EarthLink (ELNK) 10-Q 2011 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           .

Commission File Number: 001-15605

EARTHLINK, INC.

(Exact name of registrant as specified in its charter)

Delaware	58-2511877
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1375 Peachtree St., Atlanta, Georgia      30309

(Address of principal executive offices)     (Zip Code)

(404) 815-0770

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report date)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 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 x  No 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	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 o  No x

As of October 31, 2011, 106,683,532 shares of common stock, $0.01 par value per share, were outstanding.

EARTHLINK, INC.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2011

TABLE OF CONTENTS

Part I
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
Item 4. Controls and Procedures	53
Part II
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 5. Other Information	55
Item 6. Exhibits	55
Signatures	56

PART I

Item 1.  Financial Statements.

EARTHLINK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,			September 30,
	2010			2011
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	242,952		$	515,310
Marketable securities	307,814			—
Restricted cash	2,270			1,781
Accounts receivable, net of allowance of $1,182 and $6,417 as of December 31, 2010 and September 30, 2011, respectively	60,216			103,795
Prepaid expenses	12,161			15,960
Deferred income taxes, net	45,661			65,435
Other current assets	14,802			18,087
Total current assets	685,876			720,368
Long-term marketable securities	12,304			—
Property and equipment, net	241,111			384,620
Deferred income taxes, net	189,037			94,976
Purchased intangible assets, net	135,364			297,999
Goodwill	259,046			428,346
Other long-term assets	1,240			22,280
Total assets	$	1,523,978		$	1,948,589
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,272		$	20,881
Accrued payroll and related expenses	18,402			30,978
Accrued interest	8,622			32,712
Other accrued liabilities	67,007			102,571
Deferred revenue	40,921			56,024
Current portion of long-term debt and capital lease obligations	243,069			255,888
Total current liabilities	395,293			499,054
Long-term debt and capital lease obligations	351,251			655,064
Other long-term liabilities	19,566			31,950
Total liabilities	766,110			1,186,068
Stockholders’ equity:
Convertible preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2010 and September 30, 2011	—			—
Common stock, $0.01 par value, 300,000 shares authorized, 191,825 and 195,936 shares issued as of December 31, 2010 and September 30, 2011, respectively, and 108,382 and 107,366 shares outstanding as of December 31, 2010 and September 30, 2011, respectively	1,918			1,959
Additional paid-in capital	2,061,555			2,075,532
Accumulated deficit	(648,235		)	(617,819		)
Treasury stock, at cost, 83,443 and 88,570 shares as of December 31, 2010 and September 30, 2011, respectively	(657,611		)	(697,151		)
Accumulated other comprehensive income	241			—
Total stockholders’ equity	757,868			762,521
Total liabilities and stockholders’ equity	$	1,523,978		$	1,948,589

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

1

EARTHLINK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
	(in thousands, except per share data)
	(unaudited)
Revenues	$	145,158		$	357,290		$	455,423		$	963,867
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	55,024			161,327			170,033			429,407
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	41,896			108,827			127,517			295,786
Depreciation and amortization	4,327			46,567			13,652			113,336
Restructuring and acquisition-related costs	1,921			8,966			3,267			24,517
Total operating costs and expenses	103,168			325,687			314,469			863,046
Income from operations	41,990			31,603			140,954			100,821
Gain on investments, net	—			—			572			—
Interest expense and other, net	(5,466		)	(22,161		)	(16,241		)	(54,197		)
Income before income taxes	36,524			9,442			125,285			46,624
Income tax provision	(15,139		)	(1,937		)	(49,113		)	(16,208		)
Net income	$	21,385		$	7,505		$	76,172		$	30,416
Net income per share
Basic	$	0.20		$	0.07		$	0.71		$	0.28
Diluted	$	0.20		$	0.07		$	0.70		$	0.28
Weighted average common shares outstanding
Basic	108,220			107,794			107,968			108,585
Diluted	109,473			108,523			108,851			109,535
Dividends declared per share	$	0.16		$	0.05		$	0.46		$	0.15

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

2

EARTHLINK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
	September 30,
	2010			2011
	(in thousands)
	(unaudited)
Cash flows from operating activities:
Net income	$	76,172		$	30,416
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,652			113,336
Loss on disposals and impairments of fixed assets	561			3,688
Stock-based compensation	7,078			10,454
Non-cash income taxes	45,530			11,851
Amortization of debt discount, premium and issuance costs	10,847			9,690
Gain on investments, net	(572		)	—
Gain on debt surrendered for conversion	(172		)	—
Other	—			(748		)
(Increase) decrease in accounts receivable, net	(1,043		)	9,479
(Increase) decrease in prepaid expenses and other assets	(2,447		)	(28,140		)
Decrease in accounts payable and accrued and other liabilities	(19,498		)	(45,797		)
(Decrease) increase in deferred revenue	(2,903		)	2,251
Net cash provided by operating activities	127,205			116,480
Cash flows from investing activities:
Purchase of businesses, net of cash acquired	—			(40,097		)
Purchases of property and equipment	(8,748		)	(70,967		)
Purchases of marketable securities	(345,193		)	—
Sales and maturities of marketable securities	92,723			319,729
Change in restricted cash	—			489
Other investing activities	1,618			(3,765		)
Net cash (used in) provided by investing activities	(259,600		)	205,389
Cash flows from financing activities:
Proceeds from issuance of debt, net of issue costs	—			278,383
Proceeds from exercises of stock options	2,565			566
Repurchases of common stock	(851		)	(39,540		)
Payment of dividends	(50,118		)	(17,214		)
Repayment for debt and capital lease obligations	(2,794		)	(272,391		)
Other financing activities	—			685
Net cash used in financing activities	(51,198		)	(49,511		)
Net (decrease) increase in cash and cash equivalents	(183,593		)	272,358
Cash and cash equivalents, beginning of period	610,995			242,952
Cash and cash equivalents, end of period	$	427,402		$	515,310

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

3

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.  Organization

EarthLink, Inc. (“EarthLink” or the “Company”), together with its consolidated subsidiaries, provides Internet protocol (IP) infrastructure and communications services to business and residential customers in the United States. The Company operates two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provides a comprehensive suite of communications and technology services, including voice, data, managed network services, cloud hosting and equipment services, to businesses, enterprise organizations and communications carriers. The Company provides its Business Services primarily through a nationwide network utilizing a 27-state fiber optic network, Multi-Protocol Label Switching (“MPLS”) and other technologies. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. For further information concerning the Company’s business segments, see Note 14, “Segment Information.”

2.  Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements of EarthLink for the three and nine months ended September 30, 2010 and 2011 and the related footnote information are unaudited and have been prepared on a basis consistent with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010  as filed with the Securities and Exchange Commission (the “SEC”) (the “Annual Report”).

These financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto contained in the Company’s Annual Report.  In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments), which management considers necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented.  The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2011.

Basis of Consolidation

The accompanying condensed consolidated financial statements of EarthLink include the accounts of its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements.  Actual results may differ from those estimates.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The Company combined sales and marketing, operations and customer support and general and administrative expenses into selling, general and administrative expenses. In addition, the Company reclassified depreciation expense from cost of revenues and selling, general and administrative expenses to depreciation and amortization. Approximately $1.9 million of depreciation expense was reclassified from cost of revenues and $1.5 million of depreciation expense was reclassified from selling, general and administrative expenses to depreciation and amortization during the three months ended September 30, 2010, and approximately $5.8 million of depreciation expense was reclassified from cost of revenues and $4.5 million of depreciation expense was reclassified from selling, general and administrative expenses to depreciation and amortization during the nine months ended September 30, 2010.

4

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance related to fair value measurements. This guidance was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This guidance also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued authoritative guidance related to comprehensive income. This guidance was issued to increase the prominence of items reported in other comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, reclassification adjustments for items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 2011, the FASB issued authoritative guidance related to goodwill testing. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  This guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

3.  Earnings per Share

The Company presents a dual presentation of basic and diluted earnings per share. Basic earnings per share represents net income divided by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options, restricted stock units and convertible debt (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. 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 awards.

5

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The following table sets forth the computation for basic and diluted net income per share for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands, except per share data)
Numerator
Net income	$	21,385	$	7,505	$	76,172	$	30,416
Denominator
Basic weighted average common shares outstanding	108,220		107,794		107,968		108,585
Dilutive effect of Common Stock Equivalents	1,253		729		883		950
Diluted weighted average common shares outstanding	109,473		108,523		108,851		109,535
Basic net income per share	$	0.20	$	0.07	$	0.71	$	0.28
Diluted net income per share	$	0.20	$	0.07	$	0.70	$	0.28

During the three months ended September 30, 2010 and 2011, approximately 2.2 million and 1.6 million, respectively, of stock options and restricted stock units were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. During the nine months ended September 30, 2010 and 2011, approximately 2.8 million and 1.8 million, respectively, of stock options and restricted stock units were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. The shares that underlie the Company’s convertible senior notes were also excluded from the calculation of diluted earnings per share during the three months ended September 30, 2011 because their effect would have been anti-dilutive. Anti-dilutive securities could be dilutive in future periods.

4.  Acquisitions

ITC^DeltaCom

On December 8, 2010, EarthLink acquired ITC^DeltaCom, Inc. (“ITC^DeltaCom”), a provider of integrated communications services to customers in the southeastern U.S., at a price of $3.00 per share. EarthLink acquired 100% of ITC^DeltaCom in a merger transaction with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink. The primary reason for the acquisition was to enable the Company to expand its IP infrastructure and communications services by combining its existing business services with ITC^DeltaCom’s integrated communications business. EarthLink has included the financial results of ITC^DeltaCom in its consolidated financial statements from the date of the acquisition.

The fair value of consideration transferred was $253.8 million, which consisted of $251.4 million in cash paid to acquire the outstanding common stock of ITC^DeltaCom and $2.3 million for the fair value of restricted stock units assumed and converted. In allocating the consideration transferred based on estimated fair values, EarthLink recorded $173.7 million of goodwill, $131.2 million of identifiable intangible assets, $199.3 million of property and equipment, $351.2 million of long-term debt and $100.8 million of other net assets. The Company allocated the consideration transferred to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess of the consideration transferred over those fair values was recorded as goodwill.

During the nine months ended September 30, 2011, the Company finalized certain provisional amounts recognized at the acquisition date related to deferred taxes. The Company retrospectively adjusted the provisional amounts recorded at the acquisition date to reflect the finalization of provisional accounting. As a result, the carrying amount of deferred tax assets was increased by $18.8 million as of December 31, 2010, with

6

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

a corresponding decrease to goodwill.  The Condensed Consolidated Balance Sheet as of December 31, 2010 and the allocation of consideration transferred noted above have been reflected for this adjustment. During the nine months ended September 30, 2011, the Company recorded $3.5 million of goodwill adjustments from adjustments in the fair value of assets and liabilities assumed that were not deemed material to retrospectively adjust provisional amounts recorded at the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to income taxes and residual goodwill.

One Communications

On April 1, 2011, EarthLink completed its acquisition of One Communications Corp. (“One Communications”), a privately-held integrated telecommunications solutions provider serving customers in the Northeast, Mid-Atlantic and Upper Midwest. EarthLink acquired 100% of One Communications in a merger transaction with One Communications surviving as a wholly-owned subsidiary of EarthLink. One Communications stockholders had the right to elect to receive the net merger consideration in the form of cash or EarthLink common stock. The primary reason for the acquisition was to further transform the Company into an IP infrastructure and communications services provider by expanding its IP network footprint. EarthLink also believes the acquisition will provide strategic benefits because One Communications has a large established customer base that generates cash. EarthLink has included the financial results of One Communications in its consolidated financial statements from the date of the acquisition. EarthLink’s Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2011 included $119.8 million and $241.3 million, respectively, of One Communications’ revenue and $4.4 million and $10.9 million, respectively, of One Communications’ net loss.

Pursuant to the terms of the merger agreement, the aggregate merger consideration for One Communications was $370.0 million, which included repayment of debt and other liabilities and certain working capital and other adjustments. Included in the aggregate merger consideration was $13.5 million (combination of cash and approximately 0.8 million shares of common stock) deposited into an escrow account to secure potential post-closing adjustments to the aggregate consideration relating to working capital and other similar adjustments and indemnification obligations. In addition, EarthLink deposited $7.5 million (combination of cash and approximately 0.5 million shares of common stock) into an escrow account to fund certain post-closing employment-related obligations of the Company on the terms provided in the escrow agreement. This was accounted for separately from the purchase price allocation. EarthLink issued a total of 3.0 million shares in connection with the One Communications acquisition, which consisted of the 1.3 million shares deposited in escrow and 1.7 million shares issued to One Communications shareholders. During the nine months ended September 30, 2011, $1.9 million (including 0.1 million shares) that was used to fund certain post-closing employment-related obligations was returned from escrow.

The resulting preliminary fair value of consideration transferred was $39.9 million, which consisted of $20.0 million in cash paid to acquire the outstanding common stock of One Communications and $19.9 million for the issuance of EarthLink common stock. The assets acquired and liabilities assumed of One Communications were recognized at their acquisition date fair values.  The purchase price allocation is subject to change as the Company obtains additional information during the measurement period about the facts and circumstances that existed as of the acquisition date. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to working capital adjustments, income and non-income based taxes and residual goodwill.

