FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

     [X] Quarterly  Report under Section 13 or 15(d) of the Securities  Exchange
Act of 1934

                 For the quarterly period ended: March 31, 2000

                                       OR

     [ ]  Transition  report  pursuant to section 13 or 15(d) of the  Securities
Exchange Act of 1934

                        For the transition period from to

                             Commission File Number:

                                    001-12143

                              America Online, Inc.

             (Exact name of registrant as specified in its charter)

           Delaware                              54-1322110
  ------------------------------            ------------------------------
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)

                   22000 AOL Way, Dulles, Virginia 20166-9323

              (Address of principal executive offices and zip code)

Registrant's telephone number, including area code:    (703) 265-1000

     Former name, former address, and former year, if changed since last report:
Not applicable

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

               Yes           X               No

Indicate the number of shares  outstanding  of each of the  Issuer's  classes of
Common Stock, as of the latest practicable date.

Title of each class
Common stock $.01 par value
Shares outstanding on April 30, 2000...............................2,297,387,025



<PAGE>


                              AMERICA ONLINE, INC.

                                      INDEX

                                                                            Page

PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

         Condensed Consolidated Balance Sheets - March 31, 2000
         and June 30, 1999                                                     3

         Condensed Consolidated Statements of Operations - Three and nine
         months ended March 31, 2000 and 1999                                  4

         Condensed Consolidated Statements of Cash Flows - Nine
         months ended March 31, 2000 and 1999                                  5

         Condensed Consolidated Statement of Changes in
         Stockholders' Equity - Nine months ended March 31, 2000               6

         Notes to Condensed Consolidated Financial Statements                  7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk           20

PART II. OTHER INFORMATION                                                    22

Item 1.  Legal Proceedings                                                    22

Item 2.  Changes in Securities and Use of Proceeds                            22

Item 5.  Other Information                                                    22

Item 6.  Exhibits and Reports on Form 8-K                                     38

Signatures                                                                    39


<PAGE>
<TABLE>
<CAPTION>


                              AMERICA ONLINE, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                    (Amounts in millions, except share data)

                                                                                         March 31,  June 30,
                                                                                          2000         1999
                                                                                      -------------  -------
                                                                                       (Unaudited)
                                     ASSETS

Current assets:
<S>                                                                                       <C>         <C>
Cash and cash equivalents...........................................................      $ 2,655     $  887
Short-term investments..............................................................          482        537
Trade accounts receivable, less allowances of $69 and $54, respectively.............          397        323
Other receivables...................................................................          271         79
Prepaid expenses and other current assets...........................................          395        153
                                                                                      ------------  --------
Total current assets................................................................        4,200      1,979

Property and equipment at cost, net.................................................          991        657

Other assets:
Investments including available-for-sale securities.................................        4,791      2,151
Product development costs, net......................................................          135        100
Goodwill and other intangible assets, net...........................................          432        454
Other assets........................................................................          240          7
                                                                                      ------------  --------
                                                                                          $10,789     $5,348
                                                                                      ============ =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade accounts payable..............................................................      $   169     $   74
Other accrued expenses and liabilities..............................................          933        795
Deferred revenue....................................................................          941        646
Accrued personnel costs.............................................................          207        134
Deferred network services credit....................................................           76         76
                                                                                      ------------  --------
Total current liabilities...........................................................        2,326      1,725

Long-term liabilities:
Notes payable.......................................................................        1,622        348
Deferred revenue....................................................................          269         30
Other liabilities...................................................................           13         15
Deferred network services credit....................................................          140        197
                                                                                      ------------  --------
Total liabilities...................................................................        4,370      2,315

Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued
  or outstanding at March 31, 2000 and June 30, 1999...............................            -          -
Common stock, $.01 par value; 6,000,000,000 shares authorized,
  2,295,279,273 and 2,201,787,866 shares issued and outstanding at
  March 31, 2000 and June 30, 1999, respectively....................................           23         22
Additional paid-in capital..........................................................        4,283      2,692
Accumulated other comprehensive income - unrealized gain on
  available-for-sale securities, net................................................        1,062        168
Retained earnings...................................................................        1,051        151
                                                                                      ------------  --------
Total stockholders' equity..........................................................        6,419      3,033
                                                                                      ------------  --------
                                                                                          $10,789     $5,348
                                                                                      ============ =========

                             See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                              AMERICA ONLINE, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                  (Amounts in millions, except per share data)

                                   (Unaudited)

                                                     Three months ended    Nine months ended
                                                          March 31,            March 31,
                                                       2000      1999       2000       1999
                                                      -------  --------    -------  --------
Revenues:
<S>                                                   <C>       <C>        <C>       <C>
Subscription services.................................$1,153    $  869     $3,215    $2,378
Advertising, commerce and other.......................   557       275      1,344       694
Enterprise solutions..................................   126       109        365       328
                                                      -------  --------    -------  --------
Total revenues........................................ 1,836     1,253      4,924     3,400

Costs and expenses:
Cost of revenues......................................   937       693      2,558     1,916
Sales and marketing...................................   266       218        706       594
Product development...................................    76        80        217       217
General and administrative............................   156       120        423       297
Amortization of goodwill and other intangible assets..    20        17         55        49
Merger and restructuring charges......................     -        78          5        80
                                                      -------  --------    -------  --------
Total costs and expenses.............................. 1,455     1,206      3,964     3,153

Income from operations... ............................   381        47        960       247
Other income, net.....................................   336       587        533       608
                                                      -------  --------    -------  --------
Income before provision for income taxes..............   717       634      1,493       855
Provision for income taxes............................  (280)     (223)      (583)     (253)
                                                      -------  --------    -------  --------
Net income............................................$  437    $  411     $  910    $  602
                                                      =======  ========    =======  ========

Earnings per share:
Earnings per share-basic..............................$ 0.19    $ 0.20     $ 0.40    $ 0.29
Earnings per share-diluted............................$ 0.17    $ 0.16     $ 0.35    $ 0.24
Weighted average shares outstanding-basic............. 2,287     2,088      2,255     2,044
Weighted average shares outstanding-diluted........... 2,595     2,574      2,593     2,531



                             See accompanying notes.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                              AMERICA ONLINE, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                              (Amounts in millions)

                                   (Unaudited)

                                                                                        Nine months ended
                                                                                            March 31,
                                                                                         2000      1999
                                                                                        -------   -------
Cash flows from operating activities:

<S>                                                                                     <C>      <C>
Net income ............................................................................ $  910   $  602
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash restructuring charges.........................................................      2        7
Amortization of deferred network services credit.......................................    (57)     (57)
Depreciation and amortization..........................................................    264      216
Compensatory stock options.............................................................     10       19
Deferred income taxes..................................................................    568      253
Gain on available-for-sale securities..................................................   (403)    (570)
Changes in assets and liabilities, net of the effects of acquisitions and dispositions:
  Trade accounts receivable............................................................    (74)     (92)
  Other receivables....................................................................    (41)     (79)
  Prepaid expenses and other current assets............................................   (236)     (48)
  Other assets.........................................................................   (202)      (1)
  Investments including available-for-sale securities..................................   (267)      10
  Accrued expenses and other current liabilities.......................................    309      455
  Deferred revenue and other liabilities...............................................    530      214
                                                                                        -------  -------
Total adjustments......................................................................    403      327
                                                                                        -------  -------
Net cash provided by operating activities..............................................  1,313      929

Cash flows from investing activities:

Purchase of property and equipment.....................................................   (501)    (201)
Product development costs..............................................................    (60)     (32)
Proceeds from sale of investments including available-for-sale securities..............    227      606
Purchase of investments, including available-for-sale securities.......................   (804)    (214)
Proceeds of short-term investments, net................................................     54      132
Proceeds from acquisition/disposition of subsidiaries..................................     10       31
Other investing activities.............................................................    (42)     (49)
                                                                                        -------  -------
Net cash (used in) provided by investing activities.................................... (1,116)     273

Cash flows from financing activities:

Proceeds from issuance of common stock, net...........................................     333      778
Principal and accrued interest payments on debt.......................................     (13)     (13)
Payment of deferred finance costs and other financing activities, net.................     (30)       8
Proceeds from issuance of debt........................................................   1,281       29
                                                                                         ------  -------
Net cash provided by financing activities..............................................  1,571      802
                                                                                         ------  -------
Net increase in cash and cash equivalents..............................................  1,768    2,004
Cash and cash equivalents at beginning of period.......................................    887      677
                                                                                        -------  -------
Cash and cash equivalents at end of period............................................. $2,655   $2,681
                                                                                        =======  =======
Supplemental cash flow information Cash paid during the period for:

Interest............................................................................... $   11   $   10
                                                                                        =======  =======


                             See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                              AMERICA ONLINE, INC.

       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                    (Amounts in millions, except share data)

                                   (Unaudited)

                                                                               Accumulated
                                                  Common Stock     Additional    Other
                                           -----------------------  Paid-In    Comprehensive     Retained
                                              Shares        Amount  Capital     Income, Net      Earnings     Total
                                           --------------  ------- ---------  ---------------  ------------ ---------

<S>                                         <C>              <C>     <C>         <C>              <C>         <C>
Balances at June 30, 1999.................  2,201,787,866    $ 22    $ 2,692     $   168          $ 151       $3,033
Effect of immaterial pooling..............      4,794,580       -         16           -            (10)           6
Common stock issued:
  Exercise of options, ESPP and other.....     85,297,731       1        333           -              -          334
  Amortization of compensatory
     stock options........................              -       -         10           -              -           10
Unrealized gain on available-for-sale
  securities, net.........................              -       -        549         894              -        1,443
Conversion of debt........................      2,136,799       -         13           -              -           13
Tax benefit related to stock options......              -       -        566           -              -          566
Other.....................................      1,262,297       -        104           -              -          104
Net income................................              -       -          -           -            910          910
                                           --------------  ------- ---------  ---------------  ------------ ---------
Balances at March 31, 2000................  2,295,279,273    $ 23    $ 4,283     $ 1,062         $1,051       $6,419
                                           ==============  ======= =========  ===============  ============ ===========


                             See accompanying notes.
</TABLE>


<PAGE>


                              AMERICA ONLINE, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

     The accompanying  unaudited condensed  consolidated  financial  statements,
which include the accounts of America  Online,  Inc. (the  "Company" or "America
Online") and its wholly and majority owned  subsidiaries,  have been prepared in
accordance with accounting  principles  generally  accepted in the United States
for interim  financial  information  and with the  instructions to Form 10-Q and
Article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for  complete  financial   statements.   In  the  opinion  of  management,   all
adjustments,  consisting only of normal recurring accruals considered  necessary
for a fair  presentation,  have  been  included  in the  accompanying  unaudited
financial  statements.  All significant  intercompany  transactions and balances
have been eliminated in consolidation.  Operating results for the three and nine
months ended March 31, 2000 are not  necessarily  indicative of the results that
may be expected for the full year ending June 30, 2000. For further information,
refer to the consolidated  financial statements and notes thereto,  incorporated
in Part II, Item 5 of this Form 10-Q,  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.

Note 2.  Summary of Significant Accounting Policies

     Revenue Recognition. Subscription services revenues are recognized over the
period that  services are provided.  In  contractual  arrangements  in which the
Company  provides  services  to third  party  subscriber  accounts,  the Company
records its subscription  service revenue, net of associated service costs, 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.  The Company  generates  advertising  revenues  based on two types of
contracts,  standard  and  non-standard.  The  revenues  derived  from  standard
advertising  contracts  (comparable to insertion  orders),  in which the Company
provides a minimum number of impressions  for a fixed fee, are recognized as the
impressions are delivered.  The revenues derived from  non-standard  advertising
contracts,  which provide carriage,  advisory  services,  premier placements and
exclusivities,  navigation benefits,  brand affiliation and other benefits,  are
recognized straight line over the term of the contract,  provided the Company is
meeting its obligations under the contract.  Deferred revenue consists primarily
of prepaid  electronic  commerce  and  advertising  fees and  monthly and annual
prepaid subscription fees billed in advance.

         The Company enters into rebate and other promotional  programs with its
commerce partners.  For its rebate programs,  where there is a contract with the
subscriber for a defined period of time,  the Company  capitalizes  the costs of
the rebates and  amortizes the amount as a reduction of revenues over the period
in  which  services  are  performed  and/or  goods  are  delivered.   For  other
promotional programs, in which consumers are typically offered a subscription to
the  Company's  subscription  services at no charge as a result of  purchasing a
product from the commerce partner, the Company records subscription revenue on a
straight-line  basis, over the term of the service contract with the subscriber,
the amounts  received  from the  commerce  partners,  less any amounts  paid for
marketing to the commerce partners.

         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
("VSOE").  The  Company  determines  VSOE  based on an  established  price  list
published by management having the relevant authority, which reflects the prices
at which those elements are sold separately to third parties.

         Investments Including  Available-For-Sale  Securities.  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.

         Other  investments,  for which the Company does not have the ability to
exercise significant influence and for which there is not a readily determinable
market  value,  are  accounted  for under  the cost  method  of  accounting.  In
addition,  for  investments  in  equity  securities  in  which  the  Company  is
restricted from selling the equity securities within 12 months,  the investments
are accounted for under the cost method of accounting.  When the restrictions on
the sale of such securities  lapse, the Company  classifies and accounts for the
securities as available-for-sale.  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 March 31, 2000 and June 30, 1999 such
investments  were  recorded  at the lower of cost or  estimated  net  realizable
value.

         The Company has  classified  all debt and equity  securities  for which
there is a determinable  fair market value and there are no  restrictions on the
Company's  ability  to sell  within  the next 12 months  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.

Note 3.  Earnings Per Share

         The  following  table sets forth the  computation  of basic and diluted
earnings per share for the three and nine months ended March 31, 2000 and 1999:
<TABLE>

                                                                Three months ended   Nine months ended
                                                                     March 31,          March 31,
     (in millions except for per share data)                       2000     1999      2000     1999
                                                                 -------- --------   -------- --------
     Basic earnings per share:
<S>                                                              <C>      <C>        <C>      <C>
     Net income available to common shareholders................ $   437  $   411    $   910  $   602
                                                                 -------- --------   -------- --------
     Weighted average shares outstanding........................   2,287    2,088      2,255    2,044

     Basic earnings per share................................... $  0.19  $  0.20    $  0.40  $  0.29
                                                                 ======== ========   ======== ========

     Diluted earnings per share:

     Net income available to common shareholders................ $   437  $   411    $   910  $   602
     Interest on convertible debt, net of tax...................       2        4          5       12
                                                                 -------- --------   -------- --------
     Adjusted net income available to common shareholders
        assuming conversion..................................... $   439  $   415    $   915  $   614
                                                                 -------- --------   -------- --------
     Weighted average shares outstanding........................   2,287    2,088      2,255    2,044
     Effect of dilutive securities:
        Employee stock options..................................     270      388        299      380
        Warrants................................................       -       45          -       53
        Convertible debt........................................      38       53         39       54
                                                                 -------- --------   -------- --------
     Adjusted weighted average shares and assumed conversions...   2,595    2,574      2,593    2,531
                                                                 ======== ========   ======== ========
     Diluted earnings per share................................. $  0.17  $  0.16    $  0.35  $  0.24
                                                                 ======== ========   ======== ========
</TABLE>

     The diluted  share base for the three and nine months  ended March 31, 2000
excludes incremental weighted shares of 13,538,446 and 2,022,592,  respectively,
related to  convertible  subordinated  notes.  These  shares are excluded due to
their antidilutive  effect as a result of adjusting net income by $6 million and
$8  million,  respectively,  for  interest  expense  net of tax  that  would  be
forfeited if the notes were converted to equity.

