<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q

          (X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

               For the Quarterly Period Ended September 30, 1996

                                       OR

          ( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                             SECURITIES ACT OF 1934

                  For the transition period from ___ to _____

              Commission file number         0-27890             
                                     -------------------------

                           MINDSPRING ENTERPRISES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


<TABLE>
<S>                                                              <C>
         Delaware                                                    58-2113290        
-------------------------------------------------------------------------------------------------
(State or other jurisdiction of                                    (I.R.S. Employer
incorporation or organization)                                   Identification Number)
                                                             
                                                                 
                                                                 
1430 West Peachtree St. NW, Suite 400, Atlanta, GA                      30309           
--------------------------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)
                                                             
Registrant's telephone number, including area code:                 (404) 815-0770                    
                                                   -----------------------------------------------
</TABLE>


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.

<TABLE>
<S>                                           <C>
                                              Outstanding at November  11, 1996
                                              ---------------------------------
                                              
Common Stock at $.01 par value                          7,475,793 Shares
                                               
</TABLE>





<PAGE>   2


PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

                          MINDSPRING ENTERPRISES, INC.
                            CONDENSED BALANCE SHEETS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,        DECEMBER 31,
                                                                  1996                1995
                                                           ----------------   ---------------
<S>                                                        <C>                <C>
                       ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                               $      1,374,227   $       424,834
   Trade receivables, net                                         3,004,577           519,280
   Prepaids and other current assets                              1,586,188           280,950
   Inventory                                                         25,341            45,415
                                                           ----------------   ---------------
          Total current assets                                    5,990,333         1,270,479
                                                           ----------------   ---------------

PROPERTY AND EQUIPMENT:
   Computer and telecommunications equipment                     10,688,206         3,594,528
   Purchased software systems                                       152,223           103,078
   Other                                                            297,206            96,890
                                                           ----------------   ---------------
                                                                 11,137,635         3,794,496
   Less: accumulated depreciation                                (1,315,958)         (255,560)
                                                           ----------------   ---------------
          Property and equipment, net                             9,821,677         3,538,936
                                                           ----------------   ---------------



OTHER ASSETS
   Acquired customer base                                        11,970,169                 0
   Product development costs, net                                   103,371            26,779   
   Other                                                             51,481             8,606
                                                           ----------------   ---------------
          Total other assets                                     12,125,021            35,385
                                                           ----------------   ---------------

                                                                 27,937,031         4,844,800
                                                           ================   ===============
        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Notes Payable                                           $     12,029,000   $             0
   Accrued expenses                                               2,402,707           532,406
   Trade accounts payable                                         2,240,354           994,164
   Deferred revenue                                               1,833,991           336,027
   Loan from preferred stockholder                                        0         2,500,000
                                                           ----------------   ---------------
          Total current liabilities                              18,506,052         4,362,597
                                                           ----------------   ---------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value; 1,000,000 shares authorized
      and 0 shares issued and outstanding at September 30, 1996
      and December 31, 1995, respectively                                 0                 0
   Class A convertible preferred stock, $.64 par value; 1,187,895
      shares authorized, and 0 and 1,187,895 issued and
      outstanding at September 30, 1996 and December 31, 1995             0           744,575
      respectively.
   Class B convertible preferred stock, $1.55 par value; 645,596
      shares authorized and 0 and 645,594 shares issued and
      outstanding at September 30, 1996 and December 31, 1995,
      respectively                                                        0         1,000,000
   Class C convertible preferred stock, $.01 par value; 5,000,000
      shares authorized and 0 and 100,000 shares issued and
      outstanding at September 30, 1996 and December 31, 1995,
      respectively                                                        0           638,000
   Common stock, $.01 par value; 15,000,000 shares authorized
      and 5,225,793 and 1,267,304 issued and outstanding at
      September 30, 1996 and December 31, 1995, respectively         52,258            12,673
   Additional paid-in capital                                    16,613,226           120,547
   Accumulated deficit                                           (7,234,505)       (2,033,592)
                                                           ----------------   ---------------
     Total stockholders' equity                                   9,430,979           482,203
                                                           ----------------   ---------------
                                                           $     27,937,031   $     4,844,800
                                                           ================   ===============

</TABLE>


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






<PAGE>   3


FINANCIAL STATEMENTS - Continued

                          MINDSPRING ENTERPRISES, INC.
                         CONDENSED STATEMENTS OF INCOME
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED           NINE MONTHS ENDED
                                                    SEPTEMBER 30,               SEPTEMBER 30,
                                                 1996           1995          1996         1995
                                              ----------      --------     ---------     ---------
<S>                                         <C>             <C>          <C>               <C>
REVENUES
   Access                                   $  3,902,385    $  402,990   $ 6,574,019   $   750,353
   Subscriber start-up fees                      734,948       136,690     1,580,716       283,332
   Business services                             655,357        62,265     1,326,512        93,795
   Other                                           8,670       (11,601)      126,636       (25,829)
                                            ------------    ----------   -----------   -----------
     Total revenues                            5,301,360       590,344     9,607,883     1,101,651
                                            ------------    ----------   -----------   -----------

COST AND EXPENSES
   Cost of revenues -- recurring            $  1,905,802    $  178,145   $ 3,202,005   $   338,624
   Cost of subscriber start-up fees              941,376        90,636     1,557,496       153,469
   General and administrative                  2,920,303       513,230     5,690,845       932,427
   Selling                                     1,122,686       130,918     2,693,097       215,890
   Depreciation and amortization               1,011,563        65,268     1,607,906       113,393
                                            ------------    ----------   -----------   -----------
     Total operating expenses                  7,901,730       978,197    14,751,349     1,753,803
                                            ------------    ----------   -----------   -----------

OPERATING LOSS                                (2,600,370)     (387,853)   (5,143,466)     (652,152)
INTEREST (EXPENSE) INCOME, NET                  (101,330)       (1,424)      (57,447)          940
                                            ------------    ----------   -----------   -----------

NET LOSS                                     ($2,701,700)    ($389,277)  ($5,200,913)    ($651,212)
                                            ============    ==========   ===========   ===========

NET LOSS PER SHARE                                ($0.53)       ($0.11)       ($1.13)       ($0.21)
                                            ============    ==========   ===========   ===========

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING                          5,138,836     3,488,445     4,588,202     3,069,873
                                            ============    ==========   ===========   ===========

</TABLE>


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






<PAGE>   4


FINANCIAL STATEMENTS - Continued

                          MINDSPRING ENTERPRISES, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                Nine Months Ended
                                                                                   September 30,
                                                                               1996           1995
                                                                          ------------    -----------
<S>                                                                       <C>              <C>
CASH FLOW USED IN OPERATING ACTIVITIES:
   Net loss                                                               $ (5,200,913)  $  (651,212)
   Adjustments to reconcile net loss to net cash provided
      by operating activities -
   Depreciation and amortization                                             1,607,906       113,393
   Changes in operating assets and liabilities:
         Trade receivables                                                  (2,485,297)     (307,924)
         Other current assets                                               (1,285,164)      (45,883)
         Trade accounts payable                                              1,246,190       243,631
         Accrued expenses                                                    1,870,301       112,165
         Deferred revenue                                                    1,497,964       178,094
                                                                          ------------   ------------
                Net Cash Used In Operating Activities                       (2,749,013)     (357,736)
                                                                          ------------   ------------

