<PAGE>
 
FORM 10-QSB - Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-QSB

[ X ]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of l934.

For the period ended March 31, 1997.
                     ---------------

[   ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934.

For the transition period from ________________ to _________________.

Commission File Number         0-28462.
                       ----------------

ONLINE SYSTEM SERVICES, INC.
----------------------------
(Exact name of registrant as specified in its charter)

COLORADO                                              84-1293864
----------------------------------------------------------------
(State or other jurisdiction                     I.R.S. Employer
of incorporation or organization             Identification No.)

1800 GLENARM PLACE, SUITE 800, DENVER, CO      80202
------------------------------------------------------
(Address of principal executive offices)    (Zip code)

(303)296-9200
-----------------------------------------------------------------------
(Registrant's telephone number, including area code)

Not Applicable
--------------
Former name, former address and former fiscal year, if changed since last
report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

[ X ]  YES  [   ]  NO

APPLICABLE ONLY TO CORPORATE ISSUERS:

      As of March 8, 1997, Registrant had 3,179,761 shares of common stock 
outstanding.
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.
                                     Index
                                     -----
<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
  Part I.  Financial Information
 
         Item I.  Financial Statements
<S>                                                                                <C>
 
                  Unaudited Balance Sheets as of  March 31, 1997
                        and December 31, 1996                                          3
 
                  Unaudited Statements of Operations, three months
                        March 31, 1997 and 1996                                        4
 
                  Unaudited Statements of Stockholders' Equity,
                        three months ended March 31, 1997                              5
 
                  Unaudited Statements of Cash Flows,
                        three months ended March 31, 1997                            6,7
 
                  Notes to Financial Statements (unaudited)                          8,9
 
         Item 2.  Management's Discussion and Analysis of
                    Financial Condition and Results of Operations                  10-13
 
 
  Part II. Other Information
 
         Item 1-5.  Not Applicable                                                    14
 
         Item 6. Exhibits and Reports on Form 8-K                                     14
 
  Signatures                                                                          15
 
</TABLE>
 

                                       2
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.

                                BALANCE SHEETS
<TABLE>
<CAPTION>
 
                                            March 31,              December 31,
                                              1997                    1996
                                          ------------            ------------
<S>                                       <C>                      <C>
                                    ASSETS
Current assets:
 Cash and cash equivalents                $ 1,847,476               $ 1,645,163
 Short-term investments                     2,701,625                 3,855,343
 Accounts receivable, net                     400,138                   229,350
 Accrued revenue receivables                  140,252                    90,337
 Inventory                                    181,415                   195,941
 Prepaid expenses                             235,494                   132,544
 Short-term deposit                            61,015                    61,015
                                          -----------              ------------
  Total current assets                      5,567,415                 6,209,693
                                          -----------              ------------

Equipment, net                                504,742                   486,344
 
Other assets                                  164,688                   164,616
                                          -----------              ------------
                                          $ 6,236,845               $ 6,860,653
                                          ===========              ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable                         $   359,611               $   331,809
 Accrued expenses                              23,677                    17,684
 Accrued salaries and taxes payable            87,961                    82,806
 Short-term notes payable                          --                        --
 Current portion of note and capital           
  leases payable                               29,812                    30,437
 Note payable-related party                        --                        --
 Deferred revenue                              30,869                    48,669
                                          -----------              ------------
  Total current liabilities                   531,930                   511,405
                                          -----------              ------------
Note and capital leases payable                24,717                    32,647
                                          -----------              ------------
  Total Long-Term Liabilities                  24,717                    32,647
                                          -----------              ------------
  Total Liabilities                           556,647                   544,052
                                          -----------              ------------

Stockholders' equity:
 Preferred stock, no par value,
  5,000,000 shares authorized, no 
  shares issued or outstanding                     --                        --
 Common stock, no par value, 10,000,000
  shares authorized, 3,177,995 and 3,162,545       
  shares issued and outstanding, 
  respectively                              7,965,140                 7,953,665
 Stock subscriptions receivable                    --                      (586)
 Accumulated  deficit                      (2,284,942)               (1,636,478)
                                          -----------              ------------
  Total stockholders' equity                5,680,198                 6,316,601
                                          -----------              ------------
Total Liabilities and Equity              $ 6,236,845               $ 6,860,653
                                          ===========              ============
</TABLE>



 The accompanying notes to financial statements are an integral part of these
                                balance sheets.

