UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

OR

o TRANSITION 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 July 31, 2013, 102,999,383 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 June 30, 2013

TABLE OF CONTENTS

Part I
Item 1.  Financial Statements	1
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.  Controls and Procedures	52
Part II
Item 1.  Legal Proceedings	53
Item 1A.  Risk Factors	53
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 5.  Other Information	53
Item 6.  Exhibits	54
Signatures	55

PART I

Item 1.  Financial Statements.

EARTHLINK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31, 2012			June 30, 2013
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	157,621		$	113,900
Marketable securities	42,073			28,036
Restricted cash	1,013			—
Accounts receivable, net of allowance of $7,872 and $8,027 as of December 31, 2012 and June 30, 2013, respectively	112,765			109,878
Prepaid expenses	17,171			21,033
Deferred income taxes, net	15,954			9,363
Other current assets	20,303			12,076
Total current assets	366,900			294,286
Long-term marketable securities	4,778			—
Property and equipment, net	418,966			435,587
Long-term deferred income taxes, net	195,012			240,710
Goodwill	379,415			122,715
Other intangible assets, net	214,685			182,983
Other long-term assets	19,654			27,548
Total assets	$	1,599,410		$	1,303,829
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,792		$	11,760
Accrued payroll and related expenses	31,003			21,115
Other accrued liabilities	129,572			113,239
Deferred revenue	51,690			52,753
Current portion of long-term debt and capital lease obligations	1,375			1,381
Total current liabilities	232,432			200,248
Long-term debt and capital lease obligations	614,890			606,689
Other long-term liabilities	33,284			31,554
Total liabilities	880,606			838,491
Stockholders’ equity:
Convertible preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares issued and outstanding as of December 31, 2012 and June 30, 2013	—			—
Common stock, $0.01 par value, 300,000 shares authorized, 196,919 and 197,346 shares issued as of December 31, 2012 and June 30, 2013, respectively, and 102,739 and 102,938 shares outstanding as of December 31, 2012 and June 30, 2013, respectively	1,969			1,973
Additional paid-in capital	2,057,974			2,053,451
Accumulated deficit	(606,148		)	(853,764		)
Treasury stock, at cost, 94,180 and 94,408 shares as of December 31, 2012 and June 30, 2013, respectively	(735,003		)	(736,323		)
Accumulated other comprehensive income	12			1
Total stockholders’ equity	718,804			465,338
Total liabilities and stockholders’ equity	$	1,599,410		$	1,303,829

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

1

EARTHLINK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2013			2012			2013
	(in thousands, except per share data) (unaudited)
Revenues	$	334,479		$	313,401		$	675,570		$	630,189
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	165,554			152,938			322,602			305,804
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	104,418			104,980			212,335			211,558
Depreciation and amortization	45,945			44,270			91,173			87,625
Impairment of goodwill	—			—			—			255,599
Restructuring, acquisition and integration-related costs	3,836			7,278			7,357			18,540
Total operating costs and expenses	319,753			309,466			633,467			879,126
Income (loss) from operations	14,726			3,935			42,103			(248,937		)
Interest expense and other, net	(15,709		)	(18,173		)	(31,467		)	(32,729		)
Income (loss) from continuing operations before income taxes	(983		)	(14,238		)	10,636			(281,666		)
Income tax benefit (provision)	376			3,329			(3,271		)	35,447
Income (loss) from continuing operations	(607		)	(10,909		)	7,365			(246,219		)
Loss from discontinued operations, net of tax	(499		)	(292		)	(1,208		)	(1,397		)
Net income (loss)	$	(1,106	)	$	(11,201	)	$	6,157		$	(247,616	)
Other comprehensive income (loss), net of tax:
Unrealized holding (losses) gains on investments, net of tax	(4		)	(12		)	10			(11		)
Other comprehensive income (loss), net of tax	(4		)	(12		)	10			(11		)
Comprehensive income (loss)	$	(1,110	)	$	(11,213	)	$	6,167		$	(247,627	)
Basic net income (loss) per share
Continuing operations	$	(0.01	)	$	(0.11	)	$	0.07		$	(2.39	)
Discontinued operations	—			—			(0.01		)	(0.01		)
Basic net income (loss) per share	$	(0.01	)	$	(0.11	)	$	0.06		$	(2.40	)
Basic weighted average common shares outstanding	106,244			103,011			106,252			102,963
Diluted net income (loss) per share
Continuing operations	$	(0.01	)	$	(0.11	)	$	0.07		$	(2.39	)
Discontinued operations	—			—			(0.01		)	(0.01		)
Diluted net income (loss) per share	$	(0.01	)	$	(0.11	)	$	0.06		$	(2.40	)
Diluted weighted average common shares outstanding	106,244			103,011			107,036			102,963
Dividends declared per share	$	0.05		$	0.05		$	0.10		$	0.10

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

2

EARTHLINK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2012			2013
Cash flows from operating activities:	(in thousands) (unaudited)
Net income (loss)	$	6,157		$	(247,616	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	91,173			87,625
Impairment of goodwill	—			255,599
Loss (gain) on disposals and sales of fixed assets	928			(6		)
Non-cash income taxes	(137		)	(35,603		)
Stock-based compensation	5,540			7,979
Amortization of debt discount, premium and issuance costs	(973		)	48
Loss on repayment of debt	—			2,080
Other operating activities	(829		)	(382		)
Decrease in accounts receivable, net	1,114			2,713
(Increase) decrease in prepaid expenses and other assets	(474		)	459
Decrease in accounts payable and accrued and other liabilities	(14,866		)	(30,402		)
Increase in deferred revenue	829			1,046
Net cash provided by operating activities	88,462			43,540
Cash flows from investing activities:
Purchases of property and equipment	(56,225		)	(76,855		)
Purchases of marketable securities	(40,037		)	(41,209		)
Sales and maturities of marketable securities	21,132			60,024
Purchase of customer relationships	—			(1,195		)
Change in restricted cash	767			1,013
Net cash used in investing activities	(74,363		)	(58,222		)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs	—			290,673
Repayment of debt and capital lease obligations	(886		)	(309,198		)
Repurchases of common stock	(5,052		)	—
Payment of dividends	(10,777		)	(10,539		)
Proceeds from exercises of stock options	236			—
Other financing activities	49			25
Net cash used in financing activities	(16,430		)	(29,039		)
Net decrease in cash and cash equivalents	(2,331		)	(43,721		)
Cash and cash equivalents, beginning of period	211,783			157,621
Cash and cash equivalents, end of period	$	209,452		$	113,900

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, is a leading network, communications and IT services provider 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 broad range of data, voice and IT services to retail and wholesale business customers. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. The Company operates an extensive network including approximately 29,521 route fiber miles, 90 metro fiber rings and eight enterprise-class data centers that provide IP coverage across more than 90 percent of the United States. For further information concerning the Company’s reportable segments, see Note 15, “Segment Information.”

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements of EarthLink for the three and six months ended June 30, 2012 and 2013 and the related footnote information are unaudited and have been prepared on a basis consistent with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 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 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 six months ended June 30, 2013 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2013.

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.

Discontinued Operations

 The operating results of the Company's telecom systems business acquired as part of ITC^DeltaCom, Inc. ("ITC^DeltaCom") have been separately presented as discontinued operations for all periods presented. See Note6, "Discontinued Operations," for further discussion.

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 period financial statements have been reclassified to conform to the current period presentation.

Recently Issued Accounting Pronouncement

In July 2013, the Financial Accounting Standards Board issued authoritative guidance on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction

4

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the impact of the adoption of this new guidance 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 (loss) 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 and restricted stock units (collectively “Common Stock Equivalents”), were exercised, vested or converted into common stock. The dilutive effect, if any, of outstanding stock options and restricted stock units 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.

The following table sets forth the computation for basic and diluted net income (loss) per share for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands, except per share data)
Numerator
Income (loss) from continuing operations	$	(607	)	$	(10,909	)	$	7,365		$	(246,219	)
Loss from discontinued operations, net of tax	(499		)	(292		)	(1,208		)	(1,397		)
Net income (loss)	$	(1,106	)	$	(11,201	)	$	6,157		$	(247,616	)
Denominator
Basic weighted average common shares outstanding	106,244			103,011			106,252			102,963
Dilutive effect of Common Stock Equivalents	—			—			784			—
Diluted weighted average common shares outstanding	106,244			103,011			107,036			102,963
Basic net income (loss) per share
Continuing operations	$	(0.01	)	$	(0.11	)	$	0.07		$	(2.39	)
Discontinued operations	—			—			(0.01		)	(0.01		)
Basic net income (loss) per share	$	(0.01	)	$	(0.11	)	$	0.06		$	(2.40	)
Diluted net income (loss) per share
Continuing operations	$	(0.01	)	$	(0.11	)	$	0.07		$	(2.39	)
Discontinued operations	—			—			(0.01		)	(0.01		)
Diluted net income (loss) per share	$	(0.01	)	$	(0.11	)	$	0.06		$	(2.40	)

During the six months ended June 30, 2012, approximately 3.0 million 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 Company has not included the effect of Common Stock Equivalents in the calculation of diluted earnings per share for the three months ended June 30, 2012 or the three and six months ended June 30, 2013 because such inclusion would have an anti-dilutive effect due to the Company's net loss. Anti-dilutive securities could be dilutive in future periods.

5

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

4.  Acquisitions

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 sections of the United States. The fair value of consideration transferred was $39.9 million which consisted of $20.0 million in cash 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, which included $87.4 million of goodwill. Approximately 59% of the goodwill is deductible for income tax purposes.

Pursuant to the terms of the merger agreement, the aggregate merger consideration included $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. As of December 31, 2012, approximately $1.4 million of cash and 0.2 million shares of common stock valued at $1.4 million had been returned to EarthLink. During the six months ended June 30, 2013, an arbitrator made a final decision with respect to the post-closing working capital adjustments. Pursuant to the arbitrator's decision, the Company received an additional $1.9 million of cash and 0.2 million shares of common stock valued at $1.3 million from the escrow account during the six months ended June 30, 2013, which was recorded in the Condensed Consolidated Statement of Comprehensive Loss.

CenterBeam

On July 1, 2013, EarthLink acquired CenterBeam, Inc. ("CenterBeam"), a privately-held information technology managed service provider delivering cloud computing and hosted IT services to mid-sized businesses, for a total consideration of approximately $22.7 million. With this acquisition, EarthLink intends to further grow its IT services portfolio by adding IT services customer scale, expanded IT support center resources and complementary products and capabilities.

The assets acquired and liabilities assumed of CenterBeam will be recognized at their acquisition date fair values.  The allocation of the consideration transferred to the assets acquired and liabilities assumed (and the related estimated lives of depreciable tangible and identifiable intangible assets) will require a significant amount of judgment and is subject to finalization. The preliminary allocation of the consideration transferred based on currently available information will result in approximately $14.8 million of goodwill, $6.6 million of identifiable intangible assets, $0.5 million of property and equipment and $0.8 million of net other tangible assets. 

5.  Restructuring, Acquisition and Integration-Related Costs

Restructuring, acquisition and integration-related costs consist of costs related to EarthLink’s restructuring, acquisition and integration-related activities. Such costs include: 1) integration-related costs, such as system conversion, rebranding costs and integration-related consulting and employee costs; 2) severance and retention costs; 3) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees; and 4) facility-related costs, such as lease termination and asset impairments. Restructuring, acquisition and integration-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statements of Comprehensive Income (Loss).  Restructuring, acquisition and integration-related costs consisted of the following during the three and six months ended June 30, 2012 and 2013:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2013		2012			2013
	(in thousands)
Integration-related costs	$	2,179		$	5,485	$	3,330		$	10,486
Severance and retention costs	1,513			1,101		3,060			5,689
Transaction-related costs	154			210		993			315
Facility-related costs	(10		)	267		155			1,835
Legacy plan restructuring costs	—			215		(181		)	215
Restructuring, acquisition and integration-related costs	$	3,836		$	7,278	$	7,357		$	18,540

6

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

During the first quarter of 2013, the Company restructured its sales organization in order to better meet the needs of the IT services market, which resulted in a reduction in the Company's sales workforce and some office closings. As a result, the Company recorded $2.2 million of severance costs and $0.6 million of facility-related costs, which is included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statement of Comprehensive Income (Loss). The Company also recorded integration costs in connection with integrating operating support systems and networks.

6.  Discontinued Operations

The operating results of the Company's telecom systems business acquired as part of ITC^DeltaCom have been separately presented as discontinued operations for all periods presented. On August 2, 2013, the Company sold its ITC^DeltaCom telecom systems business. Upon disposition of the ITC^DeltaCom telecom systems business, the Company will have no significant continuing involvement in the operations or significant continuing direct cash flows. This business has been classified as held for sale and reported as discontinued operations. As of June 30, 2013, the assets classified as held for sale totaled approximately $2.3 million and were reported at their carrying value. These assets consist primarily of inventory, property and equipment and intangible assets, and have been included within their respective line items in the Condensed Consolidated Balance Sheet as of June 30, 2013. The telecom systems results of operations were previously included in the Company's Business Services segment.