CASH FLOW USED IN INVESTING ACTIVITIES
   Purchases of property and equipment                                      (7,366,647)   (1,466,514)
   Purchase of customer base                                               (12,473,998)            0
   Product development costs                                                   (96,763)     (100,928)
   Other                                                                       (42,875)       (9,412)
                                                                          ------------   ------------
               Net Cash Used For Investing Activities                      (19,980,283)   (1,576,854)
                                                                          ------------   ------------

CASH FLOW FROM FINANCING ACTIVITIES
   Proceeds of loan from preferred stockholder                               1,000,000       375,000
   Payments of loan from preferred stockholder                              (3,500,000)            0
   Proceeds from Note Payable                                               12,029,000             0
   Issuance of common stock                                                 14,149,689       133,000
   Issuance of preferred stock                                                       0     1,000,000
               Net Cash Provided By Financing Activities                    23,678,689     1,508,000

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                                 949,393      (426,590)
CASH AND CASH EQUIVALENTS, beginning of period                                 424,834       584,798
                                                                          ------------   ------------

CASH AND CASH EQUIVALENTS, end of period                                  $  1,374,227   $   158,208
                                                                          ============   ===========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
   Interest paid                                                          $    136,127   $         0
                                                                          ============   ===========

</TABLE>


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






<PAGE>   5


 FINANCIAL STATEMENTS - Continued


                          MINDSPRING ENTERPRISES, INC.
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)


1.       Certain information and footnote disclosures normally included in
         financial statements prepared in accordance with generally accepted
         accounting principles have been condensed or omitted pursuant to
         Article 10 of Regulation S-X of the Securities and Exchange
         Commission. The accompanying unaudited condensed financial statements
         reflect, in the opinion of management, all adjustments necessary to
         achieve a fair statement of the Company's financial position and
         results for the interim periods presented. All such adjustments are of
         a normal and recurring nature. It is suggested that these condensed
         financial statements be read in conjunction with the financial
         statements and notes thereto included in the Company's Registration
         Statement on Form S-1 (File No. 333-10779), which was declared
         effective by the Securities and Exchange Commission on October 10,
         1996.


2.       On June 28, 1996, the Company entered into a Purchase Agreement (as
         amended, the "Purchase Agreement") with PSINet, Inc., a New York
         corporation ("PSINet"), pursuant to which the Company agreed to
         acquire certain of the tangible and intangible assets and rights
         related to the consumer dial-up Internet access services provided by
         PSINet in the United States, including (i) PSINet's individual
         subscriber accounts, and (ii) the lease for a customer service
         facility located in New Cumberland, Pennsylvania (the "Harrisburg
         Facility"), and all related  telephone switches and other equipment
         (the "Acquisition").  In connection with the Acquisition, the Company
         also hired approximately 75 employees who operate the Harrisburg
         Facility.

         The Purchase Agreement specifies that the maximum aggregate purchase
         price for the Acquisition is $21,129,000 (including $1,129,000
         representing the net book value of the Harrisburg Facility and
         excluding accrued interest and increases in principal amounts under
         promissory notes issued to PSINet), assuming the acquisition of
         100,000 subscriber accounts.  The actual aggregate purchase price will
         depend on the number of acquired subscriber accounts that remain
         MindSpring subscriber accounts for a specified period.  On June 28,
         1996 (the "First Closing"), the Company paid PSINet $1,000,000 in cash
         (from cash on hand) and issued a one-year promissory note in the
         amount of $2,000,000 (the "First PSINet Note") in exchange for 15,000
         subscriber accounts.

         As of September 1, 1996, (the "Second Closing"), the Company issued an
         additional one-year promissory note to PSINet in the amount of
         $9,929,000 (the "Second PSINet Note") in exchange for (i) the lease
         for the Harrisburg Facility and certain related assets (for a purchase
         price equal to $1,129,000, the net book value of the Harrisburg
         Facility and such assets) and (ii) the account information for the
         remaining individual PSINet  subscribers, for a purchase price of
         $8,800,000.  $8,800,000 corresponds to the purchase price for an
         additional 44,000 subscriber accounts at $200 per subscriber account.
         At September 30, 1996, the Company included in its reported number of
         subscribers 59,000 subscribers acquired from PSINet, consisting of
         15,000 subscriber accounts acquired in the First Closing and an
         assumed 44,000 subscriber accounts from the Second Closing,
         representing management's best estimate of the actual number of
         subscribers acquired from PSINet who will remain MindSpring
         subscribers as of the First Measurement Date (as defined below).

         The Purchase Agreement requires the Company to issue up to three
         additional promissory notes or pay cash to PSINet in up to three
         installments, in an aggregate amount equal to the product of $200 and
         the number of subscriber accounts obtained from PSINet in excess of
         59,000, up to an aggregate maximum of 100,000 subscriber accounts.
         The Purchase Agreement provides for the






<PAGE>   6


         issuance of such additional promissory notes or cash payments as
         of the following specified measurement dates: November 15, 1996 (the
         "First Measurement Date"), December 15, 1996 and January 15, 1997.  To
         the extent that the number of subscribers actually acquired from
         PSINet is fewer than 59,000, the Company will not be required to make
         any additional payments to PSINet.  Management currently expects
         that the number of subscribers that the Company will actually acquire
         will not exceed 66,000.

         In the event that any promissory note issued in connection with the
         Acquisition (a "PSINet Note") is not paid in full within 90 days after
         the date of such PSINet Note, the principal amount thereof will
         increase by 5.0% of the principal then outstanding, compounding at the
         rate of 5.0% each 90 days thereafter until such PSINet Note is
         redeemed in full.  Pursuant to the terms of the First PSINet Note,
         principal amounts thereunder increased by 5.0% on September 26, 1996.
         Each PSINet Note is convertible into common stock of the Company if
         such note is not redeemed in full by the first anniversary of the
         issuance of such note.

         As required by the Purchase Agreement, the Company applied 50% of the
         net proceeds from the Second Offering (as defined herein)
         (approximately $9,175,000), to pay all amounts due under the First
         PSINet Note and a portion of the amounts due under the Second PSINet
         Note.  After repayment of such amounts, approximately $3,073,000 in
         principal amount remains outstanding under the Second PSINet Note.
         See Note 9 ("Subsequent Events") to Condensed Financial Statements and
         "Part II -- Management's Discussion and Analysis of Financial
         Condition and Results of Operations -- Liquidity and Capital
         Resources."

