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: December 31, 1998

                                       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
    incorporation or organization)                        Identification No.)
                     

                   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 January 31, 1999.....................          466,983,489


<PAGE>


                              AMERICA ONLINE, INC.

                                      INDEX
                                                                            Page

PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

         Condensed Consolidated Balance Sheets - December 31, 1998
         and June 30, 1998                                                     3

         Condensed Consolidated Statements of Operations - Three
         months ended December 31, 1998 and 1997                               4

         Condensed Consolidated Statements of Operations - Six
         months ended December 31, 1998 and 1997                               5

         Condensed Consolidated Statements of Cash Flows - Six
         months ended December 31, 1998 and 1997                               6

         Condensed Consolidated Statement of Changes in
         Stockholders' Equity - Six months ended
         December 31, 1998                                                     7

         Notes to Condensed Consolidated Financial Statements                  8

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            12


PART II. OTHER INFORMATION                                                    21

Item 2.           Changes in Securities and Use of Proceeds                   21

Item 4.           Submission of Matters to a Vote of Security Holders         21

Item 6.           Exhibits and Reports on Form 8-K                            21

Signatures                                                                    23


<PAGE>
<TABLE>
<CAPTION>
                              AMERICA ONLINE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (amounts in millions, except share data)

                                                                          December 31,                June 30,
                                                                              1998                      1998
                                                                      ---------------------      -------------------
ASSETS                                                                     (unaudited)

Current assets:
<S>                                                                                <C>                       <C>   
    Cash and cash equivalents                                                      $ 1,452                   $  631
    Trade accounts receivable, less allowances of $25 and $19,
             respectively                                                              113                      105
    Other receivables                                                                  112                       92
    Prepaid expenses and other current assets                                          105                      103
                                                                      ---------------------      -------------------
          Total current assets                                                       1,782                      931

Property and equipment at cost, net                                                    424                      363

Other assets:
    Investments including available-for-sale securities                                485                      449
    Product development costs, net                                                      91                       88
    Goodwill and other intangible assets, net                                          359                      381
    Other assets                                                                         5                        3
                                                                      =====================      ===================
          Total assets                                                             $ 3,146                  $ 2,215
                                                                      =====================      ===================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable                                                           $  91                    $  87
    Other accrued expenses and liabilities                                             453                      433
    Deferred revenue                                                                   309                      242
    Accrued personnel costs                                                             64                       57
    Deferred network services credit                                                    76                       76
                                                                      ---------------------      -------------------
          Total current liabilities                                                    993                      895

Long-term liabilities:
    Notes payable                                                                      400                      372
    Deferred revenue                                                                    53                       71
    Other liabilities                                                                   14                        6
    Deferred network services credit                                                   235                      273
                                                                      ---------------------      -------------------
          Total liabilities                                                          1,695                    1,617

Stockholders' equity:
  Common stock, $.01 par value, 1,800,000,000 shares authorized, 
    464,432,957 and 439,972,494 shares issued and outstanding at
    December 31, 1998 and June 30, 1998, respectively                                    5                        4
  Additional paid-in capital                                                         1,513                      872
  Unrealized gain on available-for-sale securities                                     128                      145
  Accumulated deficit                                                                (195)                    (423)
                                                                      ---------------------      -------------------
          Total stockholders' equity                                                 1,451                      598
                                                                      =====================      ===================
          Total liabilities and stockholders' equity                               $ 3,146                  $ 2,215
                                                                      =====================      ===================

                                              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
                                                                                  December 31,
                                                                -------------------------------------------------
                                                                        1998                        1997
                                                                ---------------------       ---------------------

Revenues:

<S>                                                                            <C>                         <C>  
   Online service revenues                                                     $ 779                       $ 483

   Advertising, commerce and other revenues                                      181                         109
                                                                ---------------------       ---------------------

            Total revenues                                                       960                         592

Costs and expenses:

   Cost of revenues                                                              590                         386

   Marketing                                                                     132                          97

   Product development                                                            32                          24

   General and administrative                                                     62                          52

   Amortization of goodwill and other intangible assets                           13                           2

   Settlement charge                                                               -                         (1)
                                                                ---------------------       ---------------------

          Total costs and expenses                                               829                         560

Income from operations                                                           131                          32

Other income, net                                                                 14                           1
                                                                ---------------------       ---------------------

Income before provision for income taxes                                         145                          33

Provision for income taxes                                                      (24)                           -

                                                                =====================       =====================
Net income                                                                     $ 121                        $ 33
                                                                =====================       =====================


Earnings per share-diluted                                                    $ 0.22                      $ 0.06

Earnings per share-basic                                                      $ 0.26                      $ 0.08

Weighted average shares outstanding-diluted                                      561                         512

Weighted average shares outstanding-basic                                        460                         413

                                              See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                              AMERICA ONLINE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (amounts in millions, except per share data)
                                   (unaudited)


                                                                                Six months ended
                                                                                  December 31,
                                                                -------------------------------------------------
                                                                        1998                        1997
                                                                ---------------------       ---------------------

Revenues:

<S>                                                                          <C>                           <C>  
   Online service revenues                                                   $ 1,494                       $ 917

   Advertising, commerce and other revenues                                      325                         197
                                                                ---------------------       ---------------------

            Total revenues                                                     1,819                       1,114

Costs and expenses:

   Cost of revenues                                                            1,136                         713

   Marketing                                                                     237                         195

   Product development                                                            60                          40

   General and administrative                                                    118                         107

   Amortization of goodwill and other intangible assets                           26                           4