The following table presents summarized results of operations related to discontinued operations for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Revenues	$	3,699		$	1,920		$	6,984		$	5,148
Operating costs and expenses	(4,715		)	(2,407		)	(9,182		)	(6,741		)
Income tax benefit	517			195			990			196
Loss from discontinued operations, net of tax	$	(499	)	$	(292	)	$	(1,208	)	$	(1,397	)

7.  Investments in Marketable Securities

The Company’s marketable securities consisted of the following as of December 31, 2012 and June 30, 2013:

	As of December 31, 2012			As of June 30, 2013
	(in thousands)
Corporate debt securities	$	30,181		$	—
Government and agency securities	5,314			7,898
Commercial paper	9,293			16,583
Certificates of deposit	1,552			2,505
Municipal bonds	511			1,050
Total marketable securities	46,851			28,036
Less: classified as current	(42,073		)	(28,036		)
Total long-term marketable securities	$	4,778		$	—

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 consist of corporate debt securities, government and agency notes (which include U.S. treasury securities and government-sponsored debt securities), commercial paper, certificates of deposit and municipal bonds. These securities are classified as available for sale. Available-for-sale securities are carried at fair value, with any unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity and in total comprehensive income (loss). Amounts reclassified out of accumulated other comprehensive income into earnings are

7

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

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 Statements of Comprehensive Income (Loss).

The following tables summarize gross unrealized gains and losses as of December 31, 2012 and June 30, 2013 on the Company’s marketable securities designated as available-for-sale:

	As of December 31, 2012
	Amortized Cost		Gross Unrealized Losses		Gross Unrealized Gains		Estimated Fair Value
	(in thousands)
Corporate debt securities	$	30,173	$	—	$	8	$	30,181
Government and agency securities	5,311		—		3		5,314
Commercial paper	9,292		—		1		9,293
Certificates of deposit	1,552		—		—		1,552
Municipal bonds	511		—		—		511
	$	46,839	$	—	$	12	$	46,851

	As of June 30, 2013
	Amortized Cost		Gross Unrealized Losses		Gross Unrealized Gains		Estimated Fair Value
	(in thousands)
Government and agency securities	$	7,897	$	—	$	1	$	7,898
Commercial paper	16,583		—		—		16,583
Certificates of deposit	2,505		—		—		2,505
Municipal bonds	1,050		—		—		1,050
	$	28,035	$	—	$	1	$	28,036

8

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

8. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill by operating segment during the six months ended June 30, 2013 were as follows:

	Consumer Services Segment		Business Services Segment			Total
	(in thousands)
Balance as of December 31, 2012
Goodwill	$	88,920	$	378,373		$	467,293
Accumulated impairment loss	—		(87,878		)	(87,878		)
	88,920		290,495			379,415
Goodwill impairment	—		(256,700		)	(256,700		)
Balance as of June 30, 2013
Goodwill	88,920		378,373			467,293
Accumulated impairment loss	—		(344,578		)	(344,578		)
	$	88,920	$	33,795		$	122,715

Other Intangible Assets

The following table presents the components of the Company’s acquired identifiable intangible assets included in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2012 and June 30, 2013:

	As of December 31, 2012							As of June 30, 2013
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
	(in thousands)
Customer relationships	$	361,961	$	(160,513	)	$	201,448	$	363,151	$	(189,807	)	$	173,344
Developed technology and software	24,311		(14,801		)	9,510		24,311		(16,834		)	7,477
Trade names	9,121		(6,345		)	2,776		9,121		(7,612		)	1,509
Other	1,800		(849		)	951		1,800		(1,147		)	653
	$	397,193	$	(182,508	)	$	214,685	$	398,383	$	(215,400	)	$	182,983

Definite-lived intangible assets are amortized over their estimated useful lives. The Company amortizes its customer relationships using the straight-line method to match the estimated cash flow generated by such assets, and amortizes its developed technology and trade names 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 June 30, 2013, the weighted average amortization periods were 5.3 years for customer relationships, 3.9 years for developed technology and software, 3.3 years for trade names and 4.4 years for other identifiable intangible assets.

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Amortization of intangible assets, which is included in depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Income (Loss), for the three and six months ended June 30, 2012 and 2013 was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
	(in thousands)
Amortization expense	$	17,757	$	16,458	$	35,437	$	32,892

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $32.8 million during the remaining six months in the year ending December 31, 2013 and $61.3 million, $59.3 million, $28.5 million, and $1.1 million during the years ending December 31, 2014, 2015, 2016, and 2017, 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.

Impairment of Goodwill

During the first quarter of 2013, the Company recognized a $256.7 million non-cash impairment charge to goodwill related to its Business Services reporting unit, of which $255.6 million is included in continuing operations and $1.1 million is reflected in discontinued operations. The impairment was based on an analysis of a number of factors after a decline in the Company's market capitalization following the announcement of its fourth quarter 2012 earnings and 2013 financial guidance. The primary factor contributing to the impairment was a change in the discount rate and market multiples as a result of the change in these market conditions, both key assumptions used in the determination of fair value.

The Company tests its goodwill annually during the fourth quarter of each fiscal year or when events or changes in circumstances indicate that goodwill might be impaired. The Company's stock price and market capitalization declined during the three months ended March 31, 2013 following the announcement in mid-February 2013 of the Company's fourth quarter 2012 earnings and 2013 financial guidance. As a result of the sustained decrease in stock price and market capitalization, the Company performed an interim goodwill test in conjunction with the preparation of its financial statements for the three months ended March 31, 2013.

Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. The Company identified two reporting units, Business Services and Consumer Services, for evaluating goodwill. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. The first step of the impairment test involves comparing the estimated fair values of the Company's reporting units with the reporting units' carrying amounts, including goodwill. The Company estimated the fair values of its reporting units based on weighting of the income and market approaches. These models use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, the fair value of the reporting unit was estimated based on the present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow method included internal forecasts and projections developed by management for planning purposes, available industry/market data, strategic plans, discount rates and the growth rate to calculate the terminal value. Under the market approach, the fair value was estimated using the guideline company method. The Company selected guideline companies in the industry where each reporting unit operates.

Upon completion of the first step, the Company determined that the carrying value of its Business Services reporting unit exceeded its estimated fair value, so a second step was performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied fair value of goodwill for the Business Services reporting unit was determined in the same manner as utilized to recognize goodwill in a business combination. To determine the implied value of goodwill, estimated fair values were allocated to the identifiable assets and liabilities of the Business Services reporting unit as of March 31, 2013. The implied fair value of goodwill was measured as the excess of the fair value of the Business Services reporting unit over the amounts assigned to its identifiable assets and liabilities. The impairment loss of $256.7 million during the first quarter 2013 was measured as the amount the carrying value of goodwill exceeded the implied fair value of the goodwill. Of this amount, $49.3 million was deductible for tax purposes. Approximately $33.8 million of goodwill attributable to the Business Services reporting unit remains as of June 30, 2013.

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

9.  Other Accrued Liabilities

Other accrued liabilities consisted of the following as of December 31, 2012 and June 30, 2013:

	As of December 31, 2012		As of June 30, 2013
	(in thousands)
Accrued taxes and surcharges	$	33,016	$	33,893
Accrued communications costs	39,174		29,434
Accrued interest	11,066		5,397
Amounts due to customers	15,913		14,979
Facility exit and restructuring liabilities	3,211		3,448
Other	27,192		26,088
Total other accrued liabilities	$	129,572	$	113,239

10.  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, 2012 and June 30, 2013:

	As of December 31, 2012			As of June 30, 2013
	(in thousands)
EarthLink senior secured notes due June 2020	$	—		$	300,000
EarthLink senior notes due May 2019	300,000			300,000
Unamortized discount on EarthLink senior notes due May 2019	(8,818		)	(8,302		)
ITC^DeltaCom senior secured notes due April 2016	292,300			—
Unamortized premium on ITC^DeltaCom senior secured notes due April 2016	15,694			—
Capital lease obligations	17,089			16,372
Carrying value of debt and capital lease obligations	616,265			608,070
Less current portion of debt and capital lease obligations	(1,375		)	(1,381		)
Long-term debt and capital lease obligations	$	614,890		$	606,689

EarthLink Senior Secured Notes due June 2020

General.  In May 2013, the Company completed a private placement of $300.0 million aggregate principal amount of 7.375% Senior Secured Notes due 2020 (the “Senior Secured Notes”).  The Senior Secured Notes were issued at 100% of their principal amount, resulting in gross proceeds of approximately $300.0 million and net proceeds of $292.6 million after deducting transaction fees and expenses of $7.4 million. In connection with the issuance of the Senior Secured Notes, the Company entered into a registration rights agreement with the original purchasers pursuant to which the Company is required to complete an exchange offer of the privately placed Senior Secured Notes for new 7.375% Senior Secured Notes due 2020 registered with the SEC with substantially identical terms to the original Senior Secured Notes. In July 2013, the Company filed with the SEC a registration statement on Form S-4 with respect to the exchange offer.

The Senior Secured Notes accrue interest at a rate of 7.375% per year, payable on June 1 and December 1 of each year, commencing on December 1, 2013. The Senior Secured Notes will mature on June 1, 2020.

Redemption.  The Company may redeem the Senior Secured Notes, in whole or in part, (i) from June 1, 2016 until May 31, 2017 at a price equal to 105.531% of the principal amount of the Senior Secured Notes redeemed; (ii) from June 1, 2017 until May 31, 2018 at a price equal to 103.688% of the principal amount of the Senior Secured Notes redeemed; (iii) from June 1, 2018 until May 31, 2019 at a price equal to 101.844% of the principal amount of the Senior Secured Notes redeemed; and (iv) from June 1, 2019 and thereafter at a price equal to 100% of the principal amount of the Senior Secured Notes redeemed, in each case plus accrued and unpaid interest.  Prior to June 1, 2016, the Company may also redeem the Senior Secured Notes, in whole or in part, at a price equal to 100% of the aggregate principal amount of the Senior Secured Notes to be redeemed plus a make-whole

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

premium and accrued and unpaid interest.  In addition, prior to June 1, 2016, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds of certain equity offerings at a price equal to 107.375% of the principal amount of the Notes redeemed, plus accrued and unpaid interest.

Ranking and guaranty. The Senior Secured Notes and the related guarantees are the Company's and the Guarantors' senior secured obligations and rank equally with all of the Company's and the Guarantors' other senior secured indebtedness. The Senior Secured Notes and the guarantees are secured by a first-priority lien on substantially all of EarthLink's assets and the assets of the Guarantors (subject to certain exceptions and permitted liens).

Covenants. The indenture governing the Senior Secured 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, create liens, transfer and sell assets, enter into certain transactions with affiliates, issue or sell stock of subsidiaries, engage in sale-leaseback transactions and create restrictions on dividends or other payments by restricted subsidiaries. Upon a change of control (as defined in the indenture), the Company may be required to make an offer to repurchase the Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest. The indenture governing the Senior Secured Notes also contains customary events of default. As of June 30, 2013, the Company was in compliance with these covenants.

The indenture governing the Senior Secured Notes contains covenants regarding the Company's ability to make Restricted Payments (as defined in the indenture), including certain dividends, stock purchases, debt repayments and investments.  The indenture governing the Company's Senior Secured Notes currently permits approximately $36.0 million in Restricted Payments. The Company's ability to make Restricted Payments varies over time, and is determined, in part, by the extent that the Company's cumulative EBITDA exceeds 300% of its cumulative interest expense.

EarthLink Senior Notes due May 2019

General.  In May 2011, the Company completed a private placement of $300.0 million aggregate principal amount of 8.875% 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 $280.2 million after deducting transaction fees of $9.5 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 8.875% 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 8.875% 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.

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. As of June 30, 2013, the Company was in compliance with these covenants.

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

The indenture governing the Senior Notes contains covenants regarding the Company's ability to make Restricted Payments (as defined in the indenture), including certain dividends, stock purchases, dept repayments and investments.  The indenture governing the Company's Senior Notes currently permits approximately $162.0 million in Restricted Payments. The Company's ability to make Restricted Payments varies over time, and is determined, in part, by the extent that the Company's cumulative EBITDA exceeds 300% of its cumulative interest expense.

ITC^DeltaCom Senior Secured Notes due April 2016

General.  In connection with the EarthLink’s acquisition of ITC^DeltaCom in December 2010, 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 recorded at acquisition date fair value, which was based on publicly-quoted market prices.

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

Repurchases and Redemptions. Under the indenture for the ITC^DeltaCom Notes, following the consummation of EarthLink's acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the ITC^DeltaCom Notes at 101% of their principal amount.  As a result, approximately $0.2 million outstanding principal amount of the ITC^DeltaCom Notes was repurchased in January 2011.

In December 2012, the Company exercised its right to call for the redemption of 10% of the aggregate principal amount of its outstanding ITC^DeltaCom Notes. The Company redeemed $32.5 million aggregate principal amount of the ITC^DeltaCom Notes on December 6, 2012. The redemption price was equal to 103% of the principal amount thereof, plus accrued and unpaid interest. Upon completion of the redemption, $292.3 million aggregate principal amount of the ITC^DeltaCom Notes remained outstanding. The Company recognized an $0.8 million gain on redemption.

