**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K/A**

 

**x****                                ****ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

                                                **For the fiscal year ended December 31, 2006**

**OR**

**o****        ****      TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**

                              **For the transition periodfrom         to          **

**CommissionFile Number: 001-15605**

**EARTHLINK, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                  | ** ** | **58-2511877**                        |
|---------------------------------------------------------------|------------|---------------------------------------|
| (State of  incorporation)                                     |       | (I.R.S. Employer  Identification No.) |
| * *                                                      | * *   | * *                              |
| **1375  Peachtree St., Atlanta, Georgia 30309**               |
| (Address of  principal executive offices, including zip code) |
|                                                          |
| **(404)  815-0770**                                           |
| (Registrant’s  telephone number, including area code)    |

 

Securities registeredpursuant to Section 12(b) of the Act: None

 

Securities registeredpursuant to Section 12(g) of the Act: Common Stock, $.01 par value

 

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Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.     Yes x  No o

Indicate by checkmark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.     Yes o  No x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes x  No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulationof S-K is not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.    o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large acceleratedfiler  x      Accelerated filer  o       Non-accelerated filer  o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).     Yes o  No x

The aggregate marketvalue of the registrant’s outstanding common stock held by non-affiliates ofthe registrant on June 30, 2006 was $1,107.9 million.

 As ofFebruary 28, 2007, 123,214,658 shares of common stock were outstanding.

                Portionsof the Proxy Statement to be filed with the Securities and Exchange Commissionand to be used in connection with the Annual Meeting of Stockholders to be heldon May 1, 2007 are incorporated by reference in Part III of thisForm 10-K.

 

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**EXPLANATORYNOTE**

EarthLink,Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (“AmendmentNo. 1”) to its Annual Report on Form 10-K for the year ended December 31, 2006,which was originally filed on March 1, 2007 (the “Original Filing”), to amendItem 15, Exhibits and Financial Statement Schedules, in order to file Exhibit99.1, Consolidated Financial Statements of HELIO, Inc. and HELIO LLC.Pursuant to Rule 3-09 of Regulation S-X, the Company must file separatefinancial statements of HELIO, Inc. and HELIO LLC. In accordance with Rule3-09, the separate financial statements are being filed as an amendment to theCompany’s Annual Report on Form 10-K within 90 days after the end of theCompany’s fiscal year. The Company is also filing this Amendment No. 1 to amendItem 8, Financial Statements and Supplementary Data, in order to conform thesummarized balance sheet information of HELIO in Footnote 4, “Investments,” tothe financial statements filed in Exhibit 99.1. No other changes toItem 8 have been made.

Pursuantto Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), this Amendment No. 1 amends Items 8 and Item 15 in their entirety andcontains new certifications pursuant to Rules 13a-14 and 15d-14 under theExchange Act and Section 302 of the Sarbanes-Oxley Act of 2002.  Otherthan the inclusion of Exhibit 99.1, the conformity of summarized balance sheetinformation of HELIO in Footnote 4 to Exhibit 99.1 and the inclusion ofnew certifications pursuant to Rules 13a-14 and 15d-14 under the Exchange Actand Section 302 of the Sarbanes-Oxley Act of 2002, no other changes oramendments to the Original Filing are being made.

This Amendment No. 1 contains only the sections andexhibits to the Original Filing that are being amended, and those unaffectedparts or exhibits are not included herein.  This Amendment No. 1 continuesto speak as of the date of the Original Filing and the Company has not updatedthe disclosure contained herein to reflect events that have occurred since thedate of the Original Filing.  Accordingly, this Amendment No. 1 should beread in conjunction with the Company’s other filings, if any, made with theSecurities and Exchange Commission.

2

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**Item 8.**                        FinancialStatements And Supplementary Data. 

**EARTHLINK,INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                                                  | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Reports of Independent Registered  Public Accounting Firm                                                                                        |       | 64       |   |
| Consolidated Balance Sheets as of  December 31, 2005 and 2006                                                                               |       | 66       |   |
| Consolidated Statements of  Operations for the years ended December 31, 2004, 2005 and 2006                                                 |       | 67       |   |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss) for the years ended  December 31, 2004, 2005 and 2006 |       | 68       |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2004, 2005 and 2006                                                 |       | 69       |   |
| Notes  to Consolidated Financial Statements                                                                                                      |       | 70       |   |

 

63

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholders of EarthLink, Inc.

We have audited the accompanying consolidated balancesheets of EarthLink, Inc. as of December 31, 2005 and 2006, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income (loss), and cash flows for each of the three years in theperiod ended December 31, 2006. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of EarthLink, Inc. at December 31, 2005 and 2006,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles.

As discussed in Note 2 of the Notes to theConsolidated Financial Statements, in 2006 the Company adopted Statement ofFinancial Accounting Standards No. 123 (revised), *Share-Based Payment*.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of EarthLink, Inc.’sinternal control over financial reporting as of December 31, 2006, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated February 28, 2007 expressed an unqualified opinion thereon.
|                        | /s/ Ernst & Young  LLP |
|------------------------|---------------------------------|
| Atlanta, Georgia       |
| February 28, 2007 |

 

64

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ONINTERNAL CONTROL OVER FINANCIAL REPORTING**

The Board of Directors andStockholders of EarthLink, Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting, that EarthLink, Inc. maintainedeffective internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). EarthLink, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that EarthLink, Inc. maintained effective internal control overfinancial reporting as of December 31, 2006 is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, EarthLink, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2006 based on the COSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets asof December 31, 2005 and 2006, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cashflows for each of the three years in the period ended December 31, 2006 ofEarthLink, Inc. and our report dated February 28, 2007 expressed anunqualified opinion thereon.

|                         | /s/  Ernst & Young LLP |
|-------------------------|---------------------------------|
| Atlanta, Georgia        |
| February 28,  2007 |

 

65

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**EARTHLINK, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except per share data)**

| ** **                                                                                                                                                                                                                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                         | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                         |
| Current assets:                                                                                                                                                                                                                                    |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                         |       | $                     | 173,294    |   | $ | 158,369 |   |
| Investments in  marketable securities                                                                                                                                                                                                              |       | 207,845               |       | 214,947 |   |
| Accounts receivable, net  of allowance of $8,054 and $8,062 as of December 31, 2005 and 2006,  respectively                                                                                                                                   |       | 36,033                |       | 51,054 |   |
| Prepaid expenses                                                                                                                                                                                                                                   |       | 14,225                |       | 14,831 |   |
| Other current assets                                                                                                                                                                                                                               |       | 13,121                |       | 17,549 |   |
| Total current assets                                                                                                                                                                                                                               |       | 444,518               |       | 456,750 |   |
| Long-term investments in  marketable securities                                                                                                                                                                                                    |       | 40,980                |       | 21,460 |   |
| Property and equipment,  net                                                                                                                                                                                                                       |       | 73,177                |       | 96,620 |   |
| Investment in equity  affiliate                                                                                                                                                                                                                    |       | 67,143                |       | 61,743 |   |
| Investments in other  companies                                                                                                                                                                                                                    |       | 1,417                 |       | 59,325 |   |
| Purchased intangible  assets, net                                                                                                                                                                                                                  |       | 16,278                |       | 59,798 |   |
| Goodwill                                                                                                                                                                                                                                           |       | 101,125               |       | 202,277 |   |
| Other long-term assets                                                                                                                                                                                                                             |       | 4,511                 |       | 10,066 |   |
| Total assets                                                                                                                                                                                                                                       |       | $                     | 749,149    |   | $ | 968,039 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                     |
| Current liabilities:                                                                                                                                                                                                                               |       |                  |       |   |   |
| Trade accounts payable                                                                                                                                                                                                                             |       | $                     | 31,578     |   | $ | 41,298 |   |
| Accrued payroll and  related expenses                                                                                                                                                                                                              |       | 37,741                |       | 41,079 |   |
| Other accounts payable  and accrued liabilities                                                                                                                                                                                                    |       | 84,139                |       | 94,882 |   |
| Deferred revenue                                                                                                                                                                                                                                   |       | 58,359                |       | 53,511 |   |
| Total current  liabilities                                                                                                                                                                                                                         |       | 211,817               |       | 230,770 |   |
| Long-term debt                                                                                                                                                                                                                                     |       | —                |       | 258,750 |   |
| Other long-term  liabilities                                                                                                                                                                                                                       |       | 15,468                |       | 19,855 |   |
| Total liabilities                                                                                                                                                                                                                                  |       | 227,285               |       | 509,375 |   |
| Commitments and contingencies (See Note 14)                                                                                                                                                                                                        |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                         |       |                  |       |   |   |
| Convertible preferred  stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and  outstanding as of December 31, 2005 and 2006                                                                                              |       | —                |       | — |   |
| Common stock, $0.01 par  value, 300,000 shares authorized, 181,962 and 184,545 shares issued as of  December 31, 2005 and 2006, respectively, and 131,390 and 122,634 shares  outstanding as of December 31, 2005 and 2006, respectively |       | 1,820                 |       | 1,845 |   |
| Additional paid-in  capital                                                                                                                                                                                                                        |       | 1,997,906             |       | 2,016,578 |   |
| Warrants to purchase  common stock                                                                                                                                                                                                                 |       | 259                   |       | 259 |   |
| Accumulated deficit                                                                                                                                                                                                                                |       | (1,049,982            | )          | (1,044,995 | ) |
| Treasury stock, at cost,  50,572 and 61,911 shares, respectively, as of December 31, 2005 and 2006                                                                                                                                            |       | (422,619              | )          | (508,232 | ) |
| Unrealized losses on  investments                                                                                                                                                                                                                  |       | (653                  | )          | (6,791 | ) |
| Deferred compensation                                                                                                                                                                                                                              |       | (4,867                | )          | — |   |
| Total stockholders’  equity                                                                                                                                                                                                                   |       | 521,864               |       | 458,664 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                    |       | $                     | 749,149    |   | $ | 968,039 |   |

 

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

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**EARTHLINK, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ** **                                          | ** ** | **Year Ended December 31,**                         | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues                                            |       | $                                                                  | 1,382,202  |   | $ | 1,290,072 |   | $ | 1,301,267 |   |
| Operating costs  and expenses:                      |       |                                                               |       |   |   |   |   |
| Telecommunications service and equipment costs      |       | 431,162                                                            |       | 366,654 |   | 424,425 |   |
| Sales incentives                                    |       | 10,040                                                             |       | 8,973 |   | 10,916 |   |
| Total cost of revenues                              |       | 441,202                                                            |       | 375,627 |   | 435,341 |   |
| Sales and marketing                                 |       | 417,250                                                            |       | 389,522 |   | 389,079 |   |
| Operations and customer support                     |       | 255,192                                                            |       | 233,907 |   | 260,941 |   |
| General and administrative                          |       | 105,043                                                            |       | 112,173 |   | 128,479 |   |
| Amortization of intangible assets                   |       | 24,363                                                             |       | 12,267 |   | 11,902 |   |
| Facility exit and restructuring costs               |       | 28,394                                                             |       | 2,080 |   | (117 | ) |
| Total operating costs and expenses                  |       | 1,271,444                                                          |       | 1,125,576 |   | 1,225,625 |   |
| Income from operations                              |       | 110,758                                                            |       | 164,496 |   | 75,642 |   |
| Net losses of  equity affiliate                     |       | —                                                             |       | (15,608 | ) | (84,782 | ) |
| Gain (loss) on  investments in other companies, net |       | (1,420                                                             | )          | 2,877 |   | 377 |   |
| Interest income  and other, net                     |       | 6,131                                                              |       | 13,491 |   | 14,636 |   |
| Income before income taxes                          |       | 115,469                                                            |       | 165,256 |   | 5,873 |   |
| Provision for  income taxes                         |       | 4,460                                                              |       | 22,476 |   | 886 |   |
| Net income                                          |       | $                                                                  | 111,009    |   | $ | 142,780 |   | $ | 4,987 |   |
| Basic net income per share                          |       | $                                                                  | 0.72       |   | $ | 1.04 |   | $ | 0.04 |   |
| Diluted net  income per share                       |       | $                                                                  | 0.70       |   | $ | 1.02 |   | $ | 0.04 |   |
| Basic weighted average common shares outstanding    |       | 154,233                                                            |       | 137,080 |   | 128,790 |   |
| Diluted weighted average  common shares outstanding |       | 157,815                                                            |       | 139,950 |   | 130,583 |   |

 

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

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**EARTHLINK, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

| ** ** | ** ** | ** **              | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** ** | ** **              | ** ** | ** **          | ** ** | ** **  | ** ** | **Unrealized**          | ** ** | ** **   | ** ** | **Total**  | ** ** | **Total**              | ** ** |
|------------|------------|-------------------------|------------|-------------|------------|----------------|------------|--------------|------------|-------------------------|------------|---------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|------------|------------|------------------------|------------|
| ** ** | ** ** | ** **              | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | **Accumu-**             | ** ** | ** **          | ** ** | ** **  | ** ** | **Gains (Losses)** | ** ** | **Deferred** | ** ** | **Stock-** | ** ** | **Compre-**            | ** ** |
| ** ** | ** ** | **Common Stock**   | ** ** | **Paid-in** | ** ** | ** **     | ** ** | **lated**    | ** ** | **Treasury Stock** | ** ** | **on Invest-** | ** ** | **Compen-** | ** ** | **holders’**       | ** ** | **hensive**  | ** ** |
| ** ** | ** ** | **Shares**              | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Warrants** | ** ** | **Deficit**             | ** ** | **Shares**          | ** ** | **Amount**  | ** ** | **ments**               | ** ** | **sation**   | ** ** | **Equity** | ** ** | **Income (Loss)** | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |        |

| Balance as of December 31, 2003                                                                  |   | 176,410 |   |   | $      | 1,764  |   |   |      | $      | 1,949,105 |   |   |   | $      | 1,223      |   |    | $      | (1,303,771 | )      | (17,368 | )      | $      | (104,344 | )      |   | $      | (117   | )        |   |   | $       | (197    | )      |   | $ | 543,663 |   |   |   |   |   |
|-------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|--------|--------|--------|-----------|--------|-----------|--------|--------|--------|--------|------------|--------|---------|--------|------------|--------|---------|--------|--------|----------|--------|--------|--------|--------|----------|--------|--------|---------|---------|--------|--------|---|---------|--------|--------|--------|--------|--------|
| Issuance of common stock pursuant to exercise of  stock options and vesting of restricted stock units |   | 2,132   |   |   | 22     |   |   |   | 15,845    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 15,867   |   |   |    |    |   |
| Issuance of common stock pursuant to employee stock  purchase plan                                    |   | 223     |   |   | 2      |   |   |   | 1,694     |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 1,696    |   |   |    |    |   |
| Issuance of restricted stock units and phantom share  units                                           |   | —  |   |   | — |   |   |   | 4,564     |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | (4,431 | )      |   | 133      |   |   |    |    |   |
| Amortization of deferred compensation                                                                 |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | 633    |   |   | 633      |   |   |    |    |   |
| Repurchase of common stock                                                                            |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | (12,677 | )      | (125,712   | )      |    | — |   |     |   | — |   |   | (125,712 | )      |   |    |    |   |
| Unrealized holding gains on certain investments                                                       |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | 318    |   |     |   | — |   |   | 318      |   |   | $       | 318     |   |   |
| Net income                                                                                            |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | 111,009    |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 111,009  |   |   | 111,009 |    |   |
| Total comprehensive income                                                                            |   |    |   |   |   |   |   |   |      |   |      |   |   |   |   |       |   |    |   |       |   |    |   |   |     |   |   |   |   |     |   |   | $       | 111,327 |   |   |
| Balance as of December 31, 2004                                                                  |   | 178,765 |   |   | 1,788  |   |   |   | 1,971,208 |   |      |   | 1,223  |   |   | (1,192,762 | )      | (30,045 | )      | (230,056   | )      |    | 201    |   |     |   | (3,995 | )      |   | 547,607  |   |   |    |    |   |
| Issuance of common stock pursuant to exercise of  stock options and vesting of restricted stock units |   | 3,150   |   |   | 32     |   |   |   | 22,876    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 22,908   |   |   |    |    |   |
| Issuance of common stock pursuant to employee stock  purchase plan                                    |   | 47      |   |   | — |   |   |   | 444       |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 444      |   |   |    |    |   |
| Issuance of restricted stock units and phantom share  units                                           |   | —  |   |   | — |   |   |   | 2,048     |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | (2,001 | )      |   | 47       |   |   |    |    |   |
| Amortization of deferred compensation                                                                 |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | 1,129  |   |   | 1,129    |   |   |    |    |   |
| Stock-based compensation expense                                                                      |   | —  |   |   | — |   |   |   | 366       |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 366      |   |   |    |    |   |
| Repurchase of common stock                                                                            |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | (20,527 | )      | (192,563   | )      |    | — |   |     |   | — |   |   | (192,563 | )      |   |    |    |   |
| Expiration of warrants                                                                                |   | —  |   |   | — |   |   |   | 964       |   |      |   | (964   | )      |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | —   |   |   |    |    |   |
| Unrealized holding losses on certain investments                                                      |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | (854   | )      |     |   | — |   |   | (854     | )      |   | $       | (854    | )      |   |
| Net income                                                                                            |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | 142,780    |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 142,780  |   |   | 142,780 |    |   |
| Total comprehensive income                                                                            |   |    |   |   |   |   |   |   |      |   |      |   |   |   |   |       |   |    |   |       |   |    |   |   |     |   |   |   |   |     |   |   | $       | 141,926 |   |   |
| Balance as of December 31, 2005                                                                  |   | 181,962 |   |   | 1,820  |   |   |   | 1,997,906 |   |      |   | 259    |   |   | (1,049,982 | )      | (50,572 | )      | (422,619   | )      |    | (653   | )      |     |   | (4,867 | )      |   | 521,864  |   |   |    |    |   |
| Issuance of common stock pursuant to exercise of  stock options and vesting of restricted stock units |   | 844     |   |   | 8      |   |   |   | 4,023     |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 4,031    |   |   |    |    |   |
| Issuance of common stock for acquisition of New Edge                                                  |   | 1,739   |   |   | 17     |   |   |   | 20,177    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 20,194   |   |   |    |    |   |
| Issuance of phantom share units                                                                       |   | —  |   |   | — |   |   |   | 43        |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 43       |   |   |    |    |   |
| Reclass of deferred compensation                                                                      |   | —  |   |   | — |   |   |   | (4,867    | )      |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | 4,867  |   |   | —   |   |   |    |    |   |
| Stock-based compensation expense                                                                      |   | —  |   |   | — |   |   |   | 14,242    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 14,242   |   |   |    |    |   |
| Tax provision from stock options                                                                      |   | —  |   |   | — |   |   |   | 117       |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 117      |   |   |    |    |   |
| Purchase of call options                                                                              |   | —  |   |   | — |   |   |   | (47,162   | )      |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | (47,162  | )      |   |    |    |   |
| Issuance of warrants                                                                                  |   | —  |   |   | — |   |   |   | 32,099    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 32,099   |   |   |    |    |   |
| Repurchase of common stock                                                                            |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | (11,339 | )      | (85,613    | )      |    | — |   |     |   | — |   |   | (85,613  | )      |   |    |    |   |
| Unrealized holding losses on certain investments                                                      |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | —     |   | —  |   | —     |   |    | (6,138 | )      |     |   | — |   |   | (6,138   | )      |   | $       | (6,138  | )      |   |
| Net income                                                                                            |   | —  |   |   | — |   |   |   | —    |   |      |   | — |   |   | 4,987      |   | —  |   | —     |   |    | — |   |     |   | — |   |   | 4,987    |   |   | 4,987   |    |   |
| Total comprehensive loss                                                                              |   |    |   |   |   |   |   |   |      |   |      |   |   |   |   |       |   |    |   |       |   |    |   |   |     |   |   |   |   |     |   |   | $       | (1,151  | )      |   |
| Balance as of  December 31, 2006                                                                 |   | 184,545 |   |   | $      | 1,845  |   |   |      | $      | 2,016,578 |   |   |   | $      | 259        |   |    | $      | (1,044,995 | )      | (61,911 | )      | $      | (508,232 | )      |   | $      | (6,791 | )        |   |   | $       | —  |   |   | $ | 458,664 |   |   |   |   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