7

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The following is a preliminary allocation of the consideration transferred based on currently available information (in thousands):

Acquired Assets:
Cash and cash equivalents	$	11,304
Property and equipment	145,004
Goodwill	137,903
Intangible assets	182,800
Other assets	69,409
Total assets	546,420
Assumed Liabilities:
Debt	(266,275		)
Deferred revenue	(11,379		)
Deferred tax liability, net	(53,473		)
Other liabilities	(175,366		)
Total liabilities	(506,493		)
Total consideration	$	39,927

Goodwill arising from the acquisition is attributable to the assembled workforce and expected synergies and economies of scale from combining the operations of EarthLink and One Communications. All of the goodwill will be assigned to the Company’s Business Services segment. The goodwill is not expected to be deductible for income tax purposes.

Included in other assets is accounts receivable with a preliminary estimate of fair value of $51.4 million and a gross contractual value of $60.8 million. The difference represents the Company’s best estimate of the contractual cash flows that will not be collected.

The following table summarizes the preliminary components of intangible assets acquired in connection with the One Communications acquisition (in thousands):

	Fair Value		Useful Life
Customer relationships	$	166,900	5 Years
Developed technology	12,000		3 Years
Trade name	3,900		3 Years
Total intangible assets	$	182,800

Saturn Telecommunication Services Inc.

On March 2, 2011, EarthLink acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated Voice-over-Internet Protocal (“VoIP”) platform.

The total consideration transferred was $22.9 million, which consisted of cash paid to acquire the outstanding equity interests of STS Telecom. In allocating the purchase price based on estimated fair values, EarthLink recorded approximately $21.5 million of goodwill, $17.9 million of identifiable intangible assets, $2.8 million of tangible assets and $19.3 million of net liabilities assumed. The allocation of the consideration transferred was based upon a preliminary valuation and the Company’s estimates and assumptions are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income based taxes and residual goodwill. EarthLink has included the financial results of STS Telecom in

8

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

its consolidated financial statements from the date of acquisition. Pro forma financial information for STS Telecom has not been presented, as the effects were not material to the Company’s consolidated financial statements.

Other

During the nine months ended September 30, 2011, EarthLink acquired certain other companies and purchased certain assets to expand its services and products offerings for $9.2 million of cash consideration and $1.3 million of debt repayment. These acquisitions were not significant individually or in the aggregate. Purchased identifiable intangible assets related to these acquisitions was $3.3 million and residual goodwill was $6.3 million. The allocation of the consideration transferred was based upon a preliminary valuation and the Company’s estimates and assumptions are subject to change. EarthLink has included the financial results of these companies in its consolidated financial statements from the date of acquisition. Pro forma financial information has not been presented, as the effects were not material to the Company’s consolidated financial statements.

Pro Forma Financial Information

The following unaudited pro forma revenue and earnings assumes the acquisitions of ITC^DeltaCom and One Communications occurred on January 1, 2010:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Total revenues	$	393,281	$	357,290	$	1,221,864	$	1,096,643
Net income	1,546		12,939		46,143		43,276

5.  Restructuring and Acquisition-Related Costs

Restructuring and acquisition-related costs consisted of the following during the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010			2011		2010		2011
	(in thousands)
2007 Restructuring Plan	$	(210	)	$	57	$	1,136	$	520
Legacy Restructuring Plans	131			—		131		—
Total facility exit and restructuring costs	(79		)	57		1,267		520
Acquisition-related costs	2,000			8,909		2,000		23,997
Restructuring and acquisition-related costs	$	1,921		$	8,966	$	3,267	$	24,517

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

9

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

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, there have been and may continue to be changes in estimates to amounts previously recorded.

The following table summarizes facility exit and restructuring costs during the nine months ended September 30, 2010 and 2011 and the cumulative costs incurred to date as a result of the 2007 Plan. Facility exit and restructuring costs during the nine months ended September 30, 2010 and 2011 were primarily the result of changes to sublease estimates in the Company’s exited facilities and additional costs for lease terminations. Such costs have been classified as restructuring and acquisition-related costs in the Condensed Consolidated Statements of Operations.

						Cumulative
						Costs
	Nine Months Ended September 30,					Incurred
	2010		2011			To Date
	(in thousands)
Severance and personnel-related costs	$	—	$	—		$	30,764
Lease termination and facilities-related costs	1,027		597			24,330
Non-cash asset impairments	109		(77		)	24,824
Other associated costs	—		—			1,131
	$	1,136	$	520		$	81,049

The following table summarizes activity for the liability balances associated with the 2007 Plan for the nine months ended September 30, 2011, including changes during the period attributable to costs incurred and charged to expense and costs paid or otherwise settled:

	Facilities			Assets			Total
	(in thousands)
Balance as of December 31, 2010	$	13,613		—			$	13,613
Accruals	597			(77		)	520
Payments	(5,415		)	77			(5,338		)
Non-cash charges	66			—			66
Balance as of September 30, 2011	$	8,861		$	—		$	8,861

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 Condensed Consolidated Balance Sheets. Of the unpaid balance as of December 31, 2010 and September 30, 2011, approximately $4.7 million and $3.9 million, respectively, was classified as other accrued liabilities and approximately $8.9 million and $5.0 million, respectively, was classified as other long-term liabilities.

10

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Acquisition-Related Costs

Acquisition-related costs consist of external costs directly related to EarthLink’s acquisitions, including transaction related costs, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; facility-related costs, such as lease termination and asset impairments; and integration-related costs, such as system conversion, rebranding costs and integration related consulting and employee costs. Acquisition-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring and acquisition-related costs in the Condensed Consolidated Statement of Operations. Acquisition-related costs consisted of the following during the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Transaction related costs	$	2,000	$	325	$	2,000	4,867
Severance and retention costs	—		3,783		—		13,608
Facility related costs	—		4,208		—		4,688
Integration related costs	—		593		—		834
Total acquisition-related costs	$	2,000	$	8,909	$	2,000	$	23,997

6.  Investments

Marketable Securities

The Company’s marketable securities consisted of the following as of December 31, 2010 and September 30, 2011:

	As of			As of
	December 31,			September 30,
	2010			2011
	(in thousands)
Government and agency securities	$	284,441		$	—
Commercial paper	14,666			—
Corporate debt securities	21,011			—
Total marketable securities	320,118			—
Less: classified as current	(307,814		)	—
Total long-term marketable securities	$	12,304		$	—

Marketable securities consist of investments with original maturities greater than three months at the date of acquisition. Marketable securities with maturities less than one year from the balance sheet date are classified as short-term marketable securities. Marketable securities with maturities greater than one year from the balance sheet date are classified as long-term marketable securities. These investments primarily consisted of government and agency notes, which include U.S. treasury securities and government-sponsored debt securities, commercial paper and corporate debt securities. These securities were 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 as a separate component of stockholders’ equity and in total comprehensive income. Amounts reclassified out of accumulated other comprehensive income into earnings are determined on a specific identification basis. Realized gains and losses on marketable securities are determined on a specific identification basis and included in interest expense and other, net, in the Condensed Consolidated Statement of Operations.

11

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

During the nine months ended September 30, 2011, the Company sold its investments in marketable securities and recognized a realized gain of $0.4 million, which was included in interest expense and other, net, in the Condensed Consolidated Statement of Operations. As a result, the Company had no short- or long-term marketable securities as of September 30, 2011.

The following tables summarize gross unrealized gains and losses as of December 31, 2010 on the Company’s marketable securities designated as available-for-sale:

	As of December 31, 2010
			Gross			Gross		Estimated
	Amortized		Unrealized			Unrealized		Fair
	Cost		Losses			Gains		Value
	(in thousands)
Government and agency notes	$	284,087	$	(1	)	$	355	$	284,441
Commercial paper	14,658		—			8		14,666
Corporate debt securities	20,980		(7		)	38		21,011
	$	319,725	$	(8	)	$	401	$	320,118

Gain on investments, net

During the nine months ended September 30, 2010, the Company sold certain of its investments in other companies that were classified as available for sale for proceeds of $1.6 million and recognized a realized gain on investments of $0.6 million.

7.  Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill by operating segment during the nine months ended September 30, 2011 were as follows:

	Consumer		Business
	Services		Services
	Segment		Segment			Total
	(in thousands)
Balance as of December 31, 2010
Goodwill	$	88,920	$	258,004		$	346,924
Accumulated impairment loss	—		(87,878		)	(87,878		)
	88,920		170,126			259,046
Goodwill acquired during year			165,748			165,748
Goodwill adjustments	—		3,552			3,552
Balance as of September 30, 2011
Goodwill	88,920		427,304			516,224
Accumulated impairment loss	—		(87,878		)	(87,878		)
	$	88,920	$	339,426		$	428,346

Goodwill acquired during the period resulted from EarthLink’s acquisitions of One Communications, STS Telecom and certain other companies, which are more fully described in Note 4, “Acquisitions.” Goodwill adjustments during the period resulted from adjustments in the fair value of assets and liabilities assumed in acquisitions that were not deemed material to retrospectively adjust provisional amounts recorded at the acquisition date.

12

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Other Intangible Assets

The gross carrying value and accumulated amortization by major intangible asset category as of December 31, 2010 and September 30, 2011 were as follows:

	As of December 31, 2010							As of September 30, 2011
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Value		Amortization			Value		Value		Amortization			Value
	(in thousands)
Subscriber bases and customer relationships	$	192,414	$	(71,067	)	$	121,347	$	378,332	$	(106,713	)	$	271,619
Developed technology and software	10,611		(821		)	9,790		24,311		(4,599		)	19,712
Trade names	5,221		(994		)	4,227		9,121		(2,798		)	6,323
Other	—		—			—		450		(105		)	345
	$	208,246	$	(72,882	)	$	135,364	$	412,214	$	(114,215	)	$	297,999

The Company’s identifiable intangible assets consist of subscriber bases and customer relationships, developed technology and software, 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 gross carrying value of identifiable intangible assets as of September 30, 2011 includes $166.9 million of customer relationships, $12.0 million of developed technology and $3.9 million of trade name assets resulting from the One Communications acquisition and includes $15.7 million of customer relationships, $1.7 million of developed technology and $0.5 million of other intangible assets resulting from the STS Telecom acquisition.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company’s customer relationships are being amortized using the straight-line method to match the estimated cash flow generated by such assets, and the developed technology and trade names are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined. As of September 30, 2011, the weighted average amortization periods were 5.2 years for subscriber base assets and customer relationships, 4.1 years for developed technology and software, 3.3 years for trade names and 2.5 years for other identifiable intangible assets.

Amortization of intangible assets, which is included in depreciation and amortization in the Condensed Consolidated Statements of Operations, for the three and nine months ended September 30, 2010 and 2011 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Amortization expense	$	890	$	17,509	$	3,386	$	41,591

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $17.2 million during the remaining three months in the year ending December 31, 2011 and $67.7 million, $65.9 million, $60.5 million, $58.2 million, $27.8 million and $0.7 million during the years ending December 31, 2012, 2013, 2014, 2015, and 2016 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives and other relevant factors.

13

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

8.  Long-Term Debt and Capital Lease Obligations

The Company’s long-term debt and capital lease obligations consisted of the following as of December 31, 2010 and September 30, 2011:

	As of			As of
	December 31,			September 30,
	2010			2011
	(in thousands)
ITC^DeltaCom senior secured notes due April 2016	$	325,000		$	324,800
Unamortized premium on ITC^DeltaCom senior secured notes due April 2016	26,251			23,143
EarthLink senior notes due May 2019	—			300,000
Unamortized discount on EarthLink senior notes due May 2019	—			(10,005		)
EarthLink convertible senior notes due November 2026	255,791			255,791
Unamortized discount on EarthLink convertible senior notes due November 2026	(12,722		)	(1,744		)
Capital lease obligations	—			18,967
Carrying value of debt and capital lease obligations	594,320			910,952
Less current portion of debt and capital lease obligations	(243,069		)	(255,888		)
Long-term debt and capital lease obligations	$	351,251		$	655,064

ITC^DeltaCom Senior Secured Notes due April 2016

General.  In connection with the acquisition of ITC^DeltaCom, EarthLink assumed ITC^DeltaCom’s outstanding $325.0 million aggregate principal amount of 10.5% senior secured notes due on April 1, 2016 (the “ITC^DeltaCom Notes”). The ITC^DeltaCom Notes were not repaid or guaranteed by EarthLink.  The ITC^DeltaCom Notes were recorded at acquisition date fair value, which was based on publicly-quoted market prices. The resulting debt premium of $26.3 million is being amortized over the remaining life of the ITC^DeltaCom Notes.

Under the indenture for the ITC^DeltaCom Notes, following the consummation of the acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the ITC^DeltaCom Notes at 101% of their principal amount.  The tender window was open from December 20, 2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the ITC^DeltaCom Notes was repurchased in January 2011. The remaining ITC^DeltaCom Notes remain outstanding as obligations of ITC^DeltaCom and its subsidiaries.

The ITC^DeltaCom Notes accrue interest at a rate of 10.5% per year. Interest on the ITC^DeltaCom Notes is payable semi-annually in cash in arrears on April 1 and October 1 of each year. The ITC^DeltaCom Notes will mature on April 1, 2016.