Note 4.  Comprehensive Income

         For the  three  months  ended  March 31,  2000 and 1999,  comprehensive
income was $32 million and $515 million, respectively. For the nine months ended
March 31, 2000 and 1999, comprehensive income was $1.8 billion and $688 million,
respectively.  The difference  between net income and  comprehensive  income for
each  period   presented   is  due  to  net   unrealized   gains  or  losses  on
available-for-sale securities.

Note 5.  Merger and Restructuring Charges

         During the quarter  ended  December 31, 1999,  the Company  recorded $5
million of direct  costs  related to the  merger of Tegic  Communications,  Inc.
("Tegic"). These charges primarily consisted of investment banker fees, fees for
legal  and  accounting  services  and other  expenses  directly  related  to the
transaction. All these costs have been paid as of December 31, 1999.

         During fiscal 1999, the Company recorded the following  charges related
to mergers and restructurings:

o             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.

o             Approximately $78 million of direct costs primarily related to the
              mergers of Netscape  Communications  Corporation  ("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   consisted 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.

o             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  during the nine months
ended March 31, 2000 for the charges recorded during fiscal 1999. The balance of
the restructuring  accrual is included in other accrued expenses and liabilities
on the consolidated  balance sheet and is expected to be  substantially  paid by
the end of this fiscal year.

<TABLE>

                                             Balance                              Balance
                                             June 30,      Non Cash              March 31,
                                               1999         Items     Payments      2000
                                           -------------   --------   --------    --------
                                                          Amounts in millions)
         Banking, legal, regulatory
         <S>                                    <C>            <C>       <C>        <C>
           and accounting fees...........       $ 4            $ -       $ (4)      $ -
         Severance and related costs.....        11             (2)        (7)        2
         Facilities shutdown costs.......         8              -         (1)        7
         Miscellaneous expenses..........        (3)             -          -        (3)
                                           -------------   --------   --------    --------
         Total...........................       $20           $ (2)      $(12)      $ 6
                                           =============   ========   ========    ========
</TABLE>

Note 6.  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.  In
determining  operating  segments,  the Company  reviewed the current  management
structure reporting to the chief operating  decision-maker ("CODM") and analyzed
the reporting the CODM receives to allocate resources and measure performance.

      The Company  currently  has four  operating  segments  that share the same
infrastructure.

      The  Interactive   Services  Group  operates  the  Company's   interactive
products:  the AOL,  CompuServe and custom  solution  services and their related
brand and product extensions;  Netscape Netcenter; and the Netscape Communicator
client  software,  including the Netscape  Navigator  browser.  The  Interactive
Services group also contains the new products group which 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,
Digital 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,  CompuServe and Netscape
Online  services  outside of the U.S. The AOL  International  Group operates the
AOL,  CompuServe  and Netscape  Online  brands in Europe with its joint  venture
partner  Bertelsmann AG; AOL Canada with its joint venture partner Royal Bank of
Canada;  AOL Japan with its joint venture partners Mitsui and Nikkei; AOL Latin
America with its joint venture  partner the Cisneros  Group;  AOL Hong Kong with
China Internet Corporation and its affiliate,  China.com Corporation; and AOL in
Australia with its joint venture partner AAPT Limited.

      The Enterprise  Solutions segment 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,  iPlanet 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.

         The Interactive  Services Group and the Netscape  Enterprise  Group are
the only two  reportable  segments.  The results of the  Interactive  Properties
Group and the AOL International Group have been combined in the "other segments"
row shown below.  Prior period  information  has been restated to conform to the
current  presentation.  There  are no  intersegment  revenues  between  the four
operating  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 four 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 Condensed Consolidated  Statements of
Operations  and are  not  assigned  or  allocated  to the  segments.  All  other
accounting policies are applied consistently to the segments, where applicable.

         A summary of the segment financial information is as follows:
<TABLE>

                                               Three months ended           Nine months ended
                                                    March 31,                   March 31,
                                                2000         1999           2000         1999
                                           ------------   -----------   ------------  -----------
                                                            (Amounts in millions)

     Revenues:
<S>                                             <C>          <C>            <C>          <C>
     Interactive Online Services.(1).......     $1,605       $1,121         $4,326       $3,020
     Enterprise Solutions.(2)..............        126          109            365          328
     Other segments.(3)....................        105           23            233           52
                                           ------------   -----------   ------------  -----------
         Total revenues....................     $1,836       $1,253         $4,924       $3,400

     Income (loss) from operations:

     Interactive Online Services.(1).......     $  430       $  283         $1,145       $  662
     Enterprise Solutions.(2)..............         24          (32)            71          (43)
     Other segments.(3)....................         37          (16)            66          (38)
     General & Administrative.(4)..........       (110)        (110)          (317)        (254)
     Other (5).............................          -          (78)            (5)         (80)
                                           ------------   -----------   ------------  -----------
         Total income from operations......     $  381       $   47         $  960       $  247
</TABLE>


1.   For the three months ended March 31, 2000 and 1999, the Interactive  Online
     Services Group includes online service  revenues of $1,153 million and $869
     million,  respectively,  advertising,  commerce and other  revenues of $452
     million and $252 million,  respectively,  and goodwill and other intangible
     assets  amortization of $13 million and $10 million, respectively.  For the
     nine months ended March 31, 2000 and 1999, the Interactive  Online Services
     Group  includes  online  service  revenues  of $3,215  million  and  $2,378
     million, respectively,  advertising,  commerce and other revenues of $1,111
     million and $642 million,  respectively,  and goodwill and other intangible
     assets amortization of $33 million and $23 million, respectively.

2.   For the three and nine months ended March 31, 2000 and 1999, the Enterprise
     Solutions segment is comprised solely of enterprise revenues.  For the nine
     months  ended March 31, 2000 and 1999,  the  Enterprise  Solutions  segment
     includes goodwill and other intangible asset amortization of $0 million and
     $5 million, respectively.

3.   For the three and nine months ended March 31, 2000 and 1999, Other segments
     are comprised solely of advertising,  commerce and other revenues.  For the
     three months ended March 31, 2000 and 1999, Other segments include goodwill
     and other  intangible  assets  amortization  of $7 million  and $7 million,
     respectively.  For the nine months  ended  March 31,  2000 and 1999,  Other
     segments include goodwill and other intangible  assets  amortization of $22
     million and $21 million, respectively.

4.   Bad Debt has been allocated to the applicable segment.
5.   Other consists of merger related costs.

Note 7.  Notes Payable

         During  December  1999,  the Company  sold $2.3  billion  principal  of
zero-coupon  Convertible  Subordinated  Notes due December 6, 2019 (the "Notes")
and received net proceeds of  approximately  $1.2  billion.  The Notes have a 3%
yield to maturity  and are  convertible  into the  Company's  common  stock at a
conversion  rate of  5.8338  shares of common  stock for each  $1,000  principal
amount of the Notes  (equivalent  to a  conversion  price of $94.4938  per share
based on the initial offering price of the Notes).  The Notes may be redeemed at
the option of the Company on or after December 6, 2002 at the redemption  prices
set forth in the Notes.  The holders can require the Company to  repurchase  the
Notes on December 6, 2004 at the redemption prices set forth in the Notes.

         On December 31, 1999,  the  underwriters  exercised  the  overallotment
option on the  Notes.  As a  result,  on  January  5,  2000,  the  Company  sold
additional  Notes with aggregate  principal at maturity of  approximately  $55.6
million for net proceeds of approximately $30 million.

Note 8.  Subsequent Events

         As of May 10, 2000 the fair market value of the  Company's  investments
including available-for-sale  securities had declined approximately $900 million
from  approximately  $4.8  billion as of March 31,  2000 to  approximately  $3.9
billion.

Note 9.  Legal Proceedings

         Several  complaints  have been filed and remain pending in the Delaware
Court of  Chancery  naming as  defendants  one or more of  America  Online,  the
directors of America Online,  Time Warner Inc. and the directors of Time Warner.
The complaints  purport to be filed on behalf of holders of America Online stock
or Time Warner stock,  as applicable,  and allege  breaches of fiduciary duty by
the  applicable  company and its  directors or aiding and  abetting  breaches of
fiduciary  duty by the other company and its  directors in  connection  with the
proposed  merger of America Online and Time Warner.  The plaintiffs in each case
seek to enjoin  completion of the merger and/or damages.  The Company intends to
defend against these lawsuits vigorously.

         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  and cannot reasonably
estimate  a range of  possible  loss  given  the  current  status  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,  nor can the Company reasonably estimate a range of possible
loss given the current status of the litigation.

         America  Online has been named as a defendant  in several  class action
lawsuits  that have been filed in state and federal  courts.  The  complaints in
these lawsuits contend that consumers and competing  Internet service  providers
have been injured  because of the default  selection  features in AOL 5.0. These
cases are at a preliminary  stage, but America Online does not believe they have
merit and intends to contest them vigorously.

Note 10. Business Developments

         On January 10, 2000, the Company and Time Warner Inc.  ("Time  Warner")
announced  that they had entered into an Agreement and Plan of Merger,  dated as
of January 10,  2000 (the  "Merger  Agreement"),  which sets forth the terms and
conditions of the proposed merger of equals (the "Merger") of America Online and
Time Warner.  Pursuant to the Merger  Agreement,  America Online and Time Warner
have  formed AOL Time  Warner and each holds one share of AOL Time  Warner.  AOL
Acquisition  Sub, a newly formed and wholly owned subsidiary of AOL Time Warner,
will be merged with and into America Online, with stockholders of America Online
receiving  one share of AOL Time Warner  common  stock for each share of America
Online Common  Stock,  and TW  Acquisition  Sub, a newly formed and wholly owned
subsidiary  of AOL Time Warner,  will be merged with and into Time Warner,  with
common  stockholders  of Time  Warner  receiving  1.5 shares of AOL Time  Warner
common  stock for each share of Time  Warner  common  stock.  As a result of the
Merger, the separate  corporate  existence of each of AOL Acquisition Sub and TW
Acquisition  Sub will cease and each of  America  Online  and Time  Warner  will
survive  the  Merger  as a  wholly  owned  subsidiary  of AOL Time  Warner.  The
transactions contemplated by the Merger Agreement are subject to the approval of
the  stockholders  of each of America Online and Time Warner and other customary
closing conditions, such as regulatory approvals.

         On December  22,  1999,  the  Company  announced  that it will  acquire
MapQuest.com,  Inc. in an all-stock  transaction.  The Company  expects to issue
approximately  13 million shares of common stock.  Stockholders  of MapQuest.com
will receive  0.31558 shares of AOL common stock for each share of  MapQuest.com
stock.  The  transaction  is expected to close in June 2000,  subject to various
conditions,  including  customary  regulatory  approvals  and  the  approval  of
MapQuest.com   stockholders.   The  transaction  will  be  accounted  for  as  a
pooling-of-interests.

         On March 17, 2000, America Online and Bertelsmann AG announced a global
alliance  to  expand  the  distribution  of  Bertelsmann's   media  content  and
electronic  commerce   properties  over  America  Online's   interactive  brands
worldwide.  America  Online and  Bertelsmann  also  announced  an  agreement  to
restructure  their interests in the AOL Europe and AOL Australia joint ventures.
This restructuring  consists of a put and call arrangement for America Online to
purchase,  in two  installments,  Bertelsmann's  50%  interest in AOL Europe for
consideration  ranging from $6.75 billion to $8.25  billion,  payable at America
Online's option in cash,  America Online stock (or AOL Time Warner stock, if the
merger has closed) or a combination of cash and stock. Bertelsmann has the right
to require  America  Online to purchase 80% of its 50% interest in AOL Europe on
January 31, 2002 for $5.3  billion and the  remainder  on July 1, 2002 for $1.45
billion. If Bertelsmann fails to exercise its put rights, America Online has the
right to  purchase  80% of  Bertelsmann's  50%  interest  in AOL Europe  between
January 15, 2002 and January 15, 2003 for $6.5 billion and the remainder between
June 30,  2002 and June 30, 2003 for $1.75  billion.  In  addition,  the parties
agreed that America Online would take immediate  ownership of Bertelsmann's  50%
interest in the  parties' AOL  Australia  joint  venture,  subject to receipt of
necessary regulatory approvals.  Because Bertelsmann's first put option will not
close until January 31, 2002, if exercised,  America  Online has not  determined
yet how it will fund the  payment of the  purchase  price for its  purchases  of
Bertelsmann's   interest  in  AOL  Europe.  America  Online  cannot  predict  if
Bertelsmann  will exercise its put rights,  and America Online's call rights are
not  exercisable  unless  Bertelsmann  fails  to  exercise  its put  rights.  If
Bertelsmann  does not exercise its put rights,  America Online will consider all
pertinent factors at such time and during the exercisability  period of its call
rights in  determining  whether  to  exercise  its call  rights,  including  the
performance  and perceived  value of AOL Europe at such time,  conditions in the
markets  where AOL Europe  operates,  financial  market  conditions  and America
Online's (or AOL Time Warner's) business plans and financial situation.  For the
year ended June 30,  1999,  AOL  Europe's  revenues are less than 10% of America
Online's  revenues and AOL Europe's net loss is less than 5% of America Online's
net income.  America Online anticipates that the primary impact of the potential
acquisition  of  Bertelsmann's  interest in AOL Europe on results of  operations
would be the  amortization  of $1 billion to $1.5 billion of goodwill each year.
America  Online  does not  anticipate  an  adverse  impact  from  the  potential
acquisition  on America  Online's  financial  position  because it will have the
ability to pay the purchase  price either in stock or cash, or a combination  of
the two, at its option.  America Online believes it will have adequate resources
from its  cash  reserves  or from  accessing  the  capital  markets  to make the
required  payment upon exercise of a put or call right,  should it decide to pay
in cash,  and that  following the merger,  AOL Time Warner will be in a stronger
position to make such payments than America Online alone would be.

Note 11. Recent Pronouncements

         In March 2000, the FASB issued FASB  Interpretation No. 44, "Accounting
for  Certain  Transactions  involving  Stock  Compensation"  ("FIN  44"),  which
contains  rules  designed to clarify the  application  of APB 25. FIN 44 will be
effective  on July 1,  2000 and the  Company  will  adopt it at that  time.  The
Company  believes  the  anticipated  impact  of  adoption  of FIN 44 will not be
material to the earnings and financial position of the Company.