68

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**EARTHLINK, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                    | ** ** |
| Cash flows from operating activities:                                              | ** ** | ** **                                 |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 111,009    |   | $ | 142,780 |   | $ | 4,987 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 79,219                                     |       | 47,138 |   | 46,287 |   |
| Bad debt expense                                                                   |       | 26,253                                     |       | 22,622 |   | 23,033 |   |
| Loss (gain) on disposals  and impairments of fixed assets                          |       | 10,103                                     |       | (73 | ) | 1,351 |   |
| Loss (gain) on investments  in other companies, net                                |       | 1,420                                      |       | (2,877 | ) | (377 | ) |
| Net losses of equity  affiliate                                                    |       | —                                     |       | 15,608 |   | 84,782 |   |
| Stock-based compensation                                                           |       | 633                                        |       | 1,542 |   | 14,285 |   |
| Deferred income taxes                                                              |       | 1,969                                      |       | 17,139 |   | 588 |   |
| Other adjustments                                                                  |       | —                                     |       | (255 | ) | (375 | ) |
| Increase in accounts  receivable                                                   |       | (21,401                                    | )          | (28,876 | ) | (26,131 | ) |
| Decrease (increase) in  prepaid expenses and other assets                          |       | 74                                         |       | 4,630 |   | (3,968 | ) |
| Decrease in accounts  payable and accrued and other liabilities                    |       | (11,746                                    | )          | (22,306 | ) | (24,060 | ) |
| Decrease in deferred  revenue                                                      |       | (9,381                                     | )          | (8,368 | ) | (5,153 | ) |
| Net cash provided by  operating activities                                         |       | 188,152                                    |       | 188,704 |   | 115,249 |   |
| Cash flows from investing activities:                                              |       |                                       |       |   |   |   |   |
| Purchases of property  and equipment                                               |       | (29,890                                    | )          | (33,879 | ) | (38,852 | ) |
| Purchases of subscriber  bases                                                     |       | (2,419                                     | )          | (6,690 | ) | (8,879 | ) |
| Proceeds from sales of  fixed assets                                               |       | 733                                        |       | 124 |   | 8 |   |
| Investments in marketable securities                                               |       |                                       |       |   |   |   |   |
| Purchases                                                                          |       | (540,881                                   | )          | (411,006 | ) | (179,165 | ) |
| Sales and maturities                                                               |       | 507,222                                    |       | 474,512 |   | 191,882 |   |
| Investments in and net  advances to equity affiliate                               |       | —                                     |       | (82,301 | ) | (79,020 | ) |
| Purchase of business,  net of cash acquired                                        |       | —                                     |       | (9,352 | ) | (108,663 | ) |
| Investments in other  companies                                                    |       | (3,835                                     | )          | — |   | (60,000 | ) |
| Distributions received  from investments in other companies                        |       | —                                     |       | 4,440 |   | 377 |   |
| Other                                                                              |       | —                                     |       | (929 | ) | (752 | ) |
| Net cash used in  investing activities                                             |       | (69,070                                    | )          | (65,081 | ) | (283,064 | ) |
| Cash flows from  financing activities:                                             |       |                                       |       |   |   |   |   |
| Principal payments under  capital lease obligations                                |       | (896                                       | )          | (28 | ) | (31 | ) |
| Repayment of note  payable                                                         |       | —                                     |       | — |   | (2,000 | ) |
| Proceeds from issuance  of convertible senior notes, net                           |       | —                                     |       | — |   | 251,568 |   |
| Purchase of call options                                                           |       | —                                     |       | — |   | (47,162 | ) |
| Proceeds from issuance  of warrants                                                |       | —                                     |       | — |   | 32,099 |   |
| Proceeds from exercises  of stock options and other                                |       | 17,696                                     |       | 23,352 |   | 4,029 |   |
| Repurchases of common  stock                                                       |       | (125,712                                   | )          | (192,563 | ) | (85,613 | ) |
| Net cash (used in)  provided by financing activities                               |       | (108,912                                   | )          | (169,239 | ) | 152,890 |   |
| Net increase (decrease)  in cash and cash equivalents                              |       | 10,170                                     |       | (45,616 | ) | (14,925 | ) |
| Cash and cash  equivalents, beginning of year                                      |       | 208,740                                    |       | 218,910 |   | 173,294 |   |
| Cash and cash equivalents, end of year                                             |       | $                                          | 218,910    |   | $ | 173,294 |   | $ | 158,369 |   |

 

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

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   Organization

EarthLink, Inc. (“EarthLink”or the “Company”) is a total communications provider, providing integratedcommunication services and related value-added services to individual consumersand business customers utilizing Internet Protocol, or IP, based technologies. EarthLink’score service offerings are dial-up and wireline broadband Internet accessservices and value-added services. EarthLink’s growth initiatives includeIP-based voice services, municipal wireless broadband services and services forbusiness customers.

**2.**   Summaryof Significant Accounting Policies

*Basis ofConsolidation*

The consolidated financialstatements include the accounts of EarthLink and all wholly-owned subsidiaries.All intercompany transactions and balances have been eliminated.

*Use of Estimates inPreparation of Financial Statements*

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, revenues and expenses, and thedisclosure of contingent assets and liabilities in the consolidated financialstatement and accompanying footnotes. On an ongoing basis, the Companyevaluates its estimates, including, but not limited to, those related to theallowance for doubtful accounts; the use, recoverability, and/or realizabilityof certain assets, including deferred tax assets; useful lives of intangibleassets and property and equipment; the fair values of assets acquired andliabilities assumed in acquisitions of businesses, including acquiredintangible assets; facility exit and restructuring liabilities; fair values ofinvestments; stock-based compensation; contingent liabilities and long-livedasset impairments. The Company bases its estimates on historical experience andon various other assumptions that are believed to be reasonable. Actual resultscould differ from those estimates.

*Revenues*

*General.*   EarthLinkrecognizes revenue in accordance with Securities and Exchange Commission (“SEC”)Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Revenueis recognized when persuasive evidence of an arrangement exists, delivery hasoccurred, the sales price is fixed or determinable and collectibility isprobable. Generally, these criteria are met monthly as EarthLink’s service isprovided on a month-to-month basis and collection for the service is generallymade within 30 days of the service being provided. Revenues are recorded asearned. Deferred revenue is recorded when payments are received in advance ofEarthLink performing its service obligations and recognized ratably over theservice period.

Narrowband access revenues consist of monthly feescharged to customers for dial-up Internet access. Broadband access revenuesconsist of retail and wholesale fees charged for high-speed, high-capacityaccess services including DSL, cable, satellite, wireless and dedicated circuitservices; fees charged for high-speed data networks to businesses andcommunications carriers; fees charged for IP-based voice services; installationfees; fees for equipment; early termination fees; and regulatory surchargesbilled to customers. Web hosting revenues consist of fees charged for leasingserver space and providing web services to companies and individuals wishing topresent a web or e-commerce presence. Advertising and other value-addedservices revenues consist of revenues earned from promotional arrangements withadvertisers, 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

retailers, serviceproviders and content providers. Advertising and other value-added servicesrevenues also include revenues from certain ancillary services sold as add-onfeatures to the Company’s Internet services, such as email storage and securityproducts.

Advertising and other value-added services revenuesinclude amounts derived from selling other companies’ products and services toEarthLink subscribers, subscribers using and buying other vendors’ products andservices, and other companies purchasing advertising on EarthLink’s onlineproperties, among other activities. Advertising revenues are recorded whenearned based on the per unit contractual rate and the number of units sold,number of subscriber impressions, or number of subscriber purchases or actions.

*Gross versus net revenuerecognition.*   EarthLinkmaintains relationships with certain telecommunications partners (includingcable companies) in which it provides services to customers using the “lastmile” element of the telecommunication providers’ networks. The term “last mile”generally refers to the element of telecommunications networks that is directlyconnected to homes and businesses. In these instances, EarthLink evaluates thecriteria outlined in Emerging Issues Task Force (“EITF”) Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” in determiningwhether it is appropriate to record the gross amount of revenue and relatedcosts or the net amount due it from the telecommunications partner. Generally,when EarthLink is the primary obligor in the transaction with the subscriber,has latitude in establishing prices, is the party determining the servicespecifications or has several but not all of these indicators, EarthLinkrecords the revenue at the amount billed the subscriber. If EarthLink is notthe primary obligor and/or the telecommunications partner has latitude inestablishing prices, EarthLink records revenue associated with the relatedsubscribers on a net basis, netting the cost of revenue associated with theservice against the gross amount billed the customer and recording the netamount as revenue.

*Cost of Revenues*

Cost of revenues include telecommunications serviceand equipment costs and sales incentives. Telecommunications service andequipment costs include telecommunications fees and network operations costsincurred to provide the Company’s Internet access services; fees paid tocontent providers for information provided on the Company’s online properties,including the Company’s Personal Start PageTM; the costs of equipment sold tocustomers for use with the Company’s services; activation and deactivation feespaid to the Company’s network providers for the provisioning and disconnectionof services; depreciation of network equipment; and surcharges due toregulatory agencies.

Sales incentives include the cost of promotionalproducts and services provided to potential and new subscribers, including freeInternet access on a trial basis and free modems and other hardware. EarthLinkaccounts for sales incentives in accordance with EITF Issue No. 01-09,“Accounting for Consideration Given by a Vendor to a Customer (Including aReseller of the Vendor’s Products),” which requires the costs of salesincentives to be classified as cost of revenues.

The Company also pays feesto retailers, manufacturers or other marketing partners for marketing EarthLink’sproducts and services. Depending on the nature of the arrangement, themarketing partners may purchase EarthLink’s products and services in additionto providing marketing services. If the retailer or manufacturer does notpurchase EarthLink’s products or services, the Company classifies the fees assales and marketing expenses when incurred. In this scenario, the retailer ormanufacturer is not a reseller and the accounting in EITF Issue No. 01-09does not apply. If the retailer or manufacturer purchases and 

71

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

thenresells EarthLink’s products or services, the Company accounts for the fees asa reduction in revenue in accordance with EITF Issue No. 01-09because the consideration is presumed to be a reduction of the selling price ofEarthLink’s products or services; however, if the Company receives anidentifiable benefit whose fair value can be reasonably estimated in exchangefor the fees, the Company classifies the fees as operating expenses.

*Sales and Marketing*

Sales and marketing expenses include advertising andpromotion expenses, fees paid to distribution partners to acquire new payingsubscribers, personnel-related expenses for sales and marketing personnel andtelemarketing costs incurred to acquire and retain subscribers. The Company’smarketing strategies include national branding campaigns comprised oftelevision, radio, Internet, print and outdoor advertising. Marketing andadvertising costs to promote the Company’s products and services are expensedin the period incurred. The Company also uses direct mail advertising, and theCompany incurs production, printing, mailing and postage related to its directmail advertising activities. Media and direct mail production costs areexpensed the first time the advertisement is run. Media and agency costs areexpensed over the period the advertising runs. Advertising expenses were $224.4million, $245.7 million and $242.0 million during the years ended December 31,2004, 2005 and 2006, respectively. Prepaid advertising expenses were $2.0million and $3.6 million as of December 31, 2005 and 2006, respectively.

During the years ended December 31,2004, 2005 and 2006, EarthLink incurred various shipping charges in connectionwith providing welcome kits to new customers and shipping equipment. TheCompany classifies shipping and handling charges associated with welcome kitsas sales and marketing expenses, which were $1.8 million, $1.2 million and $1.0million during the years ended December 31, 2004, 2005 and 2006,respectively, because the Company does not invoice the customer for the welcomekits or the associated shipping. All other shipping and handling costs areincluded in cost of revenues.

*SoftwareDevelopment Costs*

EarthLink accounts for research and development costsin accordance with several accounting pronouncements, including Statement ofFinancial Accounting Standards (“SFAS”) No. 2, “Accounting for Researchand Development Costs,” and SFAS No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed.” SFAS No. 86specifies that costs incurred internally in creating a computer softwareproduct should be charged to expense when incurred as research and developmentuntil technological feasibility has been established for the product. Oncetechnological feasibility is established, all software costs should becapitalized until the product is available for general release to customers.Judgment is required in determining when the technological feasibility of aproduct is established. The Company has determined that technologicalfeasibility for its products is reached very shortly before the products arereleased. Costs incurred after technological feasibility is established are notmaterial, and, accordingly, the Company expenses research and development costswhen incurred.

EarthLink accounts forcosts incurred to develop software for internal use in accordance withStatement of Position 98-1, “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use,” whichrequires such costs be capitalized and amortized over the estimated useful lifeof the software. Costs related to design or maintenance of internal-usesoftware are expensed as incurred.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Income Taxes*

The Company recognizesdeferred tax assets and liabilities for operating loss carryforwards, taxcredit carryforwards and the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates in effect for the year inwhich the temporary differences are expected to be recovered or settled. Avaluation allowance is recorded to reduce the carrying amounts of net deferredtax assets if there is uncertainty regarding their realization. EarthLinkconsiders many factors when assessing the likelihood of future realizationincluding the Company’s recent cumulative earnings experience by taxingjurisdiction, expectations of future taxable income, the carryforward periodsavailable to the Company for tax reporting purposes and other relevant factors.

*Net Income per Share*

Net income per share hasbeen computed according to SFAS No. 128, “Earnings per Share,” whichrequires a dual presentation of basic and diluted earnings per share (“EPS”).Basic EPS represents net income divided by the weighted average number ofcommon shares outstanding during a reported period. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock, including stock options, warrants, restricted stock units,phantom share units and contingently issuable shares (collectively “CommonStock Equivalents”), were exercised or converted into common stock. Thedilutive effect of outstanding stock options, warrants and restricted stockunits is reflected in diluted earnings per share by application of the treasurystock method. Phantom share units and contingently issuable shares arereflected on an if-converted basis. EarthLink’s convertible debt instrumentswere excluded from the calculation of diluted earnings per share as theireffect was antidilutive. In applying the treasury stock method for stock-basedcompensation arrangements during the year ended December 31, 2006, theassumed proceeds were computed as the sum of the amount the employee must payupon exercise and the amounts of compensation cost attributed to futureservices and not yet recognized.

Thefollowing table sets forth the computation for basic and diluted net income pershare for the years ended December 31, 2004, 2005 and 2006:

| ** **                                              | ** ** | **Year Ended December 31,**                         | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **(in thousands, except per share data)** | ** ** |
| Net income (A)                                          |       | $                                                                  | 111,009    |   | $ | 142,780 |   | $ | 4,987 |   |
| Basic weighted average common shares outstanding (B)    |       | 154,233                                                            |       | 137,080 |   | 128,790 |   |
| Dilutive effect  of Common Stock Equivalents            |       | 3,582                                                              |       | 2,870 |   | 1,793 |   |
| Diluted weighted  average common shares outstanding (C) |       | 157,815                                                            |       | 139,950 |   | 130,583 |   |
| Basic net income per share (A/B)                        |       | $                                                                  | 0.72       |   | $ | 1.04 |   | $ | 0.04 |   |
| Diluted net income per  share (A/C)                     |       | $                                                                  | 0.70       |   | $ | 1.02 |   | $ | 0.04 |   |

 

During the years ended December 31,2004, 2005 and 2006, approximately 8.7 million, 9.9 million and 21.2 million,respectively, options and warrants were excluded from the calculation ofdiluted EPS because the exercise prices exceeded the Company’s average stockprice during the respective years. These options and warrants could be dilutivein future periods. In addition, approximately 28.4 million shares underlie theCompany’s convertible debt instruments, which could be dilutive in futureperiods.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Stock-BasedCompensation*

As of December 31, 2006, EarthLink had variousstock-based compensation plans, which are more fully described in Note 11,“Stock-Based Compensation.” Prior to January 1, 2006, the Companyaccounted for stock-based compensation using the intrinsic value method, whichfollows the recognition and measurement principles of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”and Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44,“Accounting for Certain Transactions Involving Stock Compensation.” Generally,no stock-based employee compensation cost related to stock options wasreflected in net income (loss) prior to January 1, 2006, as all optionsgranted under stock-based compensation plans had an exercise price equal to themarket value of the underlying common stock on the grant date. However, to theextent that the Company modified stock options subsequent to the grant date,the Company recorded compensation expense based on the modification, asrequired by SFAS No. 123, “Accounting for Stock-Based Compensation,” andAPB Opinion No. 25. Compensation cost related to restricted stock unitsgranted to non-employee directors and certain key employees was reflected innet income as services were rendered.

On January 1, 2006, the Company adopted SFAS No. 123(R),“Share-Based Payment,” using the modified prospective method, which requiresmeasurement of compensation cost for all stock awards at fair value on the dateof grant and recognition of compensation over the requisite service period forawards expected to vest. In accordance with the modified prospective method,the Company’s financial statements for periods prior to implementation have notbeen restated to reflect, and do not include, the impact of SFAS No. 123(R).The Company estimates the fair value of stock options using the Black-Scholesvaluation model, and determines the fair value of restricted stock units basedon the number of shares granted and the quoted price of EarthLink’s commonstock on the date of grant*.* Suchvalue is recognized as expense over the requisite service period, net ofestimated forfeitures, using the straight-line attribution method. The estimateof awards that will ultimately vest requires significant judgment, and to theextent actual results or updated estimates differ from the Company’s currentestimates, such amounts will be recorded as a cumulative adjustment in theperiod estimates are revised. The Company considers many factors whenestimating expected forfeitures, including types of awards, employee class andhistorical employee attrition rates. Actual results, and future changes inestimates, may differ substantially from the Company’s current estimates.

In March 2005, the SEC published SAB No. 107,which provides the Staff’s views on a variety of matters relating tostock-based payments. SAB No. 107 requires stock-based compensation to beclassified in the same expense line items as cash compensation. The Company hasclassified stock-based compensation expense during the year ended December 31,2006 within the same operating expense line items as cash compensation paid toemployees.

In November 2005, the FASB issued FASB StaffPosition (“FSP”) No. FAS 123(R)-3, “Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards,” which provides anelective transition method for calculating the initial pool of excess taxbenefits available to absorb tax deficiencies recognized subsequent to theadoption of SFAS No. 123(R). Companies were permitted to take up to oneyear from the effective date of this FASB Staff Position to evaluate theavailable transition alternatives and make a one-time election as to whichmethod to adopt. The Company elected to use the alternative method provided inFSP No. FAS 123(R)-3.

The cumulative effect of adoption of SFAS No. 123(R) usingthe modified prospective transition method, which resulted from estimatingforfeitures on nonvested shares of restricted stock rather than 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

accounting for forfeituresas they occurred, was not material. Prior to the adoption of SFAS No. 123(R),deferred compensation relating to restricted stock units was presented as aseparate component of stockholders’ equity. Upon adoption of SFAS No. 123(R) onJanuary 1, 2006, the deferred compensation balance of $4.9 million wasreclassified to additional paid-in capital.

