure;

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security concerns;

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inconsistent quality of services; and

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lack of cost-effective, high-speed service.

If the use of online brokerage services is not readily accepted, the growth in usage of our online services would be impaired.

Intense competition in the online brokerage industry could impair our ability to grow and achieve profitability.

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have longer operating histories and significantly greater financial, technical and marketing resources than we do;

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offer a wider range of services and financial products than we do; and

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have greater name recognition, larger customer bases and greater management depth and experience than we do.

The high volatility of the securities industry could adversely affect our commission and order flow revenues.

We operate in a highly regulated industry and compliance failures could adversely affect our business.

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state and federal criminal authorities;

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the SEC;

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the NASD;

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other self-regulatory organizations, including the various securities exchanges; and

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state securities commissions or agencies.

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create uncertainty in the marketplace that could reduce demand for our services;

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limit our ability to collect and use data from our users; or

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increase the cost of doing business as a result of litigation costs or increased service delivery costs.

Joseph Fox and Avi Fox can control matters requiring stockholder approval because they own a large percentage of our common stock and they may vote this common stock in a way with which you do not agree.

If the market price of our common stock fluctuates widely, you may not be able to sell your shares at or above the initial public offering price and, therefore, you may suffer a loss on your investment.

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actual or anticipated variations in our quarterly operating results;

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announcements of new services, products, acquisitions or strategic relationships by us or our competitors;

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announcements of system slowdowns or failures by us or our competitors;

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new regulations or interpretations of regulations applicable to our online brokerage activities;

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trends or conditions in the internet industry;

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changes in accounting treatments or principles;

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changes in earnings estimates by securities analysts and in analyst recommendations;

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changes in market valuations of other internet companies; and

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general political, economic and market conditions.

Provisions in our charter, our by-laws and Delaware law could delay or deter tender offers or takeover attempts that may offer you a premium, which could adversely affect our stock price.

Our stock price may decline if a large number of shares are sold after this offering or there is a perception that these sales may occur.

Because an active trading market for our common stock may not develop after this offering, it may be difficult for you to sell your shares.

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our need to maintain and increase our customer accounts;

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our need to establish additional international and content relationships;

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the intense competition among web sites providing online financial services;

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existing and future regulations affecting our business or the internet generally; and

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other factors set forth under “Risk Factors” in this prospectus.

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Increased marketing and promotional efforts. We plan to use approximately $24.0 million of the net proceeds to market our online brokerage services and other financial services and products over the next 12 months;

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Developing a second data center. We intend to use approximately $1.0 million of the net proceeds to fund a portion of the cost to develop a second data center in Arizona so that we can (1) continue to serve our customers in the event of a catastrophic systems failure at one of our facilities, (2) increase our overall system capacity and (3) operate more efficiently by splitting the demands on our systems between two facilities; and

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Working capital and general corporate purposes. We intend to use the remaining $12.1 million of the net proceeds, $16.6 million if the underwriters exercise their over-allotment option in full, for working capital and general corporate purposes, possibly including development or acquisition of self-clearing operations and funding of acquisitions of other businesses. Though from time to time we evaluate potential acquisitions, we have no current agreement, commitment or understanding with respect to any acquisition.

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the conversion of all currently outstanding shares of our series A preferred stock into an aggregate of 450,000 shares of our common stock upon completion of this offering; and

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our issuance and sale of 3,750,000 shares of common stock and receipt of the net proceeds from our sale of these shares, after deducting the underwriting discount and estimated offering expenses.

