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Earnings Press Release

America Online Reports FY97 Q3 Net Income of $2.6 Million

Revenues Up 46% Over Previous Year to Record $456.2 Million

Non-Subscription Revenues Nearly Triple to $74.7 Million

DULLES, VA, May 5, 1997 -- America Online, Inc. today reported net income of $2.6 million, or $0.02 per share, for the three months ended March 31, 1997, the first full quarter since the Company's introduction of flat-rate pricing.

Third quarter revenues climbed 46 percent over the previous year to a record $456.2 million, with revenues from sources other than subscriptions nearly tripling to $74.7 million. Advertising and electronic commerce revenues climbed 37 percent from the December quarter to $60.7 million while, a year ago, they were approximately $15 million.

In October 1996, the Company significantly changed its business model, announcing unlimited use of AOL for a $19.95 monthly fee, and also discontinued its practice of amortizing subscriber acquisition costs over 24 months to begin expensing them as incurred. In the prior year period, which included approximately $88.2 million in net deferred subscriber acquisition costs, the Company reported net income of $15.1 million, or $0.14 per share, on revenues of $312.3 million. Despite incurring a variety of unusual costs related to the introduction of flat-rate pricing, the Company earned a profit in the latest quarter primarily through lower marketing expenses.

As the Company announced last January, it held membership relatively flat during the quarter, ending at 8,036,000 subscribers, while it worked to improve access for its existing members through accelerated network expansion. The Company said it had recently resumed marketing on a limited basis and plans to continue carefully balancing demand for the service with its ability to keep improving access.

Steve Case, Chairman and CEO, said: "We've made good progress in laying a solid foundation for sustained profitability based on our new business model of multiple revenue streams. We are also pleased to have rapidly expanded our network to meet the extraordinary level of demand for AOL. As promised, we have worked around the clock to serve our existing members first and our top priority was, and still is, improving access. At the same time, we have achieved profitability a bit ahead of schedule."

Mr. Case added, "Starting this summer, AOL will take a quantum leap forward with the roll-out of AOL 4.0 -- our next-generation software. AOL 4.0 will enrich our members' interactive experiences and reinforce our position as the industry pacesetter and value leader. We anticipate continued strong mass market demand for AOL and have an aggressive plan to keep building out and upgrading our system."

With its introduction of flat-rate pricing plans, the Company reported that members' usage of the service soared during the quarter to an average of 124 million hours per month, compared to an average of 52 million hours monthly just before the conversion. More than 80 percent of its members are now on the standard $19.95 flat-rate plan, with others using plans priced as low as $4.95 for the first three hours.

America Online said that member cancellations, as expected, increased in January because of the change to flat-rate pricing and access issues. Importantly, member retention improved steadily as the quarter progressed, with both trial member conversions and retention rates for April hitting their highest levels in the past year.

AOL's cash position improved to $197.8 million at March 31, 1997 from $130.2 million at December 31, 1996. As of March 31, the Company also had $211.2 million in deferred revenue, up $115.8 million from $95.4 million three months earlier, primarily reflecting advance subscription payments and its marketing agreement with Tel-Save Holdings, Inc. One year ago, the Company reported $33.5 million in deferred revenue.

The Company's current $350 million system expansion program, combined with its increased use of alternative networks, has resulted in a substantial increase in capacity during the first three months of calendar 1997. During this time, America Online:

* Installed more than 75,000 new modems in AOLnet and leased additional prime time capacity from outside suppliers and boosted support for the "bring-your-own-access" option;

* Increased the number of daily sessions by 3 million in the quarter to more than 12 million;

* Expanded system capacity to handle more than 335,000 simultaneous users -- an increase of 85,000;

* Increased its e-mail capability to handle up to 13 million pieces of mail daily -- to approximately 25 million recipients -- making it the largest commercial e-mail system in the world;

* Boosted capacity to serve Web pages, now totaling more than 300 million Web hits daily;

* Started construction of its third data center, a 180,000 square-foot facility due to open in Fall 1997, that will double the Company's host/server system capacity.