Redemption.  ITC^DeltaCom may redeem some or all of the ITC^DeltaCom Notes, at any time before April 1, 2013, at a redemption price equal to 100% of their principal amount plus a “make-whole” premium. ITC^DeltaCom may redeem some or all of the ITC^DeltaCom Notes at any time on or after April 1, 2013, at specified redemption prices declining from 105.250% to 100% of their principal amount. In addition, before April 1, 2013, ITC^DeltaCom may redeem up to 35% of the aggregate principal amount of the ITC^DeltaCom Notes at a redemption price equal to 110.5% of their principal amount with the net proceeds of certain equity offerings. During any 12-month period before April 1, 2013, ITC^DeltaCom may redeem up to 10% of the aggregate principal amount of the ITC^DeltaCom Notes at a redemption price equal to 103% of their principal amount.

If (1) ITC^DeltaCom sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the ITC^DeltaCom Notes, or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business, or (2) ITC^DeltaCom experiences a change of control,

14

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

ITC^DeltaCom may be required to offer to purchase ITC^DeltaCom Notes from holders at 100% of their principal amount, in the case of a sale of assets, or 101% of their principal amount, in the case of a change of control. ITC^DeltaCom would be required to pay accrued and unpaid interest, if any, on the ITC^DeltaCom Notes redeemed or purchased in each of the foregoing events of redemption or purchase.

Ranking and guaranty. The ITC^DeltaCom Notes are ITC^DeltaCom’s general senior obligations and rank equally in right of payment with any future senior indebtedness. The ITC^DeltaCom Notes are secured on a first-priority basis, along with any future pari passu secured obligations, subject to specified exceptions and permitted liens, by substantially all of the assets of ITC^DeltaCom and its subsidiaries that are deemed to be restricted subsidiaries under the indenture governing the ITC^DeltaCom Notes. Currently all of ITC^DeltaCom’s subsidiaries are deemed to be restricted subsidiaries under the indenture.

The ITC^DeltaCom Notes are guaranteed on a senior secured basis by each of ITC^DeltaCom’s restricted subsidiaries on the initial issue date of the ITC^DeltaCom Notes and will be guaranteed on a senior secured basis by each future domestic restricted subsidiary, other than certain excluded subsidiaries, and by any foreign restricted subsidiary that guarantees any indebtedness of ITC^DeltaCom or any domestic restricted subsidiary. The guarantees are the subsidiary guarantors’ general senior obligations and rank equally in right of payment with all of the subsidiary guarantors’ existing and future senior indebtedness.

Covenants. The indenture governing the ITC^DeltaCom Notes contains covenants that, among other things, limit ITC^DeltaCom’s ability, and the ability of ITC^DeltaCom’s restricted subsidiaries, to incur additional indebtedness, create liens, pay dividends on, redeem or repurchase ITC^DeltaCom’s capital stock, make investments or repay subordinated indebtedness, engage in sale-leaseback transactions, enter into transactions with affiliates, sell assets, create restrictions on dividends and other payments to ITC^DeltaCom from its subsidiaries, issue or sell stock of subsidiaries, and engage in mergers and consolidations. All of the covenants are subject to a number of important qualifications and exceptions under the indenture. As of December 31, 2010 and September 30, 2011, ITC^DeltaCom was in compliance with all of its financial covenants.

EarthLink Senior Notes due May 2019

General.  In May 2011, the Company completed a private placement of $300.0 million aggregate principal amount of 8-7/8% Senior Notes due 2019 (the “Senior Notes”).  The Senior Notes were issued at 96.555% of their principal amount, resulting in gross proceeds of approximately $289.7 million and net proceeds of $280.3 million after deducting transaction fees of $9.4 million. In September 2011, in accordance with the registration rights granted to the original purchasers of the Senior Notes, the Company completed an exchange offer of the privately placed Senior Notes for new 8-7/8% Senior Notes due 2019 registered with the SEC with substantially identical terms to the original Senior Notes.

The Senior Notes accrue interest at a rate of 8-7/8% per year, payable on May 15 and November 15 of each year, commencing on November 15, 2011. The Senior Notes will mature on May 15, 2019.

Redemption.  The Company may redeem the Senior Notes, in whole or in part, (i) from May 15, 2015 until May 15, 2016 at a price equal to 104.438% of the principal amount of the Senior Notes redeemed; (ii) from May 15, 2016 until May 15, 2017 at a price equal to 102.219% of the principal amount of the Senior Notes redeemed; and (iii) from May 15, 2017 at a price equal to 100% of the principal amount of the Senior Notes redeemed, in each case plus accrued and unpaid interest.  Prior to May 15, 2015, the Company may also redeem the Senior Notes, in whole or in part, at a price equal to 100% of the aggregate principal amount of the Senior Notes to be redeemed plus a make-whole premium and accrued and unpaid interest.  In addition, prior to May 15, 2014, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of certain equity offerings at a price equal to 108.875% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest.

15

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Ranking and guaranty. The Senior Notes and the related guarantees of certain of the Company’s wholly-owned subsidiaries (the “Guarantors”) are the Company’s and the Guarantors’ unsecured senior obligations and rank equally with all of the Company’s and the Guarantors’ other senior indebtedness.

Covenants. The indenture governing the Senior Notes includes covenants which, subject to certain exceptions, limit the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to, among other things, incur additional indebtedness, make certain types of restricted payments, incur liens on assets of the Company or the Restricted Subsidiaries, engage in asset sales and enter into transactions with affiliates. Upon a change of control (as defined in the indenture), the Company may be required to make an offer to repurchase the Notes at 101% of their principal amount, plus accrued and unpaid interest. The indenture governing the Senior Notes also contains customary events of default. The Company was in compliance with these covenants as of September 30, 2011.

EarthLink Convertible Senior Notes due November 2026

General.  In November 2006, EarthLink issued $258.8 million aggregate principal amount of convertible senior notes due November 15, 2026 (the “Convertible Notes”) in a registered offering. The Convertible Notes bear interest at 3.25% per year on the principal amount of the Convertible Notes until November 15, 2011, and 3.50% interest per year on the principal amount of the Convertible Notes thereafter, payable semi-annually in May and November of each year. The Convertible Notes rank as senior unsecured obligations of the Company.

Conversion. The Convertible 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 Convertible Notes (which represented an initial conversion price of approximately $9.12 per share). As a result of the Company’s cash dividend payments, the conversion rate has been adjusted and was 123.5033 shares per $1,000 principal amount of Convertible Notes as of September 30, 2011 (which represents a conversion price of approximately $8.10  per share), subject to further adjustment. Upon conversion, a holder will receive cash up to the principal amount of the Convertible Notes and, at the Company’s option, cash, shares of the Company’s 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 Convertible Notes are surrendered for conversion. The Convertible 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 Convertible Notes was equal to or less than 98% of the average conversion value of the Convertible 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 Convertible 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.  In addition, the holders may require the Company to purchase all or a portion of their Convertible Notes on each of November 15, 2011, November 15, 2016 and November 15, 2021.

Under the terms of the indenture governing the Convertible Notes, the Company’s payment of cash dividends while the Convertible Notes are outstanding requires an adjustment to the conversion rate for the Convertible Notes. In addition, as a result of the adjustment, the Convertible 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 nine months ended September 30, 2010, $3.0 million principal amount of Convertible Notes were surrendered for conversion for cash payment of $2.8 million, resulting in a gain on conversion of debt of $0.2 million. Such gain is included in interest expense and other, net, in the Condensed Consolidated Statement of Operations.

16

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Redemption. The Company had the option to redeem the Convertible 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. On October 14, 2011, the Company issued a notice of redemption to redeem all of the Company’s outstanding Convertible Notes.  The redemption date is November 15, 2011. See Note 16, “Subsequent Events,” for more information.

Accounting.  The Company accounts for the liability and equity components of the Convertible Notes separately. The Company is accreting the debt discount related to the equity component to non-cash interest expense over the estimated five-year life of the Convertible Notes, which represents the first redemption date of November 2011. As of September 30, 2011, the remaining amortization period for the discount was 1.5 months.

The principal amount, unamortized discount and net carrying amount of the debt and equity components as of December 31, 2010 and September 30, 2011 are presented below:

	As of			As of
	December 31,			September 30,
	2010			2011
	(in thousands)
Principal amount	$	255,791		$	255,791
Unamortized discount	(12,722		)	(1,744		)
Net carrying amount	$	243,069		$	254,047
Carrying amount of the equity component	$	61,847		$	61,847

The following table presents the associated interest cost related to the Convertible Notes during the three and nine months ended September 30, 2010 and 2011, which consists of both the contractual interest coupon and amortization of the discount on the equity component:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2011			2010			2011
	(in thousands)
Contractual interest recognized	$	2,221		$	2,221		$	6,647		$	6,662
Discount amortization	3,408			3,746			9,987			10,978
Effective interest rate	9.5		%	9.5		%	9.5		%	9.5		%

Classification. On November 15, 2011, holders of the Convertible Notes have the right under the governing indenture to require the Company to repurchase the Convertible Notes. As a result, the Company classified the Convertible Notes as a current liability in the Consolidated Balance Sheets as of December 31, 2010. On October 14, 2011, the Company issued a notice of redemption to redeem all of the Company’s outstanding Convertible Notes.  As a result, the Company classified the Convertible Notes as a current liability in the Consolidated Balance Sheets as of September 30, 2011.

Revolving Credit Facility

General.  On May 20, 2011, the Company entered into a credit agreement (the “Credit Agreement”) providing for a senior secured revolving credit facility with aggregate revolving commitments of $150.0 million. Also on May 20, 2011, EarthLink terminated its $30.0 million revolving credit facility entered into on March 18, 2011. The senior secured revolving credit facility terminates on May 20, 2015, and all amounts outstanding thereunder shall be due and payable in full.  No amounts were outstanding under the senior

17

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

secured revolving credit facility as of September 30, 2011. The Company paid $1.9 million of transaction fees related to the new senior secured revolving credit facility, which are being amortized to interest expense over the life of the credit facility.

Prepayment. The Company may prepay the senior secured revolving credit facility in whole or in part at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of LIBOR borrowings. The Company may irrevocably reduce or terminate the unutilized portion of the senior secured revolving credit facility at any time without penalty.

Covenants. The Credit Agreement contains representations and warranties, covenants, and events of default with respect to the Company and its subsidiaries that are customarily applicable to senior secured credit facilities.  However, such covenants will not apply to ITC^DeltaCom and its subsidiaries until the earlier of (i) the repayment or refinancing in full of the ITC^DeltaCom Notes or (ii) the date ITC^DeltaCom and its U.S. subsidiaries become guarantors of the senior secured revolving credit facility.  ITC^DeltaCom is not currently a guarantor under the senior secured revolving credit facility. The negative covenants contained in the Credit Agreement include restrictions on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, incur liens on assets, engage in certain mergers, acquisitions or divestitures, pay dividends or make other distributions, voluntarily prepay certain other indebtedness (including certain prepayments of the Company’s existing notes and the ITC^DeltaCom Notes), enter into transactions with affiliates, make investments, and change the nature of their businesses, and amend the terms of certain other indebtedness (including the Company’s existing notes and the ITC^DeltaCom Notes), in each case subject to certain exceptions set forth in the Credit Agreement.

Additionally, the Credit Agreement requires the Company to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio (as defined in the Credit Agreement). The Company was in compliance with these financial covenants as of September 30, 2011.

Capital Lease Obligations

The Company maintains capital leases relating to indefeasible right-to-use agreements, vehicles and equipment. Substantially all of these capital leases were assumed by the Company through its acquisition of One Communications. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense in the Condensed Consolidated Statements of Operations. The future minimum payments due under the leases are as follows (in thousands):

Year Ending December 31,
2011 (remaining three months)	$	1,025
2012	3,743
2013	3,469
2014	3,219
2015	3,247
Thereafter	17,776
Total minimum lease payments	$	32,479
Less amounts representing interest	(13,512		)
Total capital lease obligations	$	18,967

18

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

9.  Stockholders’ Equity

Comprehensive Income

Comprehensive income includes unrealized gains and losses on certain investments classified as available-for-sale, net of tax, which are excluded from the Condensed Consolidated Statements of Operations. Comprehensive income for the three and nine months ended September 30, 2010 and 2011 was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Net income	$	21,385	$	7,505	$	76,172	$	30,416
Unrealized holding gains on certain investments, net of tax	250		—		322		—
Total comprehensive income	$	21,635	$	7,505	$	76,494	$	30,416

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 September 30, 2011, the Company had $107.3 million available under the current authorizations. The Company may repurchase its common stock from time to time in compliance with the SEC’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 Company repurchased 0.1 million shares of its common stock for $0.9 million during the nine months ended September 30, 2010 and repurchased 5.0 million shares of its common stock for $38.6 million during the nine months ended September 30, 2011 pursuant to its share repurchase program. In addition, 0.1 million shares valued at $0.9 million were returned from the One Communications escrow fund and recorded as treasury stock during the nine months ended September 30, 2011.

Dividends

During the three months ended September 30, 2010 and 2011, cash dividends declared were $0.16 and $0.05 per common share, respectively, and total dividend payments were $17.4 million and $5.4 million, respectively. During the nine months ended September 30, 2010 and 2011, cash dividends declared were $0.46 and $0.15 per common share, respectively, and total dividend payments were $50.1 million and $17.2 million, respectively. The Company currently intends to pay regular quarterly dividends on its 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, the Company’s results of operations, financial condition, cash requirements, investment opportunities and other factors the Board of Directors may deem relevant.

10.  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

19

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

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.

