<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 September 30, 1996.
                     -------------------

[   ]  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)    (Zipcode)

(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 October 22, 1996, Registrant had 3,097,245 shares of common stock
outstanding.
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.
                                     INDEX
                                     -----

                                                                         Page
                                                                         ----

PART I.  FINANCIAL INFORMATION
 
         ITEM I. FINANCIAL STATEMENTS

 
                 Balance Sheets as of  September 30, 1996 (Unaudited)
                    and December 31, 1995.                               3,4
 
                 Unaudited Statements of Operations, three months
                    and nine months ended September 30, 1996 and 1995      5
 
                 Unaudited Statements of Stockholders' Equity,
                    nine months ended September 30, 1996                   6
 
                 Unaudited Statements of Cash Flows,
                    nine months ended September 30, 1996 and 1995        7,8
 
                 Notes to Financial Statements (unaudited)                 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
 


                                       2
<PAGE>
 
PART I - FINANCIAL INFORMATION
------------------------------
Item 1.  Financial Statements

                          ONLINE SYSTEM SERVICES, INC.
                                 BALANCE SHEETS
 
<TABLE> 
<CAPTION> 
 
                                          September 30,   December 31,
                                               1996           1995
                                          --------------  ------------
                                           (unaudited)
<S>                                       <C>             <C> 
ASSETS
------
Current assets:
       Cash and cash equivalents             $6,218,315       $ 25,241
       Restricted cash (Note 6)                 222,693
           Accounts receivable, net             271,727         98,282
           Hardware and software                 
            inventory                            84,082            ---
           Prepaid expense                       13,474          5,000
       Interest receivable                       88,403            ---
                                             ----------       --------
 
         Total current assets                 6,898,694        128,523
                                             ----------       --------
 
Equipment, net                                  397,113         97,215
                                             ----------       --------
Other assets
        Deposits                                  2,082            956
        Intangibles, net                            898          1,038
                                             ----------       --------
         Total other assets                       2,980          1,994
                                             ----------       --------
 
         Total assets                        $7,298,787       $227,732
                                             ==========       ========
</TABLE> 

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

                                       3
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.
                           BALANCE SHEETS (CONTINUED)

 
                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                ---------------------------------------------
<TABLE> 
<CAPTION> 
 
                                          September 30,        December 31, 
                                          -------------        -----------
                                              1996                 1995
                                              ----                 ----
                                           (unaudited)
<S>                                       <C>                  <C> 
 
Current liabilities:
      Accounts payable                     $   252,880           $  74,990
      Accrued expenses                          35,783              11,020
      Accrued salaries and taxes payable        76,938              19,403
      Short-term notes payable                     ---              50,814
      Current portion of capital lease          32,355              17,017
       and notes
      Note payable-related party                12,707              12,707
      Deferred revenue                          14,013                 ---
                                           -----------           ---------
 
         Total current liabilities             424,676             185,951
                                           -----------           ---------
 
Long-term liabilities:
      Note and capital leases payable           39,887              42,232
                                           -----------           ---------
 
         Total long-term liabilities            39,887              42,232
                                           -----------           ---------
 
         Total liabilities                     464,563             228,183
                                           -----------           ---------
 
Stockholders' equity (deficit)
 
      Common stock, 3,097,245 and
       1,625,000 shares outstanding          7,921,015             272,864  
      Stock subscriptions                       (1,248)            (57,269)
      Accumulated  deficit                  (1,085,543)           (216,046)
                                           -----------           ---------
 
         Total stockholders' equity         
            (deficit)                        6,834,224                (451)
                                           -----------           ---------
 
Total liabilities and stockholders'    
 equity                                    $ 7,298,787           $ 227,732
                                           ===========           =========
</TABLE> 
 



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

                                       4
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.
                           STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
 
                                                     FOR THE THREE MONTHS        FOR THE NINE MONTHS
                                                            ENDED                      ENDED
                                                        SEPTEMBER 30,               SEPTEMBER 30,
                                                    -----------------------    -----------------------
                                                      1996           1995        1996          1995
                                                      ----           ----        ----          ----
                                                          (UNAUDITED)                (UNAUDITED)
Net sales:
<S>                                                <C>           <C>          <C>          <C> 
   Service sales                                   $  273,043    $   69,689   $  709,223   $   94,986
   Hardware and software sales                        134,272         2,031      266,031       53,346
                                                   ----------    ----------   ----------   ----------
            Total net sales                           407,315        71,720      975,254      148,332
                                                               