		September 30, 1999
		Actual			As Adjusted
		(unaudited) (in thousands)
Long-term debt		$         —			$       —
Stockholders’ equity:
Series A preferred stock, $.01 par value, 500,000 shares authorized and                 112,500 shares issued and outstanding, actual; no shares authorized,                 issued and outstanding, as adjusted		1			—
Series C preferred stock, $.01 par value, 5,000,000 shares authorized and                 no shares issued and outstanding, actual; no shares authorized, issued                 and outstanding, as adjusted		—			—
Preferred stock, $.01 par value, 6,000,000 shares authorized and no                 shares issued and outstanding, actual; 2,000,000 shares authorized and                 no shares issued and outstanding, as adjusted		—			—
Common stock, $.01 par value, 100,000,000 shares authorized and                 20,976,521 shares issued and outstanding, actual; 100,000,000 shares                 authorized and 25,176,521 shares issued and outstanding, as adjusted		210			252
Additional paid-in capital		24,082			61,097
Accumulated deficit		(19,840	)		(19,840	)
Total stockholders’ equity and capitalization		$     4,453			$41,509

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1,619,501 shares of common stock issuable upon the exercise of warrants at a weighted average exercise price of $4.70 per share;

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2,054,870 shares of common stock issuable upon the exercise of stock options outstanding at a weighted average exercise price of $4.41 per share;

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2,097,652 shares of common stock reserved for grants that we may make in the future under our stock incentive plan; and

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1,000,000 shares of common stock reserved for issuance under our employee stock purchase plan.

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1,200,000 shares of our common stock issuable upon the exercise of warrants issued to Sun Hung Kai Online Limited, the exercisability as to 1,000,000 of which is subject to the achievement of performance milestones (see “Description of Capital Stock—Warrants ”) ;

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7,500 shares of common stock issuable upon the exercise of stock options issued in October 1999 at an exercise price of $10.00 per share; and

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an additional 420,000 shares of common stock to be reserved for grants that we may make in the future under our stock incentive plan. The maximum number of shares available for delivery under this plan increases by 10% of any increase in our outstanding shares of common stock subsequent to the August 26, 1999 effective date of the plan.

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an increase in our total assets to reflect our net proceeds from this offering as described under “Use of Proceeds;” and

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the addition of the 3,750,000 shares of common stock we are offering by this prospectus,

Assumed initial public offering price per share				$11.00
Net tangible book value per share at September 30, 1999 prior to this offering		$0.21
Increase per share attributable to new stockholders		1.44
Pro forma net tangible book value per share at September 30, 1999 after this      offering				1.65
Dilution per share to new investors				$  9.35

		Shares Purchased					Total Consideration					Average Price Per Share
		Number		Percent			Amount		Percent
Existing stockholders		21,426,521		85	%		$23,378,616		36	%		$  1.09
New investors		3,750,000		15			41,250,000		64			11.00
Total		25,176,521		100	%		$64,628,616		100	%

		Period from September 3, 1996, our inception, to December 31, 1996			Year Ended December 31,						Nine Months Ended September 30,
					1997			1998			1998			1999
											(unaudited)
					(in thousands, except share and per share data and Other Data)
Statement of Operations Data:
Revenues
Transaction revenue		$             —			$             291			$             7,350			$             4,078			$           15,941
Subscription service revenue		—			38			378			178			746
Interest income		—			—			163			110			476
Total revenues		—			329			7,891			4,366			17,163
Cost of services
Clearance and execution		—			144			2,795			1,411			7,179
Employee compensation and benefits		—			227			1,375			823			1,897
Communication and data processing		—			127			946			486			1,038
Total cost of services		—			498			5,116			2,720			10,114
Operating expenses
Marketing and advertising		—			1,389			8,152			4,524			5,533
Technology development		—			430			1,559			1,222			1,401
General and administrative		116			1,279			4,882			3,045			4,107
Total operating expenses		116			3,098			14,593			8,791			11,041
Net loss		$           (116	)		$         (3,267	)		$         (11,818	)		$           (7,145	)		$           (3,992	)
Basic and diluted net loss per common share		$         (0.01	)		$           (0.25	)		$             (0.71	)		$             (0.43	)		$             (0.19	)
Shares used in computing basic and diluted net loss per           common share		12,308,862			12,872,442			16,740,600			16,569,700			20,550,308
Other Data:
Total trades		N/A			11,500			291,500			155,300			704,600
Average trades per day		N/A			100			1,200			800			3,700
Total customer accounts(1)(2)		N/A			1,100			41,300			31,500			73,000
Total customer assets(1)		N/A			$16,082,900			$231,558,200			$156,307,300			$519,029,300
Total employees(1)		6			14			65			76			119
(1) As of the end of each of the periods presented.
(2) Represents open accounts, regardless of whether there have ever been any funds or securities in the account.
		December 31,									September 30,
		1996			1997			1998			1998			1999
											(unaudited)
		(in thousands)
Balance Sheet Data:
Cash and cash equivalents		$                3			$           1,272			$              1,580			$                150			$              1,731
Total assets		3			1,514			4,496			1,638			7,654
Total liabilities		—			412			3,345			712			3,201
Redeemable common stock		—			278			624			624			—
Total stockholders’ equity		3			824			527			302			4,453