         In connection with the Acquisition, the Company and PSINet also
         entered into a Network Services Agreement (as amended, the "Services
         Agreement"), which enables MindSpring to offer nationwide Internet
         access through PSINet's network of over 200 Points of Presence
         ("POPs").  Pursuant to the Services Agreement, PSINet has agreed,
         among other things, to provide to the Company:  (i)  Internet
         connection services which meet reasonable commercial  standards,
         including with respect to access and reliability; and (ii) access to
         PSINet's network monitoring systems and subscriber log-in and
         accounting information.  The Company has agreed to pay PSINet
         specified fees for each subscriber that the Company has assigned to a
         primary dial-in POP that is a PSINet POP.  The term of the Services
         Agreement is five years, commencing on June 28, 1996, and is
         automatically renewable annually thereafter unless either party
         notifies the other in writing not less than 12 months prior to the end
         of such five-year period or any 12-month extension thereof.  Either
         party may terminate the Services Agreement upon 365 days written
         notice to the other party.  The Company may terminate the Services
         Agreement in whole or in part without advance notice to PSINet under
         certain circumstances if there is a significant failure of PSINet's
         network.  The Company may also terminate the Services Agreement on a
         per-POP basis upon 365 days written notice or upon payment to PSINet
         of an amount equal to the aggregate amount of the fees paid or payable
         by the Company for the last two months' service provided through the
         PSINet POP or POPs being terminated.


3.       On August 6, 1996, the Company and The News and Observer Publishing
         Company ("N&O") entered into a definitive agreement, which was amended
         and restated on September 11, 1996, pursuant to which the Company
         agreed to acquire certain individual dial-up subscriber accounts in
         North Carolina (currently expected to number between 4,000 and 6,000)
         in connection with N&O's Nando.net Internet access business (the
         "Nando.net Transaction").  The Nando.net Transaction was consummated
         as of September 30, 1996 (the "Nando Closing Date").  As payment for
         the Nando.net Transaction, the Company:  (i) paid N&O $100,000 on the
         Nando Closing Date; and (ii) will pay N&O an additional amount based
         upon the number of acquired Internet subscriber accounts which
         continue to be current MindSpring subscriber accounts on December 1,
         1996 or January 1, 1997, depending on when such subscriber accounts
         were first acquired.  As of September 30, 1996, the Company recorded
         the purchase of Nando.net using an





<PAGE>   7


         estimated 4,000 subscribers.  The $420,000 for estimated customer
         acquisition costs is included in Acquired Customer Base in the
         accompanying September 30, 1996 balance sheet.


4.       Certain amounts in the prior year financial statements have been
         reclassified to conform to the current year presentation.


5.       In March 1996, the Company completed an initial public offering of its
         common stock.  The Company issued 1,950,000 shares at an initial
         public offering price of $8.00 per share.  The total proceeds of the
         offering, net of underwriting discounts and offering expenses, were
         approximately $13,672,000.  In April 1996, the Company's underwriters
         exercised a portion of the over-allotment option granted in connection
         with the Company's initial public offering, electing to purchase
         75,000 additional shares of common stock (of the 292,500 made
         available).  The net proceeds to the Company from the exercise of the
         option were approximately $478,000.


6.       The Company used a portion of the proceeds from the initial public
         offering to repay outstanding principal amounts of $3,500,000 loaned
         to the Company by ITC Holding Company, Inc. ("ITC Holding") plus
         accrued interest (at the rate of 14% per annum) of approximately
         $97,000.


7.       The net loss per share is computed using the weighted average number
         of shares of common stock and dilutive common stock equivalent shares
         from convertible preferred stock (using the if-converted method) and
         from stock options (using the treasury stock method).  For the quarter
         and nine months ended September 30, 1996, the stock options are
         excluded from the calculation as their effect is antidilutive. 
         Pursuant to Securities and Exchange Commission Staff Accounting
         Bulletins, common stock and common stock equivalent shares issued by
         the Company at prices below the public offering price during the
         twelve month period prior to the Company's initial public offering
         have been included in the calculation as if they were outstanding for
         all periods prior to the offering, regardless of whether they are
         dilutive (using the treasury stock method and an initial public
         offering price of $8.00 per share). Accordingly, all stock options
         granted are included in the earnings per share calculations for the
         quarter and nine month period ended September 30, 1995, even though
         the effect on net loss is antidilutive.  The Class A, Class B, and
         Class C Preferred have been included for the respective weighted
         average periods for which such shares were outstanding, even though
         their effect is antidilutive.
         

8.       There was no provision for or cash payment of income taxes for the
         three or nine months ended September 30, 1996 and 1995, respectively,
         as the Company had a net taxable loss for these periods and
         anticipates a net taxable loss for the year ended December 31, 1996.


SUBSEQUENT EVENTS


9.       In October 1996, the Company completed a second public offering of its
         common stock (the "Second Offering").  The Company issued 2,250,000
         shares at a public offering price of $9.125 per share.  The proceeds
         from the offering, net of underwriting discounts and offering
         expenses, were approximately $18,350,000.  The Purchase Agreement
         required the Company to apply 50% of these proceeds to repay the
         amounts outstanding under any PSINet Notes.  Accordingly, on October
         21, 1996, the Company paid PSINet approximately $9,175,000, which
         consists of payment in full of the First PSINet Note in the amount of
         $2,100,000 principal balance and approximately $70,000 accrued
         interest and partial payment of the Second PSINet Note in the






<PAGE>   8


         amount of approximately $6,856,000 principal (of the $9,929,000 total)
         and approximately $149,000 accrued interest.

10.      On October 14, 1996, the Company and Monorail Inc. ("Monorail"), an
         Internet-ready computer manufacturer, entered into an agreement (the
         "Monorail Agreement") pursuant to which the Company's software is to
         be included on personal computers manufactured by Monorail.  On
         November 5, 1996, pursuant to the Monorail Agreement, the Company paid
         $560,000 in cash to Monorail, which included a prepayment of $500,000
         for the first 12,500 subscribers acquired by the Company pursuant to
         this agreement ($40 per subscriber) and $60,000 for estimated expenses
         incurred by Monorail to include the Company's software on its PCs.  To
         the extent that more than 12,500 subscribers are acquired by the
         Company pursuant to the Monorail Agreement, the Company will be
         required to pay Monorail $40 per additional subscriber.  To the extent
         that fewer than 12,500 subscribers are acquired by the Company as of
         May 31, 1997, Monorail will be required to reimburse the Company at
         the rate of $40 per subscriber by July 30, 1997.  If Monorail adds
         additional Internet access providers to its personal computers, the
         Company, at its option, may require Monorail to reimburse the Company
         upon seven days notice for the difference between 12,500 and the
         number of subscribers acquired by the Company.





<PAGE>   9


ITEM 2-
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW

         MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a
national provider of Internet access.  The Company was incorporated in Georgia
on February 24, 1994 and began marketing its services in June 1994.  The
Company reincorporated in Delaware in December 1995.  Prior to the PSINet
Transaction (as defined below), MindSpring was a regional Internet access
provider that offered its services through 40 Points of Presence ("POPs") in
the southeastern United States and had grown to approximately 34,500
subscribers from approximately 12,400 subscribers as of December 31, 1995.  In
June 1996, the Company entered into agreements with PSINet Inc. ("PSINet") to
purchase up to 100,000 consumer dial-up subscriber accounts, a customer service
facility and certain other related assets, and to obtain access to PSINet's
national network of over 200 POPs (the "PSINet Transaction").