Cost of sales:                                                 
     Cost of services                                 174,808        42,793      443,531       79,501
     Cost of hardware and software                     97,647         1,366      201,827       42,033
                                                   ----------    ----------   ----------   ----------
          Cost of sales                               272,455        44,159      645,358      121,534
                                                   ----------    ----------   ----------   ----------
          Gross profit                                134,860        27,561      329,896       26,798
                                                   ----------    ----------   ----------   ----------
                                                               
Operating expenses:                                            
Sales and marketing expense                           203,357        25,290      395,503       49,591
Product development expense                           129,826        31,824      299,388       73,891
General and administrative expense                    263,969       157,773      554,445      242,961
Depreciation and amortization                          30,366         7,233       56,881       13,312
                                                   ----------    ----------   ----------   ----------
                                                               
            Total operating expenses                  627,518       222,120    1,306,217      379,755
                                                   ----------    ----------   ----------   ----------
                                                               
Loss from operations                                 (492,658)     (194,559)    (976,321)    (352,957)
                                                               
Interest income (expense)                              82,462          (726)     106,824         (727)
                                                   ----------    ----------   ----------   ----------
                                                               
                                                               
Loss before provision for income taxes               (410,196)     (195,285)    (869,497)    (353,684)
                                                               
Provision for income taxes                                ---           ---          ---          ---
                                                   ----------    ----------   ----------   ----------
Net loss                                           $ (410,196)   $ (195,285)  $ (869,497)  $ (353,684)
                                                   ==========    ==========   ==========   ==========
                                                               
Net loss per share                                     $(0.11)       $(0.08)      $(0.31)      $(0.14)
                                                   ==========    ==========   ==========   ==========
 
Common shares and equivalents
 outstanding                                        3,822,760     2,550,695    2,766,538    2,550,695
                                                   ==========    ==========   ==========   ==========
                                                    
 
                                                                5 
</TABLE>



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

                                       5
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.
                 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
 
                                               COMMON STOCK
                                              -------------
                                                                         STOCK        ACCUMULATED
                                           SHARES       AMOUNT      SUBSCRIPTIONS      DEFICIT
                                          ---------  -------------  --------------  -------------
<S>                                       <C>        <C>            <C>             <C>                                          
Balance, March 22, 1994                         ---           ---             ---            ---
Net loss for the period ended                                                 
 December 31, 1994                              ---           ---             ---            ---
Issuance of common stock to founder for
 cash at an average price of $0.0002                                          
 per share                                  480,000   $       100             ---            ---
 
 
Common stock issued for services
 rendered at $0.05 per share                125,000         6,250             ---
 
Common stock issued for services
 rendered at $0.56 per share                370,000       207,707             ---            ---
 
Stock subscriptions receivable                  ---           ---        $(57,269)           ---
Issuance of common stock for cash at
 $0.50 per share                            650,000       325,000             ---            ---
 
Net loss for the year ended December
 31, 1995                                       ---           ---             ---    $  (482,239)
 
Subchapter S corporation losses
 allocated to individual shareholders           ---      (266,193)            ---        266,193
                                          ---------    -----------    -----------    -----------
Balance, December 31, 1995                1,625,000       272,864         (57,269)      (216,046)
                                          ---------    -----------    -----------    -----------
Issuance of common stock for cash at
 $2.25 per share (unaudited)                182,245       410,000             ---            ---
 
Less costs of issuance (unaudited)              ---        (6,330)            ---            ---
Issuance of common stock for cash at
 $6.75 per unit (unaudited)               1,265,000     8,538,751             ---            ---
 
Less costs of issuance (unaudited)              ---    (1,306,770)            ---            ---
Exercise of stock options (unaudited)        25,000        12,500             ---            ---
Stock subscriptions receivable
 (unaudited)                                    ---           ---          56,021            ---
 
Net loss for the nine months ended
 September 30, 1996 (unaudited)                 ---           ---             ---       (869,497)
                                          ---------   -----------   -------------    -----------
Balance, September 30, 1996 (unaudited)   3,097,245   $ 7,921,015        $ (1,248)   $(1,085,543)
                                          =========   ===========   =============    ===========
 
</TABLE>



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

                                       6
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.