   Restructuring charge                                                            -                         (2)

   Settlement charge                                                               -                         (1)
                                                                ---------------------       ---------------------

          Total costs and expenses                                             1,577                       1,056

Income from operations                                                           242                          58

Other income, net                                                                 16                           6
                                                                ---------------------       ---------------------

Income before provision for income taxes                                         258                          64

Provision for income taxes                                                      (30)                           -

                                                                =====================       =====================
Net income                                                                     $ 228                        $ 64
                                                                =====================       =====================


Earnings per share-diluted                                                    $ 0.41                      $ 0.13

Earnings per share-basic                                                      $ 0.50                      $ 0.16

Weighted average shares outstanding-diluted                                      556                         508

Weighted average shares outstanding-basic                                        457                         409

                                              See accompanying notes.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                              AMERICA ONLINE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (amounts in millions)
                                   (unaudited)

                                                                                Six months ended December 31,
                                                                          ------------------------------------------
                                                                                 1998                   1997
                                                                          --------------------    ------------------

Cash flows from operating activities:
<S>                                                                                     <C>                   <C>  
   Net income                                                                           $ 228                 $  64
   Adjustments to reconcile net income to net
       cash provided by operating activities:
   Non-cash restructuring charges                                                           -                   (2)
   Depreciation and amortization                                                          105                    57
   Amortization of deferred network services credit                                      (38)                     -
   Compensatory stock options                                                               7                    24
   Deferred income taxes                                                                   30                     -
   Gain on sale of investments                                                            (2)                   (8)
   Changes in assets and liabilities:
      Trade accounts receivable                                                           (9)                  (22)
      Other receivables                                                                  (19)                     -
      Prepaid expenses and other current assets                                          (29)                    26
      Other assets                                                                        (1)                   (3)
      Investments including available-for-sale securities                                (19)                  (16)
      Accrued expenses and other current liabilities                                       33                    30
      Deferred revenue and other liabilities                                               57                     2
                                                                          --------------------    ------------------
      Total adjustments                                                                   115                    88
                                                                          --------------------    ------------------
Net cash provided by operating activities                                                 343                   152

Cash flows from investing activities:
   Purchase of property and equipment                                                   (110)                 (169)
   Product development costs                                                             (21)                  (27)
   Proceeds from sale of investments                                                        1                     7
   Purchase of available-for-sale securities                                             (45)                   (5)
   Proceeds from sale of subsidiary                                                        25                     -
   Other investing activities                                                            (17)                   (7)
                                                                          --------------------    ------------------
Net cash used in investing activities                                                   (167)                 (201)
                                                                          --------------------    ------------------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net                                            619                    50
   Proceeds from sale and leaseback of property and equipment                               8                    20
   Principal and accrued interest payments on line of credit and debt                    (10)                  (58)
   Proceeds from line of credit and issuance of debt                                       28                   379
   Restricted cash                                                                          -                    50
                                                                          --------------------    ------------------
Net cash provided by financing activities                                                 645                   441
                                                                          --------------------    ------------------

Net increase in cash and cash equivalents                                                 821                   392
Cash and cash equivalents at beginning of period                                          631                   129
                                                                          --------------------    ------------------
Cash and cash equivalents at end of period                                            $ 1,452                 $ 521
                                                                          ====================    ==================

Supplemental cash flow information Cash paid during the period for:
     Interest                                                                           $   8                 $   2

                                              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)


                                                                                          Unrealized Gain
                                                                             Additional        (Loss)on
                                                         Common Stock         Paid -In    Available-for-Sale  Accumulated
                                                       Shares      Amount      Capital       Securities         Deficit       Total
                                                  ----------------------------------------------------------------------------------


<S>                                                <C>                 <C>        <C>          <C>          <C>            <C>  
Balances at June 30, 1998                          439,972,494         $ 4        $  872       $ 145        $ (423)        $ 598

Common stock issued:
    Exercise of options                             13,468,538           -            62           -              -           62
    Sale of stock, net                              10,991,925           1           556           -              -          557
Amortization of compensatory stock options                   -           -             7           -              -            7
Unrealized loss on available-for-sale securities,            -           -          (11)        (17)              -         (28)
    including tax effect
Tax benefit related to stock options                         -           -            27           -              -           27
Net income                                                   -           -             -           -            228          228
                                                  ==============================================================================
Balances at December 31, 1998                      464,432,957        $  5       $ 1,513       $ 128         $ (195)      $ 1,451
                                                  ==============================================================================



                                              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")  and its
wholly and majority owned  subsidiaries,  have been prepared in accordance  with
generally accepted accounting  principles 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.
Certain  amounts in prior years'  consolidated  financial  statements  have been
reclassified to conform to the current year presentation.  Operating results for
the three and six months ended December 31, 1998 are not necessarily  indicative
of the results that may be expected for the full year ending June 30, 1999.  For
further  information,  refer to 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, 1998.