         On June 28, 1996, the Company entered into a Purchase Agreement (as
amended, the "Purchase Agreement") with PSINet, pursuant to which the Company
agreed to acquire certain of the tangible and intangible assets and rights
related to the consumer dial-up Internet access services provided by PSINet in
the United States, including  (i) PSINet's individual subscriber accounts, and
(ii) the lease for a customer service facility located in New Cumberland,
Pennsylvania (the "Harrisburg Facility"), and all related  telephone switches
and other equipment (the "Acquisition").  In connection with the Acquisition,
the Company also hired approximately 75 employees who operate the Harrisburg
Facility.

         The Purchase Agreement specifies that the maximum aggregate purchase
price for the Acquisition is $21,129,000 (including $1,129,000 representing the
net book value of the Harrisburg Facility and excluding accrued interest and
increases in principal amounts under promissory notes issued to PSINet),
assuming the acquisition of 100,000 subscriber accounts. The actual aggregate
purchase price will depend on the number of acquired subscriber accounts that
remain MindSpring subscriber accounts for a specified period.  On June 28, 1996
(the "First Closing"), the Company paid PSINet $1,000,000 in cash (from cash on
hand) and issued a one-year promissory note in the amount of $2,000,000 (the
"First PSINet Note") in exchange for 15,000 subscriber accounts.

         As of September 1, 1996, (the "Second Closing"), the Company issued an
additional one-year promissory note to PSINet in the amount of $9,929,000 (the
"Second PSINet Note") in exchange for (i) the lease for the Harrisburg Facility
and certain related assets (for a purchase price equal to $1,129,000, the net
book value of the Harrisburg Facility and such assets) and (ii) the account
information for the remaining individual PSINet subscribers, for a purchase
price of $8,800,000. $8,800,000 corresponds to the purchase price for an
additional 44,000 subscriber accounts at $200 per subscriber account.  At
September 30, 1996, the Company included in its reported number of subscribers
59,000 subscribers acquired from PSINet, consisting of 15,000 subscriber
accounts acquired in the First Closing and an assumed 44,000 subscriber
accounts from the Second Closing, representing management's best estimate of
the actual number of subscribers acquired from PSINet who  will remain
MindSpring subscribers as of the First Measurement Date (as defined below).

         The Purchase Agreement requires the Company to issue up to three
additional promissory notes or pay cash to PSINet in up to three installments,
in an aggregate amount equal to the product of $200 and the number of
subscriber accounts obtained from PSINet in excess of 59,000, up to an
aggregate maximum of 100,000 subscriber accounts.  The Purchase Agreement
provides for the issuance of such additional promissory notes or cash payments
as of the following specified measurement dates: November 15, 1996 (the "First
Measurement Date"), December 15, 1996 and January 15, 1997.  To the extent that
the number of subscribers actually acquired from PSINet is fewer than 59,000,
the Company will not be required to make any additional payments to PSINet.
Management currently expects that the number of subscribers that the Company
will actually acquire will not exceed 66,000.






<PAGE>   10



         In the event that any promissory note issued in connection with the
Acquisition (a "PSINet Note") is not paid in full within 90 days after the date
of such PSINet Note, the principal amount thereof will increase by 5.0% of the
principal then outstanding, compounding at the rate of 5.0% each 90 days
thereafter until such PSINet Note is redeemed in full.  Pursuant to the terms
of the First PSINet Note, principal amounts thereunder increased by 5.0% on
September 26, 1996.

         Each PSINet Note is convertible into common stock of the Company at a
rate of $9.50 per share if such note is not redeemed in full by the first
anniversary of the issuance of such note.  If such conversions would result in
an aggregate issuance of greater than 19.9% of the issued and outstanding
common stock of the Company as of June 28, 1996 (an "Excess Issuance"), and
approval by the Company's stockholders of such Excess Issuance has not been
obtained, a PSINet Note may be converted in part to the extent that such
conversion would not result in an Excess Issuance.  The Company has agreed to
seek such stockholder approval if conversion of a PSINet Note would result in
an Excess Issuance as of the date that notices must be mailed for the Company's
next annual meeting of stockholders.  If a PSINet Note is converted in part, as
described above, PSINet will be required to convert the remaining balance of
such PSINet Note upon receipt by MindSpring of stockholder approval.

         In connection with the Acquisition, the Company and PSINet also
entered into a Network Services Agreement (as amended, the "Services
Agreement"), pursuant to which PSINet has agreed generally to provide Internet
connection services to the Company and its subscribers through PSINet's
nationwide network of over 200 POPs.  Pursuant to the Services Agreement, the
Company agreed to pay specified fees for each subscriber that the Company has
assigned to a primary dial-in POP that is a PSINet POP.  The term of the
Services Agreement is five years, commencing on June 28, 1996, and is
automatically renewable annually thereafter unless either party notifies the
other in writing not less than 12 months prior to the end of such five-year
period or any 12-month extension thereof.  Either party may terminate the
Services Agreement upon 365 days written notice to the other party.  The
Company may terminate the Services Agreement in whole or in part without
advance notice to PSINet under certain circumstances if there is a significant
failure of PSINet's  network.  The Company may also terminate the Services
Agreement on a per-POP basis upon 365 days written notice or upon payment to
PSINet of an amount equal to the aggregate amount of the fees paid or payable
by the Company for the last two months' service provided through the PSINet POP
or POPs being terminated.

         On August 6, 1996, the Company and The News and Observer Publishing
Company ("N&O") entered into a definitive agreement, which was amended and
restated on September 11, 1996 (the "Nando Agreement"), pursuant to which the
Company agreed to acquire certain individual dial-up subscriber accounts in
North Carolina (currently expected to number between 4,000 and 6,000) in
connection with N&O's Nando.net Internet access business (the "Nando.net
Transaction").  The Nando.net Transaction was consummated as of September 30,
1996 (the "Nando Closing Date").  As payment for the Nando.net Transaction, the
Company:  (i) paid N&O $100,000 on the Nando Closing Date; and (ii) will pay
N&O an additional amount based upon the number of acquired Internet subscriber
accounts which continue to be current MindSpring subscriber accounts on
December 1, 1996 or January 1, 1997, depending on when such subscriber accounts
were first acquired.  The Company may pay cash for the additional amounts or
issue up to two promissory notes.