         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 believes
the  anticipated  impact of  adoption  of SFAS 133 will not be  material  to the
earnings and financial position of the Company.

Note 12. Accounting Adjustment

     After   consultation   with  the  Staff  of  the  Securities  and  Exchange
Commission,   the  Company  has  adjusted  its   accounting  to  capitalize  the
acquisition cost of Gateway.net subscribers and amortize such cost over the term
of the agreement.  Such cost had  previously  been expensed in the quarter ended
December  31,  1999.  The effect of this  adjustment  on the three  months ended
December  31,  1999 was to  increase  net  income by $18  million  and $0.01 per
diluted share.  The effect of this adjustment on the nine months ended March 31,
2000 was to  increase  net  income by $17  million  with no  effect  on  diluted
earnings per share.



                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

         Founded in 1985, America Online, Inc., (the "Company") based in Dulles,
Virginia,  is the world's leader in interactive services,  Web brands,  Internet
technologies  and  electronic  commerce  services.   The  Company  operates  two
worldwide  subscription  based Internet online services,  the AOL service,  with
more than 22 million  members,  and the CompuServe  service,  with more than 2.7
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 and Nullsoft,  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.

Consolidated Results of Operations

         Revenues

         The  following  table and  discussion  highlights  the  revenues of the
Company for the three and nine months ended March 31, 2000 and 1999:

<TABLE>

                                      Three Months Ended                 Nine Months Ended
                                            March 31,                         March 31,
                                      2000            1999              2000            1999
                                --------------- ---------------    --------------- ---------------
                                                      (Dollars in millions)
Revenues:
<S>                             <C>      <C>    <C>      <C>        <C>      <C>    <C>      <C>
Subscription services...........$1,153   62.8%  $  869   69.4%      $3,215   65.3%  $2,378   70.0%
Advertising, commerce and other..  557   30.3      275   21.9        1,344   27.3      694   20.4
Enterprise solutions.............  126    6.9      109    8.7          365    7.4      328    9.6
                                ------- ------- ------- -------    ------- ------- ------- -------
Total revenues..................$1,836  100.0%  $1,253  100.0%      $4,924  100.0%  $3,400  100.0%

</TABLE>

         Subscription Services Revenues

         For the three  months  ended  March  31,  2000,  subscription  services
revenues,   which  are  generated  mainly  from  subscribers  paying  a  monthly
membership fee, increased from $869 million to $1,153 million,  or 33%, over the
three months ended March 31, 1999. This increase was primarily attributable to a
36% increase in the average  number of revenue  generating  subscribers  for the
three months ended March 31, 2000,  compared to the three months ended March 31,
1999,  offset in part by a slight decrease in the average  monthly  subscription
services revenue per revenue generating subscriber.  The decrease in the average
monthly subscription  services revenue per revenue generating  subscriber is due
to the mix of multiple price points across the Company's subscription services.

         For the  nine  months  ended  March  31,  2000,  subscription  services
revenues increased from $2,378 million to $3,215 million,  or 35%, over the nine
months ended March 31, 1999.  This increase was primarily  attributable to a 34%
increase in the average number of revenue  generating  subscribers  for the nine
months ended March 31,  2000,  compared to the nine months ended March 31, 1999,
as well as a 1% increase in the average monthly  subscription  services  revenue
per revenue generating subscriber.

         At March 31,  2000,  the Company  had  approximately  22.2  million AOL
service subscribers, including 18.6 million in the United States and 3.6 million
in the rest of the world.  Also at that date, the Company had  approximately 2.7
million  CompuServe service  subscribers,  with 1.9 million in the United States
and 852,000 in the rest of the world. The Company also has approximately 854,000
worldwide  custom solution  subscribers on alternate  branded  services that are
provided in conjunction with the Company's partners.

         Advertising, Commerce and Other Revenues

         The following table summarizes the material  components of advertising,
commerce  and other  revenues for the three and nine months ended March 31, 2000
and 1999:

<TABLE>

                                      Three Months Ended                  Nine Months Ended
                                           March 31,                          March 31,
                                      2000            1999              2000            1999
                                --------------- ---------------    --------------- ---------------
                                                       (Dollars in millions)

Advertising and electronic

<S>                             <C>      <C>     <C>     <C>         <C>      <C>     <C>     <C>
   commerce fees................$  463   83.1%   $ 211   76.7%       $1,087   80.9%   $ 532   76.7%
Merchandise.....................    58   10.4       38   13.8           151   11.2       91   13.1
Other...........................    36    6.5       26    9.5           106    7.9       71   10.2
                                ------- ------- ------- -------     ------- ------- ------- -------
Total advertising, commerce

   and other revenues...........$  557  100.0%   $ 275  100.0%       $1,344  100.0%   $ 694  100.0%
</TABLE>


         Advertising,  commerce and other revenues, which consist principally of
advertising and related revenues,  fees associated with commerce and the sale of
merchandise across the Company's  multiple brands,  increased by 103%, from $275
million in the quarter ended March 31, 1999 to $557 million in the quarter ended
March 31, 2000. For the nine months ended March 31, 2000, advertising,  commerce
and other  revenues  increased  94% from $694  million in the nine months  ended
March 31, 1999 to $1,344 million in the nine months ended March 31, 2000.

         Advertising  and electronic  commerce fees increased by 119%, from $211
million in the three  months  ended March 31, 1999 to $463  million in the three
months ended March 31, 2000.  Advertising and electronic commerce fees increased
by 104%,  from $532  million in the nine  months  ended March 31, 1999 to $1,087
million in the nine months ended March 31, 2000.  These  increases are primarily
attributable  to  additional  advertising  and  electronic  commerce fees on the
Company's  AOL service,  as well as the  Company's  other  branded  services and
portals.  At March 31, 2000,  the Company's  advertising  and commerce  backlog,
representing the contract value of advertising and commerce  agreements  signed,
less revenues already  recognized from these agreements,  was approximately $2.7
billion,  up approximately  $1.3 billion from March 31, 1999.  Merchandise sales
increased  by 53%,  from $38 million in the three months ended March 31, 1999 to
$58  million  in the three  months  ended  March  31,  2000.  Merchandise  sales
increased  by 66%,  from $91 million in the nine months  ended March 31, 1999 to
$151 million in the nine months ended March 31, 2000. These increases are mainly
attributable to improved response rates to advertising, as well as a larger base
of subscribers.

                  Enterprise Solutions Revenues

         Enterprise  solutions  revenues,  which consist  principally of product
licensing fees and fees from technical support, consulting and training services
increased by 16%, from $109 million in three months ended March 31, 1999 to $126
million in the three  months  ended March 31,  2000.  For the nine months  ended
March 31,  2000,  Enterprise  solutions  revenues  increased  by 11%,  from $328
million in the nine  months  ended  March 31,  1999 to $365  million in the nine
months ended March 31,  2000.  The  increase  was  primarily  driven by revenues
generated  from the alliance with Sun  Microsystems,  Inc.,  which was formed in
March 1999.

         Costs and Expenses

         The following table and discussion highlights the costs and expenses of
the Company for the three and nine months ended March 31, 2000 and 1999:

<TABLE>

                                           Three Months Ended                 Nine Months Ended
                                               March 31,                           March 31,
                                         2000            1999               2000            1999
                                   --------------- ---------------     --------------- ---------------
                                                          (Dollars in millions)

<S>                                <C>     <C>     <C>     <C>          <C>     <C>     <C>     <C>
Total revenues.................... $1,836  100.0%  $1,253  100.0%       $4,924  100.0%  $3,400  100.0%

Costs and expenses:
Cost of revenues.................. $  937   51.0%  $  693   55.3%       $2,558   52.0    1,916   56.4%
Sales and marketing...............    266   14.5      218   17.4           706   14.3      594   17.5
Product development...............     76    4.1       80    6.4           217    4.4      217    6.4
General and administrative........    156    8.5      120    9.6           423    8.6      297    8.7
Amortization of goodwill and
   other intangible assets........     20    1.1       17    1.4            55    1.1       49    1.4
Merger charges....................      -      -       78    6.2             5    0.1       80    2.4
                                   ------- ------- ------- -------     ------- ------- ------- -------
Total costs and expenses.......... $1,455   79.2%  $1,206   96.3%       $3,964   80.5%  $3,153   92.8%
</TABLE>


                  Cost of Revenues

         Cost of revenues includes  network-related costs,  consisting primarily
of data network costs; personnel and related costs associated with operating the
data centers, data network and providing customer support;  billing,  consulting
and technical  support/training;  host computer and network equipment costs; and
the costs of merchandise  sold. For the three months ended March 31, 2000,  cost
of revenues increased from $693 million to $937 million,  or 35%, over the three
months ended March 31, 1999,  and  decreased as a percentage  of total  revenues
from 55.3% to 51.0%.  For the nine months ended March 31, 2000, cost of revenues
increased  from  $1,916  million to $2,558  million or 34% over the nine  months
ended March 31, 1999, and decreased as a percentage of total revenues from 56.4%
to 52.0%.

         The  increase in cost of  revenues  in the three and nine months  ended
March 31, 2000 compared to the same period ending March 31, 1999,  was primarily
attributable  to increases in data network  costs;  personnel  and related costs
associated with operating the data centers,  data network and providing customer
support;  and costs  related to the Company's  new custom  services,  as well as
increases in royalties, merchandise and billing expense as a result of increased
member activity on the various services.  Data network costs increased primarily
as a result of the  larger  customer  base and  increased  usage  per  customer.
Personnel and related costs  associated  with  operating the data centers,  data
network and providing  customer support  increased  primarily as a result of the
requirements  of  supporting a larger data  network,  larger  customer  base and
increased  subscription  services  revenues.  Costs related to the Company's new
custom services are a result of the Company's agreement with Gateway, Inc.

         The decrease in cost of revenues as a percentage  of total  revenues in
the three and nine  months  ended March 31,  2000  compared to the same  periods
ending March 31, 1999, was primarily attributable to growth of the higher margin
advertising,   commerce   and  other   revenues,   as  well  as  a  decrease  in
network-related  costs as a percentage of  subscription  services  revenue.  The
decrease in  network-related  costs as a  percentage  of  subscription  services
revenue was  primarily  driven by a 14% decrease in the hourly  network cost for
the three months  ended March 31, 2000  compared to the three months ended March
31, 1999. The decrease in the hourly network costs is mainly due to efficiencies
the  Company  continues  to gain as a result of its size and  scale,  as well as
lower  negotiated  rates with its network  providers.  This  decrease was mostly
offset by an  increase  in daily  member  usage,  from an  average  of nearly 55
minutes  per day in the three  months  ended  March 31, 1999 to an average of 64
minutes per day in the three months ended March 31, 2000.

                  Sales and Marketing

         Sales and  marketing  expenses  include the costs to acquire and retain
subscribers,  the  operating  expenses  associated  with the sales and marketing
organizations  and  other  general  marketing  costs to  support  the  Company's
multiple brands.  For the three months ended March 31, 2000, sales and marketing
expenses  increased  from $218 million to $266  million,  or 22%, over the three
months ended March 31, 1999,  and  decreased as a percentage  of total  revenues
from  17.4% to  14.5%.  For the nine  months  ended  March 31,  2000,  sales and
marketing expenses increased from $594 million to $706 million,  or 19% over the
nine  months  ended March 31,  1999,  and  decreased  as a  percentage  of total
revenues from 17.5% to 14.3%.  The increase in sales and marketing  expenses for
the three months ended March 31, 2000 was primarily  attributable to an increase
in direct  subscriber  acquisition  costs  related to the AOL  service and brand
advertising  across  multiple  brands,  offset by a decrease  in sales and sales
support  functions in the enterprise  group. The increase in sales and marketing
expenses for the nine months ended March 31, 2000 was primarily  attributable to
an increase in direct  subscriber  acquisition  costs related to the AOL service
and brand  advertising  across multiple brands offset by a decrease in sales and
sales  support  functions  in the  enterprise  group.  The decrease in marketing
expenses as a percentage  of total  revenues for the three and nine months ended
March  31,  2000 was  primarily  a result  of the  substantial  growth  in total
revenues.

                  Product Development

         Product development costs include research and development expenses and
other  product  development  costs.  For the three  months ended March 31, 2000,
product  development costs decreased from $80 million to $76 million, or 5% over
the three months ended March 31, 1999,  and  decreased as a percentage  of total
revenues  from 6.4% to 4.1%.  For the nine months ended March 31, 2000,  product
development  remained unchanged at $217 million and decreased as a percentage of
total revenues from 6.4% to 4.4%. The decrease in product  development costs for
the three months ended March 31, 2000 was primarily  attributable  to a decrease
in Enterprise personnel costs as a result of the alliance with Sun MicroSystems,
Inc., as well as the shared AOL infrastructure,  partially offset by an increase
in the number of  technical  employees  supporting  additional  products  across
multiple brands.  The decrease in product  development  costs as a percentage of
total  revenues for the three and nine months ended March 31, 2000 was primarily
a result of the substantial growth in total revenues.

                  General and Administrative

         For the three months ended March 31, 2000,  general and  administrative
expenses  increased  from $120 million to $156  million,  or 30%, over the three
months ended March 31, 1999,  and  decreased as a percentage  of total  revenues
from 9.6% to 8.5%.  For the nine  months  ended  March  31,  2000,  general  and
administrative expenses increased from $297 million to $423 million, or 42% over
the nine months  ended March 31, 1999 and  decreased  as a  percentage  of total
revenues from 8.7% to 8.6%. The increase in general and administrative costs for
the three months ended March 31, 2000 was primarily  attributable to an increase
in bad debt expense  related to the CompuServe  and AOL services,  as well as an
increase in  professional  services,  partially  offset by a decrease in payroll
taxes associated with employee stock option exercises. For the nine months ended
March 31, 2000, the increase in general and  administrative  costs was primarily
attributable  to an  increase  in  bad  debt  expense  related  to the  AOL  and
CompuServe services;  increased personnel costs, primarily payroll taxes related
to employee stock option exercises;  and other  professional  services and fees,
primarily  consulting  and legal fees.  The increase in bad debt expense for the
three and nine months ended March 31, 2000 related to the CompuServe  service is
primarily  due to the  CompuServe  rebate  program which was initiated in fiscal
year 2000.  The increase in bad debt expense for the three and nine months ended
March 31, 2000 related to the AOL service is primarily a result of extending the
collection  period for subscription  fees. In addition,  the increase in service
revenues  during the three and nine months ended March 31, 2000 for both the AOL
and CompuServe services contributed to the increase in bad debt. The decrease in
general and administrative costs as a percentage of total revenues for the three
and nine months ended March 31, 2000 was  primarily a result of the  substantial
growth in total revenues.