                                       3
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.

                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                            For Three Months Ended
                                                  March 31,
                                              1997         1996
                                          (Unaudited)  (Unaudited)
                                          -----------  -----------
<S>                                       <C>          <C>
Net sales:
     Service sales                        $  402,890   $  243,336
     Hardware and software sales             113,582       23,513
                                          -----------  -----------
                                             516,472      266,849
 
Cost of sales:
     Cost of services                        238,745      141,027
     Cost of hardware and software            96,293       21,271
                                          -----------  -----------
                                             335,038      162,298
                                          -----------  -----------
     Gross margin                            181,434      104,551
                                          -----------  -----------
 
Operating expenses:
     Sales and marketing expenses            285,868       63,173
     Product development expenses            209,944       66,551
     General and administrative expenses     356,902      131,132
     Depreciation and amortization            36,838       10,044
                                          -----------  ----------- 
                                             889,552      270,900
                                          -----------  -----------
 
     Loss from operations                   (708,118)    (166,349)
 
Other income (expense):
     Interest income (expense)                59,654       (2,695)
                                          -----------  ----------- 
 
Loss before provision for income taxes      (648,464)    (169,044)
Provision for income taxes                        --           --
                                          -----------  -----------
Net loss                                  $ (648,464)  $ (169,044)
                                          ===========  =========== 
Net loss per common and common            
 equivalent share (Note 3)                   $( 0.20)      $(0.07)
                                          ===========  =========== 
Weighted average common and common
 equivalent shares outstanding (Note 3)    3,172,715    2,550,695
                                          ===========  ===========  
 
 
</TABLE>



             The accompanying notes to financial statements are an
                      integral part of these statements.

                                       4
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.
                 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                               Common Stock              Stock                          Stockholders'
                                        -------------------------    Subscriptions     Accumulated         Equity 
                                         Shares          Amount       Receivable         Deficit          (Deficit)
                                        ---------     -----------     -----------     ------------      ----------- 
<S>                                     <C>           <C>             <C>             <C>               <C> 
Balances, December 31, 1994                    --     $        --     $        --     $         --      $        --
Common stock issued to founder
      for cash at an average price 
      of $0.0002 per share                480,000             100              --               --              100
Common stock issued to founders for
      services rendered at $0.05 
      per share 125,000                   125,000           6,250              --               --            6,250
Common stock issued for services
      rendered at $0.56 per share         370,000         207,707              --               --          207,707
Stock subscriptions  receivable                --              --         (57,269)              --          (57,269)
Common stock issued in private
      placement for cash at $0.50 
      per share 650,000                   650,000         325,000              --               --          325,000
Net loss                                       --              --              --         (482,239)        (482,239)
Subchapter S corporation losses 
      allocated to individual 
      shareholders                             --        (266,193)             --          266,193               --
                                        ---------     -----------     -----------     ------------      ----------- 

Balances, December 31, 1995             1,625,000         272,864         (57,269)        (216,046)            (451)

Common stock issued in conjunction
      with private placement              182,245         410,000              --               --          410,000
Less offering costs                            --          (6,330)             --               --           (6,330)
Common stock issued in conjunction
      with initial public offering 
      for cash at $6.75 per unit        1,265,000       8,538,750              --               --        8,538,750
Less offering costs                            --      (1,306,769)             --               --       (1,306,769)
Exercise of stock options and warrants     90,300          45,150              --               --           45,150
Stock subscriptions receivable                 --              --          56,683               --           56,683
Net loss                                       --              --              --       (1,420,432)      (1,420,432)
                                        ---------     -----------     -----------     ------------      ----------- 

Balances, December 31, 1996             3,162,545       7,953,665            (586)      (1,636,478)       6,316,601  
 
Exercise of stock options (unaudited)      15,450          11,475              --               --           11,475
Stock subscriptions receivable
      (unaudited)                              --              --             586               --              586
Net loss for the three months ended
       March 31, 1997 (unaudited)              --              --              --         (648,464)        (648,464)
                                        ---------     -----------     -----------     ------------      -----------
     
Balances, March 31, 1997 (unaudited)    3,177,995     $ 7,965,140     $        --     $ (2,284,942)     $ 5,680,198
                                        =========     ===========     ===========     ============      ===========
</TABLE>

 The accompanying notes to financial statements are an integral part of these
                                  statements.