                           STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
                                              FOR THE NINE MONTHS
                                                    ENDED
                                                 SEPTEMBER 30,
                                          ----------------------------
                                              1996           1995
                                          ------------  --------------
                                                  (UNAUDITED)
<S>                                       <C>           <C>
Cash flows from operating activities
  Net loss                                $  (869,497)      $(353,684)
  Adjustments to reconcile net loss to
    net cash used by operating activities:
    Depreciation and amortization              56,881          13,312
    Stock issued for services                  56,021         137,604
  Changes in operating assets and
   liabilities:
    Decrease (increase) in restricted cash   (222,693)            ---
    Decrease (increase) in accounts 
     receivable                              (173,445)        (33,973)
    Decrease (increase) in hardware &         
     software inventory                       (84,082)            ---
    Decrease (increase) in prepaid expense     (8,475)            ---
    Decrease (increase) in interest 
     receivable                               (88,403)            ---
    Decrease (increase) in deposits            (1,127)         (3,069)
    Increase (decrease) in accounts payable   177,890          60,666
    Increase (decrease) in accrued expenses    82,298          13,709
    Increase (decrease) in short-term notes 
     payable                                  (50,814)         24,000
    Increase (decrease) in deferred revenue    14,013             ---
                                            -----------       ---------
Net cash (used) by operating activities    (1,111,433)       (141,435)
                                            -----------       ---------
 
Cash flows from investing activities
 Purchase of fixed assets                    (314,358)        (71,705)
                                            -----------       ---------
Net cash (used) by investing activities      (314,358)        (71,705)
                                            -----------       ---------
 
Cash flows from financing activities:
     Payments on capital lease and            (29,286)            ---
      notes payable
 Issuance of common stock                   7,648,151         214,350
                                            -----------       ---------
Net cash  provided by financing             7,618,865         214,350
 activities                                 -----------       ---------
 
     Net increase in cash                 $ 6,193,074       $   1,210
                                            -----------       ---------
 
</TABLE>



   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                       7
<PAGE>
 
                          ONLINE SYSTEM SERVICES, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE> 
<CAPTION> 
  
                                                         FOR THE NINE MONTHS
                                                                 ENDED
                                                             SEPTEMBER 30,
                                                    -----------------------------
                                                      1996                  1995
                                                             (UNAUDITED)
<S>                                            <C>                      <C> 
 
Cash at beginning of period                          25,241                  ---
 
Cash at end of period                            $6,218,315             $  1,210
                                                ===========             ========
 
Supplemental cash flow information
 
Cash paid for
    Interest                                     $    9,553             $    ---
    Income taxes                                        ---                  ---
 
Non cash investing and financing activities
 
    Stock issued for services                        36,021              137,604
    Fixed assets acquired from related
     parties                                            ---               75,051
 
    Capital lease for equipment                      35,764               10,500
    Note payable for related party for
     fixed assets purchased                             ---               15,929
 
    Intangibles acquired from related
     parties                                            ---                1,271
 
 
</TABLE> 



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

                                       8
<PAGE>
 
                         ONLINE SYSTEM SERVICES, INC.
                        NOTES TO FINANCIAL STATEMENTS
                   DECEMBER 31, 1995 AND SEPTEMBER 30, 1996

NOTE 1 - BASIS OF PRESENTATION

     The accompanying unaudited consolidated condensed interim financial
statements 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 consolidated condensed 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

     Hardware and software sales revenue is recognized upon shipment.  Service
revenue is recognized using the percentage of completion method on an individual
contract basis.  Percentage completion is determined based upon the ratio of
costs incurred 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 profits, if any, reported for periods during which work on
the project is ongoing many not accurately reflect the final results of the
project, which can only be determined upon project completion.  Provisions for
any estimated losses on completed contracts are made in the period in which such
losses are determinable.  Expenses are recognized when incurred.
 
NOTE 3 - NET LOSS PER SHARE

     Net loss per share has been computed based upon the weighted average number
of common stock and common stock equivalents outstanding during each period.