Stock-based compensation expense under SFAS No. 123(R) was$14.2 million during the year ended December 31, 2006, of which $12.2million related to stock options and $2.0 million related to restricted stockunits. Stock-based compensation expense during the year ended December 31,2005 was $1.5 million, of which $1.1 million related to restricted stock unitsand $0.4 million was stock-based compensation expense arising frommodifications to extend the exercise periods of certain vested stock optionsfor EarthLink employees transferring to HELIO. As a result of adopting SFAS No. 123(R) onJanuary 1, 2006, the Company’s income from operations and net income forthe year ended December 31, 2006 were $12.3 million lower than if it hadcontinued to account for share-based compensation using the intrinsic method ofaccounting under APB Opinion No. 25. Basic and diluted net income pershare for the year ended December 31, 2006 were $0.10 per share and $0.09per share lower, respectively, than if the Company had continued to account forshare-based compensation using the intrinsic method of accounting under APBOpinion No. 25. The incremental impact of SFAS No. 123(R) duringthe year ended December 31, 2006 represents stock-based compensationexpense related to stock options and the impact of estimating forfeituresrelated to nonvested shares of restricted stock.

If theCompany had elected to adopt the optional recognition provisions of SFASNo. 123, which uses the fair value based method for stock-basedcompensation, and amortized the grant date fair value of stock options tocompensation expense on a straight-line basis over the vesting period of theoptions, net income and basic and diluted net income per share for the yearsended December 31, 2004 and 2005 would have been changed to the pro formaamounts indicated below:

| ** **                                                                                                  | ** ** | **Year Ended December 31,**                     | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                                                       | ** ** | **2005** | ** ** |
| ** **                                                                                                  | ** ** | **(in thousands, except  per share data)** | ** ** |
| Net income, as  reported                                                                                    |       | $                                                              | 111,009    |   | $ | 142,780 |   |
| Add: Stock-based  compensation expense associated with stock options included in reported net  income       |       | —                                                         |       | 366 |   |
| Deduct:  Stock-based compensation expense determined using a fair value based method  for all stock options |       | (23,311                                                        | )          | (15,900 | ) |
| Pro forma net  income                                                                                       |       | $                                                              | 87,698     |   | $ | 127,246 |   |
| Basic net income per  share:                                                                                |       |                                                           |       |   |   |
| As reported                                                                                                 |       | $                                                              | 0.72       |   | $ | 1.04 |   |
| Pro forma                                                                                                   |       | $                                                              | 0.57       |   | $ | 0.93 |   |
| Diluted net income per  share:                                                                              |       |                                                           |       |   |   |
| As reported                                                                                                 |       | $                                                              | 0.70       |   | $ | 1.02 |   |
| Pro forma                                                                                                   |       | $                                                              | 0.57       |   | $ | 0.92 |   |

 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Cash and Cash Equivalents*

All highly liquidinvestments with original maturities of three months or less at the date ofacquisition are considered cash equivalents. These investments primarilyconsist of money market funds and commercial paper.

*Investments in Marketable Securities*

Investments in marketablesecurities are accounted for in accordance with SFAS No. 115, “Accountingfor Certain Investments in Debt and Equity Securities.” All investments withoriginal maturities greater than 90 days are classified as investments inmarketable securities. Investments in marketable securities with maturitiesless than one year from the balance sheet date are considered short-terminvestments. Short-term investments also include investments in asset-backed,auction rate debt securities with interest rate reset periods of 90 days orless but whose underlying agreements have original maturities of more than 90days, based on the provisions of Accounting Research Bulletin No. 43,Chapter 3A, Working Capital-Current Assets and Liabilities, which allowsclassification of investments based on management’s view. Investments inmarketable securities with maturities greater than one year from the balancesheet date, excluding investments in asset-backed, auction rate debt securitieswith interest reset periods of 90 days or less, are considered long-terminvestments. The Company has invested in government agency notes, asset-backeddebt securities (including auction rate debt securities), corporate notes andcommercial paper, all of which bear a minimum short-term rating of A1/P1 or aminimum long-term rating of A/A2.

The Company has classifiedall short- and long-term investments in marketable securities as available-for-sale.The Company may or may not hold its investments in marketable securities untilmaturity. In response to changes in the availability of and the yield onalternative investments as well as liquidity requirements, the Companyoccasionally sells its investments in marketable securities prior to theirstated maturities. Available for sale securities are carried at fair value,with any unrealized gains and losses, net of tax, included in unrealized gains(losses) on investments as a separate component of stockholders’ equity and intotal comprehensive income (loss). Realized gains and losses are included ininterest income and other, net, in the Consolidated Statements of Operationsand are determined on a specific identification basis.

The Company periodicallyevaluates whether declines in fair values of its investments below their costare potentially other than temporary. This evaluation consists of severalqualitative and quantitative factors regarding the severity and duration of theunrealized loss as well as the Company’s ability and intent to hold theinvestment for a period of time which may be sufficient for an anticipatedrecovery in market value.

*Allowance for Doubtful Accounts*

EarthLink maintains anallowance for doubtful accounts for estimated losses resulting from theinability of EarthLink’s customers to make payments. In assessing the adequacyof the allowance for doubtful accounts, management considers multiple factorsincluding the aging of its receivables, historical write-offs, the creditquality of its customers, the general economic environment and other factorsthat may affect customers’ ability to pay. If the financial condition ofEarthLink’s customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required. The Company’sallowance for doubtful accounts was $8.1 million as of December 31, 2005and 2006. The Company recorded bad debt expense of $26.3 million, $22.6 millionand $23.0 million during the years 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

ended December 31,2004, 2005 and 2006, respectively. The Company’s write-offs of uncollectibleaccounts were $24.3 million, $22.4 million and $25.2 million during the yearsended December 31, 2004, 2005 and 2006, respectively. The Company acquireda $2.2 million allowance for doubtful accounts in its acquisition of NewEdge Holding Company (“New Edge”).

*Property and Equipment*

Property and equipment arestated at cost less accumulated depreciation. Depreciation expense isdetermined using the straight-line method over the estimated useful lives ofthe various asset classes, which are generally three to five years forcomputers, telecommunications equipment and furniture and other officeequipment and 15 years for buildings. Leasehold improvements are depreciated usingthe straight-line method over the shorter of their estimated useful lives orthe remaining term of the lease. When leases are extended, the remaining usefullives of leasehold improvements are increased as appropriate, but not for aperiod in excess of the remaining lease term. Expenditures for maintenance andrepairs are charged to operating expense as incurred. Upon retirements orsales, the original cost and related accumulated depreciation are removed fromthe respective accounts, and the gains and losses are included in interestincome and other, net, or as facility exit and restructuring costs, asappropriate. Upon impairment, the Company accelerates depreciation of the assetand such cost is included in operating expenses.

*Investments in Other Companies*

Minority investments inother companies are classified as investments in other companies in theConsolidated Balance Sheets and are accounted for under the cost method ofaccounting because the Company does not have the ability to exercise significantinfluence over the companies’ operations. Under the cost method of accounting,investments in private companies are carried at cost and are only adjusted forother-than-temporary declines in fair value and distributions of earnings. Forcost method investments in public companies that have readily determinable fairvalues, the Company classifies its investments as available-for-sale inaccordance with SFAS No. 115 and, accordingly, records these investmentsat their fair values with unrealized gains and losses included as a separatecomponent of stockholders’ equity and in total comprehensive income (loss).Upon sale or liquidation, realized gains and losses are included in theConsolidated Statement of Operations.

Management regularlyevaluates the recoverability of its investments in other companies based on theperformance and the financial position of those companies as well as otherevidence of market value. Such evaluation includes, but is not limited to,reviewing the investee’s cash position, recent financings, projected andhistorical financial performance, cash flow forecasts and financing needs.During the years ended December 31, 2004 and 2005, the Company recognizedlosses due to other-than-temporary declines of the value of investments of $1.4million and $0.9 million, respectively. These losses are included in gain(loss) on investments in other companies, net, in the Consolidated Statementsof Operations. During the year ended December 31, 2006, the Company didnot recognize any losses due to other-than-temporary declines of the value ofinvestments.

*Variable Interest Entities*

The Company applies theguidance prescribed in FIN No. 46, “Consolidation of Variable InterestEntities,” to determine if the Company must consolidate the results of companiesin which the Company has invested. Variable interest entities (“VIEs”) areentities that either do not have equity investors with proportionate economicand voting rights or have equity investors that do not provide sufficientfinancial 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

resourcesfor the entity to support its activities. Consolidation is required if it isdetermined that the Company absorbs a majority of the expected losses and/orreceives a majority of the expected returns. In determining if an investee is aVIE and whether EarthLink must consolidate its results, management evaluateswhether the equity of the entity is sufficient to absorb its expected lossesand whether EarthLink is the primary beneficiary. Management generally performsthis assessment at the date EarthLink becomes involved with the entity and uponchanges in the capital structure or related governing documents of the entity. Managementhas concluded that the Company does not have any arrangements with entitiesthat would require consolidation pursuant to FIN No. 46.

*Investment in Equity Affiliate*

The Company has a jointventure with SK Telecom Co., Ltd. (“SK Telecom”), HELIO. HELIO is anon-facilities-based mobile virtual network operator (“MVNO”) offering mobilecommunications services and handsets to U.S. consumers. EarthLink and SKTelecom each have an equal voting and economic ownership interest inHELIO. EarthLink and SK Telecom, as partners, invested an aggregate of$166.0 million of cash and non-cash assets upon completing the formation ofHELIO in March 2005, invested an aggregate of $78.0 million of cash in August 2005,invested an aggregate $157.0 million in 2006 and have committed to investadditional cash of $39.0 million in 2007, including $27.0 million that wasinvested in February 2007.

The Company accounts forits investment in HELIO under the equity method of accounting because theCompany can exert significant influence over HELIO’s operating and financialpolicies. The Company determined that HELIO does not qualify as a VIE under FINNo. 46, so consolidation pursuant to FIN No. 46 is not required.In accordance with the equity method of accounting, EarthLink’s investment inHELIO was recorded at original cost and is adjusted to recognize EarthLink’sproportionate share of HELIO’s net income (loss), amortization of basisdifferences and additional contributions made.

*Goodwill and Purchased Intangible Assets*

Goodwill is the excess ofthe purchase price over the fair value of identifiable net assets acquired inbusiness combinations accounted for under the purchase method of accountingpursuant to SFAS No. 141, “Business Combinations.” Purchased intangibleassets consist primarily of subscriber basesand customer relationships, acquired software and technology and other assets acquiredin conjunction with the purchases of businesses and subscriber bases from othercompanies. Subscriber bases acquired directly are valued at cost plus assumedservice liabilities, which approximates fair value at the time of purchase.When management determines material intangible assets are acquired inconjunction with the purchase of a company, EarthLink engages an independentthird party to determine the allocation of the purchase price to the intangibleassets acquired. Intangible assets determined to have definite lives areamortized on a straight-line basis over their estimated useful lives.

The Company accounts forgoodwill and intangible assets in accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” which prohibits the amortization of goodwill andcertain intangible assets deemed to have indefinite lives. SFAS No. 142requires the Company to test its goodwill for impairment at least annually. TheCompany performs an impairment test of its goodwill annually during the fourthquarter of its fiscal year or when events and circumstances indicate thatgoodwill might be permanently impaired. Impairment testing of goodwill istested at the reporting unit level by comparing the reporting unit’s carryingamount, including goodwill, to the estimated fair value of the reporting unit.The fair values of the reporting unit are estimated using discounted expectedfuture cash flows. If the 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

carryingamount of the reporting unit exceeds its fair value, goodwill is consideredimpaired and a second step is performed to measure the amount of the impairmentloss, if any. The Company conducted its annual impairment test as of October 1,2006 and determined that the estimated fair value exceeded the carrying value.There have not been any events or circumstances from the date of the Company’sassessment through December 31, 2006 that would cause the Company toretest its goodwill.

*Long-Lived Assets*

The Company accounts forlong-lived assets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which addresses financialaccounting and reporting for the impairment and disposition of long-livedassets, including property and equipment and purchased intangible assets. TheCompany evaluates the recoverability of long-lived assets for impairment whenevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Conditions that would necessitate an impairmentassessment include a significant decline in the observable market value of anasset, a significant change in the extent or manner in which an asset is used,or a significant adverse change that would indicate the carrying amount of anasset or group of assets is not recoverable. For long-lived assets to be heldand used, EarthLink recognizes an impairment loss only if its carrying amountis not recoverable through its undiscounted cash flows and measures theimpairment loss, if any, based on the difference between the carrying amountand fair value. Long-lived assets held for sale are reported at the lower ofcost or fair value less costs to sell.

*Leases*

The Company accounts forlease agreements in accordance with SFAS No. 13, “Accounting for Leases,”which requires categorization of leases at their inception as either operatingor capital leases depending on certain criteria. The Company recognizes rentexpense for operating leases on a straight-line basis without regard todeferred payment terms, such as rent holidays or fixed escalations. Incentivesare treated as a reduction of the Company’s rent costs over the term of thelease agreement. The Company records leasehold improvements funded by landlordsunder operating leases as leasehold improvements and deferred rent.

*Facility Exit and Restructuring Costs*

The Company accounts forfacility exit and restructuring costs in accordance with SFAS No. 144 andSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” which requires that a liability for a cost associated with an exitor disposal activity be recognized when the liability is incurred. Facilityexit and restructuring liabilities include estimates for, among other things,severance payments and amounts due under lease obligations, net of estimatedsublease income, if any. Key variables in determining such estimates include operatingexpenses due under lease arrangements, the timing and amounts of subleaserental payments, tenant improvement costs and brokerage and other relatedcosts. The Company periodically evaluates and, if necessary, adjusts itsestimates based on currently-available information. Such adjustments areclassified as facility exit and restructuring costs in the ConsolidatedStatements of Operations.

*Comprehensive Income (Loss)*

Comprehensive income(loss) as presented in the Consolidated Statements of Stockholders’ Equity andComprehensive Income (Loss) includes unrealized gains and losses which areexcluded from the 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

ConsolidatedStatements of Operations in accordance with SFAS No. 130, “ReportingComprehensive Income.” For the years ended December 31, 2004, 2005 and2006, these amounts included changes in unrealized gains and losses on certaininvestments classified as available-for-sale. The amounts are presented net oftax-related effects, which management estimated to be approximately zero.

*Certain Risks and Concentrations*

*Credit Risk.**  *By their nature, all financial instruments involverisk, including credit risk for non-performance by counterparties. Financialinstruments that potentially subject the Company to credit risk consistprincipally of cash, cash equivalents, investments in marketable securities,trade receivables and investments in other companies. The Company’s cashinvestment policy limits investments to investment grade instruments. Accountsreceivable are typically unsecured and are derived from revenues earned fromcustomers primarily located in the U.S. Credit risk with respect to tradereceivables is limited due to the large number of customers comprising theCompany’s customer base. Additionally, the Company performs ongoing creditevaluations of its customers and maintains allowances for potential creditlosses. As of December 31, 2005 and 2006, two companies each accounted formore than 10% of gross accounts receivable. Management regularly evaluates therecoverability of its investments in other companies based on the performanceand the financial position of those companies as well as other evidence ofmarket value.

*Regulatory Risk.**  *EarthLink purchases broadband access from incumbentlocal exchange carriers, competitive local exchange carriers and cableproviders. Please refer to “Regulatory Environment” in the Business section ofthis Annual Report on 10-K for a discussion of the regulatory environmentas well as a discussion regarding the Company’s contracts with broadband accessproviders.

*Supply Risk.**  *The Company’s business substantially depends on thecapacity, affordability, reliability and security of third-party telecommunicationsand data service providers. Only a small number of providers offer the networkservices the Company requires, and the majority of its telecommunicationsservices are currently purchased from a limited number of telecommunicationsservice providers. Telecommunications service providers have recently mergedand may continue to merge, which would reduce the number of suppliers fromwhich the Company could purchase telecommunications services. Althoughmanagement believes that alternate telecommunications providers could be foundin a timely manner, any disruption of these services could have a materialadverse effect on the Company’s financial position, results of operations andcash flows.

The Company also relies onthe reliability, capacity and effectiveness of its outsourced contact centerservice providers. The Company purchases contact center services from severalgeographically dispersed service providers. The contact center serviceproviders may become subject to financial, economic and political risks beyondthe Company’s or the providers’ control which could jeopardize their ability todeliver services. Although management believes that alternate contact centerservice providers could be found in a timely manner, any disruption of theseservices could have a material adverse effect on the Company’s financialposition, results of operations and cash flows.

*Fair Value of Financial Instruments*

The carrying amounts ofthe Company’s cash, cash equivalents, trade receivables and trade payablesapproximate their fair values because of their nature and respective durations.The Company’s short- and long-term investments in marketable securities consistof available-for-sale securities and are carried at market value, which isbased on quoted market prices, with unrealized gains and losses included in 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

stockholders’equity. The Company’s equity investments in publicly-held companies are statedat fair value, which is based on quoted market prices, with unrealized gainsand losses included in stockholders’ equity. The Company’s investments inprivately-held companies are stated at cost, net of other-than-temporaryimpairments. The Company’s long-term debt is carried at cost, and the estimatedfair value of the Company’s long-term debt is based on the quoted market price.

*Segments*

The Company operates inone principal business segment, IP-based access and communications services.Substantially all of the Company’s operating results and identifiable assetsare in the U.S.

*Reclassifications*

Certain amounts in theprior year financial statements have been reclassified to conform to thecurrent year presentation.

*Recently Issued Accounting Pronouncements*

In June 2006, theFASB ratified the consensus reached in EITF Issue No. 06-2, “Accountingfor Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.”EITF Issue No. 06-2 provides recognition guidance on the accrual ofemployees’ rights to compensated absences under a sabbatical or other similarbenefit arrangement. EITF Issue No. 06-2 is effective for theCompany for all financial statements after December 31, 2006. The Companyis currently assessing the impact of the adoption of EITF Issue No. 06-2on its financial statements.

In July 2006, theFASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,”which prescribes a comprehensive model for how a company should recognize,measure, present and disclose in its financial statements uncertain taxpositions that the company has taken or expects to take on a tax return(including a decision whether to file or not to file a return in a particularjurisdiction). The accounting provisions of FIN No. 48 are effective for fiscal years beginning after December 15,2006. The Company is currently assessing the impact that the adoption ofFIN No. 48 will have, if any, on its consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishesa framework for reporting fair value and expands disclosures about fair valuemeasurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007 and interim periodswithin those fiscal years. The Company is currently assessing the impact of theadoption of this standard on its financial statements.

**3.**                 Acquisitions andAsset Purchases

*Aluria Software LLC*

In September 2005,the Company acquired the assets of Aluria Software LLC (“Aluria”), a privatelyheld developer and provider of protection and security products for consumers,small businesses and enterprise customers, for $13.4 million, which consistedof $9.3 million in cash and notes payable of $4.1 million. The Company repaid$2.0 million of the notes payable during the year ended December 31, 2006.The acquisition of Aluria enabled EarthLink to enhance and improve its suite ofprotection applications.

The acquisition wasaccounted for pursuant to SFAS No. 141, “Business Combinations.” The Company assumed net liabilities ofapproximately $0.1 million and allocated $3.1 million to identifiable 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

definitelived intangible assets, primarily acquired software and technology, resultingin $10.4 million of goodwill. The amounts of identifiable intangible assetsacquired were based on a third-party appraisal. The purchase price wasallocated to the assets acquired and liabilities assumed based on theirestimated fair values, including identifiable intangible assets. The acquiredsoftware and technology is being amortized on a straight-line basis over theestimated useful lives of the assets, which range from one to six years, fromthe date of the acquisition. The pro forma effect of the transaction was notmaterial.

*New Edge*

In April 2006,EarthLink acquired New Edge, a single-source national provider of securemulti-site managed data networks and dedicated Internet access for businessesand communications carriers. Through this acquisition, EarthLink expanded its business inthe small and medium-sized business market. New Edge is a wholly-ownedsubsidiary of EarthLink and continues to operate under its current name. Theresults of operations of New Edge are included in the consolidated financialstatements from the date of the acquisition.