         The Company derives revenues primarily from monthly subscriptions and
start-up fees from individuals for dial-up access to the Internet.  Monthly
subscription fees vary by billing plan.  In May 1996, in response to a changing
competitive environment, the Company introduced five different pricing plans
for dial-up access (one of which was discontinued in September 1996 due to low
subscriber interest), compared to the two prior plan offerings.  With the new
pricing plans, new and existing customers have a choice of two "flat rate"
plans (The Works and Unlimited Access) and two "usage-sensitive" plans
(Standard and Light).  These plan changes generally represent a reduction from
the previous rates.  The Company anticipates that additional price changes may
be necessary in the future due to the dynamic nature of the Internet access
industry.  Management believes that the reduction in revenues per subscriber
due to the recently effected price changes will be offset in the near term by
continuing increases in





<PAGE>   11


subscriber growth.  However, there can be no assurance that growth in the
Company's revenues or subscriber base will be able to achieve or sustain
profitability or positive cash flow.

         For the quarter ended September 30, 1996, the average monthly
recurring revenue per dial-up subscriber was approximately $19 (monthly
recurring revenue plus usage charges for non- "Flat Rate" subscribers, divided
by total subscribers), compared to $21.00 per dial-up subscriber for the
quarter ended September 30, 1995.  Start-up fees for new subscribers typically
range from $25 to $35 per user, which covers the costs of the direct materials,
mailing, and licensing fees associated with each new subscriber.  Most of the
Company's individual subscribers pay their MindSpring fees automatically by
pre-authorized monthly charges to the subscriber's credit card.

         In addition, the Company earns revenues by providing Web-hosting
services, full-time dedicated access connections to the Internet and domain
registration primarily to businesses and some individual subscribers.  The
Company's Web-hosting services allow a business or individual to post
information on the World Wide Web, so that the  information is available to
anyone who has access to the Internet.  Through its domain registration
services, the Company provides subscribers the ability to personalize
electronic mail addresses.  These services have been classified as business
services in the condensed statements of income and the table below.





<PAGE>   12
                  

         The table below shows historical revenues and cost of revenues by
category and the percentage of total revenues attributable to each category.
Dollar amounts are shown in thousands.


<TABLE>
<CAPTION>
                                             THIRD                NINE                 THIRD                    NINE

                                         QUARTER ENDED        MONTHS ENDED         QUARTER ENDED            MONTHS ENDED

                                       SEPTEMBER 30, 1995  SEPTEMBER 30, 1995    SEPTEMBER 30, 1996      SEPTEMBER 30, 1996
                                       ------------------  ------------------    ------------------      ------------------

<S>                                   <C>        <C>        <C>        <C>     <C>         <C>          <C>         <C>
Revenues:

Dial-up access to Internet            $   403      68%      $  751      68%    $   3,902     74%        $  6,574      68%

Start-up fees                             137       23         283       26          735      14           1,581       17 
                                                                                                                          
Business services                          62       11          94        9          655      12           1,327       14 
                                                                                                                          
Other revenues, net (1)                  (12)      (2)        (26)      (3)            9       0             126        1 
                                      -------    -----      ------   ------    ---------   -----        --------     ---- 


         Total                        $   590     100%      $1,102     100%    $   5,301    100%        $  9,608     100%
                                      =======    =====      ======   ======    =========   =====        ========    ===== 

Cost of revenues -- recurring         $   178      30%      $  339      31%    $   1,906     36%        $  3,202      34%

Cost of subscriber  start-up fees          91       16         153       14          941      18           1,558       16
                                      -------    -----      ------   ------    ---------   -----        --------    ----- 

         Total cost of revenues       $   269      46%      $  492      45%    $   2,847     54%        $  4,760      50%
                                      =======    =====      ======   ======    =========   =====        ========    ===== 
</TABLE>

(1) "Other revenues, net" includes billing adjustments and miscellaneous
    (primarily non-recurring) additional items.

         The Company's costs include (1) cost of revenues that are primarily
related to the number of subscribers, (2) selling, general and administrative
expenses that are associated more generally with operations, and (3)
depreciation and amortization, which are related to the size of the Company's
network and the deferred costs associated with acquired customer bases.  Cost
of revenues consists primarily of the start-up expenses for each subscriber,
certain monthly licensing fees, and the costs of telecommunications facilities
necessary to provide service to subscribers.  Start-up expenses for each
subscriber include one-time license fees paid to third parties for the right to
bundle other capabilities into the Company's software, cost of diskettes and
other product media, manuals, and packaging and delivery costs associated with
the materials provided to new subscribers.  The Company does not defer any such
subscriber start-up expenses.  Cost of revenues also includes monthly license
fees per subscriber for the right to receive and make available certain news
services.  Telecommunications costs include the costs of providing local
telephone lines into each POP and costs associated with leased lines connecting
each POP to the Company's Atlanta hub and connecting the hub to the Internet
backbone.  The Internet backbone consists of high-speed networks that link the
smaller, independent networks of the Internet.

         As the above table indicates, subscriber start-up fees have decreased
generally as a percentage of revenues as the cumulative subscriber base has
increased.  Because operating margins on start-up fees are lower than margins
earned for providing monthly access services, a continuing trend of decreasing
start-up fee revenues would, by itself, tend to increase the overall margins
for the Company.  However, historically, the impact of this trend has been
offset by increased costs and expenses associated with opening new POPs. As a
result of the Acquisition, the Company generally anticipates opening fewer of
its own POPs.

         Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, accounting and administration.  Selling, general and
administrative costs will increase over time as the scope of  operations
increases, primarily as a result of the PSINet Transaction and the related
nationwide expansion of the Company's marketing and advertising activities.
However, the Company expects that such costs will be more than offset by
anticipated increases in revenues attributable to the subscriber accounts
acquired as part of the Acquisition.  In addition, significant levels of
marketing activity may be necessary in order for the Company to build or
increase its subscriber base in a given market to a size large enough to
generate sufficient revenues to offset such marketing expenses.  The Company
does not defer any start-up expenses related to entering new markets.  The
costs associated with the development and registration of the Company's
trademarks have been expensed as incurred.  Such costs have not been material.





<PAGE>   13


         Prior to the PSINet Transaction, as the demand for the Company's
services in a particular POP had grown, the Company had been required to invest
in additional telecommunications equipment and provide additional local
telephone lines for that POP. The Services Agreement provides the Company the
option to evaluate on a POP by POP basis whether to continue to develop
MindSpring POPs using the Company's capital resources or to conserve capital
through utilization of the PSINet POPs for a specified fee.  As the Company
expands into new markets, both cost of revenues and selling, general and
administrative expenses will increase.  To the extent the Company opens
MindSpring POPs, such expenses may also increase as a percentage of revenues in
the short term after a new MindSpring POP is opened because many of the fixed
costs of providing service in a new market are incurred before significant
revenues can be expected from that market.  However, to the extent that the
Company expands into new markets by using the PSINet POPs instead of opening
its own POPs, the Company's incremental monthly recurring costs will consist
primarily of the fees to be paid to PSINet based on revenue per subscriber
served, as provided in the Services Agreement.

