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 "Safe Harbor Statement" in this Item 2.

The following discussion 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, 2008.

Overview

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

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

Business Strategy

Our business strategy is to focus on customer retention, operational efficiency and opportunities for growth.

† Customer Retention. We are focused on retaining our existing tenured customers. We believe focusing on the customer relationship increases loyalty and reduces churn. We also believe that these tenured customers provide cost benefits, including reduced call center support costs and reduced bad debt expense. We continue to focus on offering our access services with high-quality customer service and technical support.

† Operational Efficiency. We are focused on improving the cost structure of our business and aligning our cost structure with trends in our revenue, without impacting the quality of services we provide. We are focused on delivering our services more cost effectively by reducing and more efficiently handling the number of calls to contact centers, managing cost-effective outsourcing opportunities, managing our network costs, implementing workforce reduction initiatives and streamlining our internal processes and operations.

† Opportunities for Growth. In response to changes in our business, we have significantly reduced our sales and marketing spending. However, we continue to seek to add customers that generate an

acceptable rate of return and increase the number of subscribers we add through alliances, partnerships and acquisitions from other ISPs. We also continue to evaluate potential strategic transactions within the business segments in which we currently operate.

The primary challenges we face in executing our business strategy are managing the rate of decline in our revenues, responding to competition, reducing churn, implementing cost reduction initiatives, purchasing cost-effective wholesale broadband access and adding customers that generate an acceptable rate of return. In addition, there can be no assurance that we will be able to consummate any such potential strategic transaction. The factors we believe are instrumental to the achievement of our business strategy may be subject to events and circumstances that are beyond our control. Further, we can provide no assurance that we will be successful in achieving any or all of the strategies identified above, that the achievement or existence of such strategies will favorably impact profitability, or that other factors will not arise that would adversely affect future profitability.

Revenue Sources

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

Narrowband access revenues consist of fees charged to customers for dial-up Internet access. Broadband access revenues consist of fees charged for high-speed access services; fees charged for managing private IP-based networks; fees charged for VoIP services; usage fees; activation fees; termination fees; fees for equipment; and regulatory surcharges billed to customers. Web hosting revenues consist of fees charged for leasing server space and providing web services to customers wishing to have a web or e-commerce presence. Value-added services revenues consist of fees charged for ancillary services; fees charged for paid placements for searches; delivering traffic to EarthLink's partners in the form of subscribers, page views or e-commerce transactions; advertising EarthLink partners' products and services in EarthLink's various online properties and electronic publications; and referring EarthLink customers to partners' products and services.

Trends in our Business

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

In light of this continued maturation of the market for narrowband access, we refocused our business strategy to significantly reduce our sales and marketing efforts and focus instead on retaining tenured customers and adding customers that have similar characteristics of our tenured customer base and are more likely to produce an acceptable rate of return. However, we expect the rate of revenue decline to decrease as our subscriber base becomes more tenured. We experienced an improvement in consumer subscriber churn rates during the three and nine months ended September 30, 2009 compared to the prior year periods. However, 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, and we may not be able to align our cost structure with a decline in our revenue.

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

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

Third Quarter 2009 Highlights

Total revenues decreased $56.3 million, or 24%, from the three months ended September 30, 2008 to the three months ended September 30, 2009, as our subscriber base decreased from approximately 3.0 million paying subscribers as of September 30, 2008 to approximately 2.3 million paying subscribers as of September 30, 2009. The decrease in subscribers was attributable to our reduced sales and marketing activities, as well as the continuing maturation of the narrowband Internet access market. Offsetting the decline in total revenues was a $48.7 million, or 28%, decline in total operating costs and expenses. Total operating costs and expenses decreased primarily due to reduced telecommunications costs, sales and marketing spending, back-office support costs and customer support and bad debt expense as our overall subscriber base has decreased and become longer tenured. Our longer tenured customers require less customer service and technical support and have a lower frequency of non-payment. We recognized net income of $29.9 million during the three months ended September 30, 2009 compared to $51.9 million during the three months ended September 30, 2008. The decrease in net income was primarily due to the decrease in revenues and an increase in our income tax provision, offset by the decrease in total operating costs and expenses described above.

