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, 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:
                                     0-19836

                              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 zipcode)

Registrant's telephone number, including area code:    (703) 448-8700

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, 1998.................................216,201,994

<PAGE>


                              AMERICA ONLINE, INC.

                                      INDEX
                                                                         Page

PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

         Condensed Consolidated Balance Sheets - March 31, 1998
         and June 30, 1997                                                    3

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

         Condensed Consolidated Statements of Operations - Nine
         months ended March 31, 1998 and 1997                                 5

         Condensed Consolidated Statements of Cash Flows - Nine
         months ended March 31, 1998 and 1997                                 6

         Condensed Consolidated Statement of Changes in
         Stockholders' Equity - Nine months ended
         March 31, 1998                                                       8

         Notes to Condensed Consolidated Financial Statements                 9

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                           16


PART II. OTHER INFORMATION                                                   29


Signatures                                                                   30


<PAGE>

<TABLE>
<CAPTION>

                              AMERICA ONLINE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (amounts in thousands, except share data)

                                                                           March 31,                  June 30,
                                                                             1998                       1997
                                                                     ----------------------      -------------------
ASSETS                                                                    (unaudited)

Current assets:
<S>                                                                           <C>                        <C>
    Cash and cash equivalents                                                 $    924,080               $  124,340
    Trade accounts receivable, net                                                 106,018                   65,306
    Other receivables                                                               53,500                   26,093
    Prepaid expenses and other current assets                                       90,770                  107,734
                                                                     ----------------------      -------------------
     Total current assets                                                        1,174,368                  323,473

Property and equipment at cost, net                                                340,009                  233,129

Other assets:
    Restricted cash                                                                      -                   50,000
    Product development costs, net                                                  84,543                   72,498
    License rights, net                                                             10,389                   16,777
    Investments including available-for-sale securities                            271,666                   48,267
    Other assets                                                                    46,405                   36,351
    Deferred income taxes                                                           78,806                   24,410
    Goodwill and other intangible assets, net                                      118,190                   41,783
                                                                     ======================      ===================
Total assets                                                                    $2,124,376               $  846,688
                                                                     ======================      ===================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable                                                     $    84,294              $    69,703
    Other accrued expenses and liabilities                                         419,973                  298,752
    Deferred revenue                                                               227,380                  166,007
    Accrued personnel costs                                                         48,586                   20,008
    Deferred network services credit                                                76,218                        -
                                                                     ----------------------      -------------------
           Total current liabilities                                               856,451                  554,470

Long-term liabilities:
    Notes payable                                                                  374,773                   50,000
    Deferred income taxes                                                           78,806                   24,410
    Deferred revenue                                                                72,499                   86,040
    Other liabilities                                                                1,125                    3,734
    Deferred network services credit                                               292,169                        -
                                                                     ----------------------      -------------------
           Total liabilities                                                     1,675,823                  718,654

Stockholders' equity:
  Preferred stock, $.01 par value; 5,000,000 shares
    authorized, 1,000 shares issued and outstanding                                      1                        1
  Common stock, $.01 par value, 600,000,000 shares
    authorized, 214,820,206 and 200,377,942 shares
    issued and outstanding at March 31, 1998
    and June 30, 1997, respectively                                                  2,148                    2,004
  Additional paid-in-capital                                                       788,593                  616,219
  Unrealized gain on available-for-sale securities                                  80,182                   16,924
  Accumulated deficit                                                            (422,371)                (507,114)
                                                                     ----------------------      -------------------
      Total stockholders' equity                                                   448,553                  128,034
                                                                     ======================      ===================
      Total liabilities and stockholders' equity                               $ 2,124,376               $  846,688
                                                                     ======================      ===================

                                              See accompanying notes.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                              AMERICA ONLINE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (amounts in thousands, except per share data)
                                   (unaudited)
                                                                            Three months ended
                                                                                 March 31,
                                                             --------------------------------------------------
                                                             --------------------------------------------------
                                                                     1998                        1997
                                                             ----------------------      ---------------------

Revenues:
<S>                                                                      <C>                        <C>
   Online service revenues                                               $ 575,692                  $ 381,486

 Advertising, commerce and other revenues                                  117,948                     68,605
                                                             ----------------------      ---------------------

            Total revenues                                                 693,640                    450,091

Costs and expenses:
   Cost of revenues                                                        457,755                    308,386

   Marketing                                                                84,188                     92,809

   Product development                                                      27,304                     21,466

   General and administrative                                               59,535                     32,843

   Amortization of goodwill                                                  4,227                      1,398

   Restructuring charge                                                     35,102                          -

   Acquired research and development                                         9,700                          -

   Settlement charge                                                             -                       (96)
                                                             ----------------------      ---------------------

      Total costs and expenses                                             677,811                    456,806

Income (loss) from operations                                               15,829                    (6,715)

Other income, net                                                            2,764                      1,981
                                                             ----------------------      ---------------------

Income (loss) before
   income taxes                                                             18,593                    (4,734)

Income taxes                                                                     -                          -

                                                             ======================      =====================
Net income (loss)                                                        $  18,593                $   (4,734)
                                                             ======================      =====================


Earnings (loss) per share-diluted                                           $ 0.08                  $  (0.02)

Earnings (loss) per share-basic                                             $ 0.09                  $  (0.02)

Weighted average shares outstanding-diluted                                245,506                    192,566

Weighted average shares outstanding-basic                                  211,607                    192,566

                                              See accompanying notes.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                              AMERICA ONLINE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  (amounts in thousands, except per share data)
                                   (unaudited)
                                                                               Nine months ended
                                                                                   March 31,
                                                                -------------------------------------------------
                                                                -------------------------------------------------
                                                                        1998                         1997

                                                                ----------------------        --------------------
 Revenues:
<S>                                                                      <C>                         <C>
    Online service revenues                                              $  1,493,024                $  1,043,838

    Advertising, commerce and other  revenues                                 314,250                     165,647
                                                                ----------------------        --------------------

             Total revenues                                                 1,807,274                   1,209,485

 Costs and expenses:
    Cost of revenues                                                        1,170,742                     771,428

    Marketing:
         Marketing                                                            278,810                     323,787
         Write-off of deferred subscriber acquisition costs                         -                     385,221

    Product development                                                        66,751                      59,805

    General and administrative                                                164,509                      82,103

    Amortization of goodwill                                                    8,064                       4,907

    Restructuring charge                                                       33,796                      48,627

    Acquired research and development                                           9,700                           -

    Settlement charge                                                         (1,009)                      24,204
                                                                ----------------------        --------------------

              Total costs and expenses                                      1,731,363                   1,700,082

 Income (loss) from operations                                                 75,911                   (490,597)

 Other income, net                                                              8,832                       3,069
                                                                ----------------------        --------------------

 Income (loss) before
    income taxes                                                               84,743                   (487,528)

 Income taxes                                                                       -                           -

                                                                ======================        ====================
 Net income (loss)                                                        $    84,743                  $(487,528)
                                                                ======================        ====================

 Earnings (loss) per share-diluted                                          $    0.35                   $  (2.58)

 Earnings (loss) per share-basic                                            $    0.41                   $  (2.58)

 Weighted average shares outstanding-diluted                                  243,109                     189,133

 Weighted average shares outstanding-basic                                    208,793                     189,133

                                    See accompanying notes.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                              AMERICA ONLINE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (amounts in thousands)
                                   (unaudited)
                                                                                 Nine months ended March 31,
                                                                          ------------------------------------------
                                                                                 1998                   1997
                                                                          --------------------    ------------------

Cash flows from operating activities:
<S>                                                                                <C>                <C>
   Net income (loss)                                                               $   84,743         $   (487,528)
   Adjustments to reconcile  net income (loss) to net cash provided by operating
       activities:
   Write-off of deferred subscriber acquisition costs                                       -               385,221
   Non-cash restructuring charges                                                      10,514                22,478
   Depreciation and amortization                                                       88,599                45,517
   Amortization of deferred network services credit                                  (12,703)                     -
   Charge for acquired research and development                                         9,700                     -
   Amortization of subscriber acquisition costs                                             -                59,189
   Compensatory stock options                                                          25,510                     -
   Changes in assets and liabilities:
      Trade accounts receivable                                                         (632)               (9,443)
      Other receivables                                                              (27,941)               (6,953)
      Prepaid expenses and other current assets                                        34,626              (12,767)
      Deferred subscriber acquisition costs                                                 -             (130,229)
      Other assets                                                                   (35,188)              (36,627)
      Trade accounts payable                                                           18,054              (30,148)
      Accrued personnel costs                                                          14,537               (6,553)
      Other accrued expenses and liabilities                                          115,621               117,197
      Deferred revenue                                                                 44,963               199,303
      Other liabilities                                                                 (280)                 2,351
                                                                          --------------------    ------------------
      Total adjustments                                                               285,380               598,536
                                                                          --------------------    ------------------
Net cash provided by operating activities                                             370,123               111,008

Cash flows from investing activities:
   Purchase of property and equipment                                               (253,399)              (60,788)
   Product development costs                                                         (36,440)              (45,193)
   Other investing activities                                                         (3,178)                 9,987
   Net proceeds from acquisition of CompuServe/disposition of ANS                     207,438                     -
                                                                          --------------------    ------------------
Net cash used in investing activities                                                (85,579)              (95,994)
                                                                          --------------------    ------------------

Cash flows from financing activities:
   Proceeds from issuance of preferred stock in subsidiary                                  -                15,000
   Proceeds from issuance of common stock, net                                         82,225                50,017
   Proceeds from sale and leaseback of property and equipment                          62,472                     -
   Proceeds (payments) on long-term debt                                                  631                 (801)
   Proceeds from notes payable, net                                                   370,200                     -
   Net payments under capital lease obligations                                         (332)                  (67)
   Restricted cash                                                                     50,000                     -
   Payments on line of credit                                                        (50,000)                     -
                                                                          --------------------    ------------------
Net cash provided by financing activities                                             515,196                64,149
                                                                          --------------------    ------------------

Net increase in cash and cash equivalents                                             799,740                79,163
Cash and cash equivalents at beginning of period                                      124,340               118,421
                                                                          --------------------    ------------------
Cash and cash equivalents at end of period                                           $924,080              $197,584
                                                                          ====================    ==================

Supplemental cash flow information Cash paid during the period for:
     Interest                                                                          $8,981               $ 1,300
     Income taxes                                                                           -                     -
</TABLE>


                                              See accompanying notes.

