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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to


Commission File Number: 001-15605

EARTHLINK, INC.(Exact name of registrant as specified in its charter)

Delaware(State of incorporation)

58-2511877(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
registered pursuant to Section 12(b) of the Act: None

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



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý    No o

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the of the Exchange Act (Check One):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller Reporting Company o


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

The aggregate market value of the registrant's outstanding common stock held by non-affiliates of the registrant on June 30, 2009 was
$784.6 million. As of January 29, 2010, 107,283,136 shares of common stock were outstanding.

Portions
of the Proxy Statement to be filed with the Securities and Exchange Commission and to be used in connection with the Annual Meeting of Stockholders to be held on May 4,
2010 are incorporated by reference in Part III of this Form 10-K.



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EARTHLINK, INC.  Annual Report on Form 10-K  For the Year Ended December 31, 2009    TABLE OF CONTENTS



PART IItem 1.

Business


1Item 1A.

Risk Factors


11Item 1B.

Unresolved Staff Comments


23Item 2.

Properties


23Item 3.

Legal Proceedings


23Item 4.

Submission of Matters to a Vote of Security Holders


23PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


24Item 6.

Selected Financial Data


26Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operation


28Item 7A.

Quantitative and Qualitative Disclosures about Market Risk


59Item 8.

Financial Statements and Supplementary Data


61Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


107Item 9A.

Controls and Procedures


107Item 9B.

Other Information


107PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


108Item 11.

Executive Compensation


108Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


108Item 13.

Certain Relationships and Related Transactions, and Director Independence


109Item 14.

Principal Accounting Fees and Services


109PART IVItem 15.

Exhibits, Financial Statement Schedules


110SIGNATURES


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FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words "estimate," "plan,"
"intend," "expect," "anticipate," "believe" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this
report. EarthLink, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although
EarthLink, Inc. believes that its expectations are based on reasonable assumptions, it can give no assurance that its targets and goals will be achieved. Important factors that could cause
actual results to differ from estimates or projections contained in the forward-looking statements are described under "Risk Factors" in Item 1A of Part I and under "Safe Harbor
Statement" in Item 7 of Part II.

PART I

Item 1.    Business.

Overview

EarthLink, Inc. is an Internet service provider ("ISP"), providing nationwide Internet access and related value-added services
to individual and business customers. Our primary service offerings are dial-up and high-speed Internet access services and related value-added services, such as ancillary
services sold as add-on features to our Internet access services, search and advertising. In addition, through our wholly-owned subsidiary, New Edge Networks ("New Edge"), we build and
manage IP-based wide area networks for businesses and communications carriers.

We
operate two reportable segments, Consumer Services and Business Services. Our Consumer Services segment provides Internet access and related value-added services to individual
customers. These services include dial-up and high-speed Internet access and voice-over-Internet Protocol ("VoIP") services, among others. Our Business
Services segment provides integrated communications services and related value-added services to businesses and communications carriers. These services include managed IP-based wide area
networks, dedicated Internet access and web hosting, among others. See Note 18, "Segment Information," of the Notes to Consolidated Financial Statements in Item 8 of Part II for
additional information.

We
were formed in February 2000 as a result of the merger of EarthLink Network, Inc. and MindSpring Enterprises, Inc. We were incorporated in 1999 and are a Delaware
corporation. Our corporate offices are located at 1375 Peachtree St., Atlanta, Georgia 30309, and our telephone number at that location is (404) 815-0770.

Business Strategy

Our business strategy is to maximize the cash flows generated by our business by focusing on customer retention, operational efficiency
and opportunities for growth.



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The
primary challenges we face in executing our business strategy are managing the rate of decline in our revenues, aligning costs with trends in our revenue, responding to competition,
reducing churn, purchasing cost-effective network services from third-party telecommunications service providers and
adding customers that generate an acceptable rate of return. The factors we believe are instrumental to the achievement of our business strategy may be subject to competitive, regulatory and other
events and circumstances that are beyond our control. Further, we can provide no assurance that we will be successful in achieving any or all of the strategies identified above, that the achievement
or existence of such strategies will favorably impact profitability, or that other factors will not arise that would adversely affect future profitability.

Consumer Services Segment

Service Offerings

Narrowband Access

Premium Dial-up Internet Access.Our premium dial-up, or narrowband, access is a subscription-based service that provides
customers with access to the Internet and a wide variety of content, features, services, applications, tools and 24/7 customer support. Such features include antivirus and firewall protection,
acceleration tools and privacy and safety tools. Revenues primarily consist of fees charged to customers for dial-up Internet access.

Value Dial-up Internet Access.We provide value-priced dial-up access services through our PeoplePCTM Online
offering. Our value dial-up access is a subscription-based service that provides customers access to the Internet at comparatively lower prices. We also provide to our value-priced
dial-up access customers accelerator technology that speeds up customers' page load times by compressing and simplifying web pages. Revenues primarily consist of fees charged to customers
for dial-up Internet access.

Broadband Access

High-speed, or broadband, access offers a high speed, always on Internet connection that uses a modem to supply an Internet
connection across an existing home phone line or cable connection. The Internet service doesn't interfere with a customer's voice service, so there is no need for a second phone line. We provide
high-speed access services via DSL and cable and offer different speeds of service. Availability for these services depends on the telephone or cable service provider. Our
high-speed access service includes the same features and benefits included with our premium dial-up access service, including antivirus and firewall protection, privacy and
safety tools and 24/7 customer support. Broadband access revenues primarily consist of fees charged for high-speed access services.

VoIP

We provide two VoIP services. EarthLink DSL and Home Phone Service is a bundle offer that includes EarthLink high-speed
Internet access and home phone service. It combines the last mile of traditional telephone copper wiring with the advanced features of VoIP by taking advantage of Digital

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Subscriber
Line Access Multiplexer, or DSLAM, technology. We offer subscription-based service under various plans that include features such as voicemail, call waiting, caller ID, call forwarding and
E911 service. We currently offer this service in 12 markets in the U.S. Revenues primarily consist of fees charged to customers for VoIP service plans.

We
also provide Internet-based phone service that enables our customers to make and receive phone calls with a telephone in any location where our broadband Internet access is available.
We transmit these calls using VoIP technology, which converts voice signals into digital data packets for transmission over the Internet. We offer subscription-based service under various plans that
include features such as voicemail, call waiting, caller ID, call forwarding and E911 service. Revenues primarily consist of fees charged to customers for VoIP service plans.

Value-Added Services

We offer services which are incremental to our Internet access services. Our value-added services portfolio includes products for
protection, communication and performance, such as security products, premium email only, home networking, email storage and Internet call waiting, among others. We offer free and
fee-based value-added services to both subscribers and non-subscribers.

We
also generate advertising revenues by leveraging the value of our customer base and user traffic; through paid placements for searches, powered by the GoogleTM search
engine; fees generated through revenue sharing arrangements with online partners whose products and services can be accessed through our web properties; commissions received from partners for the sale
of partners' services to our subscribers; and sales of advertising on our various web properties.

Sales and Distribution

In response to changes in our business and industry, we have significantly reduced our sales and marketing spending during the past two
years. Our marketing efforts are currently focused on retaining customers and adding customers through alliances, partnerships and acquisitions from other ISPs that generate an acceptable rate of
return. We offer our products and services primarily through direct customer contact through our call centers, search engine marketing, affinity marketing partners such as AARP and Dell, resellers and
marketing alliances such as Time Warner Cable.

Customer Service and Retention

We believe that quality customer service and technical support increase customer satisfaction, which reduces churn. We also believe
that satisfied customers provide cost benefits, including reduced call center support costs and reduced bad debt expense. We provide high-quality customer service, invest in loyalty and
retention efforts and continually monitor customer satisfaction for our services. Our customer support is available by chat, email and phone as well as through help sites and Internet guide files on
our web sites. We have been recognized historically by customer service and marketing organizations for ranking high in customer satisfaction for our dial-up and high-speed
Internet services.

In
addition to our customer support, our free tools offer protection against email viruses, spyware, spam, pop-ups and online scams, as well as dial-up Web
acceleration. We believe that providing these tools also increases customer satisfaction, which reduces churn.

Network Infrastructure

We provide subscribers with Internet access primarily through third-party telecommunications service providers. Our principal provider
for narrowband services is Level 3 Communications, Inc. ("Level 3"). Our agreement with Level 3 expires in December 2010. We also have agreements with certain regional and
local narrowband providers. We have agreements with AT&T Inc. ("AT&T"), Covad Communications

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Group, Inc.
("Covad"), Qwest Corporation ("Qwest") and Verizon Communications Inc. ("Verizon") that allow us to provide DSL services. We have agreements with Time Warner Cable that allow
us to provide broadband services over Time Warner Cable's and Bright House Networks' cable network in substantially all their markets and with Comcast Corporation ("Comcast") that allow us to provide
broadband services over Comcast's cable network in certain Comcast markets. We rely on Covad's line-powered voice access to provide our EarthLink DSL and Home Phone Service. The following
summarizes the contract expiration dates for our largest providers of broadband access:

Broadband Network Provider

Contract ExpirationComcast Corporation

December 2010Verizon Communications Inc.

March 2011Covad Communications Group, Inc.

April 2011AT&T Inc.

May 2011Time Warner Cable/Bright House Networks

November 2011Qwest Corporation

November 2012


We
maintain a leased backbone consisting of a networked loop of connections between multiple cities and our technology centers. We maintain data centers in multiple locations with
redundant systems to provide service availability and connectivity.

Competition

Access and service.We operate in the Internet access services market, which is extremely competitive. We compete directly or indirectly
with
established online services companies, such as AOL and the Microsoft Network; national communications companies and local exchange carriers, such as AT&T, Qwest and Verizon; cable companies providing
broadband access, including Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; local and regional ISPs; free or value-priced ISPs, such as United
Online, Inc. which provides services under the brands Juno and NetZero; wireless Internet service providers; content companies, such as Google and Yahoo!;
and satellite and fixed wireless service providers. Competitors for our VoIP services include established telecommunications and cable companies; ISPs; leading Internet companies; and companies that
offer VoIP services as their primary business, such as Vonage. Current and prospective competitors for our access services include many large companies that have substantially greater market presence
and greater financial, technical, marketing and other resources than we have. Competition in the market for access services is likely to continue increasing, and competition could cause us to decrease
the pricing of our services, increase churn of our existing customers, increase operating costs or decrease the number of subscribers we are able to add.

We
experience pricing pressures for certain of our consumer access services, particularly our consumer broadband services, due to competition, volume-based pricing and other factors.
Some providers have reduced and may continue to reduce the retail price of their Internet access services to maintain or increase their market share, which could cause us to reduce, or prevent us from
raising, our prices. We may encounter further market pressures to: migrate existing customers to lower-priced service offerings; restructure service offerings to offer more value; reduce prices; and
respond to particular short-term, market-specific situations, such as special introductory pricing or new product or service offerings. Any of the above could adversely affect our revenues
and profitability.

We
believe the primary competitive factors in the Internet access service industry are price, speed, features, coverage area and quality of service. While we believe our Internet access
services compete favorably based on some of these factors when compared to some Internet access providers, we are at a competitive disadvantage relative to some or all of these factors with respect to
some of our competitors. Our dial-up Internet access services do not compete favorably with broadband services with respect to speed, and dial-up Internet access services no
longer have a significant, if any, price advantage over certain

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broadband
services. Most of the largest providers of broadband services, such as cable and telecommunications companies, control their own networks and offer a wider variety of services than we offer,
including voice, data and video services. Their ability to bundle services and to offer broadband services at prices below the price that we can profitably offer comparable services puts us at a
competitive disadvantage.

Value-added services.The companies we compete with for Internet access services also compete with us for subscribers to value-added
services, such
as email storage and security products. We compete for advertising revenues with major ISPs, content providers, large web publishers, web search engine and portal companies, Internet advertising
providers, content aggregation companies, social-networking web sites, and various other companies that facilitate Internet advertising. Competition in the market for value-added services may impact
the rates we charge.

Business Services Segment

Service Offerings

Secure IP-Based Networks

Through New Edge, we provide IP-based networks for business customers. Customers can choose a blend of access technologies
including DSL, T1 and DS3 lines, Ethernet and wireless broadband. We use Multi-Protocol Label Switching ("MPLS") technology, which enables businesses to combine a variety of applications of their
choice on a single network to optimize bandwidth and provide reliable network performance. MPLS also enables class of service ("CoS") tagging of network traffic, so administrators may prioritize which
of their applications should move across the network ahead of others. Customer applications run on our mix of internal and public Internet links. Revenues consist of fees charged for managed
IP-based networks, installation fees, termination fees, fees for equipment and cost recovery fees billed to customers.

Through
New Edge, we also provide virtual private networks ("VPN") and CPE-based VPNs. VPNs are secure networks that link multiple customer locations using Internet-based
transmission capacity. Our VPN solutions also provide businesses with a cost-effective means of creating their own secure networks for their traveling workforce, telecommuters and remote
offices. Revenues consist of fees charged for access technologies, installation fees, termination fees, fees for equipment and cost recovery fees billed to customers.

Internet Access

We provide high-speed and dial-up Internet access for business customers. We offer various speeds, reliable
connectivity, business-class features like
static IP addresses, multiple email accounts and customer service that is available 24/7. Revenues primarily consist of fees charged for Internet access, installation fees and usage fees.

Wholesale Services

Through New Edge, we provide network services to communications carriers, which bundle New Edge services with their own to provide
solutions to the end customer. Revenues consist of fees charged for network services, termination fees, fees for equipment and usage fees.

Web Hosting

We lease server space and provide web hosting services that enable customers to build and maintain an effective online presence.
Features include domain names, storage, mailboxes, software tools to build websites, e-commerce applications and 24/7 customer support. Revenues primarily consist of fees charged to
customers for web hosting packages and domain registration fees.

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Other Services

We offer a variety of other services that eliminate the inconvenience and complexity of managing multiple carrier relationships,
technologies and geographic locations. These services enable our business customers to focus on their core business while we manage the network infrastructure. We believe our customers benefit from
one seamless network, one provider and one point of contact for their total connection needs. These services include installation programs, managed network services, remote access and disaster
recovery, among others.

Sales and Distribution

We sell our services to end user business customers and to wholesale customers. Our end users range from large enterprises with many
locations, to small and medium-sized multi-site businesses to business customers with one site, often a home-based location. Our wholesale customers consist primarily of
telecommunications carriers and network resellers. The mix of our business services customer base has shifted towards end users as a result of consolidation in the telecommunications industry. We sell
services through direct channels, which include our direct sales force, telephone and web sales groups. We also sell our services indirectly via a variety of third parties such as sales agents and
referral partners.

Network Infrastructure

New Edge's network is comprised of a mix of ATM and IP switches in locations across the U.S. In addition, New Edge has access under
wholesale agreements to extend its footprint where it does not have a physical presence. New Edge has interconnection agreements with all major local exchange carriers to lease unbundled network
elements, as well as commercial services agreements with national communications companies, competitive local exchange carriers ("CLECs"), and cable and wireless service providers to provide last mile
access to its customers and connectivity onto its network.

Competition

We face significant competition in our business segment markets and we expect this competition to intensify. These markets are rapidly
changing due to industry consolidation, an evolving regulatory environment and the emergence of new technologies. We compete directly or indirectly with incumbent local exchange carriers ("ILECs"),
such as AT&T, Qwest and Verizon; other competitive telecommunications companies, such as Covad, Level 3, Megapath and XO Holdings; interexchange carriers, such as Sprint Nextel; wireless and
satellite service providers; and cable service providers, such as Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable. We believe the primary
competitive factors in our business markets include price, availability, reliability of service, network security, variety of service offerings, quality of service and reputation of the service
provider. While we believe our business services compete favorably based on some of these factors, we are at a competitive disadvantage relative to some or all of these factors with respect to some of
our competitors. The market for telecommunications services, particularly local exchange services, remains dominated by the ILECs, each of which owns the majority of the local exchange network in its
respective operating region of the U.S. Each ILEC has significantly more resources available to expand its penetration within the operating regions where we compete. In addition,
industry consolidation has resulted in larger competitors that have greater economies of scale. Additionally, new competitors such as VoIP providers and cable companies have entered the market to
compete with traditional, facilities-based telecommunications services providers. The operating results of our Business Services segment may be adversely affected by increased subscriber acquisition
and retention costs necessary to attract and retain subscribers in a difficult economic environment.

We
also provide web hosting services that enable customers to build and maintain an effective online presence. The web hosting market is highly fragmented, has low barriers to entry and
is characterized by

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considerable
competition on price and features. We compete directly or indirectly with a number of companies, such as GoDaddy.com, Rackspace Hosting, Inc., Web.com and Yahoo!. Some of these
companies have substantially greater market presence and greater financial, technical, marketing and other resources than we have. Competition could cause us to decrease the pricing of our services,
increase churn of our existing customers, increase operating costs or decrease the number of subscribers we are able to add.

Regulatory Environment

Overview

The regulatory environment relating to our business continues to evolve. A number of legislative and regulatory proposals under
consideration by federal, state and local governmental entities may lead to the repeal, modification or introduction of laws or regulations which do, or could, affect our business.

Internet Access Regulation

Narrowband Internet Access

The regulatory environment for narrowband Internet access services is well established. Beginning in the 1970s, the Federal
Communication Commission's ("FCC's") policy has been to classify narrowband Internet access services as "information services", which are not subject to traditional telecommunications services
regulation, such as licensing or pricing regulation. Under this framework, ISPs are assured access to the narrowband telecommunications transmission service of telephone carriers needed to provide
narrowband Internet access information services. Any change to these rules that would apply per-minute carrier access charges to dial-up Internet access traffic could
significantly impact our costs for this service.

One
potential risk to our dial-up business would be a change to the rules governing how charges for ISP-bound traffic on telecommunications networks are levied.
While Internet traffic is not subject to the FCC's carrier access charge regime, dial-up ISP bound traffic is regulated by the FCC. The FCC has established a uniform, nationwide rate for
ISP-bound traffic, but these rules have been criticized by the courts and further judicial scrutiny is expected. Changes to the rules governing dial-up ISP bound traffic could
impact our cost of providing this service.

Broadband Internet Access

The FCC classifies broadband Internet access as a single, commingled information service, whether provided over DSL by telephone
companies or over cable modem by cable companies. As a result, cable companies and telephone companies that offer a broadband Internet access information service are not required by the FCC to offer
unaffiliated ISPs stand-alone broadband transmission. We have entered into several commercial agreements with cable and telephone companies to offer broadband access to our customers. However, if our
contracts with cable companies and telephone companies were to expire and not be replaced, our broadband Internet access customer base and revenues would be adversely affected.

Forbearance

The Communications Act of 1934, as amended, provides the FCC with the authority to not enforce, or "forbear" from enforcing, statutory
requirements and regulations if certain public interest factors are satisfied. If the FCC were to forbear from enforcing regulations that
have been established to enable competing broadband Internet access and VoIP, our business could be adversely affected.

In
December 2007, the FCC denied a petition by Verizon that requested the FCC forbear from certain telephone facilities leasing rules in six major east coast markets, including New York
and Philadelphia. In July 2008, the FCC denied a similar forbearance petition filed by Qwest seeking regulatory relief in four major west coast markets, including Seattle and Phoenix. We opposed both
the Verizon and Qwest

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forbearance
petitions by arguing that such deregulation would have removed critical facilities necessary to provide competitive broadband access to consumer and business customers. Both Verizon and
Qwest have appealed the FCC orders denying their respective requests.

We
expect reform to the FCC's forbearance review process in the near future. The FCC has initiated a proceeding to establish strict evidentiary and filing procedures for review of
forbearance petitions.

Internet Taxation

The Internet Tax Non-Discrimination Act, which is in effect through November 2014, places a moratorium on taxes on Internet
access and multiple, discriminatory taxes on electronic commerce. Certain states have enacted various taxes on Internet access and electronic commerce, and selected states' taxes are being contested
on a variety of bases. If these state tax laws are not successfully contested, or if future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce are
adopted, our cost of providing Internet access services could be increased and our business could be adversely affected.

Consumer Protection

Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address advertising and user
privacy. As part of these efforts, the Federal Trade Commission ("FTC") and some state Attorney General offices have conducted investigations into the privacy practices of companies that collect
information about individuals on the Internet. The FTC and various state agencies as well as individuals have investigated and asserted
claims against, or instituted inquiries into, ISPs in connection with marketing, billing, customer retention, cancellation and disclosure practices.

Universal Service

While current policy exempts broadband access services from the Universal Service Fund ("USF"), the Congress and FCC may consider
expanding the USF to include broadband Internet access services. This change could allow broadband service providers to receive a subsidy for deploying broadband in rural and underserved areas, but it
will most likely require broadband service providers to contribute to the USF as well. If broadband Internet access providers become subject to USF contribution obligations, they would likely impose a
USF surcharge on end users. Such a surcharge will raise the effective cost of our broadband services to our customers, and could affect customer satisfaction or our revenues and profitability.

Other Laws and Regulations

Our business also is subject to a variety of other U.S. laws and regulations that could subject us to liabilities, claims or other
remedies, such as laws relating to bulk email or "spam," access to various types of content by minors, anti-spyware initiatives, encryption, data protection, data retention and security
breaches. Compliance with these laws and regulations is complex and may require significant costs. In addition, the regulatory framework relating to Internet services is evolving and both the federal
government and states from time to time pass legislation that impacts our business. It is likely that additional laws and regulations will be adopted that would affect our business.

CLEC Regulation

New Edge is a competitive local exchange carrier ("CLEC") that is licensed in most states and subject to both state and federal
telecommunications regulation. CLECs, like New Edge, are dependent on certain provisions of the 1996 Telecommunications Act to procure facilities and services from ILECs that are necessary to provide
their services. The business of New Edge is highly dependent on rules and rulings from the FCC, legislative actions at both the state and federal level, and rulings from the state public utility
commissions. New Edge also must contribute to state and federal universal service funds. In addition, New

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Edge
makes use of the special access services and DSL services of ILECs and other CLECs in order to provide New Edge services to its customers.

VoIP Regulation

We offer voice services to our customers through a fixed line VoIP service and a nomadic-style VoIP service. The current regulatory
environment for VoIP services remains unclear, as the decision whether VoIP is an "information service" or "telecommunications service" is still pending. Classifying VoIP as a telecommunications
service could require the service provider to obtain a telecommunications license, comply with numerous legacy telephone regulations, and possibly subject the VoIP traffic to inter-carrier access
charges, which could result in increased costs. In addition, we currently must comply with seven distinct regulatory obligations imposed by the FCC on VoIP services that interconnect with the public
switched telephone network ("PSTN"): (i) access to emergency calling; (ii) compliance with Communications Assistance with Law Enforcement Act ("CALEA"); (iii) payments to the
federal universal service fund on interstate revenue; (iv) compliance with rules for disability access; (v) payments for regulatory fees; (vi) compliance with customer proprietary
network information ("CPNI") procedures; and (vii) compliance with number portability rules.

Proprietary Rights

Our EarthLink, PeoplePC and New Edge Networks trademarks are valuable assets to our business, and are registered trademarks in the
United States. In particular, we believe the strength of the EarthLink brand among existing and potential customers is important to the
success of our business. Additionally, our EarthLink, PeoplePC and New Edge Networks service marks, proprietary technologies, domain names and similar intellectual property are also important to the
success of our business. Although we do have several patents, we do not consider these patents important to our business. We principally rely upon trademark law as well as contractual restrictions to
establish and protect our technology and proprietary rights and information. We require employees and consultants and, when possible, suppliers and distributors to sign confidentiality agreements, and
we generally control access to, and distribution of, our technologies, documentation and other proprietary information. We will continue to assess appropriate occasions for seeking trademark and other
intellectual property protections for those aspects of our business and technology that we believe constitute innovations providing us with a competitive advantage. From time to time, third parties
have alleged that certain of our technologies infringe on their intellectual property rights. To date, none of these claims has had an adverse effect on our ability to market and sell our services.

Employees

As of December 31, 2009, we had 623 employees, including 333 operations and customer support personnel, 178 sales and marketing
personnel and 112 administrative personnel. As of December 31, 2009, our Consumer Services segment consisted of 339 employees and our Business Services segment consisted of 284 employees. None
of our employees are represented by a labor union, and we have no collective bargaining agreement.

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Available Information

We file annual reports, quarterly reports, current reports, proxy statements and other documents with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, as amended. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 942-8090. Also, the SEC maintains an
Internet web site that contains reports, proxy and information statements, and other information regarding issuers, including EarthLink, that file electronically with the SEC. The public can obtain
any documents that we file with the SEC at http://www.sec.gov.

We
also make available free of charge on or through our Internet web site (http://www.earthlink.net) our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934, as amended, as well as Section 16 reports filed on Forms 3, 4 and 5, as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the SEC. Our Internet web site is not meant to be incorporated by reference into this Annual Report on Form 10-K.

We
also provide a copy of our Annual Report on Form 10-K via mail, at no cost, upon receipt of a written request to the following address:



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Item 1A.    Risk Factors.

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully
considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may
adversely impact our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Risks Related to Our Business and Industry

The continued decline of our consumer access subscribers, combined with the change in mix of our consumer access subscriber base from narrowband to broadband, will adversely
affect our results of operations.

Our consumer access revenues consist primarily of narrowband access revenues and broadband access revenues. Our narrowband subscriber
base and revenues have been declining and are expected to continue to decline due to continued maturation of the market for narrowband access, increased availability and reduced pricing of broadband
access services and an increase in advanced applications such as music downloads, videos, online gaming and social networking which require greater bandwidth for optimal performance. In addition, our
narrowband subscriber base and revenues have been adversely impacted by the effects of our refocused strategy announced in 2007, which resulted in significantly reducing our sales and marketing
efforts and focusing instead on retaining customers and adding customers that are more likely to produce an acceptable rate of return. Our broadband subscriber base and revenues have also been
declining due to our refocused strategy and due to increased competition among broadband providers. We expect our consumer access subscriber base and revenues to continue to decline, which will
adversely affect our profitability and results of operations. If we do not maintain our relationships with current customers or acquire new customers, our revenues will decline and our profitability
will be adversely affected.

Changes
in the mix of our consumer access subscriber base, from narrowband access to broadband access, have also negatively affected our consumer access profitability. Our consumer
broadband access services have lower gross margins due to the higher costs associated with delivering broadband services. Our ability to provide these services profitably is dependent upon
cost-effectively purchasing wholesale broadband access and managing the costs associated with delivering broadband services. While we continuously evaluate cost reduction opportunities
associated with the delivery of broadband access services, our overall profitability will be adversely affected if we are unable to continue to manage and reduce costs associated with the delivery of
broadband services.

We will have less ability in the future to implement cost reduction initiatives to offset our revenue declines, which will adversely affect our results of operations.

We have implemented significant cost reduction initiatives to align costs with trends in our revenues, including reducing our
headcount, outsourcing certain functions, streamlining internal processes, renegotiating contacts with network service providers and consolidating or closing certain facilities. We plan to continue to
implement cost reduction initiatives and to manage
our business more efficiently. However, we believe that large-scale cost reduction opportunities will be more limited in the future and in some cases, we may incur upfront costs in connection with
implementing certain initiatives. Although we seek to align our cost structure with trends in our revenue, we do not expect to be able to reduce our cost structure to the same extent as our revenue
declines and our cost reduction initiatives might not yield the anticipated benefits. If we do not recognize the anticipated benefits of our cost reduction initiatives, or do so in a timely manner,
our profitability and cash flows will decline.

We face significant competition that could reduce our profitability.

We face significant competition in the markets in which we operate and we expect this competition to intensify. The intense competition
from our competitors could cause us to decrease the pricing of our

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services,
increase churn of our existing customers, increase operating costs or decrease the number of subscribers we are able to add, which would result in lower revenues and profits.

Consumer Services Segment

Access and service.We operate in the Internet access services market, which is extremely competitive. We compete directly or
indirectly with
established online services companies, such as AOL and the Microsoft Network; national communications companies and local exchange carriers, such as AT&T, Qwest and Verizon; cable companies providing
broadband access, including Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; local and regional ISPs; free or value-priced ISPs, such as United
Online, Inc. which provides service under the brands Juno and NetZero; wireless Internet service providers; content companies, such as Google and Yahoo!; and satellite and fixed wireless
service providers. Competitors for our VoIP services include established telecommunications and cable companies; ISPs; leading Internet companies; and companies that offer VoIP services as their
primary business, such as Vonage. Current and prospective competitors include many large companies that have substantially greater market presence and greater financial, technical, marketing and other
resources than we have. Competition in the market for access services is likely to continue increasing, and competition could cause us to decrease the pricing of our services, increase churn of our
existing customers, increase operating costs or decrease the number of subscribers we are able to add.

We
experience pricing pressures for certain of our consumer access services, particularly our consumer broadband services, due to competition, volume-based pricing and other factors.
Some providers have reduced and may continue to reduce the retail price of their Internet access services to maintain or increase their market share, which could cause us to reduce, or prevent us from
raising, our prices. We may encounter further market pressures to: migrate existing customers to lower-priced service offerings; restructure service offerings to offer more value; reduce prices; and
respond to particular short-term, market-specific situations, such as special introductory pricing or new product or service offerings. Any of the above could adversely affect our revenues
and profitability.

We
believe the primary competitive factors in the Internet access service industry are price, speed, features, coverage area and quality of service. While we believe our Internet access
services compete favorably based on some of these factors when compared to some Internet access providers, we are at a competitive disadvantage relative to some or all of these factors with respect to
some of our competitors. Our dial-up Internet access services do not compete favorably with broadband services with respect to speed, and dial-up Internet access services no
longer have a significant, if any, price advantage over certain broadband services. Most of the largest providers of broadband services, such as cable and telecommunications companies, control their
own networks and offer a wider variety of services than we offer, including voice, data and video services. Their ability to bundle services and to offer broadband services at prices below the price
that we can profitably offer comparable services puts us at a competitive disadvantage.

Value-added services.The companies we compete with for Internet access services also compete with us for subscribers to value-added
services, such
as email storage and security products. We compete for advertising revenues with major ISPs, content providers, large web publishers, web search engine and portal companies, Internet advertising
providers, content aggregation companies, social-networking web sites, and various other companies that facilitate Internet advertising. Competition in the market for value-added services may impact
the rates we charge.

Business Services Segment

Through New Edge, we build and manage IP-based wide area networks for businesses and communications carriers. We also
provide Internet access to business customers. We face significant

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competition
in these markets and we expect this competition to intensify. These markets are rapidly changing due to industry consolidation, an evolving regulatory environment and the emergence of new
technologies. We compete directly or indirectly with ILECs, such as AT&T, Qwest and Verizon; other competitive telecommunications companies, such as Covad, Level 3, Megapath and XO Holdings;
interexchange carriers, such as Sprint Nextel; wireless and satellite service providers; and cable service providers, such as Charter Communications, Inc., Comcast, Cox
Communications, Inc. and Time Warner Cable. We believe the primary competitive factors in our business markets include price, availability, reliability of service, network security, variety of
service offerings, quality of service and reputation of the service provider. While we believe our business services compete favorably based on some of these factors, we are at a competitive
disadvantage relative to some or all of these factors with respect to some of our competitors. The market for telecommunications services, particularly local exchange services, remains dominated by
the ILECs, each of which owns the majority of the local exchange network in its respective operating region of the U.S. Each ILEC has significantly more resources available to expand its penetration
within the operating regions where we compete. In addition, industry consolidation has resulted in larger competitors that have greater economies of scale. Additionally, new competitors such as VoIP
providers and cable companies have entered the market to compete with traditional, facilities-based telecommunications services providers. The operating results of our Business Services segment may be
adversely affected by increased subscriber acquisition and retention costs necessary to attract and retain subscribers in a difficult economic environment.