NOTE 4 - INITIAL PUBLIC OFFERING

     In May and June 1996, the Company completed an initial public offering of
1,265,000 Units at a price to the public of $6.75 per Unit, before deduction of
commissions and offering expenses.  Each Unit consisted of one share of common
stock and one warrant.  Two warrants included in the Units entitle the holder to
purchase one share of common stock, at an exercise price of $9.00 per share
during the three year period commencing May 23, 1996, unless previously
redeemed.

NOTE 5 - 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 has one major customer for the first nine months of 1996, which
accounted for 15% of the Company's net sales during this period.  At September
30, 1996 that customer accounted for 24% of the accounts receivable balance.

NOTE 6 - OPERATING LEASE

     In August, 1996 the Company entered into an operating lease for equipment.
The total value of the lease is $305,077 over thirty-six months.  The base
monthly payments are $9,823.  The Company made a security deposit of $222,693.
In consideration for the security deposit, the monthly payments will be reduced
by $1,601 for the first twelve months of the lease.  After the first twelve
months the lessor will refund $61,015 to the Company, reducing the security
deposit to $161,678.  The base monthly payments will be reduced by $1,144 for
the second twelve months.  After twenty-four months, the lessor will refund an
additional $61,015 to the Company, reducing the deposit to $100,663.  The base
monthly payments will be reduced by $686 for the final twelve months.

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

General

Online System Services, Inc. was formed in March 1994, commenced sales in
February 1995 and was in the development stage through December 31, 1995.  The
Company develops, markets and supports sophisticated, high-end Web sites for
customers' use on the Internet or Intranets.  As a part of the anticipated
development of interactive, self service, Web applications for its customers,
the Company has a non-exclusive value added reseller agreement with Edify
Corporation to use and sublicense the Edify "Electronic Workforce" software.
The Company is developing 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. Also, the Company has developed a specialization in the
healthcare industry with the introduction of an integrated network or
"marketspace" of Web sites called "MD Gateway" In addition, the Company markets
and supports "Community Access America", a turnkey package of hardware,
software, documentation, marketing, and technical assistance  that enables a
local cable company, telephone company, newspaper or other entity to provide
Internet access and Web site development to smaller, non-urban communities.

Results of Operations

The Company generates net sales through the sale of 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 Community Access America program, training course fees, and monthly
fees paid by customers for Internet access provided by the Company in the Denver
market.

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 and software sales, respectively.
<TABLE>
<CAPTION>
 
                                         FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                ENDED                           ENDED
                                             SEPTEMBER 30                    SEPTEMBER 30
                                         ---------------------            -------------------
                                         1996             1995            1996           1995
                                         ----             ----            ----           ----
                                              (UNAUDITED)                     (UNAUDITED)
<S>                                      <C>              <C>             <C>           <C>
Net sales:
  Service sales                           67.0%           97.2%            72.7%         64.0%
  Hardware and software sales             33.0             2.8             27.3          36.0
                                         ------         ------            ------       ------
    Total net sales                      100.0           100.0            100.0         100.0
Cost of sales:
  Cost of services                        64.0            61.4             62.5          83.7
  Cost of hardware and software           72.7            67.3             75.9          78.8
                                         ------         ------           ------        ------
     Cost of sales                        66.9            61.6             66.2          81.9
Gross profit                              33.1            38.4             33.8          18.1
                                         ------         ------           ------        ------
 
Operating expenses:
  Marketing and sales expense             49.9            35.3             40.6          33.4
  Product development expense             31.9            44.4             30.7          49.8
  General and administrative expense      64.8           220.0             56.9         163.8
  Depreciation and amortization expense    7.5            10.0              5.7           9.0
                                         ------         ------           ------        ------
    Total operating expenses             154.1           309.7            133.9         256.0
Loss from operations                    (121.0)         (271.3)          (100.1)       (237.9)
  
Net Loss                                (100.7%)        (272.3%)          (89.2%)      (238.4%)
                                         ======         ======           ======        ======
 
</TABLE>

                                      10
<PAGE>
 
Three Months and Nine Months Ended September 30, 1996 and l995 (Unaudited)

The comparisons  of the three-month and nine-month periods for fiscal 1996 to
the similar periods in fiscal 1995 reflect the fact that the Company commenced
business operations in February 1995 and was in the early development stage of
its operations during fiscal 1995.  Net losses were $410,196 and $195,285 for
the three months ended September 30, 1996 and 1995, respectively, and were
$869,497 and $353,684 for the nine months ended September 30, 1996 and 1995,
respectively. The Company expects that expenses during the next several months
will increase at a faster rate than net sales as the Company develops the
infrastructure required to service an expected higher level of operations.  It
is therefore, more likely than not that the Company will continue to incur
operating losses in the fourth quarter of 1996 and for the first two or three
quarters of 1997.  The Company expects to report an operating loss for the full
year ending December 31, 1996.