<PAGE>

<TABLE>
<CAPTION>

                             AMERICA ONLINE, INC.
       CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                    (amounts in thousands, except share data)
                                   (unaudited)

                                                                                                                         Additional
                                                           Preferred stock                  Common stock                  paid-in
                                                       Shares            Amount        Shares             Amount          capital
                                                     -------------------------------------------------------------------------------
                                                     -------------------------------------------------------------------------------


<S>                                                        <C>                 <C>     <C>                  <C>             <C>
Balances at June 30, 1997                                  1,000               $ 1     200,377,942          $ 2,004         $616,219

Common stock issued:
    Exercise of options                                        -                 -      13,984,994              140           81,854
    Business acquisitions                                      -                 -         322,782                3           13,343
    Sale of stock, net                                         -                           134,488                1            2,986
Amortization of deferred compensation                          -                 -               -                -           25,232
Unrealized gain on available-for-sale securities,
     including tax effect                                      -                 -               -                -           48,959
Net income                                                     -                 -               -                -                -
                                                     ------------      ----------------------------    -------------    ------------
                                                     ============      ============================    =============    ============
Balances at March 31, 1998                                 1,000               $ 1     214,820,206          $ 2,148         $788,593
                                                     ============      ============================    =============    ============
                                                     ============      ============================    =============    ============

                                                         Unrealized gain on
                                                         available-for-sale        Accumulated
                                                            securities               deficit            Total
                                                     ------------------------------------------------------------
                                                     ------------------------------------------------------------


<S>                                                                  <C>             <C>                <C>
Balances at June 30, 1997                                          $ 16,924          $ (507,114)        $128,034

Common stock issued:
    Exercise of options                                                   -                   -           81,994
    Business acquisitions                                                 -                   -           13,346
    Sale of stock, net                                                    -                   -            2,987
Amortization of deferred compensation                                     -                   -           25,232
Unrealized gain on available-for-sale securities,
     including tax effect                                            63,258                   -          112,217
Net income                                                                -              84,743           84,743
                                                     -----------------------    ----------------    -------------
                                                     =======================    ================    =============
Balances at March 31, 1998                                         $ 80,182          $ (422,371)        $448,553
                                                     =======================    ================    =============
                                                     =======================    ================    =============

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 (with the exception of the adjustment  discussed in Note 2 of
the Notes to Condensed Consolidated Financial Statements),  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 nine months ended
March  31,  1998  are not  necessarily  indicative  of the  results  that may be
expected for the full year ending June 30, 1998. 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, 1997.

         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 derivative  financial
instruments  as of March 31,  1998,  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 or
financial position of the Company.

Note 2.  Change in Accounting Estimate

         As a result of a change in accounting estimate,  the Company recorded a
charge of $385.2 million as of September 30, 1996,  representing  the balance of
deferred  subscriber  acquisition  costs  as  of  that  date.  The  Company  had
previously deferred the cost of certain marketing activities, to comply with the
criteria of Statement of Position 93-7  "Reporting on  Advertising  Costs",  and
then amortized those costs over a period  determined by calculating the ratio of
current  revenues  related  to  direct  response  advertising  versus  the total
expected revenues related to this advertising,  or twenty-four months, whichever
was shorter.  The Company's  changing business model,  which includes  flat-rate
pricing for its AOL brand online service,  is expected to reduce its reliance on
online service subscriber revenues for the generation of profits.  This changing
business  model,  coupled with a lack of historical  experience  with  flat-rate
pricing,  created uncertainties  regarding the level of expected future economic
benefits from online service subscriber  revenues (See "Management's  Discussion
and Analysis of Financial  Condition and Results of  Operations").  As a result,
the Company  believed it no longer had an adequate  accounting  basis to support
recognizing deferred subscriber acquisition costs as an asset.

<PAGE>

Note 3.  Income Taxes

         The  effective  income tax rate varied from the federal  statutory  tax
rate as follows:

<TABLE>

                                               Three Months              Nine Months
                                                 Ended                     Ended
                                                3/31/98                   3/31/98
                                           -------------------        --------------------

<S>                                             <C>                        <C>
Statutory rate                                  35.0%                      35.0%
State income taxes - net of federal
       income tax benefit                        3.0                         3.0
Acquired research and development               19.8                         4.3
Other                                            4.1                         2.2
Tax benefit of loss carryforwards              (61.9)                      (44.5)
                                           ===================        ====================
Effective tax rate                               0.0%                        0.0%
                                           ===================        ====================
</TABLE>

         As of March 31, 1998, the Company had net operating loss  carryforwards
of  approximately  $826.6  million for tax  purposes,  which will be  available,
subject to certain annual  limitations,  to offset future taxable income. If not
used, these loss  carryforwards will expire between 2001 and 2013. To the extent
that net  operating  loss  carryforwards  and other  deferred  tax assets,  when
realized,  relate to stock option  deductions,  the  resulting  benefits will be
credited to stockholders'  equity.  (See Note 4, Change in Accounting for Income
Taxes).

         Deferred  income taxes arise because of differences in the treatment of
income and  expense  items for  financial  reporting  and  income tax  purposes.
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 liabilities and assets as of March 31, 1998 and 1997
were as follows:

<TABLE>

                                                                         March 31,
(In thousands)                                                   1998                1997
                                                             -------------- --- ---------------

Deferred tax liabilities:
<S>                                                          <C>                <C>
   Capitalized software costs                                $    29,848         $   23,005
   Unrealized gain on available-for-sale securities               48,958                  -
                                                             ==============     ===============
Net deferred tax liabilities                                 $    78,806         $   23,005
                                                             ==============     ===============

Deferred tax assets:
    Net operating loss carryforwards                         $   314,112          $ 258,066
    Deferred network services credit                             138,355                  -
    Other                                                         20,348             10,411
                                                             --------------     ---------------
Total deferred tax assets                                        472,815            268,477
Valuation allowance for deferred assets                         (394,009)         (245,472)
                                                             ==============     ===============
Net deferred tax assets                                      $    78,806         $   23,005
                                                             ==============     ===============

</TABLE>

<PAGE>

Note 4. Change in Accounting 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  is  attributable  to  operating
activities.  The remainder of the NOLs is 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.

         For the first two quarters of fiscal 1998,  the Company  continued this
practice.  During the third quarter of 1998,  effective  retroactive  to July 1,
1997,  the Company  changed its accounting for income taxes to recognize the tax
benefits from current and prior year's stock option deductions after utilization
of NOLs from operations (i.e., NOLs determined  without deductions for exercised
stock  options) to reduce  income tax expense.  The Company  believes  that this
change is to a  preferable  method  because the Company will not realize any tax
benefit from stock option deductions until it has fully utilized its current and
prior period net operating loss carryforwards from operations. Thus, this method
more accurately  reflects the  incremental  effect of the Company's stock option
deductions in the appropriate accounting period.

         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.

         After  restating  the first and second  quarters  in fiscal  1998,  the
effect of the accounting  change for each quarter was to increase net income (in
thousands) and net income per share as follows:

                                              Per Share
                           Total          Basic      Diluted
                           ---------------------------------
First Quarter          $    12,502   $    0.06   $    0.05
Second Quarter         $    13,716   $    0.07   $    0.06


         Furthermore,  additional  paid-in capital was reduced by  approximately
$26  million  and,  as a result of this change in  accounting  method,  retained
earnings was increased by $26 million.

         The Company's  deductible  temporary  differences related to operations
and exercised stock options amounted to (in millions):

                                March 31, 1998      June 30, 1997
Operations                           $685              $ 648
Stock options                        $561              $ 163

<PAGE>

         Included in these amounts as of March 31, 1998 are net  operating  loss
carryforwards  for tax purposes  related to operations and the exercise of stock
options of $455 million and $372 million, respectively.

         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.

Note 5.  Legal Proceedings

         The Company is involved in various legal proceedings, including pending
litigation.  In February 1997, a class action lawsuit (Orman v. America  Online,
Inc., et al.) was filed against the Company,  its officers and directors and its
outside  auditors  alleging  violations of the federal  securities  laws between
August 10, 1995 and October 29,  1996.  In July 1997,  the court  dismissed  the
complaint,  finding that the allegations of the complaint were not  sufficiently
specific. The plaintiffs filed an amended complaint in September 1997, this time
naming only the Company,  its Chief  Executive  Officer and its Chief  Financial
Officer as defendants.  The court has declined to dismiss the amended  complaint
and the case is scheduled to be tried during 1998. A shareholder derivative suit
related to the Orman  lawsuit  has also been filed in  Delaware  chancery  court
against certain current and former directors of the Company.