         The Company had 40 Company-owned POPs as of September 30, 1996, which
were serving approximately 54,360 subscribers as of such date.  In addition,
the Company had access to PSINet's nationwide network of over 200 POPs.  As of
September 30, 1996, the Company and PSINet maintained approximately 20 POPs in
the same service areas.  Pursuant to the Services Agreement, the Company has
the flexibility to offer Internet access in such overlapping POP locations
through a MindSpring POP, through a PSINet POP or a combination of both.  In
certain of these locations, it may be more cost-effective for the Company to
close the MindSpring POP and offer Internet access exclusively through the
PSINet POP.  The Company does not currently plan to open a significant number
of new MindSpring POPs during the remainder of 1996.  Management will, however,
evaluate on a POP-by-POP basis the closing or expansion of existing MindSpring
POPs or the opening of new MindSpring POPs based on subscriber demand and
strategic considerations.

         The Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure and internal staffing,
develop its systems, and expand into new markets.  The Company expects to
continue to focus on increasing its subscriber base and geographic coverage.
Accordingly, the Company expects that its cost of revenues, selling expenses,
general and administrative expenses, and capital expenditures will continue to
increase significantly, all of which may have a negative impact on short-term
operating results.






<PAGE>   14


RESULTS OF OPERATIONS
  
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995
         
         The following table sets forth certain financial data for each of the
quarters ended September 30, 1996 and September 30, 1995.  The quarterly
information is unaudited, has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management, reflects
all adjustments (consisting only of normal and recurring adjustments) necessary
for a fair presentation of the information for the periods presented.
Operating results for any quarter are not necessarily indicative of results for
any future period.  Dollar amounts (except per share data) are shown in
thousands.

<TABLE>
<CAPTION>
                                                                  THIRD QUARTERS ENDED SEPTEMBER 30,
                                                            ---------------------------------------------
                                                                            % OF                   % OF
                                                               1996       REVENUES      1995     REVENUES
                                                           ----------    ----------   -------    ---------
 <S>                                                      <C>             <C>        <C>          <C>
 STATEMENTS OF OPERATIONS DATA:
 
 Revenues                                                 $    5,301        100%  $      590       100%
                                                          ----------     -------  ----------    -------
                                                                                                       
 Selling and general and administrative expenses               4,043        76%          644       109%
                                                                                                       
 Cost of revenues                                              2,847        54%          269        46%
                                                                                                       
 Depreciation and amortization                                 1,012        19%           65        11%
                                                          ----------     -------  ----------    -------
         Total costs and expenses                         $    7,902       149%   $      978       166%
                                                          ==========     =======  ==========    =======
                                                                                      
 Operating loss                                           $  (2,601)              $     (388)
                                                                                      
 Interest expense                                              (155)                      (1)
                                                                                      
 Interest income                                                  54                       0
                                                                                      
                                                                                      
 Net Loss                                                 $  (2,702)      (51)%   $     (389)      (66)%
                                                          ----------     -------  -----------    -------
 PER SHARE DATA:                                                                      
                                                                                      
 Net loss per share                                       $    (.53)              $     (.11)
                                                                              
 Weighted average common shares outstanding                5,138,836               3,488,445


 OTHER OPERATING DATA:
 
 Approximate subscribers at end of period                    117,360                   7,430

 Company-Owned POPs at end of period                              40                       7

 Employees at end of period                                      319                      52
                                                                
 Access lines at end of period                                 4,901                     694
</TABLE>


         Revenues.  Revenues for the quarter ended September 30, 1996 totaled
approximately $5,301,000, as compared to approximately $590,000 for the same
period in the prior year.  The 798% increase in quarterly revenues resulted
primarily from an increase of 1,480% in subscribers to approximately 117,360 as
of September 30, 1996, compared to approximately 7,430 subscribers as of
September 30, 1995.  Access revenues for the quarter ended September 30, 1996
totaled approximately $3,902,000, or 74% of revenue, as compared to
approximately $403,000, or 68% of revenue, for the same period in the prior
year.  Subscriber start-up fees accounted for 14% of revenue for the quarter
ended September 30, 1996, as compared to 23% for the quarter ended September
30, 1995.  The Company anticipates that as its customer base continues to
expand, subscribers start-up fees will progressively represent a smaller
percentage of revenue. In addition, business services revenue for the quarter
ended September 30, 1996 increased to approximately $655,000, or 12% of
revenue, as compared to approximately $62,000, or 11% of revenue,  for the same
period in the prior year due to substantial increases in Web-hosting accounts.

         Cost of revenues.  For the quarter ended September 30, 1996, cost of
revenues increased to approximately $2,847,000 or 54% of revenues, compared to
approximately $269,000 or 46% of revenues for the quarter ended September 30,
1995.  Cost of revenues increased significantly in the quarter ended September
30, 1996 as a result of the significant increase in subscribers.  Cost of
revenues increased as a





<PAGE>   15


percentage of revenues primarily as a result of the expenditures such as
license fees and starter kits related to the Acquisition, as well as the
significant overall increase in subscribers.

         Selling, general and administrative expenses.   Selling, general and
administrative expenses were approximately $4,043,000 or 76% of revenues for
the quarter ended September 30, 1996, compared to approximately $644,000 or
109% of revenues for the quarter ended September 30, 1995. Selling, general and
administrative expenses as a percentage of revenue decreased from 109% for the
three months ended September 30, 1995 to 87% for the same period in 1996.  This
decrease resulted from the Company benefiting from economies of scale with
respect to such costs as salaries and wages that do not increase in direct
proportion to increases in revenue and cost control efforts implemented by
management.  The increase in overall selling, general and administrative
expenses over the same period in the prior year resulted from the substantial
increase in advertising and marketing expenses related to the development of
business in existing POPs.  The Company was operating 40 Company-owned POPs as
of September 30, 1996, compared to seven POPs as of September 30, 1995.  In
addition, the Company increased the number of employees to 319 as of September
30, 1996, compared to 52 as of September 30, 1995, an increase of 513%.

         Depreciation and amortization.  During the third quarter 1995, the
Company had a relatively small amount of property, plant and equipment totaling
approximately $1,573,000, which increased significantly during the fourth
quarter of 1995 and the first nine months of 1996 to approximately $11,138,000
as of September 30, 1996.  Also, the Company recorded intangible assets of
approximately $12,474,000 for acquired customers.  The Company is amortizing
these costs over a three-year period.  Amortization expense related to the
acquired customer base for the quarter ended September 30, 1996 was
approximately $504,000.  Consequently, depreciation and amortization expenses
increased substantially to approximately $1,012,000 or 19% of revenues for the
quarter ended September 30, 1996, compared to approximately $65,000 or 11% of
revenues for the same period in the prior year.






<PAGE>   16


Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1996

         The following table sets forth certain financial data for the nine
months ended September 30, 1996 and 1995.  The period information is unaudited,
has been prepared on the same basis as the annual financial statements and, in
the opinion of the Company's management, reflects all adjustments (consisting
only of normal and recurring adjustments) necessary for a fair presentation of
the information for the periods presented.  Operating results for any period
are not necessarily indicative of results for any future period.  Dollar
amounts (except per share data) are shown in thousands.