The acquisition wasaccounted for pursuant to SFAS No. 141. The total purchase price of $144.8million consisted of $108.7 million net cash paid, including direct transactioncosts of $3.7 million; $20.2 million in EarthLink, Inc. common stock,representing approximately 1.7 million shares; and estimated net liabilitiesassumed of $15.9 million. In addition, approximately 0.9 million shares ofEarthLink, Inc. common stock are being held in escrow and will be used tocover liabilities that may arise under EarthLink’s indemnification rights underthe merger agreement. The fair value ofEarthLink, Inc. common stock was determined based on the average marketprice per share the three days before and the three days after the announcementof the execution of the merger agreement.

EarthLink allocated $37.0million of the total purchase price to identifiable definite lived intangibleassets, consisting of acquired customer relationships and software, and $7.8million of the total purchase price to identifiable indefinite lived intangibleassets, consisting of trade names. The fair values of identifiable intangibleassets acquired were based on a third-party appraisal. The purchase priceallocation resulted in $100.0 million of goodwill. The purchase price wasallocated to the assets acquired and liabilities assumed based on theirestimated fair values, including identifiable intangible assets. The acquiredcustomer relationships and software are being amortized on a straight-linebasis from the date of the acquisition over the estimated useful lives of theassets, which range from three to nine years. The weighted average amortizablelife of the acquired intangible assets is 5.9 years. The acquired trade nameswere deemed to have indefinite useful lives. The amounts of liabilities assumedand identifiable assets acquired are subject to adjustment for up to one yearfrom the date of acquisition. Any change will change the amount of purchaseprice allocable to goodwill. The pro forma effect of the transaction was notmaterial.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**4.   Investments**

*Investments inMarketable Securities*

Thefollowing table summarizes unrealized gains and losses on the Company’sinvestments in marketable securities based on quoted market prices as of December 31,2005 and 2006:

|                                                   | ** ** | **As of December 31, 2005** | ** **     | **As of December 31, 2006** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|----------------|-------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                      | ** **     | **Gross**                                       | ** ** | **Gross** | ** ** | **Estimated** | ** ** | ** ** | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                        | ** ** | **Amortized**                                   | ** **     | **Unrealized**                                  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                        | ** ** | **Cost**                                        | ** **     | **Losses**                                      | ** ** | **Gains** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Losses** | ** ** | **Gains** | ** ** | **Value** | ** ** |
| ** **                                        | ** ** | **(in thousands)**                         | ** **     |
| **Short-term**                                    |       |                                            |           | ** **                                      |       |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   | ** ** |   |
| Government agency notes                           |       |                                            | $ 101,226 | ** **                                      |       |   | $ (376 | ) |   |   | $ — | ** ** |   |   | $ 100,850 | ** ** |   |   | $ 46,666 | ** ** |   |   | $ (154 | ) |   |   | $ — | ** ** |   |   | $ 46,512 | ** ** |   |
| Asset-backed (including auction rate)  securities |       |                                            | 85,107         | ** **                                      |       |   | — |   |   |   | — | ** ** |   |   | 85,107 | ** ** |   |   | 85,050 | ** ** |   |   | — |   |   |   | — | ** ** |   |   | 85,050 | ** ** |   |
| Corporate notes                                   |       |                                            | 12,445         | ** **                                      |       |   | (24 | ) |   |   | 3 | ** ** |   |   | 12,424 | ** ** |   |   | 8,498 | ** ** |   |   | (6 | ) |   |   | 3 | ** ** |   |   | 8,495 | ** ** |   |
| Commercial paper                                  |       |                                            | 9,487          | ** **                                      |       |   | (23 | ) |   |   | — | ** ** |   |   | 9,464 | ** ** |   |   | 74,967 | ** ** |   |   | (77 | ) |   |   | — | ** ** |   |   | 74,890 | ** ** |   |
|                                              |       |                                            | $ 208,265 | ** **                                      |       |   | $ (423 | ) |   |   | $ 3 | ** ** |   |   | $ 207,845 | ** ** |   |   | $ 215,181 | ** ** |   |   | $ (237 | ) |   |   | $ 3 | ** ** |   |   | $ 214,947 | ** ** |   |
| **Long-term**                                     | ** ** |                                            | ** **     | ** **                                      |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Government agency notes                           |       |                                            | $ 20,110  | ** **                                      |       |   | $ (133 | ) |   |   | $ — | ** ** |   |   | $ 19,977 | ** ** |   |   | $ 20,997 | ** ** |   |   | $ (39 | ) |   |   | $ 1 | ** ** |   |   | $ 20,959 | ** ** |   |
| Asset-backed securities                           |       |                                            | 4,951          | ** **                                      |       |   | (13 | ) |   |   | — | ** ** |   |   | 4,938 | ** ** |   |   | — | ** ** |   |   | — |   |   |   | — | ** ** |   |   | — | ** ** |   |
| Corporate notes                                   |       |                                            | 16,069         | ** **                                      |       |   | (15 | ) |   |   | 11 | ** ** |   |   | 16,065 | ** ** |   |   | 500 | ** ** |   |   | — |   |   |   | 1 | ** ** |   |   | 501 | ** ** |   |
|                                                   |       |                                            | $ 41,130  | ** **                                      |       |   | $ (161 | ) |   |   | $ 11 | ** ** |   |   | $ 40,980 | ** ** |   |   | $ 21,497 | ** ** |   |   | $ (39 | ) |   |   | $ 2 | ** ** |   |   | $ 21,460 | ** ** |   |
| **Total**                                         | ** ** |                                            | ** **     | ** **                                      |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Government agency notes                           |       |                                            | $ 121,336 | ** **                                      |       |   | $ (509 | ) |   |   | $ — | ** ** |   |   | $ 120,827 | ** ** |   |   | $ 67,663 | ** ** |   |   | $ (193 | ) |   |   | $ 1 | ** ** |   |   | $ 67,471 | ** ** |   |
| Asset-backed (including auction rate) securities  |       |                                            | 90,058         | ** **                                      |       |   | (13 | ) |   |   | — | ** ** |   |   | 90,045 | ** ** |   |   | 85,050 | ** ** |   |   | — |   |   |   | — | ** ** |   |   | 85,050 | ** ** |   |
| Corporate notes                                   |       |                                            | 28,514         | ** **                                      |       |   | (39 | ) |   |   | 14 | ** ** |   |   | 28,489 | ** ** |   |   | 8,998 | ** ** |   |   | (6 | ) |   |   | 4 | ** ** |   |   | 8,996 | ** ** |   |
| Commercial paper                                  |       |                                            | 9,487          | ** **                                      |       |   | (23 | ) |   |   | — | ** ** |   |   | 9,464 | ** ** |   |   | 74,967 | ** ** |   |   | (77 | ) |   |   | — | ** ** |   |   | 74,890 | ** ** |   |
|                                                   |       |                                            | $ 249,395 | ** **                                      |       |   | $ (584 | ) |   |   | $ 14 | ** ** |   |   | $ 248,825 | ** ** |   |   | $ 236,678 | ** ** |   |   | $ (276 | ) |   |   | $ 5 | ** ** |   |   | $ 236,407 | ** ** |   |

 

The unrealized losses on the Company’s investments inmarketable securities were caused primarily by changes in interest rates. TheCompany’s investment portfolio consists of government and high-qualitycorporate securities. Investments in both fixed rate and floating rate interestearning instruments carry a degree of interest rate risk. Fixed rate securitiesmay have their fair market value adversely impacted due to a rise in interestrates, while floating rate securities may produce less income than expected ifinterest rates fall. The longer the term of the securities, the moresusceptible they are to changes in market rates of interest and yields on bonds.Investments are reviewed periodically to identify possible other-than-temporaryimpairment. When evaluating the investments, the Company reviews factors suchas the length of time and extent to which fair value has been below cost basis,the financial condition of the issuer and the Company’s ability and intent tohold the investment for a period of time which may be sufficient foranticipated recovery in market value. The Company believes its gross unrealizedlosses are temporary because management has the intent and ability to holdthese investments until maturity, at which time the Company would expect toreceive the amortized cost basis of the investment based on the underlyingcontractual arrangement. The Company has not experienced any significantrealized gains or losses on its investments in marketable securities during theyears presented.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table summarizes the estimated fair value of the Company’sinvestments in marketable securities designated as available-for-sale classifiedby the maturity of the security:

| ** **                              | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands)**               | ** ** |
| Due within one  year                    |       | $ 207,845                        |       | $ 214,947 |   |
| Due after one  year through two years   |       | 32,934                                |       | 19,466 |   |
| Due after two  years through five years |       | 8,046                                 |       | 1,994 |   |
|                                    |       | $ 248,825                        |       | $ 236,407 |   |

 

*Investments inOther Companies*

As of December 31, 2005 and 2006, minorityinvestments in other companies were $1.4 million and $59.3 million,respectively, and are classified as investments in other companies in theConsolidated Balance Sheets. Minority investments in other companies as of December 31,2005 and 2006 included $1.0 million and $11.0 million, respectively, ofinvestments carried at cost, and $0.4 million and $48.3 million, respectively,of investments recorded at fair value. As of December 31, 2005, grossunrealized losses were $0.1 million and there were no gross unrealized gains.As of December 31, 2006, gross unrealized losses were $6.5 million andthere were no gross unrealized gains.

In March 2006, the Company invested $50.0 millionin Covad Communications Group, LLC (“Covad”), which consisted of 6.1 millionshares of Covad common stock for an aggregate purchase price of $10.0 millionand $40.0 million aggregate principal amount of 12% Senior Secured ConvertibleNotes due 2011 (the “Covad Notes”). The Company cannot exert significantinfluence over Covad’s operating and financial policies and, as such, accountsfor its investment in Covad under the cost method of accounting and classifiesthe investment as available-for-sale. The Company deferred $0.8 million ofdirect loan origination costs that are being recognized as a reduction in theeffective yield over the term of the Covad Notes.

In April 2006, the Company invested $10.0 millionin Current Communications Group, LLC (“Current”), a privately-heldbroadband-over-powerline provider. The Company accounts for its investment inCurrent under the cost method of accounting because the Company cannot exertsignificant influence over Current’s operating and financial policies.

During the year ended December 31,2005, the Company received $4.4 million in cash distributions from eCompaniesVenture Group, L.P. (“EVG”), a limited partnership that invested in domestic emergingInternet-related companies. In applying the cost method, EarthLinkrecorded $0.6 million as a return of EarthLink’s investment based on thecarrying value of the investment, and the gain of $3.8 million was included ingain (loss) on investments in other companies, net, in the ConsolidatedStatement of Operations for the year ended December 31, 2005. During theyear ended December 31, 2006, the Company recorded a $0.4 million gain oninvestments in other companies resulting from an additional EVG dividend.

*Investment inEquity Affiliate*

In March 2005, the Company completed theformation of a joint venture with SK Telecom, HELIO, to market and sellwireless voice and data services in the U.S. EarthLink and SK Telecom each havean equal voting and economic ownership interest in HELIO. Upon formation,the Company invested 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

$43.0 million of cashand contributed non-cash assets valued at $40.0 million, including 27,000wireless customers, contractual arrangements and agreements to prospectivelymarket HELIO’s services. The non-cash assets contributed were recorded by theCompany as an additional investment of $0.5 million based on the Company’scarrying value of the assets. The Company recorded its initial investment at$43.5 million, reflecting the cash invested plus the carrying value of assetscontributed. In addition, the Company paid HELIO to assume $0.9 million of netliabilities associated with wireless customers and related operations. TheCompany recorded no gain or loss in March 2005 associated with thecontribution of non-cash assets, the transfer of net liabilities, or theassociated payment to HELIO to assume the net liabilities upon completing theformation of HELIO.

Pursuant to the HELIO Contribution and FormationAgreement, the Company contributed $122.0 million of cash and noncash assetsduring 2005, $78.5 million during 2006 and is committed to invest an additional$19.5 million of cash in HELIO during 2007, which includes $13.5 million thatwas contributed in February 2007. During 2006, HELIO received minorityinvestments, which reduced EarthLink’s and SK Telecom’s economic ownershipinterest in HELIO from 50 percent at formation to approximately 48 percent asof December 31, 2006. However, EarthLink’s and SK Telecom’s votinginterest remains the same.

The Company accounts for its investment in HELIO underthe equity method of accounting because the Company can exert significantinfluence over HELIO’s operating and financial policies. As a result, theCompany records its proportionate share of HELIO’s net loss in its ConsolidatedStatement of Operations. The Company is amortizing the difference between thebook value and fair value of non-cash assets contributed to HELIO over theirestimated useful lives. The amortization increases the carrying value of theCompany’s investment and decreases the net losses of equity affiliate includedin the Consolidated Statement of Operations. During the years ended December 31,2005 and 2006, the Company recorded $15.6 million and $84.8 million,respectively, of net losses of equity affiliate related to its HELIOinvestment, which is net of amortization of basis differences and certain otherequity method accounting adjustments.

Thefollowing is summarized statement of operations information of HELIO for theyears ended December 31, 2005 and 2006:

| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2005**                                   | ** ** | **2006** | ** ** |
| ** **     | ** ** | **(in thousands)**                    | ** ** |
| Revenues       |       | $ 16,365                              |       | $  46,580 |   |
| Operating loss |       | (45,658                                    | )          | (201,266 | ) |
| Net loss       |       | (42,023                                    | )          | (191,755 | ) |

 

Thefollowing is summarized balance sheet information of HELIO as of December 31,2005 and 2006:

| ** **            | ** ** | **As of December 31,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|
| ** **            | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **            | ** ** | **(in thousands)**               | ** ** |
| Current assets        |       | $ 159,067                        |       | $ 184,014 |   |
| Long-term assets      |       | 64,880                                |       | 80,956 |   |
| Current  liabilities  |       | 17,912                                |       | 78,889 |   |
| Long-term liabilities |       | 2,394                                 |       | 4,853 |   |

 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**5.   Propertyand Equipment**

Propertyand equipment is recorded at cost and consisted of the following as of December 31,2005 and 2006: 

| ** **                         | ** ** | **As of December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(in thousands)**               | ** ** |
| Data center and  network equipment |       | $ 247,677                        |       | $ 286,805 |   |
| Office and other  equipment        |       | 185,734                               |       | 193,692 |   |
| Land and  buildings                |       | 14,777                                |       | 15,113 |   |
| Leasehold  improvements            |       | 58,332                                |       | 65,333 |   |
| Construction in  progress          |       | 11,266                                |       | 13,848 |   |
|                               |       | 517,786                               |       | 574,791 |   |
| Less accumulated  depreciation     |       | (444,609                              | )          | (478,171 | ) |
|                               |       | $  73,177                   |       | $  96,620 |   |

 

During the year ended December 31, 2005, theCompany wrote-down and retired abandoned and disposed property and equipmentthat had a cost basis and accumulated depreciation of $6.8 million.

Depreciation expensecharged to operations, which includes depreciation expense associated withproperty under capital leases, was $54.9 million, $34.9 million and $34.4million for the years ended December 31, 2004, 2005 and 2006,respectively.

**6.   Goodwilland Purchased Intangible Assets**

*Goodwill*

Pursuant to SFAS No. 142, the Company performs animpairment test annually during the fourth quarter of its fiscal year or whenevents and circumstances indicate goodwill might be permanently impaired.During the years ended December 31, 2004, 2005 and 2006, the Company’stests indicated its goodwill was not impaired.

During the year ended December 31, 2005, thecarrying amount of goodwill decreased $6.7 million. This consisted of a $17.1million decrease in goodwill due to the realization of tax benefits associatedwith net operating loss carryforwards which were acquired in connection withacquisitions, offset by a $10.4 million increase in goodwill resulting from theacquisition of Aluria. During the year ended December 31, 2006, thecarrying amount of goodwill increased $101.2 million, which consisted of a$100.0 million increase in goodwill resulting from the acquisition of New Edgeand $1.2 million of purchase accounting adjustments.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Purchased Intangible Assets*

Thefollowing table presents the components of the Company’s acquired identifiableintangible assets included in the accompanying Consolidated Balance Sheets asof December 31, 2005 and 2006:

| ** **                                   | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2006** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **Gross**                                       | ** ** | ** **                                      | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                   | ** ** | **Carrying**                                    | ** ** | **Accumulated**                                 | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                                   | ** ** | **Value**                                       | ** ** | **Amortization**                                | ** ** | **Value** | ** ** | **Value** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                         | ** ** |
| Subscriber bases  and customer relationships |       | $                                               | 337,511    |                                            |       | $ | (327,020 | ) |   | $ | 10,491 |   | $ | 384,336 |   |   | $ | (337,708 | ) |   | $ | 46,628 |   |
| Software,  technology and other              |       | 3,125                                           |       |                                            | (338       | ) |   | 2,787 |   | 3,864 |   |   | (1,551 | ) |   | 2,313 |   |
| Trade names                                  |       | 3,000                                           |       |                                            | —     |   |   | 3,000 |   | 10,857 |   |   | — |   |   | 10,857 |   |
| Total                                        |       | $                                               | 343,636    |                                            |       | $ | (327,358 | ) |   | $ | 16,278 |   | $ | 399,057 |   |   | $ | (339,259 | ) |   | $ | 59,798 |   |

 

Amortization of intangibleassets in the Consolidated Statements of Operations for the years ended December 31,2004, 2005 and 2006 represents the amortization of definite lived intangibleassets. The Company’s definite lived intangible assets primarily consist of subscriber bases and customer relationships,acquired software and technology and other assets acquired inconjunction with the purchases of businesses and subscriber bases from otherISPs that are not deemed to have indefinite lives. Definite lived intangibleassets are amortized on a straight-line basis over their estimated usefullives, which are generally three to six years for subscriber bases and customerrelationships and one to six years for acquired software and technology. As ofDecember 31, 2006, the weighted average amortization periods were 3.3 years forsubscriber bases and customer relationships and 4.1 years for software andtechnology. Based on the current amount of definite lived intangible assets,the Company expects to record amortization expense of approximately $13.8million, $11.8 million, $9.0 million, $6.4 million, $6.0 million and $1.9 millionduring the years ending December 31, 2007, 2008, 2009, 2010, 2011 andthereafter, respectively. Actual amortization expense to be reported in futureperiods could differ materially from these estimates as a result of assetacquisitions, changes in useful lives and other relevant factors. The Company’sindefinite lived intangible assets consist of trade names.

In connection with theformation of HELIO and the transfer of 27,000 wireless subscribers to HELIO,EarthLink reclassified a subscriber base asset with a net book value of $0.4million associated with certain wireless subscribers to its investment in HELIOduring the year ended December 31, 2005. The subscriber base asset had acost basis of $1.9 million and accumulated amortization of $1.5 million.

**7.   Facility Exit and Restructuring Costs**

During the year ended December 31,2003, EarthLink executed a plan to streamline its contact center facilities(the “2003 Plan”). In connection with the 2003 Plan, EarthLink closed contactcenter facilities in Dallas, Texas; Sacramento, California; Pasadena,California; and Seattle, Washington. The closure of the four contact centerfacilities resulted in the termination of 1,220 employees and the net reductionof 920 employees, primarily customer support personnel. In connection withthe 2003 Plan, EarthLink recorded facility exit costs of $36.6 million,including $10.7 million for employee, personnel and related costs; $18.2million for real estate and telecommunications costs; and $7.7 million in assetdisposals. As of December 31, 2006, the Company had a $1.2 million liabilityremaining for real estate commitments. All other costs have been paid.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

During the year ended December 31,2004, EarthLink executed a plan to restructure and further streamline itscontact center operations (the “2004 Plan”). Under the 2004 Plan, EarthLinkclosed contact center operations in Harrisburg, Pennsylvania; Roseville,California; San Jose, California; and Pasadena, California; and reduced itscontact center operations in Atlanta, Georgia. Approximately 1,140 employeeswere directly impacted, primarily customer support personnel. As a result ofthe 2004 Plan, EarthLink recorded facility exit costs of $30.2 million,including $10.5 million for employee, personnel and related costs; $11.3million for real estate and telecommunications costs; and $8.4 million in assetdisposals. As of December 31, 2006, the Company had a $2.6 millionliability remaining for real estate commitments. All other costs have beenpaid.