In May 2013, the Company commenced a cash tender offer (the “Tender Offer”) for any and all of the $292.3 million outstanding principal amount of the ITC^DeltaCom Notes. Approximately $129.6 million aggregate principal amount (or 44.36%) of the ITC^DeltaCom Notes were validly tendered in May 2013 at a price equal to 105.875%of the principal amount thereof, plus accrued and unpaid interest. In June 2013, the Company redeemed the remaining $162.7 million aggregate principal amount of the ITC^DeltaCom Notes at a redemption price equal to 105.250% of the principal amount thereof, plus accrued and unpaid interest. As a result, all of the remaining obligations under the indenture for the ITC^DeltaCom notes have been terminated and no principal amount remains outstanding. The Company paid an aggregate of $314.8 million in the Tender Offer and redemption, which consisted of $292.3 million of outstanding principal amount, $16.2 million of premiums and $6.3 million of accrued and unpaid interest. The Company recognized a $2.0 million net loss on the Tender Offer and redemption, consisting of the $16.2 million of premiums paid, net of $14.2 million for the write-off of unamortized premium on debt. This loss is included in interest expense and other, net, in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Revolving Credit Facility

General.  In May 2013, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) providing for a senior secured revolving credit facility with aggregate revolving commitments of $135.0 million. This senior secured revolving credit facility replaced the Company's existing $150.0 million senior secured credit facility. The senior secured revolving credit facility terminates on May 29, 2017, and all amounts outstanding thereunder shall be due and payable in full. The Company paid $1.9 million of transaction fees and expenses related to the amended senior secured revolving credit facility, which are being amortized to interest expense over the life of the credit facility using the straight-line method. Commitment fees and borrowing costs under this facility vary and are based the Company’s most recent Consolidated Leverage Ratio (as defined in the Credit Agreement).  As of June 30, 2013, the Company’s Commitment Fee was 0.5% and the Company’s borrowing cost would be LIBOR plus 3.25% for LIBOR Rate Loans and the Base Rate plus 2.25% for Base Rate Loans. No loans were outstanding under the senior secured revolving credit facility as of June 30, 2013. However, $1.0 million of letters of credit were outstanding under the facility’s Letter of Credit Sublimit as of June 30, 2013.

The Company is the borrower under the Credit Agreement. All obligations of the borrower under the Credit Agreement are guaranteed by substantially all of the Company's existing direct and indirect domestic subsidiaries and will be guaranteed by

13

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

certain of the Company's future direct and indirect domestic subsidiaries. The obligations of the Company and the subsidiary guarantors under the Credit Agreement, as well as obligations under certain treasury management, interest protection or other hedging arrangements entered into with a lender, are secured by (subject to certain liens permitted by the Credit Agreement) liens, which rank equally with the Company's other senior secured indebtedness, on or security interests in substantially all of the Company's and the subsidiary guarantors' present and future assets (subject to certain exclusions set forth in the Credit Agreement).

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. The negative covenants in the Credit Agreement include restrictions on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make capital expenditures, 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), 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), in each case subject to certain exceptions set forth in the Credit Agreement.

Additionally, the Credit Agreement requires the Company to maintain a consolidated net leverage ratio of not greater than 3.5 to 1.0 (with restrictions on cash netting) and a consolidated interest coverage ratio of not less than 3.0 to 1.0. As of June 30, 2013, the Company was in compliance with these covenants.

Capital Lease Obligations

The Company maintains capital leases relating to indefeasible right-to-use agreements, vehicles and equipment. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).

11.  Stockholders’ Equity

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 June 30, 2013, the Company had $73.5 million available under the current authorizations. The Company may repurchase its common stock from time to time in compliance with the Securities and Exchange Commission’s regulations and other legal requirements, including through the use of derivative transactions, and subject to market conditions and other factors. The share repurchase program does not require the Company to acquire any specific number of shares and may be terminated by the Board of Directors at any time.

The Company repurchased 0.7 million shares of its common stock pursuant to its share repurchase program for $5.1 million during the six months ended June 30, 2012. The Company did not repurchase any of its common stock pursuant to its share repurchase program during the six months ended June 30, 2013.

Dividends

During the six months ended June 30, 2012 and 2013, cash dividends declared were $0.10 and $0.10 per common share, respectively. The Company also pays cash dividend amounts on each outstanding restricted stock unit to be paid at the time the restricted stock unit vests. Cash dividend amounts are forfeited if the restricted stock units do not vest. Total dividend payments were $10.8 million and $10.5 million during the six months ended June 30, 2012 and 2013, 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. In addition, the agreements governing the Company’s Senior Secured Notes, Senior Notes and senior secured revolving credit facility contain restrictions on the amount of dividends the Company can pay.

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

12.  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 quoted price of EarthLink’s common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated forfeitures, using the straight-line attribution method. For performance-based awards, the Company recognizes expense over the requisite service period, net of estimated forfeitures, using the accelerated attribution method when it is probable that the performance measure will be achieved. The estimate of awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

Stock-based compensation expense was $2.9 million and $4.0 million during the three months ended June 30, 2012 and 2013, respectively, and $5.5 million and $8.0 million during the six months ended June 30, 2012 and 2013, 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 to employees and non-employee directors options to purchase the Company’s common stock and restricted stock units under various stock incentive plans. Under the plans, employees and non-employee directors are eligible to receive awards of various forms of equity-based incentive compensation, including stock options, restricted stock, restricted stock units, phantom share units and performance awards, among others. The plans are administered by the Board of Directors or the Leadership and Compensation Committee of the Board of Directors, which determine the terms of the awards granted. Stock options are generally granted with an exercise price equal to the closing market value of EarthLink, Inc. common stock on the date of grant, have a term of ten years or less, and vest over terms of four years from the date of grant. Restricted stock units are granted with various vesting terms that range from one to three years from the date of grant.

Options Outstanding

The following table summarizes stock option activity as of and for the six months ended June 30, 2013:

	Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(shares and dollars in thousands)
Outstanding as of December 31, 2012	3,723		$	8.12
Granted	2,301		6.08
Forfeited and expired	(165	)	7.49
Outstanding as of June 30, 2013	5,859		7.34		7.5	$	299
Vested and expected to vest as of June 30, 2013	5,669		$	7.36	7.4	$	284
Exercisable as of June 30, 2013	2,058		$	8.58	4.2	$	—

The aggregate intrinsic value amounts in the table above represent the closing price of the Company’s common stock on June 30, 2013 in excess of the exercise price, multiplied by the number of stock options outstanding, exercisable or vested and expected to vest, 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 June 30, 2013. The total intrinsic value of options exercised during the six months ended June 30, 2012 and 2013 was $56,000 and $0, 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.  As of June 30, 2013, there was $4.6 million of total

15

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 3.1 years.

The following table summarizes the status of the Company’s stock options as of June 30, 2013:

									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)
$	6.08	to	$	6.08	2,301	9.7	$	6.08	—	$	—
6.90		to	6.98		104	3.9	6.89		104	6.98
7.02		to	7.32		324	3.9	7.27		324	7.27
7.51		to	7.51		1,976	8.6	7.51		553	7.51
7.64		to	8.96		196	5.9	8.34		119	8.26
9.01		to	9.24		247	1.3	9.03		247	9.03
9.48		to	9.89		292	2.3	9.51		292	9.51
10.36		to	11.82		419	2.0	10.60		419	10.60
$	6.08	to	$	11.82	5,859	7.5	$	7.34	2,058	$	8.58

The fair value of stock options granted during the six months ended June 30, 2013 was estimated using the Black-Scholes option-pricing model with the following assumptions:

	Six Months Ended
	June 30, 2013
Dividend yield	3.29%
Expected volatility	31.20%
Risk-free interest rate	0.88%
Expected life	5 years

The weighted average grant date fair value of options granted during the six months ended June 30, 2013 was $1.19 per share. The dividend yield assumption was based on the Company's history of dividend payouts at the time of grant. The expected volatility was based on a combination of the Company's historical stock price and implied volatility. The selection of implied volatility data to estimate expected volatility was based upon the availability of prices for actively traded options on the Company's stock. The risk-free interest rate assumption was based upon the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Restricted Stock Units

The following table summarizes restricted stock unit activity as of and for the six months ended June 30, 2013: 

	Restricted Stock Units		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding as of December 31, 2012	2,981		$	7.90
Granted	2,311		6.05
Vested	(681	)	8.23
Forfeited	(426	)	7.31
Outstanding as of June 30, 2013	4,185		$	6.88

The fair value of restricted stock units is determined based on the closing price of EarthLink’s common stock on the grant date. The weighted-average grant date fair value of restricted stock units granted during the six months ended June 30, 2012 and 2013 was $7.56 and $6.05, respectively.  As of June 30, 2013, there was $19.3 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 2.1 years. The total fair value of shares vested during the six months ended June 30, 2012 and 2013 was $4.9 million and $3.7 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.

13.  Income Taxes

The following table presents the components of the income tax benefit (provision) from continuing operations for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Current provision	$	(1,478	)	$	(27	)	$	(3,408	)	$	(156	)
Deferred benefit	1,854			3,356			137			35,603
Total income tax benefit (provision)	$	376		$	3,329		$	(3,271	)	$	35,447

The income tax provision for the six months ended June 30, 2013 represents an effective rate of 13%, including tax expense of $0.3 million for discrete items, which represents 0.11% of the effective tax rate.  The effective rate differs from the federal statutory rate of 35% primarily because of the impairment of non-deductible goodwill, as well as state taxes. The discrete expense for the six months ended June 30, 2013 relates to stock-based compensation, prior year state tax items and additional penalties and interest related to uncertain tax positions. The current tax provision for the six months ended June 30, 2013 was due to the prior year state tax items and penalties and interest related to uncertain tax positions. The non-cash deferred tax benefit was due primarily to net operating loss carryforwards and the impairment of tax deductible goodwill.

Valuation allowance. The Company has a valuation allowance of $39.2 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 $7.2 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-based 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

17

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UNAUDITED - (Continued)

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.

The Company recognizes deferred tax assets and liabilities using tax rates in effect for the years in which temporary differences are expected to reverse, including net operating loss carryforwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is "more-likely-than-not" that all or a portion of the deferred tax assets will not be realized. The Company considers the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Significant judgment is involved in this determination, including projections of future taxable income. Changes in these estimates and assumptions could materially affect the amount of valuation allowance. Adjustments could be required in the future if it is estimated that the amount of deferred tax assets that are "more-likely-than-not" able to be realized is more or less than the net amount recorded. Any change in the valuation allowance could have the effect of increasing and/or decreasing stockholders' equity or the income tax provision in the statement of comprehensive income (loss).

Uncertain tax positions.  The Company has identified its federal tax return and its state tax returns in Alabama, California, Florida, Georgia, Massachusetts, New York and North Carolina as material tax jurisdictions for purposes of calculating its uncertain tax positions.  The Company believes that its income tax filing positions and deductions through the period ended June 30, 2013 will not result in a material adverse effect on the Company's financial condition, results of operations or cash flow. The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. As of June 30, 2013, $0.8 million of interest and $0.8 million of penalties had been accrued.

There has been no change in the amount of unrecognized tax benefits for the six months ended June 30, 2013. Within the next twelve months, it is reasonably possible that approximately $1.0 million of the total uncertain tax positions recorded will reverse, primarily due to the expiration of statutes of limitation in various jurisdictions. 

14.  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 observable inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for 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, 2012 and June 30, 2013, 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. The following tables present the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2012 and June 30, 2013:

					Fair Value Measurements as of December 31, 2012 Using
Description	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Cash equivalents	$	27,854	$	27,854	$	27,854	$	—	$	—
Corporate debt securities	30,181		30,181		—		30,181		—
Government and agency securities	5,314		5,314		—		5,314		—
Commercial paper	9,293		9,293		—		9,293		—
Certificates of deposit	1,552		1,552		—		1,552		—
Municipal bonds	511		511		—		511		—
Total	$	74,705	$	74,705	$	27,854	$	46,851	$	—

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UNAUDITED - (Continued)

					Fair Value Measurements as of June 30, 2013 Using
Description	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Cash equivalents	$	26,123	$	26,123	$	26,123	$	—	$	—
Government and agency securities	7,898		7,898		—		7,898		—
Commercial paper	16,583		16,583		—		16,583		—
Certificates of deposit	2,505		2,505		—		2,505		—
Municipal bonds	1,050		1,050		—		1,050		—
Total	$	54,159	$	54,159	$	26,123	$	28,036	$	—

As of December 31, 2012 and June 30, 2013, the Company classified its cash equivalents within Level 1 because these securities were valued based on quoted market prices in active markets. The Company classified its government and agency securities, corporate debt securities, commercial paper and certificates of deposit within Level 2 because these securities were valued based on quoted prices in markets that are less active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. The Company utilizes an independent pricing service to assist in obtaining fair-value pricing for its Level 2 securities.  Where observable market data is available, the pricing service will use a weighted average price from a variety of data providers.  Where observable market data is not readily available, the pricing service will use a pricing model appropriate to the type and structure of the security.  The Company periodically evaluates the reasonableness of these models.

Fair value of debt

The estimated fair values of the Company’s debt was determined based on Level 2 input using observable market prices in less active markets. The following table presents the fair value of the Company’s debt, excluding capital leases, as of December 31, 2012 and June 30, 2013:

	As of December 31, 2012				As of June 30, 2013
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(in thousands)
ITC^DeltaCom Notes	$	307,994	$	306,915	$	—	$	—
EarthLink Senior Notes	291,182		315,000		291,698		292,125
EarthLink Senior Secured Notes	—		—		300,000		292,695
Total debt, excluding capital leases	$	599,176	$	621,915	$	591,698	$	584,820

15.  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 broad range of data, voice and IT services to retail and wholesale business customers. The Company’s Consumer Services segment provides nationwide Internet access and related value-added services to residential customers.

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UNAUDITED - (Continued)

The Company evaluates performance of its segments based on segment operating income. Segment operating income 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 operating income excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income 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, acquisition and integration-related costs, and stock-based compensation expense, as they are not considered in the measurement of segment performance. Certain amount in the prior period segment operating income information have been reclassified to conform to the current period presentation, including segment operating expenses and segment revenues.