Stock-based compensation expense was $2.7 million and $3.4 million during the three months ended September 30, 2010 and 2011, respectively, and $7.1 million and $10.5 million during the nine months ended September 30, 2010 and 2011, respectively.  The Company has classified stock-based compensation expense within selling, general and administrative expense, the same operating expense line item as cash compensation paid to employees.

Stock Incentive Plans

The Company has granted options to purchase the Company’s common stock and 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 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 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 four years from the date of grant.

Options Outstanding

The following table summarizes stock option activity as of and for the nine months ended September 30, 2011:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Stock Options		Price		Term (Years)	Value
	(shares and dollars in thousands)
Outstanding as of December 31, 2010	2,436		$	9.40
Granted	—		—
Exercised	(78	)	7.08
Forfeited and expired	(327	)	11.06
Outstanding as of September 30, 2011	2,031		9.22		3.5	$	56
Vested and expected to vest as of September 30, 2011	2,021		$	9.23	3.5	$	56
Exercisable as of September 30, 2011	2,017		$	9.23	3.5	$	56

The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on September 30, 2011 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 September 30, 2011. The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2011 was $0.9 million and $0.1 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.

20

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The following table summarizes the status of the Company’s stock options as of September 30, 2011:

									Stock Options
Stock Options Outstanding									Exercisable
						Weighted
						Average	Weighted			Weighted
						Remaining	Average			Average
Range of					Number	Contractual	Exercise		Number	Exercise
Exercise Prices					Outstanding	Life	Price		Exercisable	Price
					(in thousands)				(in thousands)
$	5.10		$	6.90	170	3.9	$	6.43	170	$	6.43
6.91			7.31		331	5.7	7.26		321	7.27
7.32			8.90		140	3.8	8.02		138	8.02
8.96			9.01		274	2.9	9.01		274	9.01
9.02			9.51		316	4.2	9.47		314	9.47
9.64			9.89		217	0.4	9.65		217	9.65
10.36			10.36		330	3.9	10.36		330	10.36
10.51			16.82		253	2.2	12.37		253	12.37
$	5.10	to	$	16.82	2,031	3.5	$	9.22	2,017	$	9.23

Restricted Stock Units

The following table summarizes restricted stock unit activity as of and for the nine months ended September 30, 2011:

			Weighted
			Average
	Restricted		Grant Date
	Stock Units		Fair Value
	(in thousands)
Outstanding as of December 31, 2010	2,357		$	8.01
Granted	2,384		7.83
Vested	(1,520	)	7.82
Forfeited	(73	)	8.46
Outstanding as of September 30, 2011	3,148		$	7.96

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 nine months ended September 30, 2010 and 2011 was $8.36 and $7.83, respectively.  As of September 30, 2011, there was $15.3 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 2.7 years. The total fair value of shares vested during the nine months ended September 30, 2010 and 2011 was $10.1 million and $12.4 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.

21

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

11. Income Taxes

The following table presents the components of the income tax provision for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Current provision	$	984	$	940	$	3,583	$	4,357
Deferred provision	14,155		997		45,530		11,851
Total income tax provision	$	15,139	$	1,937	$	49,113	$	16,208

The income tax provision for the nine months ended September 30, 2011 represents an effective rate of 34.76%, including a benefit for discrete items of -5.37%.  The current provisions were due to state income and federal and state alternative minimum tax amounts payable due to the net operating loss carryforward limitations associated with the alternative minimum tax calculation and the non-cash deferred tax provisions were due primarily to the utilization of net operating loss carryforwards.

The Company has a valuation allowance of $40.0 million against certain deferred tax assets. Of this amount, approximately $31.6 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.  Approximately $8.0 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. In addition, valuation allowance of $0.4 million was established in 2010 relating to stock compensation deferred tax assets.

To the extent the Company reports income in future periods, the Company intends to use its net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes.  The Company’s ability to use its 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.

As a result of the acquisitions of One Communications, STS Telecom and certain other acquisitions during the nine months ended September 30, 2011, EarthLink recorded net deferred tax liabilities of $53.5 million, $6.7 million and $0.7 million, respectively. Included in these amounts are $17.9 million of deferred tax assets relating to federal and state net operating losses acquired from One Communications. These amounts were recorded under acquisition accounting.

The Company has identified its federal tax return and its state tax returns in California, Florida, Georgia, Illinois, New York and Pennsylvania as material tax jurisdictions for purposes of calculating its uncertain tax positions.  Periods extending back to 1994 are still subject to examination for all material jurisdictions. The Company believes that its income tax filing positions and deductions through the period ended September 30, 2011 will not result in a material adverse effect on the Company’s financial condition, results of operations or cash flow. It is reasonably possible that during the next 12 months the unrecognized tax benefit may be reduced by a range of $0.5 million to $0.8 million because the statute of limitations is expected to expire in certain jurisdictions. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.

22

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

A reconciliation of changes in the amount of unrecognized tax benefits for the nine months ended September 30, 2011 is as follows:

	Nine Months Ended
	September 30, 2011
	(in thousands)
Balance as of December 31, 2010	$	18,367
Adjustment to tax positions under acquisition accounting	4,374
Decreases for tax positions of prior years	(1,038		)
Balance as of September 30, 2011	$	21,703

12.  Commitments and Contingencies

Operating 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.  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 September 30, 2011 are as follows:

	Operating
Year Ending December 31,	Leases
	(in thousands)
2011 (remaining three months)	$	10,983
2012	39,857
2013	36,311
2014	28,590
2015	17,703
Thereafter	76,908
Total minimum lease payments, including estimated operating expenses	210,352
Less aggregate contracted sublease income	(5,531		)
	$	204,821

23

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Purchase commitments

The Company has entered into agreements with vendors to purchase certain telecommunications services and equipment under non-cancelable agreements. The Company also has minimum commitments under network access agreements with several carriers and obligations for certain advertising spending under non-cancelable agreements. The following table summarizes commitments under these agreements as of September 30, 2011 (in thousands):

Year Ending December 31,
2011 (remaining three months)	$	25,880
2012	47,175
2013	36,657
2014	13,001
2015	6,428
Thereafter	10,349
Total	$	139,490

Legal proceedings

The Company is party to various legal proceedings arising from normal business activities. The result of any current or future disputes, litigation or other legal proceedings is inherently unpredictable. The Company’s management, however, believes that there are no disputes, litigation or other legal proceedings asserted or pending against the Company that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in the Company’s condensed consolidated financial statements.

Regulation

The Company’s services are subject to varying degrees of federal, state and local regulation. These regulations are subject to ongoing proceedings at federal and state administrative agencies or within state and federal judicial systems. Results of these proceedings could change, in varying degrees, the manner in which the Company operates. The Company cannot predict the outcome of these proceedings or their effect on the Company’s industry generally or upon the Company specifically.

Other

The Company is periodically involved in disputes related to its billings to other carriers for access to its network. The Company does not recognize revenue related to such matters until the period that it is reliably assured of the collection of these claims. In the event that a claim is made related to revenues previously recognized, the Company assesses the validity of the claim and adjusts the amount of revenue being recognized to the extent that the claim adjustment is considered probable and estimable.

The Company periodically disputes network access charges that it is assessed by other companies with which the Company interconnects. The Company maintains adequate reserves for anticipated exposure associated with these billing disputes. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. In view of the length of time historically required to resolve these disputes, they may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods.

24

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

13.  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.

Assets measured at fair value on a recurring basis

As of December 31, 2010 and September 30, 2011, 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 and marketable securities. Cash equivalents and marketable securities as of December 31, 2010 and September 30, 2011 were valued using quoted market prices and are classified within Level 1.

The following tables present the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2010 and September 30, 2011:

					Fair Value Measurements as of December 31, 2010 Using
					Quoted Prices		Significant
					in Active		Other		Significant
					Markets for		Observable		Unobservable
	Carrying		Fair		Identical Assets		Inputs		Inputs
Description	Value		Value		(Level 1)		(Level 2)		(Level 3)
			(in thousands)
Cash equivalents	$	184,054	$	184,054	$	184,054	$	—	$	—
Government and agency securities	284,441		284,441		284,441		—		—
Commercial paper	14,666		14,666		14,666		—		—
Corporate debt securities	21,011		21,011		21,011		—		—
Total	$	504,172	$	504,172	$	504,172	$	—	$	—

					Fair Value Measurements as of September 30, 2011 Using
					Quoted Prices		Significant
					in Active		Other		Significant
					Markets for		Observable		Unobservable
	Carrying		Fair		Identical Assets		Inputs		Inputs
Description	Value		Value		(Level 1)		(Level 2)		(Level 3)
			(in thousands)
Cash equivalents	$	399,985	$	399,985	$	399,985	$	—	$	—
Total	$	399,985	$	399,985	$	399,985	$	—	$	—

Assets and liabilities measured at fair value on a nonrecurring basis

Disclosures are required for certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Such measurements of fair value relate primarily to long-lived asset impairments. There were no material long-lived asset impairments for the three and nine months ended September 30, 2010 and 2011.

25

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Fair value of debt

The estimated fair value of the Company’s Convertible Notes and ITC^DeltaCom Notes were determined based on Level 1 input using quoted prices and the estimated fair value of the Company’s Senior Notes was determined based on Level 2 input using third-party quotes. The following table presents the fair value of the Company’s debt, excluding capital leases as of December 31, 2010 and September 30, 2011:

	As of December 31, 2010				As of September 30, 2011
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(in thousands)
ITC^DeltaCom senior notes	$	351,251	$	352,625	$	347,943	$	328,048
EarthLink convertible senior notes	243,069		300,281		254,047		257,548
EarthLink senior notes	—		—		289,995		261,375
Total debt, excluding capital leases	$	594,320	$	652,906	$	891,985	$	846,971

14.  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, Business Services and Consumer Services. The Company’s Business Services segment provides a comprehensive suite of communications and technology services, including voice, data, managed network services, cloud hosting and equipment services, to businesses, enterprise organizations and communications carriers. The results of ITC^DeltaCom, One Communications and STS Telecom are included in the Company’s Business Services segment. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

The Company’s Business Services segment earns revenue from the provision of retail services, wholesale services and other services. Retail services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance, conference calling and hosted VoIP; mobile voice and data services; and data center and managed services provided to businesses and enterprise organizations. Wholesale services include the sale of transmission capacity to other telecommunications carriers. Other services include web hosting and the sale of customer premises equipment. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees and termination fees.

The Company’s Consumer Services segment earns revenue from the provision of access services and related value-added services. Access services include narrowband access services (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). Value-added services includes 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. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and fees for equipment.

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

26

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

corporate management, human resources, finance and legal), depreciation and amortization, impairment of goodwill and intangible assets, restructuring and acquisition-related costs, and stock-based compensation expense, as they are not considered in the measurement of segment performance.

Information on reportable segments and a reconciliation to consolidated income from operations for the three and nine months ended September 30, 2010 and 2011 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
	(in thousands)
Business Services
Revenues	$	33,631	$	265,743	$	100,027	$	675,729
Cost of revenues	20,589		132,718		59,577		339,325
Gross margin	13,042		133,025		40,450		336,404
Direct segment operating expenses	10,313		82,154		30,019		214,484
Segment operating income	$	2,729	$	50,871	$	10,431	$	121,920
Consumer Services
Revenues	$	111,527	$	91,547	$	355,396	$	288,138
Cost of revenues	34,435		28,609		110,456		90,082
Gross margin	77,092		62,938		244,940		198,056
Direct segment operating expenses	21,243		17,356		66,532		53,877
Segment operating income	$	55,849	$	45,582	$	178,408	$	144,179
Consolidated
Revenues	$	145,158	$	357,290	$	455,423	$	963,867
Cost of revenues	55,024		161,327		170,033		429,407
Gross margin	90,134		195,963		285,390		534,460
Direct segment operating expenses	31,556		99,510		96,551		268,361
Segment operating income	58,578		96,453		188,839		266,099
Stock-based compensation expense	2,704		3,369		7,078		10,454
Depreciation and amortization	4,327		46,567		13,652		113,336
Restructuring and acquisition-related costs	1,921		8,966		3,267		24,517
Other operating expenses	7,636		5,948		23,888		16,971
Income from operations	$	41,990	$	31,603	$	140,954	$	100,821

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.

27

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Information on revenues by groups of similar services and by segment for the three and nine months ended September 30, 2010 and 2011 is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Business Services
Retail services	$	17,072	$	218,650	$	49,829	$	546,075
Wholesale services	8,101		37,228		24,917		98,915
Other	8,458		9,865		25,281		30,739
Total revenues	33,631		265,743		100,027		675,729
Consumer Services
Access services	97,399		78,520		311,149		249,380
Value-added services	14,128		13,027		44,247		38,758
Total revenues	111,527		91,547		355,396		288,138
Total Revenues	$	145,158	$	357,290	$	455,423	$	963,867

15.  Condensed Consolidating Financial Information

In May 2011, the Company completed a private placement of $300.0 million aggregate principal amount of 8-7/8% Senior Notes Due 2019 (the “Original Senior Notes”). The Original Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of the Company’s existing and future domestic subsidiaries, other than (i) ITC^DeltaCom, Inc. and its subsidiaries and (ii) certain other excluded subsidiaries (the “Guarantor Subsidiaries”). ITC^DeltaCom, Inc. and its subsidiaries are not guarantors of the Original Senior Notes (the “Non-Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company.

