AMERICA ONLINE INC, 10-Q/A, 2000-05-17

AMERICA ONLINE INC
10-Q/A, 2000-05-17
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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FORM 10-Q/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

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

For the quarterly period ended: March 31, 2000

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

For the transition period from to

Commission File Number:

001-12143

America Online, Inc.

(Exact name of registrant as specified in its charter)

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

22000 AOL Way, Dulles, Virginia 20166-9323

(Address of principal executive offices and zip code)

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

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

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

Yes X No

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

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

<PAGE>

AMERICA ONLINE, INC.

INDEX

Page

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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

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

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

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

Notes to Condensed Consolidated Financial Statements 7

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk 20

PART II. OTHER INFORMATION 22

Item 1. Legal Proceedings 22

Item 2. Changes in Securities and Use of Proceeds 22

Item 5. Other Information 22

Item 6. Exhibits and Reports on Form 8-K (as amended May 17, 2000
to reflect the revised Report of Independent Auditors from
Ernst & Young LLP in Exhibit 99) 38

Signatures 39

AMERICA ONLINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

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

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

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

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

See accompanying notes.
</TABLE>

AMERICA ONLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in millions, except per share data)

(Unaudited)

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

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

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

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

See accompanying notes.
</TABLE>

<PAGE>

AMERICA ONLINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

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

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

Cash flows from investing activities:

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

Cash flows from financing activities:

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

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

See accompanying notes.
</TABLE>

AMERICA ONLINE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Amounts in millions, except share data)

(Unaudited)

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

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

See accompanying notes.
</TABLE>

<PAGE>

AMERICA ONLINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements,
which include the accounts of America Online, Inc. (the "Company" or "America
Online") and its wholly and majority owned subsidiaries, have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring accruals considered necessary
for a fair presentation, have been included in the accompanying unaudited
financial statements. All significant intercompany transactions and balances
have been eliminated in consolidation. Operating results for the three and nine
months ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the full year ending June 30, 2000. For further information,
refer to the consolidated financial statements and notes thereto, incorporated
in Part II, Item 5 of this Form 10-Q, for the fiscal year ended June 30, 1999,
which restate and supersede the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.

Note 2. Summary of Significant Accounting Policies

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

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

Beginning in fiscal 1998, the Company adopted Statement of Position
97-2 "Software Revenue Recognition" as amended by Statement of Position 98-4.
The effect of adoption did not have a material impact on the Company's results
of operations. The Company recognizes the revenue allocable to software licenses
upon delivery of the software product to the end-user, unless the fee is not
fixed or determinable or collectibility is not probable. In software
arrangements that include more than one element, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables determined based on vendor-specific objective evidence
("VSOE"). The Company determines VSOE based on an established price list
published by management having the relevant authority, which reflects the prices
at which those elements are sold separately to third parties.

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

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

The Company has classified all debt and equity securities for which
there is a determinable fair market value and there are no restrictions on the
Company's ability to sell within the next 12 months as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity net of
applicable income taxes. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis.

Note 3. Earnings Per Share

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

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

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

Diluted earnings per share:

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

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

Note 4. Comprehensive Income

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

Note 5. Merger and Restructuring Charges

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

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

o Approximately $15 million of direct costs primarily related to the
mergers of MovieFone, Inc. ("MovieFone"), Spinner Networks
Incorporated ("Spinner") and Nullsoft, Inc. ("Nullsoft"). These
charges primarily consisted of investment banker fees, severance
and other personnel costs, fees for legal and accounting services
and other expenses directly related to the transaction.

o Approximately $78 million of direct costs primarily related to the
mergers of Netscape Communications Corporation ("Netscape") and
When, Inc. and the Company's reorganization plans to integrate
Netscape's operations and build on the strengths of the Netscape
brand and capabilities. This charge primarily consisted of
investment banker fees, severance and other personnel costs
(related to the elimination of approximately 850 positions), fees
for legal and accounting services and other expenses directly
related to the transaction.

o Approximately $2 million in merger related costs in connection
with the merger of AtWeb, Inc. These expenses were primarily
associated with fees for investment banking, legal and accounting
services, severance costs and other related charges in connection
with the transaction.

