<TABLE>
<CAPTION>

Exhibit 99 - Consolidated  financial  statements of America Online,  Inc. for
             the fiscal year ended June 30, 1999,  which  restate and  supersede
             the consolidated financial statements and notes thereto included in
             the Company's  Annual Report on Form 10-K for the fiscal year ended
             June 30, 1999 (as amended May 17, 2000 to reflect the revised Report
             of Independent Auditors from Ernst & Young LLP in Exhibit 99).

                              AMERICA ONLINE, INC.

                           CONSOLIDATED BALANCE SHEETS

                                                                                              June 30,
                                                                                        ------------------
                                                                                           1999     1998
                                                                                          -------- --------
                                                                                            (Amounts in
                                                                                         millions, except
                                              ASSETS                                        share data)
                                              ------
Current assets:
<S>                                                                                        <C>      <C>
Cash and cash equivalents...........................................................       $  887   $  677
Short-term investments..............................................................          537      146
Trade accounts receivable, less allowances of $54 and $34,
  respectively......................................................................          323      192
Other receivables...................................................................           79       93
Prepaid expenses and other current assets...........................................          153      155
                                                                                          -------- --------
Total current assets................................................................        1,979    1,263

Property and equipment at cost, net.................................................          657      503

Other assets:
Investments including available-for-sale securities.................................        2,151      531
Product development costs, net......................................................          100       88
Goodwill and other intangible assets, net...........................................          454      472
Other assets........................................................................            7       17
                                                                                          -------- --------
                                                                                           $5,348   $2,874
                                                                                          ======== ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade accounts payable..............................................................       $   74   $  120
Other accrued expenses and liabilities..............................................          795      461
Deferred revenue....................................................................          646      420
Accrued personnel costs.............................................................          134       78
Deferred network services credit....................................................           76       76
                                                                                          -------- --------
Total current liabilities...........................................................        1,725    1,155

Long-term liabilities:
Notes payable.......................................................................          348      372
Deferred revenue....................................................................           30       71
Other liabilities...................................................................           15        7
Deferred network services credit....................................................          197      273
                                                                                          -------- --------
Total liabilities...................................................................        2,315    1,878

Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued
  and outstanding at June 30, 1999 and 1998, respectively...........................            -        -
Common stock, $.01 par value; 6,000,000,000 shares authorized,
  2,201,787,866 and 1,946,300,104 shares issued and outstanding at
  June 30, 1999 and 1998, respectively..............................................           22       19
Additional paid-in capital..........................................................        2,692    1,422
Accumulated comprehensive income - unrealized gain on
  available-for-sale securities, net................................................          168      145
Retained earnings (accumulated deficit).............................................          151     (590)
                                                                                          -------- --------
Total stockholders' equity..........................................................        3,033      996
                                                                                          -------- --------
                                                                                           $5,348   $2,874
                                                                                          ======== ========

                             See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>



                              AMERICA ONLINE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                 Year ended June 30,
                                                                              ------------------------
                                                                                1999    1998     1997
                                                                                               restated
                                                                              ------- -------- --------
                                                                                (Amounts in millions,
                                                                                except per share data)
Revenues:
<S>                                                                           <C>      <C>     <C>
Subscription services...................................                      $3,321   $2,183  $1,478
Advertising, commerce and other.........................                       1,000      543     308
Enterprise solutions....................................                         456      365     411
                                                                              ------- -------- --------
Total revenues..........................................                       4,777    3,091   2,197

Costs and expenses:
Cost of revenues........................................                       2,657    1,811   1,162
Sales and marketing.....................................                         808      623     679
Product development.....................................                         286      239     195
General and administrative..............................                         408      328     220
Amortization of goodwill and other intangible assets....                          65       24       6
Acquired in-process research and development............                           -       94       9
Merger, restructuring and contract termination charges..                          95       75      73
Settlement charges......................................                           -       17      24
                                                                              ------- -------- --------
Total costs and expenses................................                       4,319    3,211   2,368

Income (loss) from operations...........................                         458     (120)   (171)
Other income, net.......................................                         638       30      10
                                                                              ------- -------- --------
Income (loss) before provision for income taxes.........                       1,096      (90)   (161)
(Provision) benefit for income taxes....................                        (334)      16     (10)
                                                                              ------- -------- --------
Net income (loss).......................................                      $  762    $ (74) $ (171)
                                                                              ======= ======== ========

Earnings (loss) per share:
Earnings (loss) per share-diluted.......................                      $ 0.30   $(0.04) $(0.10)
Earnings (loss) per share-basic.........................                      $ 0.37   $(0.04) $(0.10)
Weighted average shares outstanding-diluted.............                       2,555    1,850   1,676
Weighted average shares outstanding-basic...............                       2,081    1,850   1,676


                             See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                              AMERICA ONLINE, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                                                                                                         Retained
                                                   Preferred Stock      Common Stock       Additional    Accumulated     Earnings
                                                   --------------- ----------------------   Paid-in     Comprehensive  (Accumulated
                                                    Shares  Amount    Shares        Amount  Capital       Income, Net     Deficit)
                                                   -------- ------ ---------------  ------ -----------  ------------- --------------
                                                                                         (Amounts in millions, except share data)

<S>                                                  <C>        <C>  <C>              <C>       <C>           <C>         <C>
Balances at June 30, 1996, restated...............   1,000      $-   1,641,466,932    $16       $716          $2          $(341)

Common stock issued:
   Exercise of options and ESPP...................       -       -     116,658,638      1         93           -              -
   Business acquisitions..........................       -       -      12,391,606      -         82           -              -
   Sale of stock, net.............................       -       -       5,562,000      -        157           -              -
Amortization of compensatory stock options               -       -               -      -          2           -              -
Unrealized gain on
   available-for-sale securities, net.............       -       -               -      -         11          17              -
Tax benefit related to stock options..............       -       -               -      -         25           -              -
Net loss, restated................................       -       -               -      -          -           -           (171)
                                                  --------- ------ ---------------  -----  ---------  ---------------  ----------
Balances at June 30, 1997, restated...............   1,000       -   1,776,079,176     17      1,086          19           (512)
Effect of pooling restatement....................        -       -       2,760,856      -          8           -             (4)
Common stock issued:
   Exercise of options and ESPP...................       -       -     150,643,126      2        131           -              -
   Business acquisitions..........................       -       -       6,060,898      -         80           -              -
   Sale of stock, net.............................       -       -       7,620,048      -          8           -              -
Amortization of compensatory
    stock options.................................       -       -               -      -         33           -              -
Unrealized gain on
   available-for-sale securities, net.............       -       -               -      -         78         126              -
Conversion of preferred stock
   to common stock................................  (1,000)      -       3,136,000      -          -           -              -
Tax expense related to stock options..............       -       -               -      -         (2)          -              -
Net loss, restated................................       -       -               -      -          -           -            (74)
                                                   -------- ------ --------------- ------ ---------- ------------------ ----------
Balances at June 30, 1998.........................       -       -   1,946,300,104     19      1,422         145           (590)
Effect of pooling restatement....................        -       -       8,596,406      -         32           -            (21)
Common stock issued:
   Exercise of options, warrant and ESPP..........       -       -     185,475,716      2        265           -              -
   Sale of stock, net.............................       -       -      47,800,218      1        568           -              -
Amortization of  compensatory
    stock options..................................      -       -               -      -         20           -              -
Unrealized gain on
   available-for-sale securities, net.............       -       -               -      -         13          23              -
Conversion of debt................................       -       -      13,615,422      -         88           -              -
Tax benefit related to stock options..............       -       -               -      -        284           -              -
Net income......................................         -       -               -      -          -           -            762
                                                   -------- ------ --------------- ------ ---------- ------------------ -----------
Balances at June 30, 1999.........................       -      $-   2,201,787,866    $22     $2,692        $168         $  151
                                                   ======== ====== =============== ====== ========== ================== ===========


                                                                 Comprehensive
                                                                 Income (Loss)
                                                                    For The
                                                                  Years Ended
                                                        Total       June 30,
                                                    -----------  --------------


<S>                                                    <C>
Balances at June 30, 1996, restated...............     $393

Common stock issued:
   Exercise of options and ESPP...................       94
   Business acquisitions..........................       82
   Sale of stock, net.............................      157
Amortization of compensatory stock options                2
Unrealized gain on
   available-for-sale securities, net.............       28           17
Tax benefit related to stock options..............       25
Net loss, restated................................     (171)        (171)
                                                     -------   -------------
Balances at June 30, 1997, restated...............      610        $(154)
Effect of pooling restatement....................         4    =============
Common stock issued:
   Exercise of options and ESPP...................      133
   Business acquisitions..........................       80
   Sale of stock, net.............................        8
Amortization of compensatory
    stock options.................................       33
Unrealized gain on
   available-for-sale securities, net.............      204          126
Conversion of preferred stock
   to common stock................................        -
Tax expense related to stock options..............       (2)
Net loss, restated................................      (74)         (74)
                                                       ------   -------------
Balances at June 30, 1998.........................      996        $  52
Effect of pooling restatement....................        11    =============
Common stock issued:
   Exercise of options, warrant and ESPP..........      267
   Sale of stock, net.............................      569
Amortization of  compensatory
    stock options..................................      20
Unrealized gain on
   available-for-sale securities, net.............       36           23
Conversion of debt................................       88
Tax benefit related to stock options..............      284
Net income......................................        762          762
                                                      ------   -------------
Balances at June 30, 1999.........................   $3,033        $ 785
                                                      ======   =============

                             See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                              AMERICA ONLINE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                          Year ended June 30,
                                                                                         ---------------------
                                                                                          1999   1998    1997
                                                                                                        restated

                                                                                         ------ ------- ------
                                                                                         (Amounts in millions)
Cash flows from operating activities:

<S>                                                                                      <C>     <C>    <C>
Net income (loss)......................................................................  $ 762   $ (74) $(171)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:

Non-cash restructuring charges.........................................................      7      32     22
Depreciation and amortization..........................................................    298     191     93
Amortization of deferred network services credit.......................................    (76)    (32)     -
Charge for acquired in-process research and development................................      -      94      9
Compensatory stock options.............................................................     20      33      2
Deferred income taxes..................................................................    334     (18)    (1)
Gain on sale of investments............................................................   (564)    (28)     -
Changes in assets and liabilities, net of the effects of acquisitions and dispositions:
  Trade accounts receivable............................................................   (123)     78   (122)
  Other receivables....................................................................     12     (67)     2
  Prepaid expenses and other current assets............................................    (63)     28    (50)
 Other assets..........................................................................      4      (5)   (15)
  Investments including available-for-sale securities..................................    (16)    (40)   (30)
  Accrued expenses and other current liabilities.......................................    319     141    130
  Deferred revenue and other liabilities...............................................    185     104    262
                                                                                         ------ ------- ------
Total adjustments......................................................................    337     511    302
                                                                                         ------ ------- ------
Net cash provided by operating activities..............................................  1,099     437    131

Cash flows from investing activities:

Purchase of property and equipment.....................................................   (301)   (384)  (230)
Product development costs..............................................................    (49)    (51)   (57)
Proceeds from sale of investments......................................................    769      87     26
Purchase of investments, including available-for-sale securities....................... (2,289)   (166)  (208)
Maturity of investments................................................................    133     103     83
Net (payments) proceeds for acquisitions/dispositions of subsidiaries..................     30     (98)    30
Other investing activities.............................................................    (69)    (22)   (11)
                                                                                         ------ ------- ------
Net cash used in investing activities.................................................. (1,776)   (531)  (367)

Cash flows from financing activities:

Proceeds from issuance of common and preferred stock, net..............................    836     141    251
Proceeds from sale and leaseback of property and equipment.............................      8      70     20
Principal and accrued interest payments on line of credit and debt.....................    (22)     (2)   (22)
Proceeds from line of credit and issuance of debt......................................     65     371      1
                                                                                         ------ ------- ------
Net cash provided by financing activities..............................................    887     580    250
                                                                                         ------ ------- ------
Net increase in cash and cash equivalents..............................................    210     486     14
Cash and cash equivalents at beginning of year.........................................    677     191    177
                                                                                         ------ ------- ------
Cash and cash equivalents at end of year...............................................  $ 887   $ 677  $ 191
                                                                                         ====== ======= ======
Supplemental cash flow information Cash paid during the year for:

Interest...............................................................................  $  17   $  10  $   2


                             See accompanying notes.
</TABLE>


<PAGE>


                              AMERICA ONLINE, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

     America  Online,  Inc. (the  "Company")  was  incorporated  in the state of
Delaware in May 1985.  The Company,  based in Dulles,  Virginia,  is the world's
leader in interactive services, Web brands, Internet technologies and electronic
commerce  services.  America  Online,  Inc.  operates:  two  worldwide  Internet
services, the AOL service, with more than 18 million members, and the CompuServe
service,  with approximately 2 million members;  several leading Internet brands
including  ICQ,  AOL Instant  messenger  and Digital  City,  Inc.;  the Netscape
Netcenter  and  AOL.COM  Internet  portals;  the  Netscape  Communicator  client
software,  including the Netscape Navigator browser; AOL MovieFone, the nation's
number one movie  listing  guide and  ticketing  service;  and Spinner  Networks
Incorporated  and  Nullsoft,  Inc.,  leaders  in  Internet  music.  Through  its
strategic  alliance with Sun  Microsystems,  Inc., the Company also develops and
offers  easy-to-deploy,  end-to-end electronic commerce and enterprise solutions
for companies operating in and doing business on the Internet.

Note 2. Summary of Significant Accounting Policies

     Principles of Consolidation The consolidated  financial  statements include
the accounts of the Company and its subsidiaries.  All significant  intercompany
accounts and transactions have been eliminated.

     Business  Combinations  Business combinations which have been accounted for
under the purchase method of accounting include the results of operations of the
acquired  business  from the date of  acquisition.  Net assets of the  companies
acquired  are  recorded  at  their  fair  value  to the  Company  at the date of
acquisition.  Amounts allocated to acquired  in-process research and development
are expensed in the period of acquisition (see Note 8).

     Other   business   combinations   have   been   accounted   for  under  the
pooling-of-interests   method  of  accounting.   In  such  cases,   the  assets,
liabilities and stockholders' equity of the acquired entities were combined with
the Company's  respective  accounts at recorded  values.  Prior period financial
statements  have been restated to give effect to the merger unless the effect of
the business  combination  is not material to the  financial  statements  of the
Company (see Note 8).

     Revenue Recognition  Subscription services revenues are recognized over the
period that services are provided.  Other revenues, which consist principally of
electronic commerce and advertising  revenues,  enterprise solutions sales which
include  software  licenses  and  services,  as  well as  data  network  service
revenues,  are  recognized  as the services are  performed or when the goods are
delivered.  Deferred revenue consists primarily of prepaid  electronic  commerce
and advertising fees and monthly and annual prepaid  subscription fees billed in
advance.

     Beginning in fiscal 1998,  the Company  adopted  Statement of Position 97-2
"Software  Revenue  Recognition"  as amended by Statement of Position  98-4. The
effect of adoption did not have a material  impact on the  Company's  results of
operations.  The Company  recognizes the revenue  allocable to software licenses
upon  delivery of the software  product to the  end-user,  unless the fee is not
fixed  or  determinable  or   collectibility   is  not  probable.   In  software
arrangements that include more than one element, the Company allocates the total
arrangement fee among each deliverable  based on the relative fair value of each
of the deliverables determined based on vendor-specific objective evidence.

     Property and Equipment  Property and equipment are depreciated or amortized
using the straight-line method over the following estimated useful lives:

           Computer equipment and internal software..   2 to 5 years
           Buildings and related improvements........ 15 to 40 years
           Leasehold improvements....................  4 to 10 years
           Furniture and fixtures....................        5 years

     Effective  July 1, 1998,  the Company  adopted  Statement of Position (SOP)
98-1,  "Accounting for the Costs of Computer Software  Developed or Obtained for
Internal Use", which requires that certain costs for the development of internal
use software  should be  capitalized,  including  the costs of coding,  software
configuration, upgrades and enhancements. The adoption of this pronouncement did
not have a material effect on the Company's financial results.

     Subscriber  Acquisition  Costs and  Advertising  The Company  accounts  for
subscriber  acquisition costs pursuant to Statement of Position 93-7, "Reporting
on Advertising  Costs" ("SOP 93-7").  Included in sales and marketing expense is
both brand and acquisition  advertising across the Company's multiple brands and
was $599 million,  $476 million and $524 million for the fiscal years ended June
30, 1999, 1998 and 1997, respectively.

     Product Development Costs The Company's  subscription  service is comprised
of  various  features  which  contribute  to the  overall  functionality  of the
service. The overall functionality of the service is delivered primarily through
the  Company's  four products  (the AOL service and the  CompuServe  service for
Windows  and  Macintosh).   The  Company  capitalizes  costs  incurred  for  the
production of computer  software  used in the sale of its services.  Capitalized
costs  include  direct labor and related  overhead for software  produced by the
Company and the cost of software purchased from third parties.  All costs in the
software  development  process which are classified as research and  development
are expensed as incurred until  technological  feasibility has been  established
("beta").  Once technological  feasibility has been established,  such costs are
capitalized  until the  software  has  completed  beta  testing and is generally
available.  To the extent the Company retains the rights to software development
funded by third  parties,  such costs are  capitalized  in  accordance  with the
Company's  normal  accounting  policies.  Amortization,  a cost of  revenue,  is
provided on a  product-by-product  basis, using the greater of the straight-line
method or the current year revenue as a percentage  of total  revenue  estimates
for the related software product, not to exceed five years, commencing the month
after the date of product release.  Quarterly,  the Company reviews and expenses
the unamortized  cost of any feature  identified as being impaired.  The Company
also reviews  recoverability  of the total  unamortized cost of all features and
software  products in relation to estimated  online  service and relevant  other
revenues and, when necessary,  makes an appropriate adjustment to net realizable
value.

     Capitalized product development costs consist of the following:

<TABLE>

                                      Year ended
                                       June 30,

                                      -----------
         (in millions)                1999  1998
                                      ----- -----
<S>                                   <C>    <C>
         Balance, beginning of year.. $ 88   $73
         Costs capitalized...........   45    51
         Costs amortized.............  (33)  (36)
                                      ----- -----
         Balance, end of year........ $100   $88
                                      ===== =====
</TABLE>


     The accumulated  amortization of product  development  costs related to the
production of computer software totaled $106 million and $72 million at June 30,
1999 and 1998, respectively.

     Based on the Company's product  development process related to the Netscape
Enterprise group, costs incurred between completion of the working model and the
point at which the product is ready for general release have been  insignificant
and have not been capitalized.

     Included in product  development  costs are research and development  costs
totaling  $179  million,  $182  million  and $139  million,  and  other  product
development  costs  totaling  $107  million,  $57 million and $56 million in the
years ended June 30, 1999, 1998 and 1997, respectively.

     Foreign  Currency  Translation and Hedging of Intercompany  Balances Assets
and  liabilities  of  the  Company's   wholly-owned   foreign  subsidiaries  are
translated  into U.S.  dollars at year-end  exchange  rates,  and  revenues  and
expenses are translated at average rates prevailing during the year. Translation
adjustments  are  included  as a  component  of  stockholders'  equity.  Foreign
currency transaction gains and losses, which have been immaterial,  are included
in results of operations. In June 1998, the Company initiated hedging activities
to mitigate the impact on intercompany  balances of changes in foreign  exchange
rates. In general,  these foreign currency forward exchange  contracts mature in
three months or less.  The  estimated  fair value of the contracts is immaterial
due to their short-term nature.

     Investments  The  Company has various  investments,  including  foreign and
domestic  joint  ventures,  that are  accounted  for under the equity  method of
accounting.  All  investments  in which the  Company has the ability to exercise
significant  influence  over the investee,  but less than a  controlling  voting
interest,  are accounted for under the equity  method of  accounting.  Under the
equity method of accounting,  the Company's share of the investee's  earnings or
loss is included in consolidated operating results. To date, the Company's basis
and current commitments in its investments accounted for under the equity method
of  accounting  have been  minimal.  As a  result,  these  investments  have not
significantly  impacted the  Company's  results of  operations  or its financial
position.