Bob Pittman, President and CEO of AOL Networks, said: "A key ingredient in AOL's success is its ease-of-use and convenience. With our introduction of AOL 4.0 and other exciting products like AOL Driveway, our 'broadcast' product, and Personal Publisher 3, an incredibly easy way for anyone to create a web page, we will be making the Internet more accessible and engaging than ever for the mass market."

Mr. Pittman added: "Advertisers, marketers and independent content providers are increasingly recognizing the power of the AOL community. During the past quarter, we significantly enhanced our programming through agreements with leading news and entertainment providers like ABC News, the New York Times, and Hachette-Filipacchi magazines, as well as leading retailers like Barnes & Noble. And, starting this fall, our agreement with Tel-Save will give AOL members the opportunity to get long-distance telephone service with unmatched price and convenience. We also extended our global reach through continued expansion in Europe and Canada and the April launch of AOL Japan."

Starting this summer, AOL Networks said it would introduce AOL 4.0 -- the service's next-generation software -- which will deliver a wide array of new features, advanced technologies and exciting enhancements that will make exploring AOL and the Internet faster and more interactive. Among its highlights are:

* Engaging new multi-media technology that will make AOL content come alive with rich animation, sound and streaming pictures plus new magazine-style layouts for online articles;

* Enhanced messaging, including pictures embedded in e-mail and instant messages and rich text support for chat rooms;

* Easier navigation and ease-of-use improvements like the same combined tool bar for both AOL and the Web and the ability to switch screennames on the fly.

During this quarter, Networks concluded a number of key partnership and programming agreements including:

* Its advertising and marketing agreement with Tel-Save Holdings to offer competitively priced long-distance service to AOL members under which the Company will share no less than equally in profits generated from providing the new service to its members. AOL will also receive up to 12 million Tel-Save warrants based on the ultimate response rate, and has been paid $100 million as a non-refundable advance against future revenues and various deliverables;

* Barnes & Noble became the exclusive bookseller in AOL's Marketplace, offering its more than 1 million titles to AOL members at discounts of 20 to 30 percent;

* AOL and ABC News dramatically expanded their relationship with AOL members now having access to a customized version of the new ABC, which will provide up-to-the-minute news from the world's leading broadcast news network;

* AOL also broadened its relationships with leading partners including The New York Times -- extending AOL's exclusive rights to a range of content, including original programming, and solidifying The New York Times as AOL's premier newspaper service -- along with Hachette-Filipacchi, which expanded its relationship to provide original online programming with a variety of America's most popular magazines, including George, ELLE, Premiere, and Car & Driver.

During the last quarter, AOL's content led all categories in growth. Among the leading gainers in content usage were the Personal Finance and Games channels, while total Internet usage remained relatively constant at 20 percent of hours, and e-mail volume increased from 7.5 million to 13 million pieces daily.

Despite it being a seasonally slow period for advertising, AOL signed 27 new advertisers including Barnes & Noble, American Greetings and TRW, bringing to more than 180 its roster of clients, some 80 percent of whose advertising is focused exclusively on providing consumer products and services as opposed to technology.

The Company also made significant strides in expanding AOL globally with the April 15 launch of AOL Japan, a state-of-the-art service with a superior user interface, engaging content and a pricing structure significantly below that of current Japanese competitors. The Company passed 500,000 members in Europe, just 16 months after launching the service.


Ted Leonsis, President and CEO of AOL Studios, said: "AOL Studios continues to make progress toward its goal of being the leading Internet content programmer. As owner or partner in more than 35 separate titles and businesses, we are building enduring businesses that are redefining the nature and scope of online and Internet content."