Information on reportable segments and a reconciliation to consolidated income from operations for the three and six months ended June 30, 2012 and 2013 is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
	(in thousands)
Business Services
Revenues	$	253,783	$	243,308	$	510,762	$	487,871
Cost of revenues (excluding depreciation and amortization)	138,894		129,598		268,423		257,517
Gross margin	114,889		113,710		242,339		230,354
Direct segment operating expenses	80,898		83,282		164,772		167,794
Segment operating income	$	33,991	$	30,428	$	77,567	$	62,560
Consumer Services
Revenues	$	80,696	$	70,093	$	164,808	$	142,318
Cost of revenues (excluding depreciation and amortization)	26,660		23,340		54,179		48,287
Gross margin	54,036		46,753		110,629		94,031
Direct segment operating expenses	17,011		13,380		33,410		25,879
Segment operating income	$	37,025	$	33,373	$	77,219	$	68,152
Consolidated
Revenues	$	334,479	$	313,401	$	675,570	$	630,189
Cost of revenues	165,554		152,938		322,602		305,804
Gross margin	168,925		160,463		352,968		324,385
Direct segment operating expenses	97,909		96,662		198,182		193,673
Segment operating income	71,016		63,801		154,786		130,712
Depreciation and amortization	45,945		44,270		91,173		87,625
Impairment of goodwill	—		—		—		255,599
Restructuring, acquisition and integration-related costs	3,836		7,278		7,357		18,540
Corporate operating expenses	6,509		8,318		14,153		17,885
Income (loss) from operations	$	14,726	$	3,935	$	42,103	$	(248,937	)

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.

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UNAUDITED - (Continued)

Information on revenues by groups of similar services and by segment for the three and six months ended June 30, 2012 and 2013 is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2013		2012		2013
	(in thousands)
Business Services
Retail services	$	210,840	$	199,431	$	425,774	$	400,512
Wholesale services	37,817		39,084		74,759		77,942
Other services	5,126		4,793		10,229		9,417
Total revenues	253,783		243,308		510,762		487,871
Consumer Services
Access services	68,735		58,996		140,502		119,736
Value-added services	11,961		11,097		24,306		22,582
Total revenues	80,696		70,093		164,808		142,318
Total Revenues	$	334,479	$	313,401	$	675,570	$	630,189

The Company’s Business Services segment earns revenue by providing a broad range of data, voice and IT services to retail and wholesale business customers. The Company presents its Business Services revenue in the following three categories: (1) retail services, which includes data, voice and IT services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers; and (3) other services, which primarily consists of web hosting. The Company's IT services, which are included within its retail services, include data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; and termination fees.

The Company’s Consumer Services segment earns revenue by providing nationwide Internet access and related value-added services to residential customers. The Company presents its Consumer Services revenue in the following two categories: (1) access services, which includes narrowband and broadband Internet access services; and (2) value-added services, which 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 and email storage; 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.

16. Commitments and Contingencies

Legal proceedings and other disputes

General. The Company is party to various legal proceedings and other disputes arising in the normal course of business, including, but not limited to, regulatory audits, trademark and patent infringement, billing disputes, rights of access, tax, consumer protection, employment and tort. The Company accrues for such matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals each reporting period.

The Company's management believes that there are no disputes, litigation or other legal proceedings, audits or disputes 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. However, the ultimate result of any current or future litigation or other legal proceedings, audits or disputes is inherently unpredictable and could result in liabilities that are higher than currently predicted.

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EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Regulatory audits. The Company is subject to regulatory audits in the ordinary course of business with respect to various matters, including audits by the Universal Service Administrative Company on universal service fund assessments and payments. These audits can cover periods for several years prior to the date the audit is undertaken and could result in the imposition of liabilities, interest and penalties if the Company's positions are not accepted by the auditing entity. The Company's financial statements contain reserves for certain of such potential liabilities. It is reasonably possible that the Company could incur a favorable change to its estimates for reserves for regulatory audits in the second half of 2013 due to final interpretation and resolution of regulatory audits.

Patents. From time to time, the Company receives notices of infringement of patent rights from parties claiming to own patents related to certain of the Company's services and products. While the Company has been subject to these disputes in the past, the number has increased since the acquisitions of ITC^DeltaCom and One Communications. Certain of these claims are made by patent holding companies that are not operating companies. The alleging parties generally seek royalty payments for prior use as well as future royalty streams. Most of these matters are in preliminary stages. The Company intends to vigorously defend its position with respect to all of these matters.

Billing disputes. 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 reasonably 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 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. While the Company believes its reserves for billing disputes are adequate, the Company could record additional expense of up to $6.2 million for unrecorded disputed amounts.

 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. 

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EARTHLINK, INC.

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UNAUDITED - (Continued)

17.  Condensed Consolidating Financial Information

In May 2013, the Company completed a private placement of $300.0 million aggregate principal amount of 7.375% Senior Secured Notes Due 2020 (the “Original Senior Secured Notes”). The Original Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of the Company's existing and future domestic subsidiaries other than subsidiaries that are minor and other than certain excluded future subsidiaries (the “Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by the Company. Pursuant to a registration rights agreement, the Company is required to register an identical series of notes (the “Exchange Senior Secured Notes”) with the SEC and to offer to exchange those registered Exchange Senior Secured Notes for the Original Senior Secured Notes. The Exchange Senior Secured Notes will also be guaranteed by the Guarantor Subsidiaries. In July 2013, the Company filed with the SEC a registration statement on Form S-4 with respect to the proposed Exchange Senior Secured Notes. In connection with the registration of the Exchange Senior Secured Notes and related guarantees, the Company is required to provide the financial information in respect of those notes 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”).

In May 2013, the Company also entered into a supplemental indenture governing the Company's 8.875% Senior Notes due 2019 to add the Company's subsidiary ITC^DeltaCom, Inc. and its subsidiaries as guarantors under the indenture governing these Senior Notes. ITC^DeltaCom, Inc. and its subsidiaries were the only Company subsidiaries that did not previously guarantee the Senior Notes. Accordingly, the Company's Senior Notes are now fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantor Subsidiaries, including ITC^DeltaCom, Inc. and its subsidiaries.

The accompanying condensed consolidating financial information has been prepared and presented pursuant to Rule 3-10. The Parent column represents EarthLink's stand-alone results and its investment in all of its subsidiaries presented using the equity method of accounting. The Guarantor Subsidiaries are presented in a separate column and represent all the Guarantor Subsidiaries on a combined basis. Intercompany eliminations and consolidations, including adjustments required to present the Guarantor Subsidiaries' deferred tax balances on a stand-alone basis, as well as goodwill impairment charges that are not pushed-down to the Guarantor Subsidiaries, are shown in a separate column. Included in this column are: 1) amounts for impairment of goodwill recognized at a consolidated level that are not required or permitted in the separate stand-alone financial statements of the subsidiaries; 2) amounts for income taxes recognized at a consolidated level that are not required or permitted in the separate stand-alone financial statements of the subsidiaries, including the determination of the need for a valuation allowance; and 3) intercompany revenue and cost of revenue eliminations. Certain amounts in the prior period condensed consolidating financial information have been revised to conform with the current period presentation. The condensed consolidating financial information is presented in the following tables (in thousands):

23

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Balance Sheet

As of June 30, 2013

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	65,129		$	48,771		$	—		$	113,900
Marketable securities	28,036			—			—			28,036
Accounts receivable, net	8,698			101,180			—			109,878
Prepaid expenses	8,146			12,887			—			21,033
Deferred income taxes, net	(1,027		)	3,530			6,860			9,363
Due from affiliates	126,995			20,450			(147,445		)	—
Other current assets	(4,087		)	16,163			—			12,076
Total current assets	231,890			202,981			(140,585		)	294,286
Property and equipment, net	25,746			409,841			—			435,587
Long-term deferred income taxes, net	(3,685		)	91,302			153,093			240,710
Goodwill	88,920			194,690			(160,895		)	122,715
Purchased intangible assets, net	—			182,983			—			182,983
Investment in subsidiaries	825,472			—			(825,472		)	—
Other long-term assets	17,207			10,341			—			27,548
Total assets	$	1,185,550		$	1,092,138		$	(973,859	)	$	1,303,829
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,821		$	8,939		$	—		$	11,760
Accrued payroll and related expenses	2,188			18,927			—			21,115
Other accrued liabilities	26,516			86,723			—			113,239
Deferred revenue	13,066			39,687			—			52,753
Due to affiliates	—			147,445			(147,445		)	—
Current portion of debt and capital lease obligations	83			1,298			—			1,381
Total current liabilities	44,674			303,019			(147,445		)	200,248
Long-term debt and capital lease obligations	592,005			14,684			—			606,689
Other long-term liabilities	2,517			29,037			—			31,554
Total liabilities	639,196			346,740			(147,445		)	838,491
Stockholders’ equity:
Common stock	1,973			—			—			1,973
Additional paid-in capital	2,053,451			1,201,810			(1,201,810		)	2,053,451
Accumulated deficit	(772,748		)	(456,412		)	375,396			(853,764		)
Treasury stock, at cost	(736,323		)	—			—			(736,323		)
Accumulated other comprehensive income	1			—			—			1
Total stockholders’ equity	546,354			745,398			(826,414		)	465,338
Total liabilities and stockholders’ equity	$	1,185,550		$	1,092,138		$	(973,859	)	$	1,303,829

24

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Balance Sheet

As of December 31, 2012

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	70,312		$	87,309		$	—		$	157,621
Marketable securities	42,073			—			—			42,073
Restricted cash	—			1,013			—			1,013
Accounts receivable, net	9,490			103,275			—			112,765
Prepaid expenses	6,352			10,819			—			17,171
Deferred income taxes, net	1,234			5,932			8,788			15,954
Due from affiliates	90,778			30,429			(121,207		)	—
Other current assets	7,862			12,441			—			20,303
Total current assets	228,101			251,218			(112,419		)	366,900
Long-term marketable securities	4,778			—			—			4,778
Property and equipment, net	24,427			394,539			—			418,966
Long-term deferred income taxes, net	12,421			71,656			110,935			195,012
Goodwill	88,920			290,495			—			379,415
Purchased intangible assets, net	—			214,685			—			214,685
Investment in subsidiaries	655,951			—			(655,951		)	—
Other long-term assets	8,842			10,812			—			19,654
Total assets	$	1,023,440		$	1,233,405		$	(657,435	)	$	1,599,410
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,654		$	16,138		$	—		$	18,792
Accrued payroll and related expenses	9,493			21,510			—			31,003
Other accrued liabilities	23,064			106,508			—			129,572
Deferred revenue	13,883			37,807			—			51,690
Due to affiliates	—			121,207			(121,207		)	—
Current portion of debt and capital lease obligations	93			1,282			—			1,375
Total current liabilities	49,187			304,452			(121,207		)	232,432
Long-term debt and capital lease obligations	291,534			323,356			—			614,890
Other long-term liabilities	3,139			30,145			—			33,284
Total liabilities	343,860			657,953			(121,207		)	880,606
Stockholders’ equity:
Common stock	1,969			—			—			1,969
Additional paid-in capital	2,057,974			888,677			(888,677		)	2,057,974
Accumulated deficit	(645,372		)	(313,225		)	352,449			(606,148		)
Treasury stock, at cost	(735,003		)	—			—			(735,003		)
Accumulated other comprehensive income	12			—			—			12
Total stockholders’ equity	679,580			575,452			(536,228		)	718,804
Total liabilities and stockholders’ equity	$	1,023,440		$	1,233,405		$	(657,435	)	$	1,599,410

25

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended June 30, 2013

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
Revenues	$	74,769		$	240,809		$	(2,177	)	$	313,401
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	24,567			130,548			(2,177		)	152,938
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	21,698			83,282			—			104,980
Depreciation and amortization	2,452			41,818			—			44,270
Impairment of goodwill	—			95,805			(95,805		)	—
Restructuring, acquisition and integration-related costs	2,786			4,492			—			7,278
Total operating costs and expenses	51,503			355,945			(97,982		)	309,466
Income (loss) from operations	23,266			(115,136		)	95,805			3,935
Interest expense and other, net	(9,265		)	(8,908		)	—			(18,173		)
Equity in losses of subsidiaries	(116,455		)	—			116,455			—
Loss before income taxes	(102,454		)	(124,044		)	212,260			(14,238		)
Income tax (provision) benefit	(4,223		)	7,881			(329		)	3,329
Loss from continuing operations	(106,677		)	(116,163		)	211,931			(10,909		)
Loss from discontinued operations, net of tax	—			(292		)	—			(292		)
Net loss	$	(106,677	)	$	(116,455	)	$	211,931		$	(11,201	)
Comprehensive loss	$	(106,689	)	$	(116,455	)	$	211,931		$	(11,213	)

26

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended June 30, 2012

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
Revenues	$	86,199		$	249,962		$	(1,682	)	$	334,479
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	28,033			139,203			(1,682		)	165,554
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	23,519			80,899			—			104,418
Depreciation and amortization	2,097			43,848			—			45,945
Restructuring, acquisition and integration-related costs	1,876			1,960			—			3,836
Total operating costs and expenses	55,525			265,910			(1,682		)	319,753
Income (loss) from operations	30,674			(15,948		)	—			14,726
Interest expense and other, net	(6,451		)	(9,258		)	—			(15,709		)
Equity in losses of subsidiaries	(23,151		)	—			23,151			—
Income (loss) before income taxes	1,072			(25,206		)	23,151			(983		)
Income tax (provision) benefit	(9,659		)	2,554			7,481			376
Loss from continuing operations	(8,587		)	(22,652		)	30,632			(607		)
Loss from discontinued operations, net of tax	—			(499		)	—			(499		)
Net loss	$	(8,587	)	$	(23,151	)	$	30,632		$	(1,106	)
Comprehensive loss	$	(8,591	)	$	(23,151	)	$	30,632		$	(1,110	)