<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED SEPTEMBER 30,
                                                            -------------------------------------------
                                                                          % OF                  % OF
                                                              1996      REVENUES      1995    REVENUES
                                                            --------   ---------   --------  ----------
 <S>                                                     <C>          <C>        <C>          <C>
 STATEMENTS OF OPERATIONS DATA:
 
 Revenues                                                $     9,608       100%   $   1,102       100%
                                                         -----------     ------   ---------    -------

 Selling, general and administrative expenses                  8,384        87%       1,149       104%

 Cost of revenues                                              4,760        50%         492        45%

 Depreciation and amortization                                 1,608        17%         113        10%
                                                         -----------     ------   ---------    -------
         Total costs and expenses                        $    14,752       154%       1,754       159%
                                                         ===========    =======   =========    =======

 Operating loss                                          $   (5,144)                  (652)
 
 Interest expense                                              (247)                      0
                                           
 Interest income                                                 190                      1
                                                         -----------     ------   ---------    -------

 Net Loss                                                $   (5,201)      (54)%   $   (651)      (59)%
                                                                          

 PER SHARE DATA:

 Net loss per share                                      $    (1.13)              $   (.21)

 Weighted average common shares outstanding                4,588,202              3,069,873
</TABLE>

      Revenues.   Revenues for the nine months ended September 30, 1996
totaled approximately $9,608,000, as compared to approximately $1,102,000 for
the same period in the prior year.  The 772% increase in period revenues
resulted primarily from an increase of 1,480% in subscribers to approximately
117,360 as of September 30, 1996, compared to approximately 7,430 subscribers
as of September 30, 1995.  Access revenues for the nine months ended September
30, 1996 totaled approximately $6,574,000, or 68% of revenue, as compared to
approximately $751,000, or 68% of revenue, for the same period in the prior
year.  Subscriber start-up fees accounted for 17% of revenue for the nine
months ended September 30, 1996, as compared to 26% for the nine months ended
September 30, 1995.  The Company anticipates that as its customer base
continues to expand, subscribers start-up fees will progressively represent a
smaller percentage of revenue. In addition, business services revenue for the
nine months ended September 30, 1996 increased to approximately $1,327,000, or
14% of revenues, as compared to approximately $94,000, or 9% of revenues, for
the same period in the prior year due to substantial increases in Web-hosting
accounts.

      Cost of revenues.  For the nine months ended September 30, 1996, cost of
revenues increased to approximately $4,760,000 or 50% of revenues, compared to
approximately $492,000 or 45% of revenues for the nine month period ended
September 30, 1995. Cost of revenues increased significantly in the nine months
ended September 30, 1996 as a result of the significant increase in
subscribers.  Cost of revenues increased as a percentage of revenues primarily
as a result of the expenditures such as license fees and starter kits related
to the Acquisition, as well as the significant overall increase in subscribers.

      Selling, general and administrative expenses. Selling, general and
administrative expenses were approximately $8,384,000 or 87% of revenues for
the nine months ended September 30, 1996, compared to approximately $1,149,000
or 104% of revenues for the nine months ended September 30, 1995. Selling,
general and administrative expenses as a percentage of revenue decreased from
104% for the nine months ended September 30, 1995 to 87% for the same period in
1996.  This decrease resulted from the Company benefiting from economies of
scale with respect to such costs as salaries and wages that do not increase in
direct proportion to increases in revenue and cost control efforts implemented
by management.  The





<PAGE>   17


overall increase in expenses was primarily attributable to the expansion of the
Company's operations in terms of POPs, subscribers and employees between the
periods.  The Company was operating 40 POPs and had 319 employees as of
September 30, 1996, compared to seven POPs and 52 employees as of September 30,
1995.

      Depreciation and amortization.   Depreciation and amortization expenses
increased substantially to approximately $1,608,000 or 17% of revenues for the
nine months ended September 30, 1996, compared to approximately $113,000 or 10%
of revenues for the same period in the prior year.  During the first nine
months of 1995, the Company had a relatively small amount of property, plant
and equipment totaling approximately $1,573,000, which increased significantly
during the fourth quarter of 1995 and the first nine months of 1996 to
approximately $11,138,000 as of September 30, 1996.  Also, the Company recorded
intangible assets of approximately $12,474,000 for acquired customers.  The
Company is amortizing these costs over a three-year period.  Amortization
expense related to the acquired customer base for the nine months ended
September 30, 1996 was $504,000.

      Interest Expense.  The Company issued the First PSINet Note for
$2,000,000 as of June 28, 1996 and the Second PSINet Note for $9,929,000 on
September 1, 1996.  The interest expense related to the First PSINet Note and
Second PSINet Note, which accrued at the rate of prime plus 3.0% per annum
(11.25% at September 30, 1996), was approximately $155,000 and recorded in the
third quarter of 1996.  Also, at the beginning of the first quarter of 1996,
the Company had $2,500,000 outstanding under a loan agreement with ITC Holding
Company, Inc. ("ITC Holding").  In March 1996, the outstanding amount of
$3,500,000 was paid in full, plus accrued interest of $97,000, with a portion
of the proceeds from the Company's initial public offering.  The interest
expense of approximately $92,000 recorded during the first nine months of 1996
represents interest on this loan, which accrued at the rate of 14% per annum.
No such credit facilities existed during the first nine months of 1995.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has not generated net cash from operations for any period
presented.  The Company has primarily financed its operations to date through
public and private sales of equity securities and loans from its principal
stockholders and PSINet.  During the first six months of 1996, the Company
completed an initial public offering of its common stock, issuing 2,025,000
shares at a price of $8.00 per share.  The proceeds from the initial public
offering were approximately $14,150,000, net of underwriting discounts and
expenses.  Upon completion of the initial public offering, the Company repaid
all outstanding principal amounts loaned to the Company by ITC Holding,
totaling $3,500,000 principal balance and approximately $97,000 in interest.
Total cash from financing activities for the nine months ended September 30,
1996 was approximately $23,679,000, a $22,171,000 increase over the same period
in 1995.  Cash provided for financing activities for the third quarter ended
September 30, 1996 equaled approximately $10,929,000 (consisting of proceeds
from the Second PSINet Note and the 5.0% increase of the First PSINet Note
principal, pursuant to the terms of the PSINet Notes), a $9,471,000 increase
compared to the same period in 1995.

      The Company used approximately $19,980,000 in cash for investing
activities during the nine months ended September 30, 1996 (of which
approximately $12,980,000 was used during the third quarter ended September 30,
1996) and approximately $1,576,000 during the nine months ended September 30,
1995 (of which approximately $791,000 was used in the third quarter ended
September 30, 1995).  These activities during the third quarter of 1996
consisted primarily of purchases of telecommunications equipment necessary for
the provision of service to subscribers and the Acquisition in which the
Company purchased 59,000 subscribers for $11,800,000 and the Harrisburg
Facility for $1,129,000.