         The Company,  one of its  subsidiaries  and two officers are named in a
lawsuit  alleging,  among other matters,  that the Company breached an agreement
and has  monopolized  and attempted to  monopolize an alleged  market for online
games.  The complaint seeks $100 million in damages and requests other relief. A
trial date has been set for late June, 1998.

         The Company has been in continuing  discussions and  negotiations  with
representatives  of  the  offices  of  State  Attorneys  General  regarding  its
advertising,  consumer and marketing practices. The Company anticipates settling
with the  offices of the State  Attorneys  General  on terms  which will have no
material  adverse  effect  on the  financial  statements  or  operations  of the
Company.

         The  Company  believes  that it has valid  defenses  to all  litigation
pending  against it, and all cases against the Company are, and will continue to
be, vigorously  defended.  Management is unable to make a meaningful estimate of
the amount or range of loss that could result from an unfavorable outcome of all
pending litigation.  It is possible that the Company's operating results or cash
flows in a particular  quarter or annual period or its financial  position could
be materially  affected by an ultimate  unfavorable  outcome of certain  pending
litigation.  Management  believes,  however,  that the  ultimate  outcome of all
pending  litigation  should not have a material  adverse effect on the Company's
operating results, cash flows or financial position.

Note 6.  Notes Payable

         During  September  1997,  the  Company  borrowed  $28.5  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.


<PAGE>

         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 19.15938
shares of common stock for each $1,000 principal amount of the Notes (equivalent
to a conversion price of $52.19375 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.

Note 7.  Commitments

     The Company has guaranteed modem installation and monthly usage commitments
with certain of its data network  providers.  These  commitments  extend through
fiscal year 2003 and total approximately $3.4 billion.

Note 8.  Earnings (Loss) 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, 1998 and 1997:

<TABLE>

(in thousands except for per share data)          Three months ended March 31,    Nine months ended March 31,
                                                      1998            1997           1998            1997
                                                      ----            ----           ----            ----
Numerator for basic and diluted earnings per
      share -
<S>                                                   <C>            <C>             <C>           <C>
  Income available to common stockholders             18,593         (4,734)         84,743        (487,528)
                                                 ===============================================================

Denominator
Denominator for basic earning per share -
  Weighted average shares
                                                     211,607        192,566         208,793         189,133

Effect of dilutive securities:
  Employee stock options                              26,507              -          26,994                -
  Warrants                                             6,946              -           6,876                -
  Convertible preferred stock                            446              -             446                -
                                                 -----------------------------------------------------------
 Dilutive potential common shares                     33,899              -          34,316                -
                                                  -----------------------------------------------------------

Denominator for diluted earning per share -
  Adjusted weighted average shares
  and assumed conversions
                                                     245,506        192,566         243,109         189,133
                                                 ===========================================================
Basic earnings (loss) per share                      $  0.09       $  (0.02)      $    0.41       $   (2.58)
                                                 ===========================================================
Diluted earnings (loss) per share                    $  0.08       $  (0.02)      $    0.35       $   (2.58)

                                                 ===========================================================
</TABLE>

Note 9.  Subsequent Events

         On May 6, 1998, the Company announced it will acquire NetChannel, Inc.,
a Web-enhanced  television  company, in a transaction that will be accounted for
under the  purchase  method of  accounting.  The total  purchase  price  will be
approximately  $29 million,  comprised of approximately  $17 million in cash and
$12 million of net assumed liabilities. In connection with this transaction, the
Company  expects  to  record a  charge  for  acquired  in-process  research  and
development of approximately $20 million in the quarter ending June 30, 1998.

         The Company adopted a new shareholder  rights plan on May 12, 1998. The
new plan was implemented by declaring a dividend,  distributable to shareholders
of  record on June 1,  1998,  of one  preferred  share  purchase  right for each
outstanding  share of the Company's  common stock.  All rights granted under the
current  shareholder  rights  plan  will be  redeemed  in  conjunction  with the
implementation  of the new plan.  Each  right  under  the new plan will  entitle
holders of the Company's common stock to purchase one  one-thousandth of a share
of a new series of junior participating preferred stock, at a purchase price of

<PAGE>

$900 per right, subject to adjustment.  The rights will be exercisable only if a
person or group (i) acquires 15% or more of the  Company's  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 rights plan allows  shareholders
(other  than the  acquiror)  to purchase  common  stock in the Company or in the
acquiror at a substantial  discount.  The new rights will expire on May 12, 2008
unless redeemed by the Company prior to that date.

Note 10. Business Combinations

         On January 7, 1998, the Company  acquired  Personal  Library  Software,
Inc.,  a  developer  of  information  indexing  and  search  technologies,  in a
transaction that was accounted for under the purchase method of accounting.  The
total purchase price was approximately  $15 million,  comprised of approximately
$9 million in stock and $6 million in assumed  liabilities.  In connection  with
this transaction, the Company recorded a charge for acquired in-process research
and development of $9.7 million in the quarter ended March 31, 1998.

         On January  31,  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
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,  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 Company  entered  into this  transaction  in order to realize the
significant  growth in the value of ANS and allow the Company to  concentrate on
its core competencies - interactive  services and content.  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.

         Prior to the sale, ANS was a data  communications  and network  service
provider  whose  primary  customer  was  AOL.  AOL  sold  ANS  and  its  network
infrastructure,  related equipment and personnel capable of managing the network
and  simultaneously   executed  a  network  services  agreement  (the  "Services
Agreement") with WorldCom.  The Service  Agreement calls for WorldCom to provide
network  management  services and data  communications  services for a five-year
period.  WorldCom will utilize the purchased ANS assets to provide such services
to AOL. The sale of ANS was an integral part of the Services Agreement.

         The  Services  Agreement  provides AOL with  exclusive  use during peak
usage  periods of ANS's  portion of AOL's  analog dial up network  sold with ANS
(the "Network") and provides that the title to the modems and related  equipment
necessary  to  operate  the  Network  will  revert  to AOL upon  termination  or
expiration of the Services Agreement.  AOL will then pay an amount equal to book
value of the modems as set forth on ANS's  financial  statements and will assume
any  operating  lease  arrangements  for  modems as of such date.  The  Services
Agreement  provides AOL with  significant  continuing  involvement and influence
over the ANS network assets sold.

<PAGE>

         The  excess of the cash and the fair value of the  CompuServe  business
received  over the book value of ANS  amounted  to $381  million,  which will be
amortized  on a  straight-line  basis over the  five-year  term of the  Services
Agreement as a reduction of network  services  expense  within cost of revenues.
Such amount has been  classified as a deferred  network  services  credit on the
condensed  consolidated  balance sheet. During the quarter ended March 31, 1998,
the Company  reduced  cost of revenues by  approximately  $13 million due to the
amortization of the deferred network service credit.

         In connection with the  acquisition of CompuServe the Company  recorded
approximately  $106 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 AOL and Bertelsmann AG invested an additional $25
million  in cash in this  joint  venture.  The  Company  will  account  for this
transaction  under the equity method of accounting in accordance  with the terms
of the securities issued in the joint venture.

         The  following  unaudited  pro  forma  information  has  been  prepared
assuming  that  this  acquisition  had  taken  place  at  the  beginning  of the
respective  periods.  The pro forma  financial  information  is not  necessarily
indicative of the combined  results that would have occurred had the acquisition
taken place at the beginning of the period, nor is it necessarily  indicative of
results that may occur in the future.

<TABLE>

    (Amounts in thousands, except                     Pro Forma
    per share data)
                                      Three months ended         Three months     Nine months ended          Nine months
                                           3/31/98               ended 3/31/97         3/31/98               ended 3/31/97
                                      ---------------------    ----------------   ---------------------    ----------------
<S>                                         <C>                  <C>                   <C>                   <C>
    Revenue                                 $712,141             $528,618              $1,941,714            $1,457,652
    Income from operations                    21,101               22,923                 130,079              (456,988)
    Net income                              $ 23,865             $ 24,904              $  138,404            $ (453,919)
    Earnings per share - diluted            $   0.10             $   0.13              $     0.56            $    (2.36)
    Earnings per share - basic              $   0.11             $   0.13              $     0.65            $    (2.36)

</TABLE>

         Based on the  current  level of  commitments  that the Company has with
WorldCom, aggregate modem payments under the Services Agreement will approximate
$1.6 billion over the term of the Services Agreement.

Note 11. Restructuring Charge

         In connection  with a  restructuring  plan adopted in the quarter ended
March 31,  1998,  the  Company  recorded a $35.1  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.  The restructuring  charge is comprised of costs to
terminate  third party  agreements  associated  with  exiting  certain  business
activities totaling $14.7 million, severance-related costs of $10.8 million, the
write-off of impaired assets of $7.4 million,  and facilities shutdown and other
costs of $2.2 million.

         The  following  table  summarizes  the  activity  in the  restructuring
accrual   during  the  quarter  ended  March  31,  1998.   The  balance  of  the
restructuring  accrual at March 31, 1998 is included in other  accrued  expenses
and liabilities on the balance sheet.

<PAGE>

                    (Amounts in millions)
                     Restructuring charge                             $ 35.1
                     Payments                                          ( 7.9)
                     Non-cash adjustments                              (12.8)
                     Restructuring accrual at March 31, 1998          $ 14.4

Note 12. Capital Accounts

         On February 6, 1998, 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 300,000,000 to 600,000,000.