Note 2.  Earnings Per Share

         The  following  table sets forth the  computation  of basic and diluted
earnings  per share for the three and six months  ended  December  31,  1998 and
1997:

<TABLE>

(in millions except for per share data)                      Three months ended                Six months ended
                                                                December 31,                     December 31,
                                                            1998            1997            1998             1997
                                                            ----            ----            ----             ----
Numerator for basic and diluted earnings per share -
<S>                                                         <C>              <C>            <C>                <C>
  Income available to common stockholders                   $121             $33            $228               $64
                                                       ============================================================

Denominator
Denominator for basic earnings per share -
  Weighted average shares                                    460             413             457               409

Effect of dilutive securities:
  Employee stock options                                      87              84              85                84
  Warrants                                                    14              14              14                14
  Convertible preferred stock                                  -               1               -                 1
                                                       ------------------------------------------------------------
Dilutive potential common shares                             101              99              99                99
                                                       ------------------------------------------------------------


Denominator for diluted earnings per share -
  Adjusted weighted average shares
  and assumed conversions                                    561             512             556               508
                                                       ============================================================
Basic earnings per share                                $   0.26        $   0.08        $   0.50          $   0.16
                                                       ============================================================
Diluted earnings per share                              $   0.22        $   0.06        $   0.41          $   0.13
                                                       ============================================================
</TABLE>

Note 3.  Comprehensive Income

         For the three  months ended  December 31, 1998 and 1997,  comprehensive
income was $149 million and $36 million,  respectively. For the six months ended
December  31,  1998 and 1997,  comprehensive  income  was $211  million  and $80
million,  respectively.  The  difference  between  net income and  comprehensive
income  for each  period  presented  is due to  unrealized  gains or  losses  on
available-for-sale securities.

Note 4. Business Developments

         In November 1998, the Company  announced that it would acquire Netscape
Communications   Corporation  ("Netscape")  in  a  transaction  expected  to  be
accounted  for  as  a   pooling-of-interests   ("the  Transaction").   When  the
Transaction  is  completed,  the  financial  statements  included  in all future
filings  will be restated to include the results of  operations  of Netscape for
all periods  presented.  The Company expects to issue  approximately  45 million
shares in the  Transaction  in which the  stockholders  of Netscape will receive
0.45 shares of the  Company's  common  stock for each share of  Netscape  common
stock (the 0.45 shares is prior to the  adjustment  to reflect  the  two-for-one
stock split that will be effected on February  22,  1999).  The  Transaction  is
expected to close in the spring of 1999, subject to various conditions including
customary regulatory approvals and approval by Netscape's shareholders.

         In  November  1998,  the  Company  announced  it  would  enter  into  a
three-year  strategic  development and marketing alliance with Sun Microsystems,
Inc.  ("Sun").  Under this alliance,  both companies will use each other's sales
channels  and  customer  relationships  to market  their  existing  products and
services,  as well as their new  collaboratively  developed  electronic commerce
solutions. The Company has committed to purchasing systems and services from Sun
with a list price of $500 million through 2002. Sun has committed that the total
revenue  earned by the Company under the strategic development and marketing 
agreement will not be less than $312 million, $330 million and $333 million in
the first, second and third years following the Transaction, respectively.  In 
addition,  the Company will receive approximately $275 million in licensing  
fees and  approximately  $75 million in marketing and  advertising fees. The 
strategic development and marketing agreement is subject to renegotiation in the
event that the Transaction does not close by June 30, 1999.

Note 5. Business Combinations

         During  the  fiscal  year ended June 30,  1998,  the  Company  made two
significant acquisitions, the online services business of CompuServe Corporation
("CompuServe") and the assets of Mirabilis, Ltd., ("Mirabilis"). In exchange for
the online  services  business  of  CompuServe  valued at $280  million and $147
million in cash, the Company transferred to WorldCom, Inc. all of the issued and
outstanding shares of ANS Communications,  Inc., a then wholly-owned  subsidiary
of the Company.  For $287 million in cash (and potential  contingent payments of
up to $120 million in future years),  the Company  purchased all the outstanding
assets,   including  the  developmental  ICQ  instant  communications  and  chat
technology, and assumed certain liabilities of Mirabilis.

         The  following  unaudited  pro  forma  information  has  been  prepared
assuming that the  acquisitions  of CompuServe  and Mirabilis had taken place at
the beginning of the respective  periods.  The amount of the aggregate  purchase
price  allocated  to  in-process  research  and  development  for the  Mirabilis
acquisition  has  been  excluded  from  the pro  forma  information,  as it is a
non-recurring  item.  The pro forma effect for the six months ended December 31,
1997, would have resulted in revenues of $1,230 million,  income from operations
of $115 million,  net income of $117 million, and diluted and basic earnings per
share of $0.23 and $0.29,  respectively.  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.

         During   November   1998,   the  Company   completed  its  merger  with
PersonaLogic, Inc. ("PersonaLogic"), in which PersonaLogic became a wholly owned
subsidiary of the Company. The Company exchanged approximately 690,000 shares of
common  stock  for  all  the   outstanding   common  and  preferred   shares  of
PersonaLogic. The merger was accounted for under the pooling-of-interests method
of accounting and, accordingly,  the accompanying financial statements have been
restated to include the  operations of  PersonaLogic  for all periods  presented
prior to the merger.  The Company expensed an immaterial  amount of merger costs
during the current  period.  PersonaLogic's  revenues for the three months ended
December 31, 1997 and the six months  ended  December 31, 1998 and 1997 were not
significant.  During the three months ended December 31, 1997 and the six months
ended  December 31, 1998 and 1997,  PersonaLogic's  net loss was $1 million,  $1
million and $2 million, respectively.

Note 6.  Sale of Spry, Inc.

         On  September  10,  1998,  the  Company   announced  the  sale  of  its
subsidiary,  Spry, Inc. ("Spry").  For financial reporting purposes,  the assets
and  liabilities  of Spry have been  classified  in the  condensed  consolidated
balance  sheet as a net asset  held for sale,  which is a  component  of prepaid
expenses and other current assets. The initial  transaction  related to the sale
of Spry closed on October 15, 1998 and will be  finalized  during the March 1999
quarter.

