EarthLink (ELNK)

Interest Rate Risk

        The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest rates may cause the fair value of the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of its investment may decline. To minimize this risk, the Company has historically held many investments until maturity, and as a result, the Company receives interest and principal amounts pursuant to the underlying agreements. To further mitigate risk, the Company has historically maintained its portfolio of investments in a variety of securities, including government agency notes, asset-backed debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum short-term rating of A1/P1 or a minimum long-term rating of A/A2. As of December 31, 2007 and 2008, net unrealized losses in these investments were not material. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

        As of December 31, 2007, we had short-term investment in marketable securities of approximately $93.2 million that had a weighted average yield of 5.6% and weighted average maturity of one month. As of December 31, 2007, we had long-term investment in marketable securities of approximately $21.6 million that had a weighted average yield of 4.7% and weighted average maturity of 1.8 years. The maturity of asset-backed, auction rate securities as of December 31, 2007 was consistent with management's view as to the availability of such securities to fund current operating activities.

        As of December 31, 2008, our investments in marketable securities consisted of $47.8 million of auction rate securities with a weighted average interest rate of 2.0%. These securities are variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years. These securities are issued by various municipalities and state regulated higher education agencies and are predominantly secured by pools of student loans guaranteed by the agencies and reinsured by the U.S. Department of Education. Liquidity for these auction rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 28 days. In October 2008, we entered into an agreement with the broker that sold us our auction rate securities that gives us the right to sell our existing auction rate securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012 (herein referred to as "put right"). We recorded an other-than-temporary impairment of $9.9 million to record the auction rate securities at their fair value, as we no longer have the intent to hold the securities until maturity. We also elected a one-time transfer of our auction rate securities from the available-for-sale category to the trading category. We recorded the value of the put right as a long-term investment in our Consolidated Balance Sheet with a corresponding $9.8 million gain on investments. We elected the fair value option under SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," for the put right to offset the fair value changes of the auction rate securities. The fair value of the put right was estimated using a discounted cash flow analysis. The other-than-temporary impairment, net of the gain on the put right, was $0.1 million during the year ended December 31, 2008 and is included in gain (loss) on investments, net, in the Consolidated Statement of Operations.

        We are also exposed to interest rate risk with respect to our convertible senior notes due November 15, 2026. The fair value of our convertible senior notes may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. Our convertible senior notes bear interest at a fixed rate of 3.25% per year until November 15, 2011, and 3.50% interest per year thereafter. As of December 31, 2007 and 2008, the carrying value of our convertible senior notes was $258.8 million and the fair value was approximately $262.0 million and $236.6 million, respectively, which was based on the quoted market price.

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Table of Contents

Interest Rate Risk

        The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest
rates may cause the fair value of
the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the fair value of its investment may decline. To minimize this risk, the Company has historically held many investments until maturity, and as a result, the Company receives interest and
principal amounts pursuant to the underlying agreements. To further mitigate risk, the Company has historically maintained its portfolio of investments in a variety of securities, including government
agency notes, asset-backed debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum short-term rating of A1/P1 or a
minimum long-term rating of A/A2. As of December 31, 2007 and 2008, net unrealized losses in these investments were not material. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

        As
of December 31, 2007, we had short-term investment in marketable securities of approximately $93.2 million that had a weighted average yield of 5.6% and
weighted average maturity of one month. As of December 31, 2007, we had long-term investment in marketable securities of approximately $21.6 million that had a weighted
average yield of 4.7% and weighted average maturity of 1.8 years. The maturity of asset-backed, auction rate securities as of December 31, 2007 was consistent with management's view as
to the availability of such securities to fund current operating activities.

        As
of December 31, 2008, our investments in marketable securities consisted of $47.8 million of auction rate securities with a weighted average interest rate of 2.0%. These
securities are variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years. These securities are issued by various municipalities and
state regulated higher education agencies and are predominantly secured by pools of student loans guaranteed by the agencies and reinsured by the U.S. Department of Education. Liquidity for these
auction rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 28 days. In October 2008, we
entered into an agreement with the broker that sold us our auction rate securities that gives us the right to sell our existing auction rate securities back to the broker at par plus accrued interest,
beginning on June 30, 2010 until July 2, 2012 (herein referred to as "put right"). We recorded an other-than-temporary impairment of $9.9 million to record
the auction rate securities at their fair value, as we no longer have the intent to hold the securities until maturity. We also elected a one-time transfer of our auction rate securities
from the available-for-sale category to the trading category. We recorded the value of the put right as a long-term investment in our Consolidated Balance Sheet
with a corresponding $9.8 million gain on investments. We elected the fair value option under SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," for
the put right to offset the fair value changes of the auction rate securities. The fair value of the put right was estimated using a discounted cash flow analysis. The
other-than-temporary impairment, net of the gain on the put right, was $0.1 million during the year ended December 31, 2008 and is included in gain (loss) on
investments, net, in the Consolidated Statement of Operations.