                  Amortization of Goodwill and Other Intangible Assets

         Amortization of goodwill and other  intangible  assets increased to $20
million in the three  months  ended March 31, 2000 from $17 million in the three
months  ended March 31,  1999.  Amortization  of goodwill  and other  intangible
assets increased to $55 million in the nine months ended March 31, 2000 from $49
million in the nine months ended March 31, 1999.

         Other Income, Net

         Other  income,   net  consists   primarily  of  investment  income  and
non-operating  gains net of interest  expense  and  non-operating  charges.  The
Company  recorded  other  income of $336  million and $587  million in the three
months ended March 31, 2000 and 1999,  respectively.  The Company recorded other
income of $533  million and $608 million in the nine months ended March 31, 2000
and 1999,  respectively.  The decrease in other income in the three months ended
March 31, 2000  compared to the three months ended March 31, 1999 was  primarily
attributable  to realized  gains on  investments in the three months ended March
31,  1999 of $567  million  compared to realized  gains on  investments  of $279
million in the three  months  ended  March 31,  2000,  offset by an  increase in
interest income. The decrease in other income in the nine months ended March 31,
2000 compared to the nine months ended March 31, 1999 was primarily attributable
to realized  gains on investments of $570 million in the nine months ended March
31, 1999 compared to net realized  gains on  investments  of $399 million in the
nine months ended March 31, 2000, offset by an increase in interest income.  The
increase in interest  income is due to a higher cash balance and interest earned
on investments.

         Provision for Income Taxes

         The provision for income taxes was $280 million and $223 million in the
three  months ended March 31, 2000 and 1999,  respectively.  The  provision  for
income  taxes was $583  million and $253  million in the nine months ended March
31, 2000 and 1999  respectively.  Income tax expense for the three  months ended
March 31, 2000 includes $279 million for U.S. federal and state income taxes and
$1 million for foreign taxes. Income tax expense for the nine months ended March
31, 2000  includes  $580 million for U.S.  federal and state income taxes and $3
million for foreign  taxes.  As of March 31, 2000, the Company had net operating
loss  carryforwards of  approximately  $10.4 billion,  primarily  resulting from
stock option exercises, available to offset future U.S. federal taxable income.

Segment Results of Operations

         A summary of the segment  financial  information  is as  follows:  (For
further  information  regarding  segments,  refer  to  Note  6 of the  Notes  to
Consolidated Financial Statements).

<TABLE>

                                               Three months ended           Nine months ended
                                                     March 31,                   March 31,
                                                2000         1999           2000         1999
                                           ------------   -----------   ------------  -----------
                                                            (Amounts in millions)

     Revenues:
<S>                                             <C>          <C>            <C>          <C>
     Interactive Online Services.(1).......     $1,605       $1,121         $4,326       $3,020
     Enterprise Solutions.(2)..............        126          109            365          328
     Other segments.(3)....................        105           23            233           52
                                           ------------   -----------   ------------  -----------
         Total revenues....................     $1,836       $1,253         $4,924       $3,400

     Income (loss) from operations:

     Interactive Online Services.(1).......     $  430       $  283         $1,145       $  662
     Enterprise Solutions.(2)..............         24          (32)            71          (43)
     Other segments.(3)....................         37          (16)            66          (38)
     General & Administrative.(4)..........       (110)        (110)          (317)        (254)
     Other (5).............................          -          (78)            (5)         (80)
                                           ------------   -----------   ------------  -----------
         Total income from operations......     $  381       $   47         $  960       $  247
</TABLE>


1.   For the three months ended March 31, 2000 and 1999, the Interactive  Online
     Services Group includes online service  revenues of $1,153 million and $869
     million,  respectively,  advertising,  commerce and other  revenues of $452
     million and $252 million,  respectively,  and goodwill and other intangible
     assets  amortization of $13 million and $10 million, respectively.  For the
     nine months ended March 31, 2000 and 1999, the Interactive  Online Services
     Group  includes  online  service  revenues  of $3,215  million  and  $2,378
     million, respectively,  advertising,  commerce and other revenues of $1,111
     million and $642 million,  respectively,  and goodwill and other intangible
     assets amortization of $33 million and $23 million, respectively.

2.   For the three and nine months ended March 31, 2000 and 1999, the Enterprise
     Solutions segment is comprised solely of enterprise revenues.  For the nine
     months  ended March 31, 2000 and 1999,  the  Enterprise  Solutions  segment
     includes  goodwill and other intangible  assets  amortization of $0 million
     and $5 million, respectively.

3.   For the three and nine months ended March 31, 2000 and 1999, Other segments
     are comprised solely of advertising,  commerce and other revenues.  For the
     three months ended March 31, 2000 and 1999, Other segments include goodwill
     and other  intangible  assets  amortization  of $7 million  and $7 million,
     respectively.  For the nine months  ended  March 31,  2000 and 1999,  Other
     segments include goodwill and other intangible  assets  amortization of $22
     million and $21 million, respectively.

4.   Bad Debt has been allocated to the applicable segment.
5.   Other consists of merger related costs.


         For an  overview  of the segment  revenues,  refer to the  consolidated
results of operations discussion earlier in this section.

         Interactive Online Services income from operations  increased from $283
million in the three  months  ended March 31, 1999 to $430  million in the three
months ended March 31, 2000 and  increased  from $662 million in the nine months
ended March 31, 2000 to $1,145  million in the nine months ended March 31, 2000.
These increases are primarily the result of increases in  subscription  services
revenues and  advertising,  commerce and other  revenues,  coupled with improved
margins and a decrease in marketing expenses as a percentage of total revenues.

         Enterprise Solutions income (loss) from operations improved from a loss
of $32 million in the three months ended March 31, 1999 to income of $24 million
in the three  months  ended March 31, 2000 and a loss of $43 million in the nine
months  ended March 31,  1999 to income of $71 million in the nine months  ended
March 31, 2000. These  improvements were mainly  attributable to the increase in
revenues,  as well as a decline in operating  expenses,  as the Company began to
realize  efficiencies  from using the  Company's  infrastructure  to support the
Enterprise  Solutions  segment,  as well as the other  lines of  businesses.  In
addition,  Enterprise Solutions is experiencing  benefits from the Sun Alliance,
which was formed in March 1999.

         Other segments  income (loss) from  operations  improved from a loss of
$16 million in the three months ended March 31, 1999 to income of $37 million in
the three  months  ended  March 31,  2000 and a loss of $38  million in the nine
months  ended March 31,  1999 to income of $66 million in the nine months  ended
March 31, 2000.  The increase in income from  operations  for the three and nine
months  ended March 31, 2000  compared to the three and nine months  ended March
31, 2000 is primarily due to an increase in Interactive  Properties  advertising
revenues  partially  offset by an  increase in cost of  revenues  and  marketing
costs.

Liquidity and Capital Resources

         The Company is currently  financing its  operations  primarily  through
cash generated from operations. In addition, the Company has generated cash from
the sale of its capital stock, the sale of its convertible notes and the sale of
marketable  securities it held.  Net cash provided by operating  activities  was
$1,313  million  and $929  million in the nine  months  ended March 31, 2000 and
1999, respectively, and increased primarily due to the Company's increase in net
income before  taxes.  Net cash (used in) provided by investing  activities  was
$(1,116)  million and $273  million in the nine months  ended March 31, 2000 and
1999,  respectively,  and  increased  mainly due to the  Company's  purchases of
investments  including  available-for-sale  securities,  as well as property and
equipment. In addition to purchasing  telecommunications  equipment, the Company
also  enters  into  operating  leases  for the use of this  equipment.  Net cash
provided by financing activities was $1,571 million and $802 million in the nine
months  ended  March 31,  2000 and 1999,  respectively.  Included  in  financing
activities  for the nine  months  ended  March 31,  2000 was  $1,281  million in
proceeds  from  the  issuance  of  convertible  notes.   Included  in  financing
activities  for the nine  months  ended  March  31,  1999 was  $550  million  in
aggregate net proceeds from a public  offering of its common stock.  The Company
currently has  approximately  $3.7 billion  available for issuance under a shelf
registration filed in May 1999.

         The Company  expects to continue  using its working  capital to finance
ongoing  operations  and to fund marketing  programs and the  development of its
products and  services.  The Company  plans to continue to invest in  subscriber
acquisition,  retention and brand  marketing to expand its  subscriber  base, as
well as in network,  computing  and support  infrastructure.  Additionally,  the
Company  expects to use a portion of its cash for the acquisition and subsequent
funding  of   technologies,   content,   products,   investments  or  businesses
complementary to the Company's  current business.  The Company  anticipates that
cash on hand, cash provided by operating  activities and cash available from the
capital markets and  traditional  lending markets will be sufficient to fund its
operations for the next twelve months.

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")

         The following table and discussion  summarizes EBITDA for the three and
nine months ended March 31, 2000 and 1999:

                           Three Months Ended              Nine Months Ended
                                March 31,                     March 31,
                           2000         1999              2000         1999
                       ------------  ------------     ------------  ------------
                                         (Amounts in millions)

EBITDA(as adjusted).....   $492          $224           $1,234         $559

         The Company  defines  EBITDA (as adjusted  for  one-time  items) as net
income plus: (1) provision/(benefit) for income taxes, (2) interest (income) and
expense,   (3)   depreciation   and   amortization   and  (4)  special  one-time
charges/(gains). EBITDA is presented and discussed because 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  accounting  principles
generally  accepted in the United States. In addition,  EBITDA as defined herein
may not be comparable to similarly titled measures reported by other companies.

         For the three months ended March 31, 2000,  EBITDA  increased from $224
million to $492 million or 120% over the three months ended March 31, 1999.  The
EBITDA margin (EBITDA  divided by total  revenues)  increased from 17.9% for the
three  months ended March 31, 1999 to 26.8% for the three months ended March 31,
2000.  For the nine months  ended March 31,  2000,  EBITDA  increased  from $559
million to $1,234 million or 121% over the nine months ended March 31, 1999. The
EBITDA margin  increased  from 16.4% for the nine months ended March 31, 1999 to
25.1% for the nine months ended March 31, 2000.  In  addition,  the  incremental
EBITDA margin (the current quarter  increase over the year ago quarter in EBITDA
of $268 million divided by the increase in revenues of $583 million for the same
periods) increased to nearly 46%. This increase in the incremental EBITDA margin
is mainly due to the shared  infrastructure that supports the Company's multiple
brands;  as  these  brands  begin  to  generate  additional  revenues,  a larger
percentage of each incremental dollar flows to EBITDA.

Forward-Looking Statements

         This report and other oral and written  statements  made by the Company
to the public contain and  incorporate by reference  forward-looking  statements
within the meaning of the "safe  harbor"  provisions  of the Private  Securities
Litigation Reform Act of 1995. In particular, statements regarding the following
subjects  are  forward-looking:  the proposed  AOL/Time  Warner  merger;  future
financial  and operating  results;  anticipated  subscriber,  usage and commerce
growth; new and developing markets,  products,  services,  features and content;
anticipated  timing  and  benefits  of  acquisitions  and  other  alliances  and
relationships;  the  availability,  benefits,  and timing of  deployment  of new
platforms and access and distribution technologies; and regulatory developments,
including  the  Company's  ability  to shape  public  policy  in,  for  example,
telecommunications, privacy and tax areas.

         The  forward-looking  statements  are  based  on  management's  current
expectations or beliefs and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking  statements.  Some of these factors and  uncertainties  include:
inability to obtain, or meet conditions imposed for, governmental  approvals for
the  AOL/Time  Warner  merger;   failure  of  the  Company's  or  Time  Warner's
stockholders  to approve the merger;  costs  related to the merger;  fluctuating
market prices that could cause AOL Time Warner's stock value to be less than the
current AOL or Time Warner stock value;  the  difficulty  the market may have in
valuing the AOL Time Warner business  model;  the risk that the Company and Time
Warner businesses will not be integrated  successfully;  the failure of AOL Time
Warner to realize anticipated  benefits of the AOL/Time Warner merger; and other
economic,   business,   competitive  and/or  regulatory  factors  affecting  the
Company's business generally. For a discussion of other factors that could cause
actual results to differ materially from those described in the  forward-looking
statements, please refer to the section entitled "Forward-Looking Statements" in
the Company's Annual Report on Form 10-K for the year ended June 30, 1999.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

         Market risk is the  potential  loss  arising  from  adverse  changes in
market rates and prices, such as foreign currency exchange, interest rates and a
decline in the stock  market.  The Company  does not enter into  derivatives  or
other financial instruments for trading or speculative purposes.

         The Company's investment portfolio of available-for-sale  securities is
primarily  invested in Internet and computer  companies.  As of May 10, 2000 the
fair market  value of the  Company's  investments  including  available-for-sale
securities  had declined  approximately  $900 million  from  approximately  $4.8
billion as of March 31, 2000 to approximately $3.9 billion.


PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings

         Please  see Note 9 to the Notes to  Consolidated  Financial  Statements
included herein.

Item 2.    Changes in Securities and Use of Proceeds

           On January 18, 2000, the Company  acquired  ToFish!  Incorporated  in
exchange for the issuance of 49,901 shares of Company Common Stock.  The private
placement is exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended.

Item 5.    Other Information

         On October 29, 1996, America Online,  Inc. ("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.

         Attached to this report as Exhibit 99 are  financial  statements of AOL
for the three years in the period ended June 30,  1999,  of which the year ended
June 30, 1997 has been restated to reflect the SEC's  findings,  as disclosed in
Note  3 to  the  financial  statements.  The  financial  statements,  which  are
incorporated herein by reference, restate and supersede the financial statements
contained in AOL's Annual Report on Form 10-K for the year ended June 30, 1999.