We
also provide web hosting services to enable customers to build and maintain an effective online presence. The web hosting market is highly fragmented, has low barriers to entry and is
characterized by considerable competition on price and features. We compete directly or indirectly with a number of companies, such as GoDaddy.com, Rackspace Hosting, Inc., Web.com and Yahoo!.
Some of these companies have substantially greater market presence and greater financial, technical, marketing and other resources than we have. Competition could cause us to decrease the pricing of
our services, increase churn of our existing customers, increase operating costs or decrease the number of subscribers we are able to add, which would result in lower revenues and profits.

Adverse economic conditions may harm our business.

Unfavorable economic conditions, including recession and disruptions to the credit and financial markets, could cause customers to slow
spending. Our consumer access services are discretionary and dependent upon levels of consumer spending. In addition, our business customers are particularly exposed to a weak economy. Diminished
corporate spending, corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on revenues and churn rates, and have resulted in, and may continue to result in,
increased business customer demands for price reductions in connection with contract renewals. In addition, during challenging economic times our business customers may face issues gaining timely
access to sufficient credit, which may impair the ability of our customers to pay for services they have purchased. Any of the above could cause us to increase our allowance for doubtful accounts and
write-offs of accounts receivable, to impair amounts capitalized as intangible assets, or otherwise have a material adverse effect on our business, financial position, results of
operations and cash flows. Finally, our cash, cash equivalents and marketable securities are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by
unfavorable economic conditions. If financial markets experience prolonged periods of decline, the value or liquidity of our cash, cash equivalents and marketable securities could decline and result
in an other-than-temporary decline in fair value, which could adversely affect our financial condition and operating results.

We
are also susceptible to risks associated with the potential financial instability of the vendors and third parties on which we rely to provide services or to which we outsource
certain functions. The economic conditions that may affect our customers also could adversely affect vendors and third parties and lead to significant increases in prices, reduction in quality or the
bankruptcy of our vendors or third

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parties
upon which we rely. Any interruption in the services provided by our vendors or by third parties could adversely affect our business, financial position, results of operations and cash flows.

We may not be able to execute our business strategy for our Business Services segment, which could adversely impact our results of operations and cash flows.

Revenues for our Business Services segment, which primarily consist of New Edge revenues, have been declining due to economic and
competitive pressures. This decline in revenue impacts our ability to leverage our fixed cost network infrastructure. New Edge has a network and cost structure designed to support a larger revenue
stream. We are continuing to evaluate ways to create more scale in our New Edge business, and are closely managing operating costs and expenses. However, to achieve and sustain operating profitability
in our business services segment, we must generate revenue growth, align our cost structure with revenue trends and otherwise manage this business efficiently. In addition, in order to generate
revenue growth, we could incur significant upfront costs to acquire new customers. There can be no assurance that we will be able to reduce our operating expenses commensurate with the revenue decline
or create more scale in this business. The inability to reduce operating expenses or create scale could have an adverse impact on our business, financial condition, results of operations and cash
flows.

Our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations.

A significant number of our new subscribers have been generated through strategic alliances, including through our marketing alliance
with Time Warner Cable and Bright House Networks. Generally, our strategic alliances and marketing relationships are not exclusive and may have a short term. In addition, as our agreements expire or
otherwise terminate we may be unable to renew or replace these agreements on comparable terms, or at all. Our inability to maintain our marketing relationships or establish new marketing relationships
could result in delays and increased costs in adding paying subscribers and adversely affect our ability to add new customers, which could, in turn, have a material adverse effect on us. The number of
customers we are able to add through these marketing relationships is dependent on the marketing efforts of our partners, and there is no commitment for these partners to provide us with new
customers. A significant decrease in the number
of gross subscriber additions generated through these relationships could adversely affect the size of our customer base and revenues.

Our business is dependent on the availability of third-party telecommunications service providers.

Our business depends on the capacity, affordability, reliability and security of third-party telecommunications service providers. Only
a small number of providers offer the network services we require, and the majority of our telecommunications services are currently purchased from a limited number of telecommunications service
providers. Our principal provider for narrowband services is Level 3. Our largest providers of broadband connectivity are AT&T, Comcast, Covad, Qwest, Time Warner Cable and Verizon. We also
purchase narrowband services from certain regional and local providers. Telecommunications service providers have merged and may continue to merge, which would reduce the number of suppliers from
which we could purchase telecommunications services.

We
cannot be certain of renewal or non-termination of our contracts or that legislative or regulatory factors will not affect our contracts. Our results of operations could
be materially adversely affected if we are unable to renew or extend contracts with our current network providers on acceptable terms, renew or extend current contracts with our network providers at
all, acquire similar network capacity from other network providers, or otherwise maintain or extend our footprint. Additionally, each of our network providers sells network access to some of our
competitors and could choose to grant those competitors preferential network access or pricing. Many of our network providers compete with us in the market to provide consumer Internet access. Such
events may cause us to incur additional costs, pay increased rates for wholesale access services, increase the retail prices of our service offerings and/or discontinue providing

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retail
access services, any of which could adversely affect our ability to compete in the market for retail access services.

We may be unable to retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us.

Our business depends on the continued services of our senior management and other key personnel and our ability to effectively retain
and motivate them. We have implemented various reductions in workforce over the past few years to streamline our business and improve our cost structure. We expect to continue to implement workforce
and cost reduction initiatives. This may affect our ability to retain or replace key personnel, harm employee morale and
productivity or disrupt our business. In addition, the reductions in workforce have resulted in less redundancy of mission critical roles. Effective succession planning is important to our
long-term success. Failure to ensure effective transfer of knowledge and transitions involving key employees could hinder execution of our business strategies. Finally, the loss of any of
our key executives could have a material adverse effect on us.

We may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences.

In the past, we have acquired businesses, technologies, subscriber bases from ISPs, services, products and other assets, including our
acquisition of New Edge and PeoplePC. We expect to continue to evaluate and consider potential strategic transactions that we believe may complement our business. At any given time, we may be engaged
in discussions or negotiations with respect to one or more of such transactions that may be material to our financial condition and results of operations. There can be no assurance that any such
discussions or negotiations will result in the consummation of any transaction.

These
transactions involve significant challenges and risks including diversion of management's attention from our other businesses; the impact on employee morale and retention; the
integration of new employees, business systems and technology; the need to implement controls, procedures and policies or the need to remediate significant control deficiencies that may exist at
acquired companies; potential unknown liabilities; or any other unforeseen operating difficulties. These factors could adversely affect our operating results or financial condition.

We
may not realize the anticipated benefits of acquisitions or we may not realize them in the time frame expected. Additionally, future acquisitions may result in the dilutive issuances
of equity securities, use of our cash resources, incurrence of debt or contingent liabilities, amortization expense related to acquired definite-lived intangible assets or the potential impairment of
amounts capitalized as intangible assets, including goodwill. Any of these items could have a material adverse affect on our business, financial condition, results of operations and cash flows.

If we do not continue to innovate and provide products and services that are useful to subscribers, we may not remain competitive, and our revenues and operating results
could suffer.

The market for Internet and telecommunications services is characterized by changing technology, changes in customer needs and frequent
new service and product introductions. Our future success will depend, in part, on our ability to use leading technologies effectively, to continue to develop our technical expertise, to enhance our
existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis. We may not be able to adapt quickly enough to changing technology,
customer requirements and
industry standards. Such changes could include acceleration of the adoption of broadband due to government funding to deploy broadband to rural areas. If we fail to use new technologies effectively,
to develop our technical expertise and new services, or to enhance existing services on a timely basis, either internally or through arrangements with third parties, our product and service offerings
may fail to meet customer needs which could adversely affect our revenues and profitability.

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Our
dial-up Internet access services also rely on their compatibility with other third-party systems and products, including operating systems. Incompatibility with
third-party systems and products could adversely affect our ability to deliver our services or a user's ability to access our services. Our dial-up services are dependent on
dial-up modems and an increasing number of computer manufacturers do not pre-load their new computers with dial-up modems, requiring the user to separately acquire
a modem to access our services. There can be no assurance that, as the dial-up Internet access market declines and new technologies emerge, we will be able to continue to effectively
distribute and deliver our dial-up services.

Our business may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these services or terminate their
relationships with us.

Our business and financial results depend, in part, on the availability and quality of our customer service and technical support and
certain billing services, including collection services. We outsource a majority of our customer service and technical support functions. As a result, we maintain only a small number of internal
customer service and technical support personnel. Our Consumer Services segment relies primarily on one customer service and technical support vendor. We are not currently equipped to provide the
necessary range of service and support functions in the event that our service providers becomes unable or unwilling to offer these services to us. Our outsourced customer support providers utilize
internationally geographically dispersed locations to provide us with customer service and technical support services, and as a result, our customer support providers may become subject to financial,
economic, environmental and political risks beyond our or the providers' control, which could jeopardize their ability to deliver customer service and technical support services. We also utilize third
parties for certain billing and collection services. If one or more of our service providers does not provide us with quality services, or if our relationship with any of our third party vendors
terminates and we are unable to provide those services internally or identify a replacement vendor in an orderly, cost-effective and timely manner, our business, financial position,
results of operations and cash flows could suffer.

Interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and
harm our operating results.

We depend on network and information systems and other technologies, including those at our technology centers and those of our third
party service providers. We may experience service interruptions or system failures in the future. In addition, as we consider potential outsource or network consolidation opportunities, we may
experience service interruptions despite our efforts to minimize the impact to customers. Any service interruption adversely affects our ability to operate our business and could result in an
immediate loss of revenues. If we experience frequent or persistent system or network failures, our reputation and brand could be permanently harmed. We may make significant capital expenditures to
increase the reliability of our systems, but these capital expenditures may not achieve the results we expect. Our systems are vulnerable to damage or interruption from earthquakes and other natural
disasters, terrorist attacks, floods, fires, power loss, telecommunications failures, break ins, computer denial of service attacks, computer hackings, computer viruses, worms or other attempts to
harm our systems, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning may not be adequate. Further, any security breaches, such as misappropriation,
misuse, leakage, falsification or accidental release or loss of information maintained in our information technology systems and networks, including customer, personnel and vendor data, could damage
our reputation and require us to expend significant capital and other resources to remedy any such security breach. The occurrence of any such network or information system-related events or security
breaches could have a material adverse effect on our business, financial position, results of operations and cash flows.

In
addition, our VoIP services, including our E911 service, depend on the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our
control. If our third party service providers fail to maintain these facilities properly, or fail to respond quickly to

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problems,
our customers may experience service interruptions. In addition, our E911 emergency service for our VoIP services is different in significant respects from the emergency calling services
offered by traditional wireline telephone companies. Those differences may cause significant delays, or even failures, in callers' receipt of the emergency assistance they need. VoIP providers are not
currently protected by legislation, so any resulting liability could be substantial. If interruptions or delays adversely affect the perceived reliability of our service, we may have difficulty
attracting new customers and our brand and reputation may be negatively impacted. Any of these factors could cause us to lose revenues, incur greater expenses or cause our reputation or financial
results to suffer.

Government regulations could adversely affect our business or force us to change our business practices.

The regulatory environment relating to our business continues to evolve. A number of legislative and regulatory proposals under
consideration by federal, state and local governmental entities may lead to the repeal, modification or introduction of laws or regulations which do, or could, affect our business. Our results of
operations could be materially adversely affected by future changes of legal and regulatory rights or obligations.

Narrowband Internet access.Currently, narrowband Internet access is classified as an "information service" and is not subject to
traditional
telecommunications services regulation, such as licensing or pricing regulation. Any change to these rules that would apply per-minute carrier access charges to dial-up
Internet access traffic could significantly impact our costs for this service. While Internet traffic is not subject to the FCC's carrier access charge regime, dial-up ISP bound traffic is
regulated by the FCC. The FCC has established a uniform, nationwide rate for ISP-bound traffic, but these rules have been criticized by the courts and further judicial scrutiny is
expected. Changes to the rules governing dial-up ISP bound traffic could impact our cost of providing this service.

Broadband Internet access.Currently, broadband Internet access is classified as an "information service" and, as a result, cable
companies and
telephone companies that offer a broadband Internet access information service are not required by the FCC to offer unaffiliated ISPs stand-alone broadband transmission. Accordingly, if our contracts
with cable companies and telephone companies were to expire and not be replaced, our broadband Internet access customer base and revenues would be adversely affected.

Forbearance.The Communications Act of 1934, as amended, provides the FCC with the authority to not enforce, or "forbear" from
enforcing, statutory
requirements and regulations if certain public interest factors are satisfied. If the FCC were to forbear from enforcing regulations that have been established to enable competing broadband Internet
access and VoIP, our business could be adversely affected. We expect reform to the FCC's forbearance review process in the near future. The FCC has initiated a proceeding to establish strict
evidentiary and filing procedures for review of forbearance petitions.

Internet taxation.The Internet Tax Non-Discrimination Act, which is in effect through November 2014, places a moratorium on taxes on
Internet access and multiple, discriminatory taxes on
electronic commerce. Certain states have enacted various taxes on Internet access and electronic commerce, and selected states' taxes are being contested on a variety of bases. If these state tax laws
are not successfully contested, or if future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce are adopted, our cost of providing Internet access
services could be increased and our business could be adversely affected.

Consumer protection.Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address
advertising
and user privacy. As part of these efforts, the Federal Trade Commission ("FTC") and some state Attorney General offices have conducted investigations into the privacy practices of companies that
collect information about individuals on the Internet. The FTC and various state agencies as well as individuals have investigated and asserted claims against, or instituted inquiries into, ISPs in
connection with marketing, billing, customer retention, cancellation and disclosure practices. Our services and business practices, or changes to our services and business practices could subject us
to investigation or enforcement actions if we fail to adequately comply with applicable consumer protection laws.

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Universal Service.While current policy exempts broadband access services from the Universal Service Fund ("USF"), the Congress and FCC
may consider
expanding the USF to include broadband Internet access services. This change could allow broadband service providers to receive a subsidy for deploying broadband in rural and underserved areas, but it
will most likely require broadband service providers to contribute to the fund as well. If broadband Internet access providers become subject to USF contribution obligations, they would likely impose
a USF surcharge on end users. Such a surcharge will raise the effective cost of our broadband services to our customers, and could adversely affect customer satisfaction or our revenues and
profitability.

CLEC regulation.New Edge is a CLEC that is licensed in most states and subject to both state and federal telecommunications
regulation. CLECs, like
New Edge, are dependent on certain provisions of the 1996 Telecommunications Act to procure facilities and services from ILECs that are necessary to provide their services. The business of New Edge is
highly dependent on rules and rulings from the FCC, legislative actions at both the state and federal level, and rulings from the state public utility
commissions. New Edge also must contribute to state and federal universal service funds. In addition, New Edge makes use of the special access services and DSL services of ILECs and other CLECs in
order to provide New Edge services to its customers.

VoIP regulation.The current regulatory environment for VoIP services remains unclear, as the decision whether VoIP is an "information
service" or
"telecommunications service" is still pending. Classifying VoIP as a telecommunications service could require us to obtain a telecommunications license, comply with numerous legacy telephone
regulations, and possibly subject the VoIP traffic to inter-carrier access charges, which could result in increased costs.

Other laws and regulations.Our business also is subject to a variety of other U.S. laws and regulations that could subject us to
liabilities, claims
or other remedies, such as laws relating to bulk email or "spam," access to various types of content by minors, anti-spyware initiatives, encryption, data protection, data retention and
security breaches. Compliance with these laws and regulations is complex and may require significant costs. In addition, the regulatory framework relating to Internet services is evolving and both the
federal government and states from time to time pass legislation that impacts our business. It is likely that additional laws and regulations will be adopted that would affect our business. We cannot
predict the impact future laws, regulatory changes or developments may have on our business, financial condition, results of operations or cash flows. The enactment of any additional laws or
regulations, increased enforcement activity of existing laws and regulations, or claims by individuals could significantly impact our costs or the manner in which we conduct business, all of which
could adversely impact our results of operations and cause our business to suffer.

Privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services.

Concerns about our practices with regard to the collection, use, disclosure or security of personal information or other
privacy-related matters, even if unfounded, could damage our reputation and operating results. We strive to comply with all applicable data protection laws and regulations, as well as our own posted
privacy policies. However, any failure or perceived failure to comply with these laws, regulations or policies may result in proceedings or actions against us by government entities or others, which
could potentially have an adverse effect on our business.

In
addition, as our services are web-based, we store a substantial amount of data on our servers for customers (including personal information). Any systems failure or
compromise of our security that results in the release of our users' data could increase subscriber churn as well as limit our ability to attract new customers by damaging our reputation and brand. We
may also need to expend significant resources to protect against security breaches.

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We may not be able to protect our intellectual property.

We regard our EarthLink, PeoplePC and New Edge Networks trademarks as valuable assets to our business. In particular, we believe the
strength of the EarthLink brand among existing and potential customers is important to the success of our business. Additionally, our EarthLink, PeoplePC and New Edge Networks service marks,
proprietary technologies, domain names and similar intellectual property are also important to the success of our business. We principally rely upon trademark law as well as contractual restrictions
to establish and protect our technology and proprietary rights and information. We require employees and consultants and, when possible, suppliers and distributors to sign confidentiality agreements,
and we generally control access to, and distribution of, our technologies, documentation and other proprietary information. The efforts we have taken to protect our proprietary rights may not be
sufficient or effective. Third parties may infringe or misappropriate our trademarks and similar proprietary rights. If we are unable to protect our proprietary rights from unauthorized use, our brand
image may be harmed and our business may suffer. In addition, protecting our intellectual property and other proprietary rights is expensive and time consuming. Any increase in the unauthorized use of
our intellectual property could make it more expensive to do business and consequently harm our operating results.

We may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in
the future.

From time to time, third parties have alleged that we infringe on their intellectual property rights. We have been subject to, and
expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the patents, trademarks and other intellectual property rights of third parties. None of these
claims has had an adverse effect on our ability to market and sell and support our services. Such claims, whether or not meritorious, are time-consuming and costly to resolve, and could
require expensive changes in our methods of doing business, could require us to enter into costly royalty or licensing agreements, or could require us to cease conducting certain operations. Any of
these events could result in increases in operating expenses or could limit or reduce the number of our service offerings.

If we are unable to successfully defend against legal actions, we could face substantial liabilities.

We are currently a party to various legal actions, including consumer class action and patent litigation. Defending against these
lawsuits may involve significant expense and diversion of management's attention and resources from other matters. Due to the inherent uncertainties of litigation, we may not prevail in these actions.
In addition, our ongoing operations may subject us to litigation risks and costs in the future. Both the costs of defending lawsuits and any settlements or judgments against us could materially and
adversely affect our results of operations.

Our business depends on effective business support systems, processes and personnel.

Our business relies on our data, billing and other operational and financial reporting and control systems. To effectively manage our
technical support infrastructure, we will need to continue to maintain our data, billing, and other operational and financial systems, procedures and controls, which can be costly. We have experienced
system failures from time to time, and any interruption in the availability of our business support systems, in particular our billing system, could result in an immediate, and possibly substantial,
loss of revenues. Frequent or persistent system failures could cause customers to believe our systems are unreliable, leading them to switch to our competitors and could permanently harm our
reputation.

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As a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges, including incurring
facility exit and restructuring charges.

Over the past few years, we implemented a corporate restructuring plan under which we significantly reduced our workforce and closed or
consolidated various facilities. We also completed the divestiture of our municipal wireless broadband operations. We continue to evaluate our business, which may result in additional restructuring
activities or changes in estimates to amounts previously recorded. We may choose to divest certain business operations based on our management's assessment of their strategic value to our business,
further consolidate or close certain facilities or outsource certain functions. Decisions to eliminate or limit certain business operations in the future could involve the expenditure of capital,
consumption of management resources, realization of losses, transition and wind-up expenses, further reduction in workforce, impairment of the value of purchased assets, facility
consolidation and the elimination of revenues along with associated
costs, any of which could cause our operating results to decline and may fail to yield the expected benefits. Engaging in further restructuring activities could result in additional charges and costs,
including facility exit and restructuring costs, and could adversely affect our business, financial position, results of operations and cash flows.

We may be required to recognize additional impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial
position.

We have recorded goodwill and other intangible assets in connection with our acquisitions. We perform an impairment test of our
goodwill and indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events occur or circumstances change that would more likely than not indicate that
goodwill or any such assets might be impaired. We evaluate the recoverability of our definite-lived intangible assets for impairment when events occur or circumstances change that would indicate that
the carrying amount of an asset may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or intangible assets may not be
recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We have experienced impairment charges in the
past, and recognized an impairment charge of $24.1 million during the fourth quarter of 2009 related to our Business Services segment. As a result, there is no remaining carrying value related
to Business Services goodwill. As we continue to assess the ongoing expected cash flows and carrying amounts of our remaining goodwill and other intangible assets, which relate primarily to our
Consumer Services segment, changes in economic conditions, changes to our business strategy, changes in operating performance or other indicators of impairment could cause us to realize a significant
impairment charge, negatively impacting our results of operations and financial position.

We may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax attributes could be limited in the future.

As of December 31, 2009, we had approximately $350.0 million of tax net operating losses for federal income tax purposes
and approximately $178.0 million of tax net operating losses for state income tax purposes. The tax net operating losses for federal income tax purposes begin to expire in 2020 and the tax net
operating losses for state income tax purposes began to expire in 2010.

Our
future income taxes could be adversely affected by changes in the valuation of our deferred tax assets and liabilities or by changes in tax laws, regulations, accounting principles
or interpretations thereof. Our determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our
operating results and financial condition. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment, and there are many transactions and
calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the

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amounts
recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

Currently,
our tax net operating losses can accumulate and be used to offset any of our future taxable income. However, an "ownership change" that occurs during a "testing period" (as
such terms are defined in Section 382 of the Internal Revenue Code of 1986, as amended) could place significant limitations, on an annual basis, on the use of such net operating losses to
offset future taxable income we may generate. In general, future stock transactions and the timing of such transactions could cause an "ownership change" for income tax purposes. Such transactions may
include our purchases under our share repurchase program, additional issuances of common stock by us (including but not limited to issuances upon future conversion of our outstanding convertible
senior notes), and acquisitions or sales of shares by certain holders of our shares, including persons who have held, currently hold, or may accumulate in the future five percent or more of our
outstanding stock. Many of these transactions are beyond our control. Calculations of an "ownership change" under Section 382 are complex and to some extent are dependent on information that is
not publicly available. The risk of an "ownership change" occurring could increase if additional shares are repurchased, if additional persons acquire five percent or more of our outstanding common
stock in the near future and/or current five percent stockholders increase their interest. Due to this risk, we monitor our purchases of additional shares of our common stock. Since an "ownership
change" also could result from a change in control of our company, with subsequent annual limitations on the use of our net operating losses, this could discourage a change in control.

Risks Related to Ownership of Our Common Stock

We may change our cash return strategy.

During 2009, we began paying quarterly cash dividends on our common stock. The payment of future quarterly dividends is discretionary
and is subject to determination by our
Board of Directors each quarter following its review of our financial condition, results of operations, cash requirements, investment opportunities and such other factors as are deemed relevant by our
Board of Directors. Changes in our business needs, including working capital and funding for acquisitions, or a change in tax laws relating to dividends, among other factors, could cause our Board of
Directors to decide to reduce, or cease the payment of, dividends in the future. There can be no assurance that we will not decrease or discontinue quarterly cash dividends, and if we do, our stock
price could be negatively impacted.

In
addition, we could increase the amount of cash dividends paid to shareholders either through a larger quarterly dividend or a special dividend. This could negatively impact our cash
flows and reduce our flexibility to engage in other strategic alternatives, such as acquisitions of other businesses. This also could negatively impact our stock price, and may adversely affect our
ability to retain key employees or harm employee morale and productivity. We also could engage in a significant stock buyback which could have similar results.

Our stock price may be volatile.

The trading price of our common stock may be subject to fluctuations as we review our strategic alternatives or if we were to decide
upon a particular alternative, such as a business combination transaction or a specific capital return strategy. Our stock price also may fluctuate in response to other events and factors, such as
quarterly variations in results of operations; changes in financial estimates; unstable economic conditions; changes in recommendations or reduced coverage by securities analysts; the operating and
stock price performance of other companies that investors may deem comparable to us; and news reports relating to trends in the markets in which we operate or general economic conditions.

In
addition, the stock market in general and the market prices for Internet-related companies have experienced volatility that often has been unrelated to the operating performance of
such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our

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operating
performance. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted stock
incentive awards.

Our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry.

As of December 31, 2009, we had $258.8 million outstanding principal amount of 3.25% Convertible Senior Notes Due 2026
(the "Notes"). Our indebtedness could have important consequences to us. For example, it could:



Holders
of the Notes have the right to require us to repurchase the Notes on November 15, 2011, November 15, 2016 and November 15, 2021 or upon the occurrence of a
fundamental change prior to maturity. In addition, under the terms of the indenture governing the Notes, our payment of cash dividends requires an adjustment to the conversion rate for the Notes, and
as a result of the adjustment, the Notes may be surrendered for conversion for a period of time between the declaration date and the record date, as defined in the indenture, for the consideration
provided for in the indenture. During the year ended December 31, 2009, we began declaring dividends on our common stock, and $3.0 million of Notes were surrendered for conversion in
January 2010. The number of holders who require us to repurchase the Notes could increase as we continue to declare dividends. Upon conversion of the Notes, we are required to deliver cash equal to
the lesser of the aggregate principal amount of the Notes to be converted and the total conversion obligation. We may use cash, shares of common stock or a combination thereof, at our option, for the
remainder, if any, of the conversion obligation. We may not have sufficient funds to make the required cash payment upon conversion or to purchase or repurchase the Notes in cash at such time or the
ability to arrange necessary financing on acceptable terms. In addition, the requirement to pay the fundamental change
repurchase price, including the related make whole premium, may discourage a change in control of our company.

Provisions of our second restated certificate of incorporation, amended and restated bylaws and other elements of our capital structure could limit our share price and delay
a change of management.

Our second restated certificate of incorporation, amended and restated bylaws and shareholder rights plan contain provisions that could
make it more difficult or even prevent a third party from acquiring us without the approval of our incumbent board of directors. These provisions, among other things:



These
provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and significantly impede the ability of the holders of our
common stock to change management. In addition, we have adopted a rights plan, which has anti-takeover effects. The rights plan, if triggered, could cause substantial dilution to a person
or group that attempts to acquire our common

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stock
on terms not approved by the board of directors. These provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock.

Item 1B.    Unresolved Staff Comments.

None.

Item 2.    Properties.

We lease various properties in the United States with expiration dates through 2014. We use these properties for operations, data
centers and executive and administrative purposes. Our corporate headquarters is in Atlanta, Georgia where we occupy approximately 98,000 square feet under a lease that will expire in 2014. We occupy
55,000 square feet in Pasadena, California for operations and corporate offices under a lease that will expire in 2014 and 53,000 square feet in Vancouver, Washington for operations and corporate
offices under a lease that will expire in 2012. We also own a data center facility in Atlanta, Georgia.

We
currently have facilities in excess of our needs, and have entered into or plan to enter into various sublease agreements for our unused office and technical space. We believe the
facilities we are retaining are suitable and adequate for our business operations. For additional information regarding our obligations under property leases, see Note 14 in our Notes to
Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

Item 3.    Legal Proceedings.

We are a party to various legal proceedings that are ordinary and incidental to our business. Management does not expect that any
currently pending legal proceedings will have a material adverse effect on our results of operations or financial position.

Item 4.    Submission of Matters to a Vote of Security Holders.

During the quarter ended December 31, 2009, there were no matters submitted to a vote of security holders.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is traded on the Nasdaq Global Market under the symbol "ELNK." The following table sets forth the high and low sale
prices for our common stock for the periods indicated, as reported by the Nasdaq Global Market.

EarthLink, Inc.High

LowYear Ended December 31, 2008First Quarter

$
7.94

$
6.23Second Quarter


10.16


7.51Third Quarter


9.78


7.25Fourth Quarter


8.41


5.52Year Ended December 31, 2009First Quarter

$
7.83

$
6.02Second Quarter


8.17


6.43Third Quarter


8.75


7.30Fourth Quarter


8.93


7.92Year Ending December 31, 2010First Quarter (through January 29, 2010)

$
8.60

$
8.09


The
last reported sale price of our common stock on the Nasdaq Global Market on January 29, 2010 was $8.11 per share.

Holders

There were approximately 1,784 holders of record of our common stock on January 29, 2010.

Dividends

During 2009, we began paying quarterly cash dividends. In July 2009, our Board of Directors declared a quarterly cash dividend on our
common stock of $0.14 per share to stockholders of record on September 14, 2009, which was paid in September 2009 and totaled $15.0 million. In October 2009, our Board of Directors
declared a quarterly cash dividend on our common stock of $0.14 per share to stockholders of record on December 9, 2009, which was paid in December 2009 and totaled $15.0 million. In
January 2010, our Board of Directors declared a quarterly cash dividend on our common stock of $0.14 per share to stockholders of record on March 12, 2010 to be paid in March 2010. We currently
intend to continue to pay regular quarterly dividends on our common stock. Any decision to declare future dividends will be made at the discretion of the Board of Directors and will depend on, among
other things, our results of operations, financial condition, cash requirements, investment opportunities and other factors the Board of Directors may deem relevant. Prior to 2009, we had never
declared or paid cash dividends on our common stock.

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Performance Graph

The following indexed line graph indicates our total return to stockholders from December 31, 2004 to December 31, 2009,
as compared to the total return for the Nasdaq Global Market and the Morgan Stanley Internet Index for the same period. The calculations in the graph assume that $100 was invested on
December 31, 2004 in our common stock and each index and also assumes dividend reinvestment.

GRAPHIC

December 31,
2004

December 31,
2005

December 31,
2006

December 31,
2007

December 31,
2008

December 31,
2009EarthLink, Inc.


100.0


96.4


61.6


61.4


58.7


74.6Nasdaq Global Market


100.0


101.4


111.0


121.9


72.5


104.3Morgan Stanley Internet Index


100.0


100.8


110.3


146.2


79.1


154.8


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Item 6.    Selected Financial Data.

The following selected consolidated financial data was derived from our consolidated financial statements. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the consolidated financial statements and notes thereto included elsewhere in this Annual
Report on Form 10-K.