Note 7.  Common Stock Offering

         During  July 1998,  the Company  completed a public  offering of common
stock.  The Company sold 10,780,000  shares of common stock and raised aggregate
net  proceeds  of  approximately  $550  million in new equity  used for  general
corporate purposes,  working capital,  capital  expenditures,  and investment in
content, programming and other assets.

Note 8.  Recent Pronouncements

         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.

Note 9.  Stock Split

         On October 27, 1998, the Company  announced that its Board of Directors
approved a two-for-one  common stock split.  On the payment date of November 17,
1998,  stockholders  received one  additional  share for each share owned on the
record  date of  November  3,  1998.  The  impact of this  stock  split has been
reflected in the accompanying financial statements.

Note 10.  Subsequent Events

         On January 27, 1999, the Company  announced that its Board of Directors
approved a two-for-one  common stock split.  On the payment date of February 22,
1999, stockholders will receive one additional share for each share owned on the
record date of February 8, 1999. The impact of this stock split is not reflected
in the accompanying financial statements.

         On January 20,  1999,  the Company  sold a  substantial  portion of its
investment in Excite,  Inc. for net proceeds of approximately $500 million.  The
Company  expects to record a  significant  gain  during  the March 1999  quarter
related to this transaction.

         On  February  1,  1999,  the  Company  announced  that it will  acquire
MovieFone,   Inc.,   ("MovieFone")  in  an  all-stock   transaction   valued  at
approximately $388 million. The acquisition is expected to be accounted for as a
pooling-of-interests  and is expected to close in the spring of 1999, subject to
various  conditions  including  customary  regulatory  approvals and approval by
MovieFone's shareholders.



<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     America Online, Inc. is the world's leader in branded interactive  services
and content.  The Company  operates two  worldwide  Internet  services:  the AOL
service,  with more than 16 million members;  and the CompuServe  service,  with
approximately  2.0 million  members.  The Company also  operates AOL Studios,  a
leading creator of original interactive content. Other branded Internet services
operated by the Company include AOL.COM, the world's most accessed Web site from
home; Digital City, Inc., the No. 1 local content network and community guide on
AOL and the Internet;  AOL NetFind,  AOL's  comprehensive guide to the Internet;
AOL Instant  Messenger,  an instant  messaging  tool  available  on both the AOL
service and the Internet; and ICQ, an instant communications and chat technology
on the Internet.

         The Company  generates two types of revenues:  online service  revenues
and  advertising,  commerce  and other  revenues.  Online  service  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 from the Company's base of
subscribers  and  users  across  its  multiple  brands,  as well as  businesses.
Advertising,  commerce and other  revenues  consist of  advertising  and related
revenues,   the  sale  of  merchandise  and  transaction  fees  associated  with
electronic commerce, as well as other revenues,  which consist primarily of data
network service revenues generated by ANS Communications, Inc. (through its sale
in January 1998) as well as royalty fees and development revenues.

         Currently,   the  Company's   online  service  revenues  are  generated
primarily from subscribers  paying a monthly  membership fee. The Company offers
several pricing  alternatives to the AOL service in the U.S.  designed to appeal
to a wide range of consumers.  Most customers subscribing to the AOL service pay
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. Other pricing options
available  include  an  offering  of three  hours  for  $4.95  per  month,  with
additional time priced at $2.50 per hour, and an 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.  In order to ensure
the  competitiveness  of its offerings,  the Company has historically  conducted
tests of  alternative  pricing  plans,  and  will  continue  to do so in  future
periods.

         Effective February 1, 1998, the Company offered two price plans for the
CompuServe  service:  a standard monthly  membership  offering of five hours for
$9.95  per  month,  with  additional  time  priced  at  $2.95  per  hour  and an
alternative offering of $24.95 per month with no additional hourly charge.
<PAGE>

         In   addition  to  the   revenues   generated   from   online   service
subscriptions,  the  advertising,  commerce and other  revenues are an important
component  of the  Company's  business  objectives  and  provide  a  significant
contribution to the Company's  operating  results.  The Company has continued to
see a general  trend of increased  average  monthly  subscriber  usage since the
introduction  of flat-rate  pricing in December  1996. In the second  quarter of
fiscal  1999,  average  daily  subscriber  usage was  approximately  48 minutes,
compared to  approximately  41 minutes in the second  quarter of fiscal 1998. If
current  usage levels  increase,  further  pressures  on  operating  margins may
result.  The Company expects that the growth in advertising,  commerce and other
revenues,  assuming such growth continues,  will provide it with the opportunity
and flexibility to fund the costs  associated with the increased usage resulting
from  flat-rate  pricing,  and will  help  fund  programs  designed  to grow the
subscriber base within its various brands and meet other business objectives.

         The Company has continued to experience improved subscriber acquisition
and retention rates,  which it believes is related to the improved value offered
by flat-rate pricing and other benefits.  Going forward, the Company may need to
increase its expenditures on marketing in future periods in order to acquire and
retain customers and to address potential competitive pressures.