         In  March  1998,  the  Company  effected  a  two-for-one  split  of the
outstanding  shares of common stock by dividending one additional share for each
share  owned.  Accordingly,  all  data  shown in the  accompanying  consolidated
financial  statements and notes have been retroactively  adjusted to reflect the
stock split.

Note 13.  Recent Pronouncements

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial   Accounting  Standard  ("SFAS")  No.  130,  "Reporting
Comprehensive  Income," which requires  companies to report by major  components
and in total,  the change in its net assets  during  the period  from  non-owner
sources.  The FASB also issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise  and  Related  Information,"  which  establishes  annual and  interim
reporting  standards for a company's  operating segments and related disclosures
about  its  products,  services,  geographic  areas and  major  customers.  Both
Statements  are effective for fiscal years  beginning  after  December 15, 1997.
Adoption of these standards will not impact the Company's consolidated financial
position,  results of  operations or cash flows,  and any effect,  while not yet
determined  by  the  Company,  will  be  limited  to  the  presentation  of  its
disclosures.


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

         The  following  information  should  be read in  conjunction  with  the
consolidated  financial  statements and the notes thereto  included in Item 1 of
this Quarterly Report, and the condensed  consolidated  financial statements and
the  notes  thereto  and  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations  contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.

         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

<PAGE>

subscribers  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
(through January 1998 only) 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. 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.

         The growth of the  Company's  online  service  revenues,  assuming such
growth continues, is expected to be driven primarily by growth in its subscriber
base. The growth of the subscriber base is dependent upon the Company's  ability
to acquire and retain subscribers.

         Effective  December 1, 1996, the Company began offering several pricing
alternatives to the AOL service aimed at providing price points for a wide range
of consumers. These pricing alternatives are as follows:

* A standard monthly membership fee of $19.95, 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 $17.95.

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

* An  alternative  offering  of $9.95 per month  for  unlimited  use - for those
subscribers  who already have an Internet  connection and use this connection to
access AOL.

         In July 1997, the Company introduced premium games services,  for which
members  pay $1.99 per hour  (after any free  hours  offered  under  promotional
programs)  in addition to the regular  monthly  membership  fee and hourly usage
charges as set forth above.

         The Company  announced on February 9, 1998,  that it would increase the
price of its Flat-Rate Plan for the AOL service by $2.00 per month to $21.95 per
month, in order to fund continued  improvement of members' online experience and
to keep pace  with the cost of  members'  increased  usage.  The price  increase
became  effective at the start of each member's  monthly  billing cycle in April
1998.  In  addition,  members  may  choose to pay for one year in advance at the
monthly rate of $19.95, a $2.00 per month increase from the previous annual plan
rate. Those subscribers who are currently on the annual plan will not be subject
to an increase  until their renewal date. The Company will continue to offer its
other pricing plans with no changes.

         Prior to December 1, 1996, the Company's  standard  monthly  membership
fee for its AOL service,  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.  This
plan was discontinued upon the availability of the Flat-Rate Plan on December 1,
1996.

<PAGE>

         As a result  of the  introduction  of the  Flat-Rate  Plan as  detailed
above, the Company's  Internet service,  Global Network Navigator  ("GNN"),  was
discontinued. The Company had launched GNN in October 1995.

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

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

* An alternative offering of $24.95 per month for unlimited use.

         Subsequent  to the  introduction  of the  Flat-Rate  Plan  for  the AOL
service,  the Company  experienced  a  significant  increase in average  monthly
subscriber  usage,  and  an  attendant  decrease  in  the  average  revenue  per
member-hour.  The Company also experienced  higher cost of revenues  relative to
total revenues.  The Company plans to minimize the impact of the  aforementioned
changes  by  growing  advertising,  commerce  and other  revenues  as well as by
pricing  actions  and by  decreasing  costs,  on a relative  basis  (either on a
per-hour  basis or as a  percentage  of  total  revenues),  principally  through
network, marketing and operating cost efficiencies.

         An  important  component  of  the  Company's  business  strategy  is an
increasing reliance on advertising,  commerce and other revenues,  which include
advertising and related  revenues,  the sale of merchandise and transaction fees
associated with electronic  commerce.  Another important factor in the Company's
business  strategy  is the  further  reduction  of the  costs of  operating  the
Company's data network, on a per-hour basis, through increasing volume discounts
and efficient utilization of AOLnet, the Company's TCP/IP network. The Company's
marketing expenses as a percentage of revenues will be lower in fiscal 1998 than
they  were  in  fiscal  1997,  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. However, with the recently announced $2.00 per month price
increase for the standard monthly  membership fee, the Company may have to spend
more on marketing,  advertising and customer  service than in recent quarters in
order to acquire and retain customers and combat potential competitive pressures
and  responses.  The  Company's  marketing  strategy  is expected to continue to
emphasize  brand  advertising  as well as  cost-effective  bundling  agreements,
whereby the Company's product is widely distributed with new personal computers,
the Windows operating system and other peripheral  computer  equipment,  and the
Company will continue to market its products via direct mail programs.

         The growth of advertising,  commerce and other revenues is important to
the  Company's  business  objectives,  as those  revenues  provide an  important
contribution to the Company's  operating results. In the third quarter of fiscal
1998,  advertising,  commerce and other  revenues  totaled  $117.9  million,  an
increase of $49.3 million,  or 72% over the  comparable  quarter in fiscal 1997.
Among the Company's  business  objectives are increasing the subscriber base and
continuing to accelerate the change in its business model into one in which more
profits are generated from sources other than online service  revenues,  such as
advertising and electronic commerce. The Company expects that the growth in

<PAGE>

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.  Advertising,  commerce and other  revenues are generated  primarily
from  electronic  commerce and  advertising,  and include fees received from the
sale of  advertising,  fees  received from  companies who market their  products
through the Company's online services and the sale of merchandise by the Company
(principally  computer hardware and software and AOL  merchandise).  Advertising
revenues are expected to grow in importance as the Company continues to leverage
its large,  active and growing subscriber base. The Company is able to offer its
advertising  partners  a variety  of  customized  programs,  which  may  include
guaranteed  numbers of impressions and select  sponsorship of particular  online
areas for designated  time periods.  As merchants  realize the value of reaching
the Company's  large and active  subscriber  base,  the Company  expects to earn
additional  revenues by offering selected  merchants  exclusive rights to market
their particular class of goods or services within the Company's online service.

         The Company's  operating margin declined in fiscal 1997,  driven by the
impact of the  Company's  switch to  flat-rate  pricing in  December  1996 and a
concomitant  dramatic increase in member usage. 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 the third quarter of fiscal
year 1998,  average monthly  subscriber  usage had increased to approximately 23
hours.  Due to  the  inadequacy  of  historical  operating  experience  under  a
flat-rate pricing structure, the Company is unable to predict whether usage will
continue to trend upward,  and, if so, at what rate.  The Company is also unable
to predict the impact on subscriber usage and retention patterns that will occur
as a result of the $2.00 per month price  increase to its  Flat-Rate  Plan which
was  implemented  in the fourth  quarter of fiscal 1998. If current usage trends
continue,  further  pressures  on  operating  margins may result.  The impact of
increased usage on operating margins, if it occurs, could be offset, in whole or
in part, by increases in  advertising,  commerce and other  revenues,  increased
data network operating efficiencies, reductions in marketing and other operating
expenses, pricing changes or other factors or actions.

         The Company  competes  in a  rapidly-changing  marketplace  with a wide
range of other companies in the communications,  advertising,  entertainment and
information,  media, direct mail and commerce fields. Current competitors of the
Company for usage,  subscribers,  advertising  and electronic  commerce  include
online  services  (for  example,  the  Microsoft  Network and  Prodigy  Services
Company),   various  national  and  local  Internet   service   providers  using
industry-standard  browser and navigational software, long distance and regional
telephone companies who may offer competing services directly to their customers
as part of their telephone service (among others, AT&T Corp., MCI Communications
Corporation and various regional Bell operating companies), cable companies, and
suppliers  of  operating  systems or  personal  computer  manufacturers  who may
incorporate  functional equivalents to the Company's services in their products.
The Company also  competes for usage and  advertising  and  electronic  commerce
revenues with major Web sites  operated by search  services and other  companies
such as Yahoo! Inc., Netscape Communications Corporation,  Infoseek Corporation,
CNET, Inc., Lycos, Inc. and Excite,  Inc. Recently announced strategic alliances
among certain of the Company's competitors (for example, Yahoo! with MCI, Excite
with each of AT&T and  Netscape,  and Lycos  with  AT&T)  could  strengthen  the
Company's  competition.  On a broader  scale,  the Company  competes with global
media  companies such as newspapers,  radio and television  stations and content
providers,  such as CBS  Corporation,  The Walt  Disney  Company and Time Warner
Inc., and with direct marketing and telemarketing companies.

         The  development  of midband and broadband  distribution  technologies,
including cable Internet access services  offered by @Home Network,  Road Runner
Group (owned by Time Warner Inc.) and  MediaOne,  Inc. (a  subsidiary of US WEST
Media Group),  advanced  telephone-based access services offered through digital
subscriber line (DSL) technologies offered by local telecommunications companies
and  other  advanced   digital  services  offered  by  broadcast  and  satellite
companies,  is  intensifying  the  competition  to which the Company is subject.
Emerging convergent technologies offering combinations of television and

<PAGE>

interactive  computer  services,  such as those  offered by WebTV,  offer yet an
additional competitive  alternative to the offerings of the Company. The Company
has recently announced that it has agreed to acquire NetChannel, Inc., but there
can be no  assurance  that  the  acquisition  will be  consummated  or that  its
technology will become commercially successful.