Transaction revenue consists of brokerage commissions on customer transactions in equity securities, options and mutual funds and payments for order flow, recorded on the dates trades are made.

Subscription service revenue consists principally of fees billed monthly to customers who choose to subscribe to one of our automatically updating real-time quote services.

Interest income represents interest paid to us by U.S. Clearing on our customers’ margin debt and money market account balances, as well as interest earned on our own available cash balances. We participate in the interest spread on our customers’ debit and money market credit balances through our clearing agreement with U.S. Clearing.

Cost of services includes transaction-based clearance and execution costs for customer trades paid to U.S. Clearing under the terms of our clearing agreement; margin-sharing payments to international partners; compensation and benefit costs for employees directly involved in brokerage and subscription service operations; exchange and other market data fees; and the costs of communication lines and related equipment.

Marketing and advertising expenses consist of advertising agency fees; third-party charges for running internet, television, print and radio ads; the costs of brochures, contests and promotions; and the costs of our public relations program.

Technology development expenses include technology-related payroll, consulting, supplies and equipment costs associated with the development and enhancement of our web site and related product and service offerings.

General and administrative expenses consist primarily of compensation and benefits for corporate management and administrative personnel, occupancy costs, insurance, professional fees, postage and the provision for losses related to securities transactions.

		Percentage of Total Revenues												Period-to-Period Percentage Change
		Year Ended December 31,						Nine Months Ended September 30,						1998 Compared to 1997			Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998
		1997			1998			1998			1999
Revenues:
Transaction revenue		88	%		93	%		93	%		93	%		2,426	%		291	%
Subscription service revenue		12			5			4			4			878			319
Interest income		—			2			3			3			*			332
Total revenues		100			100			100			100			2,298			293
Cost of Services:
Clearance and execution		44			35			32			42			1,841			409
Employee compensation and            benefits		69			17			19			11			506			131
Communication and data            processing		39			12			11			6			644			114
Total Cost of Services		152			64			62			59			927			272
Operating Expenses:
Marketing and advertising		422			103			104			32			487			22
Technology development		131			20			28			8			263			15
General and administrative		389			62			70			24			282			35
Total Operating Expenses		942			185			202			64			371			26
Loss before income tax benefit		(994	)		(149	)		(164	)		(23	)		262			(44	)
Income tax benefit		—			—			—			—			—			—
Net loss		(994	)%		(149	)%		(164	)%		(23	)%		262	%		(44	)%

*Not calculable.