During the year ended December 31,2005, EarthLink executed plans to further streamline operations by outsourcingcertain contact center and credit and collections activities (the “2005 Plans”).Approximately 227 employees were directly impacted. As a result of the 2005Plans, EarthLink recorded $1.4 million of restructuring costs for severance andpersonnel-related costs. As of December 31, 2006, all severance andpersonnel-related costs related to the 2005 Plans were paid and there was noremaining liability.

EarthLink periodicallyevaluates and adjusts its estimates for facility exit and restructuring costsbased on currently-available information. Such adjustments are included asfacility exit and restructuring costs in the Consolidated Statements ofOperations. During the years ended December 31, 2004 and 2006, EarthLinkreduced its estimates for facility exit costs by $1.8 million and $0.1 million,respectively, based on events occurring during the periods. During the yearended December 31, 2005, EarthLink increased its estimates for facilityexit costs by $0.7 million based on events occurring during the period.

Facility exit andrestructuring liabilities due within one year of the balance sheet date areclassified as other accounts payable and accrued liabilities and liabilitiesdue after one year are classified as other long-term liabilities in theConsolidated Balance Sheets. Of the unpaid balance as of December 31,2006, approximately $2.1 million associated with the 2003 Plan and 2004 Planwas classified as long-term.

**8.   Other Accounts Payable and AccruedLiabilities**

Otheraccounts payable and accrued liabilities consisted of the following as of December 31,2005 and 2006:

| ** **                                                   | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**               | ** ** |
| Accrued  communications costs                                |       | $                                     | 7,952      |   | $ | 14,052 |   |
| Accrued  advertising                                         |       | 19,026                                |       | 17,299 |   |
| Accrued taxes                                                |       | 7,923                                 |       | 11,874 |   |
| Accrued bounties                                             |       | 9,760                                 |       | 1,442 |   |
| Accrued  professional fees and settlements                   |       | 3,755                                 |       | 5,475 |   |
| Liabilities  associated with non-cancelable operating leases |       | 3,473                                 |       | 2,704 |   |
| Accrued  outsourced customer support                         |       | 10,088                                |       | 8,021 |   |
| Subscriber base  and fixed asset purchases                   |       | 3,858                                 |       | 6,457 |   |
| Deposits and due  to customers                               |       | 4,088                                 |       | 5,654 |   |
| Other                                                        |       | 14,216                                |       | 21,904 |   |
|                                                         |       | $                                     | 84,139     |   | $ | 94,882 |   |

 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**9.   Long-TermDebt**

In November 2006, the Company issued $258.8million aggregate principal amount of Convertible Senior Notes due November 15,2026 (the “Notes”) in a registered offering, which reflects the exercise by theunderwriters of their option to purchase an additional $33.8 million ofprincipal to cover over-allotments. The Company received net proceeds of $251.6million after transaction fees of $7.2 million. The Notes bear interest at3.25% per year on the principal amount of the Notes until November 15,2011, and 3.50% interest per year on the principal amount of the Notesthereafter, payable semi-annually in May and November of each year.The Notes rank as senior unsecured obligations of the Company.

The Notes are payable with cash and, if applicable,convertible into shares of the Company’s common stock based on an initialconversion rate, subject to adjustment, of 109.6491 shares per $1,000 principalamount of Notes (which represents an initial conversion price of approximately$9.12 per share). Upon conversion, a holder will receive cash up to theprincipal amount of the Notes and, at the Company’s option, cash, or shares ofthe Company’s common stock or a combination of cash and shares of common stockfor the remainder, if any, of the conversion obligation. The conversionobligation is based on the sum of the “daily settlement amounts” for the20 consecutive trading days that begin on, and include, the second tradingday after the day the notes are surrendered for conversion. The Notes willbe convertible only in the following circumstances: (1) during anycalendar quarter after the calendar quarter ending December 31, 2006 (andonly during such calendar quarter), if the closing sale price of the Company’scommon stock for each of 20 or more trading days in a period of 30 consecutivetrading days ending on the last trading day of the immediately precedingcalendar quarter exceeds 130% of the conversion price in effect on the lasttrading day of the immediately preceding calendar quarter; (2) during thefive consecutive business days immediately after any five consecutive tradingday period in which the average trading price per $1,000 principal amount ofNotes was equal to or less than 98% of the average conversion value of the Notesduring the note measurement period; (3) upon the occurrence of specifiedcorporate transactions; (4) if the Company has called the Notes forredemption; and (5) at any time from, and including, October 15, 2011to, and including, November 15, 2011 and at any time on or after November 15,2024. The Company has the option to redeem the Notes, in whole or in part, forcash, on or after November 15, 2011, provided that the Company had made atleast ten semi-annual interest payments. In addition, the holders may requirethe Company to purchase all or a portion of their notes on each of November 15,2011, November 15, 2016 and November 15, 2021.

As of December 31, 2006, the fair value of theNotes was approximately $277.3 million based on the quoted market price.

In connection with theissuance of the Notes, the Company entered into separate convertible note hedgetransactions and separate warrant transactions with respect to the Company’scommon stock to reduce the potential dilution upon conversion of the Notes(collectively referred to as the “Call Spread Transactions”). The Companypurchased call options to cover approximately 28.4 million shares of theCompany’s common stock, subject to adjustment in certain circumstances, whichis the number of shares underlying the Notes. In addition, the Company soldwarrants permitting the purchasers to acquire up to approximately 28.4 millionshares of the Company’s common stock, subject to adjustment in certaincircumstances. See Note 10, “Shareholders’ Equity,” for more information on theCall Spread Transactions.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**10.   Shareholders’Equity**

*Shareholder RightsPlan*

During 2002, the Board of Directors adopted ashareholder rights plan (the “Rights Plan”). In connection with the RightsPlan, the Board of Directors also declared a dividend of one right for eachoutstanding share of EarthLink’s common stock for stockholders of record at theclose of business on August 5, 2002.

Each right entitles theholder to purchase one one-thousandth (1¤1000)of a share (a “Unit”) of EarthLink’s Series D Junior Preferred Stock at aprice of $60.00 per Unit upon certain events. Generally, in the event a personor entity acquires, or initiates a tender offer to acquire, at least 15% ofEarthLink’s then outstanding common stock, the rights will become exercisablefor common stock having a value equal to two times the exercise price of theright, or effectively at one-half of EarthLink’s then-current stock price. Therights are redeemable under certain circumstances at $0.01 per right and willexpire, unless earlier redeemed, on August 6, 2012.

*Share Repurchases*

Since the inception of the Company’s share repurchaseprogram, the Board of Directors has authorized a total of $550.0 million forthe repurchase of EarthLink’s common stock. During the years ended December 31,2004 and 2005, the Board of Directors also approved repurchasing common stockpursuant to plans under Rule 10b5-1 of the Securities Exchange Actof 1934, as amended. As of December 31, 2006, the Company had $95.3million available under the current authorizations. The Company may repurchaseits common stock from time to time in compliance with the SEC regulations andother legal requirements, including through the use of derivative transactions,and subject to market conditions and other factors. The share repurchaseprogram does not require the Company to acquire any specific number of sharesand may be terminated by the Board of Directors at any time.

Thefollowing table summarizes share repurchases during the years ended December 31,2004, 2005 and 2006 pursuant to the share repurchase program, which have beenrecorded as treasury stock:

| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(in thousands)**                    | ** ** |
| Number of shares  repurchased |       | 12,628                                     |       | 20,527 |   | 11,339 |   |
| Aggregate purchase price      |       | $                                          | 125,286    |   | $ | 192,563 |   | $ | 85,613 |   |
|                               |            |                                            |            |  |  |  |  |  |  |  |

 

*Call SpreadTransactions*

In connection with the issuance of the Notes (see Note9, “Long-Term Debt”), the Company entered into separate convertible note hedgetransactions and separate warrant transactions with respect to the Company’scommon stock to minimize the impact of the potential dilution upon conversionof the Notes. The Company purchased call options in private transactions tocover approximately 28.4 million shares of the Company’s common stock at astrike price of $9.12 per share, subject to adjustment in certaincircumstances, for $47.2 million. The call options generally allow the Companyto receive shares of the Company’s common stock from counterparties equal tothe number of shares of common stock payable to the holders of the Notes uponconversion. These call options will terminate the earlier of the maturity datesof the related senior convertible notes or the first day all of the relatedsenior convertible notes are 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

no longer outstanding dueto conversion or otherwise. As of December 31, 2006, the estimated fairvalue of the call options was $58.4 million.

The Company also sold warrants permitting thepurchasers to acquire up to approximately 28.4 million shares of theCompany’s common stock at an exercise price of $11.20 per share, subject toadjustments in certain circumstances, in private transactions for totalproceeds of approximately $32.1 million. The warrants expire at variousdates in March 2012 through July 2012. The warrants provide for netshare settlement. In no event shall the Company be required to deliver a numberof shares in connection with the transaction in excess of twice the aggregatenumber of warrants. As of December 31, 2006, the estimated fair value ofthe warrants was $41.0 million.

The Company has analyzedthe Call Spread Transactions under EITF Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled In, aCompany’s Own Stock,” and other relevant literature, and determined that theymeet the criteria for classification as equity transactions. As a result, theCompany recorded the purchase of the call options as a reduction in additionalpaid-in capital and the proceeds of the warrants as an addition to paid-incapital, and the Company will not recognize subsequent changes in fair value ofthe agreements.

**11.   Stock-BasedCompensation**

*Stock IncentivePlans*

The Company has grantedoptions to employees and directors to purchase the Company’s common stock undervarious stock incentive plans. The Company has also granted restricted stockunits to employees and directors under various stock incentive plans. Under theplans, employees and non-employee directors are eligible to receive awards ofvarious forms of equity-based incentive compensation, including stock options,restricted stock, restricted stock units, phantom share units and performanceawards, among others. The plans are administered by the Board of Directors orthe Leadership and Compensation Committee of the Board of Directors, whichdetermine the terms of the awards granted. Stock options are generally grantedwith an exercise price equal to the market value of EarthLink, Inc. commonstock on the date of grant, have a term of ten years or less, and vest overterms of four to six years from the date of grant. Restricted stock unitsgenerally vest over terms of three to six years from the date of grant. As of December 31,2006, the Company had reserved 31.3 million shares of common stock for theissuance of equity-based incentive compensation under its stock incentiveplans. As of December 31, 2006, approximately 20.5 million stock options,restricted stock units and phantom share units were outstanding under variousstock incentive plans that expire in 2010 and 2016 and approximately 10.8million shares were available for grant.

*DeferredCompensation Plan*

The Company’s SecondDeferred Compensation Plan for Directors and Certain Key Employees permitsmembers of the Board of Directors and eligible employees to elect to deferreceipt of shares of common stock pursuant to vested restricted stock units andvarious cash consideration, such as directors’ fees and bonuses. The cashconsideration is converted into phantom share units at the closing price on thedate the consideration would otherwise be paid, and vested restricted stockunits are converted into phantom share units on a one-for-one basis. Phantomshare units are fully vested at the date of grant and are converted to commonstock upon the occurrence of various events. As of December 31, 2005 and2006, approximately 18,000 and 29,000 phantom share units, respectively, wereoutstanding.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Employee StockPurchase Plan*

In January 2005, theCompany terminated its employee stock purchase plan (“ESPP”). Under the termsof the ESPP, eligible employees were able to have up to 15% of eligiblecompensation deducted from their pay to purchase EarthLink common stock. Underthe ESPP, withholdings were used to purchase shares at the beginning of eachquarter at a per share purchase price equal to 85% of the lesser of the closingprice on the first trading day of the just completed quarter or the closingprice on the last trading day of the just completed quarter. During the yearsended December 31, 2004 and 2005, employees purchased approximately223,000 and 47,000 shares, respectively, pursuant to the ESPP at weighted averageper share purchase prices of $7.58 and $9.14, respectively.

*Warrants*

Prior to December 31, 2000, the Company issuedwarrants to purchase shares of the Company’s common stock to certain members ofits Board of Directors, customers, consultants, lessors, creditors and others.As of December 31, 2006, warrants to purchase a total of 61,000 shares ofcommon stock were outstanding at exercise prices ranging from $4.02 to $5.50.The warrants are currently exercisable and expire at various dates through October 2007.

During the year ended December 31,2006, the Company sold warrants in connection with the issuance of Notespermitting the purchasers to acquire up to approximately 28.4 million shares ofthe Company’s common stock. See Note 10, “Stockholders’ Equity,” for adescription of those warrants.

*Options Outstanding*

Thefollowing table summarizes information concerning stock option activity as ofand for year ended December 31, 2006:

| ** **                                                | ** ** | ** **                                                | ** ** | ** **   | ** ** | **Weighted**          | ** ** | ** **    | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------|------------|-----------------------|------------|---------------|------------|
| ** **                                                | ** ** | ** **                                                | ** ** | **Weighted** | ** ** | **Average**           | ** ** | ** **    | ** ** |
| ** **                                                | ** ** | ** **                                                | ** ** | **Average**  | ** ** | **Remaining**         | ** ** | **Aggregate** | ** ** |
| ** **                                                | ** ** | ** **                                                | ** ** | **Exercise** | ** ** | **Contractual**       | ** ** | **Intrinsic** | ** ** |
| ** **                                                | ** ** | **Stock Options**                                    | ** ** | **Price**    | ** ** | **Term (Years)** | ** ** | **Value**     | ** ** |
| ** **                                                | ** ** | **(shares and dollars in thousands)** | ** ** |
| Outstanding as of  December 31, 2005                 |       |                                                      | 19,831     |         |       |                  | $          | 11.90         |       |   |   |   |   |   |   |   |   |   |
| Granted                                                   |       |                                                      | 3,729      |         |       |                  | 7.94       |          |       |   |   |   |   |   |   |   |   |
| Exercised                                                 |       |                                                      | (717       | )            |       |                  | 6.00       |          |       |   |   |   |   |   |   |   |   |
| Forfeited and expired                                     |       |                                                      | (2,373     | )            |       |                  | 12.88      |          |       |   |   |   |   |   |   |   |   |
| Outstanding as of  December 31, 2006                 |       |                                                      | 20,470     |         |       |                  | 11.27      |          |       |   | 6.4 |   |   |   | $ | 4,559 |   |   |
| Vested and expected to vest as of December 31,  2006 |       |                                                      | 18,691     |         |       |                  | $          | 11.52         |       |   |   | 6.1 |   |   |   | $ | 4,386 |   |   |
| Exercisable as of  December 31, 2006                 |       |                                                      | 12,200     |         |       |                  | $          | 13.02         |       |   |   | 4.8 |   |   |   | $ | 2,947 |   |   |

                                                

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The weighted average estimated fair value of stockoptions granted during the year ended December 31, 2006 was $3.28 pershare. The aggregate intrinsic value amounts in the table above represent thedifference between the closing price of the Company’s common stock on December 31,2006 and the exercise price, multiplied by the number of in-the-money stockoptions as of the same date. This represents the amount that would have beenreceived by the stock option holders if they had all exercised their stock optionson December 31, 2006. The total intrinsic value of options exercisedduring the years ended December 31, 2004, 2005 and 2006 was $6.1 million,$10.1 million and $2.4 million, respectively.

Thefollowing table summarizes the status of the Company’s stock options as of December 31,2006:

| ** **                                                             | ** ** | ** **                                                      | ** ** | ** **                                                      | ** ** | ** **                                                   | ** ** | **Stock Options**                                          | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Stock Options Outstanding**                                | ** ** | **Exercisable**                                                 | ** ** |
| ** **                                                             | ** ** | ** **                                                      | ** ** | **Weighted**                                                    | ** ** | ** **                                                   | ** ** | ** **                                                      | ** ** |
| ** **                                                             | ** ** | ** **                                                      | ** ** | **Average**                                                     | ** ** | **Weighted**                                                 | ** ** | ** **                                                      | ** ** | **Weighted** | ** ** |
| ** **                                                             | ** ** | ** **                                                      | ** ** | **Remaining**                                                   | ** ** | **Average**                                                  | ** ** | ** **                                                      | ** ** | **Average** | ** ** |
| **Range of**                                                      | ** ** | **Number**                                                      | ** ** | **    Contractual    ** | ** ** | **    Exercise    ** | ** ** | **Number**                                                      | ** ** | **    Exercise    ** | ** ** |
| **Exercise Prices**                                               | ** ** | **    Outstanding    ** | ** ** | **Life**                                                        | ** ** | **Price**                                                    | ** ** | **    Exercisable    ** | ** ** | **Price** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                                         | ** ** | ** **                                                      | ** ** | ** **                                                   | ** ** | **(in thousands)**                                         | ** ** | ** ** | ** ** |
| $ 1.17  to  $ 5.56                       |       |                                                            | 1,845      |                                                            |       |                                                         | 5.7        |                                                            |       |   | $ | 5.28 |   |   |   | 1,267 |   |   |   | $ | 5.36 |   |   |
|    5.81  to     6.72 |       |                                                            | 907        |                                                            |       |                                                         | 5.6        |                                                            |       |   | 6.17 |   |   |   | 808 |   |   |   | 6.19 |   |   |
|    6.90  to     7.82 |       |                                                            | 2,716      |                                                            |       |                                                         | 9.1        |                                                            |       |   | 7.07 |   |   |   | 262 |   |   |   | 7.72 |   |   |
|    7.99  to     9.24 |       |                                                            | 2,664      |                                                            |       |                                                         | 7.5        |                                                            |       |   | 8.93 |   |   |   | 1,373 |   |   |   | 8.87 |   |   |
|    9.25  to     9.93 |       |                                                            | 2,659      |                                                            |       |                                                         | 6.8        |                                                            |       |   | 9.58 |   |   |   | 1,373 |   |   |   | 9.64 |   |   |
|  10.06  to   10.06                       |       |                                                            | 2,290      |                                                            |       |                                                         | 3.7        |                                                            |       |   | 10.06 |   |   |   | 2,290 |   |   |   | 10.06 |   |   |
|  10.36  to   10.51                       |       |                                                            | 2,322      |                                                            |       |                                                         | 8.3        |                                                            |       |   | 10.37 |   |   |   | 871 |   |   |   | 10.37 |   |   |
|  10.56  to   15.00                       |       |                                                            | 2,410      |                                                            |       |                                                         | 6.8        |                                                            |       |   | 11.67 |   |   |   | 1,299 |   |   |   | 12.22 |   |   |
|  15.63  to   51.44                       |       |                                                            | 2,657      |                                                            |       |                                                         | 3.0        |                                                            |       |   | 26.98 |   |   |   | 2,657 |   |   |   | 26.98 |   |   |
| $ 1.17  to $51.44                                  |       |                                                            | 20,470     |                                                            |       |                                                         | 6.4        |                                                            |       |   | $ | 11.27 |   |   |   | 12,200 |   |   |   | $ | 13.02 |   |   |

 

*ValuationAssumptions for Stock Options*

Thefair value of stock options granted during the years ended December 31,2004, 2005 and 2006 was estimated using the Black-Scholes option-pricing modelwith the following assumptions:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Dividend yield           |       | 0                                          | %          | 0 | % | 0 | % |
| Expected  volatility     |       | 58                                         | %          | 49 | % | 43 | % |
| Risk-free  interest rate |       | 3.59                                       | %          | 4.03 | % | 4.86 | % |
| Expected life            |       | 4.3 years                                  |       | 4.7 years |   | 4.3 years |   |

 

The weighted average grant date fair value of optionsgranted during the years ended December 31, 2004, 2005 and 2006 was $4.71,$4.65 and $3.28, respectively.