         The  Company   competes   with  a  wide  range  of   companies  in  the
communications,   advertising,  entertainment,   information,  media,  Web-based
services,   software,   technology,   direct  mail  and   commerce   fields  for
subscription,   advertising   and  commerce   revenue  and  the  development  of
distribution technologies and equipment.

o    Competitors of the Company for subscription revenues include:
     -         online services such as the Microsoft Network,  AT&T WorldNet and
               Prodigy Services Company
     -         national and local Internet service  providers such as MindSpring
               Enterprises,  Inc.  ("MindSpring")  and EarthLink  Network,  Inc.
               ("EarthLink")
     -         long distance and regional telephone companies offering access as
               part  of  their  telephone  service,  such  as  AT&T  Corp.,  MCI
               WorldCom, Inc. and regional Bell operating companies
     -         cable Internet  access  services  offered by companies such as At
               Home Corporation and Road Runner Group

o    Competitors for advertising and commerce revenues include:
     -         online services such as the Microsoft Network,  AT&T WorldNet and
               Prodigy Services Company
     -         Web-based  navigation and search service  companies,  such Yahoo!
               Inc., Infoseek Corporation, Lycos, Inc. and Excite, Inc.
     -         global media  companies such as 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 At
               Home Corporation and Road Runner Group - direct mail, catalog and
               retail sales outlets
<PAGE>

o    Competition for the development of distribution technologies  and equipment
     includes:
     -         broadband  distribution  technologies,  such  as  cable  Internet
               access services  offered by companies such as At Home Corporation
               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

         Some of the present competitors and potential future competitors of the
Company may have greater financial,  technical, marketing or personnel resources
than the Company.  The competitive  environment  could have a variety of adverse
effects on the Company. For example, it could:

o        require  price  reductions  in the  subscription  fees for  online
         services  and require  increased  spending on  marketing,  network
         capacity, content procurement and product development
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 or impede  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 its subscriber base
o        result in attrition in the Company's subscriber base

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.

Results of Operations

Online Service Revenues

         For the three months ended December 31, 1998,  online service  revenues
increased from $483 million to $779 million, or 61%, over the three months ended
December 31, 1997.  This  increase  comprises an increase in AOL online  service
revenues of $242 million,  as well as CompuServe  online service revenues of $54
million,  which  began in February  1998.  The  increase  in AOL online  service
revenues was primarily  attributable  to a 37% increase in the average number of
AOL North  American  subscribers  for the three months ended  December 31, 1998,
compared to the three months ended  December 31, 1997, as well as a 10% increase
in the average monthly online service revenue per AOL North American subscriber.
The average  monthly  online service  revenue per AOL North American  subscriber
increased  from $17.43 in the three months ended  December 31, 1997 to $19.11 in
the three  months  ended  December  31,  1998.  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 the six months ended  December 31, 1998,  online  service  revenues
increased from $917 million to $1,494 million, or 63%, over the six months ended
December 31, 1997.  This  increase  comprises an increase in AOL online  service
revenues of $475 million,  as well as CompuServe online service revenues of $102
million,  which  began in February  1998.  The  increase  in AOL online  service
revenues was primarily  attributable  to a 39% increase in the average number of
AOL North  American  subscribers  for the six months  ended  December  31, 1998,
compared to the six months ended December 31, 1997, as well as a 10% increase in
the average  monthly online service  revenue per AOL North American  subscriber.
The average  monthly  online service  revenue per AOL North American  subscriber
increased from $17.40 in the six months ended December 31, 1997 to $19.11 in the
six months ended December 31, 1998. 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.
<PAGE>

         At December 31, 1998,  the Company had  approximately  15.1 million AOL
service subscribers,  including 13.3 million in North America and 1.8 million in
the rest of the world.  Also at that date,  the  Company had  approximately  2.0
million  CompuServe  brand  subscribers,  with 1 million in North  America and 1
million in the rest of the world.

Advertising, Commerce and Other Revenues

         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 66%, from $109
million in the quarter  ended  December  31, 1997 to $181 million in the quarter
ended December 31, 1998. The increase was driven  primarily by more  advertising
on  the  Company's  AOL  service  as  well  as an  increase  in  commerce  fees.
Advertising  and commerce fees increased by 133%,  from $54 million in the three
months  ended  December  31,  1997 to $126  million  in the three  months  ended
December 31, 1998. Merchandise sales decreased slightly, in line with management
plans,  by 3%, from $33 million in the three months  ended  December 31, 1997 to
$32 million in the three months ended  December 31, 1998.  At December 31, 1998,
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  $729 million,  up from  approximately
$320 million at December 30, 1997.

         For the six months ended December 31, 1998,  advertising,  commerce and
other revenues increased from $197 million to $325 million, or 65%, over the six
months  ended  December 31,  1997.  The  increase  was driven  primarily by more
advertising  on the  Company's  AOL  service as well as an  increase in commerce
fees.  Advertising  and commerce fees increased by 134%, from $98 million in the
six months  ended  December  31,  1997 to $229  million in the six months  ended
December 31, 1998. Merchandise sales decreased slightly, in line with management
plans, by 11%, from $57 million in the six months ended December 31, 1997 to $51
million in the six months ended December 31, 1998.

Cost of Revenues

         Cost of revenues includes  network-related costs,  consisting primarily
of data network costs and costs associated with network equipment, personnel and
related costs  associated  with  operating  the data  centers,  data network and
providing  customer  support and  billing,  royalties  paid to  information  and
service  providers,  the  costs  of  merchandise  sold and  product  development
amortization  expense.  For the three  months ended  December 31, 1998,  cost of
revenues  increased  from $386 million to $590  million,  or 53%, over the three
months ended  December 31, 1997, and decreased as a percentage of total revenues
from  65.2% to 61.5%.  For the six  months  ended  December  31,  1998,  cost of
revenues  increased  from $713 million to $1,136  million,  or 59%, over the six
months ended  December 31, 1997, and decreased as a percentage of total revenues
from 64.0% to 62.5%.