Cost of Services

Operating Expenses

Revenues

Cost of Services

Operating Expenses

		Three Months Ended
		Sept. 30, 1997			Dec. 31, 1997			Mar. 31, 1998			June 30, 1998			Sept. 30 1998			Dec. 31, 1998			Mar. 31, 1999			June 30, 1999			Sept. 30, 1999
		(unaudited)
		(in thousands, except share and per share data and Other Data)
Statement of Operations      Data:
Revenues
Transaction revenue		$             44			$             247			$             561			$              1,444			$              2,073			$              3,272			$              4,271			$              5,609			$              6,061
Subscription service            revenue		—			38			13			41			124			200			218			260			268
Interest income		—			—			20			43			47			53			148			167			162
Total revenues		44			285			594			1,528			2,244			3,525			4,637			6,036			6,491
Cost of Services
Clearance and execution		22			122			233			475			704			1,383			1,718			2,659			2,802
Employee compensation           and benefits		55			172			120			311			391			553			550			708			640
Communication and data            processing		60			67			73			251			161			461			288			331			418
Total Cost of                 Services		137			361			426			1,037			1,256			2,397			2,556			3,698			3,860
Operating Expenses
Marketing and            advertising		—			1,389			1,727			1,926			872			3,627			633			1,611			3,290
Technology            development		90			100			218			369			635			337			314			599			489
General and            administrative		187			863			1,221			889			935			1,837			1,119			1,370			1,618
Total Operating                 Expenses		277			2,352			3,166			3,184			2,442			5,801			2,066			3,580			5,397
Income (loss) before      income tax benefit		(370	)		(2,428	)		(2,998	)		(2,693	)		(1,454	)		(4,673	)		15			(1,242	)		(2,766	)
Income tax benefit		—			—			—			—			—			—			—			—			—
Net income (loss)		$           (370	)		$         (2,428	)		$         (2,998	)		$           (2,693	)		$           (1,454	)		$           (4,673	)		$                  15			$           (1,242	)		$           (2,766	)
Basic and diluted net      income (loss) per      common share		$         (0.03	)		$           (0.19	)		$           (0.19	)		$              (0.16	)		$              (0.08	)		$              (0.28	)		$                0.00			$              (0.06	)		$              (0.13	)
Shares used in computing      basic and diluted net      income (loss) per share		12,610,434			12,872,442			16,176,090			16,391,708			16,569,701			16,740,600			20,092,013	(1)		20,404,466			20,841,324
Other Data:
Total trades		2,300			9,200			20,100			52,500			82,700			136,200			187,200			253,400			264,000
Average trades per                 day		40			144			330			833			1,293			2,095			3,069			4,022			4,124
Total customer                 accounts(2) (3)		400			1,100			5,600			17,400			31,500			41,300			54,500			66,600			73,000
Total customer                 assets(2)		$6,417,184			$16,082,900			$43,163,400			$104,996,800			$156,307,300			$231,558,200			$348,308,300			$471,174,700			$519,029,300
Total employees(2)		14			14			34			61			76			65			80			112			119

(1)	Represents shares used in computing basic net income per share. 20,485,997 shares were used in computing diluted net income of $0.00 per share.

(2)	As of the end of each of the periods presented.

(3)	Represents open accounts, regardless of whether there have ever been any funds or securities in the account.

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economic conditions specific to the internet, online commerce or the brokerage industry, as well as general economic conditions;

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trends in securities markets;

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changes in trading volume in securities markets;

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the pace of development of the market for online commerce;

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customer acceptance of our online financial services and products;

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introductions of new or enhanced online financial services and products by us or our competitors;

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our ability to upgrade and change our web site and systems;

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technical difficulties or system downtime affecting the internet or the operation of our web site;

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changes in commissions charged by us or our competitors;

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changes in the level of our marketing and other operating expenses to support our growth;

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changes in clearing, execution and exchange fees; and

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domestic and international regulation of the brokerage industry.

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a virtual trading pit with rapid online order entry, transaction confirmations and account information updates;

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dynamically updated real-time market data, including stock quotes, market-maker information and financial news;

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the ability to create customized stock watch lists and to place a trade order from a watch list with one click of a mouse;

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portfolio tracking featuring historical and intra-day stock charting;

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the ability to buy, sell or exchange over 4,000 load and no-load mutual funds, obtain fund information, view fund performance reports from MorningStar and read complete fund prospectuses;

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an online help desk and 24 hours a day, seven days a week toll-free telephone support; and

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for investors in Germany and Iceland, the ability to trade in U.S. securities markets through translated versions of our web site, using funds which the investors deposit in local currencies and may convert to U.S. dollars for immediate trading.