Net sales for the three months ended September 30, 1996 totaled $407,315,
including $273,043 for service sales and $134,272 for hardware and software
sales.  A sale of a combined package of hardware, software, and services was
made to one customer totalling $143,750 representing approximately 35% of net
sales for the quarter.   Net sales for the three months ended September 30, 1995
were predominantly from two initial customers and totaled $71,720, including
$69,689 for service sales and $2,031 for hardware and software sales.

Net sales for the nine months ended September 30, 1996 totaled $975,254,
including $709,223 for service sales and $266,031 for hardware and software
sales.  The sale to the one customer amounting to $143,750 represented 15% of
total net sales for this nine month period.  The Company does not believe that
its business is substantially dependent on any one customer.  Net sales for the
nine months ended September 30, 1995, were predominantly from two initial
customers and totaled $148,332, including $94,986 for service sales and $53,346
for hardware and software sales.

The increase in net sales for the three and nine-month periods in 1996 compared
to the similar periods in 1995 were due to the development of the Company's
current product and service offerings that were not available in the prior year
periods and to a substantial increase in marketing and sales activities in
general.

Cost of sales as a percentage of net sales was 66.9% for the three months ended
September 30, 1996 and 61.6% for three months ended September 30, 1995.  Cost of
sales as a percentage of net sales was 66.2% for the nine months ended September
30, 1996 and 81.9% for the nine months ended September 30, 1995.   The Company's
gross profit margin on service sales has fluctuated and has been lower during
periods when the Company has hired additional service personnel and incurred
other fixed costs in anticipation of future growth.  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 time periods when service
sales are a greater percentage of total net sales.  The decrease in the cost of
sales as a percentage of net sales in the nine month period of 1996 is due to
the higher level of service sales in the 1996 period and the fixed costs
associated with providing initial services while the Company was in the early
development stage during the first nine months of 1995.

Sales and marketing expenses were $203,357 and $25,290 for the three months
ended September 30, 1996 and 1995, respectively, and were $395,503 and $49,591
for the nine months ended September 30, 1996 and 1995, respectively.  The
increases during the 1996 periods were due to the hiring of new sales and
marketing personnel and associated expenditures.   The Company also increased
the promotion and marketing of its MD Gateway and Community Access America
products.  Sales and marketing expenses also increased during the three months
ended September 30, 1996 as the Company continued to hire and train people for
the sale of Edify Electronic Workforce products.  Because of the potentially
long sales cycle for the sale of the Company's products and services, sales and
marketing expenses are expected to increase at a faster rate than net sales
during the next three to six months resulting in an increased percentage of net
sales for these costs.

Product development expenses were $129,826 and $31,824 for the three months
ended September 30, 1996 and 1995 respectively, and were $299,388 and $73,891
for the nine months ended September 30, 1996 and 1995, respectively.  This
increase reflects the continued development of the Company's products and
services since commencement of sales in February 1995.  Product development
expenses during the three and nine month periods ended September 30, 1996
include enhancements to the Community Access America products, continued
development work on WebQuest and MD Gateway, and initial feasibility studies on
various broadband data transmission products and services. Product development
expenses during the nine month period of 1995 included the development of the
Company's training courses entitled "The Internet Game" and "The
Businessperson's Guide to the Internet" which are primarily being utilized as a
marketing tool to enhance Web development sales activities.   Product
development expenses are expected to continue to increase during the remainder
of 1996 as the Company continues to develop the WebQuest and MD Gateway products
and investigate the feasibility of other products and services.

                                       11

<PAGE>
 
General and administrative expenses were $263,969 and $157,773 for the three
months ended September 30, 1996 and 1995, respectively, and were $554,445 and
$242,961 for the nine months ended September 30, 1996 and 1995, respectively.
This increase reflects the continued development of the Company's infrastructure
including finance, accounting, business development and investor relations
capabilities since commencement of sales in February 1995.