Looking Ahead

We expect total revenues to continue to decrease during the remainder of 2009 and into 2010 as we continue to reduce our sales and marketing efforts, and as the market for Internet access continues to mature. However, we expect the rate of revenue decline to decelerate as our customer base becomes longer tenured and churn rates go down. Consistent with trends in the Internet access industry, we expect the mix of our consumer access subscriber base to continue to shift from narrowband access to broadband access customers, which will negatively affect our profitability. We also expect economic conditions to put continued pressure on revenue and churn rates for our business services, and may impact revenue and churn for our consumer services. We expect cost savings associated with our decreased sales and marketing activities during the remainder of 2009 and into 2010, and decreased support costs from a lower and longer tenured customer base and as a result of our efforts to reduce our cost structure. We are implementing certain cost cutting initiatives in the remainder of 2009 as part of our efforts to align costs with trends in our revenue. However, we believe that large-scale cost reduction opportunities will be more limited in the future. In addition, although we seek to align our cost structure with trends in our revenue, we may not be able to reduce our cost structure to the same extent as our revenue declines.

Dividends

In July 2009, our Board of Directors declared a quarterly cash dividend on our common stock of $0.14 per share to stockholders of record on September 14, 2009. The dividend was paid on September 28, 2009 and totaled $15.0 million. In October 2009, our Board of Directors declared a quarterly cash dividend on our common stock of $0.14 per share to be paid on December 23, 2009 to stockholders of record on December 9, 2009. We currently intend to continue to pay regular quarterly dividends on our common stock. The Board of Directors also approved the payment of cash dividend amounts on each outstanding restricted stock unit to be paid at the time the restricted stock unit vests. 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.

Key Operating Metrics

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

                                 September 30,    December 31,     June 30,     September 30,
                                     2008             2008           2009           2009
Subscriber Data (a)
Consumer Services
Narrowband access subscribers        1,920,000       1,747,000     1,456,000        1,329,000
Broadband access subscribers
(b)                                    933,000         896,000       845,000          832,000
Total consumer services              2,853,000       2,643,000     2,301,000        2,161,000
Business Services
Narrowband access subscribers           19,000          17,000        11,000            9,000
Broadband access subscribers            61,000          59,000        56,000           55,000
Web hosting accounts                    91,000          87,000        81,000           78,000
Total business services                171,000         163,000       148,000          142,000
Total subscriber count at end
of period                            3,024,000       2,806,000     2,449,000        2,303,000




                                           Three Months Ended                Nine Months Ended
                                              September 30,                    September 30,
                                          2008            2009             2008             2009
Subscriber Activity
Subscribers at beginning of period       3,299,000        2,449,000        3,876,000       2,806,000
Gross organic subscriber additions         137,000          108,000          552,000         344,000
Aquired subscribers                          2,000                -            2,000               -
Adjustment (c)                             (15,000 )              -          (15,000 )        (7,000 )
Churn                                     (399,000 )       (254,000 )     (1,391,000 )      (840,000 )
Subscribers at end of period             3,024,000        2,303,000        3,024,000       2,303,000

Churn rate (d)                                 4.2 %            3.6 %            4.5 %           3.7 %

Consumer Services Data
Average subscribers (e)                  2,980,000        2,207,000        3,256,000       2,382,000
ARPU (f)                              $      21.00    $       20.87    $       20.66    $      20.77
Churn rate (d)                                 4.3 %            3.7 %            4.6 %           3.8 %

Business Services Data
Average subscribers (e)                    176,000          144,000          183,000         152,000
ARPU (f)                              $      81.50    $       84.08    $       81.33    $      82.98
Churn rate (d)                                 3.2 %            2.5 %            2.8 %           2.8 %

(b) Customers who subscribe to our EarthLink DSL and Home Phone service are counted as both a broadband subscriber and a voice subscriber.

(c) During the nine months ended September 30, 2009, we removed approximately 7,000 satellite subscribers from our broadband subscriber count and total subscriber count as a result of our sale of these subscriber accounts. During the three and nine months ended September 30, 2008, we removed approximately 15,000 EarthLink supported Sprint customers from our broadband subscriber counts due to the termination of a wholesale arrangement by Sprint.

(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.

(e) Average subscribers or accounts 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 quarterly period. Average subscribers or accounts 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 quarterly period.

(f) 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 period. 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.