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Barron’s gave us its highest rating, four stars, in 1999 and 1998, emphasizing that we have a dynamic site where all pieces of research and trading are easily accessible;

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SmartMoney rated us one of the top three overall online brokerage firms in 1999 and 1998, due to our low commissions, 24-hour service, rapid technical support, free real-time quotes and instantaneously updated online account information; and

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Time Digital rated us the third best online discount brokerage service in 1999, noting that our trading pit allows investors to monitor stock, fund and option activity, check balances and positions and execute trades, all from a single screen.

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Individual investors are increasingly taking direct control over their personal financial affairs because they find it more convenient than relying on traditional financial intermediaries. Individual investors want the flexibility to transact business at times and places that are convenient for them. Online brokerage firms enable investors to place trades 24 hours a day from their homes, offices and other locations, without the need to contact a broker;

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Individual investors are increasingly taking direct control over their personal financial affairs because they find it less expensive than relying on traditional financial intermediaries. Online brokerage firms provide investors with lower per-trade commissions due to the cost savings associated with delivering brokerage services over the internet. Online brokerage firms are also able to provide investors with access to information at little or no charge because of the low cost of exchanging information over the internet; and

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Individual investors have become increasingly sophisticated and knowledgeable about investment strategies and alternatives. In response, online brokerage firms have developed a range of tools and services not currently offered by traditional brokerage firms that meet the needs of these investors, including access to real-time stock quotes and market-maker information, as well as the ability to manage their investment portfolios online.

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Forrester Research, Inc., a leading information technology data research firm, estimates that the number of U.S. online brokerage accounts will be 5.4 million at the end of 1999 and will grow to over 20.4 million by the end of 2003; and

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Forrester estimates that the value of assets held by customers in accounts with online brokerage firms will be $374 billion in the U.S. at the end of 1999 and will grow to over $3 trillion by the end of 2003.

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quick and secure transaction execution;

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immediate access to current financial information and investment tools;

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convenience, simplicity and ease of access;

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certainty that trades will be completed reliably;

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the ability to trade worldwide; and

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low transaction fees.

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Cost-Effective, Global Online Services. We have capitalized on the global reach of the internet by enabling customers worldwide to trade in U.S. securities on our web site. By leveraging the low-cost infrastructure and efficiencies of the internet, we are able to provide cost-effective online brokerage services to a broad range of customers around the world. We are partnering with foreign brokerage firms to offer our Unified Global Brokerage Accounts. These accounts currently enable customers of these firms to trade in U.S. securities markets through translated versions of our web site, using funds which customers deposit in local currencies and may convert to U.S. dollars for immediate trading. Our foreign partners market our online services and provide local customer support in their customers ’ own languages. In December 1998, we established a mutually exclusive arrangement with ConSors Discount-Broker, a subsidiary of the German financial institution SchmidtBank and a leading online discount brokerage firm in Europe. ConSors had approximately 137,000 customer accounts as of June 30, 1999 and experienced an average annual growth in accounts of 440% from 1994 to 1999. We currently provide our services to ConSors customers with accounts in Germany and expect to begin serving ConSors customers with accounts in Austria, Italy, Luxembourg and Switzerland in late 1999 or early 2000. Investors in these European countries who trade U.S. securities through our ConSors relationship pay the same low transaction fees as investors who trade directly through us in the U.S. In addition, a limited number of investors in approximately 80 other countries use our brokerage services by directly accessing our web site.

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Real-Time Data. Our web site provides automatically updated market data, including stock quotes, market-maker information and financial news, in real time. Investors can track the rapid movement of stock prices, as well as relevant corporate and market news, on individually designed watch lists. Our web site also provides account information that is updated in real time, rather than periodically or overnight, to allow our customers to better track their positions. We notify customers as to the status of their placed orders, usually within seconds of their order entry, and update their account balances, usually within seconds of filling the orders. Our technology gives customers real-time buying power information and enables investors to make informed investment decisions in a more timely and convenient manner in constantly changing markets.