         Item 6, Selected  Financial Data, from AOL's Annual Report on Form 10-K
for the year ended June 30,  1999 has been  restated  as follows to reflect  the
SEC's findings:

<TABLE>

                                                      Year Ended June 30,
                                           ------------------------------------------
                                                             --------restated (3)----
                                             1999     1998     1997    1996     1995
                                           -------- -------- ------- -------- -------
                                          (Amounts in millions, except per share data)
Statement of Operations Data:
<S>                                          <C>     <C>     <C>     <C>        <C>
Subscription services.....................   $3,321  $2,183  $1,478  $1,024     $352
Advertising, commerce and other ..........    1,000     543     308     111       50
Enterprise solutions......................      456     365     411     188       23
                                           -------- -------- ------- -------- -------
Total revenues............................    4,777   3,091   2,197   1,323      425

Income (loss) from operations.............      458    (120)   (171)   (173)     (92)
Net income (loss) (1).....................      762     (74)   (171)   (202)    (106)
Income (loss) per common share:
Net income (loss) per share-diluted.......   $ 0.30  $(0.04) $(0.10) $(0.13)  $(0.09)
Net income (loss) per share-basic.........   $ 0.37  $(0.04) $(0.10) $(0.13)  $(0.09)
Weighted average shares outstanding:
Diluted...................................    2,555   1,850   1,676   1,501    1,175
Basic.....................................    2,081   1,850   1,676   1,501    1,175


                                                        As of June 30,
                                           ------------------------------------------
                                                                     ---restated (3)-
                                             1999     1998    1997    1996      1995
                                           -------- -------- ------- -------- -------
                                                     (Amounts in millions)
Balance Sheet Data:
Working capital (deficiency)..............     $254    $108    $(40)    $72      $18
Total assets..............................    5,348   2,874   1,501     957      382
Total debt................................      364     372      52      25       24
Stockholders' equity......................    3,033     996     610     393      165


                                                      Year Ended June 30,
                                           ------------------------------------------
                                                             --------restated-(3)----
                                             1999     1998     1997    1996     1995
                                           -------- -------- ------- -------- -------
                                                    (Amounts in millions)
Other Selected Data:
Net cash provided by operating activities.   $1,099    $437    $131      $2      $18
Earnings Before Interest, Taxes,
 Depreciation and Amortization (EBITDA)(2)      968     302      40     (91)     (25)
</TABLE>

------------------
(1)  Net income in the fiscal year ended June 30, 1999, includes special charges
     of $95  million  related  to mergers  and  restructurings,  $25  million in
     transition  costs  and a net gain of $567  million  related  to the sale of
     investments  in Excite,  Inc.  Net loss in the  fiscal  year ended June 30,
     1998,  includes  special  charges of $75  million  related  to mergers  and
     restructurings,  $94 million  related to acquired  in-process  research and
     development and $17 million related to settlements.  Net loss in the fiscal
     year ended June 30,  1997,  includes  special  charges of $49  million  for
     restructuring,  $24 million for  contract  terminations,  $24 million for a
     legal settlement and $9 million related to acquired in-process research and
     development.  Net income in the fiscal year ended June 30,  1996,  includes
     special  charges  of $17  million  for  acquired  in-process  research  and
     development,  $8 million  in merger  related  costs and $8 million  for the
     settlement  of a class  action  lawsuit.  Net loss in the fiscal year ended
     June 30,  1995,  includes  special  charges  of $50  million  for  acquired
     in-process research and development and $2 million for merger expenses.

(2)  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").

(3)  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 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 years ended June 30, 1995,  1996 and
     1997,  which has been  reflected  in the  above  table.  The  impact of the
     restatement is as follows:

<TABLE>

                                                             Year Ended June 30,
                                           ---------------------------------------------------
                                                 1997             1996             1995
                                           ----------------- ---------------- ----------------
                                           Amounts    Per    Amounts    Per    Amounts   Per
                                              in     share      in     share     in     share
                                           millions amounts  millions amounts  millions amounts

                                           -------- -------- ------- -------- -------- -------
<S>                                         <C>     <C>       <C>     <C>      <C>     <C>
Net income (loss) as originally reported... $(485)  $(0.29)   $  35   $ 0.02   $ (55)  $(0.05)
Reversals of capitalization and
  amortization of DMAC.....................   (71)   (0.04)    (237)   (0.15)    (51)   (0.04)
Reversal of write-off of DMAC..............   385     0.23        -        -       -        -
Net loss as restated....................... $(171)  $(0.10)   $(202)  $(0.13)  $(106)  $(0.09)
</TABLE>


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operation,  from AOL's Annual Report on Form 10-K for the year ended June 30,
1999 has been restated as follows to reflect the SEC's findings:

Overview

      Founded in 1985, America Online, Inc., ("America Online" or the "Company")
based in Dulles,  Virginia, is the world's leader in interactive  services,  Web
brands,  Internet  technologies,  and electronic commerce services.  The Company
operates two worldwide  subscription  based Internet  online  services,  America
Online, with more than 18 million members, and CompuServe,  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.

     The Company currently has two major lines of businesses organized into four
product  groups.  These groups are  supported by a common  infrastructure.  This
organization  structure  allows the Company to develop and grow multiple revenue
streams by utilizing  the common  infrastructure  across the multiple  brands it
currently has, as well as cost-effectively compete in new and emerging markets.

Interactive Online Services Business

         The Interactive Services Group

      The  Interactive   Services  Group  operates  the  Company's   interactive
products:  the AOL and  CompuServe  services and their related brand and product
extensions, including AOL Instant Messenger and AOL.COM; Netscape Netcenter; and
the Netscape  Communicator  client  software,  including the Netscape  Navigator
browser.  This  group is also  charged  with  rapidly  delivering  high-quality,
world-class products, features and functionality across all branded services and
properties and also has responsibility for broadband development and AOL devices
like AOL TV.

         The Interactive Properties Group

     The Interactive  Properties  Group operates ICQ,  Digital City,  MovieFone,
Direct Marketing Services ("DMS"),  Spinner Networks  Incorporated and Nullsoft,
Inc.,  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

     The AOL  International  Group  oversees  the AOL  and  CompuServe  services
outside of the U.S., as well as the recently  announced Netscape Online service.
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.

Netscape Enterprise Solution Business

         The Netscape Enterprise Group

     The Netscape  Enterprise Group serves Netscape's  enterprise  customers and
contributes  to America  Online's  part of the  strategic  alliance with Sun. 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.

Competition

     The  Company  competes  with  a  wide  range  of  other  companies  in  the
communications,   advertising,  entertainment,   information,  media,  Web-based
services, software,  technology,  direct mail and electronic commerce fields for
subscription,  advertising,  and commerce  revenues,  and in the  development of
distribution  technologies  and  equipment in its  Interactive  Online  Services
business.  The  Company  also  competes  with a wide range of  companies  in the
development and sale of electronic  commerce  infrastructure and applications in
its Enterprise Solutions business.

      o Competitors for subscription revenues include:
        --  online  services  such as the Microsoft  Network,  AT&T Worldnet and
            Prodigy Classic
        --  national and local Internet  service  providers,  such as MindSpring
            and EarthLink
        --  long distance and regional  telephone  companies  offering access as
            part of their telephone  service,  such as AT&T Corp., MCI WorldCom,
            Inc., Sprint Corporation and regional Bell operating companies
        --  cable television companies
        --  cable  Internet  access  services   offered  by  companies  such  as
            Excite@Home and Road Runner Group

      o Competitors for advertising and commerce revenues include:
        --  online  services  such as the Microsoft  Network,  AT&T Worldnet and
            Prodigy Classic
        --  Web-based  navigation  and search  service  companies such as Yahoo!
            Inc.,  Infoseek  Corporation  (to be  acquired  by the  Walt  Disney
            Company), Lycos, Inc. and Excite@Home.
        --  global media companies  including  newspapers,  radio and television
            stations and content  providers,  such as the National  Broadcasting
            Corporation,  CBS Corporation,  The Walt Disney Company, Time Warner
            Inc., The Washington Post Company and Conde Nast Publications, Inc.
        --  cable  Internet  access  services   offered  by  companies  such  as
            Excite@Home  and Road Runner Group
        --  Web sites  focusing  on  content,  commerce,  community  and similar
            features such as Amazon.com and eBay

      o  Competition  in  the  development  of  distribution   technologies  and
equipment includes:
        --  broadband  distribution  technologies  used in cable Internet access
            services  offered by companies such as  Excite@Home  and Road Runner
            Group
        --  advanced  telephone-based  access  services  offered through digital
            subscriber  line  technologies  offered by local  telecommunications
            companies
        --  other advanced digital services offered by broadcast,  satellite and
            wireless companies
        --  television-based   interactive  computer  services,  such  as  those
            offered by Microsoft's WebTV
        --  personal digital assistants or handheld  computers,  enhanced mobile
            phones and other equipment  offering  functional  equivalents to the
            Company's features

      o  Competitors  in  the  development  and  sale  of  electronic   commerce
infrastructure  and applications  include:
        --  providers  of  electronic  commerce  infrastructure  such as  server
            software,  including  International  Business Machines  Corporation,
            Microsoft   Corporation,    Oracle   Corporation,    Novell,   Inc.,
            Software.com, Inc., BEA Systems, Inc. and the provider of the Apache
            Web Server
        --  providers   of   electronic    commerce    applications    including
            International  Business Machines  Corporation,  Oracle  Corporation,
            General  Electric   Information  Systems,   Microsoft   Corporation,
            PeopleSoft,  Inc., SAP A.G., Open Market,  Inc., Ariba Technologies,
            CommerceOne, Sterling Commerce, Inc. and BroadVision, Inc.

      Some of the present  competitors and potential  future  competitors of the
Company may have greater financial,  technical, marketing or personnel resources
than the Company. In addition, as a result of acquisitions,  certain competitors
are able to  offer  both  Internet  access  and  other  services,  such as cable
television  or telephone  service,  and such  consolidation  may  continue.  The
competitive  environment could have a variety of adverse effects on the Company.
For example, it could:

      o negatively impact the Company's ability to generate greater revenues and
        profits from sources other than online  service  subscription  revenues,
        such as advertising and electronic commerce

      o limit the Company's opportunities to enter into or renew agreements with
        content providers and distribution partners
      o limit the Company's ability to develop new products and services
      o limit  the  Company's  ability  to  continue  to  grow  or  sustain  its
        subscriber base
      o require price  reductions in the  subscription  fees for online services
        and require increased spending on marketing,  network capacity,  content
        procurement and product and features development
      o require price reductions in the Company's enterprise software products
      o result  in a loss  of  the  Company's  market  share  in the  enterprise
        software industry
      o require an increase in the Company's sales and marketing expenditures

     Any of the  foregoing  events  could have an adverse  impact on revenues or
result in an  increase in costs as a  percentage  of  revenues,  either of which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and operating results.

Consolidated Results of Operations

                  Revenues

      The following table and discussion  highlights the revenues of the Company
for the years ended June 30, 1999, 1998 and 1997.

<TABLE>

                                                                       Year ended June 30,
                                                         -----------------------------------------------
                                                               1999            1998            1997
                                                         --------------- --------------- ---------------
                                                                       (Dollars in millions)
Revenues:
<S>                                                      <C>      <C>    <C>      <C>    <C>      <C>
Subscription services................................... $3,321   69.5%  $2,183   70.6%  $1,478   67.3%
Advertising, commerce and other.........................  1,000   21.0      543   17.6      308   14.0
Enterprise solutions....................................    456    9.5      365   11.8      411   18.7
                                                         ------- ------- ------- ------- ------- -------
Total revenues.......................................... $4,777  100.0%  $3,091  100.0%  $2,197  100.0%
</TABLE>


      The Company generates three main types of revenues: subscription services;
advertising, commerce and other; and enterprise solutions revenues. Subscription
services revenues are generated from customers  subscribing to the Company's AOL
service and,  effective February 1, 1998, the CompuServe  service.  Advertising,
commerce and other revenues are non-subscription  based and are generated mainly
from businesses  marketing to the Company's base of subscribers and users across
its multiple brands. Advertising,  commerce and other revenues mainly consist of
advertising and related revenues,  fees associated with electronic  commerce and
the sale of merchandise.  Enterprise  solutions revenues consist  principally of
product licensing fees and fees from technical support,  consulting and training
services.

              Subscription Services Revenues

     Currently,  the Company's  Interactive  Online Services business  generates
subscription  services  revenue  primarily  from  subscribers  paying a  monthly
membership  fee.  Prior to December  1, 1996,  a  significant  portion of online
service  revenues were  comprised of hourly  charges based on usage in excess of
the  number of hours of usage  provided  as part of the  monthly  fee.  With the
introduction of flat-rate  pricing,  as described  below,  the portion of online
service   revenues  which  are  generated  from  hourly  charges  has  decreased
substantially.

     Effective  December 1, 1996,  the Company began  offering  several  pricing
alternatives  to the AOL  service in the U.S.  aimed at  providing  a variety of
price  points  designed to appeal to a wide range of  consumers.  The  Company's
current pricing options are as follows:

     o    A standard monthly membership fee of $21.95, with no additional hourly
          charges (the "Flat-Rate Plan").  Subscribers can also choose to prepay
          for one year in advance at the  monthly  rate of $19.95.  The  Company
          increased  the price of its  Flat-Rate  Plan from  $19.95 per month to
          $21.95 per month,  and the  effective  monthly rate of the annual plan
          from $17.95 per month to $19.95 per month,  effective  at the start of
          each member's monthly billing cycle in April 1998.  Those  subscribers
          who were  currently on the annual plan were not subject to an increase
          until their renewal date. These increases were implemented in order to
          fund the continued  improvement of members'  online  experience and to
          keep pace with the cost to the Company of members' increased usage.

     o    An  alternative  offering  of three  hours for $4.95 per  month,  with
          additional time priced at $2.50 per hour.

     o    An  alternative  offering  of $9.95 per month for  unlimited  use--for
          those  subscribers who have an Internet  connection other than through
          AOL and use this connection to access AOL services.

     Prior to December 1, 1996, the Company's  standard  monthly  membership fee
for its AOL service in the U.S., which included five hours of service, was $9.95
per month,  with a $2.95 hourly fee for usage in excess of five hours per month.
Existing members at December 1, 1996, could retain the $9.95 / five hour pricing
upon request. For the period July 1, 1996 through November 30, 1996, the Company
also  offered a pricing  plan which  included 20 hours of service for $19.95 per
month,  with a $2.95  hourly  fee for usage in excess of 20 hours per month (the
"Value Plan"). This plan was discontinued upon the availability of the Flat-Rate
Plan on December 1, 1996.

     Effective  February 1, 1998, the Company  offered the following price plans
for the CompuServe service:

o A standard monthly membership offering of five hours for $9.95 per month, with
additional  time priced at $2.95 per hour. o An  alternative  offering of $24.95
per month with no additional hourly charge.

    During fiscal 1999, the Company launched  CompuServe 2000 which utilizes the
same platform and  infrastructure  as the AOL service.  This service offered the
following price plans:

     o    A  standard  monthly  membership  offering  of 20 hours  for $9.95 per
          month, with additional time priced at $2.95 per hour.

     o    An alternative  offering of $19.95 per month with no additional hourly
          charge.

     At June 30,  1999,  the Company had  approximately  17.6  million AOL brand
subscribers,   including   approximately  15.5  million  in  North  America  and
approximately  2.1  million  in the rest of the world.  Also at that  date,  the
Company had  approximately 2 million  CompuServe  brand  subscribers,  including
approximately 1 million in North America and approximately 1 million in the rest
of world. At June 30, 1998, the Company had approximately 12.5 million AOL brand
subscribers,   including   approximately  11.2  million  in  North  America  and
approximately  1.3  million  in the rest of the world.  Also at that  date,  the
Company had  approximately 2 million  CompuServe  brand  subscribers,  including
approximately 1 million in North America and approximately 1 million in the rest
of world.

      For fiscal 1999,  subscription  services  revenues  increased  from $2,183
million to $3,321 million, or 52%, over fiscal 1998. This increase was comprised
of an increase in AOL subscription  services revenues of $1,020 million, as well
as CompuServe  subscription  services  revenues of $118 million,  which began in
February 1998. The increase in AOL subscription  services revenues was primarily
attributable  to a 38%  increase  in the  average  number of AOL North  American
subscribers  for  fiscal  1999,  compared  to  fiscal  1998,  as well as an 8.2%
increase  in the average  monthly  subscription  services  revenue per AOL North
American subscriber.  The average monthly subscription  services revenue per AOL
North  American  subscriber  increased  from  $17.95 in fiscal 1998 to $19.42 in
fiscal 1999. This increase was  principally  attributable to the increase in the
Flat-Rate Plan membership fee from $19.95 to $21.95,  which became  effective in
April 1998.