                                       5
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
 
 
                                                 For the Three Months ended
                                                          March 31,
                                                    1997           1996
                                                (Unaudited)     (Unaudited)
                                               ------------     ----------- 
<S>                                            <C>              <C>
Cash flows from operating activities:                          
 Net loss                                       $ (648,464)      $(169,044)
 Adjustments to reconcile net loss to                    
  net cash used in operating                             
   activities:                                            
    Depreciation and amortization                   36,811          10,044
    Stock issued for services                          586          33,876
 Changes in operating assets and                        
  liabilities:                                          
    Short-term deposit                                  --              --
    Accounts receivable                           (170,788)            443
    Accrued revenue receivables                    (49,915)            ---
    Inventory                                       14,526        (101,975)
    Prepaid expenses                              (102,950)           (495)
    Other assets                                       (72)        (16,688)
    Accounts payable                                27,802         138,184
    Accrued expenses                                11,148          35,799
    Deferred revenue                               (17,800)             --
                                               ------------     ----------- 
    Net cash used in operating activities         (899,116)        (69,856)
                                               ------------     ----------- 
                                                        
Cash flows from investing activities:                   
 Proceeds from short-term investments            1,153,718              --
 Purchase of equipment                             (55,209)        (94,392)
                                               ------------     ----------- 
    Net cash provided by                          
     (used in) investing activities              1,098,509         (94,392)
                                               ------------     ----------- 
Cash flows from financing activities:                   
     Payments on note payable and          
      capital leases                                (8,555)         (6,518)
 Proceeds from issuance of common stock             11,475         410,000
     Payments on short-term notes payable               --          (6,330)
     Payments on note payable - related party           --         (41,814)
                                           
     Payments received on stock                         
      subscriptions receivable                          --          20,000
                                               ------------     ----------- 
          Net cash provided by              
           financing activities                      2,920         375,338
                                               ------------     ----------- 
Net increase in cash and cash                      
 equivalents                                       202,313         211,090
                                               ------------     ----------- 
Cash and cash equivalents at                     
 beginning of period                             1,645,163          25,241
                                               ------------     ----------- 
Cash and cash equivalents at end of             
 period                                         $1,847,476       $ 236,331
                                               ============     ===========
</TABLE>



              The accompanying notes to financial statements are
                     an integral part of these statements.

                                       6
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.
                      STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
                                           For the Three Months Ended
                                                    March 31,
                                              1997            1996
                                          (Unaudited)     (Unaudited)
                                          -----------     -----------
<S>                                       <C>             <C>
Supplemental disclosure of cash flow
 information:

Cash paid for
      Interest                                  $620         $ 2,468
      Income taxes                                --              --
Supplemental schedule of non-cash
 investing and financing activities:
      Stock issued for services                 $586         $33,876
      Equipment acquired from
       related parties                            --              --
      Capital lease for equipment                 --         $30,323
 
</TABLE>



             The accompanying notes to financial statements are an
                      integral part of these statements.

                                       7
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.
                         NOTES TO FINANCIAL STATEMENTS
                     DECEMBER 31, 1996 AND MARCH 31, 1997

NOTE 1--BASIS OF PRESENTATION

       The accompanying unaudited interim financial statements have been
prepared without audit pursuant to rules and regulations of the Securities and
Exchange Commission and reflect, in the opinion of management, all adjustments,
which are of a normal and recurring nature, necessary for a fair presentation of
the financial position and results of operations for the periods presented.  The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the accompanying financial statements, and the reported amounts of
revenue and expenses during the reporting period.  Actual results could differ
from those estimates.  The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.

NOTE 2 - REVENUE RECOGNITION
 
       Revenue from hardware and software sales is recognized upon shipment
provided that the Company has no further material obligations.  Revenue from
maintenance fees, training courses and Internet access are recognized as the
services are performed.  License fees are recognized when the Company has no
further material obligations.
 