Depreciation and amortization expenses were $30,366 and $7,233 for the three
months ended September 30, 1996 and 1995, respectively, and were $56,881 and
$13,312 for the nine months ended September 30, 1996 and 1995, respectively.
This increase reflects the increase in fixed assets  purchased to support higher
levels of Web site and Internet Access services as well as to support the growth
in the number of employees. During the three months ended September 30, 1996,
the Company enhanced its training facility utilized to educate potential
customers.

Interest income (expense) was $82,462 during the three-month period ended
September 30, 1996 and $106,826 during the nine-month period ending September
30, 1996, and was ($726) for the same periods in 1995.   On 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. During 1995, the Company
began incurring interest expense related to a capital lease.

Liquidity and Capital Resources
 
As of September 30, 1996 the Company had cash and cash equivalents of $6,218,315
and net working capital of $6,474,018 due to the completion during May and June
1996 of an initial public offering including the exercise of the underwriters'
overallotment option 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
nine months ended September 30, 1996, the Company also completed a private
placement of common stock that resulted in net proceeds of $403,670 and the
Company also received $12,500 from the exercise of stock options.

During the nine months ended September 30, 1996, the Company's investing
activities consisted of the purchase of $314,358 of fixed assets.    These
amounts are primarily comprised of computer equipment, communications equipment
and software necessary to provide Internet access and training to host Web sites
and to develop Web sites for customers.  In addition to these amounts, during
the three month period ending September 30, 1996, the Company entered into an
operating lease with Norwest Bank in the amount of $305,000 in order to make
significant upgrades to its web server, access server, and internet
communications capabilities including a state of the art, climate controlled
computer room.  As part of this lease agreement the Company has interest
bearing, restricted cash of $222,693 which will be released over time as lease
payments are made.  In anticipation of future growth, the Company expects to
invest in additional computer equipment, software and office equipment during
the remainder of 1996.

The Company's hardware and software inventory of $84,082 as of September, 1996
consists of  Edify software licenses purchased by the company for resale and are
now being sold as part of its high end interactive Web services as well as
hardware and software components of its Community Access America program.

Accounts receivable balances increased from $98,282 at December 31, 1995 to
$271,727 on Sepember 30, 1996 due to the increased sales level during the
quarter ended September 30, 1996 and a concentration of sales towards the end of
the three month period.  The Company has $88,403 of interest receivable on
September  30, 1996 due to interest earned but not received on Treasury Bills
and other short-term investment securities outstanding.

Trade accounts payables as of September 30, 1996 increased to $252,880 from
$74,990 as of December 31, 1995 due to the increased level of business activity
and associated expenses.

During the nine months ended September 30, 1996, the Company paid $50,814 of
short-term notes that were utilized to help finance the Company's operations
before the private placement and public offering proceeds were available.

As of September 30, 1996, the Company had deferred revenue of $14,013 resulting
from service revenue billed but not earned based on the Company's percentage of
completion revenue recognition policy.

The Company incurred an additional capital lease for expanded telephone
equipment of $5,441 during the nine months ended September 30, 1996 and also
incurred a debt obligation of $30,323 in conjunction with the purchase of
hardware and software during March of 1996.

The Company believes that its cash and cash equivalents and working capital are
adequate to sustain operations for a minimum of the next twelve-month period.
If sufficient cash flow is not being generated at the end of this twelve-month
period, the Company will 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.

                                       12

<PAGE>
 
Forward Looking Information

Information contained in this report, other than historical information, should
be considered forward looking and reflects management's current views 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 conditions and
developments within the Internet and Intranet industries; product development
and technology changes; competition and pricing pressures; length of sales
cycle; variability of sales order flow; and management of growth.

                                       13

<PAGE>
 
PART II.-- OTHER INFORMATION
----------------------------

ITEMS 1-5.  NOT APPLICABLE

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

         (b)  Reports on Form 8-K

              Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
              1934 a current report on Form 8-K was filed October 7, 1996
              reporting a change in the Company's certifying accountant.

                                       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:  November 1, 1996        By  /S/Thomas S. Plunkett
                                   ---------------------
                                    Vice President and
                                    Chief Financial Officer

                                       15
<PAGE>
 
November 1, 1996

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 September 30, 1996
               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 September
30, 1996.

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