      For fiscal 1998,  subscription  services  revenues  increased  from $1,478
million to $2,183 million, or 48%, over fiscal 1997. This increase was comprised
of an increase in AOL subscription services revenues of $637 million, as well as
CompuServe  subscription  services  revenues  of $88  million,  which  began  in
February  1998,  partially  offset by a $20  million  decrease  in  subscription
services revenues from the Company's Internet service,  Global Network Navigator
("GNN"), which was discontinued in fiscal 1997. The increase in AOL subscription
services  revenues was primarily  attributable  to a 39% increase in the average
number of AOL North  American  subscribers  for fiscal 1998,  compared to fiscal
1997, as well as a 2.7% increase in the average  monthly  subscription  services
revenue per AOL North  American  subscriber.  The average  monthly  subscription
services  revenue per AOL North  American  subscriber  increased  from $17.48 in
fiscal 1997 to $17.95 in fiscal 1998. This increase was principally attributable
to a reduction in the amount of refunds/credits  issued to subscribers in fiscal
1998.

              Advertising, Commerce and Other Revenues

     An  important   component  of  the  Company's   business  strategy  in  its
Interactive  Online Services business is an increasing  reliance on advertising,
commerce and other revenues.  These revenues include  advertising and electronic
commerce fees, the sale of merchandise, as well as other revenues, which consist
primarily  of royalty  fees and  development  revenues,  as well as data network
service revenues generated by ANS Communications, Inc. ("ANS") (through its sale
in January  1998).  The growth of  advertising,  commerce and other  revenues is
important to the Company's  business  objectives,  as these revenues  provide an
important contribution to the Company's operating results.  Advertising revenues
are  expected to grow in  importance  as the Company  continues  to leverage its
large, active and growing user base. This user base not only includes the paying
subscribers  of the AOL and CompuServe  services,  it also includes users of the
Company's  other branded  portals and services such as AOL MovieFone,  Netcenter
(with more than 18  million  registered  users),  AOL.COM,  ICQ (with  almost 15
million  active  registered  users) and Digital  City.  Affecting  the growth in
advertising,  commerce and other revenues is the backlog  balance as of June 30,
1999,  1998  and  1997  of  $1,519  million,  $511  million  and  $180  million,
respectively. During fiscal 2000, approximately $680 million of revenues will be
generated from the June 30, 1999 backlog.

      The following  table  summarizes the material  components of  advertising,
commerce and other revenues for the years ended June 30, 1999, 1998 and 1997.

<TABLE>

                                                                       Year ended June 30,
                                                         -----------------------------------------------
                                                               1999            1998            1997
                                                         --------------- --------------- ---------------
                                                                       (Dollars in millions)
<S>                                                      <C>      <C>     <C>     <C>     <C>     <C>
Advertising and electronic commerce fees................ $  765   76.5%   $ 358   65.9%   $ 147   47.7%
Merchandise.............................................    134   13.4      103   19.0      109   35.4
Other...................................................    101   10.1       82   15.1       52   16.9
                                                         ------- ------- ------- ------- ------- -------
Total advertising, commerce and other revenues.......... $1,000  100.0%   $ 543  100.0%   $ 308  100.0%
</TABLE>


     Advertising,  commerce  and  other  revenues  increased  by 84%,  from $543
million in fiscal 1998 to $1,000 million in fiscal 1999. More advertising on the
Company's AOL service and Netcenter portal, as well as an increase in electronic
commerce  fees drove the  increase.  Advertising  and  electronic  commerce fees
increased  by 114%,  from $358  million in fiscal 1998 to $765 million in fiscal
1999.

     Advertising,  commerce  and  other  revenues  increased  by 76%,  from $308
million in fiscal 1997 to $543 million in fiscal 1998.  More  advertising on the
Company's AOL service and Netcenter portal, as well as an increase in electronic
commerce fees primarily drove the increase.  Advertising and electronic commerce
fees  increased  by 144%,  from $147  million in fiscal 1997 to $358  million in
fiscal 1998.

              Enterprise Solutions Revenues

     The Netscape Enterprise  Solutions business generates revenues that consist
principally  of  product  licensing  fees  and  fees  from  technical   support,
consulting  and training  services.  The Netscape  Enterprise  Group  focuses on
providing businesses a range of software products, technical support, consulting
and training  services.  These products and services enable businesses and users
to share information,  manage networks and facilitate electronic commerce on the
Internet.  In November 1998, the Company entered into a strategic  alliance with
Sun  Microsystems,  Inc.  ("Sun"),  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.

      Enterprise  solutions  revenues  increased  by 25%,  from $365  million in
fiscal 1998 to $456 million in fiscal 1999.  The increase was due to an increase
in product sales related to server  applications and consulting services coupled
with the  decline  in  revenues  in fiscal  1998 due to  offering  the  Netscape
Communicator client software,  including the Netscape Navigator browser for free
starting in January 1998.

      Enterprise  solutions  revenues  decreased  by 11%,  from $411  million in
fiscal 1997 to $365 million in fiscal 1998. The decrease was due to offering the
Netscape Communicator client software,  including the Netscape Navigator browser
for free  starting in January  1998,  offset by an 18% increase in product sales
related to server applications and consulting services.

                  Costs and Expenses

      The following  table and  discussion  highlights the costs and expenses of
the Company for the years ended June 30, 1999, 1998 and 1997.

<TABLE>

                                                                       Year ended June 30,
                                                         -----------------------------------------------
                                                                                         ---Restated----
                                                              1999            1998            1997
                                                         --------------- --------------- ---------------
                                                                       (Dollars in millions)

<S>                                                      <C>     <C>     <C>     <C>     <C>     <C>
Total revenues.......................................... $4,777  100.0%  $3,091  100.0%  $2,197  100.0%

Costs and expenses:
Cost of revenues........................................ $2,657   55.6%  $1,811   58.6%  $1,162   52.9%
Sales and marketing.....................................    808   16.9      623   20.2      679   30.9
Product development.....................................    286    6.0      239    7.7      195    8.9
General and administrative..............................    408    8.5      328   10.6      220   10.0
Amortization of goodwill and other intangible assets....     65    1.4       24    0.8        6    0.3
Acquired in-process research and development............      -      -       94    3.0        9    0.4
Merger, restructuring and contract termination charges..     95    2.0       75    2.4       73    3.3
Settlement charges......................................      -      -       17    0.5       24    1.1
                                                         ------- ------- ------- ------- ------- -------
Total costs and expenses................................ $4,319   90.4%  $3,211  103.8%  $2,368  107.8%
</TABLE>

              Cost of Revenues

     Cost of revenues includes  network-related  costs,  consisting primarily of
data network costs,  personnel and related costs  associated  with operating the
data centers, data network and providing customer support, consulting, technical
support/training  and billing,  host computer and network  equipment  costs, the
costs of merchandise  sold,  royalties paid to information and service providers
and royalties paid for licensed technologies.

     Since  the  introduction  of the  Flat-Rate  Plan  for the AOL  service  in
December  1996, the Company has  experienced a significant  increase in both: 1)
subscriber usage,  which is mainly due to the growth of the subscriber base, and
2) the average  monthly usage per subscriber as subscribers  spend more and more
time online. These increases have the potential to increase network cost on both
an absolute  dollar basis,  as well as a percentage of revenue basis.  While the
growth in subscriber  usage and the related costs  generally are consistent with
the  increases  in  subscription  service  revenues,  the  increase in usage and
related costs per subscriber  could impact  operating  margins.  Average monthly
subscriber  usage in the first quarter of fiscal 1997,  the last quarter  before
the  introduction  of flat-rate  pricing,  was  approximately 7 hours. In fiscal
1998,  average monthly  subscriber usage ranged between 20 and 23 hours, and was
approximately  22 hours in the fourth  quarter of fiscal  1998.  In fiscal 1999,
average  monthly  subscriber  usage  ranged  between  24 and 27  hours  and  was
approximately  27 hours in the fourth  quarter of fiscal 1999.  The Company has,
and plans to continue to minimize the impact of the aforementioned  increases by
increasing  advertising,  commerce and other  revenues  and by reducing  network
costs,  on a relative  basis  (either on a per-hour  basis or as a percentage of
total revenues).  An important factor in reducing network costs is the reduction
of the costs of operating  the  Company's  data  network,  on a per-hour  basis,
through volume discounts and more efficient utilization of AOLnet, the Company's
TCP/IP network. The Company expects that the growth in advertising, commerce and
other revenues,  assuming such growth  continues,  will provide the Company with
the opportunity and flexibility to fund the costs  associated with the increased
usage resulting from flat-rate pricing, as well as programs designed to grow the
subscriber base and meet other business objectives.

     For fiscal 1999,  cost of revenues  increased from $1,811 million to $2,657
million,  or 47%,  over fiscal 1998,  and  decreased  as a  percentage  of total
revenues  from 58.6% to 55.6%.  The  increase in cost of revenues in fiscal 1999
was primarily attributable to increases in data network costs, host computer and
network  equipment  costs  and  personnel  and  related  costs  associated  with
operating  the  data  centers,   data  network,   providing   customer  support,
consulting, technical support/training and billing. Data network costs increased
primarily as a result of the larger member base and more usage per member.  Host
computer and network  equipment  costs,  consisting of lease,  depreciation  and
maintenance  expenses,  increased as a result of  additional  host  computer and
network  equipment,  necessitated  by the larger  member  base and more usage by
members. Personnel and related costs associated with operating the data centers,
data network,  providing  customer support and billing increased  primarily as a
result of the requirements of supporting a larger data network,  a larger member
base and increased  subscription services revenues.  Personnel and related costs
associated  with  consulting  and  technical  support/training  increased due to
providing additional customer support and professional services. The decrease in
cost of revenues as a percentage of total revenues was primarily attributable to
growth of the higher margin advertising, commerce and other revenues, as well as
a decrease in  network-related  costs as a percentage of  subscription  services
revenue.

      For fiscal 1998, cost of revenues  increased from $1,162 million to $1,811
million,  or 56%,  over fiscal 1997,  and  increased  as a  percentage  of total
revenues  from 52.9% to 58.6%.  The  increase in cost of revenues in fiscal 1998
was primarily attributable to increases in data network costs, host computer and
network  equipment  costs  and  personnel  and  related  costs  associated  with
operating  the  data  centers,   data  network,   providing   customer  support,
consulting, technical support/training and billing. Data network costs increased
primarily as a result of the larger member base and more usage per member.  Host
computer and network  equipment  costs,  consisting of lease,  depreciation  and
maintenance  expenses,  increased as a result of  additional  host  computer and
network  equipment,  necessitated  by the larger  member  base and more usage by
members. Personnel and related costs associated with operating the data centers,
data network,  providing  customer support and billing increased  primarily as a
result of the requirements of supporting a larger data network,  a larger member
base and increased  subscription services revenues.  Personnel and related costs
associated  with  consulting  and  technical  support/training  increased due to
providing additional customer support and professional services. The increase in
cost of  revenues,  as a  percentage  of  total  revenues,  in  fiscal  1998 was
primarily  attributable to an increase,  as a percentage of total  revenues,  in
host computer and network  equipment costs coupled with the decrease in revenues
related to the high margin Netscape  Communicator client software (including the
Netscape Navigator  browser) partially offset by a decrease,  as a percentage of
total revenues, in royalties paid to information and service providers.

              Sales and Marketing

     Sales and  marketing  expenses  include  the costs to  acquire  and  retain
subscribers,  the  operating  expenses  associated  with the sales and marketing
organizations and other general marketing costs.

     Marketing expenses have declined as a percentage of revenues primarily as a
result of the improved value proposition offered by flat-rate pricing, which has
resulted in improved subscriber  acquisition and retention rates, as compared to
rates achieved prior to flat-rate pricing.  The Company's  marketing strategy is
expected to continue to emphasize  brand  advertising  across multiple brands as
well as cost-effective  bundling  agreements,  where the Company's  products are
widely distributed with new personal computers, the Windows operating system and
other peripheral computer equipment and software. Additionally, the Company will
continue to market its products via direct mail programs.

     For fiscal 1999, sales and marketing  expenses  increased from $623 million
to $808  million,  or 30%,  over fiscal 1998,  and  decreased as a percentage of
total revenues from 20.2% to 16.9%. The increase in sales and marketing expenses
for fiscal 1999 was mainly  attributable  to an  increase  in direct  subscriber
acquisition  costs, brand advertising across multiple brands and personnel costs
associated with expanding the Netscape  Enterprise  business.  The decrease as a
percentage of total revenues was primarily a result of the substantial growth in
revenues.

     For fiscal 1998, sales and marketing  expenses  decreased from $679 million
to $623  million,  or 8.2%,  over fiscal 1997,  and decreased as a percentage of
total revenues from 30.9% to 20.2%. The decrease in sales and marketing expenses
for  fiscal  1998  was  primarily  attributable  to  a  decrease  in  subscriber
acquisition costs, partially offset by an increase in costs related to Netcenter
staffing  and related  sales  commissions.  The Company was able to decrease its
subscriber  acquisition  costs  primarily  as a  result  of the  improved  value
proposition  offered  by  flat-rate  pricing,  which has  resulted  in  improved
acquisition  and  retention  rates,  as  compared  to  rates  achieved  prior to
flat-rate pricing.

              Product Development

     Product  development  costs  consist of  personnel  and  related  costs for
research and  development  efforts and other  product  development  costs either
prior to the development effort reaching  technological  feasibility or once the
product has reached the maintenance phase of its life cycle.

     For fiscal 1999,  product  development costs increased from $239 million to
$286 million,  or 20%, over fiscal 1998,  and decreased as a percentage of total
revenues  from 7.7% to 6.0%.  The  increase  in  product  development  costs was
primarily  due to an increase in the number of  technical  employees  to support
additional  products across multiple brands. The decrease in product development
costs  as a  percentage  of  total  revenues  was  primarily  a  result  of  the
substantial growth in revenues.

     For fiscal 1998,  product  development costs increased from $195 million to
$239 million,  or 23%, over fiscal 1997,  and decreased as a percentage of total
revenues  from 8.9% to 7.7%.  The  increase  in  product  development  costs was
primarily  due to an increase in personnel  costs  resulting  from the Company's
acquisitions of Actra Business Systems LLC ("Actra"),  KIVA Software Corporation
("KIVA")  and the  online  service  of  CompuServe  (see  Note 8 of the Notes to
Consolidated Financial Statements). The decrease in product development costs as
a percentage of total revenues was primarily a result of the substantial  growth
in revenues.