       Revenue from Web site design and consulting is recognized on the
percentage of completion method on an individual contract basis.  Percentage
complete is determined primarily based upon the ratio that labor costs incurred
bear to total estimated costs.  The Company's use of the percentage of
completion method of revenue recognition requires estimates of the degree of
project completion.  To the extent these estimates prove to be inaccurate, the
revenues and gross margin, if any, reported for periods during which work on the
project is ongoing may not accurately reflect the final results of the project,
which can only be determined upon project completion.  Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses are determinable.
 
       Amounts earned but not billed are shown as accrued revenue receivables in
the accompanying balance sheets.  Amounts invoiced but not earned are shown as
deferred revenue in the accompanying balance sheets.
 
NOTE 3 - NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE

       Net loss per common and common equivalent share has been computed based
upon the weighted average number of common shares and common share equivalents
outstanding.  Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalent shares issued by the
Company at prices below the initial public offering price during the twelve
month period prior to the offering (using the treasury stock method for common
stock for common stock equivalents at an assumed offering price of $6.75 per
unit) have been included in the calculation as if they were outstanding for all
periods presented regardless of whether they were antidilutive.

NOTE 4 - CONCENTRATION OF CREDIT RISK

       The Company sells computer hardware and software and related services
from its Denver offices to the surrounding states.  The Company extends credit
to its customers.

       Credit losses, if any, have been provided for in the financial statements
and are based on management's expectations.  The Company's accounts receivable
are subject to potential concentrations of credit risk.  The Company does not
believe that it is subject to any unusual risks or significant risks in the
normal course of it's business.

       The Company had one major customer for the three months ended March 31,
1997, which accounted for 12% of net sales.  The Company had one major customer
for the three months ended March 31, 1996, which accounted for 23% of net sales.

                                       8
<PAGE>
 
NOTE 5 - NEW ACCOUNTING STANDARD

       In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", which supercedes Accounting Principles Board Opinion No. 15,
"Earnings per Share".  SFAS No. 128 is effective for annual and interim periods
ending after December 15, 1997 and simplifies the computation of earnings per
share by replacing the presentation of primary earnings per share with a
presentation of basis earnings per share.  SFAS No. 128 requires dual
presentation of basis and diluted earnings per share by entities with complex
capital structures.  Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period.  Diluted earnings
per share reflects the potential dilution of securities that could share in the
earnings of an entity.  The Company does not believe that its loss per share
calculations will be materially affected as a result of adopting SFAS No. 128.

                                       9
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL

       The Company develops sophisticated websites that are targeted to three
specific industry segments. During the first quarter of 1997, the Company formed
three separate business units, Cable Access America (CAA), Healthcare, and the
Business Resource Group (BRG), in order to better focus its efforts within each
industry segment. CAA is a turnkey product and service package featuring the use
of hybrid cable modem technology designed to put cable television operators in
the Internet servicing provisioning business. This is an outgrowth of the
Company's Community Access America products and services that have been offered
to a variety of markets since the latter part of 1995. The Healthcare division
features the MD Gateway website and is focused primarily on online medical
education for healthcare professionals and accredited Continuing Medical
Education (CME) programs for physicians. The BRG develops, markets, and supports
sophisticated, interactive Web sites for customers' use on the Internet or
Intranets. The BRG utilizes an interactive Web design process called "WebQuest"
to expedite the design of Web sites with customers both locally and by use of
remote computer access and acts as a reseller of Edify Corporation's "Electronic
Workforce" software that allows interactive, self service applications on the
web.

       The Company generates revenues through the sale of design and consulting
services for Web site development, resale of software licenses, mark-ups on
computer hardware and software sold to customers, maintenance fees charged to
customers to maintain computer hardware and Web sites, license fees based on a
percentage of revenues from the CAA program, training course fees, and monthly
fees paid by customers for Internet access provided by the Company in the Denver
market.  The Company commenced sales in February 1995, and was in the
development stage through December 31, 1995.