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

<TABLE>

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

Note 6. Segment Information

Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Certain information is
disclosed, per SFAS No. 131, based on the way management organizes financial
information for making operating decisions and assessing performance. In
determining operating segments, the Company reviewed the current management
structure reporting to the chief operating decision-maker ("CODM") and analyzed
the reporting the CODM receives to allocate resources and measure performance.

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

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

The Interactive Properties Group oversees ICQ, Digital City, MovieFone,
Digital Marketing Services (DMS), Spinner and Nullsoft, developer of the Winamp
and SHOUTcast brands. This group is responsible for building new revenue streams
by seeking out opportunities to build or acquire branded properties that operate
across multiple services or platforms.

The AOL International Group oversees the AOL, CompuServe and Netscape
Online services outside of the U.S. The AOL International Group operates the
AOL, CompuServe and Netscape Online brands in Europe with its joint venture
partner Bertelsmann AG; AOL Canada with its joint venture partner Royal Bank of
Canada; AOL Japan with its joint venture partners Mitsui and Nikkei; AOL Latin
America with its joint venture partner the Cisneros Group; AOL Hong Kong with
China Internet Corporation and its affiliate, China.com Corporation; and AOL in
Australia with its joint venture partner AAPT Limited.

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

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

The Interactive Services Group and the Netscape Enterprise Group are
the only two reportable segments. The results of the Interactive Properties
Group and the AOL International Group have been combined in the "other segments"
row shown below. Prior period information has been restated to conform to the
current presentation. There are no intersegment revenues between the four
operating segments. Shared support service functions such as human resources,
facilities management and other infrastructure support groups are allocated
based on usage or headcount, where practical, to the four operating segments.
Charges that cannot be allocated are reported as general & administrative costs
and are not allocated to the segments. Special charges determined to be
significant are reported separately in the Condensed Consolidated Statements of
Operations and are not assigned or allocated to the segments. All other
accounting policies are applied consistently to the segments, where applicable.

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

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

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

Income (loss) from operations:

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

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

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

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

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

Note 7. Notes Payable

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

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

Note 8. Subsequent Events

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

Note 9. Legal Proceedings

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

The Department of Labor ("DOL") is investigating the applicability of
the Fair Labor Standards Act ("FLSA") to the Company's Community Leader program.
The Company believes the Community Leader program reflects industry practices,
that the Community Leaders are volunteers, not employees, and that the Company's
actions comply with the law. The Company is cooperating with the DOL, but is
unable to predict the outcome of the DOL's investigation and cannot reasonably
estimate a range of possible loss given the current status of the DOL's
investigation. Former volunteers have sued the Company on behalf of an alleged
class consisting of current and former volunteers, alleging violations of the
FLSA and comparable state statutes. The Company believes the claims have no
merit and intends to defend them vigorously. The Company cannot predict the
outcome of the claims or whether other former or current volunteers will file
additional actions, nor can the Company reasonably estimate a range of possible
loss given the current status of the litigation.

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

Note 10. Business Developments

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

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

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

Note 11. Recent Pronouncements

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

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

Note 12. Accounting Adjustment

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Founded in 1985, America Online, Inc., (the "Company") based in Dulles,
Virginia, is the world's leader in interactive services, Web brands, Internet
technologies and electronic commerce services. The Company operates two
worldwide subscription based Internet online services, the AOL service, with
more than 22 million members, and the CompuServe service, with more than 2.7
million members; several leading Internet brands including ICQ, AOL Instant
Messenger and Digital City, Inc.; the Netscape Netcenter and AOL.COM Internet
portals; the Netscape Communicator client software, including the Netscape
Navigator browser; AOL MovieFone, the nation's number one movie listing guide
and ticketing service; and Spinner and Nullsoft, leaders in Internet music.
Through its strategic alliance with Sun Microsystems, Inc., the Company also
develops and offers easy-to-deploy, end-to-end electronic commerce and
enterprise solutions for companies operating in and doing business on the
Internet.