     All other  investments,  for which the Company does not have the ability to
exercise significant  influence or for which there is not a readily determinable
market value,  are accounted for under the cost method of accounting.  Dividends
and other  distributions  of earnings  from  investees,  if any, are included in
income when declared.  The Company periodically  evaluates the carrying value of
its investments accounted for under the cost method of accounting and as of June
30,  1999 and  1998,  such  investments  were  recorded  at the lower of cost or
estimated net realizable value.

     Goodwill and Other Intangible  Assets Goodwill and other intangible  assets
relate to purchase  transactions and are amortized on a straight-line basis over
periods  ranging  from 2-10  years.  As of June 30,  1999 and 1998,  accumulated
amortization  was  $89  million  and  $24  million,  respectively.  The  Company
periodically evaluates whether changes have occurred that would require revision
of the remaining  estimated  useful life of the assigned  goodwill or render the
goodwill not recoverable.  If such circumstances arise, the Company would use an
estimate of the  undiscounted  value of expected future  operating cash flows to
determine whether the goodwill is recoverable.

     Cash, Cash Equivalents and Short-term Investments The Company considers all
highly liquid  investments with an original  maturity of three months or less to
be cash equivalents.  Short-term investments of $537 million and $146 million as
of the fiscal years ended June 30, 1999 and 1998,  respectively,  are carried at
cost which approximates fair market value and mature within one year.

     Trade  Accounts  Receivables  The carrying  amount of the  Company's  trade
accounts receivables  approximate fair value. The Company recorded provisions of
$33 and $25 million  and  write-offs  of $13 and $14  million  during the fiscal
years ended June 30, 1999 and 1998, respectively.

     Investments  Including   Available-For-Sale   Securities  The  Company  has
classified   all   debt   and   equity    securities   as    available-for-sale.
Available-for-sale  securities are carried at fair value,  with unrealized gains
and losses  reported  as a separate  component  of  stockholders'  equity net of
applicable income taxes.  Realized gains and losses and declines in value judged
to be  other-than-temporary  on  available-for-sale  securities  are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis.

     As of June 30, 1999, the Company had available-for-sale  equity investments
in public  companies with a fair market value of $1,956 million and a cost basis
of $1,686  million.  The unrealized  gain of $168 million,  net of tax, has been
recorded as a separate component of stockholders' equity. Included in the $1,956
million is an  investment of $1.5 billion in a General  Motors  equity  security
related to the strategic  alliance the Company  entered with Hughes  Electronics
Corporation  ("Hughes").  For additional  information regarding this investment,
refer to Note 8. During  fiscal 1999,  the Company sold  investments  in Excite,
Inc. for a net gain of approximately $567 million.

     As of June 30, 1998, the Company had available-for-sale  equity investments
in public companies with a fair market value of $286 million and a cost basis of
$52 million.  The unrealized gain of $145 million, net of tax, has been recorded
as a separate component of stockholders' equity. Included in the $286 million is
an investment in Excite, Inc. of $250 million.

     As of June 30,  1999,  the  Company had  approximately  $12 million of debt
securities  (included in investments  including  available-for-sale  securities)
with  maturity  dates in fiscal years 2002 and 2004.  As of June 30,  1998,  the
Company  had  approximately   $47  million  of  debt  securities   (included  in
investments  including  available-for-sale  securities)  with  similar  maturity
periods. The cost of these debt securities approximated fair market value.

     In January 1997, the Securities  and Exchange  Commission  issued new rules
requiring  disclosure of the Company's  accounting  policies for derivatives and
market  risk  disclosure.  The  Company  does not have any  material  derivative
financial  instruments  as of June 30, 1999, and believes that the interest rate
risk  associated  with  its  borrowings  and  market  risk  associated  with its
available-for-sale  securities  are not material to the results of operations of
the Company. The  available-for-sale  securities subject the Company's financial
position  to market rate risk.  The  Company  sells  products  to  customers  in
diversified  industries,  primarily in the Americas,  which includes  Canada and
Latin America,  Europe and the Asia Pacific region. The Company performs ongoing
credit evaluations of its customers'  financial condition and generally does not
require  collateral on product sales. The Company maintains  reserves to provide
for  estimated  credit  losses.  Actual  credit  losses  could  differ from such
estimates.

     Financial  Instruments The carrying amounts for the Company's cash and cash
equivalents,  other receivables,  other assets, trade accounts payable,  accrued
expenses and liabilities and other liabilities  approximate fair value. The fair
market  value  for  notes  payable  (see  Note  12)  and  investments  including
available-for-sale securities is based on quoted market prices where available.

     Barter  Transactions  The Company  barters  advertising  for  products  and
services.  Such  transactions  are recorded at the  estimated  fair value of the
products or services  received or given.  Revenue  from barter  transactions  is
recognized when  advertising is provided,  and services  received are charged to
expense when used. Barter transactions are immaterial to the Company's statement
of operations for all periods presented.

     Net Income (Loss) per Common Share The Company calculates net income (loss)
per share as  required  by SFAS No.  128,  "Earnings  per  Share."  SFAS No. 128
replaced the  calculation  of primary and fully diluted  earnings per share with
the basic and diluted  earnings per share.  Unlike  primary  earnings per share,
basic earnings per share exclude any dilutive effect of stock options,  warrants
and convertible securities (see Note 7).

     Stock-Based  Compensation  During 1997,  the Company  adopted SFAS No. 123,
"Accounting for Stock-Based  Compensation." The provisions of SFAS No. 123 allow
companies  to either  expense the  estimated  fair value of stock  options or to
continue  to follow the  intrinsic  value  method set forth in APB  Opinion  25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net income  (loss) had the fair value of the options  been  expensed.
The Company has elected to continue to apply APB 25 in accounting  for its stock
option incentive plans (see Note 16).

     Reclassification  Certain  amounts in prior years'  consolidated  financial
statements have been reclassified to conform to the current year presentation.

     Use of Estimates The preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     Recent   Pronouncements   The  FASB  recently  issued  Statement  No.  137,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities-Deferral  of
Effective Date of FASB Statement No. 133". The Statement defers for one year the
effective date of FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging  Activities".  The rule now will apply to all fiscal quarters of all
fiscal years  beginning  after June 15, 2000. In June 1998, the FASB issued SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities," which
is required to be adopted in years  beginning after June 15, 1999. The Statement
permits  early  adoption as of the  beginning  of any fiscal  quarter  after its
issuance. The Statement will require the Company to recognize all derivatives on
the  balance  sheet  at fair  value.  Derivatives  that are not  hedges  must be
adjusted to fair value through income.  If the derivative is a hedge,  depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments  through earnings or recognized in other  comprehensive  income
until the hedged item is recognized in earnings.  The  ineffective  portion of a
derivative's  change in fair value will be  immediately  recognized in earnings.
The Company has not yet determined if it will early adopt and what the effect of
SFAS No. 133 will be on the earnings and financial position of the Company.

     SOP 98-9,  "Modification of SOP 97-2,  Software Revenue  Recognition,  With
Respect  to Certain  Transactions"  was issued in  December  1998 and  addresses
software  revenue   recognition  as  it  applies  to  certain   multiple-element
arrangements.  SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of
a  Provision  of SOP 97-2",  to extend the  deferral of  application  of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions  entered into in
fiscal years  beginning  after March 15, 1999.  The Company will comply with the
requirements  of this SOP as they become  effective  and this is not expected to
have a material effect on the Company's revenues and earnings.

Note 3. Restatement and other adjustments

         On October 29, 1996,  AOL  announced  that as of September 30, 1996, it
would write off the entire amount of certain  advertising  costs ("DMAC") it had
previously  capitalized.  AOL stated that the write-off was necessary to reflect
changes  in  its  evolving   business  model,   including  reduced  reliance  on
subscriber's  fees as the  company  developed  other  revenue  sources.  AOL had
responded to the competitive  environment by adopting an  unlimited-use  pricing
plan and,  by writing  off DMAC,  acknowledged  it could not rely on its revenue
history  under a different  pricing model as support for the  recoverability  of
DMAC.  The  Securities  and Exchange  Commission  ("SEC") has  recently  entered
findings  regarding  its views of AOL's  capitalization  of DMAC between July 1,
1994 and  October  29,  1996.  The SEC has found  that AOL  could  not  reliably
forecast  future  customer  behavorial  patterns  with  the  requisite  level of
certainty  necessary to justify the  capitalization  of these  advertising costs
because of the  volatile  nature of the  Internet  marketplace  during that time
period.  AOL has consented to the entry of an order making those  findings,  but
neither admits nor denies any of the SEC's allegations or findings in the order.
As a result of the  SEC's  findings,  AOL has  agreed  to a  restatement  of its
financial statements for the year ended June 30, 1997.

         On October 28, 1999,  the Board of Directors of the Company  declared a
two-for-one  common stock split, to be effected in the form of a stock dividend.
On the payment date of November 22, 1999,  stockholders  received one additional
share for each share owned on the record date of November 8, 1999.  Accordingly,
all data shown in the accompanying  consolidated  financial statements and notes
has been  retroactively  adjusted  to reflect the stock  splits.  On October 28,
1999, the Company's stockholders approved an amendment to the Company's Restated
Certificate  of  Incorporation  to increase the  authorized  number of shares of
common stock from 1,800,000,000 to  6,000,000,000.The  impact of the restatement
and the other adjustments noted are as follows:

<TABLE>

                                              Year Ended
                                             June 30, 1997
                                           -----------------
                                           Amounts    Per
                                              in     share
                                           millions amounts
                                           -------- --------
<S>                                         <C>     <C>
Net income (loss) as originally reported... $(485)  $(0.29)
Reversals of capitalization and
  Amortization of DMAC.....................   (71)   (0.04)
Reversal of write-off of DMAC..............   385     0.23
Net loss as restated....................... $(171)  $(0.10)
</TABLE>


Note 4. Merger/Restructuring Charges

     During  the  quarter  ended  June 1999,  the  Company  recorded a charge of
approximately  $15 million of direct costs  primarily  related to the mergers of
MovieFone,  Inc.  ("MovieFone"),  Spinner Networks Incorporated  ("Spinner") and
NullSoft,  Inc.  ("NullSoft").  These charges primarily  consisted of investment
banker fees,  severance and other personnel costs, fees for legal and accounting
services, and other expenses directly related to the transaction.