       RESULTS OF OPERATIONS

       The following table sets forth for the periods indicated the percentage
of net sales by items contained in the statements of operations.  All
percentages are calculated as a percentage of total net sales, with the
exception of cost of services and cost of hardware and software which are
calculated as a percentage of service sales and hardware/software sales,
respectively.
<TABLE>
<CAPTION>
 
                                  For the Three Months Ended
                                         March  31,
                               ------------------------------ 
                                  1997                1996
                                  ----                ----      
<S>                               <C>                 <C>
Net Sales:
  Service sales                   78.0%               91.2%
  Hardware/software sales         22.0%                8.8%
                                 ------              ------
    Total net sales              100.0%              100.0%
 
Cost of sales:
  Cost of services (as            
  percentage of service sales)    59.3%               58.0%      
  Cost of hardware and software 
  (as percentage of hardware 
  and software sales)             84.8%               90.5%
                                 ------              ------
    Cost of sales                 64.9%               60.8%
                                 ------              ------
 
Gross Margin                      35.1%               39.2%
                                 ------              ------
 
Operating expenses:
  Sales and marketing expenses    55.4%               23.7%
  Product development expenses    40.6%               24.9%
  General and administrative      
   expenses                       69.1%               49.1%
  Depreciation and amortization                  
   expense                         7.1%                3.8%
                                 ------              ------
    Total operating expenses     172.2%              101.5%
 
Loss from operations           (137.1%)             (62.3%)
 
Net Loss                       (125.6%)             (63.3%)
</TABLE>

                                       10
<PAGE>
 
THREE MONTHS ENDED MARCH 31, 1997 AND 1996

     Net sales for the three months ended March 31, 1997 totaled $516,472,
including $402,890 for service sales and $113,582 for hardware and software
sales. This represents an increase of 94% above 1996 net sales of $266,849 which
consisted of $243,336 for service sales and $23,513 for hardware and software
sales. The Company had one major customer for the three months ended March 31,
1997, which accounted for 12% of net sales. The Company had one major customer
for the three months ended March 31, 1996, which accounted for 23% of net sales.
The increase in sales for the 1997 period, compared to 1996, was due to the
expanded development of the Company's product and service offerings in the Cable
Access America and healthcare areas, and to a substantial increase in marketing
and sales activities in general.

     Cost of sales as a percentage of net sales was 64.9% for the 1997 period
and 60.8% for the 1996 period. Cost of sales on hardware and software sales are
generally higher than on service sales. Therefore, the Company's overall gross
profit margin is higher during periods when service sales are a greater
percentage of total net sales. The increase in the cost of sales as a percentage
of net sales in the three-month period of 1997 is due to the lower percentage of
service sales in the 1997 period, compared to the 1996 period.

 
Sales and marketing expenses were $285,868 for the 1997 period and $63,173 for
the 1996 period.  Sales and marketing expenses as a percentage of net sales
increased from 23.7% in 1996 to 55.4% in 1997.  The increase in dollars spent,
as well as the increase as a percentage of net sales during the 1997 period,
were due to the hiring of new sales and marketing personnel and associated
expenditures.  The Company also developed initial marketing materials, began
lead generation activity and began to sell its CAA and CME products and
services. In addition the Company entered into an agreement with Telemedical
Systems Integration, Inc. (TMED) during the fourth quarter of 1996 to serve as
the Company's primary sales group for its healthcare products including the
recently introduced CME products.  The Company incurred significant expenses
during the three-month period ended March 31, 1997 related to initial training
of and lead generation for this sales force.

     Product development expenses were $209,944 for the three months ended
March 31, 1997, compared to $66,551 for the 1996 period.  Product development
expense as a percentage of net sales increased from 24.9% in 1996 to 40.6% in
1997.  The increase in these expenses, as well as the increase as a percentage
of net sales during the 1997 period, reflects the continued development of the
Company's products and services.  Product development expenses during the 1997
period included the completion of the initial development of the Company's CAA
products and initial product offerings targeted at the CME segment of the
healthcare market. Product development expenses during the 1996 period included
enhancements to the initial CAA product and early development of the Company's
Webquest process.  Product development expenses are expected to continue to
increase during the remainder of fiscal 1997 as the Company continues to develop
the CAA and CME products and services and investigates the feasibility of other
product offerings.

     General and administrative expenses were $356,902 for the three months
ended March 31, 1997, compared to $131,132 for the 1996 period. General and
administrative expenses as a percentage of net sales increased from 49.1% in
1996 to 69.1% in 1997. The dollar and percentage increases reflect the
development of the Company's general and administrative infrastructure,
including finance, accounting, business development and investor relations
capabilities, as well as additional expenses related to being a public company.