The dividend yieldassumption is based on the Company’s history and expectation of future dividendpayouts. The expected volatility is based on a combination of the Company’shistorical stock price and implied volatility. The selection of impliedvolatility data to estimate expected volatility is based upon the availabilityof actively traded options on the Company’s stock. The risk-free interest rateassumption is based upon the U.S. Treasury yield curve in effect at the time ofgrant for periods corresponding with the expected life of the option. Theexpected life of employee stock options represents the weighted-average periodthe stock options are expected to remain outstanding.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

*Restricted StockUnits*

Thefollowing table summarizes the Company’s restricted stock units as of and forthe year ended December 31, 2006:

| ** **                              | ** ** | ** **           | ** ** | **Weighted**        | ** ** |
|-----------------------------------------|------------|----------------------|------------|---------------------|------------|
| ** **                              | ** ** | ** **           | ** ** | **Average**         | ** ** |
| ** **                              | ** ** | **Restricted**       | ** ** | **Grant Date** | ** ** |
| ** **                              | ** ** | **Stock Units** | ** ** | **Fair Value** | ** ** |
| Nonvested as of  December 31, 2005 |       |                 | 658,000    |                |       |   | $ | 9.81 |   |   |
| Granted                                 |       |                 | 831,000    |                |       |   | 7.89 |   |   |
| Vested                                  |       |                 | (165,000   | )                   |       |   | 9.29 |   |   |
| Forfeited                               |       |                 | (144,000   | )                   |       |   | 9.52 |   |   |
| Nonvested as of  December 31, 2006 |       |                 | 1,180,000  |                |       |   | 8.57 |   |   |

 

The fair value ofrestricted stock units is determined based on the closing trading price ofEarthLink’s common stock on the grant date. The weighted-average grant datefair value of restricted stock units granted during the years ended December 31,2004, 2005 and 2006 was $8.90, $9.49 and $7.89, respectively. As of December 31,2006, there was $7.0 million of total unrecognized compensation cost related tononvested share-based compensation arrangements. That cost is expected to berecognized over a weighted-average period of 3.1 years. The total fair value ofshares vested during the years ended December 31, 2004, 2005 and 2006 was$0.1 million, $0.1 million and $1.2 million, respectively, which represents theclosing price of the Company’s common stock on the vesting date multiplied bythe number of restricted stock units that vested.

**12.**   ProfitSharing Plans

The Company sponsors theEarthLink, Inc. 401(k) Plan (“Plan”), which qualifies as a deferredsalary arrangement under Section 401(k) of the Internal Revenue Code.Under the Plan, participating employees may defer a portion of their pretaxearnings up to the Internal Revenue Service annual contribution limit. TheCompany makes a matching contribution of 50% of the first 6% of basecompensation that a participant contributes to the Plan. The Company’s matchingcontributions vest over four years from the participant’s date of hire. TheCompany contributed $3.0 million, $2.8 million and $2.8 million during theyears ended December 31, 2004, 2005 and 2006, respectively.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**13.   IncomeTaxes**

Thecurrent and deferred income tax provisions were as follows for the years ended December 31,2004, 2005 and 2006:

| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **            | ** ** | **(in thousands)**                    | ** ** |
| **Current**           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal               |       | $                                          | 1,608      |   | $ | 2,338 |   | $ | (328 | ) |
| State                 |       | 883                                        |       | 2,999 |   | 626 |   |
| Total current         |       | 2,491                                      |       | 5,337 |   | 298 |   |
| **Deferred**          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal               |       | 1,969                                      |       | 17,038 |   | 325 |   |
| State                 |       | —                                     |       | 101 |   | 263 |   |
| Total deferred        |       | 1,969                                      |       | 17,139 |   | 588 |   |
| Income tax  provision |       | $                                          | 4,460      |   | $ | 22,476 |   | $ | 886 |   |

 

During the years ended December 31, 2004 and2005, the Company utilized approximately $94.1 million and $123.8 million,respectively, of federal net operating loss carryforwards (“NOLs”) and $88.6million and $67.9 million, respectively, of state NOLs to offset taxableincome; however, EarthLink owed state income and federal and state alternativeminimum tax (“AMT”) aggregating $2.5 million and $5.3 million for theyears ended December 31, 2004 and 2005, respectively, and the AMT waspayable primarily due to limitations associated with the utilization of NOLs incalculating AMT due. A valuation allowance of $1.8 million and $2.6 million hasbeen provided for the years ended December 31, 2004 and 2005 for AMTamounts due, respectively, that may be used to offset tax due in future years. Duringthe year ended December 31, 2006, the Company created federal NOLs of$34.5 million, and $124.2 million of state NOLs were utilized to offset statetaxable income or expired. A valuation allowance of $12.1 million has beenprovided for the year ended December 31, 2006 for the federal NOLscreated, that may be used to offset tax due in future years.

Of the federal NOLs utilized during the years ended December 31,2004 and 2005, $5.6 million and $49.0 million were acquired in connection withthe acquisitions of OneMain.com, Inc., Cidco Incorporated and PeoplePCInc. in 2000, 2001 and 2002, respectively. Upon realization of these NOLs in2004 and 2005, the associated reduction in the valuation allowance of $2.0million and $17.1 million, respectively, was recorded as a reduction togoodwill in accordance with SFAS No. 109, “Accounting for Income Taxes,”resulting in deferred income tax provisions of $2.0 million and $17.1 million,respectively.

95

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table summarizes the significant differences between the U.S. federalstatutory tax rate and the Company’s effective tax rate for financial statementpurposes for the years ended December 31, 2004, 2005 and 2006:

| ** **                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**                    | ** ** |
| Federal income  tax provision at statutory rate                                         |       | $                                          | 40,414     |   | $ | 57,840 |   | $ | 2,056 |   |
| State income  taxes, net of federal benefit                                             |       | 5,254                                      |       | 6,688 |   | 923 |   |
| Nondeductible  expenses                                                                 |       | 361                                        |       | 1,087 |   | 5,046 |   |
| Net change to  valuation allowance                                                      |       | —                                     |       | — |   | (7,142 | ) |
| Change in  valuation allowance associated with realized deferred tax assets             |       | (45,360                                    | )          | (62,938 | ) | — |   |
| Valuation  allowance for realized deferred tax assets acquired in business combinations |       | 1,969                                      |       | 17,139 |   | — |   |
| Increase in  valuation allowance for AMT due                                            |       | 1,822                                      |       | 2,582 |   | — |   |
| Other                                                                                   |       | —                                     |       | 78 |   | 3 |   |
|                                                                                    |       | $                                          | 4,460      |   | $ | 22,476 |   | $ | 886 |   |

 

The Company acquired $49.5 million of deferred taxassets, primarily related to NOLs, in conjunction with the acquisition of NewEdge in April 2006. These additional deferred tax assets and liabilitiesimpact the net change to the valuation allowance.

Deferredtax assets and liabilities include the following as of December 31, 2005and 2006:

| ** **                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2005**                              | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(in thousands)**               | ** ** |
| Deferred tax assets:                        |       |                                  |       |   |   |
| Net operating loss carryforwards            |       | $                                     | 158,371    |   | $ | 184,805 |   |
| Accrued liabilities and reserves            |       | 17,773                                |       | 16,696 |   |
| Subscriber base and other intangible assets |       | 97,295                                |       | 92,756 |   |
| Other                                       |       | 38,186                                |       | 62,644 |   |
| Total deferred tax assets                   |       | 311,625                               |       | 356,901 |   |
| Valuation  allowance                        |       | (311,625                              | )          | (356,901 | ) |
| Net deferred tax  asset                     |       | $                                     | —     |   | $ | — |   |
| Deferred tax  liabilities:                  |       |                                  |       |   |   |
| Indefinite lived intangible assets          |       | $                                     | —     |   | $ | (4,586 | ) |
| Net deferred tax  liability                 |       | $                                     | —     |   | $ | (4,586 | ) |

 

As of December 31, 2005 and 2006, the Company hadNOLs for federal income tax purposes totaling approximately $386.9 million and$513.8 million, respectively, which begin to expire in 2017. As of December 31,2005 and 2006, the Company had NOLs for state income tax purposes totalingapproximately $231.1 million and $118.2 million, respectively, which started toexpire in 2005. The Company also had $35.6 million of foreign NOLs as of December 31,2005. During the year ended December 31, 2006, all foreign entities weredissolved and the foreign deferred tax assets were reduced to zero. Under theTax Reform Act of 1986, the Company’s ability to use its federal, state andforeign NOLs 

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

and federal and state taxcredit carryforwards to reduce future taxable income and future taxes,respectively, is subject to restrictions attributable to equity transactionsthat have resulted in a change of ownership as defined in Internal Revenue CodeSection 382. During the year ended December 31, 2006, the Companyreduced deferred tax assets and the valuation allowance by $0.7 million basedon an analysis of other deferred tax assets. As a result, the NOL amounts as ofDecember 31, 2006 reflect the restriction on the Company’s ability to useits federal and state NOLs; however, the Company continues to evaluatepotential changes to the Section 382 limitations associated with acquired federaland state NOLs. The utilization of these NOLs could be further restricted infuture periods which could result in significant amounts of these NOLs expiringprior to benefiting the Company.

As of December 31, 2006, the NOLs included $82.5million related to the exercise of employee stock options and warrants. Anybenefit resulting from the utilization of this portion of the NOLs will becredited directly to equity. As of December 31, 2006, the NOLs included$40.0 million of NOLs acquired in connection with business acquisitions thatare currently available and additional NOLs of $118.9 million that could beutilized in future years. Any benefit resulting from the utilization of thisportion of the NOLs will be credited to goodwill.

The Company has provided afull valuation allowance for its deferred tax assets, including NOLs, becauseof uncertainty regarding their realization.

**14.   Commitmentsand Contingencies**

*Leases*

The Company leases certain of its facilities andequipment under non-cancelable operating leases expiring in various yearsthrough 2014. The leases generally contain annual escalation provisions as wellas renewal options. The total amount of base rent payments, net of allowancesand incentives, is being charged to expense using the straight-line method overthe terms of the leases. In addition to the base rent payments, EarthLinkgenerally pays a monthly allocation of the buildings’ operating expenses. Totalrent expense in the years ended December 31, 2004, 2005 and 2006 for alloperating leases, including operating expenses, was $17.8 million, $13.1million and $14.5 million, respectively.

Minimumlease commitments under non-cancelable leases, including estimated operatingexpenses, as of December 31, 2006 are as follows:

| ** **                                                            | ** ** | **Operating** | ** ** |
|-----------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                            | ** ** | **Leases**    | ** ** |
| **Year Ending December 31,**                           | ** ** | ** **    | ** ** | **(in thousands)** | ** ** |
| 2007                                                                  |       |          | $          | 14,854 |   |   |
| 2008                                                                  |       |          | 11,146     |   |   |
| 2009                                                                  |       |          | 12,494     |   |   |
| 2010                                                                  |       |          | 11,632     |   |   |
| 2011                                                                  |       |          | 11,124     |   |   |
| Thereafter                                                            |       |          | 27,705     |   |   |
| Total minimum  lease payments, including estimated operating expenses |       |          | 88,955     |   |   |
| Less aggregate  contracted sublease income                            |       |          | (9,130     | ) |   |
|                                                                  |       |          | $          | 79,825 |   |   |
|                                                                       |            |               |            |  |  |  |  |  |

 

97

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

During the year ended December 31,2006, the Company entered into a financing lease agreement with GeneralElectric Capital Corporation to lease certain equipment necessary to build outits municipal wireless infrastructure in selected markets. Under the agreement,the Company can lease up to $75.0 million of assets. As of December 31,2006, no equipment was leased pursuant to the financing agreement.

*Significant Agreements*

Accessto the Internet for customers outside of the Company’s base of owned POPs is providedthrough capacity leased from a number of third-party providers such as Level 3Communications, Inc. EarthLink is, in effect, buying this capacity in bulkat a discount, and providing access to EarthLink’s customer base. Certainamounts payable as of December 31, 2005 and 2006 under such agreements areincluded in accrued communications costs in Note 8, “Other Accounts Payable andAccrued Liabilities.” Minimum commitments under non-cancelable network serviceagreements and other purchase commitments are as follows as of December 31,2006:

| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 55,621     |       |
| 2008                                        |       | 37,106     |       |
| 2009                                        |       | 5,102      |       |
| Total                                       |       | $          | 97,829     |       |

 

Cost of revenues fromthese non-cancelable network service agreements totaled $132.6 million, $54.8million and $50.8 million for the years ended December 31, 2004, 2005 and2006, respectively.

*HELIO*

As of December 31,2006, the Company had committed to contribute a total of $19.5 million of cashto HELIO in 2007 pursuant to the Contribution and Formation Agreement, including$13.5 million that was contributed in February 2007 and $6.0 million to becontributed in August 2007.

**15.**    Financial Instruments

*Fair Values of Financial Instruments*

The Company has estimatedthe fair value of its financial instruments as of December 31, 2005 and2006 using available market information or other appropriate valuationmethodologies. Considerable judgment is required in interpreting market data todevelop the estimates of fair value. Accordingly, the estimates presented inthe accompanying consolidated financial statements are not necessarilyindicative of the amounts the Company would realize in a current marketexchange.

The carrying amounts of the Company’s cash, cashequivalents, trade receivables and trade payables approximate their fair valuesbecause of their nature and respective durations. The Company’s short- andlong-term investments in marketable securities consist of available-for-salesecurities and are carried at market value, which is based on quoted marketprices. The Company’s equity investments in publicly-held companies are statedat fair value, which is based on quoted market prices. The Company’sinvestments in privately-held companies are stated at cost, net ofother-than-temporary impairments, because it is impracticable to estimate fairvalue. The estimated fair value of the Company’s long-term debt is based onquoted market prices. The estimated fair value of the Company’s purchased calloptions is based on the Black-Scholes valuation model.

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thefollowing table presents the carrying value and fair value of the Company’sfinancial instruments as of December 31, 2005 and 2006:

| ** **                                       | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2006** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                      | ** ** | **Estimated**                                   | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                                       | ** ** | **Carrying**                                    | ** ** | **Fair**                                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                       | ** ** | **Amount**                                      | ** ** | **Value**                                       | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                       | ** ** | **(dollars in thousands)**            | ** ** |
| Cash and cash  equivalents                       |       | $                                               | 173,294    |                                            | $          | 173,294 |   | $ | 158,369 |   | $ | 158,369 |   |
| Investments in  marketable securities-short-term |       | 207,845                                         |       | 207,845                                         |       | 214,947 |   | 214,947 |   |
| Investments in  marketable securities-long-term  |       | 40,980                                          |       | 40,980                                          |       | 21,460 |   | 21,460 |   |
| Investments in other  companies for which it is: |       |                                            |       |                                            |       |   |   |   |   |
| Practicable to estimate fair value               |       | 417                                             |       | 417                                             |       | 48,325 |   | 48,325 |   |
| Not practicable to estimate fair value           |       | 1,000                                           |       | —                                          |       | 11,000 |   | — |   |
| Long-term debt                                   |       | —                                          |       | —                                          |       | 258,750 |   | 277,253 |   |
| Call options                                     |       | —                                          |       | —                                          |       | 47,162 |   | 58,361 |   |
|                                                  |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |  |

 

*Concentrations ofCredit Risk*

By their nature, allfinancial instruments involve risk, including credit risk for non-performanceby counterparties. Financial instruments that potentially subject the Companyto credit risk consist principally of cash, cash equivalents, investments inmarketable securities, trade receivables and investments in other companies.The Company’s cash investment policy limits investments to investment gradeinstruments. Accounts receivable are typically unsecured and are derived fromrevenues earned from customers primarily located in the U.S. Credit risk withrespect to trade receivables is limited due to the large number of customerscomprising the Company’s customer base. Additionally, the Company performsongoing credit evaluations of its customers and maintains allowances forpotential credit losses. Management regularly evaluates the recoverability ofits investments in other companies based on the performance and the financialposition of those companies as well as other evidence of market value.

*Market Risk*

The Company is exposed tomarket risk as it relates to changes in the market value of its equityinvestments. The Company invests in equity instruments of public and privatecompanies for operational and strategic purposes. These securities are subjectto significant fluctuations in fair market value due to volatility of the stockmarket and the industries in which the companies operate. These securitiesinclude an equity method investment classified as investment in equityaffiliate in the Consolidated Balance Sheets, and investments in privately-heldsecurities, publicly-traded securities and convertible securities classified asinvestments in other companies in the Consolidated Balance Sheets. As of December 31,2005, the Company had $61.1 million of investments accounted for using theequity method of accounting, $0.4 million of fair value investments and$1.0 million of cost-method investments. As of December 31, 2006, theCompany had $61.7 million of investments accounted for using the equitymethod of accounting, $48.3 million of fair value investments and$11.0 million of cost-method investments.

*Interest Rate Risk*

The Company is exposed to interest rate risk withrespect to its investments in marketable securities. A change in prevailinginterest rates may cause the fair value of the Company’s investments tofluctuate. For example, if the Company holds a security that was issued with afixed interest rate at the then-

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

prevailing rate and theprevailing interest rate later rises, the fair value of its investment maydecline. To minimize this risk, the Company has historically held manyinvestments until maturity, and as a result, the Company receives interest andprincipal amounts pursuant to the underlying agreements. To further mitigaterisk, the Company maintains its portfolio of investments in a variety ofsecurities, including government agency notes, asset-backed debt securities(including auction rate debt securities), corporate notes and commercial paper,all of which bear a minimum short-term rating of A1/P1 or a minimum long-termrating of A/A2. As of December 31, 2005 and 2006, net unrealized losses inthese investments were not material. In general, money market funds are not subjectto market risk because the interest paid on such funds fluctuates with theprevailing interest rate. In addition, the Company invests in relativelyshort-term securities and, therefore, changes in short-term interest ratesimpact the amount of interest income included in the statements of operations.

The Company is alsoexposed to interest rate risk with respect with respect to its long-term debt. Achange in prevailing interest rates may cause the fair value of its long-termdebt to fluctuate. The convertible senior notes bear interest at a fixed rateof 3.25% per annum until November 15, 2011, and 3.50% interest per annumthereafter.

**16.   Supplemental Disclosure of Cash FlowInformation**

| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                    | ** ** |
| **Significant non-cash  transactions**                   |       |                                       |       |   |   |   |   |
| Non-cash working capital adjustments to reduce  goodwill |       | $                                          | 5,300      |   | $ | 129 |   | $ | 1,187 |   |
| **Additional  cash flow information**                    |       |                                       |       |   |   |   |   |
| Cash paid during the year for interest                   |       | $                                          | 677        |   | $ | 383 |   | $ | 1,416 |   |
| Cash paid during the year for income taxes               |       | 1,778                                      |       | 5,507 |   | 850 |   |
| **Purchase  of businesses**                              |       |                                       |       |   |   |   |   |
| Cash paid, net of cash acquired                          |       | $                                          | —     |   | $ | 9,352 |   | $ | 108,663 |   |
| Issuance of common stock                                 |       | —                                     |       | — |   | 20,194 |   |
| Net liabilities incurred and assumed                     |       | —                                     |       | 4,203 |   | 15,979 |   |
| Intangible assets  acquired                              |       | $                                          | —     |   | $ | 13,555 |   | $ | 144,836 |   |

 

**17.   RelatedParty Transactions**

*HELIO*

Upon HELIO’s formation,EarthLink and HELIO entered into a services agreement for EarthLink to provideto HELIO facilities, accounting, tax, billing, procurement, risk management,payroll, human resource, employee benefit administration and other supportservices in exchange for management fees. However, as HELIO develops itbusiness, the extent to which HELIO relies on EarthLink to provide theseservices has decreased. EarthLink believes that providing these services to HELIOenabled HELIO to more quickly and cost effectively launch its business than ifit had purchased these services from third parties. The management fees weredetermined based on EarthLink’s costs to provide the services, and managementbelieves such fees are reasonable. The total amount of fees that HELIO pays toEarthLink depends on the extent to which HELIO utilizes EarthLink’s services. Feesfor services provided to HELIO are reflected as reductions to the associatedexpenses incurred by EarthLink to provide such services. 