In August 2011, pursuant to the Registration Rights Agreement, the Company registered an identical series of notes (the “Exchange Senior Notes”) with the SEC and exchanged those registered Exchange Senior Notes for the Original Senior Notes. The Exchange Senior Notes are guaranteed by the Guarantor Subsidiaries. In connection with the registration of the Exchange Senior Notes and related guarantees, the Company is required to provide the financial information set forth under Rule 3-10 of Regulation S-X, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered” (“Rule 3-10”). The accompanying condensed consolidating financial information has been prepared and presented pursuant to Rule 3-10. The column labeled Parent Company represents EarthLink’s stand-alone results and its investment in all of its subsidiaries accounted for using the equity method. The Guarantor Subsidiaries and the Non-Guarantor Subsidiaries are presented in separate columns and represent all the applicable subsidiaries on a combined basis. Intercompany eliminations are shown in a separate column.

The operating activities of the separate legal entities included in the Company’s consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the results of operations, financial position and cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities, and is not intended to present the operating results of those legal entities on a stand-alone basis.

28

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The condensed consolidating financial information is presented in the following tables (in thousands):

Condensed Consolidating Balance Sheet

As of September 30, 2011

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	443,897		$	21,197		$	50,216		$	—		$	515,310
Restricted cash	—			—			1,781			—			1,781
Accounts receivable, net	14,396			46,220			43,179			—			103,795
Prepaid expenses	5,550			4,297			6,113			—			15,960
Deferred income taxes, net	29,704			5,436			30,295			—			65,435
Due from affiliates	138,884			13,346			—			(152,230		)	—
Other current assets	2,872			11,656			3,559			—			18,087
Total current assets	635,303			102,152			135,143			(152,230		)	720,368
Property and equipment, net	18,133			155,909			210,578			—			384,620
Deferred income taxes, net	43,105			7,891			43,980			—			94,976
Purchased intangible assets, net	381			169,725			127,893			—			297,999
Goodwill	88,919			144,198			195,229			—			428,346
Investment in subsidiaries	791,448			—			—			(791,448		)	—
Other long-term assets	12,042			10,154			84			—			22,280
Total assets	$	1,589,331		$	590,029		$	712,907		$	(943,678	)	$	1,948,589
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,471		$	6,492		$	7,918		$	—		$	20,881
Accrued payroll and related expenses	9,537			11,578			9,863			—			30,978
Accrued interest	15,552			—			17,160			—			32,712
Other accrued liabilities	22,587			63,721			16,263			—			102,571
Deferred revenue	16,948			14,031			25,045			—			56,024
Due to affiliates	13,346			138,884			—			(152,230		)	—
Current portion of long-term debt and capital lease obligations	254,076			1,205			607			—			255,888
Total current liabilities	338,517			235,911			76,856			(152,230		)	499,054
Long-term debt and capital lease obligations	289,996			16,482			348,586			—			655,064
Other long-term liabilities	(5,758		)	30,836			6,872			—			31,950
Total liabilities	622,755			283,229			432,314			(152,230		)	1,186,068
Stockholders’ equity:
Common stock	1,959			—			—			—			1,959
Additional paid-in capital	2,072,016			500,354			294,610			(791,448		)	2,075,532
Accumulated deficit	(410,248		)	(193,554		)	(14,017		)	—			(617,819		)
Treasury stock, at cost	(697,151		)	—			—			—			(697,151		)
Total stockholders’ equity	966,576			306,800			280,593			(791,448		)	762,521
Total liabilities and stockholders’ equity	$	1,589,331		$	590,029		$	712,907		$	(943,678	)	$	1,948,589

29

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Balance Sheet

As of December 31, 2010

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	197,615		$	1,752		$	43,585		$	—		$	242,952
Marketable securities	307,814			—			—			—			307,814
Restricted cash	—			—			2,270			—			2,270
Accounts receivable, net	15,012			4,962			40,242			—			60,216
Prepaid expenses	2,341			1,326			8,494			—			12,161
Deferred income taxes, net	44,270			1,345			46			—			45,661
Due from affiliates	163,036			35,754			1,292			(200,082		)	—
Other current assets	6,610			3,962			4,230			—			14,802
Total current assets	736,698			49,101			100,159			(200,082		)	685,876
Long-term marketable securities	12,304			—			—			—			12,304
Property and equipment, net	21,244			12,879			206,988			—			241,111
Deferred income taxes, net	39,425			60,152			89,460			—			189,037
Purchased intangible assets, net	960			4,754			129,650			—			135,364
Goodwill	88,920			—			170,126			—			259,046
Investment in subsidiaries	391,650			—			—			(391,650		)	—
Other long-term assets	1,070			—			170			—			1,240
Total assets	$	1,292,271		$	126,886		$	696,553		$	(591,732	)	$	1,523,978
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	4,959		$	579		$	11,734		$	—		$	17,272
Accrued payroll and related expenses	13,109			1,240			4,053			—			18,402
Accrued interest	—			—			8,622			—			8,622
Other accrued liabilities	24,627			4,535			37,845			—			67,007
Deferred revenue	19,704			1,373			19,844			—			40,921
Due to affiliates	37,046			163,036			—			(200,082		)	—
Current portion of debt and capital lease obligations	243,069			—			—			—			243,069
Total current liabilities	342,514			170,763			82,098			(200,082		)	395,293
Long-term debt and capital lease obligations	—			—			351,251			—			351,251
Other long-term liabilities	10,839			793			7,934			—			19,566
Total liabilities	353,353			171,556			441,283			(200,082		)	766,110
Stockholders’ equity (deficit):
Common stock	1,918			—			—			—			1,918
Additional paid-in capital	2,061,555			130,161			261,489			(391,650		)	2,061,555
Accumulated deficit	(467,185		)	(174,831		)	(6,219		)	—			(648,235		)
Treasury stock, at cost	(657,611		)	—			—			—			(657,611		)
Accumulated other comprehensive income	241			—			—			—			241
Total stockholders’ equity (deficit)	938,918			(44,670		)	255,270			(391,650		)	757,868
Total liabilities and stockholders’ equity (deficit)	$	1,292,271		$	126,886		$	696,553		$	(591,732	)	$	1,523,978

30

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2011

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	97,953		$	146,733		$	113,363		$	(759	)	$	357,290
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	30,000			78,066			54,020			(759		)	161,327
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	25,909			50,179			32,739			—			108,827
Depreciation and amortization	2,606			25,675			18,286			—			46,567
Restructuring and acquisition-related costs	1,331			5,971			1,664			—			8,966
Total operating costs and expenses	59,846			159,891			106,709			(759		)	325,687
Income (loss) from operations	38,107			(13,158		)	6,654			—			31,603
Interest expense and other, net	(12,652		)	(1,822		)	(7,687		)	—			(22,161		)
Income (loss) before income taxes	25,455			(14,980		)	(1,033		)	—			9,442
Income tax (provision) benefit	(9,228		)	6,962			329			—			(1,937		)
Net income (loss)	$	16,227		$	(8,018	)	$	(704	)	$	—		$	7,505

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2010

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations		Consolidated
Revenues	$	119,520		$	25,638		$	—	$	—	$	145,158
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	36,208			18,816			—		—		55,024
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	32,108			9,788			—		—		41,896
Depreciation and amortization	2,681			1,646			—		—		4,327
Restructuring and acquisition-related costs	1,921			—			—		—		1,921
Total operating costs and expenses	72,918			30,250			—		—		103,168
Income (loss) from operations	46,602			(4,612		)	—		—		41,990
Interest expense and other, net	(4,372		)	(1,094		)	—		—		(5,466		)
Income (loss) before income taxes	42,230			(5,706		)	—		—		36,524
Income tax (provision) benefit	(17,307		)	2,168			—		—		(15,139		)
Net income (loss)	$	24,923		$	(3,538	)	$	—	$	—	$	21,385

31

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2011

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	308,493		$	319,635		$	336,958		$	(1,219	)	$	963,867
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	94,403			172,279			163,944			$	(1,219	)	429,407
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	79,167			110,874			105,745			—			295,786
Depreciation and amortization	7,940			52,214			53,182			—			113,336
Restructuring and acquisition-related costs	6,798			14,173			3,546			—			24,517
Total operating costs and expenses	188,308			349,540			326,417			(1,219		)	863,046
Income (loss) from operations	120,185			(29,905		)	10,541			—			100,821
Interest expense and other, net	(25,937		)	(4,882		)	(23,378		)	—			(54,197		)
Income (loss) before income taxes	94,248			(34,787		)	(12,837		)	—			46,624
Income tax (provision) benefit	(35,676		)	14,429			5,039			—			(16,208		)
Net income (loss)	$	58,572		$	(20,358	)	$	(7,798	)	$	—		$	30,416

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2010

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations		Consolidated
Revenues	$	380,572		$	74,851		$	—	$	—	$	455,423
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	116,152			53,881			—		—		170,033
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	98,845			28,672			—		—		127,517
Depreciation and amortization	8,705			4,947			—		—		13,652
Restructuring and acquisition-related costs	3,267			—			—		—		3,267
Total operating costs and expenses	226,969			87,500			—		—		314,469
Income (loss) from operations	153,603			(12,649		)	—		—		140,954
Gain on investments, net	572			—			—		—		572
Interest expense and other, net	(13,228		)	(3,013		)	—		—		(16,241		)
Income (loss) before income taxes	140,947			(15,662		)	—		—		125,285
Income tax (provision) benefit	(54,992		)	5,879			—		—		(49,113		)
Net income (loss)	$	85,955		$	(9,783	)	$	—	$	—	$	76,172

32

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2011

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Cash flows from operating activities	$	80,195		$	(1,044	)	$	37,329		$	—	$	116,480
Cash flows from investing activities:
Purchase of business, net of cash acquired	(28,685		)	11,447			(22,859		)	—		(40,097		)
Purchases of property and equipment	(4,673		)	(31,232		)	(35,062		)	—		(70,967		)
Sales and maturities of investments in marketable securities	319,729			—			—			—		319,729
Payment for investment in subsidiary	—			—			—			—		—
Change in restricted cash	—			—			489			—		489
Other	(600		)	(3,413		)	248			—		(3,765		)
Net cash provided by (used in) investing activities	285,771			(23,198		)	(57,184		)	—		205,389
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs	278,383			—			—			—		278,383
Proceeds from exercises of stock options	566			—			—			—		566
Repurchases of common stock	(39,540		)	—			—			—		(39,540		)
Payment of dividends	(17,214		)	—			—			—		(17,214		)
Repayment of debt and capital lease obligations	(1,283		)	(267,544		)	(3,564		)	—		(272,391		)
Proceeds from parent	(342,341		)	312,341			30,000			—		—
Change in due to/from affiliates, net	1,744			(1,744		)	—			—		—
Other	1			634			50			—		685
Net cash (used in) provided by financing activities	(119,684		)	43,687			26,486			—		(49,511		)
Net increase in cash and cash equivalents	246,282			19,445			6,631			—		272,358
Cash and cash equivalents, beginning of period	197,615			1,752			43,585			—		242,952
Cash and cash equivalents, end of period	$	443,897		$	21,197		$	50,216		$	—	$	515,310

33

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2010

				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations		Consolidated
Cash flows from operating activities	$	126,641		$	564		$	—	$	—	$	127,205
Cash flows from investing activities:
Purchases of property and equipment	(5,257		)	(3,491		)	—		—		(8,748		)
Purchases of investments in marketable securities	(345,193		)	—			—		—		(345,193		)
Sales and maturities of investments in marketable securities	92,723			—			—		—		92,723
Other	1,618			—			—		—		1,618
Net cash used in investing activities	(256,109		)	(3,491		)	—		—		(259,600		)
Cash flows from financing activities:
Payment of dividends	(50,118		)	—			—		—		(50,118		)
Proceeds from exercises of stock options	2,565			—			—		—		2,565
Repurchases of common stock	(851		)	—			—		—		(851		)
Repayment for debt and capital lease obligations	(2,794		)	—			—		—		(2,794		)
Change in due to/from affiliates, net	(2,854		)	2,854			—		—		—
Net cash used in financing activities	(54,052		)	2,854			—		—		(51,198		)
Net decrease in cash and cash equivalents	(183,520		)	(73		)	—		—		(183,593		)
Cash and cash equivalents, beginning of period	609,752			1,243			—		—		610,995
Cash and cash equivalents, end of period	$	426,232		$	1,170		$	—	$	—	$	427,402

16.  Subsequent Event

On October 14, 2011, the Company issued a notice of redemption to redeem all of the Company’s outstanding Convertible Notes.  The redemption date is November 15, 2011.

As a result of calling the Convertible Notes for redemption, the Convertible Notes are convertible at the option of the Convertible Note holder until November 14, 2011.  The amount of the Company’s conversion obligation is calculated pursuant to a formula contained in the Indenture dated November 17, 2006 for the Notes and 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.  Upon conversion, a holder would receive cash up to the principal amount of the Convertible Notes and, at the Company’s option, cash, or shares of the Company’s common stock or a combination of cash and shares of common stock for the remainder, if any, of the Company’s conversion obligation.

34

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

Certain statements in this Quarterly Report on Form 10-Q 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 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 believes that its expectations are based on reasonable assumptions, it can give no assurance that its 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 “Cautionary Note Concerning Factors That May Affect Future Results” in this Item 2.