      At September 30, 1996, the Company had cash on hand of approximately
$1,374,000.  In October, 1996, the Company completed a second public offering
of its common stock (the "Second Offering") and received proceeds from this
offering of approximately $18,350,000, net of underwriting discounts and
offering expenses.  The Purchase Agreement required the Company to apply 50% of
these






<PAGE>   18


proceeds to repay the amounts outstanding under any PSINet Notes.  Accordingly,
on October 21, 1996, the Company paid PSINet approximately $9,175,000, which
consists of  payment in full of the First PSINet Note in the amount of
$2,100,000 principal balance and approximately $70,000 accrued interest and
partial payment of the Second PSINet Note in the amount of approximately
$6,856,000 principal (of the $9,929,000 total) and approximately $149,000
accrued interest.

      On October 14, 1996, the Company and Monorail Inc. ("Monorail), an
Internet-ready computer manufacturer, entered into an agreement (the "Monorail
Agreement") pursuant to which the Company's software is to be included on the
personal computers manufactured by Monorail.  On November 5, 1996, pursuant to
the Monorail Agreement, the Company paid $560,000 in cash to Monorail, which
included a prepayment of $500,000 for the first 12,500 subscribers acquired by
the Company pursuant to this agreement ($40 per subscriber) and $60,000 for
estimated expenses incurred by Monorail to include the Company's software on
its PCs.

      Following this payment to PSINet on October 21, 1996 and the payment to
Monorail on November 5, 1996, the Company had available cash on hand of
approximately $8,664,000.

      The Company's significant capital commitments through mid-1997 include
$3,073,000 plus interest from October 21, 1996 related to the Second PSINet
Note assuming the acquisition of 59,000 subscribers pursuant to the Purchase
Agreement.  To the extent that the number of subscribers acquired from PSINet
is greater than 59,000, the Company will issue additional notes or pay cash to
PSINet in an amount equal to the product of $200 and the difference between
59,000 and the number of subscriber accounts actually acquired by the Company
(up to a maximum of 100,000 subscribers).  To the extent that the number of
subscribers actually acquired from PSINet is fewer than 59,000, the Company
will not be required to make any additional payments to PSINet.  Management 
currently anticipates repaying the Second PSINet Note and any new PSINet Notes
prior to an increase in principal amounts pursuant to their terms.

      In connection with the Nando.net Transaction, the Company anticipates
that it will be required to pay N&O an additional amount of approximately
$600,000 (plus interest if notes are issued for a portion of such amount) based
on management's best estimate of the number of subscribers to be acquired
pursuant to the Nando Agreement.  Pursuant to the terms of the Nando Agreement,
the Company is required to pay cash to N&O for 50% of this additional amount
and pay cash or issue up to two promissory notes payable in two equal
installments on March 31, 1997 and September 30, 1997 for the remaining 50%.

      To the extent that more than 12,500 subscribers are acquired by the
Company pursuant to the Monorail Agreement, the Company will be required to pay
Monorail $40 per additional subscriber.  To the extent that fewer than 12,500
subscribers are acquired by the Company as of May 31, 1997, Monorail will be
required to reimburse the Company at the rate of $40 per subscriber by July 30,
1997.  If Monorail adds additional Internet access providers to its personal
computers, the Company, at its option, may require Monorail to reimburse the
Company upon seven days notice for the difference between 12,500 and the number
of subscribers acquired by the Company.

      On July 15, 1996, the Company and BellSouth Telecommunications, Inc.
("BellSouth") entered into a two-year agreement (the "BellSouth Agreement"),
pursuant to which the Company agreed to purchase telecommunications services
from BellSouth for a minimum of $2,000,000 in the first year, and, in the
second year, a minimum of 90% of the amount billed to the Company during the
first year.  The Company may renew the BellSouth Agreement pursuant to two
one-year renewal options.  In the event the Company terminates the BellSouth
Agreement prior to its expiration, the Company is required to pay BellSouth a
termination fee equal to 50% of the amounts billed to the Company during the 12
months preceding such termination.





<PAGE>   19



        The Company currently estimates that capital expenditures through
mid-1997 will be approximately $4,000,000 and the Company will generate cash 
flows from operations in this period.  The impact of the BellSouth Agreement
discussed above is reflected in the expected operating cash flows.

      The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds from the Second Offering.  However, any
increases in the Company's growth rate, shortfalls in anticipated revenues,
increases in anticipated expenses, increases in the number of PSINet
subscribers acquired or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
would require the Company to raise additional capital from public or private
equity or debt sources in order to finance operating losses, anticipated growth
and contemplated capital expenditures.  If such sources of financing are
insufficient or unavailable, the Company will be required to modify its growth
and operating plans in accordance with the extent of available funding and
attempt to attain profitability in its existing markets (including those
accessible pursuant to the Services Agreement).  The Company may need to raise
additional funds in order to take advantage of unanticipated opportunities,
such as acquisitions of complementary businesses or the development of new
products, or otherwise respond to unanticipated competitive pressures.  There
can be no assurance that the Company will be able to raise any such capital on
terms acceptable to the Company or at all.






<PAGE>   20



                                  P A R T  II

                               OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits

         10.   Reseller Agreement, dated as of October 14, 1996, by and between
               MindSpring Enterprises, Inc. and Monorail Inc.

         11.  Statement Re:  Computation of loss per common share

         27.  Financial Data Schedule

    (b)  Report on Form 8-K


    On August 23, 1996, the Company filed a Current Report on Form 8-K/A (the
"Form 8-K/A"), amending its Current Report on Form 8-K dated June 28, 1996.
The Form 8-K/A reported that, on August 23, 1993, the Company had entered into
Amendment No. 1 to the Asset Purchase Agreement and the Network Services
Agreement, dated as of June 28, 1996, with PSINet Inc., pursuant to which the
Company amended certain terms of the Purchase Agreement and the Services
Agreement.  In addition, in connection with the Acquisition the Form 8-K/A
included Financial Statements as of December 31, 1994 and 1995, and June 30,
1996 (unaudited) of PSINet Inc. -- Consumer Internet Access Services in the
United States, and Financial Statements as of December 31, 1994 of PSINet
Pipeline New York, Inc.





<PAGE>   21



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.





                                            MINDSPRING ENTERPRISES, INC.
                                            -----------------------------
                                            (Registrant)
                                 
                                 
                                 
                                 
                                 
Date:  November 14, 1996          By:  /s/ Michael S. McQuary
                                       ----------------------
                                           Michael S. McQuary
                                           President and 
                                           Chief Operating Officer
                                 
                                 
                                 
                                 
Date:  November 14, 1996          By:  /s/ Michael G. Misikoff
                                       -----------------------
                                           Michael G. Misikoff
                                           Vice President, and Chief Financial
                                           Officer
                                 
                                 




<PAGE>   22



                                    INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  Exhibit Number                     Exhibit Description                     Sequentially Numbered
  --------------                     -------------------                     ---------------------
                                                                                      Page
                                                                                      ----

       <S>         <C>
       10.         Reseller Agreement, dated as of October 14, 1996, by
                   and between MindSpring Enterprises, Inc. and Monorail
                   Inc.

       11.         Statement Re:  Computation of loss per common share

       27.         Financial Data Schedule
</TABLE>