100

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**EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Duringthe years ended December 31, 2005 and 2006, fees received for servicesprovided to HELIO were $3.0 million and $2.3 million, respectively.

EarthLink markets HELIO’sproducts and services, and during the years ended December 31, 2005 and2006, EarthLink generated revenues of $0.3 million and $0.9 million,respectively, associated with marketing HELIO’s services.

EarthLink purchaseswireless Internet access devices and services from HELIO. During the yearsended December 31, 2005 and 2006, fees paid for products and servicesreceived from HELIO were $0.9 million and $0.9 million, respectively.

As of December 31,2005 and 2006, the Company had accounts receivable from HELIO of approximately$0.3 million and $0.8 million, respectively.

*Sprint*Nextel

Through its ownershipinterest in EarthLink, SprintNextel Corporation (“Sprint”) was considered a related party during theyear ended December 31, 2004. Due to sales of EarthLink common stockduring the year ended December 31, 2005, Sprint is no longer a relatedparty. The Company has amarketing relationship with Embarq Corporation (“Embarq”), a spin-off of Sprint’slocal communications business. During the year ended December 31,2004, the Company’s relationship with Embarq generated approximately 10% ofEarthLink’s total gross organic subscriber additions.

In connection with theCompany’s wholesale and customer referral arrangements with Embarq, the Companyreceived approximately $27.6 million during the year ended December 312004. The prices for services provided by the Company to Embarq were negotiatedat arms-length.

EarthLink paid Embarqapproximately $57.6 million during the year ended December 31, 2004associated with network and voice services agreements. The prices paid forservices purchased from Embarq were negotiated at arms-length.

*Officers and Directors*

As of December 31,2001, the Company had made equity investments totaling $10.0 million in EVG, anaffiliate of eCompanies, LLC (“eCompanies”). The carrying value of theinvestment in EVG as of December 31, 2005 and 2006 was zero. Sky Dayton, amember of EarthLink’s Board of Directors and HELIO’s Board of Directors, is afounding partner in EVG, a limited partnership formed to invest in domesticemerging Internet-related companies, and a founder and director of eCompanies.During the years ended December 31, 2005 and 2006, the Company received$4.4 million and $0.4 million in cash distributions from EVG.

101

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**19.   QuarterlyFinancial Data (Unaudited)**

The followingtable sets forth certain unaudited quarterly consolidated financial data forthe eight quarters in the period ended December 31, 2006. In the opinionof the Company’s management, this unaudited information has been prepared onthe same basis as the audited consolidated financial statements and includesall material adjustments (consisting of normal recurring accruals andadjustments) necessary to present fairly the quarterly unaudited financialinformation. The operating results for any quarter are not necessarilyindicative of results for any future period.
| ** **                                          | ** ** | **Three Months Ended**                                   | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Mar. 31,**                                                  | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **Mar. 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                          | ** ** | **2005**                                                           | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(unaudited)**                                                    | ** ** |
| ** **                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues                                            |       | $                                                                  | 334,740    |   | $ | 325,688 |   | $ | 316,996 |   | $ | 312,648 |   | $ | 309,712 |   | $ | 332,096 |   | $ | 331,309 |   | $ | 328,150 |   |
| Operating costs and  expenses                       |       | 297,940                                                            |       | 277,835 |   | 273,968 |   | 275,833 |   | 289,983 |   | 304,864 |   | 311,683 |   | 319,095 |   |
| Income from operations                              |       | 36,800                                                             |       | 47,853 |   | 43,028 |   | 36,815 |   | 19,729 |   | 27,232 |   | 19,626 |   | 9,055 |   |
| Gain (loss) on  investments in other companies, net |       | (915                                                               | )          | 3,352 |   | — |   | 440 |   | — |   | 352 |   | 25 |   | — |   |
| Net losses of equity  affiliate                     |       | (257                                                               | )          | (2,085 | ) | (4,592 | ) | (8,674 | ) | (7,591 | ) | (15,351 | ) | (26,174 | ) | (35,666 | ) |
| Interest income and  other, net                     |       | 2,875                                                              |       | 2,936 |   | 3,400 |   | 4,280 |   | 4,216 |   | 4,334 |   | 3,272 |   | 2,814 |   |
| Income (loss) before  income taxes                  |       | 38,503                                                             |       | 52,056 |   | 41,836 |   | 32,861 |   | 16,354 |   | 16,567 |   | (3,251 | ) | (23,797 | ) |
| Provision (benefit) for  income taxes               |       | 5,156                                                              |       | 8,208 |   | 5,401 |   | 3,711 |   | — |   | — |   | (69 | ) | 955 |   |
| Net income (loss)                                   |       | $                                                                  | 33,347     |   | $ | 43,848 |   | $ | 36,435 |   | $ | 29,150 |   | $ | 16,354 |   | $ | 16,567 |   | $ | (3,182 | ) | $ | (24,752 | ) |
| Basic net income (loss)  per share (1)              |       | $                                                                  | 0.23       |   | $ | 0.32 |   | $ | 0.28 |   | $ | 0.22 |   | $ | 0.12 |   | $ | 0.12 |   | $ | (0.02 | ) | $ | (0.20 | ) |
| Diluted net income  (loss) per share (1)            |       | $                                                                  | 0.22       |   | $ | 0.31 |   | $ | 0.27 |   | $ | 0.22 |   | $ | 0.12 |   | $ | 0.12 |   | $ | (0.02 | ) | $ | (0.20 | ) |
| Basic weighted average  common shares outstanding   |       | 146,594                                                            |       | 138,303 |   | 132,444 |   | 131,008 |   | 131,514 |   | 132,779 |   | 128,321 |   | 122,654 |   |
| Diluted weighted average common shares outstanding  |       | 149,425                                                            |       | 140,867 |   | 134,709 |   | 134,687 |   | 133,489 |   | 134,897 |   | 128,321 |   | 122,654 |   |

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(1)             Because of the method used in calculating pershare data, the quarterly net income (loss) per share amounts will notnecessarily add to the net income per share computed for the year.

102

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**PARTIV**

**Item 15. Exhibits and FinancialStatement Schedules.**

**(a)**          **Documents filed as part of this Annual Report on Form10-K**

**(1)           FinancialStatements**

1.               Reports ofIndependent Registered Public Accounting Firm

2.               ConsolidatedBalance Sheets as of December 31, 2005 and 2006

3.               ConsolidatedStatements of Operations for the years ended December 31, 2004, 2005 and2006

4.               ConsolidatedStatements of Stockholders’ Equity and Comprehensive Income (Loss) for theyears ended December 31, 2004, 2005 and 2006

5.               ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2005 and2006

6.               Notes toConsolidated Financial Statements

**(2)           Financial Statement Schedules**

TheFinancial Statement Schedule(s) described in Regulation S-X are omittedfrom this Annual Report on Form 10-K because they are either not required underthe related instructions or are inapplicable.

**(3)           Listing of Exhibits**

1.1—                    UnderwritingAgreement, dated November 13, 2006, by and among EarthLink, Inc., UBSSecurities LLC and Banc of America Securities LLC (incorporated by reference toExhibit 1.1 to EarthLink’s Report on Form 8-K dated November 13, 2006—File No.001-15605).

2.1—                    Agreement andPlan of Merger, dated December 12, 2005, by and amongEarthLink, Inc., New Edge Holding Company and New Edge Merger Corporation(incorporated by reference to Exhibit 2.1 to EarthLink, Inc.’s Reporton Form 8-K dated December 12, 2005—FileNo. 001-15605).

3.1—                    Second Restated Certificate ofIncorporation of EarthLink, Inc. (incorporated by reference to Exhibit 3.1 tothe Registration Statement on Form S-3 of EarthLink, Inc.—File No. 333-109691).

3.2—                    Amended and Restated Bylaws ofEarthLink, Inc. (incorporated by reference to Exhibit 3.2 of EarthLink, Inc.’sReport on Form 10-K for the year ended December 31, 2004—File No. 001-15605).

4.1—                    Specimen Common Stock Certificate(incorporated by reference to Exhibit 4.3 of the Registration Statement onForm S-8 of EarthLink, Inc.—File No. 333-30024).

4.2—                    Rights Agreement, dated as ofAugust 6, 2002, between EarthLink, Inc. and American Stock Transfer and TrustCo. (incorporated by reference to Exhibit 4.1 to EarthLink, Inc.’sReport on Form 8-K dated August 6, 2002—FileNo. 001-15605).

3

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4.3—                    Indenture,dated November 17, 2006, by and between EarthLink, Inc. and Wells Fargo Bank,N.A. (incorporated by reference to Exhibit 4.1 to EarthLink, Inc.’sReport on Form 8-K dated November 17, 2006—FileNo. 001-15605).

10.1#—       EarthLink, Inc. Stock Incentive Plan, as amended(incorporated by reference to Exhibit 4.4 of EarthLink, Inc.’s Post EffectiveAmendment to Registration Statement on Form S-8—File No. 333-39456).

10.2#—       EarthLink, Inc. Equity Plan for Non-EmployeeDirectors, as amended (incorporated by reference to Exhibit 4.4 of EarthLink,Inc.’s Post Effective Amendment to Registration Statement on Form S-8—File No. 333-108065).

10.3#—       EarthLink, Inc. 2006 Equity and Cash IncentivePlan (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.’s Report onForm 8-K dated May 5, 2006).

10.4#—       EarthLink, Inc.Stock Option Plan for Inducement Awards Relating to the Acquisition of New EdgeHolding Company (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.’sReport on Form 8-K dated April 14, 2006).

10.5#—       EarthLink, Inc. DeferredCompensation Plan for Directors and Certain Key Employees, as amended(incorporated by reference to Exhibit 10.3 of EarthLink, Inc.’s Report on Form8-K dated February 17, 2006—File No. 001-15605).

10.6#—       Summary of amendment to the EarthLink, Inc.Deferred Compensation Plan for Directors and Certain Key Employees(incorporated by reference to EarthLink, Inc.’s Report on Form 8-K datedDecember 13, 2004—File No. 001-15605).

10.7#—       Summary of EarthLink, Inc. Second DeferredCompensation Plan for Directors and Certain Key Employees (incorporated byreference to EarthLink, Inc.’s Report on Form 8-K dated December 13,2004—File No. 001-15605).

10.8#—       1995 Stock Option Plan (incorporated byreference to Exhibit 4.4 of EarthLink, Inc.’s Registration Statement on FormS-8—File No. 333-30024).

10.9#—       MindSpring Enterprises, Inc. 1995 Stock OptionPlan, as amended (incorporated by reference to Exhibit 4.5 of EarthLink, Inc.’sRegistration Statement on Form S-8—FileNo. 333-30024).

10.10#—MindSpring Enterprises, Inc. 1995Directors Stock Option Plan, as amended (incorporated by reference to Exhibit4.6 of EarthLink, Inc.’s Registration Statement on Form S-8—File No. 333-30024).

10.11#—Form of Incentive Stock OptionAgreement (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.’s Reporton Form 10-Q for the quarterly period ended September 30, 2005—File No. 001-15605).

10.12#—Form of Nonqualified Stock OptionAgreement (incorporated by reference to Exhibit 10.2 of EarthLink, Inc.’sReport on Form 10-Q for the quarterly period ended September 30, 2005—File No. 001-15605).

10.13#—Form of Performance AcceleratedNonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.3of EarthLink, Inc.’s Report on Form 10-Q for the quarterly period endedSeptember 30, 2005—File No. 001-15605).

4

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10.14#—Form of Restricted Stock UnitAgreement (incorporated by reference to Exhibit 10.4 of EarthLink, Inc.’sReport on Form 10-Q for the quarterly period ended September 30, 2005—File No. 001-15605).

10.15#—Form of Nonqualified Stock Option Agreementfor Nonemployee Directors (incorporated by reference to Exhibit 10.5 ofEarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended September30, 2005—File No. 001-15605).

10.16#—Form of Restricted Stock UnitAgreement for Nonemployee Directors (incorporated by reference to Exhibit 10.6of EarthLink, Inc.’s Report on Form 10-Q for the quarterly period endedSeptember 30, 2005—File No.001-15605).

10.17#—Form of Incentive Stock Option Agreementunder the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated byreference to Exhibit 10.2 to EarthLink, Inc.’s Report on Form 8-K dated May 5,2006).

10.18#—Form of Nonqualified Stock OptionAgreement under the EarthLink, Inc. 2006 Equity and Cash Incentive Plan(incorporated by reference to Exhibit 10.3 to EarthLink, Inc.’s Report on Form8-K dated May 5, 2006).

10.19#—Form of Nonqualified Stock OptionAgreement for Directors under the EarthLink, Inc. 2006 Equity and CashIncentive Plan (incorporated by reference to Exhibit 10.4 to EarthLink, Inc.’sReport on Form 8-K dated May 5, 2006).

10.20#—Form of Restricted Stock Unit Agreementunder the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated byreference to Exhibit 10.5 to EarthLink, Inc.’s Report on Form 8-K dated May 5,2006).

10.21#—Form of Award Agreement under EarthLink,Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of NewEdge Holding Company (incorporated by reference to Exhibit 4.4 to theRegistration Statement of Form S-8—File No. 333-133870).

10.22—        Office Lease Agreement dated November 16,1999, between Kingston Atlanta Partners, L.P. and MindSpringEnterprises, Inc., as amended (incorporated by reference to Exhibit 10.1of EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended March31, 2001—File No. 001-15605).

10.23—        Fourth Amendment to Office Lease betweenCalifornia State Teacher’s Retirement System and EarthLink, Inc. (incorporatedby reference to Exhibit 10.1 of EarthLink, Inc.’s Report on Form 8-K datedDecember 30, 2004—File No.001-15605).

10.24—        Office Lease by and between The Mutual LifeInsurance Company of New York, and EarthLink Network, Inc., datedSeptember 20, 1996, as amended (incorporated by reference to Exhibit 10.2of EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended March31, 2001—File No. 001-15605).

10.25—        Lease Agreement BetweenWHMNY Real Estate Limited Partnership and EarthLink, Inc. DatedSeptember 19, 2005 (incorporated by reference to Exhibit 10.1 ofEarthLink, Inc.’s Report on Form 8-K dated October 14, 2005—File No. 001-15605).

10.26—        Contribution and Formation Agreement Among SK Telecom International,Inc., SK Telecom Co., Ltd. and EarthLink, Inc. (incorporated by reference toExhibit 10.1 of EarthLink, Inc.’s Report on Form 8-K dated January 26,2005—File No. 001-15605).

5

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10.27—        Form of Certificateof Incorporation of SK-EarthLink Management Corp. (incorporated by reference toExhibit 10.3 of EarthLink, Inc.’s Report on Form 8-K datedJanuary 26, 2005—File No. 001-15605).

10.28—        Form of Bylaws ofSK-EarthLink Management Corp. (incorporated by reference to Exhibit 10.4of EarthLink, Inc.’s Report on Form 8-K dated January 26,2005—File No. 001-15605).

10.29—        Form ofStockholders Agreement of SK-EarthLink Management Corp. (incorporated byreference to Exhibit 10.5 of EarthLink, Inc.’s Report onForm 8-K dated January 26, 2005—File No. 001-15605).

10.30—        Amended and Restated Limited Liability CompanyAgreement of HELIO LLC by and among EarthLink, Inc., SK Telecom USAHoldings, Inc., HELIO, Inc. and HELIO LLC, dated as ofOctober 25, 2005 (incorporated by reference to Exhibit 10.1 ofEarthLink, Inc.’s Report on Form 8-K dated November 29,2005—File No. 001-15605).

10.31—        Purchase Agreement, by andamong EarthLink, Inc., Covad Communications Group, Inc. and CovadCommunications Company dated as of March 15, 2006 (incorporated by reference toExhibit 10.1 to EarthLink’s Report on Form 8-K dated March 15, 2006—File No.001-15605).

10.32—        Form of 12% Senior SecuredConvertible Note due 2011 issued by Covad Communications Group, Inc. and CovadCommunications Company (incorporated by reference to Exhibit 10.2 to EarthLink’sReport on Form 8-K dated March 15, 2006—File No. 001-15605).

10.33—        Form of RegistrationRights Agreement, by and between EarthLink, Inc. and Covad CommunicationsGroup, Inc. (incorporated by reference to Exhibit 10.3 to EarthLink’s Report onForm 8-K dated March 15, 2006—File No. 001-15605).

10.34—        Form of SecurityAgreement, by Covad Communications Group, Inc. and Covad Communications Companyfor the benefit of EarthLink, Inc. (incorporated by reference to Exhibit 10.4to EarthLink’s Report on Form 8-K dated March 15, 2006—File No. 001-15605).

10.35—        Confirmation ofConvertible Bond Hedge Transaction, dated November 13, 2006, by and betweenEarthLink, Inc. and UBS AG, London Branch (incorporated by reference to Exhibit10.1 to EarthLink’s Report on Form 8-K dated November 13, 2006—File No.001-15605).

10.36—        Confirmation ofConvertible Bond Hedge Transaction, dated November 13, 2006, by and betweenEarthLink, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit10.2 to EarthLink’s Report on Form 8-K dated November 13, 2006—File No.001-15605).

10.37—        Confirmation of IssuerWarrant Transaction dated November 13, 2006, by and between EarthLink, Inc. andUBS AG, London Branch (incorporated by reference to Exhibit 10.3 to EarthLink’sReport on Form 8-K dated November 13, 2006—File No. 001-15605).

10.38—        Confirmationof Issuer Warrant Transaction, dated November 13, 2006, by and betweenEarthLink, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit10.4 to EarthLink’s Report on Form 8-K dated November 13, 2006—File No.001-15605).

10.39—        Amended and RestatedEmployment Agreement, dated March 27, 2006, between EarthLink, Inc. andCharles G. Betty, President and Chief Executive Officer of 

6

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EarthLink, Inc. (incorporated by reference toExhibit 10.1 of EarthLink, Inc.’s Report of Form 8-K dated March 27, 2006—File No. 001-15605).

10.40#—EarthLink, Inc. Board of Director Compensation Plan, dated January 2007 (incorporatedby reference to Exhibit 10.1 of EarthLink, Inc.’s Report on Form 8-K datedOctober 24, 2006—File No.001-15605).

10.41#*       Change-in-ControlAccelerated Vesting and Severance Plan, amended effective as of October 19,2005 and amended and restated effective as of February 17, 2006.

10.42#—Executives’ Position Elimination andSeverance Plan, amended  and restatedFebruary 17, 2006 (incorporated by reference to Exhibit 10.2 of EarthLink, Inc.’sReport on Form 8-K dated February 17, 2006—FileNo. 001-15605).

10.43#—Stock Appreciation Rights Agreement forThomas E. Wheeler, dated February 17, 2006 (incorporated by reference toExhibit 10.4 of EarthLink, Inc.’s Report on Form 8-K dated February 17, 2006—File No. 001-15605).