     During the  quarter  ended March  1999,  the  Company  recorded a charge of
approximately  $78 million of direct costs  primarily  related to the mergers of
Netscape and When,  Inc.  and the  Company's  reorganization  plans to integrate
Netscape's  operations  and build on the  strengths  of the  Netscape  brand and
capabilities.   This  charge  primarily  consists  of  investment  banker  fees,
severance and other personnel costs (related to the elimination of approximately
850  positions),  fees for legal and  accounting  services,  and other  expenses
directly related to the transaction.

     During  the  quarter   ended   December   1998,   the  Company   recognized
approximately  $2 million in merger related costs in connection  with the merger
of AtWeb, Inc. These expenses were primarily associated with fees for investment
banking,  legal and  accounting  services,  severance  costs  and other  related
charges in connection with the transaction.

     The following table summarizes the activity in the 1999 accruals during the
period ended June 30, 1999. The balance of the restructuring accrual at June 30,
1999 is included in other accrued  expenses and liabilities on the  consolidated
balance sheet and is anticipated to be paid within 12 months.

<TABLE>

(in millions)
                                  Restructuring/                       Balance
                                     Merger       Non Cash             June 30,
                                    Charges        Items     Payments    1999
                                  -------------   --------   --------   --------
Banking, legal, regulatory
<S>                                    <C>           <C>        <C>       <C>
  and accounting fees...........       $49           $  -       $(45)     $ 4
Severance and related costs.....        27              -        (16)      11
Facilities shutdown costs.......         9              -         (1)       8
Miscellaneous expenses..........        10             (7)        (6)      (3)
                                  -------------   --------   --------   --------
Total...........................       $95           $ (7)      $(68)     $20
                                  =============   ========   ========   ========
</TABLE>

     In  connection  with a  restructuring  plan adopted in the third quarter of
fiscal 1998, the Company recorded a $35 million  restructuring charge associated
with the  restructuring of its former AOL Studios brand group. The restructuring
included  the  exiting  of  certain  business  activities,  the  termination  of
approximately  160  employees  and the  shutdown  of  certain  subsidiaries  and
facilities.

     During fiscal 1998, the Company recorded a $35 million restructuring charge
associated  with actions  aimed at reducing its cost  structure,  improving  its
competitiveness and restoring  sustainable  profitability  mainly related to the
Netscape Enterprise group. The restructuring plan resulted from decreased demand
for certain Netscape products and the adoption of a new strategic direction. The
restructuring   included  a  reduction  in  the  workforce   (approximately  400
employees),  the closure of certain facilities,  the write-off of non-performing
operating  assets,  and  third-party  royalty  payment  obligations  relating to
canceled contracts.

     As of June 30, 1999, all of the restructuring  activities related to fiscal
1998 has been completed.

     In connection  with a  restructuring  plan adopted in the second quarter of
fiscal 1997, the Company recorded a $49 million  restructuring charge associated
with the Company's change in business model, the  reorganization  of the Company
into three operating units,  the termination of approximately  300 employees and
the shutdown of certain operating  divisions and  subsidiaries.  As of September
30, 1997,  all of the  restructuring  activities  had been  completed  and, as a
result, the Company reversed $1 million of the original restructuring accrual.

Note 5. Contract Termination Charge

     In fiscal 1997, the Company recorded a contract  termination  charge of $24
million,  which consisted of unconditional  payments associated with terminating
certain information  provider contracts,  which became uneconomic as a result of
the Company's  introduction of flat-rate pricing in December 1996. Subsequent to
the contract  terminations,  the Company  entered into new agreements with these
information providers.

Note 6. Settlement Charges

     In fiscal 1998, the Company recorded a net settlement charge of $18 million
in connection  with the settlement of the Orman v. America Online,  Inc.,  class
action  lawsuit  filed in the U.S.  District  Court for the Eastern  District of
Virginia alleging  violations of federal securities laws between August 1995 and
October 1996. As of June 30, 1999,  the Company has paid out  approximately  $35
million and has a receivable of $17 million  related to the estimated  insurance
receipts in other receivables.

     In fiscal 1997, the Company recorded a settlement  charge of $24 million in
connection with a legal settlement  reached with various State Attorneys General
and a preliminary legal settlement reached with various class action plaintiffs,
to  resolve  potential  claims  arising  out of the  Company's  introduction  of
flat-rate pricing and its representation  that it would provide unlimited access
to its subscribers.  Pursuant to these  settlements,  the Company agreed to make
payments to  subscribers,  according to their usage of the AOL service,  who may
have been injured by their reliance on the Company's claim of unlimited  access.
These  payments do not represent  refunds of online  service  revenues,  but are
rather  the  compromise  and  settlement  of  allegations   that  the  Company's
advertising  of unlimited  access under its  flat-rate  plan  violated  consumer
protection  laws. In fiscal 1998, the Company  revised its estimate of the total
liability  associated with these matters and reversed $1 million of the original
settlement accrual.

Note 7. Earnings (Loss) Per Share

     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings (loss) per share for the years ended June 30, 1999, 1998 and 1997:

<TABLE>

(in millions except for per share data)                                           1999     1998     1997
                                                                                                  Restated
                                                                                -------- -------- --------
Basic earnings per share:

<S>                                                                             <C>      <C>      <C>
Net income (loss) available to common shareholders..............................$   762  $   (74) $  (171)
                                                                                -------- -------- --------
Weighted average shares outstanding.............................................  2,081    1,850    1,676

Basic earnings (loss) per share.................................................$  0.37  $ (0.04) $ (0.10)
                                                                                ======== ======== ========

Diluted earnings per share:
Net income (loss) available to common shareholders..............................$   762  $   (74) $  (171)
Interest on convertible debt, net of tax........................................     10        -        -
                                                                                -------- -------- --------
Adjusted net income (loss) available to common shareholders
   assuming conversion..........................................................$   772  $   (74) $  (171)
                                                                                -------- -------- --------
Weighted average shares outstanding.............................................  2,081    1,850    1,676
Effect of dilutive securities:
   Employee stock options.......................................................    382        -        -
   Warrants.....................................................................     40        -        -
   Convertible debt.............................................................     52        -        -
                                                                                -------- -------- --------
Adjusted weighted average shares and assumed conversions........................  2,555    1,850    1,676
                                                                                ======== ======== ========
Diluted earnings (loss) per share...............................................$  0.30  $ (0.04) $ (0.10)
                                                                                ======== ======== ========
</TABLE>


Note 8. Business Developments

Purchase Transactions

   Acquisition of Mirabilis, Ltd.

     In June 1998, the Company purchased the assets, including the developmental
ICQ instant communications and chat technology,  and assumed certain liabilities
of  Mirabilis,  Ltd.  ("Mirabilis")  for $287 million in cash.  Mirabilis  was a
development  stage  enterprise  that had  generated  no  revenues.  In addition,
contingent purchase payments,  based on future performance levels, of up to $120
million  may be made over three years  beginning  in the  Company's  fiscal year
2001. The  acquisition was accounted for under the purchase method of accounting
and,  accordingly,  the results of  operations  are  included  in the  financial
statements as of the date of acquisition,  and the assets and  liabilities  were
recorded  based upon their fair values at the date of  acquisition.  The Company
has  allocated  the excess  purchase  price over the fair value of net  tangible
assets acquired to the following  identifiable  intangible assets:  goodwill and
strategic  value,  existing  technology,  base of trial users, ICQ tradename and
brand and acquired in-process research and development.

     In  connection  with the  acquisition  of Mirabilis,  the Company  recorded
approximately  $228 million in goodwill and other intangible  assets,  which are
being amortized on a straight-line basis over periods of five to ten years.

Acquisition of CompuServe Online Services Business

     In January 1998, the Company consummated a Purchase and Sale Agreement (the
"Purchase and Sale") by and among the Company, ANS Communications, Inc. ("ANS"),
a  then  wholly-owned   subsidiary  of  the  Company,  and  MCI  WorldCom,  Inc.
("WorldCom")  pursuant to which the Company  transferred  to WorldCom all of the
issued and outstanding  capital stock of ANS in exchange for the online services
business  of  CompuServe  Corporation  ("CompuServe"),  which  was  acquired  by
WorldCom  shortly  before the  consummation  of the Purchase and Sale,  and $147
million  in  cash  (excluding  $15  million  in  cash  received  as  part of the
CompuServe online services business and after purchase price adjustments made at
closing).  The  transaction  was  accounted  for  under the  purchase  method of
accounting and, accordingly, the assets and liabilities were recorded based upon
their fair values at the date of acquisition. As a result of these transactions,
the excess of the cash and the fair value of the  CompuServe  business  received
over the book value of ANS amounted to $381 million.  This balance is classified
as current and long-term deferred network services credit and is being amortized
on a  straight-line  basis over a five-year term (equal to the term of a network
services  agreement  entered  into with  WorldCom)  as a  reduction  of  network
services expense within cost of revenues.

     In connection  with the  acquisition  of CompuServe,  the Company  recorded
approximately  $127 million in goodwill and other intangible  assets,  which are
being amortized on a straight-line basis over periods of three to seven years.

     Immediately  after the consummation of the Purchase and Sale, the Company's
European  partner,  Bertelsmann  AG,  paid $75  million to the Company for a 50%
interest in a newly  created joint  venture to operate the  CompuServe  European
online  service.  Both the Company and Bertelsmann AG invested an additional $25
million in cash in this joint venture. The Company accounts for this transaction
under  the  equity  method of  accounting  in  accordance  with the terms of the
securities issued in the joint venture.

Other Purchase Transactions

     In fiscal  1998,  the Company  acquired  Personal  Library  Software,  Inc.
("PLS"),   a  developer  of  information   indexing  and  search   technologies,
NetChannel,  Inc.  ("NetChannel"),  a  Web-enhanced  television  company and the
remaining equity  interests of Actra Business Systems LLC ("Actra"),  a designer
of Internet commerce applications.  The Company purchased all of the outstanding
capital stock of each of the corporations and the limited  liability company and
assumed all of their  outstanding  stock options in exchange for an aggregate of
approximately  6.6 million  shares of the  Company's  common  stock and options,
approximately $16 million in cash payments,  the assumption of approximately $21
million in liabilities  and $2 million in transition  costs.  The total purchase
price for these transactions was approximately $114 million.