Year Ended December 31,2005

2006

2007

2008

2009(in thousands, except per share amounts)Statement of operations data:Revenues

$
1,290,072

$
1,301,072

$
1,215,994

$
955,577

$
723,729Operating costs and expenses (1)(2)


1,125,576


1,205,431


1,167,960


790,970


541,571Income from operations


164,496


95,641


48,034


164,607


182,158Income (loss) from continuing operations (3)


142,780


23,690


(64,795
)

187,090


287,118Loss from discontinued operations (4)





(19,999
)

(80,302
)

(8,506
)

Net income (loss) (3)


142,780


3,691


(145,097
)

178,584


287,118Basic net income (loss) per shareContinuing operations

$
1.04

$
0.18

$
(0.53
)
$
1.71

$
2.69Discontinued operations





(0.16
)

(0.66
)

(0.08
)

Basic net income (loss) per share

$
1.04

$
0.03

$
(1.19
)
$
1.63

$
2.69Diluted net income (loss) per shareContinuing operations

$
1.02

$
0.18

$
(0.53
)
$
1.68

$
2.66Discontinued operations





(0.15
)

(0.66
)

(0.08
)

Diluted net income (loss) per share

$
1.02

$
0.03

$
(1.19
)
$
1.61

$
2.66Cash dividends declared per common share

$


$


$


$


$
0.28Basic weighted average common shares outstanding


137,080


128,790


121,633


109,531


106,909Diluted weighted average common shares outstanding


139,950


130,583


121,633


111,051


108,084Cash flow data:Cash provided by operating activities

$
188,704

$
115,249


88,789


230,612


208,622Cash (used in) provided by investing activities


(65,081
)

(283,064
)

13,936


107,124


(37,121
)Cash (used in) provided by financing activities


(169,239
)

152,890


(87,267
)

(24,999
)

(47,070
)


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As of December 31,2005

2006

2007

2008

2009(in thousands)Balance sheet data:Cash and cash equivalents

$
173,294

$
158,369

$
173,827

$
486,564

$
610,995Investments in marketable securities


248,825


236,407


114,768


47,809


84,966Cash and marketable securities


422,119


394,776


288,595


534,373


695,961Total assets


749,149


966,298


729,970


845,866


1,074,618Long-term debt, including long-term portion of capital leases (5)


1,067


198,223


208,472


219,733


232,248Total liabilities


227,285


448,616


415,452


359,391


340,594Accumulated deficit


(1,049,982
)

(1,046,293
)

(1,191,390
)

(1,016,833
)

(729,715
)Stockholders' equity


521,864


517,682


314,518


486,475


734,024


(1)Operating
costs and expenses for the years ended December 31, 2008 and 2009 include non-cash impairment charges of $78.7 million
and $24.1 million, respectively, related to goodwill and certain intangible assets of New Edge in our Business Services segment. We concluded the carrying value of these assets were impaired in
conjunction with our annual tests of goodwill and intangible assets deemed to have indefinite lives.(2)During
the years ended December 31, 2008 and 2009, we recorded income tax benefits in the Statement of Operations of approximately
$56.1 million and $198.8 million, respectively, from releases of our valuation allowance related to deferred tax assets. These deferred tax assets related primarily to net operating loss
carryforwards which we determined we will more likely than not be able to utilize due to the generation of sufficient taxable income in the future.(3)On
January 1, 2009, we adopted new accounting guidance related to accounting for convertible debt instruments that may be settled in cash upon
conversion. The new accounting guidance requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects an issuer's non-convertible debt borrowing rate. The resulting debt discount is accreted over the period the convertible
debt is expected to be outstanding as additional non-cash interest expense. Retrospective application to all periods presented is required. The adoption of this new guidance on
January 1, 2009 affected the accounting for our Convertible Senior Notes due November 15, 2026 (the "Notes"), which were issued in November 2006. As a result of this new guidance, we
recognized additional non-cash interest expense of $1.3 million, $10.0 million, $11.0 million and $12.2 million during the years ended December 31, 2006,
2007, 2008 and 2009, respectively, and will recognize additional non-cash interest expense of $13.4 million and $12.4 million during the years ending December 31, 2010
and 2011, respectively.(4)In
November 2007, management concluded that the municipal wireless broadband operations were no longer consistent with our strategic direction and our Board
of Directors authorized management to pursue the divestiture of our municipal wireless broadband assets. As a result of that decision, we classified the municipal wireless broadband assets as held for
sale and presented the municipal wireless broadband operations as discontinued operations for all periods presented.(5)Includes
the carrying amount of our Notes, which was $198.0 million, $208.3 million, $219.7 million and $232.2 million as of
December 31, 2006, 2007, 2008 and 2009, respectively. During November 2006, we issued $258.8 million aggregate principal amount of Notes in a registered offering. The Notes are
convertible on October 15, 2011 and upon certain events. We have the option to redeem the Notes, in whole or in part, for cash, on or after November 15, 2011, provided that we have made
at least ten semi-annual interest payments. In addition, the holders may require us to purchase all or a


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portion
of their Notes on each of November 15, 2011, November 15, 2016 and November 15, 2021. During 2009, we began paying quarterly cash dividends on our common stock. This
requires an adjustment to the conversion rate for the Notes and opens a conversion period for holders. As a result, the Notes were classified as a current liability in our Consolidated Balance Sheet
as of December 31, 2009.


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Safe Harbor Statement

The Management's Discussion and Analysis and other portions of this Annual Report on Form 10-K include "forward-looking"
statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the
expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from
and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without
limitation (1) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access subscriber base from narrowband to broadband, will adversely
affect our results of operations; (2) that we will have less ability in the future to implement cost reduction initiatives to offset our revenue declines, which will adversely affect our
results of operations; (3) that we face significant competition which could reduce our profitability; (4) that adverse economic conditions may harm our business; (5) that we may
not be able to execute our business strategy for our Business Services segment, which could adversely impact our results of operations and cash flows; (6) that our commercial and alliance
arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (7) that our business is dependent on the availability of
third-party telecommunications service providers; (8) that we may be unable to retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect
us; (9) that we may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences;
(10) that if we do not continue to innovate and provide products and services that are useful to subscribers, we may not remain competitive, and our revenues and operating results could suffer;
(11) that our business may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these services or terminate their
relationships with us; (12) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our
reputation and harm our operating results; (13) that government regulations could adversely affect our business or force us to change our business practices; (14) that privacy concerns
relating to our business could damage our reputation and deter current and potential users from using our services; (15) that we may not be able to protect our intellectual property;
(16) that we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the
future; (17) that if we are unable to successfully defend against legal actions we could face substantial liabilities; (18) that our business depends on effective business support
systems, processes and personnel; (19) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges,
including incurring facility exit and restructuring charges; (20) that we may be required to recognize additional impairment charges on our goodwill and intangible assets, which would adversely
affect our results of operations and financial position; (21) that we may have exposure to greater than anticipated tax liabilities and the use of our net operating losses and certain other tax
attributes could be limited in the future; (22) that we may change our cash return

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strategy;
(23) that our stock price may be volatile; (24) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and
(25) that provisions of our second restated certificate of incorporation, amended and restated bylaws and other elements of our
capital structure could limit our share price and delay a change of management. These risks and uncertainties are described in greater detail in Item 1A of Part I, "Risk Factors."

Overview

EarthLink, Inc. is an Internet service provider ("ISP"), providing nationwide Internet access and related value-added services
to individual and business customers. Our primary service offerings are dial-up and high-speed Internet access services and related value-added services, such as ancillary
services sold as add-on features to our Internet access services, search and advertising. In addition, through our wholly-owned subsidiary, New Edge Networks ("New Edge"), we build and
manage IP-based wide area networks for businesses and communications carriers.

We
operate two reportable segments, Consumer Services and Business Services. Our Consumer Services segment provides Internet access and related value-added services to individual
customers. These services include dial-up and high-speed Internet access and voice-over-Internet Protocol ("VoIP") services, among others. Our Business
Services segment provides integrated communications services and related value-added services to businesses and communications carriers. These services include managed IP-based wide area
networks, dedicated Internet access and web hosting, among others.

Business Strategy

Our business strategy is to maximize the cash flows generated by our business by focusing on customer retention, operational efficiency
and opportunities for growth.



The
primary challenges we face in executing our business strategy are managing the rate of decline in our revenues, aligning costs with trends in our revenue, responding to competition,
reducing churn, purchasing cost-effective network services from third-party telecommunications service providers and adding customers that generate an acceptable rate of return. The factors we believe
are instrumental to the achievement of our business strategy may be subject to competitive, regulatory and other events and circumstances that are beyond our control. Further, we can provide no
assurance that we will be successful in achieving any or all of the strategies identified above, that the achievement or existence of such

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strategies
will favorably impact profitability, or that other factors will not arise that would adversely affect future profitability.

In
response to declining revenues, changes in our industry and changes in consumer behavior, we implemented a restructuring plan ("the 2007 Plan") to reduce operating costs and improve
the efficiency of our organization. Under the 2007 Plan, we significantly reduced employees, closed or consolidated certain facilities, discontinued certain projects and reduced sales and marketing
efforts. The 2007 Plan was primarily implemented during 2007 and 2008. Costs related to the 2007 Plan are included in facility exit and restructuring costs in our Consolidated Statements of
Operations. Subsequent to the 2007 Plan, we implemented further workforce reduction and cost-cutting initiatives. We plan to continue to implement cost reduction initiatives and to better
and more efficiently manage costs of our business. Costs related to implementing initiatives subsequent to the 2007 Plan, such as employee severance, are included in sales and marketing, operations
and customer support and general and administrative expenses in our Consolidated Statements of Operations.

Revenue Sources

The primary component of our revenues is access and service revenues, which consist of narrowband access services (including
traditional, fully-featured narrowband access and value-priced narrowband access); broadband access services (including high-speed access via DSL and cable; managed IP-based
wide area networks; and VoIP); and web hosting services. We also earn revenues from value-added services, which include revenues from ancillary services sold as add-on features to our
Internet access services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues.

Narrowband
access revenues primarily consist of fees charged to customers for dial-up Internet access. Broadband access revenues primarily consist of fees charged for
high-speed access services; fees charged for managing IP-based networks; and fees charged for VoIP services. Web hosting revenues consist of fees charged for leasing server
space and providing web services that enable customers to build and maintain an effective online presence. Value-added services revenues consist of fees charged for ancillary services; fees charged
for paid placements for searches; delivering traffic to EarthLink's partners in the form of subscribers, page views or e-commerce transactions; advertising EarthLink partners'
products and services in EarthLink's various online properties and electronic publications; and referring EarthLink customers to partners' products and services.

Trends in our Business

Consumer services.We operate in the Internet access market, which is characterized by intense competition, changing technology,
changes in customer
needs and new service and product introductions. Consumers continue to migrate from dial-up to broadband access service due to the faster connection and download speeds provided by
broadband access, the ability to free up their phone lines and the more reliable and "always on" connection. The pricing for broadband services has been declining, making it a more viable option for
consumers who continue to rely on dial-up connections for Internet access. In addition, advanced applications such as online gaming, music downloads, videos and social networking require
greater bandwidth for optimal performance, which adds to the demand for broadband access. Our narrowband subscriber base and revenues have been declining and are expected to continue to decline due to
the continued maturation of the market for narrowband access. Additionally, our consumer access services are discretionary and
dependent upon levels of consumer spending. Unfavorable economic conditions could cause customers to slow spending in the future, which could adversely affect our revenues and churn.

In
light of this continued maturation of the market for narrowband access, we refocused our business strategy to significantly reduce our sales and marketing efforts and focus instead on
retaining customers

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and
adding customers that have similar characteristics as our tenured customer base and are more likely to produce an acceptable rate of return. While this change has resulted in a decline in our
revenues, we expect the rate of revenue decline to decrease as our subscriber base becomes more tenured and churn rates decline. Our consumer subscriber churn rates improved from 5.2% during the year
ended December 31, 2007, to 4.4% and 3.6% during the years ended December 31, 2008 and 2009, respectively.

Consistent
with trends in the Internet access industry, the mix of our consumer access subscriber base has been shifting from narrowband access to broadband access customers. Consumer
broadband access revenues have lower gross margins than narrowband revenues due to the costs associated with delivering broadband services. This change in mix has negatively affected our profitability
and we expect this trend to continue as broadband subscribers continue to become a greater proportion of our consumer access subscriber base. However, our consumer broadband access customers also have
lower churn rates than our consumer narrowband access customers. Accordingly, we expect to realize benefits from a more tenured subscriber base, such as reduced support costs and lower bad debt
expense.

Business services.The markets in which we operate our business services are characterized by industry consolidation, an evolving
regulatory
environment, the emergence of new technologies and intense competition. We sell our services to end user business customers and to wholesale customers. Our end users range from large enterprises with
many locations, to small and medium-sized multi-site businesses to business customers with one site, often a home-based location. Many of our end user customers are retail
businesses. Our wholesale customers consist primarily of telecommunications carriers and network resellers. Our business has become more focused on end users as a result of consolidation in the
telecommunications industry. In addition, our business customers, including retail businesses, are particularly exposed to a weak economy. We have experienced pressure on revenue and operating
expenses for our business services, given the current state of the economy, including increased subscriber acquisition and retention costs necessary to attract and retain subscribers. However, we are
seeking ways to grow our business services revenue while operating this segment more efficiently.

2009 Highlights

Total revenues decreased $231.8 million, or 24%, from the year ended December 31, 2008 to the year ended
December 31, 2009, as our subscriber base decreased from approximately 2.8 million paying subscribers as of December 31, 2008 to approximately 2.2 million paying
subscribers as of December 31, 2009. The decrease in subscribers was attributable to reduced sales and marketing activities, continued competitive pressures and continued maturation of the
narrowband Internet access market. Offsetting the decline in total revenues was a $249.4 million, or 32%, decline in total operating costs and expenses. Total operating costs and expenses
decreased as our overall subscriber base has decreased and become longer tenured. Our longer tenured customers require less customer service and technical support and have a lower frequency of
non-payment. We also experienced benefits from workforce reduction initiatives and other cost cutting initiatives. The decrease in total operating costs and expenses during the year ended
December 31, 2009 compared to the prior year period also reflects a decline in goodwill and intangible asset impairments, which decreased $54.5 million from the year ended
December 31, 2008 to the year ended December 31, 2009. Net income increased $108.5 million, or 61%, from $178.6 million during the year ended December 31, 2008 to
$287.1 million during the year ended December 31, 2009. The increase in net income reflects the changes noted above, as well as a $93.9 million increase in our income tax benefit,
primarily due to an increase in the release of our valuation allowance related to our deferred tax assets, and an $8.5 million decrease in loss from discontinued operations, net of tax.

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Looking Ahead

We expect total revenues to continue to decrease during 2010 as we continue to reduce our sales and marketing efforts and as the market
for Internet access continues to mature. However, we expect the rate of revenue decline to decelerate as our customer base becomes longer tenured and churn rates go down. Consistent with trends in the
Internet access industry, we expect the mix of our consumer access subscriber base to continue to shift from narrowband access to broadband access customers, which will negatively affect our
profitability due to the higher costs associated with delivering broadband services. We also expect economic conditions to put continued pressure on revenue and churn rates for our business services,
and may impact revenue and churn for our consumer services. We will continue to evaluate ways to grow revenues or create more scale for our business services. We expect cost savings in 2010 associated
with our decreased sales and marketing activities, and decreased telecommunication and support costs from a lower and longer tenured customer base. We will continue to implement cost reduction
initiatives. However, we believe that large-scale cost reduction opportunities will be more limited in the future. In addition, although we
seek to align our cost structure with trends in our revenue, we do not expect to be able to reduce our cost structure to the same extent as our revenue declines.

Dividends

During 2009, we began paying quarterly cash dividends to shareholders. In July 2009, our Board of Directors declared a quarterly cash
dividend on our common stock of $0.14 per share to stockholders of record on September 14, 2009. The dividend was paid in September 2009 and totaled $15.0 million. In October 2009, our
Board of Directors declared a quarterly cash dividend on our common stock of $0.14 per share to stockholders of record on December 9, 2009. The dividend was paid in December 2009 and totaled
$15.0 million. The Board of Directors also approved the payment of cash dividend amounts on each outstanding restricted stock unit to be paid at the time the restricted stock unit vests. We
currently intend to continue to pay regular quarterly dividends on our common stock. Any decision to declare future dividends will be made at the discretion of the Board of Directors and will depend
on, among other things, our results of operations, financial condition, cash requirements, investment opportunities and other factors the Board of Directors may deem relevant.

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Key Operating Metrics

We utilize certain non-financial and operating measures to assess our financial performance. Terms such as churn and
average revenue per user ("ARPU") are terms commonly used in our industry. The following table sets forth subscriber and operating data for the periods indicated:

December 31,
2007

December 31,
2008

December 31,
2009Subscriber Data (a)Consumer ServicesNarrowband access subscribers


2,624,000


1,747,000


1,225,000Broadband access subscribers


1,059,000


896,000


804,000Total consumer services subscribers


3,683,000


2,643,000


2,029,000Business ServicesNarrowband access subscribers


27,000


17,000


8,000Broadband access subscribers


66,000


59,000


54,000Web hosting accounts


100,000


87,000


75,000Total business services subscribers


193,000


163,000


137,000Total subscribers at end of year


3,876,000


2,806,000


2,166,000




Year Ended December 31,2007

2008

2009Subscriber ActivitySubscribers at beginning of year


5,313,000


3,876,000


2,806,000Gross organic subscriber additions


1,994,000


666,000


419,000Acquired subscribers


65,000


8,000


Adjustment (b)


(753,000
)

(15,000
)

(7,000
)Churn


(2,743,000
)

(1,729,000
)

(1,052,000
)Subscribers at end of year


3,876,000


2,806,000


2,166,000Churn rate (c)


5.1
%

4.4
%

3.6
%Consumer Services DataAverage subscribers (d)


4,321,000


3,130,000


2,310,000ARPU (e)

$
19.77

$
20.76

$
20.76Churn rate (c)


5.2
%

4.4
%

3.6
%Business Services DataAverage subscribers (d)


207,000


179,000


149,000ARPU (e)

$
76.62

$
81.64

$
82.83Churn rate (c)


2.6
%

2.8
%

2.6
%


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December 31,
2007

December 31,
2008

December 31,
2009Employee DataConsumer Services


676


457


339Business Services


307


297


284Total number of employees (f)


983


754


623Operations and customer support


499


396


333Sales and marketing


302


207


178General and administrative


182


151


112Total number of employees (f)


983


754


623


(a)Subscriber
counts do not include nonpaying customers. Customers receiving service under promotional programs that include periods of free service at
inception are not included in subscriber counts until they become paying customers.(b)We
had a marketing relationship with Embarq, a spin-off of Sprint Nextel Corporation's ("Sprint") local communications business, under which
EarthLink was the wholesale high-speed ISP for Embarq's local residential and small business customers. In April 2007, our wholesale contract with Embarq expired. As a result, we removed
753,000 wholesale broadband EarthLink-supported Embarq subscribers from our broadband subscriber count and total subscriber count. During the year ended December 31, 2008, we removed 15,000
additional EarthLink-supported Sprint customers from our broadband subscriber counts. During the year ended December 31, 2009, we removed approximately 7,000 satellite subscribers from our
broadband subscriber count and total subscriber count as a result of our sale of these subscriber accounts.(c)Churn
rate is used to measure the rate at which subscribers discontinue service on a voluntary or involuntary basis. Churn rate is computed by dividing the
average monthly number of subscribers that discontinued service during the year by the average subscribers for the year. Churn rate for the years ended December 31, 2007, 2008 and 2009 excludes
the impact of the adjustments noted in (b) above.(d)Average
subscribers or accounts is calculated by averaging the ending monthly subscribers or accounts for the thirteen months preceding and including the
end of the year.(e)ARPU
represents the average monthly revenue per user (subscriber). ARPU is computed by dividing average monthly revenue for the year by the average number
of subscribers for the year. Average monthly revenue used to calculate ARPU includes recurring service revenue as well as nonrecurring revenues associated with equipment and other one-time
charges associated with initiating or discontinuing services.(f)Represents
full-time equivalents.


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Results of Operations

Consolidated Results of Operations

The following table sets forth statement of operations data for the years ended December 31, 2007 and 2008:

Year Ended December 31,2007

2008

Change Between
2007 and 2008% of
Revenue



% of
RevenueAmount

Amount

Amount

%(dollars in thousands)Revenues

$
1,215,994


100%

$
955,577


100%

$
(260,417
)

-21%Operating costs and expenses:Cost of revenues


442,697


36%


360,920


38%


(81,777
)

-18%Sales and marketing


291,105


24%


98,212


10%


(192,893
)

-66%Operations and customer support


221,443


18%


136,797


14%


(84,646
)

-38%General and administrative


128,412


11%


93,878


10%


(34,534
)

-27%Amortization of intangible assets


14,672


1%


13,349


1%


(1,323
)

-9%Impairment of goodwill and intangible assets


4,250


0%


78,672


8%


74,422


*Facility exit and restructuring costs


65,381


5%


9,142


1%


(56,239
)

-86%Total operating costs and expenses


1,167,960


96%


790,970


83%


(376,990
)

-32%Income from operations


48,034


4%


164,607


17%


116,573


243%Net losses of equity affiliate


(111,295
)

-9%





0%


111,295


-100%Gain (loss) on investments, net


(5,585
)

0%


2,708


0%


8,293


148%Interest income (expense) and other, net


2,824


0%


(12,409
)

-1%


(15,233
)

539%Income (loss) from continuing operations before income taxes


(66,022
)

-5%


154,906


16%


220,928


335%Income tax benefit


1,227


0%


32,184


3%


30,957


*Income (loss) from continuing operations


(64,795
)

-5%


187,090


20%


251,885


389%Loss from discontinued operations, net of tax


(80,302
)

-7%


(8,506
)

-1%


71,796


-89%Net income (loss)

$
(145,097
)

-12%

$
178,584


19%

$
323,681


223%


*denotes
percentage is not meaningful or is not calculable


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The
following table sets forth statement of operations data for the years ended December 31, 2008 and 2009:

Year Ended December 31,2008

2009

Change Between
2008 and 2009% of
Revenue



% of
RevenueAmount

Amount

Amount

%(dollars in thousands)Revenues

$
955,577


100%

$
723,729


100%

$
(231,848
)

-24%Operating costs and expenses:Cost of revenues


360,920


38%


273,755


38%


(87,165
)

-24%Sales and marketing


98,212


10%


59,474


8%


(38,738
)

-39%Operations and customer support


136,797


14%


98,435


14%


(38,362
)

-28%General and administrative


93,878


10%


72,398


10%


(21,480
)

-23%Amortization of intangible assets


13,349


1%


7,749


1%


(5,600
)

-42%Impairment of goodwill and intangible assets


78,672


8%


24,145


3%


(54,527
)

-69%Facility exit and restructuring costs


9,142


1%


5,615


1%


(3,527
)

-39%Total operating costs and expenses


790,970


83%


541,571


75%


(249,399
)

-32%Income from operations


164,607


17%


182,158


25%


17,551


11%Gain (loss) on investments, net


2,708


0%


(1,321
)

0%


(4,029
)

-149%Interest expense and other, net


(12,409
)

-1%


(19,804
)

-3%


(7,395
)

60%Income from continuing operations before income taxes


154,906


16%


161,033


22%


6,127


4%Income tax benefit


32,184


3%


126,085


17%


93,901


292%Income from continuing operations


187,090


20%


287,118


40%


100,028


53%Loss from discontinued operations, net of tax


(8,506
)

-1%





0%


8,506


-100%Net income

$
178,584


19%

$
287,118


40%

$
108,534


61%


Segment Results of Operations

We operate two reportable segments, Consumer Services and Business Services. We present our segment information along the same lines
that our chief executive reviews our operating results in assessing performance and allocating resources. Our Consumer Services segment provides Internet access services and related value-added
services to individual customers. These services include dial-up and high-speed Internet access and VoIP services, among others. Our Business Services segment provides
integrated communications services and related value-added services to businesses and communications carriers. These services include managed IP-based wide area networks, dedicated
Internet access and web hosting, among others.

We
evaluate the performance of our operating segments based on segment income from operations. Segment income from operations includes revenues from external customers, related cost of
revenues and operating expenses directly attributable to the segment, which include expenses over which segment managers have direct discretionary control, such as advertising and marketing programs,
customer support expenses, operations expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment income from
operations excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment income from operations include
various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), amortization of intangible assets, impairment of goodwill and intangible
assets, facility exit and

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restructuring
costs and stock-based compensation expense, as they are not considered in the measurement of segment performance.

The
following table set forth segment data for the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,

2008 vs. 2007

2009 vs. 20082007

2008

2009

$ Change

% Change

$ Change

% Change(dollars in thousands)Consumer ServicesRevenues

$
1,025,408

$
779,876

$
575,412

$
(245,532
)

-24%

$
(204,464
)

-26%Cost of revenues


324,465


259,851


186,570


(64,614
)

-20%


(73,281
)

-28%Gross margin


700,943


520,025


388,842


(180,918
)

-26%


(131,183
)

-25%Direct segment operating expenses


506,975


207,236


131,154


(299,739
)

-59%


(76,082
)

-37%Segment operating income

$
193,968

$
312,789

$
257,688

$
118,821


61%

$
(55,101
)

-18%Business ServicesRevenues

$
190,586

$
175,701

$
148,317

$
(14,885
)

-8%

$
(27,384
)

-16%Cost of revenues


118,232


101,069


87,185


(17,163
)

-15%


(13,884
)

-14%Gross margin


72,354


74,632


61,132


2,278


3%


(13,500
)

-18%Direct segment operating expenses


58,548


51,276


41,975


(7,272
)

-12%


(9,301
)

-18%Segment operating income

$
13,806

$
23,356

$
19,157

$
9,550


69%

$
(4,199
)

-18%ConsolidatedRevenues

$
1,215,994

$
955,577

$
723,729

$
(260,417
)

-21%

$
(231,848
)

-24%Cost of revenues


442,697


360,920


273,755


(81,777
)

-18%


(87,165
)

-24%Gross margin


773,297


594,657


449,974


(178,640
)

-23%


(144,683
)

-24%Direct segment operating expenses


565,523


258,512


173,129


(307,011
)

-54%


(85,383
)

-33%Segment operating income


207,774


336,145


276,845


128,371


62%


(59,300
)

-18%Stock-based compensation expense


19,553


20,133


13,231


580


3%


(6,902
)

-34%Amortization of intangible assets


14,672


13,349


7,749


(1,323
)

-9%


(5,600
)

-42%Impairment of goodwill and intangible assets


4,250


78,672


24,145


74,422


*


(54,527
)

-69%Facility exit and restructuring costs


65,381


9,142


5,615


(56,239
)

-86%


(3,527
)

-39%Other operating expenses


55,884


50,242


43,947


(5,642
)

-10%


(6,295
)

-13%Income from operations

$
48,034

$
164,607

$
182,158

$
116,573


243%

$
17,551


11%


*denotes
percentage is not meaningful or is not calculable


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Revenues

The following table presents revenues by groups of similar services and by segment for the years ended December 31, 2007, 2008
and 2009:

Year Ended December 31,

2008 vs. 2007

2009 vs. 20082007

2008

2009

$ Change

% Change

$ Change

% Change(dollars in thousands)Consumer ServicesAccess and service

$
897,423

$
682,135

$
503,769

$
(215,288
)

-24%

$
(178,366
)

-26%Value-added services


127,985


97,741


71,643


(30,244
)

-24%


(26,098
)

-27%Total revenues

$
1,025,408

$
779,876

$
575,412

$
(245,532
)

-24%

$
(204,464
)

-26%Business ServicesAccess and service

$
187,709

$
172,944

$
146,087

$
(14,765
)

-8%

$
(26,857
)

-16%Value-added services


2,877


2,757


2,230


(120
)

-4%


(527
)

-19%Total revenues

$
190,586

$
175,701

$
148,317

$
(14,885
)

-8%

$
(27,384
)

-16%ConsolidatedAccess and service

$
1,085,132

$
855,079

$
649,856

$
(230,053
)

-21%

$
(205,223
)

-24%Value-added services


130,862


100,498


73,873


(30,364
)

-23%


(26,625
)

-26%Total revenues

$
1,215,994

$
955,577

$
723,729

$
(260,417
)

-21%

$
(231,848
)

-24%


Consolidated revenues

The primary component of our revenues is access and service revenues, which consist of narrowband access services (including
traditional, fully-featured narrowband access and value-priced narrowband access); broadband access services (including high-speed access via DSL and cable; VoIP; and managed
IP-based wide area networks); and web hosting services. We also earn revenues from value-added services, which include revenues from ancillary services sold as add-on features
to our Internet access services, search and advertising. Total revenues were $1.2 billion, $1.0 billion and $0.7 billion during the years ended December 31, 2007, 2008 and
2009, respectively. The decreases over the past three years were primarily due to decreases in our Consumer Services segment, resulting from decreases in average consumer subscribers, which were
approximately 4.3 million, 3.1 million and 2.3 million during the years ended December 31, 2007, 2008 and 2009, respectively. These decreases were driven by narrowband and
broadband subscribers, as we reduced our sales and marketing efforts in connection with our refocused strategy and as the market for Internet access continued to mature. Also contributing to the
decrease in total revenues were decreases in our Business Services segment. The decreases in business services revenue were primarily due to decreases in average business subscribers, which were
approximately 207,000, 179,000 and 149,000 during the years ended December 31, 2007, 2008 and 2009, respectively. Slightly offsetting the decreases in our average business subscribers were
increases in business services ARPU, which increased due to the shift in mix of our business access subscriber base from business dial-up and high-speed services to
IP-based network services.

Consumer services revenues

Access and service.Consumer access and service revenues consist of narrowband access (including traditional, fully-featured narrowband
access and
value-priced narrowband access) and broadband access services (including high-speed access via DSL and cable and VoIP services). These revenues are derived from fees charged to customers
for dial-up Internet access; fees charged for high-speed access services; fees charged for VoIP services; usage fees; shipping and handling fees; and termination fees.

Consumer
access and service revenues decreased $215.3 million, or 24%, from the year ended December 31, 2007 to the year ended December 31, 2008 and decreased
$178.4 million, or 26%, from the

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year
ended December 31, 2008 to the year ended December 31, 2009. The decreases in consumer access and service revenues were due to decreases in narrowband access and broadband access
revenues. Narrowband access revenues decreased due to a decrease in average premium narrowband and value-priced narrowband subscribers resulting from reduced sales and marketing activities and the
continued maturation of and competition in the market for narrowband Internet access. During 2008 and 2009, we significantly reduced sales and marketing efforts. We are focusing our efforts primarily
on the retention of our customers and adding customers that have similar characteristics of our tenured customer base and are more likely to produce an acceptable rate of return. Average consumer
narrowband subscribers were 3.0 million, 2.1 million and 1.5 million during the years ended December 31, 2007, 2008 and 2009. Our value-priced narrowband services comprised
a larger proportion of this decrease, as average PeoplePC access subscribers was approximately 50%, 47% and 39% of our average consumer narrowband customer base during the years ended
December 31, 2007, 2008 and 2009, respectively. Broadband access revenues decreased due to a decline in average broadband subscribers resulting from reduced sales and marketing efforts and
competitive pressures. Average consumer broadband subscribers were 1.3 million, 0.9 million and 0.8 million during the years ended December 31, 2007, 2008 and 2009,
respectively. Contributing to the decrease in broadband access revenues during the year ended December 31, 2008 compared to the prior year period was the removal of 753,000 Embarq subscribers
effective April 2007.

Offsetting
the decline in average consumer subscribers was an improvement in consumer subscriber churn rates, which were 5.2%, 4.4% and 3.6% during the years ended December 31,
2007, 2008 and 2009, respectively. We expect our consumer access and service subscriber base to continue to decrease due to decreased sales and marketing activities, competitive pressures and the
continued maturation of
the market for narrowband Internet access. However, as our customers become more tenured, we expect our churn rates to decline.

Value-added services revenues.Value-added services revenues consist of revenues from ancillary services sold as add-on features to our
Internet access services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues. We derive these revenues
from fees charged for ancillary services; paid placements for searches; delivering traffic to our partners in the form of subscribers, page views or e-commerce transactions;
advertising our partners' products and services in our various online properties and electronic publications; and referring our customers to our partners' products and services.

Value-added
services revenues decreased $30.2 million, or 24%, from the year ended December 31, 2007 to the year ended December 31, 2008. This was due primarily to
decreases in search advertising revenues and in partnership advertising revenues, which resulted from the decline in total average consumer subscribers, from 4.3 million during the year ended
December 31, 2007 to 3.1 million during the year ended December 31, 2008. The decline in subscribers also caused sales of ancillary services to decrease.

Value-added
services revenues decreased $26.1 million, or 27%, from the year ended December 31, 2008 to the year ended December 31, 2009. This was due primarily to
decreases in subscribers for ancillary services, primarily security services, and in search advertising revenues. The decreases resulted from the decline in total average consumer subscribers from
3.1 million during the year ended December 31, 2008 to 2.3 million during the year ended December 31, 2009. However, partially offsetting these decreases was an increase in
subscription revenue per subscriber.

Business services revenues

The primary component of business services revenues is access and service revenues, and includes New Edge access and service revenues.
Business access and service revenues consist of fees charged for managed IP-based networks; fees charged for Internet access services; installation fees; termination fees; fees for
equipment; usage fees; and cost recovery fees billed to customers. Business access and service

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revenues
also consist of web hosting revenues from leasing server space and providing web services to enable customers to build and maintain an effective online presence. We sell our services to
end-user business customers and to wholesale customers. Our end users range from large enterprises with many locations, to small and medium-sized multi-site businesses to
business customers with one site, often a home-based location. Our wholesale customers consist primarily of telecommunications carriers. Many of our end user customers are retail
businesses.