The following Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited Consolidated Financial Statements and the Notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

EarthLink, Inc. (“EarthLink” or the “Company”), together with its consolidated subsidiaries, provides Internet protocol (IP) infrastructure and communications services to business and residential customers in the United States. The Company operates two reportable segments, Business Services and Consumer Services. The Company’s Business Services segment provides a comprehensive suite of communications and technology services, including voice, data, managed network services, cloud hosting and equipment services, to businesses, enterprise organizations and communications carriers. The Company provides its Business Services primarily through a nationwide network utilizing a 27-state fiber optic network, Multi-Protocol Label Switching (“MPLS”) and other technologies. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

During late 2010 and early 2011, we entered into two transactions that transformed our business from being primarily an Internet services provider (“ISP”) to an IP infrastructure and managed services provider. We now offer a robust suite of business services, including data and voice, and have more scale in the markets we serve. In December 2010, we completed the acquisition of ITC^DeltaCom, Inc. (“ITC^DeltaCom”), a provider of integrated communications services to customers in the southeastern U.S. In April 2011, we completed the acquisition of One Communications Corp. (“One Communications”), a privately-held integrated telecommunications solutions provider serving customers in the Northeast, Mid-Atlantic and Upper Midwest. ITC^DeltaCom and One Communications are included in our Business Services segment.

We have also entered into other strategic transactions we believe will complement our business services and expand our managed services portfolio. In March 2011, we acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held company that operates a sophisticated Voice-over-Internet Protocol (“VoIP”) platform that we plan to leverage on a nationwide basis as part of our Business Services offerings. In May 2011, we acquired Logical Solutions.net, Inc. (“Logical Solutions”), a privately-held company that provides a suite of cloud computing and hosted network and security services.  In July 2011, we acquired Business Vitals, LLC., a privately-held company that provides national managed IT security and professional services. Finally, in September 2011, we acquired the xDefenders assets of Synergy Global Solutions, Inc., a managed IT security provider, and in October 2011, we announced plans to acquire an IT Solutions Center and application service from Synergy Global Solutions, Inc. We believe these transactions will further establish EarthLink as a secure IP infrastructure and national managed services provider.

35

Business Strategy

Successfully integrate acquisitions. We acquired several companies in late 2010 and to date in 2011.  We are focused on successfully integrating these acquisitions in order to realize synergies, cost benefits and increase the scale and scope of our product offerings. This includes the integration of operating support systems, networks, sales forces, marketing channels, product offerings and personnel. We believe that our competitive positioning will be strengthened by our ability to continue to successfully integrate recent and other potential acquisitions.

Grow our business services revenue. We are focused on leveraging our existing customer relationships, favorable brand image and experience in providing IP communication and managed services, in order to grow our business services revenue, specifically our managed services revenue.  With our recent acquisitions, we acquired new product and service capabilities, including a hosted VoIP platform, virtual computing platform and managed IT and cloud security. We are now focused on growing these managed services revenues through new and existing channels and positioning our business to take advantage of important trends in the markets for our products and services, including the emergence of cloud computing.

Maintain focus on operational efficiency. Our operating framework includes a disciplined focus on operational efficiency. We plan to use this disciplined focus on operational efficiency to create synergies from our recent and potential future acquisitions. We will also continue to implement cost reduction initiatives and manage our business more efficiently, such as reducing headcount, streamlining internal processes, outsourcing certain functions and consolidating or closing certain facilities.

Provide a superior customer experience. We are committed to providing high-quality customer service and continuing to monitor customer satisfaction in all facets of our business. We remain focused on retaining our customers and building long-term customer relationships based on customized service offerings, bundled service offerings and superior customer service. We believe focusing on the customer relationship increases loyalty and reduces churn. In light of our recent acquisitions, we are focused on creating a customer-focused organization that will provide a consistent nationwide approach to offering and supporting EarthLink products and services. We plan to continue to invest in network expansion and enhancements and to offer new product and service capabilities that evolve with customer needs to ensure a quality customer experience.

Selectively pursue potential strategic acquisitions. In addition to our recent acquisitions, we will continue to selectively evaluate and consider other potential strategic transactions that we believe will complement and grow our business. Our acquisition strategy may include investments or acquisitions of new product and services capabilities, existing networks or business customers within our network to create more scale.

Challenges and Risks

The primary challenges we face in our Business Services segment are successfully integrating our acquisitions to achieve expected synergies and cost savings, providing new products and services that meet changing customer needs on a timely and cost effective basis, responding to competitive and economic pressures in the communications industry and adapting to regulatory changes and initiatives.  The primary challenges we face in our Consumer Services segment are managing the rate of decline in our consumer revenues, implementing cost-saving initiatives and operating our network cost-effectively, including network services purchased from third-party telecommunications service providers. 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. For a complete list of all risks and uncertainties inherent in our business, please refer to the detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010.

36

Revenue Sources

Business Services. Our Business Services segment earns revenue from the provision of retail services, wholesale services and other services. Retail services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance, conference calling and hosted VoIP; mobile voice and data services; and data center and managed services provided to businesses and enterprise organizations. Wholesale services include the sale of transmission capacity to other telecommunications carriers. Other services include web hosting and the sale of customer premises equipment. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees and termination fees.

Consumer Services. Our Consumer Services segment earns revenue from the provision of access services and related value-added services. Access services include narrowband access services (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). Value-added services includes 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. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and fees for equipment.

Trends in our Business

Our financial results are impacted by several significant trends, which are described below. We expect that these will continue to affect our results of operations, cash flows and financial position.

Business Services. We operate in the communications industry. The communications industry is highly competitive, 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 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. Our wholesale customers consist primarily of telecommunications carriers and network resellers. In addition, merger and acquisition transactions have created more significant competitors for us and have reduced the number of vendors from which we may purchase network elements we leverage to operate our business.

Our business customers are particularly exposed to a weak economy. We believe that the financial and economic pressures faced by our business customers in this environment of diminished consumer spending, corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on our results of operations, including increased customer demands for price reductions in connection with contract renewals.

We have and may continue to experience pressure on revenue and operating expenses for our business services as a result of competition or current economic conditions, including increased subscriber acquisition and retention costs necessary to attract and retain subscribers.

Consumer Services. We operate in the Internet access services 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. Most of the largest providers of broadband services, such as cable and telecommunications companies, control their own networks and their ability to bundle services puts us at a competitive disadvantage.  Changes in technology, such as an increasing number of computer manufacturers not pre-loading dial-up modems and system upgrades which allow cable and telecommunications companies to provide broadband capable of peak download speeds in excess of 50 Mbps, also may affect our consumer access services. 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.

37

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, we expect to realize benefits from a subscriber base that continues to be longer tenured, such as reduced support costs and lower bad debt expense.

Results of Operations

The following comparison of statement of operations data is affected by our acquisition of ITC^DeltaCom on December 8, 2010 and our acquisition of One Communications on April 1, 2011. The results of operations of ITC^DeltaCom and One Communications are included in our operating results beginning on the respective acquisition dates. Due to these acquisitions, direct comparisons of our results of operations for the three and nine months ended September 30, 2011 with the prior year periods are less meaningful than usual since most of the significant period over period variances are caused by the acquisitions.  The following table sets forth statement of operations data for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2011			2010			2011
	(in thousands)
Revenues	$	145,158		$	357,290		$	455,423		$	963,867
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	55,024			161,327			170,033			429,407
Selling, general and administrative (exclusive of of depreciation and amotization shown separately below)	41,896			108,827			127,517			295,786
Depreciation and amortization	4,327			46,567			13,652			113,336
Restructuring and acquisition-related costs	1,921			8,966			3,267			24,517
Total operating costs and expenses	103,168			325,687			314,469			863,046
Income from operations	41,990			31,603			140,654			100,821
Gain on investments, net	—			—			572			—
Interest expense and other, net	(5,466		)	(22,161		)	(16,241		)	(54,197		)
Income before income taxes	36,524			9,442			125,285			46,624
Income tax provision	(15,139		)	(1,937		)	(49,113		)	(16,208		)
Net income	$	21,385		$	7,505		$	76,172		$	30,416

38

Revenues

The following table presents revenues by groups of similar services and by segment for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended									Nine Months Ended
	September 30,				Change					September 30,				Change
	2010		2011		Dollars			Percent		2010		2011		Dollars			Percent
	(dollars in thousands)
Business Services
Retail services	$	17,072	$	218,650	$	201,578		1181	%	$	49,829	$	546,075	$	496,246		996	%
Wholesale services	8,101		37,228		29,127			360	%	24,917		98,915		73,998			297	%
Other	8,458		9,865		1,407			17	%	25,281		30,739		5,458			22	%
Total revenues	33,631		265,743		232,112			690	%	100,027		675,729		575,702			576	%
Consumer Services
Access services	97,399		78,520		(18,879		)	-19	%	311,149		249,380		(61,769		)	-20	%
Value-added services	14,128		13,027		(1,101		)	-8	%	44,247		38,758		(5,489		)	-12	%
Total revenues	111,527		91,547		(19,980		)	-18	%	355,396		288,138		(67,258		)	-19	%
Total revenues	$	145,158	$	357,290	$	212,132		146	%	$	455,423	$	963,867	$	508,444		112	%

Business Services

Our Business Services segment earns revenue from the provision of retail services, wholesale services and other services. Retail services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile voice and data services; and data center and managed services provided to businesses and enterprise organizations. Wholesale services include the sale of transmission capacity to other telecommunications carriers. Other services include web hosting and the sale of customer premises equipment. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees and termination fees.

The increases in Business Services revenue compared to the prior year periods were primarily due to the inclusion of $234.7 million and $580.1 million of revenues during the three and nine months ended September 30, 2011, respectively, generated from the acquired businesses of ITC^DeltaCom, One Communications and STS Telecom. This was partially offset by declining business demand and competitive pricing pressures for our web hosting services and business Internet access services.

We expect Business Services segment revenues to increase compared to the prior year periods due to our acquisitions. We also seek to grow our managed services product revenues. However, Business Services segment revenues may be adversely impacted by competition in the telecommunications industry, regulatory changes impacting rates, shifting patterns of use and convergence of technology and general economic conditions. To combat competitive pressures, we continue to emphasize our bundled products and services and we continue to offer products and services that we can provide to customers on a nationwide basis.

Consumer Services

Access services. Access services include narrowband access services (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). Access service revenues consist of recurring monthly charges for narrowband and broadband access services; usage fees; installation fees; termination fees; and fees for equipment.

The decrease in consumer access revenues was due to a decrease in narrowband access and broadband access revenues. This was primarily due to a decrease in average consumer access subscribers, which decreased

39

from 1.8 million and 1.9 million during the three and nine months ended September 30, 2010, respectively, to 1.4 million and 1.5 million during the three and nine months ended September 30, 2011, respectively.  Narrowband access comprised a larger portion of the average consumer access subscriber decreases as our consumer access subscriber base continues to shift towards broadband subscribers.  The decrease in average consumer access subscribers resulted from reduced sales and marketing activities, the continued maturation of and competition in the market for narrowband Internet access and competitive pressures in the industry. However, we continue to focus on the retention of customers and on marketing channels that we believe will produce an acceptable rate of return.

Our monthly consumer subscriber churn rates decreased from 3.1% during the three and nine months ended September 30, 2010 to 2.7% during the three and nine months ended September 30, 2011, which moderated the decline in average consumer subscribers. Churn rates decreased due to the increased tenure of our subscriber base. We expect our consumer access and service subscriber base and revenues to continue to decrease due to limited sales and marketing activities, competitive pressures and the continued maturation of the market for narrowband Internet access. However, we expect the rate of churn and revenue decline to continue 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.

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; fees generated through revenue sharing arrangements with online partners whose products and services can be accessed through our web properties, such as the GoogleTM search engine; and fees charged for advertising on our various web properties.

The decrease in value-added services revenues was due primarily to a decrease in subscribers for ancillary services, primarily security services, and in search revenues. The decrease resulted from the decline in total average consumer subscribers.  However, partially offsetting this decrease was an increase in subscription revenue per subscriber.

Cost of revenues

The following table presents cost of revenues by segment for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended									Nine Months Ended
	September 30,				Change					September 30,				Change
	2010		2011		Dollar			Percent		2010		2011		Dollar			Percent
	(dollars in thousands)
Business Services	$	20,589	$	132,718	$	112,129		545	%	$	59,577	$	339,325	$	279,748		470	%
Consumer Services	34,435		28,609		(5,826		)	-17	%	110,456		90,082		(20,374		)	-18	%
Total cost of revenues	$	55,024	$	161,327	$	106,303		193	%	$	170,033	$	429,407	$	259,374		153	%

40

Business Services

Cost of revenues for our Business Services segment primarily consists of the cost of connecting customers to our networks via leased facilities; the costs of leasing components of our network facilities; costs paid to third-party providers for interconnect access and transport services; and the cost of equipment sold to customers for use with our services.

The increase in Business Services cost of revenues compared to the prior year periods were primarily due to the inclusion of $115.2 million and $285.8 million of cost of revenues during the three and nine months ended September 30, 2011, respectively, generated from the acquired businesses of ITC^DeltaCom, One Communications and STS Telecom. Partially offsetting this was a decrease in cost of revenues resulting from network cost efficiencies and a decline in web hosting accounts and business Internet access customers.

Consumer Services

Cost of revenues for our Consumer Services segment primarily consists of telecommunications fees and network operations costs incurred to provide our Internet access services; fees paid to suppliers of our value-added services; fees paid to content providers for information provided on our online properties; and the cost of equipment sold to customers for use with our services. Our principal provider for narrowband services is Level 3 Communications, Inc. We also purchase lesser amounts of narrowband services from certain regional and local providers. Our principal providers of broadband connectivity are AT&T Inc., Bright House Networks, Comcast Corporation, Covad Communications Group, Inc., Qwest Corporation, Time Warner Cable and Verizon Communications, Inc. Cost of revenues for our Consumer Services segment 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.