                  Some  of  the  present   competitors   and  potential   future
competitors  of the Company may have  greater  financial,  technical,  marketing
and/or personnel resources than the Company.  The competitive  environment could
(i) require  price  reductions  and  increased  spending on  marketing,  network
capacity, content procurement and product development,  (ii) limit the Company's
opportunities to enter into and/or renew  agreements with content  providers and
distribution  partners,  (iii)  limit its ability to develop  new  products  and
services,  (iv) limit its ability to continue to grow its  subscriber  base, (v)
result  in  increased  attrition  in the  Company's  subscriber  base  and  (vi)
negatively  impact the  Company's  ability  to meet its  business  objective  of
changing its business  model into one in which  increasingly  more  revenues and
profits  are  generated  from  sources  other than online  service  subscription
revenues,  such as  advertising  and electronic  commerce.  Any of the foregoing
events  could have an adverse  impact on  revenues  or result in an  increase in
costs as a percentage of revenues, 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 March 31, 1998,  online  service  revenues
increased from $381.5 million to $575.7  million,  or 51%, over the three months
ended March 31, 1997.  This  increase was comprised of an increase in AOL online
service revenues of $160.8 million as well as CompuServe online service revenues
of $33.4  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 quarter ended March 31, 1998,
compared to the prior year comparable  quarter,  as well as a 4% 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 $17.02 in the three months ended March 31, 1997 to $17.65 in the
three months ended March 31, 1998. This increase was principally attributable to
a  reduction  in the  amount of  refunds/credits  issued to  subscribers  in the
quarter ended March 31, 1998.

         For the nine  months  ended March 31,  1998,  online  service  revenues
increased  from  $1,043.8  million to $1,493.0  million,  or 43%,  over the nine
months ended March 31, 1997.  This  increase was comprised of an increase in AOL
online service  revenues of $415.8 million as well as the  aforementioned  $33.4
million in  CompuServe  online  service  revenues.  The  increase  in AOL online
service  revenues was  primarily  attributable  to a 38% increase in the average
number of AOL North  American  subscribers  for the nine months  ended March 31,
1998,  compared to the prior year comparable period, as well as a 3% 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 $16.94 in the nine months  ended March 31, 1997 to $17.48 in the
nine months ended March 31, 1998. This increase was principally  attributable to
a reduction in the amount of  refunds/credits  issued to subscribers in the nine
months ended March 31, 1998.

         At March 31, 1998, the Company had  11,870,000  AOL brand  subscribers,
including  10,715,000  in North  America and 1,155,000 in the rest of the world.
Also at that date,  the  Company had  2,175,000  CompuServe  brand  subscribers,
including 1,100,000 in North America and 1,075,000 in the rest of the world.


<PAGE>

         The Company is unable to predict the impact on online service  revenues
resulting from the $2.00 per month price increase that was  implemented on April
1. The  Company  anticipates  that  the  increase  in  online  service  revenues
resulting from the price  increase will be partially  offset by the loss of some
number of subscribers  and by some  reduction in the growth of new  subscribers.
The Company is unable to predict the amount of such offset.

Advertising, Commerce and Other Revenues

         For the three months ended March 31,  1998,  advertising,  commerce and
other revenues,  which consist  principally of advertising and related revenues,
fees associated with electronic commerce and the sale of merchandise,  increased
from $68.6 million to $117.9 million,  or 72%, over the three months ended March
31, 1997.  For the nine months ended March 31, 1998,  advertising,  commerce and
other revenues increased from $165.6 million to $314.3 million, or 90%, over the
nine months ended March 31, 1997.  The increase in both the three and nine month
periods  ended March 31, 1998 was driven  primarily by more  advertising  on the
Company's  AOL  service as well as an  increase  in  electronic  commerce  fees.
Advertising   and   electronic   commerce  fees  increased  by  207%  and  218%,
respectively,  in the three and nine month  periods  ended March 31, 1998,  from
$24.3  million in the three months ended March 31, 1997, to $74.7 million in the
three  months ended March 31,  1998,  and from $53.1  million in the nine months
ended March 31, 1997 to $168.8  million in the nine months ended March 31, 1998.
A portion of the advertising and electronic  commerce revenues recognized in the
quarter ended March 31, 1998 reflect  revenues  associated  with Tel-Save,  Inc.
("Tel-Save")  warrants  earned by the Company  during that period as a result of
the sale of Tel-Save  long-distance  telephone service to AOL members. The value
of such warrants for revenue  recognition  purposes was  calculated  based upon,
among other variables,  the average market price of Tel-Save common stock at the
end of the March 1998  quarter.  Future  revenues  will be earned by the Company
based  upon  the  growth  in the  number  of  Tel-Save  long-distance  telephone
subscribers  and will be calculated  using the number of warrants earned and the
value of those warrants. The value of future warrants earned by the Company will
be calculated using, among other variables, the average market price of Tel-save
common  stock  at the end of the  quarter  in which  the  warrants  are  earned.
Merchandise  sales decreased by 21% and increased by 10%,  respectively,  in the
three and  nine-month  periods  ended March 31, 1998,  from $30.3 million in the
three  months  ended March 31, 1997 to $24.0  million in the three  months ended
March 31, 1998,  and from $73.6  million in the nine months ended March 31, 1997
to $81.3 million in the nine months ended March 31, 1998. At March 31, 1998, the
Company's advertising and electronic commerce backlog, representing the contract
value of advertising and electronic  commerce  agreements signed,  less revenues
already  recognized from these agreements,  was approximately  $427 million,  up
from approximately $129 million at March 31, 1997.

         The  Company  is unable to  predict  the  effect of the $2.00 per month
price  increase on subscriber  acquisition  and retention  rates.  Any effect on
subscriber  acquisition  and  retention  rates may  impact the rate of growth in
advertising, commerce and other revenues.

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 and billing,  host
computer  and  network  equipment  costs,  the costs of  merchandise  sold,  and
royalties paid to information and service providers.  For the three months ended
March 31,  1998,  cost of  revenues  increased  from  $308.4  million  to $457.8
million,  or 48%, over the three months ended March 31, 1997, and decreased as a
percentage  of total  revenues  from 68.5% to 66.0%.  For the nine months  ended
March 31,  1998,  cost of revenues  increased  from  $771.4  million to $1,170.7
million,  or 52%, over the nine months ended March 31, 1997,  and increased as a
percentage of total revenues from 63.8% to 64.8%.


<PAGE>

         The increase in cost of revenues  for the three and nine month  periods
ended March 31, 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 and providing customer
support and billing.  Data network costs increased  primarily as a result of the
larger  customer  base and more usage by  customers.  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 customer base and more usage by customers.  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.

         The decrease in cost of revenues as a percentage of total  revenues for
the three months ended March 31, 1998 was primarily  attributable to a decrease,
as a percentage of total  revenues,  in personnel  and related costs  associated
with operating the data centers, data network and providing customer support and
billing as well as in royalties paid to information  providers.  These decreases
were partially offset by an increase, as a percentage of total revenues, in host
computer  and network  equipment  costs.  The  increase in cost of revenues as a
percentage of total  revenues for the nine month period ended March 31, 1998 was
primarily  attributable to an increase,  as a percentage of total  revenues,  in
host computer and network  equipment costs partially offset by a decrease,  as a
percentage  of total  revenues,  in royalties  paid to  information  and service
providers.

         Several  factors   influence  the  Company's  cost  of  revenues  as  a
percentage  of total  revenues.  These  factors  include the rates of subscriber
acquisition and retention,  average subscriber usage, the growth of advertising,
commerce and other  revenues,  and other costs of  delivering  the  service.  As
previously  noted,  the Company  implemented a $2.00 per month price increase in
its Flat-Rate Plan  beginning  April 1, 1998. As a result of this price increase
the Company expects that cost of revenues as a percentage of total revenues will
be lower in the quarter ending June 30, 1998 than in the quarter ended March 31,
1998. The Company is unable to predict,  however, the impact on cost of revenues
as a percentage of total revenues  beyond the quarter ending June 30, 1998 which
will result from the  combination  of all the foregoing  factors,  including the
price increase.

         The  Company  operates  AOLnet,  its TCP/IP  data  network,  to provide
network  capacity to its  members.  The Company  manages and lowers its per-hour
data network costs by relying on increasing  network  volumes to negotiate lower
costs per network hour as well by efficiently utilizing the network.

         Pursuant to the 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 WorldCom, Inc. ("WorldCom"), the Company recorded
a deferred network  services credit on the balance sheet of $381 million,  which
is  equivalent  to the excess of the cash and the fair  value of the  CompuServe
business  received over the book value of ANS. This  deferred  network  services
credit will be amortized as a reduction of network  service  expense within cost
of  revenues  on a  straight-line  basis over the five year term of the  network
services  agreement  entered into between the Company and  Worldcom.  During the
quarter  ended  March  31,  1998,  the  Company  reduced  cost  of  revenues  by
approximately  $13  million  due to the  amortization  of the  deferred  network
services credit. For additional  information  regarding this transaction and the
deferred  network  services  credit  see  Note  10 of  the  Notes  to  Condensed
Consolidated Financial Statements.