              General and Administrative

     For fiscal 1999,  general and  administrative  expenses increased from $328
million to $408 million, or 24%, over fiscal 1998, and decreased as a percentage
of total revenues from 10.6% to 8.5%. The increase in general and administrative
costs for fiscal 1999, was primarily  attributable  to higher  personnel  costs,
including  payroll taxes  associated with employee stock option  exercises.  The
decrease in general and  administrative  costs as a percentage of total revenues
was primarily attributable to the substantial growth in revenues.

     For fiscal 1998,  general and  administrative  expenses increased from $220
million to $328 million,  or 49%, over fiscal 1997, and increased  slightly as a
percentage of total  revenues  from 10.0% to 10.6%.  The increase in general and
administrative  costs for fiscal 1998,  and such costs as a percentage  of total
revenues,  was primarily  attributable  to higher  personnel and related  costs,
which included compensatory stock options and other charges primarily related to
the sale of ANS, as well as increases in professional fees,  principally related
to legal matters.

              Amortization of Goodwill and Other Intangible Assets

     Amortization  of goodwill  and other  intangible  assets  increased  to $65
million in fiscal  1999 from $24 million in fiscal 1998 and $6 million in fiscal
1997.  The  increase in  amortization  expense over the three years is primarily
attributable  to goodwill  associated with the  acquisitions of Mirabilis,  Ltd.
("Mirabilis") in June 1998, CompuServe in January 1998, DigitalStyle Corporation
("DigitalStyle") and Portola Communications,  Inc. ("Portola") in June 1997, and
Actra in December  1997, as well as purchases of various  companies  made by the
Company in late fiscal 1997 and early  fiscal  1998.  The  increase is partially
offset by a decrease in goodwill amortization  resulting from the disposition of
ANS in  January  1998  and the  shutdown  of GNN in the  Company's  fiscal  1997
restructuring.

              Acquired In-Process Research and Development

     The Company incurred a total of $94 million in acquired in-process research
and development charges in fiscal 1998 related to the acquisitions of Mirabilis,
Actra,   Personal  Library   Software,   Inc.   ("PLS")  and  NetChannel,   Inc.
("NetChannel").

     In June 1998, the Company acquired the assets,  including the developmental
ICQ instant communications and chat technology,  and assumed certain liabilities
of  Mirabilis.   The  ICQ  technology  is  an  enabling  technology  for  online
communication.  At the  date  of  acquisition,  Mirabilis  reported  12  million
registered trial users of which approximately half were active. The Company paid
$287  million in cash and may pay up to $120  million in  additional  contingent
purchase payments based on future performance levels. The Company's Consolidated
Statements of Operations  reflect a one-time write-off of the amount of purchase
price  allocated to in-process  research and  development of  approximately  $60
million.

     The Company  allocated the excess purchase price over the fair value of net
tangible assets  acquired to identified  intangible  assets.  In performing this
allocation,  the Company considered,  among other factors, the attrition rate of
the active users of the technology at the date of  acquisition  (estimated to be
similar  to the  rate  experienced  by the AOL  service)  and the  research  and
development  projects in-process at the date of acquisition.  With regard to the
in-process  research and development  projects,  the Company  considered,  among
other  factors,  the  stage  of  development  of  each  project  at the  time of
acquisition, the importance of each project to the overall development plan, and
the projected  incremental  cash flows from the projects when  completed and any
associated  risks.  Associated  risks  include  the  inherent  difficulties  and
uncertainties  in completing  each project and thereby  achieving  technological
feasibility  and risks  related  to the  impact of  potential  changes in future
target markets.

     During fiscal 1999, the Company incurred approximately $5 million,  related
primarily to salaries,  to develop the in-process  technology into  commercially
viable products and the Company intends to incur  approximately  $9 million more
over the next year.  Remaining  development  efforts are  focused on  addressing
security issues,  architecture  stability and electronic commerce  capabilities,
and completion of these projects will be necessary before revenues are produced.
The Company expects to begin to benefit from the purchased  in-process  research
and development by its fiscal year 2000. If these projects are not  successfully
developed,  the Company may not  realize  the value  assigned to the  in-process
research and development projects. In addition,  the value of the other acquired
intangible assets may also become impaired.

     The Company  acquired  Actra,  a developer  of  commerce  applications  for
conducting   business-to-business  and  business-to-consumer   commerce  on  the
Internet in December 1997,  PLS, a developer of information  indexing and search
technologies in January 1998 and NetChannel,  a Web-enhanced television company,
in June 1998. These transactions were accounted for under the purchase method of
accounting.  In connection  with the purchase of Actra,  the Company  recorded a
charge for acquired  in-process  research  and  development  of $14 million.  In
connection  with the  purchases  of PLS and  NetChannel,  the  Company  recorded
charges for acquired  in-process  research and development in fiscal 1998 of $10
million related to each acquisition.

     The  Company  incurred a total of $9 million  ($5  million  and $4 million,
respectively) in acquired  in-process research and development charges in fiscal
1997 related to the acquisitions of Portola and DigitalStyle in June 1997.

     The technology, market and development risk factors discussed above for the
Mirabilis  acquisition are also relevant and should be considered with regard to
the acquisitions of Actra, PLS, NetChannel, Portola and DigitalStyle.

              Merger, Restructuring and Contract Termination Charges

     In fiscal  1999,  the Company  recognized  charges that totaled $95 million
related to restructurings and mergers.

     o    In connection with the mergers of MovieFone,  Inc.,  Spinner  Networks
          Incorporated,  NullSoft,  Inc. and AtWeb,  Inc.  the Company  recorded
          direct merger-related costs of $17 million.
     o    In connection  with plans announced and implemented in March 1999, the
          Company  recorded a charge of $78 million for direct costs  related to
          the merger with  Netscape and the  Company's  reorganization  plans to
          integrate  Netscape's  operations  and build on the  strengths  of the
          Netscape brand and capabilities as well as the merger with When, Inc.

     In fiscal 1998, the Company  recognized net charges of $75 million  related
to restructurings and mergers.

     o    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 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.
     o    At the end of the second and beginning of the third quarters of fiscal
          1998, the Company recorded a $35 million  restructuring charge related
          to the implementation of certain  restructuring actions mainly related
          to the  Enterprise  Solution  business.  These  actions  were aimed at
          reducing  its  cost  structure,   improving  its  competitiveness  and
          restoring sustainable  profitability.  The restructuring plan resulted
          from decreased demand for certain Enterprise 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.
     o    In the fiscal year ended 1998, the Company  recognized merger costs of
          $6 million  related to the  acquisition of Kiva Software  Corporation,
          consisting  mainly  of  investment   banking,   legal  and  accounting
          services.
     o    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 the first  quarter  of
          fiscal 1998,  substantially  all of the  restructuring  activities had
          been  completed  and the Company  reversed $1 million of the  original
          restructuring accrual in the first quarter of fiscal 1998.

     In fiscal 1997, the Company  recognized net charges of $73 million  related
to restructurings and contract terminations.

     o    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.
     o    In the fourth quarter of fiscal 1997, the Company  recorded a contract
          termination  charge of $24 million,  which  consists 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.

     Refer to Notes 4 and 5 of the Notes to  Consolidated  Financial  Statements
for further information related to the restructurings, contract terminations and
merger costs.

              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 U.S. District Court for the Eastern District of Virginia
alleging  violations of federal  securities laws between August 1995 and October
1996.  Included  in the net  settlement  charge is an estimate of $17 million in
insurance receipts.

     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  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  pricing  plan  violated
consumer  protection  laws.  In the second  quarter of fiscal 1998,  the Company
revised its estimate of the total liability  associated with these matters,  and
reversed $1 million of the original settlement accrual.

                  Other Income, net

     Other income, net consists primarily of investment income and non-operating
gains net of interest expense and non-operating  charges.  The Company had other
income  of $638  million  and $30  million  in  fiscal  1999  and  fiscal  1998,
respectively.  The  increase  in other  income  in  fiscal  1999  was  primarily
attributable to a net gain of approximately  $567 million on the sale of Excite,
Inc.  investments.  The additional  increase is mainly due to an increase in net
interest  income and a  reduction  of  non-operating  losses  related to various
investments.  The  Company  had other  income of $30  million and $10 million in
fiscal 1998 and fiscal  1997,  respectively.  The  increase  in other  income in
fiscal  1998  was  primarily  attributable  to  gains  on the  sale  of  certain
available-for-sale  securities  and increases in net interest  income  partially
offset by decreases in the  allocation  of losses to minority  stockholders  and
increases in non-operating losses related to various investments.

                  (Provision) Benefit for Income Taxes

     The (provision)  benefit for income taxes was $(334), $16 and $(10) million
in fiscal  1999,  fiscal 1998 and fiscal  1997,  respectively.  The  substantial
increase in the  provision for income taxes in fiscal 1999 is a direct result of
the Company's increase in pre-tax income. For additional  information  regarding
income  taxes,  refer  to  Note  14  of  the  Notes  to  Consolidated  Financial
Statements.

Segment Results of Operations

     The Company  operates  its two major  lines of  businesses  as  Interactive
Online  Services and Enterprise  Solutions.  For further  information  regarding
segments, refer to Note 9 of the Notes to Consolidated Financial Statements.

     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.

     For an overview of the segment revenues,  refer to the consolidated results
of operations discussion earlier in this section.

     Interactive  Online  Services  income from  operations  increased  from $57
million in fiscal 1997 to $412 million in fiscal 1998 and $955 million in fiscal
1999.  These  increases  are  mainly  the result of  increases  in  subscription
services and  advertising,  commerce and other  revenues  coupled with  improved
margins and a decrease in  marketing  expenses  (as a  percentage  of  revenues)
resulting from the improved value proposition offered by flat-rate pricing.

      Enterprise  Solutions  income (loss) from  operations  decreased  from $98
million in fiscal 1997 to a loss of $(18)  million in fiscal 1998 and  increased
to income of $6 million in fiscal 1999.  The  decrease  from fiscal 1997 to 1998
was  mainly a result of  offering  the  Netscape  Communicator  client  software
(including  the Netscape  Navigator  browser) for free starting in January 1998.
The increase from fiscal 1998 to 1999 was mainly attributable to the increase in
revenues.

Liquidity and Capital Resources

     The Company is currently  financing its operations  primarily  through cash
generated from operations.  During fiscal 1999, the Company  generated more than
$1 billion in cash from operations.  In addition, the Company has generated cash
from the sale of its capital stock, the sale of its convertible notes as well as
the sale of  marketable  securities  it  held.  The  Company  has  financed  its
investments in  telecommunications  equipment  principally through leasing.  Net
cash provided by operating activities was $1,099 million,  $437 million and $131
million in fiscal 1999, 1998 and 1997, respectively, and increased primarily due
to the Company's increase in net income.  Net cash used in investing  activities
was $1,776  million,  $531 million and $367 million in fiscal 1999,  fiscal 1998
and fiscal 1997, respectively. The increase in cash used in investing activities
is mainly due to the  Company's  $1.5  billion  investment  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 of the  Notes to the  Consolidated  Financial
Statements.  The increase in cash used in investing activities was offset by net
proceeds  of  approximately  $600  million  related to the sale of Excite,  Inc.
investments  during fiscal 1999.  Net cash provided by financing  activities was
$887  million,  $580 million and $250  million in fiscal  1999,  fiscal 1998 and
fiscal 1997, respectively. Included in financing activities for the fiscal 1999,
were $550 million in aggregate net proceeds from a public stock  offering of its
common stock.

     The Company uses its working capital to finance  ongoing  operations and to
fund  marketing and the  development  of its products and services.  The Company
plans to  continue  to invest in  subscriber  acquisition,  retention  and brand
marketing to expand its  subscriber  base, as well as in network,  computing and
support  infrastructure.  Additionally,  the Company expects to use a portion of
its cash for the acquisition and subsequent  funding of  technologies,  content,
products or businesses  complementary  to the Company's  current  business.  The
Company anticipates that cash on hand and cash provided by operating  activities
will be  sufficient  to fund its  operations  for the next  twelve  months.  The
Company  currently  has  approximately  $450  million  available  under  a shelf
registration  filed in June 1998. In May 1999,  the Company filed a registration
statement  to raise an  additional  $4.5 billion by sale of the  Company's  debt
securities,  common stock, preferred stock depositary shares,  warrants or stock
purchase  contracts  to purchase  common  stock or  preferred  stock.  The total
offering  price of these  securities,  in the  aggregate,  will  not  exceed  $5
billion.

     At June 30, 1999, the Company had working capital of $254 million, compared
to working  capital of $108 million at June 30, 1998.  In addition,  the Company
had investments  including  available-for-sale  securities of $2,151 million and
$531 million at June 30, 1999 and 1998,  respectively.  Current assets increased
by $716 million,  from $1,263 million at June 30, 1998 to $1,979 million at June
30, 1999,  while  current  liabilities  increased by $570  million,  from $1,155
million to $1,725 million, over this same period. The increase in current assets
was primarily  attributable  to an increase in cash and  short-term  investments
resulting from cash generated by operations.  The change in current  liabilities
was due to  increases  in other  accrued  expenses  and  liabilities,  primarily
related to an increase in accrued  telecommunications costs, as well an increase
in deferred revenues.

     During  July  1998,  the  Company  improved  its cash and  working  capital
balances as a result of a public  offering  of common  stock.  The Company  sold
43,120,000  shares of common  stock and  raised a total of $550  million  in new
equity which was used to fund general corporate purposes.  In November 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.  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.

     In June 1998, the Company purchased Mirabilis for $287 million in cash (and
contingent purchase price payments of up to $120 million) and NetChannel for $16
million in cash. For additional  information  regarding these acquisitions,  see
Note 8 of the Notes to Consolidated Financial Statements.

     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 MCI
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).  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. Each company invested an additional $25 million in cash
in this joint  venture.  The  Company  generated  $207  million in net cash as a
result of the aforementioned transactions.

     The Company enters into  multiple-year  data  communications  agreements in
order to support AOLnet.  In connection with those  agreements,  the Company may
commit to purchase  certain  minimum data  communications  services.  Should the
Company not require the delivery of such  minimums,  the Company's per hour data
communications  costs may increase.  For  additional  information  regarding the
Company's  commitments,  see  Note 11 of the  Notes  to  Consolidated  Financial
Statements.

     In May 1996,  the Company  entered into a joint  venture with Mitsui & Co.,
("Mitsui") and Nihon Keizai Shimbun, Inc. ("Nikkei") to offer interactive online
services in Japan.  In  connection  with the  agreement,  the  Company  received
approximately  $28 million  through the sale of convertible  preferred  stock to
Mitsui.  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,  together with accrued but unpaid
dividends, was converted into 3,136,000 shares of common stock based on the fair
market value of common stock at the time of conversion.