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Fast, Reliable and Efficient Trading System. We specifically designed our systems and operations to exploit the operating benefits of the internet, rather than simply to link customers electronically to an existing traditional brokerage operation. We have automated the online investment process, significantly reducing the need for human intervention to review or execute trades for our customers. As a result, currently, over 90% of all our customer orders are entered, processed and confirmed electronically. This enables us to avoid the longer trade execution time, personnel requirements, possibility of human error and costs associated with less automated order entry and processing. In addition, we designed our system with excess capacity to allow uninterrupted access and rapid trade entry during periods of heavy trading volume. Our system is fully redundant. If any component affecting the ability of our customers to enter orders fails, a back-up will automatically take over in a manner that is transparent to our customers. However, approximately five minutes will be required to remedy a database failure. Additionally, we have begun to develop a second data center in Arizona so that we can (1) continue to serve our customers in the event of a catastrophic systems failure at one of our facilities, (2) increase our overall system capacity and (3) operate more efficiently by splitting the demands on our system between two facilities. Our system also allows for application programs to be quickly modified in response to changing customer requirements, for processing power to be quickly and easily added without service interruption and for advanced and complementary financial services and products to be easily added. In addition, we offer highly secure services through our use of encryption and authentication technology, allowing investors to conduct transactions privately and with confidence that their funds and securities are protected.

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User-Friendly Web Site. Our web site has user-friendly graphical interfaces that make online investing easy and fast, even for investors unaccustomed to conducting transactions over the internet. Through our virtual trading pit, our customers have quick and convenient access to a variety of investment tools, including portfolio tracking, market-maker information, historical and intra-day stock charting, market and company news and investment research. Investors can even customize user interfaces on our web site to select the market and securities watch lists, news, charts and market analyses that are most valuable to them based on their individual investment objectives. With these tools, investors can conveniently and quickly trade securities and access a wide variety of financial and account information with just a few clicks of their mouse and without changing screens on our web site. In addition, our web site contains an online help desk that provides basic information on how to use our services, answers to frequently asked questions about our web site and services and a glossary of frequently used financial terms.

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Continuous Access and Support. We offer customers the ability to place orders with us 24 hours a day, seven days a week. We submit orders placed after market hours for execution upon the next day’s market opening. Customers can trade securities through the internet, with licensed brokers over the telephone or through our automated touch-tone telephone trading service. Customers have the ultimate control over when and where they enter trade orders. In addition, we believe that offering quality customer service and support is critical to building and maintaining high levels of customer satisfaction, retention and loyalty. Our online help desk provides quick and efficient answers to customers’ questions. In addition, although we do not provide investment advice, we provide toll-free telephone access to service representatives 24 hours a day, seven days a week for customers requiring additional information.

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Expand Brand Awareness and Customer Base. We intend to build on the positive marketplace perception of our web site and online services by pursuing a focused advertising and public relations campaign to enhance consumer recognition of our brand, differentiate our online brokerage services, increase visits to our web site and attract new accounts. In particular, we intend to use a portion of our proceeds from this offering for national and local advertising in financial magazines and newspapers, on television, over the internet and on the radio. We also intend to establish financial services centers in strategic locations in major U.S. and international cities, where visitors can learn about financial markets around the world, domestic and international online investing, opening an account with us and using our services. We opened our first financial services center in Beverly Hills, California in June 1999.