     Depreciation and amortization expenses were $36,838 for the three months
ended March 31, 1997, compared to $10,044 for the 1996 period.  This increase
reflects the increase in fixed assets and equipment to support higher levels of
Web site and Internet access services, as well as to support the growth in the
number of employees.

      Other income (expense) was $59,654 during the three-month period ended
March 31, 1997, compared to ($2,695) for the 1996 period.  Upon completion of
the Company's initial public offering in May 1996, the Company paid a portion of
its outstanding debt resulting in a reduction of future interest expense and
began earning interest income on the invested net proceeds.  The Company's
investments consist of U.S. Treasury Bills and cash equivalents.

      Net losses were $648,464 in the three-month period ended March  31, 1997
compared to $169,044 for the 1996 period.  This increase in  loss in the 1997
period reflects expenses in the marketing and sales, product development, and
general and administrative areas that have increased at a faster rate than net
sales.  This is due to the time lag associated with product development and
market introduction as well as the long sales cycle for most of the Company's
products and services.    The Company expects to continue to experience
increased operating expenses and capital investments during the remainder of
fiscal 1997, as it continues to develop new product offerings and the
infrastructure required to support its 

                                       11
<PAGE>
 
anticipated growth. The Company believes that, initially, these expenses are
expected to be greater than increases in net sales and, more likely than not,
will result in substantial operating losses in the second and third quarters of
fiscal 1997. The Company expects to report an operating loss for the full year
ending December 31, 1997.


LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 1997, the Company had cash and cash equivalents of
$1,847,476, short-term investments of $2,701,625 and working capital of
$5,035,485. The Company has financed its operations and capital equipment
expenditures through a combination of public and private sales of common stock,
issuing common stock for services, lease financing, short-term loans and the
utilization of trade payables. During 1996, the Company completed an initial
public offering of its common stock which resulted in net proceeds to the
Company of $7,231,981 and the issuance of an additional 1,265,000 shares of
common stock.

     During the three months ended March 31, 1997, the Company purchased
$55,209 of fixed assets.  These purchases were primarily computer equipment,
communications equipment, cable modems and software necessary to develop and
demonstrate the recently introduced Cable Access America products. In
anticipation of future growth, the Company expects to invest a minimum of
$200,000 during the remainder of fiscal 1997 to purchase additional computer
equipment, software and office equipment.

     Accounts receivable balances increased from $229,350 at December 31, 1996
to $400,138 at March 31, 1997, due to the increased sales level during the three
month period and a concentration of billing towards the end of the quarter.  Due
to the Company's utilization of the percentage of completion method of revenue
recognition for its Web services, an asset of $140,252, representing revenue
earned and not billed, is shown as accrued revenue receivable at March 31, 1997.
This amount has increased from $90,337 at December 31, 1996 due to increased
revenue for the quarter.  A liability for amounts invoiced but not earned of
$30,869 is shown as deferred revenue at March 31, 1997.  The Company's hardware
and software inventory of $181,415 at March 31, 1997 decreased from $195,941  at
December 31, 1996, and consists of software licenses and computer hardware
purchased by the Company for resale.

     Prepaid expenses increased to $235,494 at March 31, 1997, from $132,544
at December 31, 1996, primarily due to amounts prepaid for insurance for the
Company. The major portion of the remaining balance consists primarily of
amounts paid under a marketing and sales agreement with an independent company.
These amounts consist of advanced consulting fees, sales commission advances and
travel advances that are expected to be earned through commissions on sales of
the Company's CME products and services.  Trade account payables at March  31,
1997, increased to $359,611 from $331,809 at December 31, 1996, due to the
increased level of business activity for the quarter.

     The Company believes that its cash and cash equivalents and working
capital are adequate to sustain operations for at least the next twelve months.
If sufficient cashflow is not being generated at the end of this period, the
Company may be required to seek additional funds through equity, debt or other
external financing.  There is no assurance that any additional capital
resources, which the Company may need, will be available if and when required,
and on terms that will be acceptable to the Company.