     In  fiscal  1997,  the  Company  acquired  Portola   Communications,   Inc.
("Portola"),  a builder  of  high-performance  messaging  systems,  DigitalStyle
Corporation  ("DigitalStyle"),  a developer of Web graphics tools and Java-based
animation and the  ImagiNation  Network,  Inc.  ("INN"),  an  interactive  games
company.  The Company purchased all of the outstanding  capital stock of each of
the corporations and assumed all of their  outstanding stock options in exchange
for an aggregate of  approximately  9.4 million  shares of the Company's  common
stock and options and approximately $3 million in transition costs. The purchase
price for the acquisitions was approximately $76 million.

     In connection with the above mentioned purchase  transactions,  the Company
recorded charges for acquired in-process  research and development  ("IPR&D") of
approximately   $94  million  in  the  fiscal  year  ended  June  30,  1998  and
approximately  $9 million in the fiscal  year ended June 30,  1997.  Any related
purchased IPR&D for each of the above acquisitions  represents the present value
of the estimated  after-tax cash flows expected to be generated by the purchased
technology,  which, at the acquisition dates, had not yet reached  technological
feasibility.  The cash flow  projections for revenues were based on estimates of
relevant  market  sizes  and  growth  factors,  expected  industry  trends,  the
anticipated  nature and timing of new product  introductions  by the Company and
its competitors,  individual product sales cycles and the estimated life of each
product's underlying  technology.  Estimated operating expenses and income taxes
were  deducted  from  estimated  revenue  projections  to  arrive  at  estimated
after-tax cash flows.  Projected  operating expenses include cost of goods sold,
marketing  and  selling  expenses,  general  and  administrative  expenses,  and
research and  development,  including  estimated  costs to maintain the products
once they have been introduced into the market and are generating  revenue.  The
remaining  identified  intangibles,  including goodwill that may result from any
future contingent purchase payments,  will be amortized on a straight-line basis
over lives ranging from 5 to 10 years.

     The following  unaudited pro forma  information has been prepared  assuming
that the  sale of ANS and the  acquisitions  of  Portola,  DigitalStyle,  Actra,
CompuServe  and  Mirabilis  had taken place at the  beginning of the  respective
periods  presented.  The amount of the  aggregate  purchase  price  allocated to
acquired IPR&D for each  applicable  acquisition  has been excluded from the pro
forma  information,  as it is a  non-recurring  item.  The pro  forma  financial
information  is not  necessarily  indicative of the combined  results that would
have occurred had the  acquisitions  taken place at the beginning of the period,
nor is it  necessarily  indicative of results that may occur in the future.  The
proforma effect of the PLS,  NetChannel and INN  transactions are immaterial for
all  periods  presented  and  therefore  are  not  included  in  the  pro  forma
information.

                                                      Pro Forma
                                                    For the year
                                                   ended June 30,
                                                   ---------------
              (in millions, except per share data)       1998
                                                   ---------------
                                                     (unaudited)
              Revenue.............................     $3,229
              Loss from operations................       $(57)
              Net Loss............................       $(11)
              Loss per share-diluted..............     $(0.01)
              Loss per share-basic................     $(0.01)

Pooling Transactions

     In  March  1999,   the   Company   completed   its  merger  with   Netscape
Communications Corporation ("Netscape"), in which Netscape became a wholly-owned
subsidiary  of the  Company.  The Company  exchanged  approximately  190 million
shares of common stock for all the  outstanding  common shares of Netscape.  The
merger was  accounted  for under the  pooling-of-interests  method of accounting
and, accordingly,  the accompanying financial statements and footnotes have been
restated to include the operations of Netscape for all periods presented. During
the quarter ended March 31, 1999, the Company incurred approximately $25 million
in transition and retention costs,  which was charged to operations as incurred.
For the years ended June 30, 1999  (through  the date of the  merger),  1998 and
1997, Netscape's revenues were approximately $461 million, $452 million and $461
million,  respectively.  For the years ended June 30, 1999  (through the date of
the merger), 1998 and 1997, Netscape's net income (loss) was approximately $(77)
million, $(159) million and $14 million, respectively. See Note 4 for additional
information.

     During  fiscal 1999,  the Company  completed  mergers with  Nullsoft,  Inc.
("Nullsoft")  and Spinner  Networks  Incorporated  ("Spinner"),  companies  that
provide  Internet  music,  When,  Inc.  ("When.com"),  a company that provides a
personalized  event directory and calendar  services,  AtWeb, Inc. ("AtWeb") and
PersonaLogic,  Inc.  ("PersonaLogic").  The Company exchanged approximately 16.4
million  shares of common stock for all the  outstanding  capital stock of these
companies.  These  mergers  were  accounted  for under the  pooling-of-interests
method of accounting.  As the combined results of these companies is material to
the  Company's  net income  (loss) for the fiscal year ended June 30, 1998,  the
accompanying  financial  statements have been restated to include the operations
of these companies for all periods presented.  For the year ended June 30, 1999,
these companies had revenues of approximately $2 million through the date of the
merger and all prior  years were  immaterial.  For the years ended June 30, 1999
(through  the  dates of the  mergers),  1998 and  1997,  the net loss for  these
companies   was   approximately   $18  million,   $8  million  and  $3  million,
respectively. See Note 4 for additional information.

     In May 1999,  the  Company  completed  its  merger  with  MovieFone,  Inc.,
("MovieFone").  The Company exchanged approximately 8.6 million shares of common
stock for all the  outstanding  common and  preferred  shares of  MovieFone.  As
MovieFone's  historical  results of operations  were not material in relation to
those of AOL, the financial information prior to the quarter ended June 30, 1999
has  not  been  restated  to  reflect  the  merger.  See  Note 4 for  additional
information.

     In December  1997,  the  Company  completed  its merger with KIVA  Software
Corporation ("KIVA"). The Company exchanged approximately 10.8 million shares of
common  stock for all of the  outstanding  capital  stock and options of KIVA, a
privately  held company.  The merger was treated as a  pooling-of-interests  for
accounting purposes,  and accordingly the historical financial statements of the
Company  have been  restated as if the merger  occurred at the  beginning of the
earliest  period  presented.  In connection with the business  combination,  the
Company incurred direct  transaction  costs of  approximately $6 million,  which
consisted  primarily  of fees  for  investment  banking,  legal  and  accounting
services  incurred in conjunction with the business  combination.  For the years
ended June 30, 1998 (through the date of the merger) and 1997,  KIVA's  revenues
were approximately $4 million and $1 million,  respectively. For the years ended
June 30, 1998  (through  the date of the  merger) and 1997,  KIVA's net loss was
approximately $3 million and $5 million, respectively.

   Other Business Developments

     In June 1999,  the  Company  announced  a  strategic  alliance  with Hughes
Electronics  Corporation  ("Hughes") to develop and market  uniquely  integrated
digital entertainment and Internet services nationwide. This new alliance builds
on the Company's "AOL Anywhere"  strategy as well as providing  another means of
higher speed access to its  subscribers.  The Companies will launch an extensive
cross-marketing  initiative  to package  and extend the reach of both AOL TV and
DirecTV.  Under  the  agreement,  the  Company  made  a $1.5  billion  strategic
investment in a General Motors preference  stock,  which carries a 6-1/4% coupon
rate and has a mandatory  conversion  into  General  Motors Class H common stock
(GMH) in three years.

     In November  1998,  the Company  announced  a strategic  alliance  with Sun
Microsystems,   Inc.  ("Sun")  to  jointly  develop  a  comprehensive  suite  of
easy-to-deploy,  end-to-end  solutions to help  companies  and Internet  service
providers  rapidly  enter  the  electronic   commerce  market  and  scale  their
electronic  commerce  operations.  Sun will  become a lead  systems  and service
provider to the Company and the  Company is  committed  to purchase  systems and
services  worth  approximately  $400 million at list price from Sun through 2002
for its electronic  commerce  partners and its own use. The Company will receive
more than $350 million in licensing,  marketing and  advertising  fees from Sun,
plus  significant  minimum  revenue  commitments of $975 million,  over the next
three years.

Note 9. Segment Information

      Effective  June 30, 1999, the Company  adopted SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information." Certain information is
disclosed,  per SFAS No. 131,  based on the way management  organizes  financial
information for making operating decisions and assessing performance.

     The Company currently has two major lines of businesses organized into four
product groups who all share the same infrastructure.

      The Interactive  Online Services  business is comprised of the Interactive
Services  group,  the  Interactive  Properties  group and the AOL  International
group.  The  Interactive  Services  group  operates  the  Company's  interactive
products:  the AOL and  CompuServe  services and their related brand and product
extensions;  Netscape Netcenter;  and the Netscape Communicator client software,
including   the  Netscape   Navigator   browser.   The  new  product  group  has
responsibility  for  broadband  development  and AOL devices like AOL TV, and is
charged with rapidly delivering high-quality, world-class products, features and
functionality  across all  branded  services  and  properties.  The  Interactive
Properties  Group  oversees  ICQ,  Digital  City,  MovieFone,  Direct  Marketing
Services  (DMS),  Spinner and Nullsoft ,  developer of the Winamp and  SHOUTcast
brands.  This group is responsible  for building new revenue  streams by seeking
out  opportunities  to build or acquire  branded  properties that operate across
multiple services or platforms. The AOL International Group oversees the AOL and
CompuServe services outside of the U.S. The AOL International Group operates the
AOL and CompuServe  brands in Europe with its joint venture partner  Bertelsmann
AG; AOL Canada,  a wholly-owned  subsidiary of America Online,  Inc.; AOL Japan,
with its joint venture  partners  Mitsui and Nikkei;  and AOL in Australia  with
Bertelsmann.  America  Online  plans to launch  services in Hong Kong with China
Internet Corporation and in Latin America with the Cisneros Group.

      The Enterprise  Solutions business is comprised of the Netscape Enterprise
Group.  This  segment  focuses  on  providing  businesses  a range  of  software
products,  technical support,  consulting and training services.  These products
and  services   historically   have  enabled   businesses  and  users  to  share
information, manage networks and facilitate electronic commerce.