10.44—        Summary of 2006 bonus payments and 2007 salaries for executive officers(incorporated by reference to EarthLink, Inc.’s Report on Form 8-K datedJanuary 25, 2007—File No. 001-15605).

21.1* —    Subsidiaries of the Registrant.

23.1* —    Consent of Ernst & Young LLP, an independentregistered public accounting firm.

23.2**—Consent of Ernst & Young LLP, anindependent registered public accounting firm.

24.1* —    Power of Attorney (see the Power of Attorney in thesignature page hereto).

31.1**—Certificationof Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2**—Certificationof Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**—Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**—Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1**—Consolidated Financial Statements of HELIO, Inc. and HELIO LLC.

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*Previously filed with EarthLink, Inc.’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2006, which wasfiled on March 1, 2007.

**Filed herewith.

#Managementcompensatory plan or arrangement.

**(b)**          **Exhibits**

Theresponse to this portion of Item 15 is submitted as a separate section of thisAnnual Report on Form 10-K.

7

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**(c)**          **Financial Statement Schedule**

TheFinancial Statement Schedule(s) described in Regulation S-X are omittedfrom this Annual Report on Form 10-K because they are either not required underthe related instructions or are inapplicable.

 

8

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**SIGNATURES**

                Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|            | **EARTHLINK, INC.** |
|------------|---------------------|
| ** ** | ** **          |
| ** ** | ** **          |
|       | By:                 | /s/ MICHAEL C. LUNSFORD |
|       |                | Michael C. Lunsford, |
| * *   |                | *Interim Chief Executive Officer* |
|       |                | Date: March 29, 2007 |

 

                Each person whose signature appears below herebyconstitutes and appoints Michael C. Lunsford and Kevin M. Dotts, the true and lawfulattorneys-in-fact and agents of the undersigned, with full power ofsubstitution and resubstitution, for and in the name, place and stead of theundersigned, in any and all capacities, to sign any and all amendments to thisReport, and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, and herebygrants to such attorneys-in-fact and agents full power and authority to do andperform each and every act and thing requisite and necessary to be done, asfully to all intents and purposes as the undersigned might or could do inperson, hereby ratifying and confirming all that said attorneys-in-fact andagents, or their substitute or substitutes, may lawfully do or cause to be doneby virtue hereof.

                Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of registrant and in thecapacities and on the dates indicated.
| Date:  | March 29, 2007 |   | By:    | /s/ MICHAEL C. LUNSFORD                                                                |
|--------|----------------|--------|--------|----------------------------------------------------------------------------------------|
|   |           |   |   | Michael C. Lunsford, Interim Chief Executive Officer  (principal executive officer)    |
|   |           |   |   |                                                                                   |
| Date:  | March 29, 2007 |   | By:    | /s/ KEVIN M. DOTTS                                                                     |
|   |           |   |   | Kevin M. Dotts, Chief Financial Officer   (principal financial and accounting officer) |
|   |           |   |   |                                                                                   |
| Date:  | March 29, 2007 |   | By:    | /s/ ROBERT M. KAVNER*                                                                  |
|   |           |   |   | Robert M. Kavner, Chairman of the Board                                                |
|   |           |   |   |                                                                                   |
| Date:  | March 29, 2007 |   | By:    | /s/ SKY D. DAYTON*                                                                     |
|   |           |   |   | Sky D. Dayton, Director                                                                |
|   |           |   |   |                                                                                   |
| Date:  | March 29, 2007 |   | By:    | /s/ S. MARCE FULLER*                                                                   |
|   |           |   |   | S. Marce Fuller, Director                                                              |
|   |           |   |   |                                                                                   |
| Date:  | March 29, 2007 |   | By:    | /s/ WILLIAM H. HARRIS, JR.*                                                            |
|   |           |   |   | William H. Harris, Jr., Director                                                       |
|   |           |   |   |                                                                                   |
| Date:  | March 29, 2007 |   | By:    | /s/ TERRELL B. JONES*                                                                  |
|   |           |   |   | Terrell B. Jones, Director                                                             |
|   |           |   |   |                                                                                   |

9

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| Date:  | March 29, 2007 |   | By:    | /s/ LINWOOD A. LACY, JR.*      |
|--------|----------------|--------|--------|--------------------------------|
|   |           |   |   | Linwood A. Lacy, Jr., Director |
|   |           |   |   |                           |
| Date:  | March 29, 2007 |   | By:    | /s/ THOMAS E. WHEELER*         |
|   |           |   |   | Thomas E. Wheeler, Director    |

 

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*Signed by MichaelC. Lunsford and Kevin M. Dotts as attorneys-in-fact.

 

10

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**EXHIBITINDEX**
| Exhibit     | ** ** | **Description**                                                                                                                                                                                                                                                                                                     |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1—   |       | Underwriting Agreement, dated November 13, 2006, by  and among EarthLink, Inc., UBS Securities LLC and Banc of America Securities  LLC (incorporated by reference to Exhibit 1.1 to EarthLink’s Report on Form  8-K dated November 13, 2006—File No. 001-15605).                                          |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 2.1—   |       | Agreement and Plan of Merger, dated  December 12, 2005, by and among EarthLink, Inc., New Edge Holding  Company and New Edge Merger Corporation (incorporated by reference to  Exhibit 2.1 to EarthLink, Inc.’s Report on Form 8-K dated December  12, 2005—File No. 001-15605). |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 3.1—   |       | Second Restated Certificate of Incorporation of  EarthLink, Inc. (incorporated by reference to Exhibit 3.1 to the Registration  Statement on Form S-3 of EarthLink, Inc.—File No. 333-109691).                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 3.2—   |       | Amended and Restated Bylaws of EarthLink, Inc.  (incorporated by reference to Exhibit 3.2 of EarthLink, Inc.’s Report on Form  10-K for the year ended December 31, 2004—File  No. 001-15605).                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 4.1—   |       | Specimen Common Stock Certificate (incorporated by  reference to Exhibit 4.3 of the Registration Statement on Form S-8 of  EarthLink, Inc.—File No. 333-30024).                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 4.2 —  |       | Rights Agreement, dated as of August 6, 2002,  between EarthLink, Inc. and American Stock Transfer and Trust Co.  (incorporated by reference to Exhibit 4.1 to EarthLink, Inc.’s  Report on Form 8-K dated August 6, 2002—File  No. 001-15605).                                            |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 4.3—   |       | Indenture, dated November 17, 2006, by and between  EarthLink, Inc. and Wells Fargo Bank, N.A. (incorporated by reference to  Exhibit 4.1 to EarthLink, Inc.’s Report on Form 8-K dated November  17, 2006—File No. 001-15605).                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 10.1#— |       | EarthLink, Inc. Stock Incentive Plan, as amended  (incorporated by reference to Exhibit 4.4 of EarthLink, Inc.’s Post Effective  Amendment to Registration Statement on Form S-8—File No. 333-39456).                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 10.2#— |       | EarthLink, Inc. Equity Plan for Non-Employee  Directors, as amended (incorporated by reference to Exhibit 4.4 of EarthLink,  Inc.’s Post Effective Amendment to Registration Statement on Form S-8—File No. 333-108065).                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 10.3#— |       | EarthLink, Inc. 2006 Equity and Cash Incentive Plan  (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.’s Report on  Form 8-K dated May 5, 2006).                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 10.4#— |       | EarthLink, Inc. Stock Option Plan for Inducement  Awards Relating to the Acquisition of New Edge Holding Company (incorporated  by reference to Exhibit 10.1 to EarthLink, Inc.’s Report on Form 8-K dated  April 14, 2006).                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 10.5#— |       | EarthLink, Inc. Deferred Compensation Plan for  Directors and Certain Key Employees, as amended (incorporated by reference to  Exhibit 10.3 of EarthLink, Inc.’s Report on Form 8-K dated February 17,  2006—File No. 001-15605).                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                |
| 10.6#— |       | Summary of amendment to the EarthLink, Inc.  Deferred Compensation Plan for Directors and Certain Key Employees  (incorporated by reference to EarthLink, Inc.’s Report on Form 8-K dated  December 13, 2004—File No. 001-15605).                                                     |

 

E-1

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| 10.7#—  |   | Summary of EarthLink, Inc. Second Deferred  Compensation Plan for Directors and Certain Key Employees (incorporated by  reference to EarthLink, Inc.’s Report on Form 8-K dated  December 13, 2004—File No. 001-15605). |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                  |
| 10.8#—  |   | 1995 Stock Option Plan (incorporated by reference to  Exhibit 4.4 of EarthLink, Inc.’s Registration Statement on Form S-8—File No. 333-30024).                                                                                              |
|         |   |                                                                                                                                                                                                                                                  |
| 10.9#—  |   | MindSpring Enterprises, Inc. 1995 Stock Option Plan,  as amended (incorporated by reference to Exhibit 4.5 of EarthLink, Inc.’s  Registration Statement on Form S-8—File  No. 333-30024).                                                   |
|         |   |                                                                                                                                                                                                                                                  |
| 10.10#— |   | MindSpring Enterprises, Inc. 1995 Directors Stock  Option Plan, as amended (incorporated by reference to Exhibit 4.6 of  EarthLink, Inc.’s Registration Statement on Form S-8—File No. 333-30024).                                          |
|         |   |                                                                                                                                                                                                                                                  |
| 10.11#— |   | Form of Incentive Stock Option Agreement  (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.’s Report on  Form 10-Q for the quarterly period ended September 30, 2005—File No. 001-15605).                                  |
|         |   |                                                                                                                                                                                                                                                  |
| 10.12#— |   | Form of Nonqualified Stock Option Agreement  (incorporated by reference to Exhibit 10.2 of EarthLink, Inc.’s Report on  Form 10-Q for the quarterly period ended September 30, 2005—File No. 001-15605).                               |
|         |   |                                                                                                                                                                                                                                                  |
| 10.13#— |   | Form of Performance Accelerated Nonqualified  Stock Option Agreement (incorporated by reference to Exhibit 10.3 of  EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended  September 30, 2005—File No.  001-15605).     |
|         |   |                                                                                                                                                                                                                                                  |
| 10.14#— |   | Form of Restricted Stock Unit Agreement  (incorporated by reference to Exhibit 10.4 of EarthLink, Inc.’s Report on  Form 10-Q for the quarterly period ended September 30, 2005—File No. 001-15605).                                   |
|         |   |                                                                                                                                                                                                                                                  |
| 10.15#— |   | Form of Nonqualified Stock Option Agreement for  Nonemployee Directors (incorporated by reference to Exhibit 10.5 of  EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended  September 30, 2005—File No. 001-15605).    |
|         |   |                                                                                                                                                                                                                                                  |
| 10.16#— |   | Form of Restricted Stock Unit Agreement for  Nonemployee Directors (incorporated by reference to Exhibit 10.6 of  EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended  September 30, 2005—File No.  001-15605).       |
|         |   |                                                                                                                                                                                                                                                  |
| 10.17#— |   | Form of Incentive Stock Option Agreement under the  EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by  reference to Exhibit 10.2 to EarthLink, Inc.’s Report on Form 8-K dated May  5, 2006).                                 |
|         |   |                                                                                                                                                                                                                                                  |
| 10.18#— |   | Form of Nonqualified Stock Option Agreement under  the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by  reference to Exhibit 10.3 to EarthLink, Inc.’s Report on Form 8-K dated May  5, 2006).                              |
|         |   |                                                                                                                                                                                                                                                  |
| 10.19#— |   | Form of Nonqualified Stock Option Agreement for  Directors under the EarthLink, Inc. 2006 Equity and Cash Incentive Plan  (incorporated by reference to Exhibit 10.4 to EarthLink, Inc.’s Report on  Form 8-K dated May 5, 2006).                |
|         |   |                                                                                                                                                                                                                                                  |
| 10.20#— |   | Form of Restricted Stock Unit Agreement under the  EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by  reference to Exhibit 10.5 to EarthLink, Inc.’s Report on Form 8-K dated May  5, 2006).                                  |

 

E-2

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| 10.21#— |   | Form of Award Agreement under EarthLink, Inc. Stock  Option Plan for Inducement Awards Relating to the Acquisition of New Edge  Holding Company (incorporated by reference to Exhibit 4.4 to the Registration  Statement of Form S-8—File No. 333-133870).                                                                                                                        |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.22—  |   | Office Lease Agreement dated November 16, 1999,  between Kingston Atlanta Partners, L.P. and MindSpring  Enterprises, Inc., as amended (incorporated by reference to Exhibit 10.1  of EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended March  31, 2001—File No. 001-15605).                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23—  |   | Fourth Amendment to Office Lease between California  State Teacher’s Retirement System and EarthLink, Inc. (incorporated by  reference to Exhibit 10.1 of EarthLink, Inc.’s Report on Form 8-K dated  December 30, 2004—File No.  001-15605).                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.24—  |   | Office Lease by and between The Mutual Life  Insurance Company of New York, and EarthLink Network, Inc., dated  September 20, 1996, as amended (incorporated by reference to Exhibit  10.2 of EarthLink, Inc.’s Report on Form 10-Q for the quarterly period ended  March 31, 2001—File No.  001-15605).                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.25—  |   | Lease Agreement Between WHMNY Real Estate Limited  Partnership and EarthLink, Inc. Dated September 19, 2005 (incorporated  by reference to Exhibit 10.1 of EarthLink, Inc.’s Report on Form 8-K dated  October 14, 2005—File No.  001-15605).                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26—  |   | Contribution and Formation  Agreement Among SK Telecom International, Inc., SK Telecom Co., Ltd. and  EarthLink, Inc. (incorporated by reference to Exhibit 10.1 of EarthLink,  Inc.’s Report on Form 8-K dated January 26, 2005—File No. 001-15605).                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.27—  |   | Form of Certificate of Incorporation of  SK-EarthLink Management Corp. (incorporated by reference to Exhibit 10.3  of EarthLink, Inc.’s Report on Form 8-K dated January 26,  2005—File No. 001-15605).                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.28—  |   | Form of Bylaws of SK-EarthLink Management Corp.  (incorporated by reference to Exhibit 10.4 of EarthLink, Inc.’s  Report on Form 8-K dated January 26, 2005—File No. 001-15605).                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.29—  |   | Form of Stockholders Agreement of SK-EarthLink  Management Corp. (incorporated by reference to Exhibit 10.5 of  EarthLink, Inc.’s Report on Form 8-K dated January 26,  2005—File No. 001-15605).                                                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.30—  |   | Amended and Restated Limited Liability Company  Agreement of HELIO LLC by and among EarthLink, Inc., SK Telecom USA  Holdings, Inc., HELIO, Inc. and HELIO LLC, dated as of  October 25, 2005 (incorporated by reference to Exhibit 10.1 of  EarthLink, Inc.’s Report on Form 8-K dated November 29,  2005—File No. 001-15605). |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.31—  |   | Purchase Agreement, by and among EarthLink, Inc.,  Covad Communications Group, Inc. and Covad Communications Company dated as of  March 15, 2006 (incorporated by reference to Exhibit 10.1 to EarthLink’s  Report on Form 8-K dated March 15, 2006—File No. 001-15605).                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.32—  |   | Form of 12% Senior Secured Convertible Note due 2011  issued by Covad Communications Group, Inc. and Covad Communications Company  (incorporated by reference to Exhibit 10.2 to EarthLink’s Report on Form 8-K  dated March 15, 2006—File No. 001-15605).                                                                                                                   |

 

E-3

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| 10.33—  |   | Form of Registration Rights Agreement, by and  between EarthLink, Inc. and Covad Communications Group, Inc. (incorporated by  reference to Exhibit 10.3 to EarthLink’s Report on Form 8-K dated March 15,  2006—File No. 001-15605).                                                                               |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.34—  |   | Form of Security Agreement, by Covad Communications  Group, Inc. and Covad Communications Company for the benefit of EarthLink,  Inc. (incorporated by reference to Exhibit 10.4 to EarthLink’s Report on Form  8-K dated March 15, 2006—File No. 001-15605).                                                      |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.35—  |   | Confirmation of Convertible Bond Hedge Transaction,  dated November 13, 2006, by and between EarthLink, Inc. and UBS AG, London  Branch (incorporated by reference to Exhibit 10.1 to EarthLink’s Report on  Form 8-K dated November 13, 2006—File No. 001-15605).                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.36—  |   | Confirmation of Convertible Bond Hedge Transaction,  dated November 13, 2006, by and between EarthLink, Inc. and Bank of America,  N.A. (incorporated by reference to Exhibit 10.2 to EarthLink’s Report on Form  8-K dated November 13, 2006—File No. 001-15605).                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.37—  |   | Confirmation of Issuer Warrant Transaction dated November  13, 2006, by and between EarthLink, Inc. and UBS AG, London Branch  (incorporated by reference to Exhibit 10.3 to EarthLink’s Report on Form 8-K  dated November 13, 2006—File No. 001-15605).                                                          |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.38—  |   | Confirmation of Issuer Warrant Transaction, dated  November 13, 2006, by and between EarthLink, Inc. and Bank of America, N.A.  (incorporated by reference to Exhibit 10.4 to EarthLink’s Report on Form 8-K  dated November 13, 2006—File No. 001-15605).                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.39—  |   | Amended and Restated Employment Agreement, dated  March 27, 2006, between EarthLink, Inc. and Charles G. Betty, President  and Chief Executive Officer of EarthLink, Inc. (incorporated by  reference to Exhibit 10.1 of EarthLink, Inc.’s Report of Form 8-K dated March  27, 2006—File No. 001-15605). |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.40#— |   | EarthLink, Inc. Board of  Director Compensation Plan, dated January 2007 (incorporated by  reference to Exhibit 10.1 of EarthLink, Inc.’s Report on Form 8-K dated  October 24, 2006—File No.  001-15605).                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.41#*      |   | Change-in-Control Accelerated Vesting and Severance  Plan, amended effective as of October 19, 2005 and amended and restated  effective as of February 17, 2006.                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.42#— |   | Executives’ Position Elimination and Severance Plan,  amended and restated February 17, 2006 (incorporated by reference to Exhibit  10.2 of EarthLink, Inc.’s Report on Form 8-K dated February 17, 2006—File No. 001-15605).                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.43#— |   | Stock Appreciation Rights Agreement for Thomas E.  Wheeler, dated February 17, 2006 (incorporated by reference to Exhibit 10.4  of EarthLink, Inc.’s Report on Form 8-K dated February 17, 2006—File No. 001-15605).                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 10.44—  |   | Summary of 2006 bonus payments  and 2007 salaries for executive officers (incorporated by reference to  EarthLink, Inc.’s Report on Form 8-K dated January 25, 2007—File No. 001-15605).                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 21.1* — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 23.1* — |   | Consent of Ernst & Young LLP, an independent  registered public accounting firm.                                                                                                                                                                                                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                         |
| 23.2**— |   | Consent of Ernst & Young LLP, an independent  registered public accounting firm.                                                                                                                                                                                                                                         |

 

E-4

----

 
| 24.1*  — |   | Power of Attorney (see the Power of Attorney in the  signature page hereto).                                                                                                  |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                          |
| 31.1* —  |   | Certification of Chief Executive Officer pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|          |   |                                                                                                                                                                          |
| 31.2* —  |   | Certification of Chief Financial Officer pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|          |   |                                                                                                                                                                          |
| 32.1* —  |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                          |
|          |   |                                                                                                                                                                          |
| 32.2* —  |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                          |
|          |   |                                                                                                                                                                          |
| 99.1**—  |   | Consolidated Financial Statements of  HELIO, Inc. and HELIO LLC.                                                                                                         |

----

| *  | Previously filed with EarthLink, Inc.’s Annual Report on Form  10-K for the fiscal year ended December 31, 2006, which was filed on March 1,  2007. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | Filed herewith.                                                                                                                                          |
| #  | Management  compensatory plan or arrangement.                                                                                                            |

 

E-5

----