Greenhouse Networks

During the last quarter, Greenhouse Networks continued to develop its strategy of building consumer brands for entertainment, sports, romance and women on AOL, the Internet and on other Web delivery platforms by acquiring LightSpeed Media of Culver City, CA, which will become the cornerstone of Greenhouse's new Entertainment network launching later this year. In addition, former NBC Programming Chief Brandon Tartikoff was appointed chairman of the new Entertainment network. Greenhouse also announced plans to license Firefly Network, Inc.'s profile management and advanced collaborative filtering technologies for its new consumer networks. Firefly's technology will enable Greenhouse brands to create powerful relationships with their customers and build communities by personalizing content, products and sites based on individual preferences.

Digital City, Inc.

The Digital City network, which currently consists of 14 online interactive cities including eight of the country's top 10 markets, made significant strides during the quarter to reinforce its position as the nation's leading provider of local interactive content and services. Digital City has recently entered into partnerships with technology and directory industry leaders such as Switchboard, Electric Classifieds, Accipiter, and R.H. Donnelley, as well as a strategic content relationship with Star Tribune Online in Minneapolis. Digital City and clothing giant The Gap recently signed an advertising agreement to introduce first-ever online fragrance "sampling."

ImagiNation Network, Inc.

ImagiNation Network Inc., a leading online games and entertainment company, has just acquired exclusive global rights to the first online multiplayer version of Tetris, the most popular electronic game in the world with more than 40 million copies sold. The multiplayer version of Tetris will be available to millions of online enthusiasts through ImagiNation's distribution partnerships with AOL and leading Internet service providers. ImagiNation Network also has acquired exclusive rights to the first online version of SET, an interactive, action puzzle game for all ages, which will be offered online later this year.

In addition, ImagiNation Network has entered into agreements with AOL Networks and Microsoft Corporation to bring online gaming to millions of users by enhancing games development. ImagiNation will support DirectPlay technology and games, and Microsoft Corp. will distribute unique elements of ImagiNation's software development kit (SDK) as part of Microsoft's DirectX' 5.0 SDK.


"ANS is continuing to implement its plan to become a major worldwide provider of mission-critical, Internet-based managed network services," said Bruce Bond, ANS President and CEO. "Through the successful introduction of new services, the development of domestic and international alliances with other industry leaders, and the expansion of our executive management team, we are strengthening our reputation as a partner of choice in this market."

Highlights for the quarter include the announcement of a partnership with Bertelsmann AG, the world's second largest media company, to establish joint ventures throughout Europe for managed multimedia network services to the Global 1000. This is an extension of an already strong partnership between AOL and Bertelsmann, which began in March 1995 with the establishment of AOL Europe, a joint venture for which ANS provides the network infrastructure.

Expanding on its strategy to provide complete solutions to its customers, ANS announced alliances with Hewlett-Packard Company and Connect, Inc. to provide Web-hosting services for high-end, turnkey electronic commerce offerings. Also introduced was the new ANS SecureConnect Service, which addresses the critical business need for cost-effective, managed and secure Internet access by combining a dedicated T1 connection with the National Computer Security Association (NCSA)-certified ANS InterLock Security Service at a very competitive price.

Additionally, ANS has appointed Allen T. Preece to the position of Chief Financial Officer. Mr. Preece joined ANS from Northern Telecom, where he most recently served as Vice President and Treasurer for the multi-billion dollar global telecommunications company.

America Online, Inc. (NYSE: AOL), based in Dulles, Virginia, is the world's leading Internet online service, with approximately 8 million members worldwide. AOL, founded in 1985, offers its subscribers a wide variety of services including electronic mail, conferencing, software, computing support, interactive magazines and newspapers and online classes, as well as easy access to services of the Internet. Personal computer owners can obtain America Online software at major retailers and bookstores, by calling 800/827-6364, or by downloading from http.//

This release contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations or beliefs and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. In particular, careful consideration should be given to cautionary statements made in the Company's reports filed with the Securities and Exchange Commission.

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