Business
access and service revenues decreased $14.8 million, or 8%, from the year ended December 31, 2007 to the year ended December 31, 2008. The decrease was
primarily due to a decrease in average business access and service subscribers, comprised of decreases in average web hosting accounts, average New Edge customers and average business narrowband
customers. Our wholesale business was also negatively impacted by consolidation in the telecommunications industry. In addition, our business customers are particularly exposed to a weak economy. Our
churn rates for business services customers increased during the year ended December 31, 2008 as a result of our customers experiencing downsizing, retail store closures and other business
issues resulting from the economic downturn.

Business
access and service revenues decreased $26.9 million, or 16%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease was
primarily due to a decrease in New Edge revenues resulting from a decrease in average subscribers and an increase in promotions and retention incentives necessary to attract and retain subscribers in
a difficult economic environment. Although our churn rates decreased during the year ended December 31, 2009 compared to the prior period, the number of new customers we were able to add was
negatively impacted by economic and competitive pressures. Also contributing to the decrease in business access and service revenues were decreases in average web hosting accounts, average business
broadband customers and average business narrowband customers. Business access and service ARPU increased during the year ended December 31, 2009 compared to the prior period due to the shift
in mix of our business access subscriber base from business dial-up and high-speed services to IP-based network services.

Cost of revenues

Cost of revenues consist of telecommunications fees, set-up fees, the costs of equipment sold to customers for use with our
services, depreciation of our network equipment and surcharges due to regulatory agencies. Our principal provider for narrowband services is Level 3 Communications, Inc. Our largest
providers of broadband connectivity are AT&T Inc., Comcast Corporation, Covad Communications Group, Inc. ("Covad"), Qwest Corporation, Time Warner Cable and Verizon Communications, Inc.
We also do lesser amounts of business with a wide variety of local, regional and other national providers. Cost of revenues also includes sales incentives. We offer sales incentives, such as free
modems and Internet access on a trial basis, for certain products and promotions.

Total
cost of revenues decreased $81.8 million, or 18%, from the year ended December 31, 2007 to the year ended December 31, 2008. This decrease was comprised of a
$64.6 million decrease in consumer services cost of revenues and $17.2 million decrease in business services cost of revenue. Consumer
services cost of revenues decreased primarily due to the decline in average consumer services subscribers as a result of our refocused strategy. Also contributing to the decrease was a decline in
sales incentives resulting from fewer gross subscriber additions during the year ended December 31, 2008, as we reduced our customer acquisition activities. Partially offsetting this decrease
was an increase in average consumer cost of revenue per subscriber due to a greater proportion of our consumer subscriber base consisting of broadband subscribers. Business services cost of revenues
decreased due to a decrease in average business services subscribers and a decrease in average monthly costs per subscriber, primarily as a result of a decrease in New Edge cost of revenues due to
more favorable agreements with telecommunications service providers. Total cost of revenues increased from 36% of revenues to 38% of revenues due to a greater proportion of our subscriber base
consisting of broadband subscribers.

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Total
cost of revenues decreased $87.2 million, or 24%, from the year ended December 31, 2008 to the year ended December 31, 2009. This decrease was comprised of a
$73.3 million decrease in consumer services cost of revenues and $13.9 million decrease in business services cost of revenue. Consumer services cost of revenues decreased primarily due
to the decline in average consumer services subscribers. Also contributing was a decline in average consumer cost of revenue per subscriber resulting from contract renegotiations with network service
providers and internal network cost management efforts. Business services cost of revenues decreased due to a decrease in average business services subscribers. Total cost of revenues remained
constant at 38% of revenues due to our contract renegotiations and internal network cost management efforts which mitigated the effect of the change in mix of our subscriber base to broadband
subscribers.

Sales and marketing

Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new paying
subscribers and compensation and related costs (including stock-based compensation).

Sales
and marketing expenses decreased $192.9 million, or 66%, from the year ended December 31, 2007 to the year ended December 31, 2008. The decrease consisted
primarily of a decrease in advertising and promotions expense, personnel-related costs and outsourced labor resulting from the change in our business strategy to significantly reduce discretionary
sales and marketing spend and benefits from the 2007 Plan. Sales and marketing expenses decreased from 24% of revenues during the year ended December 31, 2007 to 10% of revenues during year
ended December 31, 2008, as we reduced sales and marketing efforts that resulted in adding customers that did not provide an acceptable rate of return or that had a pattern of early life churn.

Sales
and marketing expenses decreased $38.7 million, or 39%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease consisted
primarily of decreases in advertising and promotions expense, personnel-related costs, outsourced labor and occupancy and related costs resulting from reduced headcount and continued cost reduction
initiatives. Sales and marketing expenses decreased from 10% of revenues during the year ended December 31, 2008 to 8% of revenues during year ended December 31, 2009, as we continued to
reduce sales and marketing efforts and focused our efforts primarily on the retention of customers and on marketing channels that are more likely to produce an acceptable rate of return.

Operations and customer support

Operations and customer support expenses consist of costs associated with technical support and customer service, maintenance of
customer information systems, software development, network operations and compensation and related costs (including stock-based compensation).

Operations
and customer support expenses decreased $84.6 million, or 38%, from the year ended December 31, 2007 to the year ended December 31, 2008. The decrease in
operations and customer support expenses consisted of decreases in personnel-related costs, outsourced labor, professional fees and occupancy costs. These decreases were primarily attributable to
benefits realized as a result of the 2007 Plan and a decrease in call volumes for customer service and technical support as our overall subscriber base has decreased and become longer tenured. Our
longer tenured customers require less customer service and technical support. Operations and customer support expenses decreased from 18% of revenues the year ended December 31, 2007 to 14% of
revenues during the year ended December 31, 2008.

Operations
and customer support expenses decreased $38.4 million, or 28%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease in
operations and customer support expenses consisted of decreases in personnel-related costs, outsourced labor and occupancy and related costs. These decreases were primarily attributable to our efforts
to reduce our back-office cost

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structure,
including reduced headcount and continued cost reduction initiatives, and a decrease in call volumes for customer service and technical support as our overall subscriber base has decreased
and become longer tenured. In addition, we consolidated to primarily one outsourced customer service and technical support provider for our consumer services, which resulted in cost benefits.
Operations and customer support expenses remained constant as a percent of revenues at 14% during the years ended December 31, 2008 and 2009.

General and administrative

General and administrative expenses consist of compensation and related costs (including stock-based compensation) associated with our
finance, legal, facilities and human resources organizations; fees for professional services; payment processing; credit card fees; collections and bad debt.

General
and administrative expenses decreased $34.5 million, or 27%, from the year ended December 31, 2007 to the year ended December 31, 2008. The decrease in
general and administrative expenses consisted primarily of decreases in bad debt and payment processing fees, personnel-related costs, professional and legal fees, and stock-based compensation
expense. Bad debt and payment processing fees decreased due to the decrease in our overall subscriber base and due to our subscriber base consisting of longer tenured customers, who have a lower
frequency of non-payment. The decrease in personnel-related costs, professional and legal fees was attributable to our efforts to reduce our back-office cost structure,
including benefits realized as a result of the 2007 Plan. General and administrative expenses decreased from 11% of revenues the year ended December 31, 2007 to 10% of revenues during the year
ended December 31, 2008.

General
and administrative expenses decreased $21.5 million, or 23%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decreases in
general and administrative expenses consisted primarily of decreases in bad debt and payment processing fees, personnel-related costs and legal and professional fees. Bad debt and payment processing
fees decreased due to the decrease in our overall subscriber base and due to our subscriber base consisting of longer tenured customers, who have a lower frequency of non-payment. The
decrease in personnel-related costs and professional and legal fees was attributable to reduced headcount and continued cost reduction initiatives. Partially offsetting these decreases were costs
incurred as a result of certain legal settlements and resolution of various state and local tax issues and audits. As a result of the items noted above, general and administrative expenses remained
constant as a percent of revenues at 10% during the years ended December 31, 2008 and 2009.

Amortization of intangible assets

Amortization of intangible assets represents the amortization of definite-lived intangible assets acquired in purchases of businesses
and purchases of customer bases from other companies. Definite-lived intangible assets, which primarily consist of subscriber bases and customer relationships, acquired software and technology, trade
names and other assets, are amortized on a straight-line basis over their estimated useful lives, which range from three to six
years. Amortization of intangible assets decreased $1.3 million, or 9%, from the year ended December 31, 2007 to the year ended December 31, 2008. The decrease in amortization of
intangible assets compared to the prior year period was primarily due to certain identifiable definite-lived intangible assets becoming fully amortized over the past year. Amortization of intangible
assets decreased $5.6 million, or 42%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease in amortization of intangible assets compared to the
prior year period was primarily due to certain identifiable definite-lived intangible assets becoming fully amortized over the past year. In addition, we impaired certain identifiable definite-lived
intangible assets during the fourth quarter of 2008, which contributed to the decrease in amortization expense.

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Impairment of goodwill and intangible assets

During the years ended December 31, 2007, 2008 and 2009, we recorded non-cash impairment charges for goodwill and
intangible assets of $4.3 million, $78.7 million and $24.1 million, respectively. We test goodwill and indefinite-lived intangible assets for impairment annually or when events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

After
completing our annual impairment test during the fourth quarter of 2008, we concluded that goodwill and certain intangible assets recorded as a result of our April 2006 acquisition
of New Edge were impaired and we recorded non-cash impairment charges related to the New Edge reporting unit of $64.0 million for goodwill, $3.1 million for the
indefinite-lived trade name and $11.6 million for customer relationships. The primary factor contributing to the impairment charge was the recent significant economic downturn. New Edge serves
a large percentage of small and medium-sized business customers, especially retail businesses, which have been particularly affected by the recent economic downturn. Economic conditions affecting
retail businesses worsened substantially during the "holiday season" in the fourth quarter of 2008. As a result, management updated its long-range financial outlook, which reflected
decreased expectations of future growth rates and cash flows for New Edge. We used this updated financial outlook in conjunction with our annual impairment test.

After
completing our annual impairment test during the fourth quarter of 2009, we concluded that goodwill and certain intangible assets recorded as a result of the New Edge acquisition
were further impaired and recorded non-cash impairment charges related to the New Edge reporting unit of $23.9 million for goodwill and $0.2 million for the indefinite-lived
trade name. As a result, there is no remaining carrying value related to New Edge goodwill. The primary factor contributing to the
impairment charge was continued sales pressure in the small and medium-sized business market due to the economy, which adversely impacted our long-range financial outlook.

Goodwill.Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. Although we operate
two
reportable segments, Consumer Services and Business Services, we have identified three reporting units for evaluating goodwill, which are Consumer Services, New Edge and Web Hosting. The Consumer
Services reportable segment is one reporting unit, while the Business Services reportable segment consists of two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a
business for which discrete financial information is available and segment management regularly reviews the operating results.

The
first step of the impairment test involves comparing the estimated fair value of our reporting units with the reporting unit's carrying amount, including goodwill. We estimated the
fair values of our reporting units primarily using the income approach valuation methodology that included the discounted cash flow method, taking into consideration the market approach and certain
market multiples as a validation of the values derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit were based on discrete financial forecasts
developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated by using a terminal value calculation, which incorporated historical and forecasted financial
trends for each identified reporting unit.

Upon
completion of the first step of the impairment test during the years ended December 31, 2008 and 2009, we determined that the carrying value of our New Edge reporting unit
exceeded its estimated fair value. Because indicators of impairment existed for this reporting unit, we performed the second step of the test. We determined the implied fair value of goodwill in the
same manner used to recognize goodwill in a business combination. To determine the implied value of goodwill, we allocated fair values to the assets and liabilities of the New Edge reporting unit. We
calculated the implied fair value of goodwill as the excess of the fair value of the New Edge reporting unit over the amounts assigned to its assets and liabilities. We determined the
$64.0 million and $23.9 million impairment losses during the years ended December 31, 2008 and 2009, respectively, as the amount by which the carrying value of goodwill exceeded
the implied fair value of the goodwill.

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Indefinite-lived intangible assets.The impairment test for our indefinite-lived intangible assets, which consist of trade names,
involves a
comparison of the estimated fair value of the intangible asset with its carrying value. We determined the fair value of our trade names using the royalty savings method, in
which the fair value of the asset was calculated based on the present value of the royalty stream that we are saving by owning the asset. Given the economic environment and other factors noted above,
we decreased our estimates for revenues associated with our New Edge trade name. As a result, we recorded non-cash impairment charges related to our New Edge trade name of
$3.1 million and $0.2 million during the years ended December 31, 2008 and 2009, respectively. We also recorded a non-cash impairment charge of $4.3 million
during the year ended December 31, 2007 related to the analysis of our other indefinite-lived trade names.

Definite-lived intangible assets.As a result of the goodwill and indefinite-lived asset impairments in the New Edge reporting unit, we
also tested
this segment's definite-lived intangible assets for impairment. Because of the decrease in expected future cash from such definite-lived intangible assets, we concluded certain customer relationships
were not fully recoverable and recorded a non-cash impairment charge of $11.6 million during the year ended December 31, 2008. We did not record any impairment charges for
our definite-lived intangible assets during the years ended December 31, 2007 and 2009.

Facility exit and restructuring costs

Facility exit and restructuring costs consisted of the following during the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)2007 Restructuring PlanSeverance and personnel-related costs

$
30,303

$
461

$
Lease termination and facilities-related costs


12,216


4,808


5,697Non-cash asset impairments


20,621


4,125


46Other associated costs


1,131





64,271


9,394


5,743Legacy Restructuring Plans


1,110


(252
)

(128
)Total facility exit and restucturing costs

$
65,381

$
9,142

$
5,615


2007 Restructuring Plan.In August 2007, we adopted a restructuring plan to reduce costs and improve the efficiency of our operations.
The 2007 Plan
was the result of a comprehensive review of operations within and across our functions and businesses. Under the 2007 Plan, we reduced our workforce by approximately 900 employees, consolidated our
office facilities in Atlanta, Georgia and Pasadena, California and closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco, California. The 2007
Plan was primarily implemented during the latter half of 2007 and during 2008. As a result of the 2007 Plan, we recorded facility exit and restructuring costs of $64.3 million,
$9.4 million and $5.7 million during the years ended December 31, 2007, 2008 and 2009, respectively. The asset impairment charges primarily relate to fixed asset
write-offs due to facility closings and consolidations and the termination of certain projects for which costs had been capitalized. These assets were impaired as the carrying values of
the assets exceeded the expected future undiscounted cash flows to us. Since management continues to evaluate EarthLink's businesses, there have been and may continue to be supplemental provisions for
new plan initiatives as well as changes in estimates to amounts previously recorded.

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Legacy Restructuring Plans.During the years ended December 31, 2003, 2004 and 2005, we executed a series of plans to restructure
and
streamline our contact center operations and outsource certain internal functions (collectively referred to as "Legacy Plans"). The Legacy Plans included facility exit costs, personnel-related costs
and asset disposals. We periodically evaluate and adjust our estimates for facility exit and restructuring costs based on currently-available information and record such adjustments as facility exit
and restructuring costs. During the year ended December 31, 2007, we recorded $1.1 million of facility exit and restructuring costs as a result of changes in estimates for Legacy Plans.
During the years ended December 31, 2008 and 2009, we recorded reductions of $0.3 million and $0.1 million, respectively, to facility exit and restructuring costs as a result of
changes in estimates for Legacy Plans.

Net losses of equity affiliate

We had a joint venture with SK Telecom Co., Ltd., HELIO. HELIO was a non-facilities-based mobile virtual
network operator offering mobile communications services and handsets to consumers in the U.S. We accounted for our investment in HELIO under the equity method of accounting because we were able to
exert significant influence over HELIO's operating and financial policies. Accordingly, we recorded our proportionate share of HELIO's net losses. These equity method losses were offset by increases
in the carrying value of our investment associated with amortizing the difference between the carrying value and fair value of non-cash assets contributed to HELIO.

Net
losses of equity affiliate for the year ended December 31, 2007 of $111.3 million included our proportionate share of HELIO's net losses offset by amortization
associated with recognizing the difference between the carrying value and fair value of non-cash assets contributed. During the year ended December 31, 2007, we stopped recording
additional net losses of equity affiliate because the carrying value of our investment in HELIO was reduced to zero. In August 2008, Virgin Mobile USA, Inc. ("Virgin Mobile") acquired HELIO and
our investment in HELIO was exchanged for limited partnership units equivalent to approximately 1.8 million shares of Virgin Mobile common stock. In November 2009, Sprint Nextel and Virgin
Mobile completed a merger and we received 2.4 million shares of Sprint Nextel common stock for our Virgin Mobile common stock. As a result, we no longer have an investment in HELIO and we did
not record any net losses of equity affiliate during the years ended December 31, 2008 and 2009.

Gain (loss) on investments, net

Gain (loss) on investments, net, consisted of the following during the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)Other-than-temporary impairment losses

$
(7,142
)
$
(3,556
)
$
(9,300
)Cash distributions from investments


1,557





231Gain from sale of Covad common stock





2,025


Gain from receipt of Virgin Mobile shares





4,352


Gain from receipt and sale of Sprint Nextel shares








7,641Net change in fair value of auction rate securities and put right





(113
)

107$
(5,585
)
$
2,708

$
(1,321
)


We
had an investment in Covad consisting of 6.1 million shares of Covad common stock and $47.5 million aggregate principal amount of 12% Senior Secured Convertible Notes
due 2011. During the year ended December 31, 2008, Platinum Equity, LLC acquired all outstanding shares of Covad. As a result, we received cash of $6.3 million for our
6.1 million shares of Covad common stock and recognized a gain of $2.0 million based on our cost basis of the Covad common stock.

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During
the year ended December 31, 2008, we received limited partnership units equivalent to approximately 1.8 million shares of Virgin Mobile common stock in exchange for
our investment in HELIO. We recognized a gain of $4.4 million as a result of this transaction. During the year ended December 31, 2009, Sprint Nextel and Virgin Mobile completed a merger
and we received 2.4 million shares of Sprint Nextel common stock for our Virgin Mobile common stock. During the year ended December 31, 2009, we sold 2.2 million of the Sprint
Nextel shares for net proceeds of $8.2 million. We recorded a $7.6 million gain resulting from the receipt of Sprint Nextel shares and the subsequent sale.

As
of December 31, 2008 and 2009, we held auction rate securities with a carrying value and fair value of $47.8 million and $42.9 million, respectively. These
securities are variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years, but have interest rate reset periods at
pre-determined intervals, usually every 28 days. These securities are predominantly secured by student loans guaranteed by state related higher education agencies and reinsured by
the U.S. Department of Education. Beginning in February 2008, auctions for these securities failed to attract sufficient buyers, resulting in us continuing to hold such securities. In October 2008, we
entered into an agreement with the broker that sold us our auction rate securities that gives us the right to sell our existing auction rate securities back to the broker at par plus accrued interest,
beginning on June 30, 2010 until July 2, 2012 (herein referred to as "put right"). During 2008, we recorded an other-than-temporary impairment of
$9.9 million to reflect the auction rate securities at their fair value, as we no longer had the intent to hold the securities until maturity. We also elected a one-time transfer of
our auction rate securities from the available-for-sale category to the trading category. We recorded the value of the put right in our Consolidated Balance Sheet with a
corresponding $9.8 million gain on investments in the Consolidated Statement of Operations. We elected the fair value option for the put right to offset the fair value changes of the auction
rate securities. The other-than-temporary impairment, net of the gain on the put right, was $0.1 million during the year ended December 31, 2008. During the year
ended December 31, 2009, we redeemed $9.6 million of auction rate securities at par and recognized a net gain of $0.1 million resulting from the redemption and net changes in fair
value of our auction rate securities and put right.

Interest income (expense) and other, net

Interest income (expense) and other, net, is primarily comprised of interest expense incurred on our Convertible Senior Notes due
November 15, 2026 ("Notes"); interest earned on our cash, cash equivalents and marketable securities; and other miscellaneous income and expense items. We recognized net interest income of
$2.8 million during the year ended December 31, 2007 compared to net interest expense of $12.4 million during the year ended December 31, 2008. This was primarily due to a
decrease in interest earned on our cash, cash equivalents and marketable securities, despite an increase in our average cash and marketable securities balance, due to lower investment yields from
deteriorating financial and credit markets. Also contributing to the decrease was the liquidation of our Covad debt investment, which was repurchased by Platinum Equity, LLC in April 2008.

Interest
expense and other, net, increased $7.4 million, from $12.4 million during the year ended December 31, 2008 to $19.8 million during the year ended
December 31, 2009. The increase was primarily due to a decrease in interest earned on our cash, cash equivalents and marketable securities, despite an increase in our average cash and
marketable securities balance, due to lower investment yields from deteriorating financial and credit markets. Also contributing to the increase was an increase in interest expense resulting from an
increase in accretion of the debt discount relating to our Notes.

Income tax (provision) benefit

We recognized an income tax benefit of $1.2 million during year ended December 31, 2007, which was primarily due to the
change in the deferred tax liability related to long-lived assets. We recognized an income tax benefit of $32.2 million during year ended December 31, 2008. This consisted
primarily of a benefit of $56.1 million resulting from the release of a portion of our valuation allowance against our

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deferred
tax assets, primarily related to net operating loss carryforwards. Offsetting this benefit was an income tax provision of $23.9 million recorded during the year ended
December 31, 2008. The tax provision consisted of $7.0 million state income and federal and state alternative minimum tax ("AMT") amounts payable due to the net operating loss
carryforward limitations associated with the AMT calculation and $16.9 million for non-cash deferred tax provisions associated with the utilization of net operating loss
carryforwards which were acquired in connection with acquisitions. We recognized an income tax benefit of $126.1 million during year ended December 31, 2009. This benefit consisted
primarily of a benefit of $198.8 million resulting from the release of a portion of our valuation allowance against our deferred tax assets, primarily related to net operating loss
carryforwards. During the year ended December 31, 2009, we determined we will more likely than not be able to utilize these
deferred tax assets due to the generation of sufficient taxable income in the immediate future. Offsetting this benefit was an income tax provision of $72.6 million, consisting of
$9.3 million state income and federal and state AMT amounts payable and $63.3 million for non-cash deferred tax provisions associated with the utilization of net operating
loss carryforwards.

We
continue to maintain a valuation allowance of $34.1 million against our unrealized deferred tax assets, which include net operating loss carryforwards. Of this amount,
$31.7 million relates to net operating losses generated by the tax benefits of certain stock compensation arrangements. The valuation allowance will be removed upon utilization of these net
operating losses as an adjustment to additional paid-in-capital. The remaining $2.4 million valuation allowance is retained for net operating losses in certain
jurisdictions where there is uncertainty regarding realization.

To
the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for
income taxes. Our ability to use our federal and state net operating loss carryforwards and federal and state tax credit carryforwards may be subject to restrictions attributable to equity
transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.

Loss from discontinued operations, net of tax

Loss from discontinued operations, net of tax, during the years ended December 31, 2007 and 2008 reflects our municipal wireless
broadband operations. In November 2007, management concluded that our municipal wireless broadband operations were no longer consistent with our strategic direction and our Board of Directors
authorized management to pursue the divestiture of our municipal wireless broadband assets. The municipal wireless results of operations were previously included in our Consumer Services segment.

During
the year ended December 31, 2008, we transferred our municipal wireless broadband networks to Corpus Christi, TX and Milpitas, CA in exchange for releasing us from our
existing network agreements. We also transferred our municipal wireless broadband networks in the city of Philadelphia, PA to a local Philadelphia company. Additionally, we terminated our municipal
wireless broadband service in New Orleans, LA and Anaheim, CA and removed our network equipment from those cities. As of December 31, 2008, the divestiture of our municipal wireless broadband
assets was complete.

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The
following table presents summarized results of operations related to our discontinued operations for the years ended December 31, 2007 and 2008:

Year Ended December 31,2007

2008(in thousands)Revenues

$
2,097

$
1,305Operating costs and expenses


(33,871
)

(4,569
)Impairment, facility exit and restructuring costs


(48,528
)

(6,326
)Income tax benefit





1,084Loss from discontinued operations, net of tax

$
(80,302
)
$
(8,506
)


Loss
from discontinued operations, net of tax, decreased $71.8 million from the year ended December 31, 2007 to the year ended December 31, 2008. This was primarily
due to a decrease in impairment and facility exit and restructuring costs, as well as a decrease in operating costs and expenses as we discontinued our municipal wireless broadband operations during
2008.

Stock-Based Compensation

We measure stock-based compensation cost for all stock awards at fair value on the date of grant and recognition of compensation over
the requisite service period for awards expected to vest. The fair value of our stock options is estimated using the Black-Scholes valuation model, and the fair value of restricted stock units is
determined based on the number of shares granted and the quoted price of our common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated
forfeitures, using the straight-line attribution method. For performance-based awards, we recognize expense over the requisite service period, net of estimated forfeitures, using the
accelerated attribution method when it is probable that the performance measure will be achieved. The estimate of awards that will ultimately vest requires significant judgment, and to the extent
actual results or updated estimates differ from management's current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors
when estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future changes in estimates, may differ substantially from
our current estimates.

Stock-based
compensation expense was $19.6 million, $20.1 million and $13.2 million during the years ended December 31, 2007, 2008 and 2009, respectively.
Stock-based compensation expense is classified within the same operating expense line items as cash compensation paid to employees. Stock-based compensation was allocated as follows for the years
ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)Sales and marketing

$
3,826

$
5,713

$
3,633Operations and customer support


7,007


9,829


6,544General and administrative


8,720


4,591


3,054$
19,553

$
20,133

$
13,231


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Facility Exit and Restructuring Costs

2007 Plan.We expect to incur future cash outflows for real estate obligations through 2014 related to the 2007 Plan. The following
table summarizes
activity for the liability balances associated with the 2007 Plan for the years ended December 31, 2007, 2008 and 2009, including changes during the year attributable to costs incurred and
charged to expense and costs paid or otherwise settled:

Severance
and Benefits

Facilities

Asset
Impairments

Other
Costs

Total(in thousands)Balance as of December 31, 2006

$


$


$


$


$
Accruals


30,303


12,216


20,621


1,131


64,271Payments


(18,262
)

(480
)




(760
)

(19,502
)Non-cash charges





4,388


(20,621
)

(371
)

(16,604
)Balance as of December 31, 2007


12,041


16,124








28,165Accruals


461


4,808


4,125





9,394Payments


(12,502
)

(6,174
)







(18,676
)Non-cash charges





1,936


(4,125
)




(2,189
)Balance as of December 31, 2008





16,694








16,694Accruals





5,697


46





5,743Payments





(5,442
)







(5,442
)Non-cash charges





489


(46
)




443Balance as of December 31, 2009

$


$
17,438

$


$


$
17,438


Legacy Plans.As of December 31, 2009, we had a $0.5 million liability remaining for real estate commitments associated with
the Legacy
Plans. All other costs have been paid or otherwise settled. We expect to incur future cash outflows for real estate obligations through 2010 related to the Legacy Plans.

Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)Net income (loss)

$
(145,097
)
$
178,584

$
287,118Non-cash items


265,252


112,307


(58,711
)Changes in working capital


(31,366
)

(60,279
)

(19,785
)Net cash provided by operating activities

$
88,789

$
230,612

$
208,622Net cash provided by (used in) investing activities

$
13,936

$
107,124

$
(37,121
)Net cash used in financing activities

$
(87,267
)
$
(24,999
)
$
(47,070
)


Operating activities

Net cash provided by operating activities increased during the year ended December 31, 2008 compared to the year ended
December 31, 2007. The increase was primarily due to a decrease in costs to acquire and support new customers, a decrease in operating costs resulting from our efforts to reduce our
back-office cost structure, benefits realized from the 2007 Plan and a reduction in customer support costs and bad debt expense as our overall subscriber base has decreased and become
longer tenured. Net cash provided by operating activities decreased during the year ended December 31, 2009 compared to the year

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ended
December 31, 2008 primarily due to a decrease in revenues as our overall subscriber base has decreased over the past year. However, this decrease was partially offset by reduced sales and
marketing spending, reduced telecommunication costs, reduced back-office support costs and reduced customer support and bad debt expense as our overall subscriber base has decreased and
become longer tenured.

Non-cash
items include items that are not expected to generate or require the use of cash, such as depreciation and amortization relating to our network, facilities and
intangible assets, net losses of equity affiliate, deferred income taxes, stock-based compensation, non-cash disposals and impairments of fixed assets, impairments of goodwill and
intangible assets, gain (loss) on investments, net, accretion of debt discount and amortization of debt issuance costs. Non-cash items decreased during the year ended December 31,
2008 compared to the prior year primarily due to a decrease in net losses of equity affiliate and an increase in non-cash income tax benefits, offset by an increase in impairment of
goodwill and intangible assets. Non-cash items decreased during the year ended December 31, 2009 compared to the prior year period due to an increase in deferred income taxes, which
was partially offset by decreases in depreciation expense and loss on disposals and impairments of fixed assets.

Changes
in working capital requirements include changes in accounts receivable, prepaid and other assets, accounts payable, accrued and other liabilities and deferred revenue. Cash used
for working capital requirements increased during 2008 compared to the prior year primarily due to payments resulting from the 2007 Plan and from the discontinuation of our municipal wireless
broadband operations. Cash used for working capital requirements decreased during the year ended December 31, 2009 compared to the prior year period primarily due to reduced back office support
and sales and marketing spending. Also contributing to the decrease were decreases in payments resulting from the 2007 Plan, from other workforce reductions and from the discontinuation of our
municipal wireless broadband operations.

Investing activities

Our investing activities provided cash of $13.9 million during the year ended December 31, 2007. This consisted primarily
of $122.0 million of sales and maturities of investments in marketable securities, net of purchases, and $1.6 million of distributions received from investments in other companies. These
were partially offset by $53.5 million of capital expenditures, $30.0 million loaned to HELIO, $19.5 million of contributions to HELIO and $7.3 million to purchase
subscriber bases from other ISPs.

Our
investing activities provided cash of $107.1 million during the year ended December 31, 2008. This consisted primarily of $57.1 million received for our Covad
investment and $56.9 million of sales and maturities of investments in marketable securities, net of purchases. In April 2008, Platinum Equity, LLC acquired all outstanding shares of
Covad. As a result, we received cash of $50.8 million for the aggregate principal amount of the 12% Senior Secured Convertible Notes due 2011 held by us plus accrued interest in April 2008 and
we received cash of $6.3 million for our 6.1 million shares of Covad common stock in May 2008. The decreases were offset by $5.7 million of capital expenditures and
$1.2 million used to purchase subscriber bases from other ISPs.

Our
investing activities used cash of $37.1 million during the year ended December 31, 2009. This consisted primarily of $32.4 million of purchases of investments in
marketable securities, net of sales and maturities, and $13.1 million of capital expenditures, primarily associated with network and technology center related projects. This was offset by
$8.4 million of proceeds received from investments in other companies. During the year ended December 31, 2009, we sold 2.2 million of our Sprint Nextel shares for net proceeds of
$8.2 million and received $0.2 million in cash distributions from one of our investments.

Financing activities

Our financing activities used cash of $87.3 million during the year ended December 31, 2007. This consisted primarily of
$94.3 million used to repurchase 14.0 million shares of our common stock and $2.0 million used to repay a note payable. Partially offsetting cash used for repurchases were
proceeds from

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the
exercise of stock options of $9.5 million. Our financing activities used cash of $25.0 million during the year ended December 31, 2008. This consisted primarily of
$31.9 million used to repurchase 3.8 million shares of our common stock and $2.7 million to pay off a capital lease obligation. Included in
the share repurchase amount is the repurchase of approximately 2.5 million shares of common stock for approximately $22.7 million in connection with the termination of our convertible
note hedge and warrant agreements. Partially offsetting cash used for repurchases were proceeds of $8.1 million from the exercise of stock options. Our financing activities used cash of
$47.1 million during year ended December 31, 2009. This consisted primarily of $30.0 million for payment of dividends and $22.3 million used to repurchase
3.6 million shares of our common stock, offset by $5.3 million of proceeds from the exercise of stock options.