     The Company  leases the  majority  of its  equipment  under  non-cancelable
operating leases. It is building AOLnet,  its data  communications  network,  as
well as  expanding  its data  center  capacity.  The  buildout of AOLnet and the
expansion  of  data  center  capacity  requires  a  substantial   investment  in
telecommunications  and server  equipment.  The Company plans to continue making
significant   investments   in  these  areas.   The  Company  is  funding  these
investments,  which are anticipated to total  approximately $1 billion in fiscal
2000, through a combination of leases, debt financing and cash purchases.

Earning Before Interest, Taxes, Depreciation and Amortization ("EBITDA")

     The following  table and discussion  summarizes  EBITDA for the years ended
June 30, 1999, 1998 and 1997:

                                                  Years ended June 30,
                                        ----------------------------------------
                                                                    --Restated--
                                           1999         1998          1997
                                        ------------  ------------  ------------
                                                  (Amounts in millions)

EBITDA................................      $968         $302          $40

     The Company defines EBITDA as net income plus: (1)  provision/(benefit) for
income taxes,  (2) interest  expense,  (3) depreciation and amortization and (4)
special charges. EBITDA is presented and discussed because 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").

     For fiscal 1999, EBITDA increased from $302 million to $968 million or 221%
over fiscal 1998.  For fiscal 1998,  EBITDA  increased  from $40 million to $302
million or 655%.  The  increase  from  fiscal  1998 to 1999 is mainly due to the
significant increase in income before taxes (excluding special charges) from $96
million in fiscal 1998 to $649  million in fiscal 1999 as well as an increase of
approximately  $100 million in depreciation and amortization.  The increase from
fiscal  1997  to 1998 is due to the  increase  in  income  (loss)  before  taxes
(excluding  special charges) from $(55) million in fiscal 1997 to $96 million in
fiscal 1998 as well as an increase of approximately $100 million in depreciation
and amortization.

Seasonality

     The growth in subscriber  acquisitions  and usage in the  Company's  online
services  appears to be highest in the second and third  fiscal  quarters,  when
sales of new  computers  and  computer  software  are highest due to the holiday
season and following the holiday  season,  when new computer and software owners
are discovering Internet online services while spending more time indoors due to
winter weather.  However,  the Company does not  definitively  know whether such
increases in subscriber  acquisitions  and usage are primarily  attributable  to
seasonal factors or to increased demand for Internet online services as a result
of the growing market demand and utility for such services.

     Since making advertising  revenue a key component of the Company's strategy
in its  Interactive  Online  Services  business,  the  Company  has  experienced
difficulty in  distinguishing  seasonality in advertising sales from the overall
market growth.  Seasonal  factors seem to be mitigated by  advertisers'  growing
interest in the overall online medium as well as gaining access to the Company's
large and growing  subscriber/user  base across  multiple  branded  distribution
channels.  When the online  advertising  industry matures and online advertising
budgets  experience normal growth, the Company expects to experience the effects
of seasonality in securing advertising commitments.

Year 2000 Compliance

     The Company utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
operating its online services and Web sites, the proprietary software of the AOL
and  CompuServe  services,  Netscape  software  products,  member  and  customer
services,   network  access,  content  providers,  joint  ventures  and  various
administrative  and billing  functions.  To the extent  that these  applications
contain  source codes that are unable to  appropriately  interpret  the upcoming
calendar year 2000, some level of modification, or even possibly replacement may
be necessary.

     In 1997,  the Company  appointed a Year 2000 Task Force to perform an audit
to assess  the scope of the  Company's  risks  and bring its  applications  into
compliance. This Task Force oversees testing and is continuing its assessment of
the Company's company-wide compliance. The Company's system hardware components,
client and host software,  current  versions of Netscape  software  products and
corporate business and information  systems are currently  undergoing review and
testing.  To date, the Company has experienced few problems related to Year 2000
testing,  and the problems that have been identified are in the process of being
addressed.

     The Company  intends to make Year 2000  compliant  certain  versions of the
client  software  for the  AOL  service  and the  CompuServe  service  that  are
available on the Windows and Macintosh operating systems, as well as versions of
Netscape software products that are currently shipped. While the majority of AOL
and CompuServe members use proprietary client software that will be compliant, a
third-party  internet  browser  utilized in most versions of the client software
may not be Year 2000  compliant.  A free patch or upgrade  will be required  for
members  using some  versions of the client  software or browser to achieve Year
2000 compliance. In the coming months, the Company will encourage members of its
online  services to upgrade their browser and/or their software to versions that
are  expected to be Year 2000  compliant,  if they have not already done so. The
Company will make available to members, and communicate that availability,  free
patches or upgrades that can be downloaded from the online services. The Company
has not tested,  and does not expect to certify as Year 2000 compliant,  certain
older  versions of the AOL and CompuServe  software.  The Company has developed,
and will be implementing over the remainder of the year, a communication program
that  informs  members  how to obtain  the free  patch or upgrade to a Year 2000
compliant  version  of the  client  software  or  browser.  With  respect to the
Company's  Netscape  software  business,  testing continues on currently shipped
products.  The  Company  also  will make  available,  at no  additional  cost to
customers,  any  required  patch to the versions of Netscape  software  products
currently  being shipped to customers and  communicate  their  availability.  In
addition,  the Company will be  encouraging  customers to upgrade to versions of
the  software  that are  expected  to be Year 2000  compliant,  if they have not
already done so.

     In  addition,  the Company is  continuing  to gather  information  from its
vendors,  joint venture  partners and content  partners  about their progress in
identifying  and  addressing  problems that their  computer  systems may face in
correctly  processing  date  information  related to the Year 2000.  The Company
intends to continue  its efforts to seek  reassurances  regarding  the Year 2000
compliance of vendors, joint venture partners and content partners. In the event
any third  parties  cannot timely  provide the Company with  content,  products,
services  or systems  that meet the Year 2000  requirements,  the content on the
Company's  services,  access to the  Company's  services,  the  ability to offer
products  and  services  and the ability to process  sales  could be  materially
adversely affected.

     The costs  incurred  through June 30, 1999 to address Year 2000  compliance
were approximately $11 million.  The Company currently estimates it will incur a
total  of  approximately   $20  million  in  costs  to  support  its  compliance
initiatives.  The Company  cannot  predict the outcome of its Year 2000 program,
whether  third party  systems and  component  software are, or will be Year 2000
compliant,  the costs  required  to address  the Year 2000  issue,  or whether a
failure to achieve substantial Year 2000 compliance will have a material adverse
effect on the Company's business,  financial condition or results of operations.
Failure to achieve Year 2000 compliance  could result in some  interruptions  in
the work of some  employees,  the  inability  of some  members and  customers to
access the Company's  online services and Web sites or errors and defects in the
Netscape  products.  This,  in turn,  may  result  in the  loss of  subscription
services  revenue,  advertising  and  commerce  revenue or  enterprise  solution
revenue,  the  inability  to  deliver  minimum  guaranteed  levels  of  traffic,
diversion of development  resources,  or increased  service and warranty  costs.
Occurrence  of any of these may also  result in  additional  remedial  costs and
damage to reputation.

     The Company has developed a contingency  plan to address possible Year 2000
risks to its systems.  The plan  identifies  a hierarchy of critical  functions,
acceptable delay times,  recovery  strategies to return functions to operational
status and defines the core team for managing this recovery process. The Company
will continue to modify this plan to address systems of its recent acquisitions.

Inflation

     The Company  believes that  inflation has not had, and will not have in the
future, a material effect on its results of operations.

Forward-Looking Statements

     This  report and other oral and written  statements  made by the Company to
the public  contain and  incorporate  by  reference  forward-looking  statements
within the meaning of the "safe  harbor"  provisions  of the Private  Securities
Litigation  Reform  Act of 1995.  The  forward-looking  statements  are based on
management's  current  expectations  or beliefs  and are  subject to a number of
factors and  uncertainties  that could cause actual results to differ materially
from those described in the forward-looking  statements. Such statements address
the  following  subjects:  future  operating  results;   subscriber  growth  and
retention;  advertising,  commerce  and  other  revenues;  earnings  growth  and
expectations;  development  and success of multiple  brands;  new  products  and
services  (such as AOL 5.0, and the "You've Got  Pictures,"  "My  Calendar," AOL
Search and AOL Plus features);  corporate spending; liquidity; network capacity;
new access and distribution technologies; regulatory developments, including the
Company's  ability to shape public  policy in, for example,  telecommunications,
privacy and tax areas.

     The following factors,  among others,  could cause actual results to differ
materially from those described in the forward-looking statements:

          The risk that the Company and its data communications access providers
     will be unable to provide  adequate  server  and  network  capacity.  Risks
     associated  with  the  fixed  costs  and  minimum  commitment  nature  of a
     substantial  majority  of  the  Company's  network  services,  such  that a
     significant  decrease in demand for online  services  would not result in a
     corresponding  decrease in network costs. Risks related to the build-out of
     AOLnet and the  expansion  of server and  network  capacity;  the risk that
     demand  will not  develop for the  capacity  created;  the risk that supply
     shortages for hardware and equipment and for local  exchange  carrier lines
     from local  telephone  companies  could  impede the  provision  of adequate
     network  and  system  capacity;  and the risk of the  failure to obtain the
     necessary financing.

          Any damage or  failure to the  Company's  computer  equipment  and the
information stored in its data centers.

          Factors related to increased competition,  including: price reductions
     and increased spending;  inability to generate greater revenues and profits
     from  advertising  and  electronic  commerce;  limitations on the Company's
     opportunities to enter into or renew agreements with content  providers and
     distribution partners;  limitations on the Company's ability to develop new
     products and services;  limitations on the Company's ability to continue to
     grow or sustain its subscriber  base; loss of the Company's market share in
     the  enterprise  software  industry;  and an  adverse  impact  on gross and
     operating margins.

          The failure to increase  revenues at a rate  sufficient  to offset the
     increase  in  data   communications  and  equipment  costs  resulting  from
     increasing usage.

          The risk of loss of  services  of  executive  officers  and  other key
employees.

          The risk that  because of seasonal and other  factors,  the Company is
     unable to  predict  growth in sales,  usage,  subscriber  acquisitions  and
     advertising commitments.

          The  failure  of the  Company  to  establish  new  relationships  with
     electronic  commerce,   advertising,   marketing,  technology  and  content
     providers or the loss of a number of  relationships  with such providers or
     the risk of significantly  increased costs or decreased revenues needed, to
     maintain, or resulting from the failure to maintain, such relationships, as
     the case may be.

          The risk associated with accepting warrants in lieu of cash in certain
     electronic commerce agreements,  as the value of such warrants is dependent
     upon the common stock price of the warrant  issuer at the time the warrants
     are earned.

          The risks  related to the  acquisition  of  businesses,  including the
     failure  to  successfully   integrate  and  manage   acquired   technology,
     operations  and  personnel,  the  loss  of key  employees  of the  acquired
     companies and diversion of the Company's  management's attention from other
     ongoing  business  concerns;  and  the  risk  of  significant  charges  for
     in-process research and development or other matters.

          The  inability of the Company to introduce  new products and services;
     and its inability to develop,  or achieve commercial  acceptance for, these
     new  products  and  services.  The  failure  to resolve  issues  concerning
     commercial  activities via the Internet,  including security,  reliability,
     cost,  ease of use and  access.  The risk of  adverse  changes  in the U.S.
     regulatory environment surrounding interactive services.

          The failure of the Company or its  partners  to  successfully  market,
     sell and deliver its services in international  markets; and risks inherent
     in doing  business  on an  international  level,  such as laws that  differ
     greatly from those in the United States,  unexpected  changes in regulatory
     requirements,  political risks, export  restrictions and controls,  tariffs
     and other trade barriers and fluctuations in currency exchange rates.

          The  Company's  inability  to  offer  its  services  through  advanced
     distribution  technologies  such as cable and broadcast,  and the resulting
     inability to offer  advanced  services such as voice and full motion video.
     The  Company's  inability to develop new  technology or modify its existing
     technology  to keep pace with  technological  advances  and the  pursuit of
     these technological advances requiring substantial expenditures.

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit 23  Consent of Ernst & Young LLP

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.

(b)      Reports on Form 8-K

Form      Item #  Description                                     Filing Date
----      ------  -----------                                     -----------
Form 8-K  5, 7    Announcement of entering into an Agreement   January 14, 2000
                  and Plan of Merger,  dated as of January 10,
                  2000 with Time Warner Inc.

Form 8-K  5, 7    Announcement of Earnings                     January 20, 2000

Form 8-K  7       Pro Forma Financial Information              February 11, 2000

Form 8-K  5, 7    Announcement of Agreement with               March 24, 2000
                  Bertelsmann AG



<PAGE>


                              AMERICA ONLINE, INC.

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                            AMERICA ONLINE, INC.


DATE: May 15, 2000               SIGNATURE:/s/Stephen M. Case
                                           Stephen M. Case
                                           Chairman of the Board and Chief
                                           Executive Officer

DATE: May 15, 2000               SIGNATURE:/s/J. Michael Kelly
                                           J. Michael Kelly
                                           Senior Vice President and Chief
                                           Financial Officer


<PAGE>

Exhibit 23  Consent of Ernst & Young LLP

Consent Of Independent Auditors

We consent to the  incorporation  by  reference in the  Registration  Statements
listed below of our report  dated July 21, 1999,  except for Note 3, as to which
the date is May 12, 2000, with respect to the consolidated  financial statements
of  America  Online,  Inc.  for the  year  ended  June  30,  1999,  as  amended,
incorporated by reference as Exhibit 99 to this Form 10-Q.

1)  No. 33-46607  15)  No. 333-07603  29)  No. 333-74523     43)  No. 333-79489
2)  No. 33-48447  16)  No. 333-22027  30)  No. 333-74525     44)  No. 333-79797
3)  No. 33-78066  17)  No. 333-46633  31)  No. 333-74527     45)  No. 333-82123
4)  No. 33-86392  18)  No. 333-46635  32)  No. 333-74529     46)  No. 333-83409
5)  No. 33-86394  19)  No. 333-46637  33)  No. 333-74531     47)  No. 333-85337
6)  No. 33-86396  20)  No. 333-57143  34)  No. 333-74533     48)  No. 333-85343
7)  No. 33-90174  21)  No. 333-57153  35)  No. 333-74535     49)  No. 333-85345
8)  No. 33-91050  22)  No. 333-60623  36)  No. 333-74537     50)  No. 333-94253
9)  No. 33-94000  23)  No. 333-60625  37)  No. 333-74539     51)  No. 333-94255
10) No. 33-94004  24)  No. 333-68605  38)  No. 333-74541     52)  No. 333-94259
11) No. 333-00416 25)  No. 333-68631  39)  No. 333-74543     53)  No. 333-95013
12) No. 333-02460 26)  No. 333-68599  40)  No. 333-76725
13) No. 333-07163 27)  No. 333-72499  41)  No. 333-76733
14) No. 333-07559 28)  No. 333-74521  42)  No. 333-76743


                                                       /s/ Ernst & Young LLP


McLean, Virginia
May 12, 2000

<PAGE>

<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.

                              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 14 to the consolidated  financial statements,  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