         The  increase  in cost of  revenues  in the three and six months  ended
December 31, 1998 was primarily attributable to increases in data network costs,
as well as  personnel  and related  costs  associated  with  operating  the data
centers,  data network and providing customer support and billing.  Data network
costs  increased  primarily  as a  result  of the  larger  customer  base and an
increased  usage per  customer.  Personnel  and related  costs  associated  with
operating the data  centers,  data network and  providing  customer  support and
billing  increased  primarily as a result of the  requirements  of  supporting a
larger  data  network,  a larger  customer  base and  increased  online  service
revenues.
<PAGE>

         The decrease in cost of revenues as a percentage  of total  revenues in
the three and six months ended December 31, 1998 was primarily  attributable  to
growth of the higher margin  advertising,  commerce and other revenues offset by
an increase in  network-related  costs as a percentage of service revenues.  The
increase  in  network-related  costs as a  percentage  of service  revenues  was
primarily  driven by an increase in daily  member  usage,  from an average of 41
minutes per day in the three months ended  December 31, 1997 to an average of 48
minutes per day in the three months ended  December 31, 1998.  This  increase in
network costs as a percentage of service  revenues  were  partially  offset by a
reduction  in the  network  cost per hour for the  three  and six  months  ended
December 31, 1997 and 1998.

Marketing

         Marketing  expenses include the costs to acquire and retain subscribers
and other general marketing costs. For the three months ended December 31, 1998,
marketing expenses increased from $97 million to $132 million,  or 36%, over the
three months ended  December 31, 1997,  and  decreased as a percentage  of total
revenues  from  16.4% to 13.8%.  For the six months  ended  December  31,  1998,
marketing expenses increased from $195 million to $237 million, or 22%, over the
six months  ended  December  31, 1997,  and  decreased as a percentage  of total
revenues from 17.5% to 13.0%.  The increase in marketing  expenses for the three
and six months ended December 31, 1998 was primarily attributable to an increase
in direct subscriber  acquisition  costs and brand  advertising  across multiple
brands. The decrease in marketing expenses as a percentage of total revenues for
the  three  months  ended  December  31,  1998 was  primarily  a  result  of the
substantial growth in revenues.

Product Development

        Product development costs include research and development  expenses and
other product  development  costs. For the three months ended December 31, 1998,
product  development  costs  increased from $24 million to $32 million,  or 33%,
over the three months ended  December 31, 1997, and decreased as a percentage of
total  revenues from 4.1% to 3.3%.  For the six months ended  December 31, 1998,
product  development  costs  increased from $40 million to $60 million,  or 50%,
over the six months ended  December 31, 1997,  and  decreased as a percentage of
total revenues from 3.6% to 3.3%. The increase in product  development costs for
the three and six months ended December 31, 1998 was primarily  attributable  to
an  increase  in  personnel  costs as a result of an  increase  in the number of
technical  employees to support additional  products across multiple brands. The
decrease of product  development  costs as a percent of total  revenues  for the
three  and six  months  ended  December  31,  1998 was  mainly  a result  of the
substantial growth in revenues.

General and Administrative

         For  the  three   months  ended   December   31,   1998,   general  and
administrative  expenses increased from $52 million to $62 million, or 19%, over
the three months ended December 31, 1997, and decreased as a percentage of total
revenues from 8.8% to 6.5%. For the six months ended December 31, 1998,  general
and administrative expenses increased from $107 million to $118 million, or 10%,
over the six months ended  December 31, 1997,  and  decreased as a percentage of
total  revenues  from 9.6% to 6.5%.  The increase in general and  administrative
costs  for the  three and six  months  ended  December  31,  1998 was  primarily
attributable to higher  personnel costs and  professional  fees. The decrease of
general and  administrative  costs as a percent of total  revenues for the three
and six months ended  December  31, 1998 was mainly a result of the  substantial
growth in revenues.

Amortization of Goodwill and Other Intangible Assets

         Amortization of goodwill and other  intangible  assets increased to $13
million in the three months ended December 31, 1998 from $2 million in the three
months ended December 31, 1997.  Amortization  of goodwill and other  intangible
assets  increased to $26 million in the six months ended  December 31, 1998 from
$4  million  in the  six  months  ended  December  31,  1997.  The  increase  in
amortization  expense in the three and six months  ended  December  31,  1998 is
primarily  attributable  to goodwill  associated  with the  acquisitions  of the
CompuServe service in January 1998 and Mirabilis,  Ltd. and NetChannel,  Inc. in
June 1998 partially offset by the sale of ANS in January 1998.
<PAGE>

Restructuring Charge

         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,  substantially  all of the  restructuring  activities had
been completed and the Company reversed $2 million of the original restructuring
accrual in the first quarter of fiscal 1998.

Settlement Charge

         In the quarter ended December 31, 1996,  the Company  recorded a charge
of $24  million  related  to a  legal  settlement  reached  with  various  State
Attorneys  General 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 this legal settlement, 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 protections laws. As of December 31, 1997, the Company revised
its  estimate  of the total  settlement  charge 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 $14 million and $1 million in the three months ended
December  31, 1998 and 1997,  respectively.  The Company had other income of $16
million  and $6 million  in the six months  ended  December  31,  1998 and 1997,
respectively.  The  increase in other  income in the three and six months  ended
December  31, 1998 was  primarily  attributable  to an increase in net  interest
income and a reduction of  non-operating  losses related to various  investments
offset by prior year gains on the sale of certain available-for-sale securities.