27

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Comprehensive Loss

Six Months EndedJune 30, 2013

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
Revenues	$	151,870		$	482,728		$	(4,409	)	$	630,189
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	50,783			259,430			(4,409		)	305,804
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	43,763			167,795			—			211,558
Depreciation and amortization	4,071			83,554			—			87,625
Impairment of goodwill	—			95,805			159,794			255,599
Restructuring, acquisition and integration-related costs	6,338			12,202			—			18,540
Total operating costs and expenses	104,955			618,786			155,385			879,126
Income (loss) from operations	46,915			(136,058		)	(159,794		)	(248,937		)
Interest expense and other, net	(15,994		)	(16,735		)	—			(32,729		)
Equity in losses of subsidiaries	(143,187		)	—			143,187			—
Loss before income taxes	(112,266		)	(152,793		)	(16,607		)	(281,666		)
Income tax (provision) benefit	(15,110		)	9,902			40,655			35,447
Loss from continuing operations	(127,376		)	(142,891		)	24,048			(246,219		)
Loss from discontinued operations, net of tax	—			(296		)	(1,101		)	(1,397		)
Net loss	$	(127,376	)	$	(143,187	)	$	22,947		$	(247,616	)
Comprehensive loss	$	(127,387	)	$	(143,187	)	$	22,947		$	(247,627	)

28

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Comprehensive Income (Loss)

Six Months EndedJune 30, 2012

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
Revenues	$	176,091		$	502,981		$	(3,502	)	$	675,570
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	57,045			269,059			(3,502		)	322,602
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	47,564			164,771			—			212,335
Depreciation and amortization	4,022			87,151			—			91,173
Restructuring, acquisition and integration-related costs	3,662			3,695			—			7,357
Total operating costs and expenses	112,293			524,676			(3,502		)	633,467
Income (loss) from operations	63,798			(21,695		)	—			42,103
Interest expense and other, net	(12,923		)	(18,544		)	—			(31,467		)
Equity in losses of subsidiaries	(33,869		)	—			33,869			—
Income (loss) before income taxes	17,006			(40,239		)	33,869			10,636
Income tax (provision) benefit	(19,074		)	7,578			8,225			(3,271		)
Income (loss) from continuing operations	(2,068		)	(32,661		)	42,094			7,365
Loss from discontinued operations, net of tax	—			(1,208		)	—			(1,208		)
Net income (loss)	$	(2,068	)	$	(33,869	)	$	42,094		$	6,157
Comprehensive income (loss)	$	(2,058	)	$	(33,869	)	$	42,094		$	6,167

29

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Cash Flows

Six Months EndedJune 30, 2013

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations			Consolidated
Cash flows from operating activities	$	7,596		$	35,944		$	—		$	43,540
Cash flows from investing activities:
Purchases of property and equipment	(3,215		)	(73,640		)	—			(76,855		)
Purchases of marketable securities	(41,209		)	—			—			(41,209		)
Sales and maturities of marketable securities	60,024			—			—			60,024
Purchase of customer relationships	—			(1,195		)	—			(1,195		)
Payment for investment in subsidiary stock	(308,460		)	—			308,460			—
Change in restricted cash	—			1,013			—			1,013
Net cash used in investing activities	(292,860		)	(73,822		)	308,460			(58,222		)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs	290,673			—			—			290,673
Principal payments under capital lease obligations	(53		)	(309,145		)	—			(309,198		)
Payment of dividends	(10,539		)	—			—			(10,539		)
Proceeds from parent	—			308,460			(308,460		)	—
Other	—			25						25
Net cash provided by (used in) financing activities	280,081			(660		)	(308,460		)	(29,039		)
Net decrease in cash and cash equivalents	(5,183		)	(38,538		)	—			(43,721		)
Cash and cash equivalents, beginning of period	70,312			87,309			—			157,621
Cash and cash equivalents, end of period	$	65,129		$	48,771		$	—		$	113,900

30

EARTHLINK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Condensed Consolidating Statement of Cash Flows

Six Months EndedJune 30, 2012

	Parent			Guarantor Subsidiaries			Consolidations & Eliminations		Consolidated
Cash flows from operating activities	$	32,852		$	55,610		$	—	$	88,462
Cash flows from investing activities:
Purchases of property and equipment	(9,395		)	(46,830		)	—		(56,225		)
Purchases of marketable securities	(40,037		)	—			—		(40,037		)
Sales and maturities of marketable securities	21,132			—			—		21,132
Change in restricted cash	—			767			—		767
Net cash used in investing activities	(28,300		)	(46,063		)	—		(74,363		)
Cash flows from financing activities:
Repayment of debt and capital lease obligations	(20		)	(866		)	—		(886		)
Repurchases of common stock	(5,052		)	—			—		(5,052		)
Payment of dividends	(10,777		)	—			—		(10,777		)
Proceeds from exercises of stock options	236			—			—		236
Change in due to/from affiliates, net	(12,176		)	12,176			—		—
Other	—			49			—		49
Net cash (used in) provided by financing activities	(27,789		)	11,359			—		(16,430		)
Net (decrease) increase in cash and cash equivalents	(23,237		)	20,906			—		(2,331		)
Cash and cash equivalents, beginning of period	148,363			63,420			—		211,783
Cash and cash equivalents, end of period	$	125,126		$	84,326		$	—	$	209,452

31

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.

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of management. 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, 2012. Management's Discussion and Analysis of Financial Condition and Results of Operations is presented in the following sections:

• Overview

• Consolidated Results of Operations

• Segment Results of Operations

• Liquidity and Capital Resources

• Non-GAAP Financial Measures

• Cautionary Note Regarding Factors That May Affect Future Results

Overview

EarthLink, Inc. (“EarthLink” or the “Company”), together with its consolidated subsidiaries, is a leading network, communications and IT services provider to business and residential customers in the United States. We operate two reportable segments, Business Services and Consumer Services. Our Business Services segment provides a broad range of data, voice, equipment and IT services to retail and wholesale business customers. Our Consumer Services segment provides nationwide Internet access and related value-added services to residential customers. We operate an extensive network including approximately 29,521 route miles of fiber, 90 metro fiber rings and eight enterprise-class data centers that provide IP coverage across more than 90 percent of the United States.

Recent Developments

Debt Issuance and Redemption.In May 2013, we completed a private placement of $300.0 million aggregate principal amount of 7.375% Senior Secured Notes due 2020 (the “Senior Secured Notes”).  The Senior Secured Notes were issued at 100% of their principal amount, resulting in gross proceeds of approximately $300.0 million and net proceeds of $292.6 million after deducting transaction fees of $7.4 million. Proceeds from the private placement, together with available cash, were used to fund a tender offer and redemption of our ITC^DeltaCom 10.5% Senior Secured Notes due April 2016 (the "ITC^DeltaCom Notes"), which had been assumed in connection with our acquisition of ITC^DeltaCom, Inc. ("ITC^DeltaCom"). Approximately $314.8 million was used for repayment of the ITC^DeltaCom Notes, including premiums and accrued and unpaid interest. The debt issuance and redemption will reduce the amount of interest we will pay going forward. Also in May 2013, we amended and restated our existing revolving credit facility, which reduced the capacity from $150.0 million to $135.0 million and extended the term through May 2017.

CenterBeam Acquisition.On July 1, 2013, we acquired CenterBeam, Inc. ("CenterBeam"), a privately-held information technology managed service provider delivering cloud computing and hosted IT services to mid-sized businesses, for a total consideration of approximately $22.7 million. With this acquisition, we intend to further grow our IT services portfolio by adding IT services customer scale, expanded IT support center resources and complementary products and capabilities.

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Discontinued Operations.The operating results of our telecom systems business acquired as part of ITC^DeltaCom have been separately presented as discontinued operations for all periods presented. On August 2, 2013, we sold our ITC^DeltaCom telecom systems business. The telecom systems results of operations were previously included in our Business Services segment.

Second Quarter 2013 Highlights

• Total revenues were $313.4 million, a 6% decrease compared to the three months ended June 30, 2012, consisting

of a $10.5 million decrease in Business Services revenue and a $10.6 million decrease in Consumer Services revenue

• Net loss was $11.2 million, compared to net loss of $1.1 million during the three months ended June 30, 2012

• Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) was $59.5 million, a decrease from $67.4 million during the three months ended June 30, 2012 due to the decrease in total revenues and an increase in costs to grow our Business Services, offset by cost synergies from integrating acquisitions

• Net cash provided by operating activities was $43.5 million for the six months ended June 30, 2013, a decrease from $88.5 million during the comparable period in 2012

• Unlevered free cash flow (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) was $44.0 million during the six months ended June 30, 2013, a decrease from $89.9 million during the six months ended June 30, 2012

• Cash used in investing activities and cash used in financing activities were $58.2 million and $29.0 million, respectively, for the six months ended June 30, 2013, compared to cash used in investing activities and cash used in financing activities of $74.4 million and $16.4 million, respectively, during the six months ended June 30, 2012

Business Strategy

Our business strategy is to continue our transformation into a nationwide provider of communications and IT services for the mid-market business customer. We believe IT services is an emerging market with significant opportunity for growth, and we are positioning EarthLink to be a trusted partner in the small and medium-sized enterprise marketplace for businesses with IT and network security needs. The key elements of our business strategy are as follows:

• Offer a complete package of communications and IT services products. We provide a nationwide suite of business voice, data and IT services. We are focused on continuing to broaden our suite of products and services to offer a complete package of network connectivity and IT services and to design and implement solutions to address the evolving business and infrastructure needs of our customers. We recently expanded our IT solutions footprint with four additional data centers and are currently investing capital to extend our core fiber IP network, of which many of these routes have already been installed. We also recently acquired CenterBeam to further grow our IT services portfolio.

• Increase revenues from growth products and services. Revenues from our legacy products and services have been declining due to economic, competitive, technological and regulatory developments and we expect these revenues to continue to decline. We are focused on managing this decline by executing on opportunities to leverage these customer relationships by migrating these customers to our growth products. We believe our growth products are MPLS, hosted voice and IT services. We are focused on growing revenues for these products by enhancing our sales force efforts and increasing brand awareness for our IT services. We are also focused on growing our wholesale services as we capitalize on unique fiber routes within our footprint.

• 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 believe focusing on the customer relationship increases loyalty and reduces churn. We believe that our broad communications and IT services portfolio and blend of access technologies for connectivity are key differentiators that can help us build long-term customer relationships. We bring these services together through our myLink^TM self-service customer control point where users can access all of their EarthLink Business services via one interface. We are focused on creating a customer-focused organization that will provide a consistent nationwide approach to offering and supporting EarthLink products and services.

• Successfully integrate acquisitions. We are focused on successfully integrating our acquisitions in order to realize synergies and cost benefits. To date, we have functionally aligned employees across the organization, launched a nationwide product and IT services portfolio, implemented a common financial system and consolidated and integrated network operations centers, sales platforms and certain billing platforms. We are currently integrating our operating support system and certain other billing systems. We believe that we can strengthen our competitive positioning with current and existing customers by continuing to successfully integrate past and potential acquisitions.

• Selectively pursue potential strategic acquisitions. We will continue to selectively evaluate and consider potential strategic transactions that we believe will complement and grow our business. Our acquisition strategy may include

33

investments or acquisitions of new product and services capabilities, network assets or business customers to achieve greater national scale.

Challenges and Risks

The primary challenge we face in executing our business strategy to successfully transition into a national communications and IT services provider is to grow revenues from our evolving Business Services product portfolio on a timely basis to offset declining revenues from other Business Services products and from our Consumer Services segment. Contributing to this challenge are the following: providing products and services that meet changing customer needs on a timely and cost-effective basis, responding to competitive and economic pressures, managing the rate of decline in certain revenue streams, successfully integrating our acquisitions to achieve expected synergies and cost savings, implementing operating efficiencies and adapting to regulatory changes and initiatives.  Our future success for growth depends on the timing and market acceptance of our new products and services, our ability to market our services in a cost-effective manner to new customers, our ability to reduce churn in our existing customer base, our ability to differentiate our services from those of our competitors, our ability to maintain and expand our sales to existing customers, our ability to strengthen awareness of our brand, our ability to provide quality implementation and customer support for these products and the reliability and quality of our services.  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 more detailed list of all risks and uncertainties inherent in our business, please refer to the detailed cautionary statements and risk factors referred to under “Risk Factors” in Item 1A of Part II and under “Cautionary Note Concerning Factors That May Affect Future Results” in this Item 2.

Trends in our Business

Our financial results are impacted by several significant trends, which are described below.

Industry factors. We operate in the communications and IT services industry, which is characterized by intense competition, industry consolidation resulting in larger competitors, an evolving regulatory environment, changing technology and changes in customer needs.  We expect these trends to continue. In addition, merger and acquisition transactions and other factors have reduced the number of vendors from which we may purchase network elements that we leverage to operate our business.