Future Uses of Cash and Funding Sources

Uses of cash.We expect to incur capital expenditures to maintain and upgrade our network and technology infrastructure. The actual
amount of capital
expenditures may fluctuate due to a number of factors which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital
expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment. We also expect to use cash to pay dividends on our common stock and
restricted stock units. In 2009, we began paying quarterly cash dividends on our common stock. We currently intend to pay regular quarterly dividends on our common stock. Any decision to declare
future dividends will be made at the discretion of the Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, investment
opportunities and other factors the Board of Directors may deem relevant. We expect to continue to use cash to retain existing and acquire new subscribers for our services, which may include purchases
of subscriber bases from other ISPs. We will also use cash to pay real estate obligations associated with facilities exited in our restructuring plans and for workforce reduction initiatives or other
cost reduction initiatives. Finally, we may also use cash to invest in or acquire other companies, to pay additional dividends, to repurchase common stock, to repurchase Notes or in connection with
holders' conversion of Notes. Although we continue to consider and evaluate potential investments or acquisitions, there can be no assurance that we will be able to consummate any such transaction.

Our
cash requirements depend on numerous factors, including our ability to maintain our customer base, the costs required to maintain our network infrastructure, the size and types of
acquisitions in which we may engage, the pricing of our access services, and the level of resources used for our sales and marketing activities, among others.

Sources of cash.Our principal sources of liquidity are our cash, cash equivalents and investments in marketable securities, as well as
the cash flow
we generate from our operations. During the years ended December 31, 2007, 2008 and 2009, we generated $88.8 million, $230.6 million and $208.6 million in
cash from operations, respectively. As of December 31, 2009, we had $611.0 million in cash and cash equivalents. In addition, we held short-term marketable securities valued
at $85.0 million. Short-term marketable securities consist of investments that have effective maturity dates of up to one year from the balance sheet date. Our cash, cash
equivalents and marketable securities are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by unfavorable economic conditions. If financial markets
experience prolonged periods of decline, the value or liquidity of our cash, cash equivalents and marketable securities could decline and result in an other-than-temporary
decline in fair value, which could adversely affect our financial condition.

Our
short-term marketable securities as of December 31, 2009 included $42.9 million of auction rate securities. These securities are variable-rate
debt instruments whose underlying agreements have contractual maturities of up to 40 years. The securities are issued by various state related higher education agencies and predominantly
secured by student loans guaranteed by the agencies and reinsured by the United States Department of Education. Liquidity for these auction rate securities is typically provided by

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an
auction process that resets the applicable interest rate at pre-determined intervals, usually every 28 days. Beginning in February 2008, all of our auction rate securities failed
to attract sufficient buyers, resulting in our continuing to hold such securities. In October 2008, we entered into an agreement with the broker that sold us our auction rate securities that gives us
the right to sell our existing auction rate securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012. The agreement also grants the
broker the right to buy our auction rate securities at par plus accrued interest, until July 2, 2012. Based on our remaining cash and marketable securities and operating cash flows, we do not
anticipate the current lack of liquidity on these investments will affect our ability to operate our business as usual.

We
expect to generate positive cash flows from operations during the year ended December 31, 2010. Our available cash and marketable securities, together with our results of
operations, are expected to be sufficient to meet our operating expenses, capital requirements and investment and other obligations for the next 12 months. However, as a result of other
investment activities, possible acquisition opportunities or other strategic uses of cash, we may seek additional financing in the future. We have no commitments for any additional financing and have
no lines of credit or similar sources of financing. We cannot be sure that we can obtain additional financing on favorable terms, if at all, through the issuance of equity securities or the incurrence
of additional debt. Additional equity financing may dilute our stockholders, and debt financing, if available, may restrict our ability to repurchase common stock or debt, declare and pay dividends
and raise future capital. If we are unable to obtain additional needed financing, it may prohibit us from making acquisitions, capital expenditures and/or investments, which could materially and
adversely affect our business.

Off-Balance Sheet Arrangements

As of December 31, 2009, we did not have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to investors.

Contractual Obligations and Commitments

As of December 31, 2009, we had the following contractual commitments:

Year Ending December 31,2010

2011

2012

2013-
2014(in millions)Operating leases (1)

$
12.5

$
10.7

$
10.1

$
17.5Purchase commitments (2)


0.5








Convertible senior notes (3)





258.8





$
13.0

$
269.5

$
10.1

$
17.5


(1)These
amounts represent base rent payments under noncancellable operating leases for facilities and equipment that expire in various years through 2014, as
well as an allocation for operating expenses. Not included in these amounts is expected sublease income of $2.5 million, $1.3 million, $1.3 million and $2.1 million during
the years ended December 31, 2010, 2011, 2012 and thereafter, respectively.(2)We
have commitments to purchase telecommunications services from one of our third party providers under a non-cancelable agreement.(3)During
November 2006, we issued $258.8 million aggregate principal amount of Notes in a registered offering. The Notes are convertible on
October 15, 2011 and upon certain events. We have the option to redeem the Notes, in whole or in part, for cash, on or after November 15, 2011, provided that we have made at least ten
semi-annual interest payments. In addition, the holders may require us to purchase all or a portion of their Notes on each of November 15, 2011, November 15, 2016 and
November 15, 2021.


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Share Repurchase Program

The Board of Directors has authorized a total of $750.0 million to repurchase our common stock under our share repurchase
program. As of December 31, 2009, we had utilized approximately $603.2 million pursuant to the authorizations and had $146.8 million available under the current authorization. We
may repurchase our common stock from time to time in compliance with the Securities and Exchange Commission's regulations and other legal requirements, and subject to market conditions and other
factors. The share repurchase program does not require us to acquire any specific number of shares and may be terminated by the Board of Directors at any time.

Income Taxes

We continue to maintain a partial valuation allowance of $34.1 million against our net deferred tax assets, consisting primarily
of net operating loss carryforwards. Of this amount, $31.7 million relates to net operating losses generated by the tax benefits of certain stock compensation arrangements. The valuation
allowance will be removed upon utilization of these net operating losses as an adjustment to additional paid-in-capital. The remaining $2.4 million valuation allowance
is retained for net operating losses in certain jurisdictions where there is uncertainty regarding realization.

To
the extent we owe income taxes in future periods, we intend to use our net operating loss carryforwards to the extent available to reduce cash outflows for income taxes. However, our
ability to use our net operating loss carryforwards to offset future taxable income and future taxes, may be subject to restrictions attributable to equity transactions that result in changes in
ownership as defined by Internal Revenue Code Section 382.

Related Party Transactions

As a result of our prior ownership interest in HELIO, HELIO was considered a related party. In August 2008, Virgin Mobile acquired
HELIO and our equity and debt investments in HELIO were exchanged for limited partnership units of Virgin Mobile. EarthLink and HELIO had a services agreement pursuant to which we provided HELIO
billing and other support services in exchange for management fees. The management fees were determined based on our costs to provide the services, and management believed such fees were reasonable.
Fees for services provided to HELIO are reflected as reductions to the associated expenses incurred by us to provide such services. During the years ended December 31, 2007 and 2008, fees
received for services provided to HELIO were $1.6 million and $1.0 million, respectively.

Critical Accounting Policies and Estimates

Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding
our consolidated financial statements, financial condition and results of operations and which require complex management judgments, uncertainties and/or estimates. The preparation of financial
statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities,
and the reported amounts of revenues and expenses during a reporting period; however, actual results could differ from those estimates. Management has discussed the development, selection and
disclosure of the critical accounting policies and estimates with the Audit Committee of the Board of Directors. Information regarding our other accounting policies is included in the Notes to our
Consolidated Financial Statements.

Revenue recognition

We maintain relationships with certain broadband partners in which we provide services to customers using the "last mile" element of
the telecommunications providers' networks. The term "last mile" generally refers to the element of telecommunications networks that is directly connected to homes and

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businesses.
Generally, when we are the primary obligor in the transaction with the subscriber, have latitude in establishing prices, are the party determining the service specifications or have
several but not all of these indicators, we record the revenue at the amount billed the subscriber. If we are not the primary obligor and/or the broadband partner has latitude in establishing prices,
we record revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net
amount as revenue. The determination of whether we meet many of the attributes for gross and net revenue recognition is judgmental in nature and is based on an evaluation of the terms of each
arrangement. A change in the determination of gross versus net revenue recognition would have an impact on the gross amounts of revenues and cost of revenues we recognize and the gross profit margin
percentages in the period in which such determination is made and in subsequent periods; however, such a change in determination of revenue recognition would not affect net income.

Income taxes

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We establish
reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain
positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. We adjust these reserves in light of changing facts and circumstances, such
as the closing of a tax audit, new tax legislation, or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences
will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions
and changes to reserves that are considered appropriate, as well as the related net interest and penalties.

We
recognize deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book and tax bases of recorded assets and
liabilities, including net operating loss carryforwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is more likely than not that all or a
portion of the deferred tax assets will not be realized. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the
valuation allowance. During the year ended December 31, 2009, we released $199.0 million of our valuation allowance related to our deferred tax assets. Of the valuation allowance
release, $198.8 million was recorded as an income tax benefit in the Consolidated Statement of Operations and $0.2 million related to temporary differences and was recorded to
accumulated other comprehensive income (loss) on the Consolidated Balance Sheet. These deferred tax assets relate primarily to net operating loss carryforwards which we determined we will more likely
than not be able to utilize due to the generation of sufficient taxable income in the future. Our determination was made based on our past performance and our belief that we will generate sufficient
taxable income in the future to utilize our tax assets. Significant judgment was involved in this determination, including projections of future taxable income. Changes in these estimates and
assumptions could materially affect the amount or timing of the valuation allowance release.

We
continue to maintain a partial valuation allowance of $34.1 million against our net deferred tax assets, consisting primarily of net operating loss carryforwards. Of this
amount, $31.7 million relates to net operating losses generated by the tax benefits of certain stock compensation arrangements. The valuation allowance will be removed upon utilization of these
net operating losses as an adjustment to additional paid-in-capital. The remaining $2.4 million valuation allowance is retained for net operating losses in certain
jurisdictions where we do not believe it is more likely than not that the net operating losses will be realized. Adjustments could be required in the future if we estimate that the amount of deferred
tax assets to be realized is more or less than the net amount we have recorded. Any decrease in the valuation

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allowance
could have the effect of increasing stockholders' equity and/or decreasing the income tax provision in the statement of operations.

Recoverability of noncurrent assets

Goodwill and indefinite-lived intangible assets

We test goodwill and indefinite-lived intangible assets for impairment at least annually. We perform an impairment test of our goodwill
and indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events and circumstances indicate the indefinite-lived intangible assets might be permanently
impaired. During the fourth quarter of 2008, our annual impairment test concluded that goodwill and certain intangible assets recorded as a result of our April 2006 acquisition of New Edge were
impaired and we recorded non-cash impairment charges related to the New Edge reporting unit of $64.0 million for goodwill and $3.1 million for the indefinite-lived trade
name. During the fourth quarter of 2009, our annual impairment test concluded that goodwill and certain intangible assets recorded as a result of the New Edge acquisition were further impaired and we
recorded non-cash impairment charges related to the New Edge reporting unit of $23.9 million for goodwill and $0.2 million for the indefinite-lived trade name. As a result,
there is no remaining carrying value related to New Edge goodwill.

Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining
appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could
trigger impairment or impact the amount of the impairment.

Although
we operate two reportable segments, we have identified three reporting units for evaluating goodwill, which are Consumer Services (which consists of our consumer product
offerings including narrowband and broadband access, VoIP and value-added services), New Edge and Web Hosting. The Consumer Services reportable segment is one reporting unit, while the Business
Services reportable segment consists of two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a business for which discrete financial information is available and
segment management regularly reviews the operating results. Goodwill resulting from our New Edge acquisition in 2006 was allocated to the New Edge reporting unit. Goodwill resulting from all other
acquisitions related to consumer products and was allocated to the Consumer Services reporting unit. No goodwill is allocated to our Web Hosting reporting unit.

Impairment
testing of goodwill is required at the reporting unit level and involves a two-step process. The first step of the impairment test involves comparing the estimated
fair value of our reporting units with the reporting unit's carrying amount, including goodwill. We estimate the fair values of our reporting units primarily using the income approach valuation
methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash
flow methodology. The discounted cash flows for each reporting unit are based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts
are estimated using a terminal value calculation, which incorporates historical and forecasted financial trends for each identified reporting unit.

If
we determine that the carrying value of a reporting unit exceeds its estimated fair value, we perform a second step. The implied fair value of goodwill is determined in the same
manner as utilized to recognize goodwill in a business combination. The implied fair value of goodwill is measured as the excess of the fair value of the reporting unit over the amounts assigned to
its assets and liabilities. Any impairment loss is measured by the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.

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The
impairment test for our indefinite-lived intangible assets, which consist of trade names, involves a comparison of the estimated fair value of the intangible asset with its carrying
value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We determine the fair value of our trade names using
the royalty savings method, in which the fair value of the asset is calculated based on the present value of the royalty stream that we are saving by owning the asset. Significant judgments required
to estimate the fair value include assumptions about royalty rates and the selection of appropriate discount rates. Changes in these estimates and assumptions could materially affect the determination
of fair value for our indefinite-lived intangible assets which could impact the amount of an impairment.

Long-lived assets

For noncurrent assets such as property and equipment, definite-lived intangible assets and investments in other companies, we perform
tests of impairment when certain events or changes in circumstances indicate that the carrying amount may not be recoverable. Our tests involve critical estimates reflecting management's best
assumptions and estimates related to, among other factors, subscriber additions, churn, prices, marketing spending, operating costs and capital spending. Significant judgment is involved in estimating
these factors, and they include inherent uncertainties. Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability of these
factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates may change from period to period. If other assumptions and estimates had been
used in the current period, the balances for noncurrent assets could have been materially impacted. Furthermore, if management uses different assumptions or if different conditions occur in future
periods, future operating results could be materially impacted.

Fair value measurements

We utilize unobservable (Level 3) inputs in determining the fair value of certain assets, which included auction rate securities
with a carrying value and fair value of $42.9 million as of December 31, 2009 and our put right with a carrying value and fair value of $5.2 million as of December 31,
2009.

Our
auction rate securities are variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years, but have interest rate reset
periods at pre-determined intervals, usually every 28 days. These securities are predominantly secured by student loans guaranteed by state related higher education agencies and
reinsured by the U.S. Department of Education. Beginning in February 2008, auctions for these securities failed to attract sufficient buyers, resulting in us continuing to hold such securities. Prior
to February 2008, due to the auction process, quoted market prices were readily available, which would have qualified as Level 1. However, due to events in credit markets beginning in February
2008, these securities did not have readily determinable market values and were not liquid. The fair values of our auction rate securities as of December 31, 2008 and 2009 were estimated
utilizing a discounted cash flow analysis. This analysis considered, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, and the
timing and value of expected future cash flows. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by us. Due to
the failed auctions, we classify these instruments within Level 3. We elected the fair value option for the put right to offset the fair value changes of the auction rate securities. The fair
value of the put right is estimated using a discounted cash flow analysis and is classified within Level 3.

Determining
the fair values of our auction rate securities and put right requires judgment. If other assumptions and estimates had been used in the current period, the fair value of our
auction rate securities and put right could have been materially impacted. Furthermore, if management uses different assumptions in future periods, future operating results could be materially
impacted.

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Restructuring and facility exit costs

Over the past few years, we have closed facilities, reduced personnel and outsourced certain functions to streamline our business.
Restructuring-related liabilities, including reserves for facility exit costs, include estimates for, among other things, severance payments and amounts due under lease obligations, net of estimated
sublease income, if any. Key variables in determining such estimates include estimating the future operating expenses to be incurred for the facilities, anticipating the timing and amounts of sublease
rental payments, tenant improvement costs and brokerage and other related costs. We accrue the estimated future costs of any lease obligation, net of estimated sublease income, as facility exit and
restructuring costs in the Consolidated Statement of Operations.

If
the real estate and leasing markets change or if existing subtenants experience financial difficulty, especially given the weak economy, sublease amounts could vary significantly from
the amounts estimated, resulting in a material change to our recorded liability. We record any adjustments to liabilities associated with facility exit costs as facility exit and restructuring costs.
We periodically evaluate and, if necessary, adjust our estimates based on currently-available information and such adjustments have periodically resulted in additional expense. Adjustments to our
recorded liabilities for future lease obligations associated with vacated facilities could adversely or favorably affect future operating results.

Recently Issued Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board ("FASB") issued new guidance on revenue recognition. The new guidance
addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit and to modify the manner
in which the transaction consideration is allocated across the separately identifiable deliverables and how revenue is recognized. The new guidance also significantly expands the disclosure
requirements for multiple-element arrangements. The new guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. We do not expect the adoption of the new guidance to have a material impact on our financial statements.

In
December 2009, the FASB issued new guidance regarding variable interest entities ("VIEs"). VIEs are entities that either do not have equity investors with proportionate economic and
voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities. The new guidance requires a qualitative approach to identifying a
controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The new
guidance is effective
for annual reporting periods beginning after November 15, 2009. We do not expect the adoption of this new guidance to have a material impact on its consolidated financial statements.

Adoption of Recent Accounting Pronouncements

Codification.In the third quarter of 2009, we adopted the FASB Accounting Standards Codification ("ASC"). The ASC became the single
official source
of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB, other than guidance issued by the Securities and Exchange Commission. The adoption of the ASC did not
have a material impact on our financial statements. However, the adoption of the ASC changed our references to GAAP in our consolidated financial statements.

Convertible Debt.On January 1, 2009, we adopted new accounting guidance related to accounting for convertible debt instruments
that may be
settled in cash upon conversion. The new accounting guidance requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) be separately accounted for in a manner that reflects an issuer's non-convertible debt borrowing rate. The resulting debt discount is accreted over the

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period
the convertible debt is expected to be outstanding as additional non-cash interest expense. Retrospective application to all periods presented is required. The adoption of this new
guidance on January 1, 2009 affected the accounting for our Notes, which were issued in November 2006. Upon adoption, we recorded an adjustment to increase additional paid-in
capital as of the November 2006 issuance date by approximately $62.1 million. We are accreting the resulting debt discount to interest expense over the estimated five-year life of
the Notes, which represents the first redemption date of November 2011. Upon adoption, we also recorded an adjustment to decrease additional paid-in capital and other long-term assets by approximately
$1.8 million to reclassify debt issuance costs related to the equity component of the Notes. We recorded a pre-tax adjustment of approximately $22.3 million to accumulated
deficit that represents accretion of the debt discount and decrease in amortization of debt issuance costs during the years ended December 31, 2006, 2007 and 2008, recognized additional
non-cash interest expense of $12.2 million during the year ending December 31, 2009 and will recognize additional non-cash interest expense of
$13.4 million and $12.4 million during the years ending December 31, 2010 and 2011, respectively, for accretion of the debt discount and decrease in amortization of debt issuance
costs. As a result of the adoption of this new guidance, we reduced
income from continuing operations and net income for the year ended December 31, 2009 by $12.2 million and reduced basic and diluted earnings per share by $0.11 per share. We also
recorded a deferred tax liability for temporary tax differences. However, this was offset by a corresponding decrease in the valuation allowance for deferred tax assets.

The
following tables present the effect of the adoption of this new guidance on our affected financial statement line items for the years ended December 31, 2007 and 2008 and as
of December 31, 2008:

Year Ended December 31, 2007

Year Ended December 31, 2008As Originally
Reported

As
Adjusted

Effect of
Change

As Originally
Reported

As
Adjusted

Effect of
Change(in thousands, except per share data)Statement of Operations:Interest income (expense) and other, net

$
12,824

$
2,824

$
(10,000
)
$
(1,381
)
$
(12,409
)
$
(11,028
)Income (loss) from continuing operations


(54,795
)

(64,795
)

(10,000
)

198,118


187,090


(11,028
)Net income (loss)


(135,097
)

(145,097
)

(10,000
)

189,612


178,584


(11,028
)Basic net income (loss) per shareContinuing operations

$
(0.45
)
$
(0.53
)
$
(0.08
)
$
1.81

$
1.71

$
(0.10
)Basic net income per share


(1.11
)

(1.19
)

(0.08
)

1.73


1.63


(0.10
)Diluted net income (loss) per shareContinuing operations

$
(0.45
)
$
(0.53
)
$
(0.08
)
$
1.78

$
1.68

$
(0.10
)Diluted net income per share


(1.11
)

(1.19
)

(0.08
)

1.71


1.61


(0.10
)




As of December 31, 2008As Originally
Reported

As
Adjusted

Effect of
Change(in thousands)Balance Sheet:Other long-term assets

$
5,725

$
4,698

$
(1,027
)Long-term debt


258,750


219,733


(39,017
)Additional paid-in capital


2,075,571


2,135,887


60,316Accumulated deficit


(994,507
)

(1,016,833
)

(22,326
)


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Item 7a.    Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest
rates may cause the fair value of
the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the fair value of its investment may decline. To minimize this risk, the Company has historically held many investments until maturity, and as a result, the Company receives interest and
principal amounts pursuant to the underlying agreements. To further mitigate risk, the Company has historically maintained its portfolio of investments in a variety of securities, including government
agency notes, asset-backed debt securities (including auction rate debt securities) and commercial paper, all of which bear a minimum short-term rating of A1/P1 or a minimum
long-term rating of A/A2. As of December 31, 2008 and 2009, net unrealized losses in these investments were not material. In general, money market funds are not subject to market
risk because the interest paid on such funds fluctuates with the prevailing interest rate.

As
of December 31, 2008, our investments in marketable securities consisted of $47.8 million of auction rate securities with a weighted average interest rate of 2.0%. As of
December 31, 2009, our investments in marketable securities included $42.9 million of auction rate securities with a weighted average interest rate of 1.42%. These securities are
variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years. These securities are issued by various municipalities and state regulated
higher education agencies and are predominantly secured by pools of student loans guaranteed by the agencies and reinsured by the U.S. Department of Education. Liquidity for these auction rate
securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 28 days. In October 2008, we entered into
an agreement with the broker that sold us our auction rate securities that gives us the right to sell our existing auction rate securities back to the broker at par plus accrued interest, beginning on
June 30, 2010 until July 2, 2012 (herein referred to as "put right"). We elected a one-time transfer of our auction rate securities from the
available-for-sale category to the trading category. We also elected the fair value option for the put right to offset the fair value changes of the auction rate securities.

We
are also exposed to interest rate risk with respect to our convertible senior notes due November 15, 2026. The fair value of our convertible senior notes may be adversely
impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. Our convertible senior notes bear
interest at a fixed rate of 3.25% per year until November 15, 2011, and 3.50% interest per year thereafter. As of December 31, 2008 and 2009, the principal amount of our convertible
senior notes was $258.8 million and the fair value was approximately $236.6 million and $279.8 million, respectively, which was based on the quoted market price.

Equity Risk

We are exposed to equity price risk as it relates to changes in the market value of our equity investments. We invest in equity
instruments of public and private companies for operational and strategic purposes. These securities are subject to significant fluctuations in fair market value due to volatility of the stock market
and the industries in which the companies operate. We typically do not attempt to reduce or eliminate our market exposure in these equity instruments.

59

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Table of Contents

The
following table presents the carrying value and fair value of our financial instruments subject to equity risk as of December 31, 2008 and 2009:

As of December 31, 2008

As of December 31, 2009Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value(dollars in thousands)Investments in other companies for which it is:Practicable to estimate fair value

$
1,580

$
1,580

$
1,529

$
1,529Not practicable to estimate fair value


9,300


N/A





N/A


60

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Table of Contents

Item 8.    Financial Statements And Supplementary Data.

EARTHLINK, INC.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageReports of Independent Registered Public Accounting Firm

62Consolidated Balance Sheets as of December 31, 2008 and 2009

64Consolidated Statements of Operations for the years ended December 31, 2007, 2008 and
2009

65Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years ended
December 31, 2007, 2008 and 2009

66Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2008 and
2009

67Notes to Consolidated Financial Statements

68


61

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Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and
Stockholders of EarthLink, Inc.

We
have audited the accompanying consolidated balance sheets of EarthLink, Inc. as of December 31, 2008 and 2009, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EarthLink, Inc. at
December 31, 2008 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles.

As
discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for convertible debt instruments with the adoption of the guidance
originally issued in FASB Staff Position APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), (codified primarily in FASB ASC Topic 470,Debt) effective January 1, 2009.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EarthLink, Inc.'s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.



Atlanta,
Georgia
February 26, 2010

62

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL  CONTROL OVER FINANCIAL REPORTING

The
Board of Directors and
Stockholders of EarthLink, Inc.

We
have audited EarthLink, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). EarthLink, Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, EarthLink, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2008
and 2009, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended
December 31, 2009 of EarthLink, Inc. and our report dated February 26, 2010 expressed an unqualified opinion thereon.



Atlanta,
Georgia
February 26, 2010

63

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Table of Contents



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

December 31,2008

2009ASSETSCurrent assets:Cash and cash equivalents

$
486,564

$
610,995Marketable securities





84,966Accounts receivable, net of allowance of $4,048 and $1,736 as of December 31, 2008 and 2009, respectively


30,569


20,560Prepaid expenses


6,445


4,374Deferred income taxes, net


20,254


46,063Other current assets


15,452


16,423Total current assets


559,284


783,381Long-term marketable securities


47,809


Long-term investments


20,708


Property and equipment, net


37,246


34,267Deferred income taxes, net


43,757


153,132Purchased intangible assets, net


19,552


11,550Goodwill


112,812


88,920Other long-term assets


4,698


3,368Total assets

$
845,866

$
1,074,618LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
13,109

$
6,270Accrued payroll and related expenses


37,470


25,093Other accrued liabilities


39,415


34,659Deferred revenue


33,649


25,728Convertible senior notes, net of discount of $26,502 as of December 31, 2009





232,248Total current liabilities


123,643


323,998Convertible senior notes, net of discount of $39,017 as of December 31, 2008


219,733


Other long-term liabilities


16,015


16,596Total liabilities


359,391


340,594Commitments 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, 2008 and 2009





Common stock, $0.01 par value, 300,000 shares authorized, 188,264 and 190,472 shares issued as of December 31, 2008 and 2009, respectively, and 108,516
and 107,132 shares outstanding as of December 31, 2008 and 2009, respectively


1,883


1,905Additional paid-in capital


2,135,887


2,118,100Accumulated deficit


(1,016,833
)

(729,715
)Treasury stock, at cost, 79,748 and 83,340 shares,respectively, as of December 31, 2008 and 2009


(634,420
)

(656,760
)Accumulated other comprehensive income (loss)


(42
)

494Total stockholders' equity


486,475


734,024Total liabilities and stockholders' equity

$
845,866

$
1,074,618


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

64

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EARTHLINK, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,2007

2008

2009(in thousands, except per share data)Revenues

$
1,215,994

$
955,577

$
723,729Operating costs and expenses:Cost of revenues


442,697


360,920


273,755Sales and marketing


291,105


98,212


59,474Operations and customer support


221,443


136,797


98,435General and administrative


128,412


93,878


72,398Amortization of intangible assets


14,672


13,349


7,749Impairment of goodwill and intangible assets


4,250


78,672


24,145Facility exit and restructuring costs


65,381


9,142


5,615Total operating costs and expenses


1,167,960


790,970


541,571Income from operations


48,034


164,607


182,158Net losses of equity affiliate


(111,295
)




Gain (loss) on investments, net


(5,585
)

2,708


(1,321
)Interest income (expense) and other, net


2,824


(12,409
)

(19,804
)Income (loss) from continuing operations before income taxes


(66,022
)

154,906


161,033Income tax benefit


1,227


32,184


126,085Income (loss) from continuing operations


(64,795
)

187,090


287,118Loss from discontinued operations, net of tax


(80,302
)

(8,506
)

Net income (loss)

$
(145,097
)
$
178,584

$
287,118Basic net income (loss) per shareContinuing operations

$
(0.53
)
$
1.71

$
2.69Discontinued operations


(0.66
)

(0.08
)

Basic net income (loss) per share

$
(1.19
)
$
1.63

$
2.69Basic weighted average common shares outstanding


121,633


109,531


106,909Diluted net income (loss) per shareContinuing operations

$
(0.53
)
$
1.68

$
2.66Discontinued operations


(0.66
)

(0.08
)

Diluted net income (loss) per share

$
(1.19
)
$
1.61

$
2.66Diluted weighted average common shares outstanding


121,633


111,051


108,084Dividends declared per common share

$


$


$
0.28


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

65

---





EARTHLINK, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

Accumulated
Other
Comprehensive
Income
(Loss)Common Stock







Treasury StockAdditional
Paid-in
Capital



Accumulated
Deficit

Total
Stockholders'
Equity

Total
Comprehensive
Income (Loss)Shares

Amount

Warrants

Shares

Amount(in thousands)Balance as of December 31, 2006


184,545

$
1,845

$
2,076,894

$
259

$
(1,046,293
)

(61,911
)
$
(508,232
)
$
(6,791
)
$
517,682Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units


1,796


18


9,707

















9,725Issuance of common stock for acquisition of New Edge


49


1


379

















380Issuance of common stock


100


1


724

















725Exercise of warrants








259


(259
)













Issuance of phantom share units








45

















45Stock-based compensation expense








19,576

















19,576Repurchase of common stock

















(14,032
)

(94,332
)




(94,332
)Reclassification adjustment for realized losses on certain investments























4,770


4,770Unrealized holding gains on certain investments, net of tax























1,044


1,044

$
1,044Net loss














(145,097
)










(145,097
)

(145,097
)Total comprehensive loss




























$
(144,053
)Balance as of December 31, 2007


186,490


1,865


2,107,584





(1,191,390
)

(75,943
)

(602,564
)

(977
)

314,518Cumulative effect of change in accounting principle














(4,027
)










(4,027
)Issuance of common stock pursuant to exercise of


























stock options and vesting of restricted stock units


1,774


18


5,728

















5,746Tax benefit from equity awards








1,017

















1,017Termination of convertible note hedge and warrant agreements








1,425

















1,425Stock-based compensation expense








20,133

















20,133Repurchase of common stock

















(3,805
)

(31,856
)




(31,856
)Reclassification adjustment for realized gains and losses on certain investments























893


893Unrealized holding gains on certain investments, net of tax























42


42

$
42Net income














178,584











178,584


178,584Total comprehensive income




























$
178,626Balance as of December 31, 2008


188,264


1,883


2,135,887





(1,016,833
)

(79,748
)

(634,420
)

(42
)

486,475Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units


2,208


22


5,054

















5,076Tax withholdings related to net share settlements of restricted stock units and stock options








(5,450
)
















(5,450
)Dividends paid on shares outstanding and restricted stock units








(30,006
)
















(30,006
)Dividends payable on restricted stock units








(616
)
















(616
)Stock-based compensation expense








13,231

















13,231Repurchase of common stock

















(3,592
)

(22,340
)




(22,340
)Unrealized holding gains on certain investments, net of tax























536


536

$
536Net income














287,118











287,118


287,118Total comprehensive income




























$
287,654Balance as of December 31, 2009


190,472

$
1,905

$
2,118,100

$


$
(729,715
)

(83,340
)
$
(656,760
)
$
494

$
734,024


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

66

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EARTHLINK, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,2007

2008

2009(in thousands)Cash flows from operating activities:Net income (loss)

$
(145,097
)
$
178,584

$
287,118Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


54,169


36,333


23,962Impairment of goodwill and intangible assets


4,250


78,672


24,145Net losses of equity affiliate


111,295





Loss on disposals and impairments of assets


60,385


10,078


345Loss (gain) on investments in other companies, net


5,585


(2,708
)

1,321Stock-based compensation


19,599


20,133


13,231Non-cash income taxes


(1,516
)

(42,714
)

(135,359
)Accretion of debt discount and amortization of debt issuance costs


11,485


12,513


13,644Decrease in accounts receivable, net


9,285


10,929


10,009Decrease (increase) in prepaid expenses and other assets


3,061


(4,535
)

8,193Decrease in accounts payable and accrued and other liabilities


(35,727
)

(54,632
)

(29,839
)Decrease in deferred revenue


(7,934
)

(12,041
)

(8,148
)Other


(51
)




Net cash provided by operating activities


88,789


230,612


208,622Cash flows from investing activities:Purchases of property and equipment


(53,478
)

(5,681
)

(13,119
)Purchases of subscriber bases


(7,290
)

(1,232
)

Purchases of investments in marketable securities


(403,432
)

(53,027
)

(56,702
)Sales and maturities of investments in marketable securities


525,458


109,929


24,259Investments in and net advances to/from equity affiliate


(48,915
)

65


Proceeds received from investments in other companies


1,557


57,070


8,441Other investing activities


36





Net cash provided by (used in) investing activities


13,936


107,124


(37,121
)Cash flows from financing activities:Principal payments under capital lease obligations


(372
)

(2,707
)

(36
)Proceeds from exercises of stock options


9,462


8,139


5,312Repurchases of common stock


(94,332
)

(31,856
)

(22,340
)Payment of dividends








(30,006
)Other financing activities


(2,025
)

1,425


Net cash used in financing activities


(87,267
)

(24,999
)

(47,070
)Net increase in cash and cash equivalents


15,458


312,737


124,431Cash and cash equivalents, beginning of year


158,369


173,827


486,564Cash and cash equivalents, end of year

$
173,827

$
486,564

$
610,995


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

67

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Table of Contents

EARTHLINK, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization

EarthLink, Inc. ("EarthLink" or the "Company") is an Internet service provider ("ISP"), providing nationwide Internet access and related value-added
services to individual and business customers. The Company's primary service offerings are dial-up and high-speed Internet access services and related value-added services,
such as ancillary services sold as add-on features to the Company's Internet access services, search and advertising. In addition, through the Company's wholly-owned subsidiary, New Edge
Networks ("New Edge"), the Company builds and manages IP-based wide area networks for businesses and communications carriers.