Consolidated Results of Operations

Revenues

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

<TABLE>

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

</TABLE>

Subscription Services Revenues

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

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

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

Advertising, Commerce and Other Revenues

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

<TABLE>

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

Advertising and electronic

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

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

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

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

Enterprise Solutions Revenues

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

Costs and Expenses

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

<TABLE>

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

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

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

Cost of Revenues

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

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

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

Sales and Marketing

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

Product Development

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

General and Administrative

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

Amortization of Goodwill and Other Intangible Assets

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

Other Income, Net

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

Provision for Income Taxes

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

Segment Results of Operations

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

<TABLE>

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

Income (loss) from operations:

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

The Company defines EBITDA (as adjusted for one-time items) as net
income plus: (1) provision/(benefit) for income taxes, (2) interest (income) and
expense, (3) depreciation and amortization and (4) special one-time
charges/(gains). EBITDA is presented and discussed because the Company considers
EBITDA an important indicator of the operational strength and performance of its
business including the ability to provide cash flows to service debt and fund
capital expenditures. EBITDA, however, should not be considered an alternative
to operating or net income as an indicator of the performance of the Company, or
as an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with accounting principles
generally accepted in the United States. In addition, EBITDA as defined herein
may not be comparable to similarly titled measures reported by other companies.

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

Forward-Looking Statements

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

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

Item 5. Other Information

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

Attached to this report as Exhibit 99 (as amended May 17, 2000 to reflect
the revised Report of Independent Auditors from Ernst & Young LLP in Exhibit 99)
are financial statements of AOL for the three years in the period ended June 30,
1999, of which the year ended June 30, 1997 has been restated to reflect the
SEC's findings, as disclosed in Note 3 to the financial statements. The
financial statements, which are incorporated herein by reference, restate and
supersede the financial statements contained in AOL's Annual Report on Form 10-K
for the year ended June 30, 1999.

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

<TABLE>

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

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

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

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

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

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

(3) On October 29, 1996, AOL announced that as of September 30, 1996, it would
write off the entire amount of certain advertising costs ("DMAC") it had
previously capitalized. AOL stated that the write-off was necessary to
reflect changes in its evolving business model, including reduced reliance
on subscriber's fees as the company developed other revenue sources. AOL
had responded to the competitive environment by adopting an unlimited-use
pricing plan and, by writing off DMAC, acknowledged it could not rely on
its revenue history under a different pricing model as support for the
recoverability of DMAC. The SEC has recently entered findings regarding its
views of AOL's capitalization of DMAC between July 1, 1994 and October 29,
1996. The SEC has found that AOL could not reliably forecast future
customer behavorial patterns with the requisite level of certainty
necessary to justify the capitalization of these advertising costs because
of the volatile nature of the Internet marketplace during that time period.
AOL has consented to the entry of an order making those findings, but
neither admits nor denies any of the SEC's allegations or findings in the
order. As a result of the SEC's findings, AOL has agreed to a restatement
of its financial statements for the years ended June 30, 1995, 1996 and
1997, which has been reflected in the above table. The impact of the
restatement is as follows:

<TABLE>

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

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

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

Overview

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

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

Interactive Online Services Business

The Interactive Services Group

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

The Interactive Properties Group

The Interactive Properties Group operates ICQ, Digital City, MovieFone,
Direct Marketing Services ("DMS"), Spinner Networks Incorporated and Nullsoft,
Inc., developer of the Winamp and SHOUTcast brands. This group is responsible
for building new revenue streams by seeking out opportunities to build or
acquire branded properties that operate across multiple services or platforms.

The AOL International Group

The AOL International Group oversees the AOL and CompuServe services
outside of the U.S., as well as the recently announced Netscape Online service.
The AOL International Group operates the AOL and CompuServe brands in Europe
with its joint venture partner Bertelsmann AG; AOL Canada, a wholly-owned
subsidiary of America Online, Inc.; AOL Japan, with its joint venture partners
Mitsui and Nikkei; and AOL in Australia with Bertelsmann. America Online plans
to launch services in Hong Kong with China Internet Corporation and in Latin
America with the Cisneros Group.

Netscape Enterprise Solution Business

The Netscape Enterprise Group

The Netscape Enterprise Group serves Netscape's enterprise customers and
contributes to America Online's part of the strategic alliance with Sun. In
combination with dedicated resources from Sun, the Netscape Enterprise Group
delivers easy-to-deploy, end-to-end solutions to help business partners and
other companies put their businesses online.