Provision for Income Taxes

     The provision for income taxes was $24 million and zero in the three months
ended December 31, 1998 and 1997,  respectively.  The provision for income taxes
was $30 million  and zero in the six months  ended  December  31, 1998 and 1997,
respectively.  Income tax expense for the three months  ended  December 31, 1998
includes $23 million for U.S.  federal and state income taxes and $1 million for
foreign taxes.  Utilization of operations-related  deferred tax benefits reduced
the Company's  U.S.  federal and state income tax expense by $33 million and $13
million in the three  months  ended  December  31, 1998 and 1997,  respectively.
Utilization of  operations-related  deferred tax benefits  reduced the Company's
U.S.  federal and state income tax expense by $73 million and $26 million in the
six months ended  December 31, 1998 and 1997,  respectively.  As of December 31,
1998 the Company had net operating loss carryforwards available to offset future
U.S. federal taxable income of approximately $1.6 billion.
<PAGE>

Liquidity and Capital Resources

         The Company has financed its  operations  through cash  generated  from
operations, the sale of its capital stock and the sale of convertible notes. The
Company has  financed  its  investments  in  facilities  and  telecommunications
equipment principally through leasing. Net cash provided by operating activities
was $343 million and $152 million in the six months ended  December 31, 1998 and
1997,  respectively and increased primarily due to the Company's increase in net
income.  Net cash used in  investing  activities  decreased to $167 million from
$201  million in the six months ended  December 31, 1998 and 1997,  respectively
due to the timing of purchased  property and  equipment as well as proceeds from
the Company's sale of Spry,  Inc. Net cash provided by financing  activities was
$645  million and $441  million in the six months  ended  December  31, 1998 and
1997,  respectively.  Included in financing  activities for the six months ended
December  31, 1998 were $550 million in  aggregate  net  proceeds  from a public
stock offering of its common stock. The Company also has available,  to meet its
working capital needs, a $200 million secured  revolving credit facility with no
amounts outstanding as of December 31, 1998.

         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  available  cash  and  cash  provided  by  operating
activities will be sufficient to fund its operations for the next twelve months.

         On January 20,  1999,  the Company  sold a  substantial  portion of its
investment in Excite, Inc. for net proceeds of approximately $500 million.

Seasonality

         The  number  of  subscriber  acquisitions  and the  amount of usage per
subscriber  appear 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 services while spending more time indoors due to winter
weather. However, the Company does not know whether such increases in subscriber
acquisitions  and usage are  primarily  attributable  to seasonal  factors or to
increased demand for Internet  services as a result of the growing market demand
and utility for such services.
<PAGE>

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  the AOL service,  the  CompuServe  service,  the  proprietary
software of the AOL and CompuServe  services,  member services,  network access,
content  providers,  joint  ventures  and  various  administrative  and  billing
functions.  To the extent the Company's  software  applications  contain  source
codes that are unable to  appropriately  interpret  the upcoming  calendar  year
2000,  some  level  of  modification,  or  even  possibly  replacement  of  such
applications may be necessary.  The Company has 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 is undertaking its assessment of
the Company's  compliance and has begun testing.  The Company's  client and host
software and corporate business and information systems are currently undergoing
review and testing.  The testing of the  Company's  system  hardware  components
began in January 1999. To date,  the Company has  experienced  very few problems
related to Year 2000 testing,  and the problems that have been identified are in
the process of being fixed. The international portion of the AOL service and the
CompuServe service continues to move forward with system inventory gathering, as
well as an analysis of common systems.  The  international  services utilize the
same  AOL  infrastructure,  so  it  is  anticipated  that  additional  costs  of
compliance for the international portion will be minimal.

         In addition, the Company is in the process of asking 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,  but has received very few complete
responses.  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 by the Company through December 1998 to address Year
2000 compliance were approximately $3 million.  The Company currently  estimates
it will  incur a total of  approximately  $8  million  in costs to  support  its
compliance initiatives. Although the Company expects its proprietary software to
be Year 2000  compliant on or before  December 31, 1999,  it cannot  predict the
outcome or the success of its Year 2000 program, or that third party systems are
or will be Year 2000  compliant,  or 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. The Company is in the process of developing a contingency
plan to address possible risks to its systems.  It is the Company's intention to
implement its contingency plan no later than July 1999.

Inflation

         The Company  believes that  inflation has not had 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
subjects  including the  following:  future  financial  and  operating  results;
subscriber  growth and retention;  timing and benefits of acquisitions and other
alliances;  development and success of multiple brands;  new markets,  products,
services,  features  and content  (such as the "You've Got  Pictures"  service);
corporate spending;  network capacity; new platforms and access and distribution
technologies;  and the Company's ability to shape public policy in, for example,
telecommunications, privacy and tax areas.
<PAGE>

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

          Factors related to increased competition,  including: price reductions
     and  increased  spending;  negative  impact  on the  Company's  ability  to
     generate  greater revenues and profits from sources such as advertising and
     electronic  commerce;  limitations on the Company's  opportunities to enter
     into  or  renew  agreements  with  content  and   distribution   providers;
     limitations on the Company's  ability to develop new products and services;
     limitations  on its  ability to grow its  subscriber  base;  and  increased
     attrition in the Company's subscriber base.

          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 buildout of
     AOLnet and the  expansion  of server and  network  capacity:  the risk that
     supply  shortages for local  exchange  carrier  lines from local  telephone
     companies could impede the provision of adequate network capacity;  and the
     risk of the failure to obtain the  necessary  financing.  Risks  related to
     CompuServe's reliance on network services which are provided under a single
     agreement.