<PAGE>

Marketing and Write-off of Deferred Subscriber Acquisition Costs

         Marketing  expenses include the costs to acquire and retain subscribers
and other general  marketing  costs.  For the three months ended March 31, 1998,
marketing  expenses  decreased from $92.8 million to $84.2 million,  or 9%, over
the three months ended March 31, 1997,  and  decreased as a percentage  of total
revenues  from  20.6% to  12.1%.  For the nine  months  ended  March  31,  1998,
marketing expenses decreased from $323.8 million to $278.8 million, or 14%, over
the nine months ended March 31,  1997,  and  decreased as a percentage  of total
revenues from 26.8% to 15.4%.

         The decrease in marketing expenses for the three and nine month periods
ended March 31, 1998, and such expenses as a percentage of total  revenues,  was
primarily attributable to decreases in subscriber acquisition costs. The Company
made a change in the first  quarter of fiscal 1997 which  resulted in subscriber
acquisition costs being expensed for periods  subsequent to the first quarter of
fiscal 1997, versus being  capitalized and amortized over twenty-four  months in
the first  quarter of fiscal 1997 and prior.  As a result of the  aforementioned
change in accounting  estimate,  the balance of deferred subscriber  acquisition
costs as of September 30, 1996,  totaling $385.2  million,  was written off. For
additional  information  regarding this change,  refer to Note 2 of the Notes to
Condensed Consolidated Financial Statements.

         For the nine months ended March 31, 1998,  marketing  expenses,  before
capitalization  and  amortization,  decreased  from  $394.8  million  to  $278.8
million,  or 29%, over the nine months ended March 31, 1997,  and decreased as a
percentage  of total  revenues  from 32.6% to 15.4%.  The  decrease in marketing
expenses  for the nine months ended March 31, 1998,  before  capitalization  and
amortization, was primarily attributable to a decrease in subscriber acquisition
costs,  offset  in part by an  increase  in other  general  marketing  expenses,
principally related to an increase in personnel costs. The decrease in marketing
expenses as a percentage  of total  revenues for the nine months ended March 31,
1998, before  capitalization and amortization,  was primarily  attributable to a
decrease in subscriber acquisition costs.

         Marketing  expenses in the quarter ended March 31, 1998 were limited by
the Company.  The Company  expects that  marketing  expenses in the next several
quarters  will  likely be higher on an  absolute  basis,  and may be higher as a
percentage of total revenues,  than those experienced in the quarter ended March
31, 1998.

Product Development

         Product development costs include research and development expenses and
other  product  development  costs.  For the three  months ended March 31, 1998,
product development costs increased from $21.5 million to $27.3 million, or 27%,
over the three  months ended March 31, 1997,  and  decreased as a percentage  of
total  revenues  from 4.8% to 3.9%.  For the nine months  ended March 31,  1998,
product development costs increased from $59.8 million to $66.8 million, or 12%,
over the nine months ended March 31,  1997,  and  decreased  as a percentage  of
total revenues from 4.9% to 3.7%. The increase in product  development costs was
primarily  due to an increase in personnel  costs  resulting  from the Company's
acquisition  of  CompuServe.  The  decrease  in product  development  costs as a
percentage of total revenues was primarily a result of the substantial growth in
revenues.

<PAGE>

General and Administrative

         For the three months ended March 31, 1998,  general and  administrative
expenses  increased from $32.8 million to $59.5 million,  or 81%, over the three
months ended March 31, 1997,  and  increased as a percentage  of total  revenues
from 7.3% to 8.6%.  For the nine  months  ended  March  31,  1998,  general  and
administrative expenses increased from $82.1 million to $164.5 million, or 100%,
over the nine months ended March 31,  1997,  and  increased  as a percentage  of
total  revenues  from 6.8% to 9.1%.  The increase in general and  administrative
costs for the three months ended March 31, 1998,  and such costs as a percentage
of total  revenues,  was primarily  attributable  to higher  personnel costs and
increases  in  professional  fees,  principally  related to legal  matters.  The
increase in general and administrative costs for the nine months ended March 31,
1998,  and  such  costs  as  a  percentage  of  total  revenues,  was  primarily
attributable to higher personnel costs, which included compensatory stock option
and  other  charges  related  to the  sale of  ANS,  as  well  as  increases  in
professional fees, principally related to legal matters.

Amortization of Goodwill

         Goodwill  is being  amortized  on a  straight-line  basis over  periods
ranging  from two to ten  years.  Amortization  of  goodwill  increased  to $4.2
million in the three  months ended March 31, 1998 from $1.4 million in the three
months ended March 31, 1997.  Amortization of goodwill increased to $8.1 million
in the nine months  ended  March 31,  1998 from $4.9  million in the nine months
ended March 31, 1997. The increase in  amortization of goodwill in the three and
nine month  periods ended March 31, 1998 is primarily  attributable  to goodwill
associated  with  the  acquisition  of  CompuServe  in  January  1998 as well as
purchases of various  companies made by the Company  subsequent to third quarter
of fiscal 1997,  partially  offset by a decrease in goodwill  resulting from the
disposition of ANS in January 1998. In addition, the increase in amortization of
goodwill for the nine month period ended March 31, 1998 was partially  offset by
a decrease in goodwill  associated with GNN, which was written off in connection
with the Company's fiscal 1997 restructuring charge.

Restructuring Charge

         In connection with a restructuring plan adopted in the third quarter of
fiscal  1998,  the  Company  recorded  a  $35.1  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.   For  additional   information   regarding  this
restructuring, refer to Note 11 of the Notes to Condensed Consolidated Financial
Statements.

         In connection with a  restructuring  plan adopted in the second quarter
of fiscal  1997,  the  Company  recorded a $48.6  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  $1.3  million  of  the  original
restructuring accrual in the September 1997 quarter.

Acquired Research and Development

         Acquired research and development  costs,  totaling $9.7 million in the
quarter  ended March 31, 1998,  relate to  in-process  research and  development
purchased  pursuant to the Company's  acquisition of Personal Library  Software,
Inc. For additional information regarding this purchase, refer to Note 10 of the
Notes to Condensed Consolidated Financial Statements.

<PAGE>

Settlement Charge

         In the nine month period ended March 31, 1997,  the Company  recorded a
charge of $24.3 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. In the quarter ended March 31, 1997, as a
result of a change in  accounting  estimate,  the Company  recorded a benefit of
$6.0 million related to the  aforementioned  legal settlement,  representing the
Company's  revised estimate of the total liability  associated with this matter.
In the nine month period ended March 31, 1998, the Company  further  revised its
estimate of the total  liability  associated  with this matter,  and reversed an
additional $1.0 million of the original settlement accrual.

         In the quarter ended March 31, 1997,  the Company  recorded a charge of
$5.9 million  related to a  preliminary  legal  settlement  reached with various
class action  plaintiffs which pertained to many of the same issues contained in
the  legal  settlement  with  the  State  Attorneys  General  in  the  preceding
paragraph.  The preliminary  legal  settlement with the class action  plaintiffs
extended and expanded the relief  provided to qualifying  subscribers  under the
State Attorneys General settlement.

Other Income

         Other income consists  primarily of investment income and non-operating
gains net of interest expense and non-operating  charges.  The Company had other
income of $2.8 million and $2.0 million in the three months ended March 31, 1998
and 1997,  respectively.  The Company had other  income of $8.8 million and $3.1
million in the nine  months  ended March 31,  1998 and 1997,  respectively.  The
increases in other income for the three and nine month  periods  ended March 31,
1998,  are  primarily  attributable  to the sale of  certain  available-for-sale
securities and increases in net interest income partially offset by decreases in
the allocation of minority interest losses and increases in non-operating losses
related to various investments.

Income Taxes

     Income  tax  expense  was  zero in all  periods  reported.  For  additional
information  regarding  income  taxes,  refer to  Notes 3 and 4 of the  Notes to
Condensed Consolidated Financial Statements.

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 $370.1  million and $111.0  million in the nine months  ended March 31, 1998
and 1997, respectively.  Net cash used in investing activities was $85.6 million
and  $96.0   million  in  the  nine  months  ended  March  31,  1998  and  1997,
respectively.  Included in investing  activities for the nine months ended March
31, 1998 was $253.4  million for the purchase of property and  equipment and net
proceeds of $207.4  million from the Company's  acquisition  of  CompuServe  and
disposition of ANS. Net cash provided by financing activities was $515.2 million
and  $64.1   million  in  the  nine  months  ended  March  31,  1998  and  1997,
respectively.  Included in financing  activities for the nine months ended March
31, 1998 were $341.7 million in proceeds from convertible notes issued and sold

<PAGE>

in November  1997 (see below),  $28.5  million in proceeds  from notes  payable,
$62.5 million in proceeds from the sale and leaseback of property and equipment,
and $82.2 million in proceeds from the sale of common stock pursuant to employee
stock  option and stock  purchase  plans.  At March 31,  1998,  the  Company had
working capital of $317.9 million,  compared to a working capital  deficiency of
$231.0  million  at June 30,  1997.  The  improvement  in  working  capital  was
primarily  related to $341.7  million in net  proceeds  from  convertible  notes
issued in November  1997 and the net proceeds of $207.4  million  related to the
acquisition of CompuServe and disposition of ANS.

         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 19.15938
shares of common stock for each $1,000 principal amount of the notes (equivalent
to a conversion price of $52.19375 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.