The
Company operates two reportable segments, Consumer Services and Business Services. The Company's Consumer Services segment provides Internet access and related value-added services
to individual customers. These services include dial-up and high-speed Internet access and voice-over-Internet protocol ("VoIP") services, among others.
The Company's Business Services segment provides integrated communications services and related value-added services to businesses and communications carriers. These services include managed
IP-based wide area networks, dedicated Internet access and web hosting, among others. For further information concerning the Company's business segments, see Note 18, "Segment
Information."

2.     Summary of Significant Accounting Policies

Basis of Consolidation

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

Discontinued Operations

The Company reflected its municipal wireless broadband results of operations as discontinued operations for the years ended
December 31, 2007 and 2008. See Note 4, "Discontinued Operations," for further discussion.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in the consolidated financial
statements and accompanying footnotes. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the
allowance for doubtful accounts; the use, recoverability, and/or realizability of certain assets, including deferred tax assets; useful lives of intangible assets and property and equipment; the fair
values of assets acquired and liabilities assumed in acquisitions of businesses, including acquired intangible assets; facility exit and restructuring liabilities; fair values of investments;
stock-based compensation; contingent liabilities and long-lived asset impairments. The Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable.

Revenues

General.EarthLink recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or
determinable and collectibility is reasonably assured. EarthLink's

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

customers
generally pay in advance for their services, and revenue is recognized ratably over the service period. Advance payments from customers for invoiced services that have not yet been performed
are recorded as deferred revenue in the Consolidated Balance Sheets.

The
primary component of EarthLink's revenues is access and service revenues, which consist of narrowband access services (including traditional, fully-featured narrowband access and
value-priced narrowband access); broadband access services (including high-speed access via DSL and cable; managed IP-based networks; and VoIP); and web hosting services.
EarthLink also earns revenues from value-added services, which include revenues from ancillary services sold as add-on features to EarthLink's Internet access services, such as security
products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues.

Narrowband
access revenues consist of fees charged to customers for dial-up Internet access. Broadband access revenues consist of fees charged for high-speed,
high-capacity access services including DSL and cable services; fees charged for managing IP-based networks; fees charged for VoIP services; usage fees; installation fees;
termination fees; fees for equipment; and cost recovery fees billed to customers. Web hosting revenues consist of fees charged for leasing server space and providing web services to enable customers
to build and maintain an effective online presence. Value-added services revenues consist of fees charged for ancillary services; fees charged for paid placements for searches; delivering traffic to
EarthLink's partners in the form of subscribers, page views or e-commerce transactions; advertising EarthLink partners' products and services in EarthLink's various online
properties and electronic publications; and referring EarthLink customers to partners' products and services. Advertising revenues are recorded when earned 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 revenue recognition.EarthLink maintains relationships with certain broadband partners in which it provides services
to customers
using the "last mile" element of the telecommunication providers' networks. The term "last mile" generally refers to the element of telecommunications networks that is directly connected to homes and
businesses. Generally, when EarthLink is the primary obligor in the transaction with the subscriber, has latitude in establishing prices, is the party determining the service specifications or has
several but not all of these indicators, EarthLink records the revenue at the amount billed the subscriber. If EarthLink is not the primary obligor and/or the broadband partner has latitude in
establishing prices, EarthLink records revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the
customer and recording the net amount as revenue.

Cost of Revenues

Cost of revenues include telecommunications fees and network operations costs incurred to provide the Company's Internet access
services; depreciation of network equipment; fees paid to content providers for information provided on the Company's online properties; the costs of equipment sold to customers for use with the
Company's services; activation and deactivation fees paid to the Company's network providers for the provisioning and disconnection of services; the cost of connecting customers to the Company's
networks via leased facilities; the costs of leasing components of its network facilities; costs paid to third-party providers for interconnect access and transport services; and surcharges due to
regulatory agencies.

Cost
of revenues also include sales incentives, which include the cost of promotional products and services provided to potential and new subscribers, including free modems and other
hardware and free Internet access on a trial basis. EarthLink classifies the costs of sales incentives as cost of revenues.

69

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Advertising Costs

Advertising costs include media, agency and promotion expenses to promote the Company's products and services. Advertising costs are
expensed as incurred and included in sales and marketing expense. Advertising expenses were $159.6 million, $21.6 million and $13.8 million during the years ended
December 31, 2007, 2008 and 2009, respectively.

Income Taxes

The Company recognizes deferred tax assets and liabilities for operating loss carryforwards, tax credit carryforwards and the estimated
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce the carrying amounts of net deferred tax assets if there is uncertainty regarding their realization. EarthLink considers many factors when assessing the likelihood of
future realization including the Company's recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, prudent and feasible tax planning strategies that are
available, the carryforward periods available to the Company for tax reporting purposes and other relevant factors.

Earnings per Share

The Company presents a dual presentation of basic and diluted earnings per share ("EPS"). Basic EPS represents net income (loss)
divided by the weighted average number of common shares outstanding during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock, including stock options, warrants, restricted stock units, phantom share units, convertible debt and contingently issuable shares (collectively "Common Stock Equivalents"), were
exercised or converted into common stock. The dilutive effect of outstanding stock options, restricted stock units and convertible debt is reflected in diluted earnings per share by application of the
treasury stock method. Phantom share units and contingently issuable shares are reflected on an if-converted basis. In applying the treasury stock method for stock-based compensation
arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized and
the amount of excess tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the options.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
following table sets forth the computation for basic and diluted net income per share for the years ended December 31, 2008 and 2009:

Year Ended December 31,2008

2009(in thousands, except per share data)NumeratorIncome from continuing operations

$
187,090

$
287,118Loss from discontinued operations


(8,506
)

Net income

$
178,584

$
287,118DenominatorBasic weighted average common shares outstanding


109,531


106,909Dilutive effect of Common Stock Equivalents


1,520


1,175Diluted weighted average common shares outstanding


111,051


108,084Basic net income per shareContinuing operations

$
1.71

$
2.69Discontinued operations


(0.08
)

Basic net income per share

$
1.63

$
2.69Diluted net income per shareContinuing operations

$
1.68

$
2.66Discontinued operations


(0.08
)

Diluted net income per share

$
1.61

$
2.66


During
the years ended December 31, 2008 and 2009, approximately 8.4 million and 4.9 million, respectively, options and restricted stock units were excluded from the
calculation of diluted EPS because the exercise prices plus the amount of unrecognized compensation cost attributed to future services exceeded the Company's average stock price during the respective
years. Approximately 28.4 million shares and 29.4 million shares, respectively, that underlie the Company's convertible debt instruments were also excluded from the calculation of
diluted EPS during the years ended December 31, 2008 and 2009 because the exercise price exceeded the Company's average stock price during the periods. These securities could be dilutive in
future periods.

The
Company has not included the effect of Common Stock Equivalents in the calculation of diluted EPS for the year ended December 31, 2007 because such inclusion would have an
anti-dilutive effect due to the Company's net loss. As of December 31, 2007, the Company had 13.4 million options outstanding, 28.4 million warrants outstanding and
2.1 million restricted stock units and phantom share units outstanding.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Stock-Based Compensation

As of December 31, 2009, EarthLink had various stock-based compensation plans, which are more fully described in Note 11,
"Stock-Based Compensation." The Company measures compensation cost for all stock awards at fair value on the date of grant and recognizes compensation expense over the requisite service period for
awards expected to vest. The Company estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the number of
shares granted and the quoted price of EarthLink's common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated forfeitures, using the
straight-line attribution method. For performance-based awards, the Company recognizes expense over the requisite service period, net of estimated forfeitures, using the accelerated
attribution method when it is probable that the performance measure will be achieved. The estimate of awards that will ultimately vest requires significant judgment, and to the extent actual results
or updated estimates differ from the Company's current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when
estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future changes in estimates, may differ substantially from the
Company's current estimates.

Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash
equivalents. Cash equivalents are stated at cost, which approximates fair value. These investments primarily consist of money market funds.

Marketable Securities

All investments with original maturities greater than 90 days are classified as marketable securities. These securities
primarily consist of auction rate securities and government-sponsored debt securities, all of which bear a minimum short-term rating of A1/P1 or a minimum long-term rating of
A/A2. Marketable securities with effective maturities less than one year from the balance sheet date are classified as short-term marketable securities. Marketable securities with
effective maturities greater than one year from the balance sheet date are classified as long-term marketable securities. The Company's auction rate securities are
variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years, but have interest rate reset periods at pre-determined
intervals, usually every 28 days. These securities are predominantly secured by student loans guaranteed by state related higher education agencies and reinsured by the U.S. Department of
Education. Beginning in February 2008, auctions for these securities failed to attract sufficient buyers, resulting in the Company continuing to hold such securities. In October 2008, EarthLink
entered into an agreement with the broker that sold the Company its auction rate securities that gives the Company the right to sell its existing auction rate securities back to the broker at par plus
accrued interest, beginning on June 30, 2010 until July 2, 2012. See Note 5, "Investments," for more information.

The
Company's auction rate securities are classified as trading. Trading securities are carried at fair value, with any unrealized gains and losses included in gain (loss) on
investments, net, in the Consolidated Statement of Operations. The Company's other marketable securities are classified as available for sale. Available-for-sale securities are
carried at fair value, with any unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss) as a separate component of stockholders' equity and in total
comprehensive income (loss). Amounts reclassified out of accumulated other comprehensive income (loss) into earnings are determined on a specific identification basis. Realized gains

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

and
losses on marketable securities are included in gain (loss) on investments, net, in the Consolidated Statements of Operations and are determined on a specific identification basis.

The
Company periodically evaluates whether declines in fair values of its investments below their cost are potentially other than temporary. This evaluation consists of several
qualitative and quantitative factors such as 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 to
hold the investment for a period of time which may be sufficient for anticipated recovery in market value.

Allowance for Doubtful Accounts

EarthLink maintains an allowance for doubtful accounts for estimated losses resulting from the inability of EarthLink's customers to
make payments. In assessing the adequacy of the allowance for doubtful accounts, management considers multiple factors including the aging of its receivables, historical write-offs, the
credit quality of its customers, the general economic environment and other factors that may affect customers' ability to pay. If the financial condition of EarthLink's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be required. The Company's allowance for doubtful accounts was $4.0 million and $1.7 million as of
December 31, 2008 and 2009, respectively. The Company recorded bad debt expense of $26.3 million, $16.1 million and $6.2 million during the years ended December 31,
2007, 2008 and 2009, respectively. The Company's write-offs of uncollectible accounts were $28.0 million, $18.5 million and $8.5 million during the years ended
December 31, 2007, 2008 and 2009, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is determined using the
straight-line method over the estimated useful lives of the various asset classes, which are generally three to five years for computers, telecommunications equipment and furniture and
other office equipment and 15 years for buildings. Leasehold improvements are depreciated using the straight-line method over the shorter of their estimated useful lives or the
remaining term of the lease. When leases are extended, the remaining useful lives of leasehold improvements are increased as appropriate, but not for a period in excess of the remaining lease term.
Expenditures for maintenance and repairs are charged to operating expense as incurred. Upon retirements or sales, the original cost and related accumulated depreciation are removed from the respective
accounts, and the gains and losses are included in interest income (expense) and other, net, or as facility exit and restructuring costs, as appropriate. Upon impairment, the Company accelerates
depreciation of the asset and such cost is included in operating expenses or as facility exit and restructuring costs, as appropriate.

Investments

Investments in other companies are accounted for under the cost method of accounting because the Company does not have the ability to
exercise significant influence over the companies' operations. Under the cost method of accounting, investments in private companies are carried at cost and are only adjusted for
other-than-temporary declines in fair value and distributions of earnings. For cost method investments in public companies that have readily determinable fair values, the
Company classifies its investments as available-for-sale and, accordingly, records these investments at their fair values with unrealized gains and losses included as a
separate component of stockholders' equity and in total comprehensive income (loss). Upon sale or liquidation, realized gains and losses are included in the Consolidated Statement of Operations.
Amounts reclassified out of accumulated other comprehensive income (loss) into earnings are determined on a specific identification basis.

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Management
regularly evaluates the recoverability of its investments based on the performance and the financial position of those companies as well as other evidence of market value.
Such evaluation includes, but is not limited to, reviewing the investee's cash position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs.
Management also regularly evaluates whether declines in fair values of its investments below their cost are potentially other than temporary. This evaluation consists of several qualitative and
quantitative factors regarding the severity and duration of the unrealized loss as well as the Company's ability and intent to hold the investment for a period of time to recover the cost basis of the
investment.

The
Company has a put right (herein referred to as "put right") to sell its existing auction rate securities back to the broker beginning on June 30, 2010. The put right was
classified as long-term investments in the Consolidated Balance Sheet as of December 31, 2008 and as other current assets in the Consolidated Balance Sheet as of December 31,
2009. The Company elected the fair value option for the put right and records the put right at fair value, with changes in fair value recognized as gain (loss) on investments, net, in the Consolidated
Statement of Operations. The fair value of the put right is estimated using a discounted cash flow analysis. See Note 5, "Investments," for more information.

Variable Interest Entities

Variable interest entities ("VIEs") are entities that either do not have equity investors with proportionate economic and voting rights
or have equity investors that do not provide sufficient financial resources for the entity to support its activities. Consolidation is required if it is determined that the Company absorbs a majority
of the expected losses and/or receives a majority of the expected returns. In determining if an investee is a VIE and whether EarthLink must consolidate its results, management evaluates whether the
equity of the entity is sufficient to absorb its expected losses and whether EarthLink is the primary beneficiary. Management generally performs this assessment at the date EarthLink becomes involved
with the entity and upon changes in the capital structure or related governing documents of the entity. Management has concluded that the Company does not have any arrangements with entities that
would require consolidation.

Investment in Equity Affiliate

The Company had a joint venture with SK Telecom Co., Ltd. ("SK Telecom"), HELIO. HELIO was a
non-facilities-based mobile virtual network operator offering mobile communications services and handsets to consumers in the U.S. The Company accounted for its investment in HELIO under
the equity method of accounting because the Company was able to exert significant influence over HELIO's operating and financial policies. In accordance with the equity method of accounting,
EarthLink's investment in HELIO was recorded at original cost and was subsequently adjusted to recognize EarthLink's proportionate share of HELIO's net loss, amortization of basis differences and
additional contributions made. During the year ended December 31, 2007, EarthLink stopped recording additional net losses of equity affiliate because its investment in HELIO was reduced to
zero. During the year ended December 31, 2008, Virgin Mobile USA, Inc. ("Virgin Mobile") acquired HELIO and the Company's investment in HELIO was exchanged for limited partnership units
equivalent to approximately 1.8 million shares of Virgin Mobile common stock. As a result, the Company no longer has an investment in HELIO.

Goodwill and Purchased Intangible Assets

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted
for under the purchase method of accounting. Purchased intangible assets consist primarily of subscriber bases and customer relationships, acquired software and technology,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

trade
names and other assets acquired in conjunction with the purchases of businesses and subscriber bases from other companies. When management determines material intangible assets are acquired in
conjunction with the purchase of a company, EarthLink determines the fair values of the identifiable intangible assets by taking into account management's own analysis and an independent third party
appraisal. Intangible assets determined to have definite lives are amortized on a straight-line basis over their estimated useful lives. Subscriber bases acquired directly are valued at
cost plus assumed service liabilities, which approximates fair value at the time of purchase.

The
Company does not amortize goodwill and intangible assets deemed to have indefinite lives. The Company tests its goodwill and intangible assets deemed to have indefinite lives at
least annually. The Company performs an impairment test of its goodwill and intangible assets deemed to have indefinite lives annually during the fourth quarter of its fiscal year or when events and
circumstances indicate that those assets might be permanently impaired. Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment)
and involves a two-step process. The first step of the impairment test involves comparing the estimated fair value of the Company's reporting units with the reporting unit's carrying
amount, including goodwill. The Company estimates the fair value of the reporting unit using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value,
a second step is performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an
impairment loss would be recognized in an amount equal to the excess. Impairment testing of intangible assets deemed to have indefinite lives is performed by comparing the carrying value of the asset
to the fair value. If the carrying amount of an indefinite-lived intangible asset exceeds the fair value, an impairment loss is recognized equal to the excess.

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets, including property and equipment and purchased
definite-lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an
impairment assessment include a significant decline
in the observable market value of an asset, 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 an asset
or group of assets is not recoverable. For long-lived assets to be held and used, EarthLink recognizes an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss, if any, based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the
lower of cost or fair value less costs to sell.

Leases

The Company categorizes leases at their inception as either operating or capital leases depending on certain criteria. The Company
recognizes rent expense for operating leases on a straight-line basis without regard to deferred payment terms, such as rent holidays or fixed escalations. Incentives are treated as a
reduction of the Company's rent costs over the term of the lease agreement. The Company records leasehold improvements funded by landlords under operating leases as leasehold improvements and deferred
rent.

Facility Exit and Restructuring Costs

The Company recognizes a liability for costs associated with an exit or disposal activity when the liability is incurred. Facility exit
and restructuring liabilities include estimates for, among other things,

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severance
payments and amounts due under lease obligations, net of estimated sublease income, if any. Key variables in determining lease estimates include operating expenses due under lease
arrangements, the timing and amounts of sublease rental payments, tenant improvement costs and brokerage and other related costs. The Company periodically evaluates and, if necessary, adjusts its
estimates based on currently-available information. Such adjustments are classified as facility exit and restructuring costs in the Consolidated Statements of Operations.

Post-Employment Benefits

Post-employment benefits primarily consist of the Company's severance plans. When the Company has either a formal severance
plan or a history of consistently providing severance benefits representing a substantive plan, the Company recognizes severance costs when they are both probable and reasonably estimable.

Comprehensive Income (Loss)

Comprehensive income (loss) as presented in the Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
includes unrealized gains and losses which are excluded from the Consolidated Statements of Operations. For the years ended December 31, 2007, 2008 and 2009, these amounts included changes in
unrealized gains and losses, net of tax, on certain investments classified as available-for-sale.

Certain Risks and Concentrations

Credit Risk.By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties.
Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, marketable securities, trade receivables and long-term investments.
In addition, credit risk for the Company's cash, cash equivalents and marketable securities may be exacerbated by unfavorable economic conditions. If financial markets experience prolonged periods of
decline, the value or liquidity of the Company's cash, cash equivalents and marketable securities could decline and result in an other-than-temporary decline in fair value,
which could adversely affect the Company's financial position, results of operations and cash flows.

The
Company's cash investment policy limits investments to investment grade instruments. Accounts receivable are typically unsecured and are derived from revenues earned from customers
primarily located in the U.S. Credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base. Additionally, the Company maintains
allowances
for potential credit losses. As of December 31, 2008, one company accounted for more than 10% of gross accounts receivable. As of December 31, 2009, two companies each accounted for more
than 10% of gross accounts receivable. Management regularly evaluates the recoverability of its investments in other companies based on the performance and the financial position of those companies as
well as other evidence of market value.

Regulatory Risk.EarthLink purchases broadband access from incumbent local exchange carriers, competitive local exchange carriers and
cable
providers. Please refer to "Regulatory Environment" in the Business section of this Annual Report on Form 10-K for a discussion of the regulatory environment as well as a discussion
regarding the Company's contracts with broadband access providers.

Supply Risk.The Company's business depends on the capacity, affordability, reliability and security of third-party telecommunications
service
providers. Only a small number of providers offer the network

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

services
the Company requires, and the majority of its telecommunications services are currently purchased from a limited number of telecommunications service providers. Although management believes
that alternate telecommunications providers could be found in a timely manner, any disruption of these services could have a material adverse effect on the Company's financial position, results of
operations and cash flows.

The
Company also relies on the reliability, capacity and effectiveness of its outsourced customer service and technical support providers. The Company's Consumer Services segment relies
primarily on one customer service and technical support vendor. The Company purchases customer service and technical support services primarily from geographically dispersed service providers. The
customer service and technical support service providers may become subject to financial, economic, environmental and political risks, system failures or other services interruptions beyond the
Company's or the providers' control which could jeopardize their ability to deliver services. Although management believes that alternate contact center service providers could be found in a timely
manner, any disruption of these services could have a material adverse effect on the Company's financial position, results of operations and cash flows.

Fair Value of Financial Instruments

The carrying amounts of the Company's cash, cash equivalents, trade receivables and trade payables approximate their fair values
because of their nature and respective durations. The Company's short- and long-term investments in marketable securities consist of available-for-sale and trading
securities that are carried at market value. The Company's equity investments in publicly-held companies are stated at fair value, which is based on quoted market prices, with unrealized
gains and losses included in stockholders' equity. The Company's investments in privately-held companies are stated at cost, net of other-than-temporary
impairments, because it is impracticable to estimate fair value.

Reclassifications

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

Recently Issued Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board ("FASB") issued new guidance on revenue recognition. The new guidance
addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit and to modify the manner
in which the transaction consideration is allocated across the separately identifiable deliverables and how revenue is recognized. The new guidance also significantly expands the disclosure
requirements for multiple-element arrangements. The new guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. The Company does not expect the adoption of the new guidance to have a material impact on its financial statements.

In
December 2009, the FASB issued new guidance regarding VIEs. The new guidance requires a qualitative approach to identifying a controlling financial interest in a VIE, and requires
ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The new guidance is effective for annual reporting periods
beginning after November 15, 2009. The Company does not expect the adoption of this new guidance to have a material impact on its consolidated financial statements.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Adoption of Recent Accounting Pronouncements

Codification.In the third quarter of 2009, the Company adopted the FASB Accounting Standards Codification ("ASC"). The ASC became the
single
official source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB, other than guidance issued by the Securities and Exchange Commission. The adoption of
the ASC did not have a material impact on the Company's financial statements. However, the adoption of the ASC changed the Company's references to GAAP in its consolidated financial statements.

Convertible Debt.On January 1, 2009, the Company adopted new accounting guidance related to accounting for convertible debt
instruments that
may be settled in cash upon conversion. The new accounting guidance requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for in a manner that reflects an issuer's non-convertible debt borrowing rate. The resulting debt discount is accreted over the
period the convertible debt is expected to be outstanding as additional non-cash interest expense. Retrospective application to all periods presented is required. The adoption of this new
guidance on January 1, 2009 affected the accounting for the Company's Convertible Senior Notes due November 15, 2026 (the "Notes"), which were issued in November 2006. Upon adoption, the
Company recorded an adjustment to increase additional paid-in capital as of the November 2006 issuance date by approximately $62.1 million. The Company is accreting the resulting
debt discount to interest expense over the estimated five-year life of the Notes, which represents the first redemption date of November 2011. Upon adoption, the Company also recorded an
adjustment to decrease additional paid-in capital and other long-term assets by approximately $1.8 million to reclassify debt issuance costs related to the equity component of the Notes. The
Company recorded a pre-tax adjustment of approximately $22.3 million to accumulated deficit that represents accretion of the debt discount and decrease in amortization of debt
issuance costs during the years ended December 31, 2006, 2007 and 2008, recognized additional non-cash interest expense of $12.2 million during the year ending
December 31, 2009 and will recognize additional non-cash interest expense of $13.4 million and $12.4 million during the years ending December 31, 2010 and 2011,
respectively, for accretion of the debt discount and decrease in amortization of debt issuance costs. As a result of the adoption of this new guidance, the Company reduced income from continuing
operations and net income for the year ended December 31, 2009 by $12.2 million and reduced basic and diluted earnings
per share by $0.11 per share. The Company also recorded a deferred tax liability for temporary tax differences. However, this was offset by a corresponding decrease in the valuation allowance for
deferred tax assets.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
following tables present the effect of the adoption of this new guidance on the Company's affected financial statement line items for the years ended December 31, 2007 and
2008 and as of December 31, 2008:

Year Ended December 31, 2007

Year Ended December 31, 2008As Originally
Reported

As
Adjusted

Effect of
Change

As Originally
Reported

As
Adjusted

Effect of
Change(in thousands, except per share data)Statement of Operations:Interest income (expense) and other, net

$
12,824

$
2,824

$
(10,000
)
$
(1,381
)
$
(12,409
)
$
(11,028
)Income (loss) from continuing operations


(54,795
)

(64,795
)

(10,000
)

198,118


187,090


(11,028
)Net income (loss)


(135,097
)

(145,097
)

(10,000
)

189,612


178,584


(11,028
)Basic net income (loss) per shareContinuing operations

$
(0.45
)
$
(0.53
)
$
(0.08
)
$
1.81

$
1.71

$
(0.10
)Basic net income per share


(1.11
)

(1.19
)

(0.08
)

1.73


1.63


(0.10
)Diluted net income (loss) per shareContinuing operations

$
(0.45
)
$
(0.53
)
$
(0.08
)
$
1.78

$
1.68

$
(0.10
)Diluted net income per share


(1.11
)

(1.19
)

(0.08
)

1.71


1.61


(0.10
)




As of December 31, 2008As Originally
Reported

As
Adjusted

Effect of
Change(in thousands)Balance Sheet:Other long-term assets

$
5,725

$
4,698

$
(1,027
)Long-term debt


258,750


219,733


(39,017
)Additional paid-in capital


2,075,571


2,135,887


60,316Accumulated deficit


(994,507
)

(1,016,833
)

(22,326
)


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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

3.     Facility Exit and Restructuring Costs

Facility exit and restructuring costs consisted of the following during the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)2007 Restructuring Plan

$
64,271

$
9,394

$
5,743Legacy Restructuring Plans


1,110


(252
)

(128
)$
65,381

$
9,142

$
5,615


2007 Restructuring Plan

In August 2007, EarthLink adopted a restructuring plan (the "2007 Plan") to reduce costs and improve the efficiency of the Company's
operations. The 2007 Plan was the result of a comprehensive review of operations within and across the Company's functions and businesses. Under the 2007 Plan, the Company reduced its workforce by
approximately 900 employees, closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco, California and consolidated its office facilities in
Atlanta, Georgia and Pasadena, California. The 2007 Plan was primarily implemented during the latter half of 2007 and during the year ended December 31, 2008. However, since management
continues to evaluate EarthLink's businesses, there have been and may continue to be supplemental provisions for new cost savings initiatives as well as changes in estimates to amounts previously
recorded.

The
following table summarizes facility exit and restructuring costs during the years ended December 31, 2007, 2008 and 2009 and the cumulative costs incurred to date as a result
of the 2007
Plan. Such costs have been classified as facility exit and restructuring costs in the Consolidated Statements of Operations.

Year Ended December 31,Cumulative Costs
Incurred To Date2007

2008

2009(in thousands)Severance and personnel-related costs

$
30,303

$
461

$


$
30,764Lease termination and facilities-related costs


12,216


4,808


5,697


22,721Non-cash asset impairments


20,621


4,125


46


24,792Other associated costs


1,131








1,131$
64,271

$
9,394

$
5,743

$
79,408


The
Company recorded $9.4 million and $5.7 million of facility exit and restructuring costs during the years ended December 31, 2008 and 2009, respectively,
primarily as a result of changes to sublease estimates in its exited facilities and further consolidation in its Atlanta, Georgia facility. The asset impairment charges recorded during the years ended
December 31, 2007 and 2008 primarily relate to fixed asset write-offs due to facility closings and consolidations and the termination of certain projects for which costs had been
capitalized. These assets were impaired as the carrying values of the assets exceeded the expected future undiscounted cash flows to the Company. The impairment charges recorded during the years ended
December 31, 2007 and 2008 have been classified as facility exit and restructuring costs in the Consolidated Statements of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
following table summarizes activity for the liability balances associated with the 2007 Plan for the years ended December 31, 2007, 2008 and 2009, including changes during the
years attributable to costs incurred and charged to expense and costs paid or otherwise settled:

Severance
and Benefits

Facilities

Asset
Impairments

Other
Costs

Total(in thousands)Balance as of December 31, 2006

$


$


$


$


$
Accruals


30,303


12,216


20,621


1,131


64,271Payments


(18,262
)

(480
)




(760
)

(19,502
)Non-cash charges





4,388


(20,621
)

(371
)

(16,604
)Balance as of December 31, 2007


12,041


16,124








28,165Accruals


461


4,808


4,125





9,394Payments


(12,502
)

(6,174
)







(18,676
)Non-cash charges





1,936


(4,125
)




(2,189
)Balance as of December 31, 2008





16,694








16,694Accruals





5,697


46





5,743Payments





(5,442
)







(5,442
)Non-cash charges





489


(46
)




443Balance as of December 31, 2009

$


$
17,438

$


$


$
17,438


Facility
exit and restructuring liabilities due within one year of the balance sheet date are classified as other accrued liabilities and facility exit and restructuring liabilities due
after one year are classified as other long-term liabilities in the Consolidated Balance Sheets. Of the unpaid balance as of December 31, 2008 and 2009, approximately
$5.9 million and $5.1 million, respectively, was classified as other accrued liabilities and approximately $10.8 million and $12.3 million, respectively, was classified as
other long-term liabilities.

Legacy Restructuring Plans

During the years ended December 31, 2003, 2004 and 2005, EarthLink executed a series of plans to restructure and streamline its
contact center operations and outsource certain internal functions (collectively referred to as "Legacy Plans"). The Legacy Plans included facility exit costs, personnel-related costs and asset
disposals. EarthLink periodically evaluates and adjusts its estimates for facility exit and restructuring costs based on currently-available information. Such adjustments are included as facility exit
and restructuring costs in the Consolidated Statements of Operations. During the year ended December 31 2007, EarthLink recorded $1.1 million of facility exit and restructuring costs
related to Legacy Plans as a result of changes in estimates. During the years ended December 31, 2008 and 2009, EarthLink recorded reductions of $0.3 million and $0.1 million,
respectively, to facility exit and restructuring costs as a result of changes in estimates. As of December 31, 2009, the Company had a $0.5 million liability remaining for real estate
commitments related to Legacy Plans which was classified as other accrued liabilities in the Consolidated Balance Sheet. All other costs have been paid.

4.     Discontinued Operations

In November 2007, management concluded that its municipal wireless broadband operations were no longer consistent with the Company's strategic direction and the
Company's Board of Directors authorized management to pursue the divestiture of the Company's municipal wireless broadband assets. As a result

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

of
that decision, the Company classified the municipal wireless broadband assets as held for sale on the Consolidated Balance Sheets and presented the municipal wireless broadband results of
operations as discontinued operations for all periods presented. The results of operations for municipal wireless broadband were previously included in the Consumer Services segment.