LENGTH OF SALES CYCLE; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS

     The development and implementation of interactive Web sites is often an
enterprise-wide decision by prospective customers and may require the Company to
engage in a lengthy sales cycle.  The pursuit of sales leads typically involves
an analysis of the prospective customer's needs, preparation of a written
proposal, one or more presentations and contract negotiations.  The Company
often provides significant education to prospective customers regarding the use
and benefits of Internet or Intranet technologies and products such as Edify's
Electronic Workforce.  Extensive Web site development or licensing of Electronic
Workforce may also involve a substantial commitment of capital and the attendant
delays frequently associated with approving large capital expenditures and
reviewing new technologies that affect key operations.  While the sales cycle
varies from customer to customer, it typically has ranged from one to six months
for Web site design and support, and from one to three months for Community
Access America projects.  The sales cycle may also be subject to a prospective
customer's budgetary constraints and internal acceptance reviews, over which the
Company has little or no control.  Consequently, if sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company is unlikely to be able to generate revenue from alternate sources in
time to compensate for the shortfall.  If a larger order is delayed or lost to a
competitor, the Company's revenues for that quarter could be materially
diminished.  Moreover, 

                                       12
<PAGE>
 
to the extent that significant sales occur earlier than expected, operating
results for subsequent quarters may be adversely affected.

       Further, as a result of the Company's limited operating history, the
Company does not have historical financial data for a sufficient number of
periods on which to base planned operating expenses.  Accordingly, the Company's
expense levels are based in part on its expectations as to future revenues and
to a large extent are fixed.  The Company typically operates with little or no
backlog and the sales cycles for its products and services may vary
significantly.  As a result, quarterly sales and operating results generally
depend on the volume and timing of and ability to close customer contracts
within the quarter, which are difficult to forecast.  The Company may be unable
to adjust spending on a timely manner to compensate for any unexpected revenue
shortfalls.  Accordingly, any significant shortfall of demand for the Company's
products and services in relation to the Company's expectations would have an
immediate adverse impact on the Company's business, operating results and
financial condition.  In addition, the Company plans to increase its operating
expenses to fund product development and increase sales and marketing.  To the
extent that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition will
be materially adversely affected.

FORWARD LOOKING INFORMATION

       Information contained in this report, other than historical information,
should be considered forward looking and reflects management's current view of
future events and financial performance that involve a number of risks and
uncertainties.  The factors that could cause actual results to differ materially
include, but are not limited to, the following: general economic product
development and technology changes; competition and pricing pressures; length of
sales cycle; variability of sales order flow; and management growth.

                                       13
<PAGE>
 
Part II.-- Other Information
----------------------------

Items 1-5.  Not Applicable

Item 6.  Exhibits and Reports on Form 8-K

       (a)  Exhibits
            Exhibit 27 - Financial Data Schedule

       (b)  Reports on Form 8-K
            None

                                       14
<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.



                                 ONLINE SYSTEM SERVICES, INC.



Date:  March 31, 1997            By   /S/Thomas S. Plunkett
                                      ---------------------
                                      Vice President and
                                      Chief Financial Officer


                                      15
<PAGE>
 
March 31, 1997

Via EDGAR

Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C.  20549

          RE:  Online System Services, Inc.
               Quarterly Report of Form 10-QSB
               for the Quarter Ended March 31, 1997
               Commission File No. 0-28462

Ladies and Gentlemen:

The registrant, Online System Services, Inc. (The Company), first became subject
to the reporting requirements under the Securities Exchange Act of 1934, as
amended, on May 23, 1996.  Enclosed for filing with the Commission via EDGAR is
the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1997.

Very truly yours,

ONLINE SYSTEM SERVICES, INC.


By        /S/ Thomas S. Plunkett
          ----------------------
          Vice President and
          Chief Financial Officer
 
enclosure
cc:       Nasdaq Stock Market
          Nasdaq Regulatory Filings
          1735 K. Street, N.W.
          Washington, D.C.  2006-1500

          Cohig & Associates, Inc.
          6300 S. Syracuse Way, Suite 430
          Englewood, CO  80111
 
          Gray Plant Mooty
          Attn:  Bruce McPheeters
          3400 City Center
          33 South 6/th/ Street
          Minneapolis, MN  55402
 
          Arthur Andersen LLP
          Attn:  Michael Berup
          1225 17/th/ St.
          Denver, CO  80202-5531


                                      16