Hi,
I believe that internal exams are what students who have 'exams after 2 years' subjects are doing. They will be marked by subject tutors, but they are just as important as external AS grades in terms of getting your predicted grade for university applications. The only difference is that the internal grade does not contribute to your overall A-Level grade, so, if you get a C in the internal exam, provided you work hard in the second year, you are no more disadvantaged than someone who achieved an A in getting an A overall. The only difference is that your predicted grade will probably be lower, so you won't be able to apply to universities that will ask for an A in that subject.
I hope that made sense!