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Increase Global Market Presence. We have begun to expand our global market presence by establishing relationships with foreign brokerage firms. We have relationships with ConSors and Landsbref, Ltd., the securities house of The Bank of Iceland, which requires ConSors and Landsbref to direct to us all their customers in Germany, Austria, Iceland, Italy, Luxembourg and Switzerland who wish to trade stocks and options in U.S. markets. We recently entered into an alliance with a subsidiary of Sun Hung Kai Securities Ltd. in Hong Kong to provide our online brokerage services to its customers in Hong Kong and to help us form alliances or joint ventures in China, Japan and Australia and possibly other Pacific Rim nations. We also entered into an alliance with a subsidiary of C.B. Capitales in Chile to provide our online brokerage services to its customers in Chile. We are exploring alliances and joint venture opportunities with financial institutions in other locations, including the United Kingdom, Canada, France, Scandinavia, South America and Central America. We may also establish our own, or acquire, operations in key international markets.

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Facilitate Trading in World Markets through Unified Global Brokerage Accounts. We have begun to offer Unified Global Brokerage Accounts to online investors. We expect that once fully operational, these accounts will allow a customer to (1) view and value different types of securities in various major global financial markets in the customer’s language of choice and (2) place orders in major global financial markets. We plan to offer services tailored to regional regulatory requirements and customs.

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Enhance Services to Encourage Increased Customer Account Balances. We intend to encourage our customers to maintain more of their investment assets with us by expanding our product offerings. We intend to introduce new products, including various fixed-income products, and improvements to existing products, including advanced option trading features and more competitive interest rates on margin loans. We recently established our Mutual Fund SuperSite, which allows our customers to buy, sell or exchange over 4,000 load and no-load mutual funds, obtain fund information, view fund performance reports from MorningStar and read complete fund prospectuses. We also intend to target high net worth investors by marketing our private client group, Web Street Elite. Through this group, investors who trade frequently or maintain higher average asset balances in their accounts have access to free streaming real-time quotes, Nasdaq Level-2 market-maker information, quick trade execution with one click of a mouse and personalized customer service via a dedicated toll-free number.

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Maintain and Enhance Advanced Technological Capabilities. We are committed to maintaining our proprietary trading system as a technologically advanced online trading site on the internet through the ongoing efforts of our sophisticated in-house development team and technical consultants and collaborations with other entities. By continuously investing in our technology platform and operational software, we believe we can add capacity to our system as needed, develop new features that differentiate our services and increase operational efficiencies. We intend to maintain a positive work environment and offer competitive compensation incentives so that we can continue to attract and retain top systems developers and technology specialists.

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Offer a Broad Array of Financial Services. We intend to offer a comprehensive package of financial services and products in order to build our web site into a one-stop online financial service destination for consumers. For example, we provide our customers with the opportunity to obtain a Web Street Platinum MasterCard issued by First USA Bank. In addition, we may seek joint ventures with commercial banks, mortgage companies and insurance companies in order to provide our customers with online banking, consumer credit, home mortgage brokerage services, insurance and a variety of other complementary financial services. In addition, we intend to engage in the online distribution of securities, as a selling group member, in public offerings led by established investment banking firms.

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Pursue Acquisitions, Joint Ventures and Partnerships. We intend to expand our service and content offerings, expand our customer base, increase our technical expertise and obtain competitive advantages through acquisitions, joint ventures and partnerships. We may seek to form relationships with business partners to share technical and industry knowledge and to pursue marketing opportunities.

Mutual Funds

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search the mutual funds we offer by name and criteria, such as fund category, fees, performance, risk and rankings;

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view fund performance reports from MorningStar which provide comprehensive fund information, including returns, investment objectives, fees, holdings and analysis;

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read the prospectuses for mutual funds they are interested in and enter orders to purchase or sell an existing position;

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request that a prospectus for a mutual fund be mailed to them; and

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automatically re-invest dividends and capital gains from particular mutual funds.