Legacy business services revenues. Our legacy business service revenues, specifically traditional voice services, have been declining due to competitive pressures and changes in the industry, and we expect this trend to continue. We have experienced an increase in churn for legacy products and the rate of new customer bookings has not consistently kept up with expectations. In addition, revenues have been adversely impacted as a result of rules adopted by the FCC in late 2011 regarding intercarrier compensation. The rules include the elimination of terminating switched access rates and other per-minute terminating charges between service providers by 2018, through annual reductions in the rates. To counteract trends in our legacy Business Services revenues, we are focused on building long-term customer relationships, offering a diverse portfolio of IT services and investing in additional data centers, our fiber network and our next generation cloud services. We have experienced an increase in sales of our growth products. In July 2013, we acquired CenterBeam to further grow our IT services portfolio. We are also taking steps to lower the cost structure of our legacy Business Services. For example, during 2013 we decided to exit telecom systems sales, which was a low margin, non-recurring revenue stream. This will allow us to focus on our hosted VoIP products.

IT services. The industry for cloud, managed security and IT services is relatively new and continues to evolve. The IT services market is growing as security needs, compliance requirements and IT costs increase. IT services currently represents the smallest proportion of our Business Services revenues. However, we believe this represents a significant growth area for our business and there is opportunity for EarthLink to address this market nationally for small and medium-sized enterprises. As a result, we are taking steps to accelerate our transition into an IT services company. In January 2013, we restructured our sales organization to better meet the needs of the IT services market. Specifically, we are focusing on larger geographic markets where there are more customers with a propensity to buy IT services, increasing our efforts in Search Engine Marketing to drive leads for our inside sales force, increasing brand awareness for our IT services and adding additional technical talent in the field to support our IT services sales efforts.

Economic conditions. Many of our existing and target customers are small and medium-sized businesses. We believe these businesses are more likely to be affected by economic downturns than larger, more established businesses. We believe that the financial and economic pressures faced by our 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 longer sales cycles and increased customer demands for price reductions in connection with contract renewals. 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.

34

Consumer access declines. Our consumer access subscriber base and revenues have been declining and are expected to continue to decline due to the continued maturation of the market for Internet access and competitive pressures in the industry. In addition, we have implemented, and expect to continue to implement, targeted price increases, which could negatively impact our churn rates. To counteract trends in our consumer revenues, we are focused on customer retention, operational efficiency and adding customers through marketing channels that we believe will produce an acceptable rate of return.

Revenue Sources

Business Services. Our Business Services segment earns revenue by providing a broad range of data, voice and IT services to retail and wholesale business customers. We present our Business Services revenue in the following three categories: (1) retail services, which includes data, voice and IT services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers; and (3) other services, which primarily consists of web hosting. Our IT services, which are included within our retail services, include data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; and termination fees.

Consumer Services. Our Consumer Services segment earns revenue by providing nationwide Internet access and related value-added services to residential customers. We present our Consumer Services in two categories: (1) access services, which includes narrowband access services and broadband access services; and (2) value-added services, which 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 and email storage; search revenues; and advertising revenues. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and equipment fees.

Consolidated Results of Operations

The following table sets forth statement of operations data for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Revenues	$	334,479		$	313,401		$	675,570		$	630,189
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	165,554			152,938			322,602			305,804
Selling, general and administrative (exclusive of of depreciation and amortization shown separately below)	104,418			104,980			212,335			211,558
Depreciation and amortization	45,945			44,270			91,173			87,625
Impairment of goodwill	—			—			—			255,599
Restructuring, acquisition and integration-related costs	3,836			7,278			7,357			18,540
Total operating costs and expenses	319,753			309,466			633,467			879,126
Income (loss) from operations	14,726			3,935			42,103			(248,937		)
Interest expense and other, net	(15,709		)	(18,173		)	(31,467		)	(32,729		)
Income (loss) from continuing operations before income taxes	(983		)	(14,238		)	10,636			(281,666		)
Income tax benefit (provision)	376			3,329			(3,271		)	35,447
Income (loss) from continuing operations	(607		)	(10,909		)	7,365			(246,219		)
Loss from discontinued operations, net of tax	(499		)	(292		)	(1,208		)	(1,397		)
Net income (loss)	$	(1,106	)	$	(11,201	)	$	6,157		$	(247,616	)

35

Revenues

The following table presents revenues by groups of similar services and by segment for the three months ended June 30, 2012 and 2013:

	Three Months Ended June 30,								Change
			% of				% of
	2012		Total		2013		Total		Dollars			Percent
	(dollars in thousands)
Business Services
Retail services	$	210,840	83	%	$	199,431	82	%	$	(11,409	)	(5	)%
Wholesale services	37,817		15	%	39,084		16	%	1,267			3	%
Other	5,126		2	%	4,793		2	%	(333		)	(6	)%
Total revenues	253,783		100	%	243,308		100	%	(10,475		)	(4	)%
Consumer Services
Access services	68,735		85	%	58,996		84	%	(9,739		)	(14	)%
Value-added services	11,961		15	%	11,097		16	%	(864		)	(7	)%
Total revenues	80,696		100	%	70,093		100	%	(10,603		)	(13	)%
Total revenues	$	334,479			$	313,401			$	(21,078	)	(6	)%

The following table presents revenues by groups of similar services and by segment for the six months ended June 30, 2012 and 2013:

	Six Months Ended June 30,								Change
			% of				% of
	2012		Total		2013		Total		Dollars			Percent
	(dollars in thousands)
Business Services
Retail services	$	425,774	83	%	$	400,512	82	%	$	(25,262	)	(6	)%
Wholesale services	74,759		15	%	77,942		16	%	3,183			4	%
Other	10,229		2	%	9,417		2	%	(812		)	(8	)%
Total revenues	510,762		100	%	487,871		100	%	(22,891		)	(4	)%
Consumer Services
Access services	140,502		85	%	119,736		84	%	(20,766		)	(15	)%
Value-added services	24,306		15	%	22,582		16	%	(1,724		)	(7	)%
Total revenues	164,808		100	%	142,318		100	%	(22,490		)	(14	)%
Total revenues	$	675,570			$	630,189			$	(45,381	)	(7	)%

Business Services

Our Business Services segment earns revenue by providing a broad range of data, voice and IT services to retail and wholesale business customers. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; and termination fees. Total Business Services revenue decreased $10.5 million and $22.9 million during the three and six months ended June 30, 2013 compared to the prior year periods, as further discussed below.

We expect continued declines in Business Services revenues from traditional voice services and other legacy products. Business Services revenues will also be adversely impacted as a result of the rules adopted by the FCC regarding intercarrier compensation. In addition, growth in our Business Services revenues may be adversely impacted by longer than anticipated sales cycles and installations of our more advanced products, churn, competition, regulatory changes, timing and market acceptance of our new products and services, shifting patterns of use, convergence of technology and general economic conditions. However, to counteract these pressures, we continue to emphasize our diverse portfolio of communications and IT services and are focused on growing our suite of growth and IT services, including with our recent acquisition of CenterBeam. As a result, we expect the mix of our retail Business Service revenues to change over time, from legacy services to growth products and services. We are also focused on growing our wholesale services as we capitalize on unique fiber routes within our footprint.

36

Retail Services. Retail services include data, voice and IT services (including data centers, virtualization, security, applications, premises-based solutions, managed solutions and support services) provided to business customers. The following table presents the primary reasons for the change in Business Services retail revenues for the three and six months ended June 30, 2013 compared to the prior year periods:

	Three Months Ended			Six Months Ended
	June 30, 2013			June 30, 2013
	(in millions)
Due to decline in legacy products (a)	$	(18.5	)	$	(38.7	)
Due to growth products (b)	5.4			10.2
Due to IT services product launches (c)	1.7			3.2
Total change in retail services revenues	$	(11.4	)	$	(25.3	)

______________

(a) Decrease due to decline in certain legacy products, including traditional voice, lower-end, single site broadband services and web hosting. Revenues for these legacy products have been decreasing due to competition in the industry, the migration of customers to more advanced services and a decreased emphasis on selling these services

(b) Increase due to sales of growth products, including MultiProtocol Label Switching ("MPLS") and hosted Voice-over-Internet Protocol (“VoIP”)

(c) Increase due to new IT services product launches over the past year

Wholesale Services. Wholesale services includes the sale of transmission capacity to other telecommunications carriers. The increase in wholesale services revenues during the three and six months ended June 30, 2013 compared to the prior year periods was primarily due to an increase in transport and usage revenues as we capitalize on unique fiber routes. Contributing to the increase during the six months ended June 30, 2013 compared to the prior year period was a $1.2 million favorable adjustment recognized during the six months ended June 30, 2013 associated with the One Communications acquisition. During the first quarter of 2013, an arbitrator made a final decision with respect to post-closing working capital adjustments relating to the acquisition.

Other Services. Other services consists primarily of web hosting. The decrease in other services revenues during the three and six months ended June 30, 2013 compared to the prior year periods was primarily due to a decrease in average legacy web hosting accounts.

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 from 1.3 million during the three and six months ended June 30, 2012 to 1.1 million during the three and six months ended June 30, 2013.  The decrease in average consumer access subscribers resulted from limited sales and marketing activities, the continued maturation of and competition in the market for 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 2.5% during the six months ended June 30, 2012 to 2.2% during the six months ended June 30, 2013, which moderated the decline in average consumer subscribers. Churn rates decreased due to the increased tenure of our consumer subscriber base.

We expect our consumer access and service subscriber base and revenues to continue to decrease due to limited sales and marketing activities, competition from cable, DSL and wireless providers, declines in gross broadband subscriber additions and the continued maturation of the market for narrowband Internet access. However, we expect the rate of churn and revenue decline to continue to remain stable as our customer base becomes longer tenured.

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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 and email storage; 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 Google™ search engine; and fees charged for advertising on our various web properties.

The decreases in value-added services revenues were due primarily to a decrease in revenues from our security and home networking services and a decrease in search and advertising revenues. These decreases were attributable to the overall decline in average consumer subscribers.

Cost of revenues

The following table presents cost of revenues by segment for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2012		2013		Dollar			Percent		2012		2013		Dollar			Percent
	(dollars in thousands)
Business Services	$	138,894	$	129,598	$	(9,296	)	(7	)%	$	268,423	$	257,517	$	(10,906	)	(4	)%
Consumer Services	26,660		23,340		(3,320		)	(12	)%	54,179		48,287		(5,892		)	(11	)%
Total cost of revenues	$	165,554	$	152,938	$	(12,616	)	(8	)%	$	322,602	$	305,804	$	(16,798	)	(5	)%

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; the costs of providing IT services; and the cost of equipment sold to customers.

The following table presents the primary reasons for the change in Business Services cost of revenues for the three and six months ended June 30, 2013 compared to the prior year periods:

	Three Months Ended			Six Months Ended
	June 30, 2013			June 30, 2013
	(in millions)
Due to reserves for regulatory audit established in prior year (a)	$	(8.3	)	$	(8.3	)
Due to decline in legacy products (b)	(3.1		)	(5.0		)
Due to reduction of IRU liability (c)	—			(1.8		)
Due to favorable settlements (d)	(1.1		)	(2.0		)
Due to IT services product launches (e)	3.2			6.2
Total change in Business Services cost of revenues	$	(9.3	)	$	(10.9	)

______________

(a) Decrease due to an $8.3 million charge recorded in the second quarter of 2012 to increase our reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administrative Company on previous ITC^DeltaCom Universal Service Fund assessments and payments.

(b) Decrease due to decline in certain legacy products, including traditional voice, lower-end, single site broadband services and web hosting, partially offset by sales of growth products which include MPLS and hosted VoIP

(c) Decrease due to the renegotiation of an IRU agreement recorded as a liability in purchase accounting for ITC^DeltaCom

(d) Decrease due to a $1.1 million favorable settlement with a telecommunication vendor recognized during the three months ended June 30, 2013 and a $0.9 million favorable adjustment recognized during the three months ended March 31, 2013 for an arbitrator's final decision with respect to post-closing working capital adjustments relating to the One Communications acquisition

(e) Increase due to IT services product launches over the past year

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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. 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. 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, CenturyLink, Inc., Comcast Corporation, Megapath, Time Warner Cable and Verizon Communications, Inc. Many of our agreements have a short term or operate on a month-to-month basis. We cannot be certain of renewal or non-termination of our contracts or that legislative or regulatory factors will not affect our contracts. In addition, Level 3 Communications, Inc. is planning to decommission its managed modem network at the end of 2013, which will require us to transition customers to other narrowband providers.

The decrease in Consumer Services cost of revenues compared to the prior year periods was primarily due to the decline in average consumer services subscribers. Partially offsetting this decrease was an increase due to the shift in mix from narrowband to broadband customers.

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 six months ended June 30, 2012 and 2013: 

	Three Months Ended							Six Months Ended
	June 30,				Change			June 30,				Change
	2012		2013		Dollar		Percent	2012		2013		Dollar			Percent
	(dollars in thousands)
Selling, general and administrative expenses	$	104,418	$	104,980	$	562	1%	$	212,335	$	211,558	$	(777	)	—%

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, occupancy costs, advertising and other administrative expenses.

The following table presents the primary reasons for the change in selling, general and administrative expenses for the three and six months ended June 30, 2013 compared to the prior year periods:

	Three Months Ended			Six Months Ended
	June 30, 2013			June 30, 2013
	(in millions)
Due to decrease in people-related costs (a)	$	(0.1	)	$	(6.3	)
Due to favorable One Communications settlement (b)	—			(1.1		)
Due to increase in reserves for loss contingencies (c)	—			3.0
Due to increase in stock-based compensation (d)	1.1			2.5
Due to change in other selling, general and administrative costs (e)	(0.4		)	1.1
Total change in Business Services cost of revenues	$	0.6		$	(0.8	)

______________

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(a) Decrease due to decline in people costs resulting from reduction in headcount over the past year and synergies from integrating our businesses

(b) Decrease due to a favorable adjustment recognized during the six months ended June 30, 2013 for an arbitrator's final decision with respect to post-closing working capital adjustments relating to the One Communications acquisition

(c) Increase due to additional reserves for loss contingencies recorded during the six months ended June 30, 2013

(d) Increase in stock-based compensation expense due to an increase in grants over the past year and additional costs related to our 2013 annual bonus plan as certain employees will receive a portion of their 2013 bonus in restricted stock units.