         On January 31,  1998,  the Company  consummated  the  Purchase and Sale
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,  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).  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 $207.4 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  7 of  the  Notes  to  Condensed  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  has  an  aggregate  liquidation   preference  of
approximately  $28  million  and  accrues  dividends  at a rate of 4% per annum.
Accrued  dividends  can 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 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  facilities and equipment  under
non-cancelable operating leases, and 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,  as well as  facilities.  The Company
plans to continue making significant  investments in these areas. The Company is
funding these  investments,  which are anticipated to total  approximately  $800
million in fiscal 1998, through a combination of leases, debt financing and cash
purchases.

<PAGE>

         The Company uses its working capital to finance ongoing  operations and
to fund marketing and content  programs and the  development of its products and
services.  The Company  plans to continue to invest in  subscriber  acquisition,
retention  and brand  marketing  and content  programs 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.

Seasonality

         The growth in subscriber  acquisitions  and usage 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,
because of the  Company's  limited  history with the  Flat-Rate  Plan (which was
adopted  effective  as of December 1, 1996),  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  online  services as a
result of the growing market demand and utility for such services.

         Beginning with the second quarter of fiscal 1998, the Company  believes
it has  begun  to  see  the  effects  of  seasonality  in  securing  advertising
commitments. The Company expects that advertising commitments will be highest in
the second fiscal  quarter each year due to  calendar-year  budgeting  cycles of
many advertisers.  However,  because of the Company's recent focus on developing
advertising  revenues,  the Company does not know whether  increases in securing
advertising  commitments are due to seasonal factors or to increased interest by
advertisers in the Company's medium and distribution channels or other factors.

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,  their
proprietary software, member services,  network access, content providers, joint
ventures and various  administrative  and billing  functions.  To the extent the
Company's and CompuServe'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  currently  in the  process of  completing  its
identification  of applications  that are not Year 2000 compliant.  In addition,
the Company has begun to ask 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.


<PAGE>

                  The Company is in the early stages of conducting its Year 2000
audit  and  therefore  is  unable  to make a  reasonable  estimate  of the costs
associated  with Year 2000  compliance.  Accordingly,  no assurance can be given
that any or all of the Company's or third party systems are or will be Year 2000
compliant  or that the costs  required  to  address  the Year 2000  issue or the
impact of a failure to achieve  substantial Year 2000 compliance will not have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

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. Such 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  forward-looking   statements  address  the
following subjects:  future operating results;  subscriber growth and retention;
increasing  advertising and electronic commerce revenues;  sustaining  earnings'
growth and meeting profit targets; development and success of multiple brands in
the U.S. and internationally; AOL 4.0 and other new products (such as CompuServe
4.0 and  Digital  City  2.0) and  services  (such as in Hong  Kong);  marketing,
advertising and customer service spending;  expansion and utilization of network
capacity;   identification,   testing  and  implementation  of  new  access  and
distribution technologies;  and 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 that described in the forward-looking statements:

         Factors  related  to  increased   competition  from  existing  and  new
competitors,  including:  price reductions and increased  spending on marketing,
network capacity,  content procurement and product  development;  limitations on
the Company's  opportunities  to enter into and/or renew agreements with content
providers and distribution  partners;  limitations on its ability to develop new
products  and  services;  limitations  on its  ability to  continue  to grow its
subscriber  base;  increased  attrition in the Company's  subscriber base; and a
negative  impact on the  Company's  ability to meet its  business  objective  of
implementing  its business model into one in which more revenues and profits are
generated from sources other than online service subscription revenues,  such as
advertising and electronic commerce.

         The  risk  that  past   difficulties   of  the  Company  and  its  data
communications  access  providers  in  providing  adequate  server  and  network
capacity  will  recur.  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 demand
will not develop for the capacity  created;  the risk that supply  shortages for
local  exchange  carrier  lines from local  telephone  companies  could slow the
buildout;  and the risk that the failure to obtain the necessary financing could
slow or halt the buildout.

         Any damage or  failure  to the  Company's  computer  equipment  and the
information  stored in its data  centers,  such as damage by fire,  power  loss,
telecommunications  failures,  service  failures by third party network  service
providers,  unauthorized  intrusions and other events, that causes interruptions
in the Company's  operations,  or any interruptions or service outages caused by
software defects or server and network expansion.

<PAGE>

         The failure to increase  revenues  at a rate  sufficient  to offset the
increase in data communications costs resulting from increasing usage. Risks and
uncertainties  associated with a recently  announced price increase,  including:
the  risk  that  competitive  offerings  to the  AOL  service  may  become  more
attractive to AOL members; the risk of decreased demand for the AOL service; 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 risk that gross and operating margins will decrease as a result of
a decrease in the rate of  advertising,  electronic  commerce and other  revenue
growth or an increase in marketing expenses.

         The  Company's  inability  to  manage  its  growth  and  to  adapt  its
administrative,  operational  and financial  control  systems to the needs of an
expanded and  evolving  entity;  and the failure of  management  to  anticipate,
respond to and manage changing business conditions.

         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  acquisition  of  businesses,  fixed  assets  and other  assets and
acquisition-related  risks,  including successful  integration and management of
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 making or incurring of any expenditures
and expenses,  including, but not limited to, significant charges for in-process
research and development.

         The  ability of the  Company to leverage  its  technological  and other
competencies  through the  introduction  of new products and  services;  and its
ability 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 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 governing content that differ
greatly  from  those in the United  States,  unexpected  changes  in  regulatory
requirements,  political risks, export restrictions, export controls relating to
encryption  technology,  tariffs  and  other  trade  barriers,  fluctuations  in
currency exchange rates,  issues regarding  intellectual  property,  privacy and
potentially adverse tax consequences.

<PAGE>

         The  Company's   inability  to  offer  its  services  through  advanced
distribution  technologies  such as cable,  satellite,  broadcast  and  enhanced
telephone  distribution  and the  inability to offer  advanced  services such as
voice and full motion video. The Company's  ability 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.


PART II.    OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

         On January 7, 1998, the Company  acquired  Personal  Library  Software,
Inc. in exchange for the issuance of 255,334 shares of Company Common Stock. The
transaction  was a private  placement and exempt from  registration  pursuant to
Rule 506 of the Securities Act of 1933.


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

         The Company held a Special  Meeting of Stockholders on February 6, 1998
to vote on the amendment of the Company's Restated  Certificate of Incorporation
to increase the authorized  number of shares of common stock from 300,000,000 to
600,000,000. Following are the results of such meeting:

                                                  Number of Shares
Matter Voted On                     For                Against           Abstain

Amendment of Restated Certificate
 of Incorporation                   84,028,201         2,724,752         78,772

Item 5.  Other Events

Shareholder Rights Plan

 Redemption of Old Rights and Dividend of New Rights

         In 1993,  the Board of Directors  declared a dividend to holders of the
Company's Common Stock,  $.01 par value per share ("Common  Shares"),  of rights
(the "Old  Rights") to purchase  shares of a series of the  Company's  preferred
stock (the "Old Preferred Stock"). Each Old Right entitled the registered holder
to purchase from the Company one one-hundredth of a share of Old Preferred Stock
upon the terms and  subject to the  conditions  set forth in a Rights  Agreement
dated as of April 23, 1993,  between  America  Online,  Inc. and Security  Trust
Company,  N.A., as amended by the Amendment to Rights Agreement  between America
Online,  Inc. and  Chemical  Bank,  N.A.  dated as of January 31, 1995 (the "Old
Plan").  On May 12, 1998, the Board of Directors  directed the Company to redeem
the Old Rights, terminate the Old Plan and eliminate the Old Preferred Stock and
declared a dividend of one new preferred  share  purchase  right (a "New Right")
for each  outstanding  Common Share of the Company.  The  redemption  of the Old
Rights  will be  effective  at the time the  dividend of the New Rights is paid,
which is scheduled to be June 1, 1998 (the  "Record  Date"),  and the payment of
the redemption  price, as well as the dividend of the New Rights,  shall be made
to the  stockholders  of  record  on that  date.  Each New  Right  entitles  the
registered holder to purchase from the Company one  one-thousandth of a share of
a new series of the Company's  preferred  stock (the "Preferred  Shares"),  at a
price of $900.00  per one  one-thousandth  of a Preferred  Share (the  "Purchase
Price"), subject to adjustment.  Each one one thousandth of a share of Preferred
Stock has rights,  privileges and preferences which make its value approximately
equal to the value of one Common Share.  A full  description of the terms of the
New Rights is set forth in a new  shareholder  rights  agreement dated as of May
12, 1998 (the "New Rights Agreement"), between the Company and BankBoston, N.A.,
as Rights Agent (the "Rights Agent").

<PAGE>

Terms and conditions of New Rights and New Rights Agreement

         Initially,  the New Rights will be evidenced by the stock  certificates
representing  the  Common  Shares  then  outstanding,   and  no  separate  Right
Certificates,  as  defined,  will be  distributed.  Until the earlier of (i) the
close of business on the tenth day  following the day on which there is a public
announcement or public  disclosure of facts indicating that a person,  entity or
group of affiliated or associated persons (an "Acquiring Person") have acquired,
beneficial ownership of 15% or more of the outstanding Common Shares (other than
certain excluded persons) or (ii) the tenth business days (or such later date as
may be determined by action of the Board of Directors  prior to such time as any
person or entity becomes an Acquiring  Person) following the commencement of, or
announcement  of an  intention  to make,  a tender  offer or exchange  offer the
consummation  of which would result in the  beneficial  ownership by a person or
group of 15% or more of such  outstanding  Common  Shares  (the  earlier of such
dates being called the "Distribution  Date"),  the New Rights will be evidenced,
with respect to any of the Common Share  certificates  outstanding as of June 1,
1998, by such Common Share certificates.