      In November 1998,  America  Online entered into a strategic  alliance with
Sun Microsystems,  Inc., a leader in network computing products and services, to
accelerate the growth of electronic  commerce.  The strategic  alliance provides
that,  over a three year period,  the Company will develop and market,  together
with Sun,  client  software  and network  application  and server  software  for
electronic commerce,  extended communities and connectivity,  including software
based in part on the  Netscape  code  base,  on Sun code and  technology  and on
certain  America  Online  services  features,   to  business   enterprises.   In
combination  with dedicated  resources from Sun, the Netscape  Enterprise  Group
delivers  easy-to-deploy,  end-to-end  solutions to help  business  partners and
other companies put their businesses online.

      While  there  are no  intersegment  revenues  between  the two  reportable
segments,  shared support service functions such as human resources,  facilities
management and other infrastructure  support groups are allocated based on usage
or  headcount,  where  practical,  to the two operating  segments.  Charges that
cannot be allocated are reported as general &  administrative  costs and are not
allocated to the segments.  Special  charges  determined to be  significant  are
reported  separately in the  Consolidated  Statement of  Operations  and are not
assigned  or  allocated  to the  segments.  All other  accounting  policies,  as
described previously in Note 2 "Summary of Significant Accounting Policies," are
applied consistently to the segments, where applicable.

      A summary of the segment financial information is as follows:

<TABLE>

                                                          Years ended June 30,
                                              ----------------------------------------
                                                                          --Restated--
                                                 1999          1998          1997
                                              ------------  ------------  ------------
                                                         (Amounts in millions)
Revenues:
<S>                                                <C>          <C>           <C>
Interactive Online Services.................       $4,321       $2,726        $1,786
Enterprise Solutions........................          456          365           411
                                              ------------  ------------  ------------
    Total revenues..........................       $4,777       $3,091        $2,197

Income (loss) from operations:

Interactive Online Services (1).............       $  955       $  412          $ 57
Enterprise Solutions. (1)...................            6          (18)           98
General & Administrative....................         (408)        (328)         (220)
Other (2)...................................          (95)        (186)         (106)
                                              ------------  ------------  ------------
    Total income (loss) from operations.....       $  458       $ (120)       $ (171)
</TABLE>


1.   In fiscal  1999,  Enterprise  Solutions  and  Interactive  Online  Services
     include $5 million and $60  million,  respectively,  of goodwill  and other
     intangible assets amortization.
2.   Other  consists  of all  special  items:  merger,  restructuring,  contract
     termination,  acquired  in-process  research and development and settlement
     charges.

     The Company does not have any material  revenues  and/or assets outside the
United  States and no single  customer  accounts for more than 10% or greater of
total revenues.

Note 10. Property and Equipment

     Property and equipment consist of the following:

                                                                    June 30,
                                                                   ---------
                  (in millions)                                    1999 1998
                                                                   ---- ----
                  Land............................................ $ 31 $ 24
                  Buildings, equipment and related improvements...  191   98
                  Leasehold and network improvements..............  189  149
                  Furniture and fixtures..........................   73   42
                  Computer equipment and internal software........  494  341
                  Construction in progress........................   15   36
                                                                   ---- ----
                                                                    993  690
                  Less accumulated depreciation and amortization..  336  186
                  Less restructuring-related adjustments..........    -    1
                                                                   ---- ----
                  Net property and equipment...................... $657 $503
                                                                   ==== ====

     The Company's  depreciation  and  amortization  expense for the years ended
June 30, 1999, 1998 and 1997 totaled $159 million, $110 million and $46 million,
respectively.

Note 11. Commitments and Contingencies

     The  Company  leases  facilities  and  equipment  primarily  under  several
long-term  operating  leases,  certain of which  have  renewal  options.  Future
minimum payments under non-cancelable operating leases with initial terms of one
year or more consist of the following:

                  (in millions)
                  Year ending June 30,
                  -------------------- -----
                  2000................  $262
                  2001................   186
                  2002................   129
                  2003................    76
                  2004................    33
                  Thereafter..........   123
                                       -----
                                        $809
                                       =====

     The Company's rental expense under operating leases in the years ended June
30, 1999,  1998 and 1997 totaled  approximately  $294 million,  $261 million and
$154 million, respectively.

     The  Company  has  guaranteed  monthly  usage  levels  of  data  and  voice
communications with some of its network providers and commitments related to the
construction  of additional  office  buildings.  The remaining  commitments  are
$1,270 million,  $1,216  million,  $1,212 million and $186 million for the years
ending June 30, 2000, 2001, 2002 and 2003, respectively. The related expense for
the years ended June 30, 1999, 1998 and 1997, was $1,397  million,  $958 million
and $405 million, respectively.

     As of June 30, 1999, the Company has guaranteed  approximately  $17 million
in indebtedness  of one of its joint  ventures.  The Company has not had to make
any payments related to this guarantee during the year ended June 30, 1999.

     The Company is a party to various  litigation  matters,  investigations and
proceedings,  including a shareholder derivative suit filed in Delaware chancery
court  against  certain  current and former  directors  of the Company  alleging
violations of federal  securities  laws. The Company has settled the shareholder
derivative  suit and obtained the  approval of the  Delaware  chancery  court on
terms that will not have a material adverse effect on the financial condition or
results of operations of the Company.

     The Department of Labor ("DOL") is investigating  the  applicability of the
Fair Labor Standards Act ("FLSA") to the Company's Community Leader program. The
Company believes the Community Leader program reflects industry practices,  that
the Community  Leaders are  volunteers,  not  employees,  and that the Company's
actions  comply with the law.  The Company is  cooperating  with the DOL, but is
unable to predict the outcome of the DOL's investigation. Former volunteers have
sued the Company on behalf of an alleged class  consisting of current and former
volunteers,  alleging violations of the FLSA and comparable state statutes.  The
Company believes the claims have no merit and intends to defend them vigorously.
The Company  cannot predict the outcome of the claims or whether other former or
current volunteers will file additional actions.

     The costs and other effects of pending or future  litigation,  governmental
investigations, legal and administrative cases and proceedings (whether civil or
criminal),  settlements,  judgments  and  investigations,  claims and changes in
those matters  (including  those matters  described  above) and  developments or
assertions by or against the Company  relating to  intellectual  property rights
and intellectual property licenses,  could have a material adverse effect on the
Company's  business,  financial  condition  and  operating  results.  Management
believes,  however,  that the ultimate outcome of all pending  litigation should
not have a material  adverse  effect on the  Company's  financial  position  and
results of operations.

Note 12. Notes Payable

     During June 1999,  the Company  borrowed  approximately  $65 million in the
form of two  mortgages  on its  office  buildings  and land  located  in Dulles,
Virginia.  The  notes are  collateralized  by the  buildings  and land and carry
interest  rates of 7.7% and  6.75%.  The  notes  amortize  over 25 years and are
payable  in full at the end of 10  years.  As of June 30,  1999,  the  principal
amount outstanding on these mortgages is $65 million.

     During September 1997, the Company borrowed  approximately $29 million in a
refinancing of one of its office  buildings.  The note is  collateralized by the
Company's  office  building and carries  interest at a fixed rate of 7.46%.  The
note amortizes on a straight-line  basis over a term of 25 years and if not paid
in full at the end of 10 years,  the interest rate, from that point forward,  is
subject  to  adjustment.  As of June 30,  1999 and 1998,  the  principal  amount
outstanding on this note was $28 million.

     On November  17,  1997,  the Company  sold $350  million of 4%  Convertible
Subordinated  Notes  due  November  15,  2002  (the  "Notes").   The  Notes  are
convertible  into the Company's  common stock at a conversion  rate of 153.27504
shares of common stock for each $1,000 principal amount of the Notes (equivalent
to a conversion  price of $6.52422 per share),  subject to adjustment in certain
events and at the holders option.  Interest on the Notes is payable semiannually
on May 15 and November 15 of each year,  commencing  on May 15, 1998.  The Notes
may be redeemed at the option of the Company on or after  November 14, 2000,  in
whole or in part, at the redemption prices set forth in the Notes. During fiscal
1999,  approximately  13.6 million shares of common stock were issued related to
conversions. At June 30, 1999, the fair value of the Notes exceeded the carrying
value by nearly $2 billion as  estimated by using quoted  market  prices.  As of
June 30, 1999 and 1998, the principal amount, net of unamortized  discount,  was
$256 million and $345 million, respectively.

     Notes payable at June 30, 1997, totaled $52 million and mainly consisted of
a two-year senior secured  revolving credit facility  ("Credit  Facility").  The
Company had the Credit Facility  available to support its continuing  growth and
network expansion. The interest rate on the Credit Facility was 100 basis points
above the London Interbank Offered Rate and interest was paid periodically,  but
at least  quarterly.  The Credit  Facility  was  subject  to  certain  financial
covenants  and is payable  in full at the end of the two year  term,  on July 1,
1999.  As of June 30, 1999 and 1998,  there were no  outstanding  amounts on the
Credit Facility and the Credit Facility was terminated June 30, 1999.

Note 13. Other Income, Net

     The following table summarizes the components of other income:

                                                        Year ended June 30,
                                                         -----------------
         (in millions)                                   1999  1998  1997
                                                         ----- ----- -----
         Interest income................................ $102   $37   $16
         Interest expense...............................  (20)  (15)   (2)
         Allocation of losses to minority shareholders..    -     6    15
         Equity investment losses.......................   (4)  (10)  (10)
         Gain (loss) on investments.....................  558    17    (9)
         Other income (expense).........................    2    (5)    -
                                                         ----- ----- -----
                                                         $638   $30   $10
                                                         ===== ===== =====

Note 14. Income Taxes

     The (provision) benefit for income taxes is comprised of:

<TABLE>

                                                                                    Year Ended June 30,
                                                                                    --------------------
         (in millions)                                                               1999   1998   1997
                                                                                    ------ ------ ------
<S>                                                                                 <C>     <C>    <C>
         Current - primarily foreign............................................... $  (2)  $ (2)  $ (2)
         Deferred - primarily US federal and state.................................   (48)    18     (8)
         Deferred tax charge attributable to the Company's stock option plans......  (284)     -      -
                                                                                    ====== ====== ======
         Provision for income taxes................................................ $(334)  $ 16   $(10)
                                                                                    ====== ====== ======
</TABLE>


     The provision for income taxes differs from the amount computed by applying
the  statutory  federal  income tax rate to income  before  provision for income
taxes. The sources and tax effects of the differences are as follows:

<TABLE>

                                                                                Year Ended June 30,
                                                                                ------------------
                                                                                            Restated

         (in millions)                                                          1999   1998   1997
                                                                                ----- ------- ----
         <S>                                                                   <C>   <C>     <C>
         Income tax (provision) benefit at the federal statutory rate of 35%.. $(384)  $ 31   $ 56
         State income (tax) benefit, net of federal benefit...................   (23)    (6)     5
         Nondeductible charge for purchased research and development..........     -    (28)    (3)
         Nondeductible charge for merger related expenses ....................   (21)     -      -
         Valuation allowance changes affecting the provision for income taxes.   113     32    (61)
         Other................................................................   (19)   (13)    (7)
                                                                                ----- ------- ----
                                                                               $(334)  $ 16   $(10)
                                                                                ===== ======= ====

</TABLE>

     As of June 30, 1999,  the Company has net operating loss  carryforwards  of
approximately  $7 billion for tax  purposes  which will be  available  to offset
future taxable income. If not used, these carryforwards will expire between 2001
and 2019. To the extent that net operating  loss  carryforwards,  when realized,
relate to stock option  deductions,  the resulting  benefits will be credited to
stockholders' equity.