Competition

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

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

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

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

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

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

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

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

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

Consolidated Results of Operations

Revenues

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

<TABLE>

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

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

Subscription Services Revenues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Advertising, Commerce and Other Revenues

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

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

<TABLE>

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

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

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

Enterprise Solutions Revenues

The Netscape Enterprise Solutions business generates revenues that consist
principally of product licensing fees and fees from technical support,
consulting and training services. The Netscape Enterprise Group focuses on
providing businesses a range of software products, technical support, consulting
and training services. These products and services enable businesses and users
to share information, manage networks and facilitate electronic commerce on the
Internet. In November 1998, the Company entered into a strategic alliance with
Sun Microsystems, Inc. ("Sun"), a leader in network computing products and
services, to accelerate the growth of electronic commerce. The strategic
alliance provides that, over a three year period, the Company will develop and
market, together with Sun, client software and network application and server
software for electronic commerce, extended communities and connectivity,
including software based in part on the Netscape code base, on Sun code and
technology and on certain America Online services features, to business
enterprises.

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

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

Costs and Expenses

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

<TABLE>

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

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

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

Cost of Revenues

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

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

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

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

Sales and Marketing

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

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

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

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

Product Development

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

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

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

General and Administrative

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

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

Amortization of Goodwill and Other Intangible Assets

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

Acquired In-Process Research and Development

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

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

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

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

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

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

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

Merger, Restructuring and Contract Termination Charges

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

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

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

o In connection with a restructuring plan adopted in the third quarter
of fiscal 1998, the Company recorded a $35 million restructuring
charge associated with the restructuring of its AOL Studios brand
group. The restructuring included the exiting of certain business
activities, the termination of approximately 160 employees and the
shutdown of certain subsidiaries and facilities.
o At the end of the second and beginning of the third quarters of fiscal
1998, the Company recorded a $35 million restructuring charge related
to the implementation of certain restructuring actions mainly related
to the Enterprise Solution business. These actions were aimed at
reducing its cost structure, improving its competitiveness and
restoring sustainable profitability. The restructuring plan resulted
from decreased demand for certain Enterprise products and the adoption
of a new strategic direction. The restructuring included a reduction
in the workforce (approximately 400 employees), the closure of certain
facilities, the write-off of non-performing operating assets and
third-party royalty payment obligations relating to canceled
contracts.
o In the fiscal year ended 1998, the Company recognized merger costs of
$6 million related to the acquisition of Kiva Software Corporation,
consisting mainly of investment banking, legal and accounting
services.
o In connection with a restructuring plan adopted in the second quarter
of fiscal 1997, the Company recorded a $49 million restructuring
charge associated with the Company's change in business model, the
reorganization of the Company into three operating units, the
termination of approximately 300 employees and the shutdown of certain
operating divisions and subsidiaries. As of the first quarter of
fiscal 1998, substantially all of the restructuring activities had
been completed and the Company reversed $1 million of the original
restructuring accrual in the first quarter of fiscal 1998.

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

o In connection with a restructuring plan adopted in the second quarter
of fiscal 1997, the Company recorded a $49 million restructuring
charge associated with the Company's change in business model, the
reorganization of the Company into three operating units, the
termination of approximately 300 employees and the shutdown of certain
operating divisions and subsidiaries.
o In the fourth quarter of fiscal 1997, the Company recorded a contract
termination charge of $24 million, which consists of unconditional
payments associated with terminating certain information provider
contracts, which became uneconomic as a result of the Company's
introduction of flat-rate pricing in December 1996.

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

Settlement Charges

In fiscal 1998, the Company recorded a net settlement charge of $18 million
in connection with the settlement of the Orman v. America Online, Inc. class
action lawsuit filed in U.S. District Court for the Eastern District of Virginia
alleging violations of federal securities laws between August 1995 and October
1996. Included in the net settlement charge is an estimate of $17 million in
insurance receipts.