The decreases in Consumer Services cost of revenues compared to the prior year periods were 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.

We expect Consumer Services segment cost of revenues to continue to decrease as a result of declines in average consumer subscribers. 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 Consumer Services segment cost of revenues due to the higher costs associated with delivering broadband services.

Selling, general and administrative

The following table presents our selling, general and administrative expenses for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2010		2011		Dollars		Percent		2010		2011		Dollars		Percent
	(dollars in thousands)
Selling, general and administrative expenses	$	41,896	$	108,827	$	66,931	160	%	$	127,517	$	295,786	$	168,269	132	%

Selling, general and administrative expenses consist of expenses related to sales and marketing, customer service, network operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs (including stock-based compensation), outsourced labor, professional fees, property taxes, travel, insurance, rent, advertising and other administrative expenses.

41

The increase in selling, general and administrative expenses compared to the prior year periods was due to the inclusion of $73.1 million and $187.7 million of selling, general and administrative expenses during the three and nine months ended September 30, 2011, respectively, from the acquired businesses of ITC^DeltaCom, and One Communications and STS Telecom . Partially offsetting this was a decrease in selling, general and administrative expenses in our Consumer Services segment consisting of decreases in personnel-related costs, outsourced labor, advertising expense, bad debt and payment processing fees and legal and professional fees.  The decreases resulted from reduced headcount and continued cost reduction initiatives, reduced discretionary sales and marketing spend, and continued benefits as our overall consumer subscriber base has decreased and become longer tenured. Longer tenured customers have a lower frequency of non-payment and require less customer service and technical support.

We expect that selling, general and administrative expenses will increase in the remainder of 2011 compared to the prior year periods due to our acquisitions. However, we expect to realize cost synergies as we integrate these acquisitions. We will continue to seek cost reduction initiatives, such as consolidating data centers and proprietary platforms.

Depreciation and amortization

The following table presents our depreciation and amortization expense for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2010		2011		Dollars		Percent		2010		2011		Dollars		Percent
	(dollars in thousands)
Depreciation expense	$	3,437	$	29,058	$	25,621	745	%	$	10,266	$	71,745	$	61,479	599	%
Amortization expense	890		17,509		16,619		1867	%	3,386		41,591		38,205		1128	%
Total	$	4,327	$	46,567	$	42,240	976	%	$	13,652	$	113,336	$	99,684	730	%

Depreciation and amortization includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses and purchases of customer bases from other companies. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the various asset classes. 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.

The increases in depreciation and amortization expense compared to the prior year periods were primarily attributable to expense resulting from property and equipment and definite-lived intangible assets obtained in the acquisitions of ITC^DeltaCom on December 8, 2010, One Communications on April 1, 2011 and STS Telecom on March 2, 2011. Also contributing to the increase in depreciation expense was an increase in capital expenditures.

We expect that depreciation and amortization expenses will increase in the remainder of 2011 compared to the prior year periods due to our acquisitions and as we expect to make additional capital investments in network expansion and network enhancements. Depreciation and amortization expenses may also increase as a result of potential strategic acquisitions.

42

Restructuring and acquisition-related costs

Restructuring and acquisition-related costs consisted of the following during the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010			2011		2010		2011
	(in thousands)
2007 Restructuring Plan	$	(210	)	$	57	$	1,136	$	520
Legacy Restructuring Plans	131			—		131		—
Total facility exit and restructuring costs	(79		)	57		1,267		520
Acquisition-related costs	2,000			8,909		2,000		23,997
Restructuring and acquisition-related costs	$	1,921		$	8,966	$	3,267	$	24,517

2007 Restructuring Plan. In August 2007, we adopted a restructuring plan to reduce costs and improve the efficiency of our operations (“the 2007 Plan”). 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. However, there have been and may continue to be changes in estimates to amounts previously recorded.

The following table reconciles the beginning and ending liability balances associated with the 2007 Plan as of September 30, 2011, including changes during the period attributable to costs incurred and charged to expense and costs paid or otherwise settled.

	Facilities			Assets			Total
	(in thousands)
Balance as of December 31, 2010	$	13,613		—			$	13,613
Accruals	597			(77		)	520
Payments	(5,415		)	77			(5,338		)
Non-cash charges	66			—			66
Balance as of September 30, 2011	$	8,861		$	—		$	8,861

Acquisition-Related Costs. Acquisition-related costs consist of costs directly related to EarthLink’s acquisitions, including transaction related costs, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; facility-related costs, such as lease termination and asset impairments; and integration-related costs, such as system conversion, rebranding costs and integration related consulting and employee costs. Acquisition-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring and acquisition-related costs in the Condensed Consolidated Statement of Operations. Acquisition-related costs consisted of the following during the three and nine months ended September 30, 2010 and 2011:

43

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Transaction related costs	$	2,000	$	325	$	2,000	4,867
Severance and retention costs	—		3,783		—		13,608
Facility exit costs	—		4,208		—		4,688
Integration related costs	—		593		—		834
Total acquisition-related costs	$	2,000	$	8,909	$	2,000	$	23,997

We expect to incur additional integration costs related to our recent acquisitions. Once the businesses are integrated, we expect to realize cost synergies from the combined businesses. However, we expect to incur upfront costs to gain these synergies. Such costs may include severance and employee benefits, the elimination of duplicate facilities and contracts and costs to develop common operating platforms, and may result in additional restructuring activities.

Interest expense and other, net

The following table presents our interest expense and other, net, for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2010		2011		Dollars		Percent		2010		2011		Dollars		Percent
	(dollars in thousands)
Interest expense and other, net	$	5,466	$	22,161	$	16,695	305	%	$	16,241	$	54,197	$	37,956	234	%

Interest expense and other, net, is primarily comprised of interest expense incurred on our debt and capital leases, amortization of debt issuance costs, debt premiums, and debt discounts; interest earned on our cash, cash equivalents and marketable securities; and other miscellaneous income and expense items.

The increases in interest expense and other, net, compared to the prior year periods were primarily due to the inclusion of ITC^DeltaCom interest expense and the issuance of new debt in May 2011. In connection with the ITC^DeltaCom acquisition in December 2010, we assumed $325.0 million aggregate principal amount of ITC^DeltaCom’s 10.5% senior secured notes due 2016 (the “ITC^DeltaCom Notes”).  In May 2011, we issued $300.0 million aggregate principal amount of 8-7/8% Senior Notes due 2019 (the “Senior Notes”).

We expect interest expense and other, net, to increase in the remainder of 2011 compared to prior year periods as a result of the ITC^DeltaCom Notes and the Senior Notes. However, we expect interest expense and other, net, will decrease in future periods as a result of the redemption of our convertible senior notes due 2026 (the “Convertible Notes”). On October 14, 2011, we issued a notice of redemption to redeem all of our outstanding $255.8 million principal amount of Convertible Notes.  The redemption date is November 15, 2011.

44

Income tax provision

The following table presents the components of the income tax provision for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Current provision	$	984	$	940	$	3,583	$	4,357
Deferred provision	14,155		997		45,530		11,851
Total income tax provision	$	15,139	$	1,937	$	49,113	$	16,208

The current provisions were due to state income and federal and state alternative minimum tax amounts payable due to the net operating loss carryforward limitations associated with the alternative minimum tax calculation and the non-cash deferred tax provisions were due primarily to the utilization of net operating loss carryforwards.

We continue to maintain a valuation allowance of $40.0 million against our unrealized deferred tax assets, which include net operating loss carryforwards. Of this amount, $31.6 million relates to net operating losses generated by the tax benefits of certain stock compensation arrangements. Upon utilization of these net operating losses, the valuation allowance will be removed as an adjustment to additional paid-in-capital. Approximately $8.0 million relates to net operating losses in certain jurisdictions where we believe it is not “more likely than not” to be recognized in future periods.  In addition, valuation allowance of $0.4 million was established in 2010 relating to stock compensation deferred tax assets.

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.

Segment Results of Operations

We operate two reportable segments, Business Services and Consumer 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 Business Services segment provides a comprehensive suite of communications and technology services, including voice, data, managed network services, cloud hosting and equipment services, to businesses, enterprise organizations and communications carriers. Our Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

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), depreciation and amortization, impairment of goodwill and intangible assets, restructuring and acquisition-related costs and stock-based compensation expense, as they are not considered in the measurement of segment performance.

45

Business Services Segment

The following table sets forth operating results for our Business Services segment for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended								Nine Months Ended
	September 30,				Change				September 30,				Change
	2010		2011		Dollars		Percent		2010		2011		Dollars		Percent
	(dollars in thousands)
Segment revenues	$	33,631	$	265,743	$	232,112	690	%	$	100,027	$	675,729	$	575,702	576	%
Segment operating income	2,729		50,871		$	48,142	1764	%	10,431		121,920		$	111,489	1069	%

The increases in Business Services revenues and operating income compared to the prior year periods were primarily due to the inclusion of ITC^DeltaCom and One Communications results of operations. This was partially offset by a decrease in other Business Services revenues, which was primarily due to declining business demand and competitive pricing pressures for our web hosting services and business Internet access services.

Consumer Services Segment

The following table sets forth operating results for our Consumer Services segment for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended									Nine Months Ended
	September 30,				Change					September 30,				Change
	2010		2011		Dollars			Percent		2010		2011		Dollars			Percent
	(dollars in thousands)
Segment revenues	$	111,527	$	91,547	$	(19,980	)	-18	%	$	355,396	$	288,138	$	(67,258	)	-19	%
Segment operating income	55,849		45,582		(10,267		)	-18	%	178,408		144,179		(34,229		)	-19	%

The decrease in Consumer Services revenues and operating income compared to the prior year periods was primarily due to the continued maturation of and competition in the market for narrowband Internet access and competitive pressures in the industry. The decrease in revenue was partially offset by a decrease in operating expenses as our consumer 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.

46

The following table sets forth subscriber and operating data for our Consumer Services segment for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2011			2010			2011
Consumer Subscriber Activity
Subscribers at beginning of year	1,808,000			1,478,000			2,029,000			1,636,000
Gross organic subscriber additions	72,000			49,000			206,000			136,000
Churn	(165,000		)	(117,000		)	(520,000		)	(362,000		)
Subscribers at end of period (a)	1,715,000			1,410,000			1,715,000			1,410,000
Consumer Metrics
Average narrowband subscribers (b)	1,024,000			802,000			1,100,000			853,000
Average broadband subscribers (b)	737,000			640,000			764,000			666,000
Average consumer subscribers (b)	1,761,000			1,442,000			1,864,000			1,519,000
ARPU (c)	$	21.11		$	21.13		$	21.19		$	21.07
Churn rate (d)	3.1		%	2.7		%	3.1		%	2.7		%

(a) Subscriber counts do not include new 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)  Average subscribers for the three month periods is calculated by averaging the ending monthly subscribers or accounts for the four months preceding and including the end of the period. Average subscribers for the nine month periods is calculated by averaging the ending monthly subscribers or accounts for the ten months preceding and including the end of the period.

(c) ARPU represents the average monthly revenue per user (subscriber). ARPU is computed by dividing average monthly revenue for the period 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.

(d) 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 period by the average subscribers for the period.

Stock-Based Compensation

We measure stock-based compensation cost for all stock awards at fair value on the date of grant and recognize 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 quoted price of our common stock on the date of grant. Such value is recognized as compensation 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.

47

Stock-based compensation expense is classified within selling, general and administrative expenses, which is the same operating expense line item as cash compensation paid to employees. The following table presents stock-based compensation expense for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Stock-based compensation	$	2,704	$	3,369	$	7,078	$	10,454

Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the nine months ended September 30, 2010 and 2011:

	Nine Months Ended
	September 30,						Change
	2010			2011			Dollars			Percent
	(dollars in thousands)
Net cash provided by operating activities	$	127,205		$	116,480		$	(10,725	)	-8	%
Net cash (used in) provided by in investing activities	(259,600		)	205,389			464,989			-179	%
Net cash used in financing activities	(51,198		)	(49,511		)	1,687			-3	%
Net (decrease) increase in cash and cash equivalents	$	(183,593	)	$	272,358		$	455,951		-248	%

Operating activities

The decrease in cash provided by operating activities during the nine months ended September 30, 2011 compared to the prior year period was primarily due to cash used to settle liabilities assumed in our acquisition of One Communications and increased liabilities associated with our acquisitions, including severance and retention costs, transaction costs and other integration-related costs.

Investing activities

The increase in cash flows from investing activities was primarily due to a change in cash associated with investments in marketable securities. During the nine months ended September 30, 2010, we used cash of $252.5 million for purchases of investments in marketable securities, net of sales and maturities, as we invested some of our excess cash in longer term marketable securities.  During the nine months ended September 30, 2011, we received cash of $319.7 million for sales and maturities of investments in marketable securities as we converted our investments to cash equivalents during the period.  The overall increase in cash flows from investing activities was offset by a $40.1 million increase in cash used for acquisitions, net of cash acquired, and a $62.2 million increase in capital expenditures, primarily due to the inclusion of capital expenditures of our acquired companies, network and technology center related projects and customer acquisition costs. We continue to focus on investment in our technology infrastructure to support our long-term strategic plans.