     The  Company's  income tax  provision  was  computed  based on the  federal
statutory rate and the average state statutory rates, net of the related federal
benefit.

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

                                                              June 30,
                                                           --------------
         (in millions)                                       1999   1998
                                                           ------- ------
         Short term:
         Short term deferred tax assets:
         Deferred revenue................................  $   21  $  30
         Accrued expenses and other......................      34     19
         Restructure reserve.............................       -     32
         Valuation allowance.............................     (52)   (38)
                                                           ------- ------
         Total...........................................  $    3    $43
                                                           ======= ======
         Long term:
         Long term deferred tax liabilities:

         Capitalized software costs......................  $  (46) $ (33)
         Unrealized gain on available-for-sale securities    (103)   (89)
         Unremitted earnings of foreign subsidiaries ....      (6)     -
                                                           ------- ------
         Total...........................................    (155)  (122)

         Long term deferred tax assets:

         Net operating loss carryforwards................   2,670    412
         Deferred network services credit................     101    131
         Other...........................................      95      8
         Valuation allowance.............................  (2,714)  (426)
                                                           ------- ------
         Total...........................................     152    125
                                                           ------- ------
         Net long term deferred asset (liability)........  $   (3) $   3
                                                           ======= ======

     The valuation allowance for deferred tax assets increased by $2,302 million
in fiscal 1999.  The increase in this allowance was primarily due to the benefit
generated from the current year exercise of stock options and warrants of $2,609
million and certain  deferred tax assets  associated  with  acquisitions  of $95
million which will result in future tax deductions.  The benefit from the fiscal
1999 exercise of options and warrants will be recorded to  stockholders'  equity
as it is realized.  This increase was partially offset by (1) the utilization of
$284 million of benefits  generated from prior years' exercises of stock options
to reduce  fiscal  1999 income  taxes  payable  and (2) the  utilization  of net
operating losses relating to book taxable income of  approximately  $171 million
resulting in valuation  allowance  changes  affecting  the  provision for income
taxes.

     The Company has net operating loss  carryforwards for tax purposes ("NOLs")
and other  deferred tax benefits  that are  available to offset  future  taxable
income. Only a portion of the NOLs are attributable to operating activities. The
remainder of the NOLs are attributable to tax deductions related to the exercise
of stock options.

     Prior to the third  quarter  of  fiscal  1998,  the  Company  followed  the
practice of computing its income tax expense using the  assumption  that current
year stock option  deductions were used first to offset its financial  statement
income.  NOLs could then offset any excess of  financial  statement  income over
current year stock option  deductions.  Because stock option  deductions are not
recognized as an expense for financial  reporting  purposes,  the tax benefit of
stock option  deductions must be credited to additional  paid-in capital with an
offsetting income tax expense recorded in the income statement.

     The Company  changed its  accounting  for income taxes to recognize the tax
benefits from current and prior years' stock option deductions after utilization
of NOLs from operations (i.e., NOLs determined  without deductions for exercised
stock  options) to reduce income tax expense.  Because  stock option  deductions
would have been utilized for financial  accounting purposes in prior years under
both  accounting  methods  due to the  absence  of NOLs  from  operations,  this
accounting  change  had no effect on 1997 and prior  years'  tax  provisions  or
additional paid-in capital. The effect of this change was to increase net income
and diluted  earnings  per share for the year ended June 30, 1998 by $73 million
and $0.04, respectively.

     The Company's  deferred tax asset related to operations and exercised stock
options amounted to:

                                            June 30,
                                         --------------
     (in millions)                        1999    1998
                                         ------  ------
     Operations.....                     $  141  $  252
     Stock options..                     $2,626  $  383

     When  realization  of the  deferred  tax asset is more  likely  than not to
occur, the benefit related to the deductible temporary differences  attributable
to  operations  will be  recognized  as a reduction of income tax  expense.  The
benefit related to the deductible  temporary  differences  attributable to stock
option deductions will be credited to additional paid-in capital when realized.

Note 15. Capital Accounts

     Common Stock At June 30, 1999 and 1998, the Company's $.01 par value common
stock authorized was 6,000,000,000  shares with  2,201,787,866 and 1,946,300,104
shares  issued and  outstanding,  respectively.  At June 30,  1999,  474,019,746
shares were  reserved  for the  exercise  of issued and  unissued  common  stock
options,  and convertible debt, and 20,148,320 shares were reserved for issuance
in connection with the Company's Employee Stock Purchase Plans.

     During July 1998, the Company  completed a public offering of common stock.
The Company sold approximately 43.2 shares of common stock and raised a total of
$550 million in new equity.  The Company used the proceeds for general operating
purposes.  In  addition,  the  Company  sold  approximately  7.6 million and 4.6
million  shares in fiscal 1998 and 1999,  respectively,  and had net proceeds of
approximately $8 million and $19 million in the same time periods.

     Preferred  Stock In February 1992, the Company's  stockholders  approved an
amendment and restatement of the certificate of  incorporation  which authorized
the future issuance of 5,000,000 shares of preferred stock, $.01 par value, with
rights and preferences to be determined by the Board of Directors.

     During May 1996,  the  Company  sold 1,000  shares of Series B  convertible
preferred  stock ("the  Preferred  Stock") for  approximately  $28 million.  The
Preferred Stock had an aggregate  liquidation  preference of  approximately  $28
million and accrued dividends at a rate of 4% per annum. Accrued dividends could
be paid in the form of additional  shares of Preferred  Stock.  During May 1998,
the Preferred Stock, plus accrued but unpaid dividends,  automatically converted
into  3,136,000  shares of common stock based on the fair market value of common
stock at the time of conversion.

     Warrant  In  connection  with  an  agreement  with  one  of  the  Company's
communications  providers,  the Company  had an  outstanding  warrant,  that was
exercised  during  March  1999.  The  warrant,  subject to  certain  performance
standards  specified  in the  agreement,  allowed  the  Company's  communication
provider to purchase 57,600,000 shares of common stock at a price of $0.2461 per
share.

     Shareholder  Rights Plan The Company adopted a new shareholder  rights plan
on May 12, 1998 (the "New Plan").  The New Plan was  implemented  by declaring a
dividend,  distributable  to  stockholders  of  record on June 1,  1998,  of one
preferred share purchase right (a "Right") for each outstanding  share of common
stock.  All rights granted under the Company's  former  shareholder  rights plan
adopted in fiscal 1993 were redeemed in conjunction with the  implementation  of
the New Plan and the former plan was  terminated.  Each Right under the New Plan
will initially  entitle  registered  holders of the common stock to purchase one
one-thousandth  of a share of the Company's new Series A-1 Junior  Participating
Preferred  Stock ("Series A-1 Preferred  Stock") at a purchase price of $900 per
one  one-thousandth  of a share  of  Series  A-1  Preferred  Stock,  subject  to
adjustment.  The  Rights  will be  exercisable  only if a person  or  group  (i)
acquires 15% or more of the common  stock or (ii)  announces a tender offer that
would result in that person or group  acquiring 15% or more of the common stock.
Once exercisable, and in some circumstances if certain additional conditions are
met,  the New Plan allows  stockholders  (other than the  acquirer)  to purchase
common stock or securities of the acquirer having a then current market value of
two times the exercise  price of the Right.  The Rights are redeemable for $.001
per Right (subject to adjustment) at the option of the Board of Directors. Until
a Right is  exercised,  the  holder of the  Right,  as such,  has no rights as a
stockholder  of the  Company.  The Rights  will  expire on May 12,  2008  unless
redeemed by the Company prior to that date.

     Stock  Splits In November  1994,  April 1995,  November  1995,  March 1998,
November 1998, February 1999, and November 1999 the Company effected two-for-one
splits of the outstanding shares of common stock. Accordingly, all data shown in
the  accompanying   consolidated   financial   statements  and  notes  has  been
retroactively adjusted to reflect the stock splits.

Note 16. Stock Plans

     Options to purchase the  Company's  common stock under various stock option
plans have been granted to employees,  directors and  consultants of the Company
at fair  market  value at the  date of  grant.  Generally,  the  options  become
exercisable  over  periods  ranging  from one to four years and expire ten years
from the date of grant.  In certain of these plans,  the Company has  repurchase
rights upon the  individual  cessation of  employment.  Generally,  these rights
lapse  over a  48-month  period.  In fiscal  years  1998 and 1997,  the Board of
Directors  authorized  approximately  22  million  options to be  repriced.  The
vesting schedules were not materially changed and no employees owning 3% or more
of the  Company's  common stock nor any senior  executives  participated  in the
repricing.