During
the year ended December 31, 2008, the Company transferred its municipal wireless broadband networks to Corpus Christi, TX and Milpitas, CA in exchange for releasing the
Company from its existing network agreements. The Company also transferred its municipal wireless broadband networks in the city of Philadelphia, PA to a local Philadelphia company. Additionally, the
Company terminated its municipal wireless broadband service in New Orleans, LA and Anaheim, CA and removed its network equipment from those cities. As of December 31, 2008, the Company had
completed the divestiture of its municipal wireless broadband assets.

The
following table presents summarized results of operations related to the Company's discontinued operations for the years ended December 31, 2007 and 2008:

Year Ended December 31,2007

2008(in thousands)Revenues

$
2,097

$
1,305Operating costs and expenses


(33,871
)

(4,569
)Impairment, facility exit and restructuring costs


(48,528
)

(6,326
)Income tax benefit





1,084Loss from discontinued operations, net of tax

$
(80,302
)
$
(8,506
)


The
Company recorded a $27.6 million charge during the year ended December 31, 2007 to reduce the carrying value of the long-lived assets to their fair value
less estimated costs to sell. The Company also recorded restructuring costs in connection with the 2007 Plan of $20.9 million during the year ended December 31, 2007 related to the
municipal wireless broadband operations, including $5.0 million for severance and personnel-related costs; $6.9 million for non-cash asset impairments; and
$9.0 million for other associated costs. During the year ended December 31, 2008, the Company recorded restructuring costs in connection with the 2007 Plan of $6.3 million related
to the municipal wireless broadband operations. These charges are reflected within loss from discontinued operations, net of tax, in the Consolidated Statements of Operations. All costs have been paid
or otherwise settled.

5.     Investments

Marketable Securities

The Company's marketable securities consisted of the following as of December 31, 2008 and 2009:

As of December 31,2008

2009(in thousands)Auction rate securities

$
47,809

$
42,906Government agency notes





42,060Total marketable securities

$
47,809

$
84,966


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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
Company's auction rate securities are variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years, but have interest
rate reset periods at pre-determined intervals, usually every 28 days. These securities are predominantly secured by student loans guaranteed by state related higher education
agencies and reinsured by the U.S. Department of Education. Beginning in February 2008, auctions for these securities failed to attract sufficient buyers, resulting in the Company continuing to hold
such securities. In October 2008, EarthLink entered into an agreement with the broker that sold the Company its auction rate securities that gives the Company the right to sell its existing auction
rate securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012. The agreement also grants the broker the right to buy the Company's
auction rate securities at par plus accrued interest, until July 2, 2012. These securities were classified as long-term marketable securities in the Consolidated Balance Sheet as of
December 31, 2008. As a result of the put right, these securities were classified as short-term marketable securities in the Consolidated Balance Sheet as of December 31,
2009.

During
the year ended December 31, 2008, the Company recorded an other-than-temporary impairment of $9.9 million to record the auction rate
securities at their fair value, as the Company no longer had the intent to hold the securities until
maturity. The Company also elected a one-time transfer of its auction rate securities from the available-for-sale category to the trading category. The Company
recorded the value of the put right to long-term investments in its Consolidated Balance Sheet with a corresponding $9.8 million gain on investments. The Company elected the fair
value option for the put right to offset the fair value changes of the auction rate securities. The fair value of the put right is estimated using a discounted cash flow analysis. The
other-than-temporary impairment, net of the gain on the put right, was $0.1 million during the year ended December 31, 2008 and is included in gain (loss) on
investments, net, in the Consolidated Statement of Operations. During the year ended December 31, 2009, the Company redeemed $9.6 million of auction rate securities at par, plus accrued
interest. During the year ended December 31, 2009, the Company recorded a $4.7 million gain on investments related to the auction rate securities and recorded a $4.6 million loss
on investments related to the put right. The net gain of $0.1 million during the year ended December 31, 2009 is included in gain on investments, net, in the Consolidated Statement of
Operations. See Note 15, "Fair Value Measurements," for a table that reconciles the beginning and ending balances of the auction rate securities.

The
Company's government agency notes consist of government-sponsored debt securities and are classified as available for sale. The amortized cost and aggregate fair value of the
government agency notes was $42.1 million as of December 31, 2009. Gross unrealized losses and gross unrealized gains as of December 31, 2009 were nominal. These securities were
classified as short-term marketable securities in the Consolidated Balance Sheet as of December 31, 2009.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Investments

The Company's investments consisted of the following as of December 31, 2008 and 2009:

As of December 31,2008

2009(in thousands)Investments stated at fair value

$
11,408

$
6,768Investments stated at cost


9,300


Total investments


20,708


6,768Less: classifed as other current assets





(6,768
)Total long-term investments

$
20,708

$



As
of December 31, 2008, gross unrealized losses were nominal and there were no gross unrealized gains. As of December 31, 2009, gross unrealized losses were nominal and
gross unrealized gains were $0.5 million.

The
Company's gain (loss) on investments, net, consisted of the following during the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)Other-than-temporary impairment losses

$
(7,142
)
$
(3,556
)
$
(9,300
)Cash distributions from investments


1,557





231Gain from sale of Covad common stock





2,025


Gain from receipt of Virgin Mobile shares





4,352


Gain from receipt and sale of Sprint Nextel shares








7,641Net change in fair value of auction rate securities and put right





(113
)

107$
(5,585
)
$
2,708

$
(1,321
)


The
Company had an investment in Covad Communications Group, LLC ("Covad") consisting of 6.1 million shares of Covad common stock and $47.5 million aggregate
principal amount of 12% Senior Secured Convertible Notes due 2011 (the "Covad Notes"). During the year ended December 31, 2008, Platinum Equity, LLC acquired all outstanding shares of
Covad. Upon closing of the transaction, a change of control of Covad occurred, resulting in Covad's repurchase of all Covad Notes held by EarthLink at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest. As a result, the Company received cash of $50.8 million for the aggregate principal amount of the Covad Notes plus accrued interest and received
cash of $6.3 million for its 6.1 million shares of Covad common stock. The Company recognized a gain of $2.0 million based on its cost basis of the Covad common stock, which was
classified as gain (loss) on investments, net, in the Consolidated Statement of Operations.

During
the year ended December 31, 2008, the Company received limited partnership units equivalent to approximately 1.8 million shares of Virgin Mobile common stock in
exchange for its investment in HELIO. EarthLink had an approximate 2% ownership interest in Virgin Mobile following the transaction. EarthLink accounted for its investment in Virgin Mobile under the
cost method and classified the investment as available for sale. As a result of the transaction, EarthLink recorded a gain of $4.4 million, which is included in gain (loss) on investments, net,
in the Consolidated Statement of Operations.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

During
the year ended December 31, 2009, Sprint Nextel and Virgin Mobile completed a merger. As a result, EarthLink received 2.4 million shares of Sprint Nextel common
stock for its Virgin Mobile common stock. During the year ended December 31, 2009, EarthLink sold 2.2 million of the Sprint Nextel shares for net proceeds of $8.2 million.
EarthLink recorded a $7.6 million gain resulting from the receipt of Sprint Nextel shares and the subsequent sale, which is included in gain (loss) on investments, net, in the Consolidated
Statement of Operations. The carrying value and fair value of the remaining 0.2 million Sprint Nextel shares was $0.9 million as of December 31, 2009 and included in other current
assets in the Consolidated Balance Sheet. EarthLink accounts for its investment in Sprint Nextel under the cost method and classifies the investment as available for sale.

Investment in Equity Affiliate

The Company had a joint venture with SK Telecom, HELIO. HELIO was a non-facilities-based mobile virtual network operator
offering mobile communications services and handsets to consumers in the U.S. EarthLink invested an aggregate of $220.0 million of cash and non-cash assets in HELIO, of which
$19.5 million was contributed to HELIO
during the year ended December 31, 2007. The Company also loaned HELIO $30.0 million during the year ended December 31, 2007. In August 2008, Virgin Mobile acquired HELIO.
EarthLink's equity and debt investments in HELIO were exchanged for limited partnership units equivalent to approximately 1.8 million shares of Virgin Mobile common stock. In November 2009,
Sprint Nextel and Virgin Mobile completed a merger and the Company received 2.4 million shares of Sprint Nextel common stock for its Virgin Mobile common stock. As a result, the Company no
longer has an investment in HELIO.

Prior
to the transaction with Virgin Mobile, the Company accounted for its investment in HELIO under the equity method of accounting because the Company was able to exert significant
influence over HELIO's operating and financial policies. The Company had been recording its proportionate share of HELIO's net loss in its Consolidated Statements of Operations and amortizing the
difference between the book value and fair value of non-cash assets contributed to HELIO over their estimated useful lives. The amortization increased the carrying value of the Company's
investment and decreased the net losses of equity affiliate included in the Consolidated Statements of Operations. During the year ended December 31, 2007, the Company recorded
$111.3 million of net losses of equity affiliate related to its HELIO investment, which is net of amortization of basis differences and certain other equity method accounting adjustments.
During 2007, EarthLink discontinued recording additional net losses of equity affiliate because the carrying value of its investment in HELIO was reduced to zero.

The
following is summarized statement of operations information of HELIO for the year ended December 31, 2007:

Year Ended
December 31,
2007(in thousands)Revenues

$
170,988Operating loss


(328,196
)Net loss


(326,562
)


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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

6.     Property and Equipment

Property and equipment is recorded at cost and consisted of the following as of December 31, 2008 and 2009:

As of December 31,2008

2009(in thousands)Data center and network equipment

$
123,284

$
125,166Office and other equipment


141,102


139,793Land and buildings


17,188


17,243Leasehold improvements


42,115


42,254Construction in progress


194


1,051323,883


325,507Less accumulated depreciation


(286,637
)

(291,240
)$
37,246

$
34,267


Depreciation
expense charged to continuing operations, which includes depreciation expense associated with property under capital leases, was $32.6 million, $23.0 million
and $16.2 million for the years ended December 31, 2007, 2008 and 2009, respectively.

7.     Goodwill and Purchased Intangible Assets

Goodwill

The changes in the carrying amount of goodwill by operating segment during the year ended December 31, 2009 were as follows:

Consumer
Services
Segment

Business
Services
Segment

Total(in thousands)Balance as of December 31, 2008Goodwill

$
88,920

$
87,878

$
176,798Accumulated impairment loss





(63,986
)

(63,986
)88,920


23,892


112,812Impairment loss





(23,892
)

(23,892
)Balance as of December 31, 2009Goodwill


88,920


87,878


176,798Accumulated impairment loss





(87,878
)

(87,878
)$
88,920

$


$
88,920


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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Purchased Intangible Assets

The following table presents the components of the Company's acquired identifiable intangible assets included in the accompanying
Consolidated Balance Sheets as of December 31, 2008 and 2009:

As of December 31, 2008

As of December 31, 2009Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value

Gross
Carrying
Value

Accumulated
Amortization

Net
Carrying
Value(in thousands)Intangible assets subject to amortization:Subscriber bases and customer relationships

$
94,039

$
(77,758
)
$
16,281

$
79,413

$
(70,487
)
$
8,926Software, technology and other


739


(649
)

90


711


(711
)

Trade names


1,521


(304
)

1,217


1,521


(608
)

91396,299


(78,711
)

17,588


81,645


(71,806
)

9,839Intangible assets not subject to amortization:Trade names


1,964





1,964


1,711





1,711$
98,263

$
(78,711
)
$
19,552

$
83,356

$
(71,806
)
$
11,550


Amortization of intangible assets in the Consolidated Statements of Operations for the years ended December 31, 2007, 2008 and 2009
represents the amortization of definite-lived intangible assets. The Company's definite-lived intangible assets primarily consist of subscriber bases and customer relationships, acquired software and
technology, trade names and other assets acquired in conjunction with the purchases of businesses and subscriber bases from other companies that are not deemed to have indefinite lives. The Company's
identifiable indefinite-lived intangible assets consist of certain trade names. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives,
which are generally three to six years for subscriber bases and customer relationships and three years for acquired software and technology. As of December 31, 2009, the weighted average
amortization periods were 4.4 years for subscriber base assets and customer relationships, 3.0 years for software and technology and 5.0 years for trade names. Based on the
current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $4.1 million, $2.9 million, $1.5 million,
$0.8 million and $0.5 million during the years ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively. Actual amortization expense to be reported in future periods
could differ materially from these estimates as a result of asset acquisitions, changes in useful lives and other relevant factors.

During
the year ended December 31, 2009, the Company removed fully amortized intangible assets that had a gross carrying value and accumulated amortization of
$14.6 million.

Impairment of Goodwill and Intangible Assets

During the years ended December 31, 2007, 2008 and 2009, the Company recorded non-cash impairment charges of
$4.3 million, $78.7 million and $24.1 million, respectively, which are included in impairment of goodwill and intangible assets in the Consolidated Statements of Operations.

After
completing its annual impairment test during the fourth quarter of 2008, the Company concluded that goodwill and certain intangible assets recorded as a result of its April 2006
acquisition of New Edge were impaired and recorded non-cash impairment charges related to the New Edge reporting unit of $64.0 million for goodwill, $3.1 million for the
indefinite-lived trade name and $11.6 million for customer relationships. The primary factor contributing to the impairment charge was the recent significant economic downturn. New Edge serves
a large percentage of small and medium-sized business customers, especially retail businesses, which have been particularly affected by the recent economic

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

downturn.
Economic conditions affecting retail businesses worsened substantially during the "holiday season" in the fourth quarter of 2008. As a result, the Company updated its long-range
financial outlook in the fourth quarter of 2008, which reflected decreased expectations of future growth rates and cash flows for New Edge. The Company used this updated financial outlook in
conjunction with its annual impairment test.

After
completing its annual impairment test during the fourth quarter of 2009, the Company concluded that goodwill and certain intangible assets recorded as a result of the New Edge
acquisition were further impaired and recorded non-cash impairment charges related to the New Edge reporting unit of $23.9 million for goodwill and $0.2 million for the
indefinite-lived trade name. As a result, there is no remaining carrying value related to New Edge goodwill. The primary factor contributing to the impairment charge was continued sales pressure in
the small and medium-sized business market due to the economy, which adversely impacted the Company's long-range financial outlook. The Company used this updated financial outlook in
conjunction with its annual impairment test.

Goodwill.Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. Although the Company
operates two reportable segments, Consumer Services and Business Services, the Company has identified three reporting units for evaluating goodwill, which are Consumer Services, New Edge and Web
Hosting. The Consumer Services reportable segment is one reporting unit, while the Business Services reportable segment consists of two reporting units, New Edge and Web Hosting. Each of these
reporting units constitutes a business
for which discrete financial information is available and segment management regularly reviews the operating results.

The
first step of the annual impairment test involves comparing the estimated fair value of the Company's reporting units with the reporting unit's carrying amount, including goodwill.
The Company estimated the fair values of its reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the
market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit were based on discrete
financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated using a terminal value calculation, which incorporated historical and
forecasted financial trends for each identified reporting unit.

Upon
completion of the first step during the years ended December 31, 2008 and 2009, the Company determined that the carrying value of its New Edge reporting unit exceeded its
estimated fair value. Because indicators of impairment existed for this reporting unit, the Company performed the second step of the test. The implied fair value of goodwill was determined in the same
manner as utilized to estimate the amount of goodwill recognized in a business combination. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of the
New Edge reporting unit. The implied fair value of goodwill was measured as the excess of the fair value of the New Edge reporting unit over the amounts assigned to its assets and liabilities. The
impairment losses of $64.0 million and $23.9 million during the years ended December 31, 2008 and 2009, respectively, were measured as the amount the carrying value of goodwill
exceeded the implied fair value of the goodwill.

Indefinite-lived intangible assets.The impairment test for the Company's indefinite-lived intangible assets, which consist of trade
names, involves
a comparison of the estimated fair value of the intangible asset with its carrying value. The Company determined the fair values of its trade names using the royalty savings method, in which the fair
value of the asset was calculated based on the present value of the royalty stream that we are saving by owning the asset. Given the economic environment and other factors noted above, the Company
decreased its estimates for revenues associated with its New Edge trade name. As a

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

result,
the Company recorded non-cash impairment charges of $3.1 million and $0.2 million during the years ended December 31, 2008 and 2009, respectively, related to
its New Edge trade name. The Company also recorded a non-cash impairment charge of $4.3 million during the year ended December 31, 2007 related to the analysis of its other
indefinite-lived trade names.

Definite-lived intangible assets.As a result of the goodwill and indefinite-lived asset impairments in the New Edge reporting unit,
the Company also
tested this segment's definite-lived intangible assets for impairment. Because of the decrease in expected future cash from such definite-lived intangible assets, the Company concluded certain
customer relationships were not fully recoverable and recorded a non-cash impairment charge of $11.6 million during the year ended December 31, 2008. The Company did not
record any impairment charges for its definite-lived intangible assets during the years ended December 31, 2007 and 2009.

8.     Other Accrued Liabilities

Other accrued liabilities consisted of the following as of December 31, 2008 and 2009:

As of December 31,2008

2009(in thousands)Accrued communications costs

$
7,214

$
4,621Accrued advertising


2,570


1,255Accrued taxes


4,224


3,413Accrued professional fees and settlements


932


6,073Facility exit and restructuring liabilities


6,750


5,643Accrued outsourced customer support


3,067


1,537Deposits and due to customers


2,550


1,619Accrued interest


2,022


2,507Other


10,086


7,991$
39,415

$
34,659


9.     Convertible Senior Notes

General

In November 2006, the Company issued $258.8 million aggregate principal amount of Convertible Senior Notes due
November 15, 2026 in a registered offering. The Company received net proceeds of $251.6 million after transaction fees of $7.2 million. The Notes bear interest at 3.25% 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 Notes thereafter, 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, are convertible into shares of the Company's common stock. The initial conversion rate was 109.6491 shares per $1,000 principal amount
of Notes (which represented an initial conversion price of approximately $9.12 per share). As a result of the Company's cash dividend payments in September and December 2009, the conversion rate was
adjusted and is 113.4422 shares per $1,000 principal amount of Notes (which represents a conversion price of approximately $8.82 per share), subject to further adjustment. Upon conversion, a holder
will receive cash up to the principal amount of the Notes and, at the Company's option, cash, or shares of the Company's

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

common
stock or a combination of cash and shares of common stock for the remainder, if any, of the conversion obligation. The conversion obligation is based on the sum of the "daily settlement
amounts" for the 20 consecutive trading days that begin on, and include, the second trading day after the day the notes are surrendered for conversion. The Notes will be convertible only in the
following circumstances: (1) during any calendar quarter after the calendar quarter ending December 31, 2006 (and only during such calendar quarter), if the closing sale price of the
Company's common stock for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the
conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days
immediately after any five consecutive trading day period in which the average trading price per $1,000 principal amount of Notes was equal to or less than 98% of the average conversion value of the
Notes during the note measurement period; (3) upon the occurrence of specified corporate transactions, including the payment of dividends in certain circumstances; (4) if the Company has
called the Notes for redemption; and (5) at any time from, and including, October 15, 2011 to, 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, for cash, on or after November 15, 2011, provided that the Company has made at least ten semi-annual
interest payments. In addition, the holders may require the Company to purchase all or a portion of their Notes on each of November 15, 2011, November 15, 2016 and November 15,
2021.

In
connection with the issuance of the Notes, the Company entered into separate convertible note hedge transactions and separate warrant transactions with respect to the Company's common
stock to reduce the potential dilution upon conversion of the Notes (collectively referred to as the "Call Spread Transactions"). During 2008, the Company terminated the convertible note hedge and
warrant agreements. See Note 10, "Shareholders' Equity," for more information on the Call Spread Transactions.

As
of December 31, 2008 and 2009, the fair value of the Notes was approximately $236.6 million and $279.8 million, respectively, based on quoted market prices.

Adoption of New Accounting Guidance

On January 1, 2009, the Company adopted new accounting guidance related to accounting for convertible debt instruments that may
be settled in cash upon conversion, which requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects an issuer's non-convertible debt borrowing rate. The resulting debt discount is accreted over the period the convertible
debt is expected to be outstanding as additional non-cash interest expense. The adoption of the new guidance on January 1, 2009 affected the Company's accounting for the Notes. Upon
adoption, the Company recorded an adjustment to increase additional paid-in capital as of the November 2006 issuance date by approximately $62.1 million. The Company is accreting
the resulting debt discount to interest expense over the estimated five-year life of the Notes, which represents the first redemption date of November 2011. Upon adoption, the Company also
recorded an adjustment to decrease additional paid-in capital and other long-term assets by approximately $1.8 million to reclassify debt issuance costs related to the equity component of the
Notes. The Company recorded a pre-tax adjustment of approximately $22.3 million to accumulated deficit that represents accretion of the debt discount and decrease in amortization of
debt issuance costs during the years ended December 31, 2006, 2007 and 2008, recognized additional non-cash interest expense of $12.2 million during the year ended
December 31, 2009 and will recognize additional non-cash interest expense of $13.4 million and $12.4 million during the years ending December 31, 2010 and 2011,
respectively, for accretion of the debt discount and decrease in amortization of debt issuance costs.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
principal amount, unamortized discount and net carrying amount of the debt and equity components as of December 31, 2008 and 2009 are presented below:

As of December 31,2008

2009(in thousands)Principal amount

$
258,750

$
258,750Unamortized discount


(39,017
)

(26,502
)Net carrying amount

$
219,733

$
232,248Carrying amount of the equity component

$
62,095

$
62,095


As
of December 31, 2009, the remaining amortization period for the discount is 22 months. As of December 31, 2009, the conversion price was approximately $8.82 per
share, resulting in 29.4 million shares issuable upon conversion.

The
following table presents the associated interest cost related to the Notes during the years ended December 31, 2007, 2008 and 2009, which consists of both the contractual
interest coupon and amortization of the discount on the liability component:

Year Ended December 31,2007

2008

2009(in thousands)Contractual interest recognized

$
8,895

$
8,895

$
8,895Discount amortization


10,358


11,386


12,516Effective interest rate


9.5
%

9.5
%

9.5
%


Classification

In 2009, the Company began paying quarterly cash dividends on its common stock. The Company currently intends to pay regular quarterly
dividends on its common stock. Under the terms of the indenture governing the Notes, the Company's payment of cash dividends requires an adjustment to the conversion rate for the Notes. In addition,
as a result of the adjustment, the Notes may be surrendered for conversion for a period of time between the declaration date and the record date, as defined in the indenture, for the consideration
provided for in the indenture. As a result, the Company classified the Notes as a current liability in the Consolidated Balance Sheet as of December 31, 2009. The Notes were classified as a
long-term liability in the Consolidated Balance Sheet as of December 31, 2008.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

10.   Shareholders' Equity

Shareholder Rights Plan

During 2002, the Board of Directors adopted a shareholder rights plan (the "Rights Plan"). In connection with the Rights Plan, the
Board of Directors also declared a dividend of one right for each outstanding share of EarthLink's common stock for stockholders of record at the close of business on August 5, 2002.

Each
right entitles the holder to purchase one one-thousandth (1/1000) of a share (a "Unit") of EarthLink's Series D Junior Preferred Stock at a price of $60.00 per
Unit upon certain events. Generally, in the event a person or entity acquires, or initiates a tender offer to acquire, at least 15% of EarthLink's then outstanding common stock, the rights will become
exercisable for common stock having a value equal to two times the exercise price of the right, or effectively at one-half of EarthLink's then-current stock price. The rights
are
redeemable under certain circumstances at $0.01 per right and will expire, unless earlier redeemed, on August 6, 2012.

Share Repurchases

Since the inception of the Company's share repurchase program, the Board of Directors has authorized a total of $750.0 million
for the repurchase of EarthLink's common stock. As of December 31, 2009, the Company had $146.8 million available under the current authorizations. The Company may repurchase its common
stock from time to time in compliance with the Securities and Exchange Commission's regulations and other legal requirements, including through the use of derivative transactions, and subject to
market conditions and other factors. The share repurchase program does not require the Company to acquire any specific number of shares and may be terminated by the Board of Directors at any time.

The
following table summarizes share repurchases during the years ended December 31, 2007, 2008 and 2009 pursuant to the share repurchase program, which have been recorded as
treasury stock:

Year Ended December 31,2007

2008

2009(in thousands)Number of shares repurchased


14,032


3,805


3,592Aggregate purchase price

$
94,332

$
31,856

$
22,340


Dividends

In July 2009, the Company's Board of Directors declared a quarterly cash dividend on its common stock of $0.14 per share to
stockholders of record on September 14, 2009. The dividend was paid on September 28, 2009 and totaled $15.0 million. In October 2009, the Company's Board of Directors declared a
quarterly cash dividend on its common stock of $0.14 per share to stockholders of record on December 9, 2009. The dividend was paid on December 23, 2009 and totaled $15.0 million.
The Company currently intends to pay regular quarterly dividends on its common stock. The Board of Directors also approved the payment of cash dividend amounts on each outstanding restricted stock
unit to be paid at the time the restricted stock unit vests. Cash dividend amounts are forfeited if the restricted stock units do not vest. Any decision to declare future dividends will be made at the
discretion of the Board of Directors and will depend on, among other things, the Company's results of operations, financial condition, cash requirements, investment opportunities and other factors the
Board of Directors may deem relevant.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Call Spread Transactions

In connection with the issuance of the Notes (see Note 9, "Convertible Senior Notes"), the Company entered into separate
convertible note hedge transactions and separate warrant transactions with respect to the Company's common stock to minimize the impact of the potential dilution upon conversion of the Notes. The
Company purchased call options in private transactions to cover approximately 28.4 million shares of the Company's common stock at a strike price of $9.12 per share, subject to adjustment in
certain circumstances, for $47.2 million. The Company also sold warrants permitting the purchasers to acquire up to approximately 28.4 million shares of the Company's common stock at an
exercise price of $11.20 per share, subject to adjustments in certain circumstances, in private transactions for total proceeds of approximately $32.1 million. In September 2008, the Company
terminated its convertible note hedge and warrant agreements. The Company received an aggregate payment from the counterparties to the agreements, which was recorded as additional paid-in
capital. Upon termination of the agreements, the Company purchased approximately 2.5 million shares of common stock the counterparties held in hedge positions for approximately
$22.7 million, based on the closing price of the EarthLink common stock on the purchase date.

11.   Stock-Based Compensation

Stock-based compensation expense was $19.6 million, $20.1 million and $13.2 million during the years ended December 31, 2007, 2008 and
2009, respectively. The Company has classified stock-based compensation expense within the same operating expense line items as cash compensation paid to employees.

Included
in stock-based compensation expense for the year ended December 31, 2007 was $4.9 million of stock-based compensation expense related to Charles G. Betty,
EarthLink's former President and Chief Executive Officer. Mr. Betty passed away on January 2, 2007. Pursuant to Mr. Betty's employment agreement, all unvested stock options and
restricted stock units immediately vested and became fully exercisable upon death. In addition, the Leadership and Compensation Committee of the Board of Directors extended the exercise period of
Mr. Betty's stock options until December 31, 2008. This date represents the exercise period if Mr. Betty had terminated employment after serving the full term of his employment
agreement, which was set to expire in July 2008. During the year ended December 31, 2007, EarthLink recorded stock-based compensation of $3.5 million related to the accelerated vesting
of 1.1 million stock options and 120,000 restricted stock units and recorded stock-based compensation expense of $1.4 million related to the extension of the exercise period for
Mr. Betty's stock options.

Stock Incentive Plans

The Company has granted options to employees and non-employee directors to purchase the Company's common stock under
various stock incentive plans. The Company has also granted restricted stock units to employees and non-employee directors under various stock incentive plans. Under the plans, employees
and non-employee directors are eligible to receive awards of various forms of equity-based incentive compensation, including stock options, restricted stock, restricted stock units,
phantom share units and performance awards, among others. The plans are administered by the Board of Directors or the Leadership and Compensation Committee of the Board of Directors, which determine
the terms of the awards granted. Stock options are generally granted with an exercise price equal to the market value of EarthLink, Inc. common stock on the date of grant, have a term of ten
years or less, and vest over terms of four years from the date of grant. Restricted stock units are granted with various vesting terms that range from one to six years from the date of grant. The
Company's various stock incentive plans provide for the issuance of a maximum of 31.0 million shares, of which approximately 13.8 million shares were still

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

available
for grant as of December 31, 2009. Upon exercise of stock options or vesting of restricted stock units, the Company will issue authorized but unissued common stock.

Deferred Compensation Plan

The Company had a Deferred Compensation Plan for Directors and Certain Key Employees that permitted members of the Board of Directors
and eligible employees to elect to defer receipt of shares of common stock pursuant to vested restricted stock units and various cash consideration, such as directors' fees and bonuses. The cash
consideration was converted into phantom share units at the closing price on the date the consideration would otherwise be paid, and vested restricted stock units were converted into phantom share
units on a one-for-one basis. Phantom share units are fully vested at the date of grant and are converted to common stock upon the occurrence of various events. As of
December 31, 2008, approximately 24,000 phantom share units were outstanding. During the year ended December 31, 2008, the plan was discontinued for further deferral elections. All
phantom share units were converted to common stock during the year ended December 31, 2009.

Options Outstanding

The following table summarizes information concerning stock option activity as of and for year ended December 31, 2009:

Stock
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic
Value(shares and dollars in thousands)Outstanding as of December 31, 2008


7,159

$
9.58Granted


Exercised


(1,952
)

6.92Forfeited and expired


(1,291
)

13.50Outstanding as of December 31, 2009


3,916


9.61


4.6

$
1,662Vested and expected to vest as of December 31, 2009


3,803

$
9.68


4.5

$
1,542Exercisable as of December 31, 2009


3,136

$
10.07


4.0

$
995


The
aggregate intrinsic value amounts in the table above represent the closing price of the Company's common stock on December 31, 2009 in excess of the exercise price, multiplied
by the number of stock options outstanding or exercisable, when the closing price is greater than the exercise price. This represents the amount that would have been received by the stock option
holders if they had all exercised their stock options on December 31, 2009. The total intrinsic value of options exercised during the years ended December 31, 2007, 2008 and 2009 was
$1.0 million, $2.2 million and $2.5 million, respectively. The intrinsic value of stock options exercised represents the difference between the market value of Company's common
stock at the time of exercise and the exercise price, multiplied by the number of stock options exercised. To the extent the forfeiture rate is different than what the Company has anticipated,
stock-based compensation related to these awards will be different from the Company's expectations. As of December 31, 2009, there was $1.8 million of total unrecognized compensation
cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.4 years.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
following table summarizes the status of the Company's stock options as of December 31, 2009:

Stock Options Outstanding

Stock Options ExercisableRange of
Exercise Prices

Number
Outstanding

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price(in thousands)





(in thousands)$  5.10 to $  6.86


324


5.0

$
6.21


258

$
6.056.90 to    7.25


353


7.1


7.00


178


7.007.31 to    7.31


400


7.5


7.31


100


7.317.32 to    8.96


302


5.2


8.11


241


8.219.01 to    9.01


373


4.6


9.01


373


9.019.23 to    9.51


425


6.0


9.44


256


9.419.64 to  10.06


693


1.3


9.88


693


9.8810.36 to  28.25


1,046


3.9


12.96


1,037


12.97$  5.10 to $28.25


3,916


4.6

$
9.61


3,136

$
10.07


Valuation Assumptions for Stock Options

The Company did not grant any stock options during the year ended December 31, 2009. The fair value of stock options granted
during the years ended December 31, 2007 and 2008 was estimated using the Black-Scholes option-pricing model with the following assumptions:

Year Ended December 31,2007

2008Dividend yield


0
%

0
%Expected volatility


39
%

39
%Risk-free interest rate


4.78
%

3.00
%Expected life


4.3 years


4.2 years


The
weighted average grant date fair value of options granted during the years ended December 31, 2007 and 2008 was $2.79 and $2.71, respectively.