        We
are also exposed to interest rate risk with respect to our convertible senior notes due November 15, 2026. The fair value of our convertible senior notes may be adversely
impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. Our convertible senior notes bear
interest at a fixed rate of 3.25% per year until November 15, 2011, and 3.50% interest per year thereafter. As of December 31, 2007 and 2008, the
carrying value of our convertible senior notes was $258.8 million and the fair value was approximately $262.0 million and $236.6 million, respectively, which was based on the
quoted market price.

54

HREF="#bg13901a_main_toc">Table of Contents

Interest Rate Risk

        The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest
rates may cause the fair value of
the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the fair value of its investment may decline. To minimize this risk, the Company has historically held many investments until maturity, and as a result, the Company receives interest and
principal amounts pursuant to the underlying agreements. To further mitigate risk, the Company has historically maintained its portfolio of investments in a variety of securities, including government
agency notes, asset-backed debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum short-term rating of A1/P1 or a
minimum long-term rating of A/A2. As of December 31, 2007 and 2008, net unrealized losses in these investments were not material. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

        As
of December 31, 2007, we had short-term investment in marketable securities of approximately $93.2 million that had a weighted average yield of 5.6% and
weighted average maturity of one month. As of December 31, 2007, we had long-term investment in marketable securities of approximately $21.6 million that had a weighted
average yield of 4.7% and weighted average maturity of 1.8 years. The maturity of asset-backed, auction rate securities as of December 31, 2007 was consistent with management's view as
to the availability of such securities to fund current operating activities.

        As
of December 31, 2008, our investments in marketable securities consisted of $47.8 million of auction rate securities with a weighted average interest rate of 2.0%. These
securities are variable-rate debt instruments whose underlying agreements have contractual maturities of up to 40 years. These securities are issued by various municipalities and
state regulated higher education agencies and are predominantly secured by pools of student loans guaranteed by the agencies and reinsured by the U.S. Department of Education. Liquidity for these
auction rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 28 days. In October 2008, we
entered into an agreement with the broker that sold us our auction rate securities that gives us the right to sell our existing auction rate securities back to the broker at par plus accrued interest,
beginning on June 30, 2010 until July 2, 2012 (herein referred to as "put right"). We recorded an other-than-temporary impairment of $9.9 million to record
the auction rate securities at their fair value, as we no longer have the intent to hold the securities until maturity. We also elected a one-time transfer of our auction rate securities
from the available-for-sale category to the trading category. We recorded the value of the put right as a long-term investment in our Consolidated Balance Sheet
with a corresponding $9.8 million gain on investments. We elected the fair value option under SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," for
the put right to offset the fair value changes of the auction rate securities. The fair value of the put right was estimated using a discounted cash flow analysis. The
other-than-temporary impairment, net of the gain on the put right, was $0.1 million during the year ended December 31, 2008 and is included in gain (loss) on
investments, net, in the Consolidated Statement of Operations.

        We
are also exposed to interest rate risk with respect to our convertible senior notes due November 15, 2026. The fair value of our convertible senior notes may be adversely
impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. Our convertible senior notes bear
interest at a fixed rate of 3.25% per year until November 15, 2011, and 3.50% interest per year thereafter. As of December 31, 2007 and 2008, the
carrying value of our convertible senior notes was $258.8 million and the fair value was approximately $262.0 million and $236.6 million, respectively, which was based on the
quoted market price.

54

HREF="#bg13901a_main_toc">Table of Contents

Interest Rate Risk

        The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest rates may cause the fair value of the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of its investment may decline. To minimize this risk, the Company has historically held many investments until maturity, and as a result, the Company receives interest and principal amounts pursuant to the underlying agreements. To further mitigate risk, the Company maintains its portfolio of investments in a variety of securities, including government agency notes, asset-backed debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum short-term rating of A1/P1 or a minimum long-term rating of A/A2. As of December 31, 2006 and 2007, net unrealized losses in these investments were not material. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. In addition, the Company invests in relatively short-term securities and, therefore, changes in short-term interest rates impact the amount of interest income included in the statements of operations.

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

97

EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED—(Continued)

Interest Rate Risk

        The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest rates may cause the fair
value of the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the fair value of its investment may decline. To minimize this risk, the Company has historically held many investments until maturity, and as a result, the Company receives
interest and principal amounts pursuant to the underlying agreements. To further mitigate risk, the Company maintains its portfolio of investments in a variety of securities, including government
agency notes, asset-backed debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum short-term rating of A1/P1 or a
minimum long-term rating of A/A2. As of December 31, 2006 and 2007, net unrealized losses in these investments were not material. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the prevailing interest rate. In addition, the Company invests in relatively short-term securities and, therefore,
changes in short-term interest rates impact the amount of interest income included in the statements of operations.

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

97

EARTHLINK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED—(Continued)

Interest Rate Risk

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

99

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

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

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

Interest Rate Risk

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

99

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

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

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