     The effect of  applying  SFAS No. 123 on 1999,  1998 and 1997 pro forma net
loss as  stated  below  is not  necessarily  representative  of the  effects  on
reported  net income  (loss) for future years due to,  among other  things,  the
vesting  period of the stock  options  and the fair  value of  additional  stock
options in future years.  Had  compensation  cost for the Company's stock option
plans  been  determined  based  upon the fair value at the grant date for awards
under the plans  consistent with the methodology  prescribed under SFAS No. 123,
the  Company's  net  income  (loss)  in  1999,  1998 and 1997  would  have  been
approximately  $504 million,  $(132)  million and $(311)  million,  or $0.20 per
share,  $(0.07)  per share and  $(0.19)  per share,  respectively,  on a diluted
basis.  The fair value of the options  granted  during  1999,  1998 and 1997 are
estimated   at  $11.47  per  share,   $2.64  per  share  and  $0.57  per  share,
respectively,  on the date of grant using the Black-Scholes option-pricing model
with  the  following  assumptions:  no  dividend  yield,  volatility  of 65%,  a
risk-free  interest  rate of 5.40% for 1999,  5.51% for 1998 and 5.69% for 1997,
and an  expected  life of 0.45  years from date of  vesting.  A summary of stock
option activity is as follows:

                                   Number         Weighted-
                                     of       average exercise
                                   shares           price
                                ------------- ----------------
     Balance at June 30, 1996..  521,548,860            $ 0.84
     Granted...................  104,396,812            $ 1.95
     Exercised................. (111,449,714)           $ 0.63
     Forfeited.................  (50,026,286)           $ 1.47
                                ------------- ----------------
     Balance at June 30, 1997..  464,469,672            $ 1.07
     Granted...................  162,740,866            $ 6.19
     Exercised................. (147,415,960)           $ 0.76
     Forfeited.................  (35,069,072)           $ 2.46
                                ------------- ----------------
     Balance at June 30, 1998..  444,725,506            $ 2.94
     Granted...................  109,530,776            $25.28
     Exercised................. (122,404,410)           $ 1.69
     Forfeited.................  (32,713,354)           $ 9.95
                                ------------- ----------------
     Balance at June 30, 1999..  399,138,518            $ 8.88
                                ============= ================

<TABLE>

                                   Options outstanding              Options exercisable
                         --------------------------------------- ------------------------
                                          Weighted-
                                           average     Weighted-                Weighted-
                             Number       remaining     average      Number      average
            Range         outstanding    contractual    exercise exercisable as  exercise
      of exercise price  as of 6/30/99 life (in years)   price     of 6/30/99     price
     ------------------- ------------- --------------- --------- -------------- ---------
     <S>                    <C>              <C>          <C>       <C>            <C>
     $0.01 to $0.85.....    68,656,456       5.0          $0.45     66,744,614     $0.46
     $0.86 to $1.70.....    81,337,482       6.6          $1.41     52,492,338     $1.29
     $1.73 to $4.03.....    74,427,544       7.7          $3.42     22,863,600     $3.04
     $4.22 to $10.96....    70,031,866       8.4          $7.42     13,522,726     $7.71
     $10.97 to $22.75...    73,626,222       9.2         $12.37      4,374,882    $13.22
     $22.85 to $45.07...     8,294,238       9.6         $38.91        638,462    $37.03
     $45.44 to $64.16...    15,006,158       9.8         $56.02         23,838    $54.08
     $64.54 to $83.75...     7,758,552       9.8         $70.88        386,230    $70.54
     ------------------- ------------- --------------- --------- -------------- ---------
     $0.01 to $83.75....   399,138,518       7.6          $8.88    161,046,690     $2.37
                         ============= =============== ========= ============== =========
</TABLE>

     Employee Stock Purchase Plan In May 1992, the Company's  Board of Directors
adopted a non-compensatory  Employee Stock Purchase Plan ("the ESPP"). Under the
ESPP,  employees of the Company who elect to participate  are granted options to
purchase  common  stock at a 15 percent  discount  from the market value of such
stock. The ESPP permits an enrolled  employee to make  contributions to purchase
shares  of  common  stock by having  withheld  from his or her  salary an amount
between  1  percent  and 15  percent  of  compensation.  The  Stock  and  Option
Subcommittee of the  Compensation  and Management  Development  Committee of the
Board of  Directors  administer  the ESPP.  The total number of shares of common
stock  that  may be  issued  pursuant  to  options  granted  under  the  ESPP is
28,800,000. A total of approximately 11 million shares of common stock have been
issued under the ESPP.

     In June  1995,  the  Company  adopted  a  non-compensatory  Employee  Stock
Purchase Plan ("the  Netscape  ESPP") under Section 423 of the Internal  Revenue
Code and a total of 6,300,000  shares of common stock may be issued  pursuant to
options  under the  Netscape  ESPP.  The  Company's  Board of  Directors in 1998
amended  the  Netscape  ESPP to  increase  the  maximum  percentage  of  payroll
deductions  which  any  participant  may  contribute  from  his or her  eligible
compensation to 15%;  amended the Netscape ESPP from a two-year rolling offering
period to a six-month fixed offering  period  effective with the offering period
beginning March 1999; amended the limit to the number of shares any employee may
purchase in any purchase  period to a maximum of 1,800  shares;  and changed the
offering dates for each purchase period to March 1 and September 1 of each year.
Under this plan,  qualified employees are entitled to purchase common stock at a
15 percent discount from the market value of such stock. Approximately 4 million
shares of common stock have been issued under the Netscape ESPP.

Note 17. Employee Benefit Plan

     Savings  Plans The Company has two savings plans that qualify as a deferred
salary  arrangement under Section 401(k) of the Internal Revenue Code. Under the
plans,  participating employees may defer a portion of their pretax earnings. In
one plan,  the Company  matches  50% of each  employee's  contributions  up to a
maximum matching  contribution of 3% of the employee's earnings and in the other
plan, the Company's contributions are discretionary. The Company's contributions
to plans were  approximately $6 million,  $5 million and $3 million in the years
ended June 30, 1999, 1998 and 1997, respectively.

Note 18. Quarterly Information (unaudited)

<TABLE>

                                                                 Quarter Ended
                                             ---------------------------------------------
                                             September 30, December 31, March 31, June 30,
                                             ------------- ------------ --------- --------
                                               (Amounts in millions, except per share data)
Fiscal 1999(1)(3)
<S>                                                  <C>          <C>       <C>      <C>
Subscription service revenues...............         $723         $786      $869     $943
Advertising, commerce and other revenues....          175          244       275      306
Enterprise solution revenues................          101          118       109      128
                                             ------------- ------------ --------- --------
Total revenues..............................          999        1,148     1,253    1,377
Income from operations......................           77          123        47      211
Net income .................................           76          115       411      160
Net income  per share-diluted...............        $0.03        $0.05     $0.16    $0.06
Net income  per share-basic.................        $0.04        $0.06     $0.20    $0.07

Net cash provided by operating activities...         $120         $178      $605     $196
Earnings Before Interest, Taxes,
 Depreciation and Amortization (EBITDA)(4)..          153          221       251      343


Fiscal 1998(2)(3)
Subscription service revenues...............         $439         $488      $580     $676
Advertising, commerce and other revenues....          106          131       142      164
Enterprise solution revenues................          123          104        35      103
                                             ------------- ------------ --------- --------
Total revenues..............................          668          723       757      943
Income (loss) from operations...............           25          (54)      (83)      (8)
Net income (loss)...........................           31          (34)      (78)       7
Net income (loss) per share-diluted.........        $0.01       $(0.02)   $(0.04)   $0.00
Net income (loss) per share-basic...........        $0.02       $(0.02)   $(0.04)   $0.00

Net cash provided by operating activities...         $125          $57      $130     $125
Earnings Before Interest, Taxes,
 Depreciation and Amortization (EBITDA)(4)..           76           41        31      154
</TABLE>


The special  charges  referred  to below  include  charges  for  restructurings,
acquired  in-process  research  and  development,   mergers,  transition  costs,
settlements,  write-off of deferred  subscriber  acquisition  costs and contract
terminations.

(1)   Net income in the fiscal year ended June 30, 1999 includes special charges
      of $2 million in the quarter ended  December 31, 1998, $78 million and $25
      million in the quarter ended March 31, 1999 and $15 million in the quarter
      ended June 30, 1999.  Net income in the quarter  ended March 31, 1999 also
      includes a gain on the sale of Excite,  Inc.  investments of approximately
      $567 million.

(2)   Net loss in the fiscal  year ended June 30, 1998  includes  net charges of
      $42 million in the quarter  ended  December 31,  1997,  $58 million in the
      quarter ended March 31, 1998 and $88 million in the quarter ended June 30,
      1998.

(3)   The sum of per share earnings  (loss) does not equal  earnings  (loss) per
      share for the year due to equivalent share calculations which are impacted
      by the Company's losses, fluctuations in the Company's common stock market
      prices and the timing (weighting) of shares issued.

(4)   EBITDA is defined as net income plus: (1)  provision/(benefit)  for income
      taxes,  (2) interest  expense,  (3)  depreciation and amortization and (4)
      special charges.  The Company  considers EBITDA an important  indicator of
      the  operational  strength and  performance of its business  including the
      ability  to  provide   cash  flows  to  service   debt  and  fund  capital
      expenditures.  EBITDA, however, should not be considered an alternative to
      operating or net income as an indicator of the performance of the Company,
      or as an alternative to cash flows from operating  activities as a measure
      of  liquidity,  in each  case  determined  in  accordance  with  generally
      accepted accounting principles ("GAAP").


<PAGE>



                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
America Online, Inc.

     We have audited the  accompanying  consolidated  balance  sheets of America
Online,  Inc.  as of June  30,  1999  and  1998,  and the  related  consolidated
statements of  operations,  changes in  stockholders'  equity and cash flows for
each of the three  years in the period  ended  June 30,  1999.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of  material  misstatements.  An audit  includes  examining,  on a test
basis,  evidence  supporting  the  amounts  and  disclosures  in  the  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America Online,
Inc. at June 30, 1999 and 1998, and the  consolidated  results of its operations
and its cash  flows for each of the three  years in the  period  ended  June 30,
1999, in conformity with accounting  principles generally accepted in the United
States.

     As  discussed  in  Note 3 to the  consolidated  financial  statements,  the
consolidated statements of operations,  changes in stockholders' equity and cash
flows for the year ended  June 30,  1997 have been  restated.  In  addition,  as
discussed in Note 14, in 1998 the Company  changed its method of accounting  for
income taxes.
                                                           /s/ ERNST & YOUNG LLP

McLean,  Virginia
July 21, 1999,  except for Note 3,
as to which the date is May 12, 2000