Margin Accounts

Market Data and Financial Information

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research and industry graphical reports of fundamental investment information for approximately 7,000 companies and 100 industries, including company overviews, market trends, earnings estimates, price-to-earnings ranges, stock price charts and industry comparisons, from BASELINE Financial Services, Inc.;

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unlimited 20-minute delayed stock quotes and expanded quotes that provide more detailed information about a security, including trading volume, 52-week highs and lows, earnings per share and time and size of last sale. Customers also receive 100 real-time stock quotes for each trade they execute;

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up to 10 customized watch lists of 10 securities each and real-time world financial news relating to these securities from Reuters News Service, PR Newswire and Business Wire;

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summaries of composite indices, including for the major U.S. exchanges, Nasdaq and S&P 500 and market look tables that provide a quick glance at the market;

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initial public offering filing and pricing data from IPO.com, provided by Reuters Reality Online;

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indices and key news items for over 20 major global financial markets; and

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information about mutual funds, searchable by specific desired criteria.

Portfolio Tracking and Records Management

Private Client Group

Cash Management Services

International

Content

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substantially reduces trade execution time;

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makes it more likely that investors’ trades will be completed at desired prices; because securities prices are often extremely volatile, delays in processing can cause customer market orders to be completed at prices that are different from those available at the time the orders were originally entered by investors;

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enables customers to know in real-time when their transactions have been completed and how their accounts have been affected;

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minimizes human error; and

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lowers personnel costs.

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continuing this marketing campaign, including advertising in the print, direct mail, television, radio and outdoor medias; and

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targeting international customers.

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enter into a new agreement with U.S. Clearing;

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enter into a clearing arrangement with a different firm; or

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enter into a joint venture with a clearing firm.

Ÿ timeliness of execution;   Ÿ depth, breadth and quality of services and content;   Ÿ ease of use, graphical user interface look and feel;

Ÿ customer service and support;   Ÿ cost;   Ÿ brand loyalty; and   Ÿ financial strength and innovation.

Ÿ longer operating histories;   Ÿ greater name recognition;   Ÿ greater management depth and experience;   Ÿ larger customer bases;

Ÿ greater financial, technical and marketing resources; and   Ÿ a wider range of services and financial products.

United States

International

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a broker-dealer must maintain a specified minimum net capital requirement;

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a broker-dealer is prohibited from making dividend payments, redeeming stock, repaying subordinated indebtedness and making any unsecured advance or loan to a stockholder, employee or affiliate, if its aggregate debit items rise beyond 5% of its net capital or its ratio of aggregate indebtedness to net capital exceeds 10 to 1; and

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the SEC may restrict a broker-dealer, for up to 20 business days, from making any withdrawal of equity capital, or unsecured loans or advances to stockholders, employees or affiliates if (1) the capital withdrawal, together with all other net capital withdrawals during a 30-day period, exceeds 30% of excess net capital and (2) the SEC concludes that the capital withdrawal may be detrimental to the financial integrity of the broker-dealer.

Name		Age		Principal Positions
Joseph J. Fox		33		Co-Chairman of the Board and Chief Executive Officer
Avi Fox		35		Co-Chairman of the Board and President
Joseph A. Barr		37		Executive Vice President, Chief Financial Officer and Treasurer
Stuart A. Cohn		47		Executive Vice President, General Counsel and Secretary
William J. Mania		38		Executive Vice President and Chief Technology Officer
D. Jonathan Rosenberg		31		Executive Vice President, Chief Operating Officer and Director
John V. Hackett		33		Senior Vice President of Global Business Development
Robert F. Bernard		38		Director
Fredric J. Graber		56		Director

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an annual fee of $5,000;

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$1,000 for each board meeting attended; and

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$1,000 for each board committee meeting attended, but only $500 for a committee meeting held the same day as a board meeting.

Name and Principal Positions		Annual Compensation				Long Term Compensation
		Salary($)		Bonus($)		Securities Underlying Options(#)
Joseph J. Fox Co-Chairman and Chief Executive Officer		$181,304		$80,000		—
Avi Fox Co-Chairman and President		181,304		80,000		—
Stuart A. Cohn Executive Vice President, General Counsel and Secretary		115,865		20,000		356,250
William J. Mania Executive Vice President and Chief Technology Officer		115,406		15,000		241,875

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