(e) Change due to other selling, general and administrative costs such as outsourced labor, professional fees, property taxes, travel, insurance, occupancy costs and advertising.

We expect that selling, general and administrative expenses will increase as we seek to grow our business services revenue. However, we expect to realize cost synergies as we integrate our acquisitions. We will continue to seek operating efficiencies, such as consolidating operations and integrating systems, though certain of these synergies may take longer or present greater costs to realize than originally anticipated.

Depreciation and amortization

The following table presents our depreciation and amortization expense for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended								Six Months Ended
	June 30,				Change				June 30,				Change
	2012		2013		Dollars			Percent	2012		2013		Dollars			Percent
	(dollars in thousands)
Depreciation expense	$	28,188	$	27,812	$	(376	)	(1)%	$	55,736	$	54,733	$	(1,003	)	(2)%
Amortization expense	17,757		16,458		(1,299		)	(7)%	35,437		32,892		(2,545		)	(7)%
Total	$	45,945	$	44,270	$	(1,675	)	(4)%	$	91,173	$	87,625	$	(3,548	)	(4)%

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. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease. 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 decrease in depreciation and amortization expense during the three and six months ended June 30, 2013 compared to the prior year periods was primarily due to definite-lived intangible assets becoming fully amortized over the past year and property and equipment becoming fully depreciated over the past year.

Impairment of goodwill

During the first quarter of 2013, we recognized a $256.7 million non-cash impairment charge to goodwill related to its Business Services reporting unit, of which $255.6 million is included in continuing operations and $1.1 million is reflected in discontinued operations. The impairment was based on an analysis of a number of factors after a decline in our market capitalization following the announcement of our fourth quarter 2012 earnings and 2013 financial guidance. The primary factor contributing to the impairment was a change in the discount rate and market multiples as a result of the change in these market conditions, both key assumptions used in the determination of fair value.

We test our goodwill annually during the fourth quarter of each fiscal year or when events or changes in circumstances indicate that goodwill might be impaired. Our stock price and market capitalization declined during the three months ended March 31, 2013 following the announcement in mid-February 2013 of our fourth quarter 2012 earnings and 2013 financial guidance. As a result of the sustained decrease in stock price and market capitalization, we performed an interim goodwill test in conjunction with the preparation of our financial statements for the three months ended March 31, 2013.

Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. We identified two reporting units, Business Services and Consumer Services, for evaluating goodwill. Each of these reporting units constitutes a

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business for which discrete financial information is available and segment management regularly reviews the operating results. The first step of the impairment test involves comparing the estimated fair values of our reporting units with the reporting units' carrying amounts, including goodwill. We estimated the fair values of our reporting units based on weighting of the income and market approaches. These models use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, the fair value of the reporting unit was estimated based on the present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow method included internal forecasts and projections developed by management for planning purposes, available industry/market data, strategic plans, discount rates and the growth rate to calculate the terminal value. Under the market approach, the fair value was estimated using the guideline company method. We selected guideline companies in the industry where each reporting unit operates.

Upon completion of the first step, we determined that the carrying value of our Business Services reporting unit exceeded its estimated fair value, so a second step was performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied fair value of goodwill for the Business Services reporting unit was determined in the same manner as utilized to recognize goodwill in a business combination. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of the Business Services reporting unit as of March 31, 2013. The implied fair value of goodwill was measured as the excess of the fair value of the Business Services reporting unit over the amounts assigned to its assets and liabilities. The impairment loss of $256.7 million during the first quarter of 2013 was measured as the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.

Approximately $33.8 million of goodwill attributable to the Business Services reporting unit remains as of June 30, 2013. Deterioration in market conditions or estimated future cash flows in this reporting unit could result in future goodwill impairment. We continue to monitor events and circumstances which may affect the fair value of this reporting unit.

Restructuring, acquisition and integration-related costs

Restructuring, acquisition and integration-related costs consisted of the following during the three and six months ended June 30, 2012 and 2013:

	Three Months Ended									Six Months Ended
	June 30,					Change				June 30,					Change
	2012			2013		Dollars			Percent	2012			2013		Dollars			Percent
	(dollars in thousands)
Integration-related costs	$	2,179		$	5,485	$	3,306		152%	$	3,330		$	10,486	$	7,156		215	%
Severance and retention costs	1,513			1,101		(412		)	(27)%	3,060			5,689		2,629			86	%
Transaction-related costs	154			210		56			36%	993			315		(678		)	(68	)%
Facility-related costs	(10		)	267		277			*	155			1,835		1,680			*
Legacy plan restructuring costs	—			215		215			—%	(181		)	215		396			(219	)%
Restructuring, acquisition and integration-related costs	$	3,836		$	7,278	$	3,442		90%	$	7,357		$	18,540	$	11,183		152	%

__________

* Denotes percentage is not meaningful.

Restructuring, acquisition and integration-related costs consist of costs related to EarthLink’s restructuring, acquisition and integration-related activities. Such costs include: 1) integration-related costs, such as system conversion, rebranding costs and integration-related consulting and employee costs; 2) severance and retention costs; 3) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees; and 4) facility-related costs, such as lease termination and asset impairments. Restructuring, acquisition and integration-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring, acquisition and integration-related costs in the Condensed Consolidated Statements of Comprehensive Income (Loss).

The increase in restructuring, acquisition and integration-related costs compared to the prior year periods was primarily due to an increase in costs to integrate operating support systems and networks and costs to exit duplicate facilities. In addition, during the first quarter of 2013, we restructured our sales organization in order to better meet the needs of the IT services market, which resulted in a reduction in our sales workforce and some offices closing. We also decided to exit telecom systems sales early in 2013 to enable focus on our hosted VoIP platform for new voice customers, which resulted in a small number of position eliminations.

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We expect to incur additional integration costs related to our acquisitions. Once the businesses are fully integrated, we expect to realize cost synergies from the combined businesses. However, we may incur upfront costs to gain these synergies, which may take longer or present greater cost to realize than originally anticipated. Such costs may include severance and employee benefits, the elimination of duplicate facilities and contracts and costs to develop common operating platforms.

Interest expense and other, net

The following table presents our interest expense and other, net, for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended									Six Months Ended
	June 30,						Change			June 30,						Change
	2012			2013			Dollars		Percent	2012			2013			Dollars			Percent
	(dollars in thousands)
Interest expense	$	16,548		$	18,092		$	1,544	9%	$	33,036		$	32,909		$	(127	)	—	%
Interest income	(835		)	(37		)	798		(96)%	(1,646		)	(85		)	1,561			(95	)%
Other, net	(4		)	118			122		(3,050)%	77			(95		)	(172		)	(223	)%
Total	$	15,709		$	18,173		2,464		16%	$	31,467		$	32,729		$	1,262		4	%

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 increase in interest expense and other, net, compared to the prior year periods was primarily due to a $2.0 million loss on repayment of debt recorded during the three months ended June 30, 2013 in connection with the redemption of our ITC^DeltaCom Notes. In May 2013, we completed a tender offer and redemption of all outstanding principal of our ITC^DeltaCom Notes. We recognized a net loss of $2.0 million as a result of $16.2 million of premiums paid for the tender and redemption, net of a $14.2 million write-off of unamortized premium on debt. Also contributing to the increase was a decrease in interest income due to lower investment yields and lower cash and marketable securities.

Income tax benefit (provision)

The following table presents the components of the income tax benefit (provision) for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Current provision	$	(1,478	)	$	(27	)	$	(3,408	)	$	(156	)
Deferred benefit	1,854			3,356			137			35,603
Total income tax benefit (provision)	$	376		$	3,329		$	(3,271	)	$	35,447

The current tax provision for the three and six months ended June 30, 2013 was due to discrete items of prior year state tax expense and penalties and interest related to uncertain tax positions. The non-cash deferred tax benefit was due primarily to net operating loss carryforwards and the impairment of tax deductible goodwill.

We have a valuation allowance of $39.2 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 us as an adjustment to additional paid-in-capital.  Approximately $7.2 million relates to net operating losses in certain jurisdictions where we believe it is not “more likely than not” to be realized in future periods. In addition, a valuation allowance of $0.4 million was established in 2010 relating to stock compensation deferred tax assets.

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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.

We recognize deferred tax assets and liabilities using tax rates in effect for the years in which temporary differences are expected to reverse, including net operating loss carryforwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is "more-likely-than-not" that all or a portion of the deferred tax assets will not be realized. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Significant judgment is involved in this determination, including projections of future taxable income. Changes in these estimates and assumptions could materially affect the amount of valuation allowance. Adjustments could be required in the future if we estimate that the amount of deferred tax assets that we are more-likely-than-not able to realize is more or less than the net amount we have recorded. Any change in the valuation allowance could have the effect of increasing and/or decreasing stockholders' equity or the income tax provision in the statement of comprehensive income (loss). 

Loss from discontinued operations, net of tax

Loss from discontinued operations, net of tax, for the three and six months ended June 30, 2012 and 2013 reflects our telecom systems business acquired as part of ITC^DeltaCom. On August 2, 2013, we sold our ITC^DeltaCom telecom systems business. Upon disposition of the ITC^DeltaCom telecom systems business, we will have no significant continuing involvement in the operations or significant continuing direct cash flows. This business has been classified as held for sale and reported as discontinued operations. The telecom systems results of operations were previously included in our Business Services segment.

The following table presents summarized results of operations related to our discontinued operations for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Revenues	$	3,699		$	1,920		$	6,984		$	5,148
Operating costs and expenses	(4,715		)	(2,407		)	(9,182		)	(6,741		)
Income tax benefit	517			195			990			196
Loss from discontinued operations, net of tax	$	(499	)	$	(292	)	$	(1,208	)	$	(1,397	)

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 earns revenue by providing a broad range of data, voice and IT services to businesses 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 operating income. Segment operating income 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 operating income excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment operating income 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, acquisition and integration-related costs and stock-based compensation expense, as they are not considered in the measurement of segment performance.

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Business Services Segment

Business Services Operating Metrics

We utilize certain non-financial and operating measures to assess our financial performance. The following table sets forth operating data as of June 30, 2012 and 2013:

	June 30, 2012	June 30, 2013
Total fiber optic route miles (a)	28,804	29,521
Colocations	1,415	1,483
Voice and data switches	56	60

(a) As of June 30, 2012 and 2013, includes 24,859 and 25,576, respectively, route miles owned or obtained through indefeasible rights to use (IRU) and 3,945 marketed and managed route miles.

Business Services Operating Results

The following table sets forth operating results for our Business Services segment for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2012		2013		Dollars			Percent		2012		2013		Dollars			Percent
	(dollars in thousands)
Segment revenues	$	253,783	$	243,308	$	(10,475	)	(4	)%	$	510,762	$	487,871	$	(22,891	)	(4	)%
Segment operating income	33,991		30,428		(3,563		)	(10	)%	77,567		62,560		(15,007		)	(19	)%

The decrease in Business Services revenues during the three and six months ended June 30, 2013 compared to the prior year periods was due to a decline in revenues for certain legacy products, including traditional voice, web hosting and lower-end, single site broadband services. The decrease was partially offset by an increase in revenues from our newer products, including IT services, MPLS and hosted VoIP. Partially offsetting the decrease for the six month period was the favorable settlement of working capital adjustments associated with the acquisition of One Communications recorded during 2013.

The decrease in Business Services operating income during the three and six months ended June 30, 2013 was primarily due to the decrease in revenues discussed above and an increase in operating costs for growth services. Partially offsetting these decreases was a decline in operating costs due to cost synergies realized from the integration of acquired businesses and the decline in cost of revenue for certain legacy products.

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Consumer Services Segment

Consumer Services Operating Metrics

The following table sets forth subscriber and operating data for our Consumer Services segment for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
Consumer Subscriber Activity
Subscribers at beginning of period	1,294,000			1,095,000			1,350,000			1,139,000
Gross organic subscriber additions	36,000			27,000			79,000			58,000
Churn	(91,000)			(67,000)			(190,000)			(142,000)
Subscribers at end of period (a)	1,239,000			1,055,000			1,239,000			1,055,000
Consumer Metrics
Average narrowband subscribers (b)	690,000			591,000			706,000			602,000
Average broadband subscribers (b)	576,000			484,000			588,000			493,000
Average consumer subscribers (b)	1,266,000			1,075,000			1,294,000			1,095,000
ARPU (c)	$	21.24		$	21.74		$	21.23		$	21.65
Churn rate (d)	2.4		%	2.1		%	2.5		%	2.2		%

(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 six month periods is calculated by averaging the ending monthly subscribers or accounts for the seven months preceding and including the end of the period.

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

Consumer Services Operating Results

The following table sets forth operating results for our Consumer Services segment for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended									Six Months Ended
	June 30,				Change					June 30,				Change
	2012		2013		Dollars			Percent		2012		2013		Dollars			Percent
	(dollars in thousands)
Segment revenues	$	80,696	$	70,093	$	(10,603	)	(13	)%	$	164,808	$	142,318	$	(22,490	)	(14	)%
Segment operating income	37,025		33,373		(3,652		)	(10	)%	77,219		68,152		(9,067		)	(12	)%

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 consumer 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

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decreased and become longer-tenured. Our longer tenured customers require less customer service and technical support and have a lower frequency of non-payment.

Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the six months ended June 30, 2012 and 2013:

	Six Months Ended
	June 30,						Change
	2012			2013			Dollars			Percent
	(dollars in thousands)
Net cash provided by operating activities	$	88,462		$	43,540		$	(44,922	)	(51	)%
Net cash used in investing activities	(74,363		)	(58,222		)	16,141			(22	)%
Net cash used in financing activities	(16,430		)	(29,039		)	(12,609		)	77	%
Net decrease in cash and cash equivalents	$	(2,331	)	$	(43,721	)	$	(41,390	)	*

__________

* Denotes percentage is not meaningful.

Operating activities

The decrease in cash provided by operating activities during the six months ended June 30, 2013 compared to the prior year period was primarily due to the overall decrease in revenues as well as a decrease in working capital related to timing of accounts payable, accrued liabilities and prepaid expenses.

Investing activities

The decrease in net cash used in investing activities during the six months ended June 30, 2013 compared to the prior year period was primarily due to a $37.7 million change in net cash from purchases and sales of marketable securities. During the six months ended June 30, 2012, we used $18.9 million of cash for purchases of marketable securities, net of sales and maturities. During the six months ended June 30, 2013, we generated $18.8 million of cash from sales and maturities of marketable securities, net of purchases. Partially offsetting this decrease was a $20.6 million increase in capital expenditures as we expand our fiber network and upgrade our network and technology infrastructure.

Financing activities

The increase in net cash used in financing activities during the six months ended June 30, 2013 compared to the prior year period was primarily due to a $17.6 million increase in net cash used for debt and capital lease transactions. In May 2013, we completed a private placement of $300.0 million aggregate principal amount of Senior Secured Notes, resulting in net proceeds of $292.6 million million after deducting transaction fees of $7.4 million. We used proceeds from the private placement, together with available cash, were used to fund a tender offer and redemption of our ITC^DeltaCom Notes. We used approximately $314.8 million to repay the ITC^DeltaCom Notes, which consisted of $292.3 million of outstanding principal amount, $16.2 million of premiums and $6.3 million of accrued and unpaid interest. In May 2013, we also amended and restated our revolving credit facility and paid $1.9 million of transaction fees and expenses.

The above increase in net cash used in financing activities was partially offset by a $5.1 million decrease in repurchases of common stock and a $0.2 million decrease in dividends paid. During the six months ended June 30, 2012, we repurchased 0.7 million shares of our common stock for $(5.1) million pursuant to our share repurchase program. We did not repurchase any of our common stock during the six months ended June 30, 2013. During the six months ended June 30, 2012 and 2013, cash dividends declared were $0.10 per share.

Future Uses of cash

Our primary future cash requirements relate to outstanding indebtedness, capital expenditures, investments in our business services segment, acquisition and integration-related costs and dividends. In addition, we may use cash in the future to make strategic acquisitions or repurchase common stock or debt.

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Debt and interest. We expect to use cash to service our outstanding indebtedness, including our $300.0 million aggregate principal amount of Senior Notes due in May 2019, our $300.0 million aggregate principal amount of Senior Secured Notes due in June 2020 and any future borrowings under our $135.0 million revolving credit facility.

Capital expenditures. We expect to incur capital expenditures of approximately $140.0 million to $155.0 million during 2013. The capital expenditures are for expansion of our fiber network, the acquisition of new customers and 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.

Investments in our Business Services segment. One of our key strategies is to grow our Business Services revenue. We are deploying a wide array of cloud, managed security and IT support services. We expect to invest cash in sales and marketing efforts and resources required to support our business services, including investments in search engine marketing campaigns and advertising to increase brand awareness.

Restructuring, acquisition and integration-related costs. We are currently integrating our operating support system and certain billing systems, which we expect to be substantially completed in 2013. We expect to incur expenses in connection with completing our integration. In January 2013, we restructured our sales organization in order to better meet the needs of the IT services market and decided to exit telecom systems sales to focus on our hosted VoIP platform for new voice customers. We will continue to evaluate our business, and may incur costs for additional restructuring activities.

Dividends. During the six months ended June 30, 2012 and 2013, cash dividends declared were $0.10 per common share. 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, restrictions on dividends under the agreements governing our indebtedness and other factors the Board of Directors may deem relevant.

Other. We used cash of $22.7 million for our acquisition of CenterBeam in the July 2013. We may also use cash to invest in or acquire other companies, to repurchase common stock or to repurchase or redeem debt. We expect to continue to evaluate and consider potential strategic transactions that we believe may complement or grow 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 incurred to redeem or repurchase debt, the size and types of future acquisitions in which we may engage, the costs required to maintain our network infrastructure, the outcome of various telecommunications-related disputes and proceedings, the pricing of our 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 and dividend payments.

Future sources of cash

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow we generate from our operations. During the six months ended June 30, 2012 and 2013, we generated $88.5 million and $43.5 million in cash from operations, respectively. As of June 30, 2013, we had $113.9 million in cash and cash equivalents and $28.0 million in marketable securities. 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.

Another source of liquidity is our revolving credit facility. We have a credit agreement providing for a senior secured revolving credit facility with aggregate revolving commitments of $135.0 million. The senior secured revolving credit facility terminates in May 2017, and at that time any amounts outstanding thereunder shall be due and payable in full. As of June 30, 2013, no amounts had been drawn or were outstanding under the senior secured revolving credit facility.

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 at least the next 12 months. However, to refinance existing indebtedness, to increase available liquidity or to fund acquisitions or other strategic activities, we may seek additional financing. We have no commitments for any additional financing and have no lines of credit or similar sources of financing, other than the $135.0 million credit facility. 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

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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 refinancing existing indebtedness and making acquisitions, capital expenditures and/or investments, which could materially and adversely affect our business.

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 June 30, 2013.

Off-Balance Sheet Arrangements

As of June 30, 2013, 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 June 30, 2013, we had utilized approximately $676.5 million pursuant to the authorizations and had $73.5 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.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with U.S. generally accepted accounting principles (“GAAP”), management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G, to clarify and enhance understanding of past performance and prospects for the future. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. Set forth below is a discussion of the presentation and use of Adjusted EBITDA and Unlevered Free Cash Flow, the non-GAAP financial measures used by management.

Adjusted EBITDA is defined as net income (loss) before interest expense and other, net, income tax provision (benefit), depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and loss from discontinued operations, net of tax.  Unlevered Free Cash Flow is defined as net income (loss) before interest expense and other, net, income tax provision (benefit), depreciation and amortization, stock-based compensation, impairment of goodwill and intangible assets, restructuring, acquisition and integration-related costs, and loss from discontinued operations, net of tax, less cash used for purchases of property and equipment.

These non-GAAP financial measures are commonly used in our industry and are presented because management believes they provide relevant and useful information to investors. Management uses these non-GAAP financial measures to evaluate the performance of its business. Management also uses Unlevered Free Cash Flow to assess its ability to fund capital expenditures, fund growth and service debt. Management believes that excluding the effects of certain non-cash and non-operating items enables investors to better understand and analyze the current period’s results and provides a better measure of comparability.

There are limitations to using these non-GAAP financial measures. Adjusted EBITDA and Unlevered Free Cash Flow are not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies.  Adjusted EBITDA and Unlevered Free Cash Flow should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP.

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The following table presents a reconciliation of Adjusted EBITDA to the most closely related financial measure reported under GAAP for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012		2013
	(in thousands)
Net income (loss)	$	(1,106	)	$	(11,201	)	$	6,157	$	(247,616	)
Interest expense and other, net	15,709			18,173			31,467		32,729
Income tax provision (benefit)	(376		)	(3,329		)	3,271		(35,447		)
Depreciation and amortization	45,945			44,270			91,173		87,625
Impairment of goodwill	—			—			—		255,599
Stock-based compensation expense	2,868			4,010			5,540		7,979
Restructuring, acquisition and integration-related costs	3,836			7,278			7,357		18,540
Loss from discontinued operations, net of tax	499			292			1,208		1,397
Adjusted EBITDA	$	67,375		$	59,493		$	146,173	$	120,806

The following table presents a reconciliation of Unlevered Free Cash Flow to the most closely related financial measure reported under GAAP for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Net income (loss)	$	(1,106	)	$	(11,201	)	$	6,157		$	(247,616	)
Interest expense and other, net	15,709			18,173			31,467			32,729
Income tax provision (benefit)	(376		)	(3,329		)	3,271			(35,447		)
Depreciation and amortization	45,945			44,270			91,173			87,625
Impairment of goodwill	—			—			—			255,599
Stock-based compensation expense	2,868			4,010			5,540			7,979
Restructuring, acquisition and integration-related costs	3,836			7,278			7,357			18,540
Loss from discontinued operations, net of tax	499			292			1,208			1,397
Purchases of property and equipment	(24,450		)	(34,401		)	(56,225		)	(76,855		)
Unlevered Free Cash Flow	$	42,925		$	25,092		$	89,948		$	43,951

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The following table presents a reconciliation of Unlevered Free Cash Flow, as a liquidity measure, to net cash provided by operating activities for the three and six months ended June 30, 2012 and 2013:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2013			2012			2013
	(in thousands)
Net cash provided by operating activities	$	22,251		$	11,696		$	88,462		$	43,540
Income tax provision (benefit)	(376		)	(3,329		)	3,271			(35,447		)
Non-cash income taxes	1,854			3,356			137			35,603
Interest expense and other, net	15,709			18,173			31,467			32,729
Amortization of debt discount, premium and issuance costs	479			(462		)	973			(48		)
Restructuring, acquisition and integration-related costs	3,836			7,278			7,357			18,540
Changes in operating assets and liabilities	22,913			23,420			13,397			26,184
Purchases of property and equipment	(24,450		)	(34,401		)	(56,225		)	(76,855		)
Other, net	709			(639		)	1,109			(295		)
Unlevered Free Cash Flow	$	42,925		$	25,092		$	89,948		$	43,951
Net cash used in investing activities	$	(24,151	)	$	(15,471	)	$	(74,363	)	$	(58,222	)
Net cash used in financing activities	$	(10,651	)	$	(28,473	)	$	(16,430	)	$	(29,039	)

Recently Issued Accounting Pronouncement

In July 2013, the Financial Accounting Standards Board issued authoritative guidance on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the impact of the adoption of this new guidance on our consolidated financial statements.

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 include: (1) that we may not be able to execute our strategy to be an IT services company for small and medium-sized businesses with IT and network security needs, which could adversely affect our results of operations and cash flows; (2) that we may not be able to grow revenues from our evolving Business Services product portfolio to offset declining revenues from our legacy Business Services products and from our Consumer Services segment, which could adversely affect our results of operations and cash flows; (3) that we may not be able to develop the optimal sales model necessary to implement our business strategy; (4) that we may be unsuccessful integrating acquisitions into our business, which could result in operating difficulties, losses and other adverse consequences; (5) that if we are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (6) that our failure to achieve operating efficiencies will adversely affect our results of operations; (7) that as a result of our continuing review of our business, we may have to undertake further restructuring plans that would require additional charges, including incurring facility exit and restructuring charges; (8) that unfavorable general economic conditions could harm our business; (9) that we may be unable to successfully identify, manage and assimilate future acquisitions, which could adversely affect our results of operations; (10) that we face significant competition in the IT services and communications industry that could

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reduce our profitability; (11) that decisions by legislative or regulatory authorities, including the Federal Communications Commission relieving incumbent carriers 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; (12) 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; (13) 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; (14) that we may experience reductions in switched access and reciprocal compensation revenue; (15) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (16) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our wholesale revenue and results of operations; (17) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (18) that work stoppages experienced by other communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (19) that our commercial and alliance arrangements may not be renewed or may not generate expected benefits, which could adversely affect our results of operations; (20) that our consumer business is dependent on the availability of third-party network service providers; (21) that we face significant competition in the Internet access industry that could reduce our profitability; (22) 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; (23) that potential regulation of Internet service providers could adversely affect our operations; (24) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (25) 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; (26) that we may not be able to protect our intellectual property; (27) that we may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us; (28) that our business depends on effective business support systems and processes; (29) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (30) that cyber security breaches could harm our business; (31) 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; (32) that government regulations could adversely affect our business or force us to change our business practices; (33) that regulatory audits have in the past, and could in the future, result in increased costs; (34) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (35) that we may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (36) 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; (37) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (38) that we may require substantial capital to support business growth or refinance existing indebtedness, and this capital may not be available to us on acceptable terms, or at all; (39) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness or inability to borrow funds under our existing credit facility; (40) that we may reduce, or cease payment of, quarterly cash dividends; (41) that our stock price may be volatile; and (42) that provisions of our third 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 control of the company  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, 2012.

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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, 2012.

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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II

Item 1. Legal Proceedings.

The Company is party to various legal and regulatory proceedings and other disputes arising from normal business activities. The Company’s management believes that there are no disputes, litigation or other legal or regulatory 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. However, the result of any current or future disputes, litigation or other legal or regulatory proceedings is inherently unpredictable and could result in liabilities that are higher than currently predicted.

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, 2012.

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

None.

Item 5.  Other Information.

None.

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Item 6.   Exhibits.

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

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.

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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:	August 5, 2013	/s/ ROLLA P. HUFF
		Rolla P. Huff, Chairman of the Board and Chief Executive Officer and President (principal executive officer)
Date:	August 5, 2013	/s/ BRADLEY A. FERGUSON
		Bradley A. Ferguson, Chief Financial Officer
		(principal financial and accounting officer)

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