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

Other Income, net

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

(Provision) Benefit for Income Taxes

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

Segment Results of Operations

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

A summary of the segment financial information is as follows:

<TABLE>

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

Revenues:
<S> <C> <C> <C>
Interactive Online Services................. $4,321 $2,726 $1,786
Enterprise Solutions........................ 456 365 411
------------ ------------ ------------
Total revenues.......................... $4,777 $3,091 $2,197

Income (loss) from operations:

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

(1) In fiscal 1999, Enterprise Solutions and Interactive Online Services
include $5 million and $60 million, respectively, of goodwill and other
intangible assets amortization.

(2) Other consists of all special items; merger, restructuring, contract
termination, acquired in-process research and development and settlement
charges.

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

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

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

Liquidity and Capital Resources

The Company is currently financing its operations primarily through cash
generated from operations. During fiscal 1999, the Company generated more than
$1 billion in cash from operations. In addition, the Company has generated cash
from the sale of its capital stock, the sale of its convertible notes as well as
the sale of marketable securities it held. The Company has financed its
investments in telecommunications equipment principally through leasing. Net
cash provided by operating activities was $1,099 million, $437 million and $131
million in fiscal 1999, 1998 and 1997, respectively, and increased primarily due
to the Company's increase in net income. Net cash used in investing activities
was $1,776 million, $531 million and $367 million in fiscal 1999, fiscal 1998
and fiscal 1997, respectively. The increase in cash used in investing activities
is mainly due to the Company's $1.5 billion investment in a General Motors
equity security related to the strategic alliance the Company entered with
Hughes Electronics Corporation ("Hughes"). For additional information regarding
this investment, refer to Note 8 of the Notes to the Consolidated Financial
Statements. The increase in cash used in investing activities was offset by net
proceeds of approximately $600 million related to the sale of Excite, Inc.
investments during fiscal 1999. Net cash provided by financing activities was
$887 million, $580 million and $250 million in fiscal 1999, fiscal 1998 and
fiscal 1997, respectively. Included in financing activities for the fiscal 1999,
were $550 million in aggregate net proceeds from a public stock offering of its
common stock.

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

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

During July 1998, the Company improved its cash and working capital
balances as a result of a public offering of common stock. The Company sold
43,120,000 shares of common stock and raised a total of $550 million in new
equity which was used to fund general corporate purposes. In November 1997, the
Company sold $350 million of 4% Convertible Subordinated Notes due November 15,
2002 (the "Notes"). The Notes are convertible into the Company's common stock at
a conversion rate of 153.27504 shares of common stock for each $1,000 principal
amount of the Notes (equivalent to a conversion price of $6.52422 per share),
subject to adjustment in certain events. Interest on the Notes is payable
semiannually on May 15 and November 15 of each year, commencing on May 15, 1998.
The Notes may be redeemed at the option of the Company on or after November 14,
2000, in whole or in part, at the redemption prices set forth in the Notes.

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

In January 1998, the Company consummated a Purchase and Sale Agreement (the
"Purchase and Sale") by and among the Company, ANS Communications, Inc. ("ANS"),
a then wholly-owned subsidiary of the Company, and MCI WorldCom, Inc.
("WorldCom") pursuant to which the Company transferred to WorldCom all of the
issued and outstanding capital stock of ANS in exchange for the online services
business of CompuServe Corporation ("CompuServe"), which was acquired by MCI
WorldCom shortly before the consummation of the Purchase and Sale, and $147
million in cash (excluding $15 million in cash received as part of the
CompuServe online services business and after purchase price adjustments made at
closing). Immediately after the consummation of the Purchase and Sale, the
Company's European partner, Bertelsmann AG, paid $75 million to the Company for
a 50% interest in a newly created joint venture to operate the CompuServe
European online service. Each company invested an additional $25 million in cash
in this joint venture. The Company generated $207 million in net cash as a
result of the aforementioned transactions.

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

In May 1996, the Company entered into a joint venture with Mitsui & Co.,
("Mitsui") and Nihon Keizai Shimbun, Inc. ("Nikkei") to offer interactive online
services in Japan. In connection with the agreement, the Company received
approximately $28 million through the sale of convertible preferred stock to
Mitsui. The preferred stock had an aggregate liquidation preference of
approximately $28 million and accrued dividends at a rate of 4% per annum.
Accrued dividends could be paid in the form of additional shares of preferred
stock. During May 1998, the preferred stock, together with accrued but unpaid
dividends, was converted into 3,136,000 shares of common stock based on the fair
market value of common stock at the time of conversion.