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

          The inability to increase  revenues at a rate sufficient to offset the
     increase in data  communications  costs  resulting from  increasing  usage.
     Risks and  uncertainties  associated  with current or future price changes,
     including:  the risk that  competitive  offerings  to the AOL  service  may
     become more  attractive  to AOL  members;  the risk of slowing or reversing
     subscriber growth or reducing subscriber  retention rates and the resulting
     impact on the Company's ability to generate advertising  revenues;  and the
     risk that the Company may be required to increase marketing  expenses.  The
     resulting risk that gross and operating margins will decrease.

          The risk that  because of seasonal and other  factors,  the Company is
     unable to predict growth in 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 the risk of significant  charges for in-process  research and
     development  or other  matters.  The risk of loss of services of  executive
     officers and other key employees.

          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.
<PAGE>

          The  Company's  inability  to  offer  its  services  through  advanced
     distribution technologies such as cable, satellite,  wireless,  television,
     broadcast and enhanced  telephone  distribution  and the 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.

          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.



<PAGE>


PART II.  OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

         On November  11,  1998,  the  Company  acquired  PersonaLogic,  Inc. in
exchange  for the  issuance of 392,834  shares of Company  Common  Stock  (share
numbers do not reflect the two-for-one  stock split effected November 17, 1998).
The private  placement is exempt from  registration  pursuant to Section 4(2) of
the Securities Act of 1933, as amended.

Item 4.    Submission of Matters to a Vote of Security Holders

         The  Company  held its Annual  Meeting of  Stockholders  on October 20,
1998. Following are descriptions of the matters voted on and the results of such
meeting  (share  numbers do not reflect  the  two-for-one  stock split  effected
November 17, 1998):

<TABLE>

                                                                          Number of Shares
                    Matter Voted On                              For             Against         Abstain

1.  Election of Directors:
<S>                                                          <C>               <C>                 <C>
     Frank J. Caufield                                       162,915,182       19,390,834          N/A
     Robert W. Pittman                                       162,911,990       19,396,026          N/A
     General Colin L. Powell                                 162,872,345       19,434,671          N/A
     Franklin D. Raines                                      162,891,940       19,416,076          N/A

2.   Amendment of Restated Certificate of                    145,509,040       36,663,786        135,190
     Incorporation to increase the number of
     authorized shares

3.   Approval of an increase in the number of                180,582,361        1,545,711        179,944
     shares of Common Stock authorized for issuance
     under the Company's Employee Stock Purchase Plan

4.   Approval of an amendment to the eligibility             180,683,133        1,403,059        221,824
     requirements under the Company's Employee Stock
     Purchase Plan

5.   Proposal to ratify the appointment of Ernst &           181,903,214         287,470         117,332
     Young as the Company's independent public
     accountants for the fiscal year ended June 30, 1999
</TABLE>


Item 6.    Exhibits and Reports on Form 8-K

(a)      Exhibits
         Exhibit 2.1    Agreement and Plan of Merger dated as of November
                        23, 1998 by and among America  Online,  Inc.,  Apollo
                        Acquisition   Corp.   and   Netscape   Communications
                        Corporation.  (Filed  as  Exhibit  2.1  to a  Current
                        Report on Form 8-K for an event on November  23, 1998
                        and hereby incorporated by reference.)

         Exhibit 10.1   Strategic Development and Marketing Agreement made and
                        entered into on November 23, 1998, by and between
                        America Online, Inc. and Sun Microsystems, Inc.
                        (Confidential treatment of portions of this document has
                        been requested.)

         Exhibit 10.2   Sun Microsystems, Inc. Service Provider Agreement
                        effective on November 1, 1998 (Confidential treatment of
                        portions of this document has been requested.)

(b)      Reports on Form 8-K

Form      Item # Description                                    Filing Date
----      ------ -----------                                    -----------
Form 8-K  5, 7   Announcement of entering into an Agreement    November 24, 1998
                 and Plan of Merger, dated as of November 23,
                 1998 between America Online, Inc. and
                 Netscape Communications Corporation

                 Announcement of entering into strategic
                 development and marketing agreements with
                 Sun Microsystems, Inc.



<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: February 10, 1999                SIGNATURE:/s/___________________________ 
                                                  Stephen M. Case
                                                  Chairman of the Board
                                                  and Chief Executive Officer



DATE: February 10, 1999                SIGNATURE: /s/__________________________ 
                                                  J. Michael Kelly
                                                  Senior Vice President
                                                  and Chief Financial Officer


<PAGE>


Exhibit Index

         Exhibit  2.1      Agreement and Plan of Merger dated as of November
                           23, 1998 by and among America  Online,  Inc.,  Apollo
                           Acquisition   Corp.   and   Netscape   Communications
                           Corporation.  (Filed  as  Exhibit  2.1  to a  Current
                           Report on Form 8-K for an event on November  23, 1998
                           and hereby incorporated by reference.)

         Exhibit 10.1      Strategic Development and Marketing Agreement made 
                           and entered into on November 23,1998, by and between 
                           America Online, Inc. and Sun Microsystems, Inc. 
                           (Confidential treatment of portions of this document
                           has been requested.)

         Exhibit 10.2      Sun Microsystems, Inc. Service Provider Agreement 
                           effective on November 1, 1998
                           (Confidential treatment of portions of this document
                           has been requested.)