         The New Rights Agreement  provides that,  until the Distribution  Date,
the New Rights will be transferred  with and only with the Common Shares.  Until
the Distribution  Date (or earlier  redemption or expiration of the New Rights),
new Common Share  certificates  issued after June 1, 1998,  upon transfer or new
issuance of Common Shares, will contain a notation  incorporating the New Rights
Agreement by reference.  Until the Distribution  Date (or earlier  redemption or
expiration of the New Rights), the surrender or transfer of any certificates for
Common Shares  outstanding  as of June 1, 1998,  even without such notation or a
copy of the Summary of Rights being attached  thereto,  will also constitute the
transfer of the New Rights associated with the Common Shares represented by such
certificate.  As soon as practicable  following the Distribution Date,  separate
certificates  evidencing the New Rights ("Right Certificates") will be mailed to
holders  of record of the  Common  Shares  as of the  close of  business  on the
Distribution Date and such separate Right  Certificates  alone will evidence the
New Rights.

         The New Rights are not exercisable until the Distribution Date. The New
Rights will expire on May 12, 2008 (the  "Final  Expiration  Date"),  unless the
Final  Expiration Date is extended or unless the New Rights are earlier redeemed
by the Company, in each case, as described below.

         The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable,  upon exercise of the New Rights are subject to
adjustment  from time to time to  prevent  dilution  (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares,  (ii) upon the  grant to  holders  of the  Preferred  Shares of  certain
rights,  options or warrants to subscribe for or purchase  Preferred Shares at a
price, or securities  convertible into Preferred Shares with a conversion price,
less than the then current  market price of the  Preferred  Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of indebtedness
or assets  (excluding  regular  periodic cash  dividends paid out of earnings or
retained  earnings or dividends  payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).

         The  number  of  outstanding  New  Rights  and  the  number  of one one
thousandths  of a Preferred  Share  issuable upon exercise of each New Right are
also subject to adjustment in the event of a stock split of the Common Shares or
a stock dividend on the Common Shares payable in Common Shares or  subdivisions,
consolidation or combinations of the Common Shares occurring, in any case, prior
to the Distribution Date.

         Preferred  Shares  purchasable upon exercise of the New Rights will not
be redeemable.  Each Preferred Share will be entitled to a minimum  preferential
quarterly  dividend  payment  of $1.00  but  will be  entitled  to an  aggregate
dividend of 1,000 times the dividend  declared per Common Share. In the event of
liquidation,  the holders of the Preferred  Shares will be entitled to a minimum
preferential  liquidation payment of $1,000 but will be entitled to an aggregate
payment of 1,000 times the payment made per Common Share.  Each Preferred  Share
will have 1,000 votes,  voting together with the Common Shares.  Finally, in the
event of any merger,  consolidation or other  transaction in which Common Shares
are exchanged,  each Preferred Share will be entitled to receive 1,000 times the
amount of consideration received per Common Share. These rights are protected by
customary  anti  dilution  provisions.  Because of the  nature of the  Preferred
Shares'  dividend and liquidation  rights,  the value of one one thousandth of a
Preferred Share should approximate the value of one Common Share.

<PAGE>

         In the event  that any  person  becomes  an  Acquiring  Person,  proper
provision  shall be made so that each  holder  of a New  Right,  other  than New
Rights  beneficially  owned by the Acquiring Person or an Associate or Affiliate
of such  Acquiring  Person or certain of their  transferees  (which  Rights will
thereafter be void), will have the right to receive upon exercise that number of
Common Shares  having a market value of two times the exercise  price of the New
Right (or, if such number of shares is not and cannot be authorized, the Company
may issue  Preferred  Stock,  cash,  debt,  stock or a  combination  thereof  in
exchange for the New Rights).

         In the event that the Company is acquired in a merger or other business
combination  transaction  or 50% or more of its  consolidated  assets or earning
power are sold, proper provision will be made so that each holder of a New Right
will thereafter have the right to receive, upon the exercise thereof at the then
current  exercise price of the New Right,  that number of shares of common stock
of the  acquiring  company  which at the time of such  transaction  will  have a
market value of two times the exercise price of the New Right.

         At any time after the acquisition by a person or group of affiliated or
associated  persons of  beneficial  ownership of 15% or more of the  outstanding
Common  Shares and prior to the  acquisition  by such  person or group of 50% or
more of the outstanding Common Shares, the Board of Directors of the Company may
exchange  the New Rights  (other  than New Rights  owned by such person or group
which have become void), in whole or in part, at an exchange ratio of one Common
Share,  or one one  thousandth of a Preferred  Share,  per New Right (or, if the
number of shares is not and cannot be  authorized,  the  Company may issue cash,
debt, stock or a combination thereof in exchange for the New Rights), subject to
adjustment.

         With certain  exceptions,  no adjustment in the Purchase  Price will be
required until  cumulative  adjustments  require an adjustment of at least 1% in
such Purchase Price. No fractional  Preferred  Shares will be issued (other than
fractions which are integral multiples of the number of one one thousandths of a
Preferred  Share issuable upon the exercise of one New Right,  which may, at the
option  of the  Company,  be  evidenced  by  depository  receipts),  and in lieu
thereof,  an  adjustment  in cash will be made based on the market  price of the
Preferred Shares on the last trading day prior to the date of exercise.

         At any  time  prior to the  earlier  of (i) the  time  that any  person
becomes an Acquiring  Person,  or (ii) the Final  Expiration  Date, the Board of
Directors of the Company may redeem the New Rights in whole, but not in part, at
a  price  of  $.001  per New  Right  (the  "Redemption  Price").  Following  the
expiration  of  the  above  periods,   the  New  Rights  become   nonredeemable.
Immediately upon any redemption of the New Rights, the right to exercise the New
Rights will terminate and the only right of the holders of New Rights will be to
receive the Redemption Price.

         The Company may from time to time,  and the Rights  Agent will,  if the
Company so directs,  supplement  or amend the New Rights  Agreement  without the
approval of any holders of Right Certificates in order to cure any ambiguity, to
correct or supplement any provision  contained therein which may be defective or
inconsistent  with any other  provisions  therein,  or to make any  change to or
delete any provision  thereof or to adopt any other  provisions  with respect to
the Rights which the Company may deem necessary or desirable; provided, however,
that from and after such time as any Person becomes an Acquiring Person, the New
Rights  Agreement may not be amended or  supplemented  in any manner which would
adversely affect the interests of the holders of Rights (other than an Acquiring
Person and its Affiliates and Associates).

<PAGE>

         Until a New Right is exercised,  the holder thereof, as such, will have
no rights as a stockholder of the Company,  including,  without limitation,  the
right to vote or to receive dividends.

         The New Rights have certain anti-takeover  effects. The New Rights will
cause  substantial  dilution  to a person or group that  attempts to acquire the
Company on terms not  approved  by the  Company's  Board of  Directors.  The New
Rights  should  not  interfere  with any  merger or other  business  combination
approved by the Board of  Directors  since the New Rights may be redeemed by the
Company  at $.001 per New Right  prior to the  earlier  of (i) the time prior to
such time as any  person  has  become  an  Acquiring  Person,  or (ii) the Final
Expiration Date.

Item 6.    Exhibits and Reports on Form 8-K

(a)       Exhibits

Exhibit 3.1 Amendment of Section A of Article 4 of the Restated  Certificate  of
Incorporation of America Online,  Inc. (Filed as to Exhibit 4.1 to the Company's
Registration  Statement on Form S-3, Registration No. 333-46633 and incorporated
herein by reference and as Exhibit 3.1 to the Company's Form 10-K for the fiscal
year ended June 30, 1997)

Exhibit 4.1  Rights  Agreement  dated as of May 12,  1998,  between  America
Online, Inc. and BankBoston, N.A., as Rights Agent

Exhibit  18.1  Ernst & Young  Letter  dated  May 15,  1998  regarding  change in
accounting principles

Exhibit 99.1 Press  Release  dated May 14, 1998  announcing  that  America
Online, Inc. Board of Directors Approved a New Shareholder Rights Plan

<TABLE>

(b)      Reports on Form 8-K

Form      Item # Description                                             Filing Date
<S>        <C>   <C>                                                     <C>
Form 8-K  5      Restatement  of Earnings  due to FASB  Statement of     February 13, 1998
                 Financial Accounting Standards No. 128
Form 8-K  2, 7   Completion  of  the   Acquisition   of  the  online     February 17, 1998
                 services  division  of  CompuServe  Corporation  in
                 Exchange   for  ANS   Communications,   Inc.,   the
                 Company's network services subsidiary
</TABLE>

<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, 1998                  SIGNATURE:
                                    /s/ Stephen M. Case
                                    Stephen M. Case
                                    Chief Executive Officer




DATE: May 15, 1998                   SIGNATURE
                                    /s/ Lennert J. Leader
                                    Lennert J. Leader
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

<PAGE>

                                 Exhibit Index


Exhibit 4.1  Rights  Agreement  dated as of May 12,  1998,  between  America
             Online, Inc. and BankBoston, N.A., as Rights Agent.

Exhibit 18.1 Ernst & Young Letter  dated May 15, 1998  regarding  change in
             accounting principles

Exhibit 99.1 Press  Release  dated May 13, 1998  announcing  that  America
             Online, Inc. Board of Directors Approved a New Shareholder Rights
             Plan