The
dividend yield assumption was based on the Company's history of dividend payouts at the time of grant. The expected volatility was based on a combination of the Company's historical
stock price and implied volatility. The selection of implied volatility data to estimate expected volatility was based upon the availability of prices for actively traded options on the Company's
stock. The risk-free interest rate assumption was based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Restricted Stock Units

The following table summarizes the Company's restricted stock units as of and for the year ended December 31, 2009:

Restricted
Stock Units

Weighted
Average
Grant Date
Fair Value(in thousands)Nonvested as of December 31, 2008


4,123

$
7.20Granted


352


7.39Vested


(2,002
)

7.17Forfeited


(307
)

7.18Nonvested as of December 31, 2009


2,166


7.25


The
fair value of restricted stock units is determined based on the closing trading price of EarthLink's common stock on the grant date. The weighted-average grant date fair value of
restricted stock units granted during the years ended December 31, 2007, 2008 and 2009 was $6.94, $7.20 and $7.39, respectively. As of December 31, 2009, there was $5.0 million of
total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of
shares vested during the years ended December 31, 2007, 2008 and 2009 was $2.7 million, $7.0 million and $15.4 million, respectively, which represents the closing price of
the Company's common stock on the vesting date multiplied by the number of restricted stock units that vested.

12.   Profit Sharing Plans

The Company sponsors the EarthLink, Inc. 401(k) Plan ("Plan"), which qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Under the Plan, participating employees may defer a portion of their pretax earnings up to the Internal Revenue Service annual contribution limit. The Company makes a matching
contribution of 50% of the first 6% of base compensation that a participant contributes to the Plan. The Company's matching contributions vest over four years from the participant's date of hire. The
Company contributed $3.0 million, $1.3 million and $1.2 million during the years ended December 31, 2007, 2008 and 2009, respectively.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

13.   Income Taxes

The current and deferred income tax (provision) benefit from continuing operations for the years ended December 31, 2007, 2008 and 2009 were as follows:

Year Ended December 31,2007

2008

2009(in thousands)CurrentFederal

$


$
(20,618
)
$
(4,103
)State


(220
)

(4,860
)

(5,184
)Total current


(220
)

(25,478
)

(9,287
)DeferredFederal


1,244


52,475


124,357State


203


5,187


11,015Total deferred


1,447


57,662


135,372Income tax benefit

$
1,227

$
32,184

$
126,085


During
the year ended December 31, 2009, the Company released $199.0 million of its valuation allowance related to its deferred tax assets. Of the valuation allowance
release, $198.8 million was recorded as an income tax benefit in the Consolidated Statement of Operations and $0.2 million related to temporary differences and was recorded to
accumulated other comprehensive income (loss) on the Consolidated Balance Sheet. These deferred tax assets relate primarily to net operating loss carryforwards ("NOLs") which the Company determined it
will more likely than not be able to utilize due to the generation of sufficient taxable income in the future.

During
the year ended December 31, 2008, the Company released $65.6 million of its valuation allowance related to its deferred tax assets. These deferred tax assets relate
primarily to NOLs which the Company determined it will more likely than not be able to utilize due to the generation of sufficient taxable income in the future. Of the total valuation allowance
release, $56.1 million was recorded as an income tax benefit in the Consolidated Statement of Operations. The remaining $9.5 million related to acquired net operating losses and reduced
goodwill on the Consolidated Balance Sheet.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
following table summarizes the significant differences between the U.S. federal statutory tax rate and the Company's effective tax rate for continuing operations for financial
statement purposes for the years ended December 31, 2007, 2008 and 2009:

Year Ended December 31,2007

2008

2009(in thousands)Federal income tax provision at statutory rate

$
19,607

$
(58,077
)
$
(56,362
)State income taxes, net of federal benefit


1,382


(2,995
)

(5,757
)Nondeductible expenses


(4,152
)

1,841


(269
)Goodwill and intangible asset impairment





(23,081
)

(8,362
)Net change to valuation allowance


(9,233
)

114,808


198,767Change in state effective tax rate


(5,321
)




Other


(1,056
)

(312
)

(1,932
)Income tax benefit

$
1,227

$
32,184

$
126,085


Deferred
tax assets and liabilities from continuing operations include the following as of December 31, 2008 and 2009:

As of December 31,2008

2009(in thousands)Current deferred tax assets:Accrued liabilities and reserves

$
16,237

$
7,709Net operating loss carryforwards


57,390


45,047Other


1,440


911Valuation allowance


(54,338
)

(6,995
)Current deferred tax liabilities:Other


(475
)

(609
)Total net current deferred tax assets


20,254


46,063Non-current deferred tax assets:Net operating loss carryforwards

$
123,296

$
86,885Accrued liabilities and reserves


332


2,078Subscriber base and other intangible assets


77,071


66,144Valuation allowance


(178,729
)

(27,116
)Other


57,523


52,863Non-current deferred tax liabilities:Subscriber base and other intangible assets


(3,163
)

(3,010
)Other


(30,937
)

(22,912
)Indefinite lived intangible assets


(1,636
)

(1,800
)Total net non-current deferred tax asset


43,757


153,132Net deferred tax asset

$
64,011

$
199,195


As
of December 31, 2008 and 2009, the Company had NOLs for federal income tax purposes totaling approximately $532.7 million and $350.0 million, respectively, which
begin to expire in 2020. Of these federal NOLs approximately $100.0 million are limited under Internal Revenue Code Section 382. As of

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Table of Contents

EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31,
2008 and 2009, the Company had NOLs for state income tax purposes totaling approximately $165.9 million and $178.0 million, respectively, which started to expire in
2010. Under the Tax Reform Act of 1986, the Company's ability to use its federal and state NOLs and federal and state tax credit carryforwards to reduce future taxable income and future taxes,
respectively, is subject to restrictions attributable to equity transactions that have resulted in a change of ownership as defined in Internal Revenue Code Section 382. As a result, the NOL
amounts as of December 31, 2009 reflect the restriction on the Company's ability to use its acquired federal and state NOLs; however, the Company continues to evaluate potential changes to the
Section 382 limitations associated with acquired federal and state NOLs. The utilization of these NOLs could be further restricted in future periods which could result in significant amounts of
these NOLs expiring prior to benefiting the Company.

Future
transactions and the timing of such transactions could cause an ownership change under Section 382 of the Internal Revenue Code. Such transactions may include our share
repurchase program, additional issuances of common stock by us (including but not limited to issuances upon future conversion of our convertible senior notes), and acquisitions or sales of shares by
certain holders of our shares, including persons who have held, currently hold, or may accumulate in the future five percent or more of our outstanding stock. Many of these transactions are beyond our
control.

The
Company continues to maintain a valuation allowance of $34.1 million against certain deferred tax assets. Of this amount, $31.7 million relates to net operating losses
generated by the tax benefits of stock-based compensation. The valuation allowance will be removed upon utilization of these net operating losses by the Company as an adjustment to additional
paid-in-capital. The remaining $2.4 million relates to net operating losses in certain jurisdictions where the Company believes it is not more likely than not to be
realized in future periods.

As
of December 31, 2009, the Company has alternative minimum tax credits of approximately $10.5 million. These credits do not have an expiration date.

The
Company has identified its federal tax return and its state tax returns in California, Florida, Georgia and Illinois as "major" tax jurisdictions. Periods extending back to 1994 are
still subject to examination for all "major" jurisdictions. The Company believes that its income tax filing positions and deductions through year ended December 31, 2009 will be sustained on
audit and does not anticipate any adjustments that will result in material adverse effect on the Company's financial condition, results of operations or cash flow. The Company's policy for recording
interest and penalties associated with audits is to record such items as a component of income tax expense.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2008 and 2009 is as follows:

Year Ended December 31,2008

2009(in thousands)Balance as of January 1

$
732

$
732Additions for tax positions of prior years





583Balance as of December 31

$
732

$
1,315


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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

14.   Commitments and Contingencies

Leases

The Company leases certain of its facilities under various non-cancelable operating leases. The facility leases generally
require the Company to pay operating costs, including property taxes, insurance and maintenance, and generally contain annual escalation provisions as well as renewal options. Total rent expense
(including operating expenses) during the years ended December 31, 2007, 2008 and 2009 for all operating leases, excluding rent and operating expenses associated with facilities exited as part
of the Company's restructuring plans, was $13.6 million, $7.1 million and $4.5 million, respectively.

Minimum
lease commitments (including estimated operating expenses) under non-cancelable leases, including commitments associated with facilities exited as part of the
Company's restructuring plans, as of December 31, 2009 are as follows:

Year Ending December 31,

Operating
Leases(in thousands)2010

$
12,5312011


10,7142012


10,0832013


10,4472014


7,089Total minimum lease payments, including estimated operating expenses


50,864Less aggregate contracted sublease income


(7,169
)$
43,695


Purchase Obligations

The Company leases network capacity from a number of third-party providers, such as Level 3 Communications, Inc.
EarthLink is, in effect, buying this capacity in bulk at a discount, and providing access to EarthLink's customer base. The Company has commitments to purchase these telecommunications services and
equipment under non-cancelable agreements. The Company also has commitments for certain advertising spending under non-cancelable agreements. The Company had minimum
commitments under non-cancelable agreements and other purchase commitments of $0.5 million for the year ending December 31, 2010.

15.   Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (an exit price). A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As
of December 31, 2008 and 2009, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included the Company's cash
equivalents, marketable securities, auction rate securities, investments equity securities and the Company's put right.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The
following tables present the Company's assets that are measured at fair value on a recurring basis as of December 31, 2008 and 2009:

Fair Value Measurements as of
December 31, 2008 UsingDescription

Carrying
Value

Fair
Value

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)(in thousands)Cash equivalents

$
483,916

$
483,916

$
483,916

$


$
Auction rate securities


47,809


47,809








47,809Equity investments inother companies


1,580


1,580


84


1,496


Put right


9,828


9,828








9,828Total

$
543,133

$
543,133

$
484,000

$
1,496

$
57,637




Fair Value Measurements as of
December 31, 2009 UsingDescription

Carrying
Value

Fair
Value

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)(in thousands)Cash equivalents

$
588,666

$
588,666

$
588,666

$


$
Marketable securities


42,060


42,060


42,060





Auction rate securities


42,906


42,906








42,906Equity investments inother companies


1,529


1,529


1,529





Put right


5,239


5,239








5,239Total

$
680,400

$
680,400

$
632,255

$


$
48,145


Cash
equivalents, marketable securities, auction rate securities, equity investments in other companies and the Company's put right are measured at fair value. Cash equivalents,
marketable securities and equity investments in other companies that are valued using quoted market prices are classified within Level 1. The Company's investment in Virgin Mobile partnership
units was valued using quoted prices for similar assets and was classified within Level 2 as of December 31, 2008. Investments in auction rate securities are classified within
Level 3 because they are valued using a discounted cash flow model. Some of the inputs to this model are unobservable in the market and are significant. The Company's put right is estimated
using a discounted cash flow analysis and is classified within Level 3. The Company has consistently applied these valuation techniques in all periods presented.

The
Company has invested in auction rate securities, which are more fully described in Note 5, "Investments." Beginning in February 2008, these instruments held by the Company
failed to attract sufficient buyers. As a result, these securities do not have a readily determinable market value and are not liquid. The fair values of the Company's auction rate securities as of
December 31, 2008 and 2009 were estimated utilizing a discounted cash flow analysis. These analyses consider, among other items, the collateralization underlying the security investments, the
creditworthiness of the counterparty, and the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

timing
and value of expected future cash flows. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company.

In
October 2008, EarthLink entered into an agreement with the broker that sold the Company its auction rate securities that gives the Company the right to sell its existing auction rate
securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012. The Company elected the fair value option for the put right to offset the fair
value changes of the auction rate securities. The fair value of the put right was estimated using a discounted cash flow analysis and is classified as within Level 3.

The
following table presents a reconciliation of the beginning and ending balances of the Company's assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) as of December 31, 2009:

Auction
Rate
Securities

Put
Right

Total(in thousands)Balance as of December 31, 2008

$
47,809

$
9,828

$
57,637Total realized gains


4,697





4,697Total realized losses





(4,589
)

(4,589
)Settlements


(9,600
)




(9,600
)Balance as of December 31, 2009

$
42,906

$
5,239

$
48,145


During
the year ended December 31, 2009, the Company recorded realized gains of $4.7 million related to its auction rate securities and recorded realized losses of
$4.6 million related to its put right, which are included in gain (loss) on investments, net, in the Consolidated Statement of Operations. Also during the year ended December 31, 2009,
the Company redeemed $9.6 million of auction rate securities at par, plus accrued interest.

16.   Supplemental Disclosure of Cash Flow Information

Year Ended December 31,2007

2008

2009(in thousands)Significant non-cash transactionsAssets acquired pursuant to capital lease agreement

$
2,927

$


$
Additional cash flow informationCash paid during the year for interest

$
10,225

$
10,355

$
10,422Cash paid during the year for income taxes


68


4,109


4,261Purchase of businessesIssuance of common stock

$
379

$


$
Net liabilities incurred and assumed


(379
)




Intangible assets acquired

$


$


$



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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

17.   Related Party Transactions

As a result of EarthLink's prior ownership interest in HELIO, HELIO was considered a related party. In August 2008, Virgin Mobile acquired HELIO and EarthLink's
equity and debt investments in HELIO were exchanged for limited partnership units of Virgin Mobile. EarthLink and HELIO had a services agreement pursuant to which EarthLink provides HELIO billing and
other support services in exchange for management fees. The management fees were determined based on EarthLink's costs to provide the services, and management believed such fees were reasonable. Fees
for services provided to HELIO were reflected as reductions to the associated expenses incurred by EarthLink to provide such services. During the years ended December 31, 2007 and 2008, fees
received for services provided to HELIO were $1.6 million and $1.0 million, respectively.

18.   Segment Information

The Company reports segment information along the same lines that its chief executive officer reviews its operating results in assessing performance and
allocating resources. The Company operates two reportable segments, Consumer Services and Business Services. The Company's Consumer Services segment provides Internet access services and related
value-added services to individual customers. These services include dial-up and high-speed Internet access and VoIP
services, among others. The Company's Business Services segment provides integrated communications services and related value-added services to businesses and communications carriers. These services
include managed IP-based wide area networks, dedicated Internet access and web hosting, among others.

The
Company evaluates performance of its segments based on segment income from operations. Segment income from operations includes revenues from external customers, related cost of
revenues and operating expenses directly attributable to the segment, which include costs over which segment managers have direct discretionary control, such as advertising and marketing programs,
customer support expenses, operations expenses, product development expenses, certain technology and facilities expenses, billing operations and provisions for doubtful accounts. Segment income from
operations excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment income from operations include
various corporate expenses (consisting of certain costs such as corporate management, human resources, finance and legal), amortization of intangible assets, impairment of goodwill and intangible
assets, facility exit and restructuring costs, and stock-based compensation expense, as they are not considered in the measurement of segment performance.

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Table of Contents

EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Information
on the Company's reportable segments and a reconciliation to consolidated income from operations for the years ended December 31, 2007, 2008 and 2009 is as follows:

Year Ended December 31,2007

2008

2009(in thousands)Consumer ServicesRevenues

$
1,025,408

$
779,876

$
575,412Cost of revenues


324,465


259,851


186,570Gross margin


700,943


520,025


388,842Direct segment operating expenses


506,975


207,236


131,154Segment operating income

$
193,968

$
312,789

$
257,688Business ServicesRevenues

$
190,586

$
175,701

$
148,317Cost of revenues


118,232


101,069


87,185Gross margin


72,354


74,632


61,132Direct segment operating expenses


58,548


51,276


41,975Segment operating income

$
13,806

$
23,356

$
19,157ConsolidatedRevenues

$
1,215,994

$
955,577

$
723,729Cost of revenues


442,697


360,920


273,755Gross margin


773,297


594,657


449,974Direct segment operating expenses


565,523


258,512


173,129Segment operating income


207,774


336,145


276,845Stock-based compensation expense


19,553


20,133


13,231Impairment of goodwill and intangible assets


4,250


78,672


24,145Amortization of intangible assets


14,672


13,349


7,749Facility exit and restructuring costs


65,381


9,142


5,615Other operating expenses


55,884


50,242


43,947Income from operations

$
48,034

$
164,607

$
182,158


The
primary component of the Company's revenues is access and service revenues, which consist of narrowband access services (including traditional, fully-featured narrowband access and
value-priced narrowband access); broadband access services (including high-speed access via DSL and cable, VoIP and managed IP-based networks); and web hosting services. The
Company also earns revenues from value-added services, which include ancillary services sold as add-on features to the Company's access services, search and advertising revenues.

Consumer
access and service revenues consist of narrowband access and broadband access services. These revenues are derived from fees charged to customers for dial-up
Internet access; fees charged for high-speed access services; fees charged for VoIP services; usage fees; shipping and handling fees; and termination fees. Consumer value-added services
revenues consist of revenues from ancillary services sold as add-on features to the Company's Internet
services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues.

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Business
access and service revenues consist of fees charged for managed IP-based networks; fees charged for Internet access services; installation fees; termination fees;
fees for equipment; usage fees; cost recovery fees billed to customers; and fees charged for leasing server space and providing web services that enable customers to build and maintain an effective
online presence.

Information
on revenues by groups of similar services and by segment for the years ended December 31, 2007, 2008 and 2009 is as follows:

Year Ended December 31,2007

2008

2009(in thousands)Consumer ServicesAccess and service

$
897,423

$
682,135

$
503,769Value-added services


127,985


97,741


71,643Total revenues


1,025,408


779,876


575,412Business ServicesAccess and service


187,709


172,944


146,087Value-added services


2,877


2,757


2,230Total revenues


190,586


175,701


148,317ConsolidatedAccess and service


1,085,132


855,079


649,856Value-added services


130,862


100,498


73,873Total revenues

$
1,215,994

$
955,577

$
723,729


The
Company manages its working capital on a consolidated basis and does not allocate long-lived assets to segments. In addition, segment assets are not reported to, or used
by, the chief operating decision maker and therefore, total segment assets have not been disclosed.

The
Company has not provided information about geographic segments because substantially all of the Company's revenues, results of operations and identifiable assets are in the United
States.

19.   Quarterly Financial Data (Unaudited)

The following table sets forth certain unaudited quarterly consolidated financial data for the eight quarters in the period ended December 31, 2009. In the
opinion of the Company's management, this unaudited information has been prepared on the same basis as the audited consolidated financial statements and includes all material adjustments (consisting
of normal recurring accruals and adjustments)

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EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

necessary
to present fairly the quarterly unaudited financial information. The operating results for any quarter are not necessarily indicative of results for any future period.

Three Months EndedMar. 31,
2008

June 30,
2008

Sept. 30,
2008

Dec. 31,
2008

Mar. 31,
2009

June 30,
2009

Sept. 30,
2009

Dec. 31,
2009(unaudited)
(in thousands, except per share data)Revenues

$
263,074

$
245,603

$
230,831

$
216,069

$
199,063

$
185,597

$
174,521

$
164,548Cost of revenues


97,551


92,488


87,616


83,265


75,565


69,270


66,885


62,035Operating costs and expenses (1)


100,109


89,264


83,786


156,891


66,025


61,857


55,823


84,111Income (loss) from operations


65,414


63,851


59,429


(24,087
)

57,473


54,470


51,813


18,402Gain (loss) on investments in other companies, net





1,325


4,352


(2,969
)

259


11


35


(1,626
)Interest expense and other, net (2)


(1,041
)

(3,482
)

(3,281
)

(4,604
)

(4,291
)

(5,100
)

(5,067
)

(5,346
)Income (loss) from continuing operations before income taxes


64,373


61,694


60,500


(31,660
)

53,441


49,381


46,781


11,430Income tax (provision) benefit (3)


(9,274
)

(6,725
)

(7,924
)

56,107


(20,944
)

(17,896
)

(16,914
)

181,839Income from continuing operations


55,099


54,969


52,576


24,447


32,497


31,485


29,867


193,269Loss from discontinued operations, net of tax (4)


(3,392
)

(4,365
)

(681
)

(68
)










Net income

$
51,707

$
50,604

$
51,895

$
24,379

$
32,497

$
31,485

$
29,867

$
193,269Basic net income per share (5):Income from continuing operations

$
0.50

$
0.50

$
0.48

$
0.23

$
0.30

$
0.30

$
0.28

$
1.80Loss from discontinued operations


(0.03
)

(0.04
)

(0.01
)

(0.00
)










Net income

$
0.47

$
0.46

$
0.47

$
0.22

$
0.30

$
0.30

$
0.28

$
1.80Diluted net income per share (5):Income from continuing operations

$
0.50

$
0.49

$
0.47

$
0.22

$
0.30

$
0.29

$
0.28

$
1.79Loss from discontinued operations


(0.03
)

(0.04
)

(0.01
)

(0.00
)










Net income

$
0.47

$
0.45

$
0.46

$
0.22

$
0.30

$
0.29

$
0.28

$
1.79Basic weighted average common shares outstanding


109,493


110,033


110,153


108,449


108,071


105,908


106,615


107,075Diluted weighted average common shares outstanding


110,300


112,256


112,039


109,617


109,168


107,080


107,943


108,178


(1)Operating
costs and expenses for the quarters ended December 31, 2008 and 2009 include non-cash impairment charges of
$78.7 million and $24.1 million, respectively, related to goodwill and certain intangible assets of New Edge in the Company's Business Services segment. EarthLink concluded the carrying
value of these assets were impaired in conjunction with its annual tests of goodwill and intangible assets deemed to have indefinite lives.(2)Interest
expense and other, net, reflects the adoption of new accounting guidance on January 1, 2009. This new guidance affected the accounting for
the Company's Notes and resulted in additional non-cash interest expense. Prior period amounts have been restated.(3)During
the quarters ended December 31, 2008 and 2009, EarthLink recorded income tax benefits in the Statement of Operations of $56.1 million
and $198.8 million, respectively, as a result of releases of its valuation allowance related to deferred tax assets. These deferred tax assets related primarily to net operating loss
carryforwards which the Company determined it will more likely than not be able to utilize due to the generation of sufficient taxable income in the future.(4)In
November 2007, management concluded that the municipal wireless broadband operations were no longer consistent with EarthLink's strategic direction and
the Company's Board of Directors authorized management to pursue the divestiture of the Company's municipal wireless broadband assets. As a result of that decision, the Company classified the
municipal wireless broadband assets as held for sale and presented the municipal wireless broadband operations as discontinued operations for all periods presented.(5)The
quarterly net income per share amounts will not necessarily add to the net income per share computed for the year because of the method used in
calculating per share data.


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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we carried
out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as
defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is
recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal ControlIntegrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2009.

The
effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included herein.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information.

There was no information required to be disclosed in a report on Form 8-K during the three months ended
December 31, 2009 covered by this Annual Report on Form 10-K that was not reported.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

Information relating to the directors and nominees for directors of EarthLink will be set forth under the captions "Proposal
1Election of DirectorsNominees Standing for Election" and "Proposal 1Election of DirectorsDirectors Not Standing for Election" in our Proxy
Statement for our 2010
Annual Meeting of Stockholders ("Proxy Statement") or in a subsequent amendment to this Annual Report on Form 10-K. Information relating to our executive officers will be set forth
under the caption "Executive Officers" in the Proxy Statement or in a subsequent amendment to this Annual Report on Form 10-K. Information regarding compliance by our directors and
executive officers and owners of more than 10% of EarthLink's common stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, will be set forth
under the caption "Executive OfficersCompliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement or in a subsequent amendment to this Annual Report
on Form 10-K. Information relating to EarthLink's Code of Ethics for directors and officers will be set forth under the caption "Proposal 1Election of
DirectorsCorporate Governance MattersCodes of Ethics" in the Proxy Statement or in a subsequent amendment to this Annual Report on Form 10-K. Information
relating to corporate governance will be set forth under the caption "Proposal 1Election of DirectorsCorporate Governance Matters" in the Proxy Statement or in a subsequent
amendment to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

Item 11.    Executive Compensation.

Information relating to compensation of our directors and executive officers will be set forth under the captions "Proposal
1-Election of Directors-Director Compensation" and "Executive Compensation" in our Proxy Statement referred to in Item 10 above or in a subsequent amendment to this Annual Report on
Form 10-K. Such information is incorporated herein by reference, except for the information set forth under the caption "Executive CompensationLeadership and
Compensation Committee Report," which specifically is not so incorporated by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information regarding security ownership of certain beneficial owners and management of our voting securities will be set forth under
the caption "Beneficial Ownership of Common Stock" in our Proxy Statement referred to in Item 10 above or in a subsequent amendment to this Annual Report on Form 10-K. Such
information is incorporated herein by reference.

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Table of Contents

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2009 concerning the shares of our common stock which are
authorized for issuance under our equity compensation plans:

Plan Category

Number of Securities
to Be Issued on Exercise
of Outstanding Options
(a)

Weighted Average
Exercise Price of
Outstanding Options
(b)

Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)Equity Compensation PlansApproved By Stockholders

3,916,182 (2)

$
9.61


13,786,919 (1)


(1)This
number includes shares available by plan as follows:


Plan

Securities
Available
for Future
IssuanceEarthLink, Inc. 2006 Equity and Cash Incentive Plan


4,569,288EarthLink, Inc. Stock Incentive Plan (expires February 28, 2010)


8,760,199EarthLink, Inc. Equity Plan for Non-Employee Directors


457,43213,786,919


The
grants of approximately 5.5 million restricted stock units and phantom share units have been deducted from the number of securities available for future issuance. (2)Pursuant
to our merger agreement with New Edge Holding Company in 2006, we were required to grant options to purchase up to 657,000 shares of our Common
Stock to New Edge employees. These options were "inducement grants" to new employees in connection with our acquisition of New Edge that qualified under the "inducement grant exception" to the
shareholder approval requirement of NASD Marketplace Rule 4350(i)(1)(A). In connection with the closing, the Leadership and Compensation Committee approved the EarthLink, Inc. Stock
Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company. The Leadership and Compensation Committee then granted options to purchase 657,000 shares of our Common Stock
to these New Edge employees in accordance with this plan. As of December 31, 2009, 200,793 of these options were outstanding. The options have an exercise price equal to the last reported price
of $9.48 and vest 25 percent after 12 months and then 6.25 percent each quarter thereafter. The options have a term of 10 years.


Item 13.    Certain Relationships and Related Transactions, and Director Independence.

Information regarding certain relationships and transactions between EarthLink and certain of our affiliates is set forth under the
caption "Executive CompensationLeadership and Compensation Committee Interlocks" and "Executive CompensationCertain Relationships and Related Transactions" in our Proxy
Statement referred to in Item 10 above or in a subsequent amendment to this Report on Form 10-K. Information regarding director independence is set forth under the caption
"Proposal IElection of DirectorsDirector Independence" in our Proxy Statement referred to in Item 10 above or in a subsequent amendment to this Annual Report on
Form 10-K. Such information is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services.

Information regarding our principal accounting fees and services is set forth under the caption "Proposal 2Ratification of
Appointment of Independent Registered Public Accounting Firm" in our Proxy Statement referred to in Item 10 above or in a subsequent amendment to this Annual Report on
Form 10-K. Such information is incorporated herein by reference.

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PART IV



Item 15.    Exhibits, Financial Statement Schedules.

(a)   Documents filed as part of this Annual Report on Form 10-K



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

Second Amended and Restated Bylaws of EarthLink, Inc. (incorporated by reference to Exhibit 3.1 of EarthLink, Inc.'s Report on Form 8-K dated July 18, 2007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).


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10.5#

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).10.6#

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).10.7#

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).10.8#

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).10.9#

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).10.10#

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).10.11#

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).10.12#

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).10.13#

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).10.14#

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).10.15#

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).10.16#

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).10.17#

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).10.18#

Form of Restricted Stock Unit Agreement under the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.4 of EarthLink, Inc.'s Report on Form 10-K for the year
ended December 31, 2007File No. 001-15605).10.19#*

Form of Restricted Stock Unit Agreement for Nonemployee Directors.10.20#

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).


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10.21#

Restricted Stock Unit Agreement dated as of February 8, 2008 for Rolla P. Huff under the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.4 of EarthLink,
 Inc.'s Report on Form 10-Q for the quarterly period ended June 30, 2008File No. 001-15605).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

Amended and Restated Employment Agreement, dated December 30, 2008, between EarthLink, Inc. and Rolla P. Huff, President and Chief Executive Officer of EarthLink, Inc. (incorporated by reference to
Exhibit 10.1 of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended March 31, 2009File No. 001-15605).10.27

Amended and Restated Employment Agreement, dated December 30, 2008, between EarthLink, Inc. and Joseph M. Wetzel, Chief Operating Officer of EarthLink, Inc. (incorporated by reference to Exhibit 10.2
of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended March 31, 2009File No. 001-15605).10.28#*

EarthLink, Inc. Board of Directors Compensation Plan, effective January 2010.10.29#*

Amended and Restated Change-in-Control Accelerated Vesting and Severance Plan, effective as of February 3, 2010.10.30#

Executives' Position Elimination and Severance Plan, amended and restated effected as of December 15, 2008 (incorporated by reference to Exhibit 10.30 of EarthLink, Inc.'s Report on Form 10-K for the
year ended December 31, 2008File No. 001-15605).10.31

Summary of 2009 bonus payments and 2010 salaries for executive officers (incorporated by reference to EarthLink, Inc.'s Report on Form 8-K dated February 4, 2010File No. 001-15605).10.32#*

EarthLink, Inc. 2010 Short Term Incentive Bonus Plan.10.33#

Form of Executive Retention Incentive Award Agreement under the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.3 of EarthLink, Inc.'s Report on Form 10-Q
for the quarterly period ended March 31, 2009File No. 001-15605).10.34#

Form of Retention Incentive Award Agreement for Rolla P. Huff under the EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.4 of EarthLink, Inc.'s Report on
Form 10-Q for the quarterly period ended March 31, 2009File No. 001-15605).


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10.35+

High-Speed Service Agreement between EarthLink, Inc. and Time Warner Cable Inc. (incorporated by reference to Exhibit 10.5 of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended
March 31, 2009File No. 001-15605).21.1*

Subsidiaries of the Registrant.23.1*

Consent of Ernst & Young LLP, an independent registered public accounting firm.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.


*Filed
herewith.#Management
compensatory plan or arrangement.+Confidential
treatment has been requested with respect to portions of this exhibit.


(b)   Exhibits

The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10-K.

(c)   Financial Statement Schedule

The Financial Statement Schedule(s) described in Regulation S-X are omitted from this Annual Report on Form 10-K because
they are either not required under the related instructions or are inapplicable.

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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

EARTHLINK, INC.By:

/s/ ROLLA P. HUFF Rolla P. Huff, Chairman of the Board,
Chief Executive Officer and PresidentDate: February 26, 2010


Each
person whose signature appears below hereby constitutes and appoints Rolla P. Huff and Bradley A. Ferguson, the true and lawful
attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all
capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant and in the capacities and on the
dates indicated.

Date:

February 26, 2010



By:

/s/ ROLLA P. HUFF Rolla P. Huff, Chairman of the Board, Chief Executive Officer and President (principal executive officer)Date:

February 26, 2010



By:

/s/ BRADLEY A. FERGUSON Bradley A. Ferguson, Chief Financial Officer (principal financial and accounting officer)Date:

February 26, 2010



By:

/s/ S. MARCE FULLER S. Marce Fuller, Lead DirectorDate:

February 26, 2010



By:

/s/ SUSAN D. BOWICK Susan D. Bowick, DirectorDate:

February 26, 2010



By:

/s/ TERRELL B. JONES Terrell B. Jones, DirectorDate:

February 26, 2010



By:

/s/ DAVID A. KORETZ David A. Koretz, DirectorDate:

February 26, 2010



By:

/s/ THOMAS E. WHEELER Thomas E. Wheeler, DirectorDate:

February 26, 2010



By:

/s/ M. WAYNE WISEHART M. Wayne Wisehart, Director


114

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