FOR IMMEDIATE RELEASE                                    2000-63

   SEC Sues America Online For Financial Reporting Violations;
           Settled Action Yields $3.5 Million Penalty

     Washington, DC, May 15, 2000 -- The Securities and Exchange
Commission today brought and settled civil and administrative
charges against America Online, Inc. (AOL) for financial
reporting violations in connection with its accounting for
certain advertising costs.  Without admitting or denying the
charges, AOL agreed to pay a $3,500,000 civil penalty and
consented to an administrative order prohibiting it from
violating certain federal securities laws in the future.  The
civil charges were filed in U.S. District Court for the District
of Columbia.

     SEC Director of Enforcement Richard H. Walker said, "This
action reflects the Commission's close scrutiny of accounting
practices in the technology industry to make certain that the
financial disclosure of companies in this area reflect present
reality, not hopes about the future."  This is the first time the
Commission has brought an enforcement action against a public
company for improper capitalization of advertising costs
associated with soliciting new customers.

     In its administrative cease-and-desist order, the Commission
found that AOL violated the reporting and books and records
provisions of the federal securities laws in connection with its
accounting for certain advertising costs during fiscal years 1995
and 1996.  During that period, AOL capitalized most of the costs
of acquiring new subscribers -- including the costs associated
with sending computer disks to potential customers -- and
reported those costs as an asset on its balance sheet, instead of
expensing them as incurred.  AOL reported profits for six of
eight quarters in fiscal years 1995 and 1996, rather than the
losses it would have reported had the costs been expensed as
incurred.  The advertising costs improperly capitalized on AOL's
balance sheet reached approximately $385 million by September 30,
1996, when AOL wrote them off in their entirety.

      Accounting rules do not allow a company to capitalize
"direct response advertising costs" unless it can demonstrate
from its past experience that future net revenues from customers
obtained through the advertising will exceed the amount of
capitalized costs.  (See Accounting Standards Executive Committee
Statement of Position 93-7 ("SOP 93-7")).  The Commission found
that AOL could not meet this requirement because the volatile and
unstable nature of the Internet marketplace precluded reliable
forecasts of future revenues.  Specifically, the Commission found
that AOL's business was characterized, during the relevant
period, by the following factors:
     
       ú    AOL was operating in a nascent business sector characterized
          by rapid technological change;
ú    AOL's business model was evolving;
ú    Extraordinarily rapid growth in AOL's customer base caused
significant changes to its customer demographics;
ú    AOL's customer retention rates were unpredictable;
ú    AOL's product pricing was subject to potential change;
ú    AOL could not reliably predict future costs of obtaining
revenues;
ú    AOL's competition was increasing; and
ú    AOL was experiencing negative cash flow.

     Due to these factors, according to the Commission's
findings, AOL did not have sufficient reliable evidence that its
capitalized advertising costs were recoverable to satisfy the
requirements of SOP 93-7.  AOL's financial statements as filed
with the Commission in quarterly reports on Form 10-Q and annual
reports on Form 10-K, from the quarter that began July 1, 1994
through the quarter beginning July 1, 1996 were consequently
rendered inaccurate by AOL's accounting treatment for direct
response advertising costs.

Contacts:

Richard H. Walker, Director of the Division of Enforcement,
202.942.4500
Thomas Newkirk, Associate Director, 202.942.4550
Richard Sauer, Assistant Director, 202.942.4777

                             #  #  #