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

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

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

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

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

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

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

Seasonality

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

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

Year 2000 Compliance

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

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

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

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

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

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

Inflation

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

Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 23 Consent of Ernst & Young LLP

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

(b) Reports on Form 8-K

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

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

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

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

<PAGE>

AMERICA ONLINE, INC.

SIGNATURES

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

AMERICA ONLINE, INC.

DATE: May 17, 2000 SIGNATURE:/s/Stephen M. Case
Stephen M. Case
Chairman of the Board and Chief
Executive Officer

DATE: May 17, 2000 SIGNATURE:/s/J. Michael Kelly
J. Michael Kelly
Senior Vice President and Chief
Financial Officer

<PAGE>

Exhibit 23 Consent of Ernst & Young LLP

Consent Of Independent Auditors

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

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

/s/ Ernst & Young LLP

McLean, Virginia
May 12, 2000

<PAGE>

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

AMERICA ONLINE, INC.

CONSOLIDATED BALANCE SHEETS

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

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

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

See accompanying notes.
</TABLE>

AMERICA ONLINE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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

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

See accompanying notes.
</TABLE>

AMERICA ONLINE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

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

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

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

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

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

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

See accompanying notes.
</TABLE>

AMERICA ONLINE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

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

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

Cash flows from investing activities:

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

Cash flows from financing activities:

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

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

See accompanying notes.
</TABLE>

<PAGE>

AMERICA ONLINE, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

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

Note 2. Summary of Significant Accounting Policies

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

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

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

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

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

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

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

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

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

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

Capitalized product development costs consist of the following:

<TABLE>

Year ended
June 30,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note 3. Restatement and other adjustments

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

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

<TABLE>

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

Note 4. Merger/Restructuring Charges

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

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

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

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

<TABLE>

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

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

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

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

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

Note 5. Contract Termination Charge

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

Note 6. Settlement Charges

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

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

Note 7. Earnings (Loss) Per Share

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

<TABLE>

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

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

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

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

Note 8. Business Developments

Purchase Transactions

Acquisition of Mirabilis, Ltd.

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

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

Acquisition of CompuServe Online Services Business

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

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

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

Other Purchase Transactions

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

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

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

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

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

Pooling Transactions

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

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

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

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

Other Business Developments

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

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

Note 9. Segment Information

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

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

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

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

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

A summary of the segment financial information is as follows:

<TABLE>

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

Income (loss) from operations:

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

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

Note 10. Property and Equipment

Property and equipment consist of the following:

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

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

Note 11. Commitments and Contingencies

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

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

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

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

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

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

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

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

Note 12. Notes Payable

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

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

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

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

Note 13. Other Income, Net

The following table summarizes the components of other income:

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

Note 14. Income Taxes

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

<TABLE>

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

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

<TABLE>

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

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

</TABLE>

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

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

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

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

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

Long term deferred tax assets:

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

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

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

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

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

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

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

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

Note 15. Capital Accounts

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

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

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

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

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

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

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

Note 16. Stock Plans

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

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

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

<TABLE>

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

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

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

Note 17. Employee Benefit Plan

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

Note 18. Quarterly Information (unaudited)

<TABLE>

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

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

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

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

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

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

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

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

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

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
America Online, Inc.

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

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

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

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

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

<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,655
<SECURITIES> 482
<RECEIVABLES> 742
<ALLOWANCES> 74
<INVENTORY> 26
<CURRENT-ASSETS> 4,200
<PP&E> 1,492
<DEPRECIATION> 501
<TOTAL-ASSETS> 10,789
<CURRENT-LIABILITIES> 2,326
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 6,396
<TOTAL-LIABILITY-AND-EQUITY> 10,789
<SALES> 4,924
<TOTAL-REVENUES> 4,924
<CGS> 2,558
<TOTAL-COSTS> 3,964
<OTHER-EXPENSES> 16
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 1,493
<INCOME-TAX> 583
<INCOME-CONTINUING> 910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 910
<EPS-BASIC> .40
<EPS-DILUTED> .35

</TABLE>