48

Financing activities

The decrease in net cash used in financing activities was primarily due to a $32.8 million decrease in dividend payments and a $9.6 million net change in cash associated with our debt obligations, partially offset by a $38.7 million increase in cash used to repurchase common stock. Dividend payments decreased from $50.1 million during the nine months ended September 30, 2010 to $17.3 million during the nine months ended September 30, 2011 as we reduced the amount of our quarterly dividend from $0.16 per share to $0.05 per share in the beginning of 2011. During the nine months ended September 30, 2010, we used $0.9 million to repurchase 0.1 million shares of our common stock and during the nine months ended September 30, 2011, we used $39.5 million to repurchase 5.0 million shares of our common stock.

In May 2011, we issued $300.0 million aggregate principal amount of 8-7/8% Senior Notes due 2019 at an issue price of 96.555% and received net proceeds of $280.3 million after transaction fees. We also paid transaction fees of $1.9 million related to our senior secured revolving credit facility entered into in May 2011.

In connection with the One Communications acquisition, we repaid $266.5 million of One Communications debt. In addition, under the indenture for the ITC^DeltaCom Notes, following the consummation of the acquisition of ITC^DeltaCom, ITC^DeltaCom was required to offer to repurchase any or all of the ITC^DeltaCom Notes at 101% of their principal amount.  The tender window was open from December 20, 2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the ITC^DeltaCom Notes was repurchased in January 2011. Also during the nine months ended September 30, 2011, we repaid $3.0 million of debt assumed in the STS Telecom acquisition.

Future Uses of cash

Our primary future cash requirements will be to fund outstanding indebtedness, capital expenditures, acquisition-related costs, dividends and cost reduction initiatives. In addition, we may use cash in the future to make strategic acquisitions or repurchase common stock or debt.

Debt and interest. We expect to use cash to service our outstanding indebtedness. On October 14, 2011, we issued a notice of redemption to redeem all of our $255.8 million outstanding principal amount of convertible senior notes due 2026 (“Convertible Notes”).  The redemption date is November 15, 2011. In addition, on November 15, 2011, holders of our Convertible Notes have the right under the governing indenture to require us to repurchase the Convertible Notes. In addition, from October 15, 2011 to November 15, 2011, the Convertible Notes are convertible. We will use cash to repurchase Convertible Notes or in connection with holders’ conversion of Convertible Notes if the holders exercise their right on those dates or on potential future dates. In addition, in connection with our acquisition of ITC^DeltaCom, we assumed ITC^DeltaCom’s outstanding $324.8 million aggregate principal amount of 10.5% senior secured notes due on April 1, 2016. As a result, we also expect to use cash for incremental interest payments. We also may use cash to redeem the Convertible Notes or the ITC^DeltaCom Notes in accordance with the terms of the related indenture or to purchase them in the open market. Finally, we expect to use cash for incremental interest payments related to our Senior Notes issued in May 2011.

Capital expenditures. We believe that to remain competitive with much larger communications companies, we will require significant additional capital expenditures to enhance and operate our fiber network. We plan on making network investments to support our future expansion and further enhance our customers’ experience and growth opportunities. We expect to incur capital expenditures of approximately $34 million to $44 million during the remainder of 2011 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 obsolete equipment.

Acquisition-related costs. We expect to continue to use cash for one-time costs related to our recent acquisitions, including severance and retention costs and integration-related costs. These transactions may result in significant costs and expenses, including those related to severance pay, payments to executive officers and

49

key employees under retention plans, employee benefit costs, and legal, accounting and financial advisory fees. There are a number of systems that continue to be integrated, including management information, sales, billing and human resources.  We expect to incur expenses in connection with integrating the businesses, policies, procedures, operations, technologies and systems of our acquisitions to common platforms.   In addition, we expect to continue to incur integration costs related to branding initiatives associated with changing the trade name to EarthLink Business.

Dividends. During the nine months ended September 30, 2010 and 2011, cash dividends declared were $0.46 and $0.15 per common share, respectively. We currently intend to continue to pay regular quarterly dividends on our common stock. However, 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.

Cost reduction initiatives. We plan to continue to implement cost reduction initiatives and to manage our business more efficiently. This may include outsourcing certain functions, renegotiating contracts with network service providers and consolidating or closing certain facilities, including our data centers. We may incur upfront costs in connection with implementing these initiatives. We will also continue to use cash to pay real estate obligations associated with facilities exited in our past restructuring plans and for workforce reduction initiatives. We expect to incur future cash outflows for real estate obligations through 2014 related to the 2007 Plan.

Other. We may use cash to invest in or acquire other companies or to repurchase common stock or debt. We expect to continue to evaluate and consider potential strategic transactions that we believe may complement our business.  Although we continue to consider and evaluate potential strategic transactions, there can be no assurance that we will be able to consummate any such transaction.

Our cash requirements depend on numerous factors, including costs required to integrate our acquisitions, costs required to repurchase debt, the size and types of future acquisitions in which we may engage, the costs required to maintain our network infrastructure, the pricing of our access services, and the level of resources used for our sales and marketing activities, among others. In addition, our use of cash in connection with acquisitions may limit other potential uses of our cash, including stock repurchases, debt repayments or repurchases, dividend payments and payments for outstanding indebtedness.

Future sources of cash

Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the nine months ended September 30, 2010 and 2011, we generated $127.2 million and $116.5 million in cash from operations, respectively. As of September 30, 2011, we had $515.3 million in cash and cash equivalents. 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.

Another source of liquidity is our revolving credit facility. In May 2011, we entered into a credit agreement providing for a senior secured revolving credit facility with aggregate revolving commitments of $150.0 million. Also in May 2011, we terminated our $30.0 million revolving credit facility entered into in March 2011. The senior secured revolving credit facility terminates in May 2015, and at that time all amounts outstanding thereunder shall be due and payable in full. No amounts were outstanding under the senior secured revolving credit facility as of September 30, 2011.

Our available cash and cash equivalents, together with our results of operations, are expected to be sufficient to meet our operating expenses, service outstanding indebtedness, capital requirements and investment and other obligations for the next 12 months. However, to increase available liquidity or to fund acquisitions or other strategic activities, we may seek additional financing. We have no commitments for any additional

50

financing and have no lines of credit or similar sources of financing, other than the $150.0 million credit facility we entered into in May 2011, which expires in May 2015. 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.

Contractual Obligations and Commitments

The following table sets forth our contractual obligations and commercial commitments as of September 30, 2011:

			Payment Due by Period
			Remaining		2012 -		2014 -
	Total		2011		2013		2015		After 5 Years
					(in thousands)
Long-term debt, including current portion (1)	$	880,591	$	255,791	$	—	$	—	$	624,800
Interest payments on long-term debt (2)	372,595		34,532		121,500		121,500		95,063
Purchase commitments (3)	139,490		25,880		83,832		19,429		10,349
Operating leases (4)	210,352		10,983		76,168		46,293		76,908
Capital leases (5)	32,479		1,025		7,212		6,466		17,776
Total (6)	$	1,635,507	$	328,211	$	288,712	$	193,688	$	824,896

(1)  Long-term debt, including current portion, includes principal payments on outstanding debt obligations. Long-term debt, including current portion, excludes unamortized discounts and premiums. As of September 30, 2011, we had $880.6 million aggregate principal amount of debt outstanding, consisting of $300.0 million of 8-7/8% Senior Notes due 2019, $324.8 million of ITC^DeltaCom’s 10.5% senior secured notes due on April 1, 2016 and $255.8 million of convertible senior notes due November 15, 2026.

On October 14, 2011, we issued a notice of redemption to redeem all of our $255.8 million outstanding principal amount of Convertible Notes.  The redemption date is November 15, 2011.

(2)  Interest payments on long-term debt includes interest due on outstanding debt through maturity, except for our Convertible Notes. Interest payments on our Convertible Notes assumes repurchase or conversion during the year ended December 31, 2011.

(3) Purchase commitments represent non-cancellable contractual obligations for services and equipment; minimum commitments under network access agreements with several carriers; and non-cancelable contractual obligations for certain advertising spending.

(4) These amounts represent base rent payments under non-cancellable operating leases for facilities and equipment that expire in various years through 2016, as well as an allocation for operating expenses. Not included in these amounts is expected sublease income of $0.5 million during the remaining nine months in the year ended December 31, 2011 and $1.9 million, $2.0 million and $1.1 million during the years ended December 31, 2012, 2013 and 2104, respectively.

(5)  Represents remaining payments under capital leases, including interest, substantially all of which were assumed from our acquisition of One Communications.

(6)  The table does not include our reserve for uncertain tax positions, which as of September 30, 2011 total $6.9 million, as the specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty.

51

Debt Covenants

Under the indentures governing our debt agreements, acceleration on principal payments would occur upon payment default or violation of debt covenants. We were in compliance with all covenants under our debt agreements as of September 30, 2011.

Off-Balance Sheet Arrangements

As of September 30, 2011, 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.

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 September 30, 2011, we had utilized approximately $642.7 million pursuant to the authorizations and had $107.3 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.

Cautionary Note Concerning Factors That May Affect Future Results

The Management’s Discussion and Analysis and other portions of this Quarterly Report on Form 10-Q 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 and uncertainties (1) that we may not be able to execute our business strategy to grow our business services revenue, which could adversely impact our results of operations and cash flows; (2) that we may be unsuccessful in making and integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (3) that if we do not continue to innovate and provide products and services that are useful to individual subscribers and business customers, we may not remain competitive, and our revenues and operating results could suffer; (4) that the continuing effects of adverse economic conditions could harm our business;  (5) that we face significant competition in the communications industry that could reduce our profitability; (6) that decisions by the Federal Communications Commission relieving ILECs of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (7) that our wholesale services, including our broadband transport services, will be adversely affected by pricing pressure, network overcapacity, service cancellations and other factors; (8) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (9) that we may experience reductions in switched access and reciprocal compensation revenue; (10) that our inability to maintain our network infrastructure, portions of which we do not own, could adversely affect our operating results; (11) that if we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (12) that we may not be able to compete effectively if we are unable to install additional network equipment or convert our network to more advanced technology; (13) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (14) that our failure to implement cost reduction initiatives will adversely affect our results of operations; (15) that we face significant competition in the Internet industry that could reduce our profitability; (16) that our consumer business is dependent on the availability of third-party network service providers; (17) that the continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband to broadband, will adversely affect our results of operations; (18)

52

that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (19) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (20) that changes in technology in the Internet access industry could cause a decline in our business; (21) that we may be unable to employ sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (22) 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; (23) that our business depends on effective business support systems and processes; (24) that government regulations could adversely affect our business or force us to change our business practices; (25) 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; (26) that we may not be able to protect our intellectual property; (27) 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; (28) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (29) 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; (30) that we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (31) 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; (32) that we may reduce, or cease payment of, quarterly cash dividends; (33) that our stock price may be volatile; (34) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; and (35) 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, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010 (as amended on Form 10-K/A).

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in market risk from the information provided in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2010 (as amended on Form 10-K/A).

Item 4. 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.

53

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1.    Legal Proceedings.

The Company is party to various legal proceedings arising from normal business activities. The result of any current or future disputes, litigation or other legal proceedings is inherently unpredictable. The Company’s management, however, believes that there are no disputes, litigation or other legal proceedings asserted or pending against the Company that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in the Company’s condensed consolidated financial statements.

Item 1A.  Risk Factors.

There were no material updates to the risk factors discussed in EarthLink’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The number of shares repurchased and the average price paid per share for each month in the three months ended September 30, 2011 are as follows:

				Total Number of	Maximum Dollar
	Total Number	Average		Shares Repurchased	Value that May
	of Shares	Price Paid		as Part of Publicly	Yet be Purchased
2011	Repurchased	per Share		Announced Program (1)	Under the Program
	(in thousands, except average price paid per share)
July 1 through July 31	—	$	—	—	$	110,799
August 1 through August 31	—	—		—	110,799
September 1 through September 30	510	6.82		510	107,313
Total	510			510

(1)Since the inception of the share repurchase program (“Repurchase Program”), the Board of Directors has authorized a total of $750.0 million for the repurchase of our common stock. The Board of Directors has also approved repurchasing common stock pursuant to plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. 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 Repurchase Program does not require EarthLink to acquire any specific number of shares and may be terminated at any time.

54

Item 5.  Other Information.

None.

Item 6.   Exhibits.

(a)Exhibits.   The following exhibits are filed as part of this report:

4.1	Second Supplemental Indenture, Supplementing the Indenture Dated as of May 17, 2011, among EarthLink, Inc., the subsidiary guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee.
4.2	Joinder Agreement dated as of September 27, 2011 by and between Business Vitals, LLC, and Regions Bank, in its capacities as Administrative Agent and Collateral Agent under that certain Credit Agreement dated as of May 20, 2011 among EarthLink, Inc., certain other Credit Parties party thereto from time to time, the Lenders from time to time party thereto and Regions Bank, as Administrative Agent and Collateral Agent.
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.
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

*Pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections.

55

SIGNATURES

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

		EARTHLINK, INC.
Date:	November 4, 2011	/s/ ROLLA P. HUFF
		Rolla P. Huff, Chairman of the Board and Chief Executive Officer (principal executive officer)
Date:	November 4, 2011	/s/ BRADLEY A. FERGUSON
		Bradley A. Ferguson, Chief Financial Officer
		(principal financial and accounting officer)

56