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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15605

EARTHLINK, INC.
(Exact Name of Registrant as Specified in Its Charter)

1375 Peachtree St., Atlanta, Georgia 30309
(Address of Principal Executive Offices, Including Zip Code)

(404) 815-0770
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ý

        The aggregate market value of the registrant's outstanding common stock held by non-affiliates of the registrant on June 28, 2002 was $931,986,546.

        As of February 28, 2003, 152,398,509 shares of common stock were outstanding.

        Portions of the Proxy Statement to be filed with the Securities and Exchange Commission on or about April 7, 2003 and to be used in connection with the Annual Meeting of Stockholders expected to be held on May 27, 2003 are incorporated by reference in Part III of this Form 10-K.

EARTHLINK, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2002

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

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

PART I

Item 1. Business

Overview

        EarthLink, Inc. ("EarthLink," "we," "us" or "our") is a leading Internet service provider ("ISP"), providing reliable nationwide Internet access and related value-added services to its individual and business customers. EarthLink was formed in February 2000 as a result of the merger of EarthLink Network, Inc. ("EarthLink Network") and MindSpring Enterprises, Inc. ("MindSpring"). The word "Network" was dropped from the name of the combined company to differentiate it from the former EarthLink Network. The combination of EarthLink Network and MindSpring resulted in one of the largest ISPs in the U.S.

        We provide a variety of Internet access and related services, including narrowband access, wireless access, broadband or high speed access, and web hosting. We focus on providing a high-quality user experience for our users through reliable access, superior customer service and support, and useful features like email, web storage, spam filtering and Pop-Up Blocker^SM. Our customer base grew from approximately 4.8 million paying customers on December 31, 2001 to approximately 5.0 million paying customers on December 31, 2002. We have grown our customer base organically through traditional marketing channels such as direct marketing; alliances with strategic partners and original equipment manufacturers (OEMs); retail outlets; and word of mouth and referral marketing. We have also grown our customer base through acquisitions of businesses, including the purchases of OneMain.com, Inc. ("OneMain"), Cidco Incorporated ("Cidco"), and PeoplePC Inc. ("PeoplePC") in September 2000, December 2001, and July 2002, respectively, and the acquisitions of customer bases.

        Our corporate offices are located at 1375 Peachtree St., Atlanta, Georgia 30309, and our telephone number at that location is (404) 815-0770.

Our Business Strategy

        Our goal is to sustain and build upon our strong position in the U.S. Internet access market by providing a high-quality customer experience; focusing on high growth opportunities, such as broadband; increasing the range of services offered, including new forms of access, value-added services, and a differentiated service offering targeting the value segment; leveraging the scale of our customer base and existing infrastructure to improve profitability; and pursuing acquisitions to supplement growth achieved through traditional sales and marketing channels.

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Continue to emphasize customer service, fostering increased customer loyalty and lower churn

        We continue to focus significant resources on attracting and retaining subscribers by providing them with fast and reliable access to the Internet through a variety of platforms and services. By providing a service that is easy to install and use, in addition to offering high-quality customer service and technical support, we intend to continue to achieve high levels of customer satisfaction. In addition, we provide a customizable personal start page that lets subscribers create their own launch point to the Internet. As a result, subscribers can search, organize, shop and communicate—via email, chat or Instant Messaging—all from one convenient location. Historically, we have received recognition for our focus on providing fast and reliable access to the Internet, including "Best in Service" and quality awards from industry publications including MacHome, PC World.Com and Mobile Computing. In 2002, EarthLink received additional recognition for its customer satisfaction from market research firms and industry publications.

Aggressively grow our broadband business

        EarthLink provides broadband Internet access services in markets throughout the U.S., and as of December 31, 2002, we had approximately 779,000 broadband subscribers. We focus on offering our customers a choice of technologies through which they can gain high-speed access to the Internet. We have established a national broadband footprint via multiple wholesale vendors, enabling us to deploy Digital Subscriber Line ("DSL"), cable, fixed wireless and/or satellite broadband solutions in multiple markets throughout the U.S. We believe that our ability to leverage our existing narrowband subscriber base by migrating those subscribers to our broadband service offering is a key competitive advantage and will enable us to grow our broadband subscriber base.

Increase the range of services offered

        We are focused on deploying products and services that enhance customers' Internet experiences as well as extending Internet access beyond the personal computer. During 2002, we launched a number of applications and services designed to enhance customers' Internet experiences, including Pop-Up Blocker, TotalAccess® 2003, email-by-phone, and digital music and photography services. We also launched mobile wireless Internet access services over a variety of new devices. In addition, we continued to expand and improve our DSL service targeted at SOHO (small office/home office) customers. We selected Google™ as our preferred search partner to provide the most relevant, up-to-date search results for our customers. We intend to create additional revenue opportunities from value-added products and services, including expanding the availability of home networking services; offering special security or privacy services, entertainment-related Internet products and services, and a suite of communication products; increasing the functionality of our broadband and narrowband services by adding features related to voice services; and expanding the wireless service offerings.

Targeting the value segment

        With PeoplePC, we acquired a platform that will allow us to participate in the growing value segment, where price is a significant factor in the buying decision. Continued declines in telecommunications costs have allowed companies to begin offering Internet access services with limited functionality and support services at comparatively lower prices. We will begin aggressively marketing this lower-priced, differentiated service in the first half of 2003, and we believe that the value-priced offering will enable us to grow our narrowband subscriber base.

Leverage the scale of our large customer base and existing infrastructure

        We focus on leveraging our national footprint by continuing to migrate customers to lower cost telecommunications networks, utilizing volume discounts and managing the network to increase its efficiency. We will continue to manage operating expenses and attempt to increase them more slowly than

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revenues, leveraging our infrastructure as we grow our customer base and revenues. Finally, we will remain focused on improving our marketing effectiveness and utilizing the most cost effective channels.

        Consistent with these efforts, in January 2003, we announced a comprehensive plan designed to streamline our call center facilities and reduce overall costs while maintaining our commitment to providing award winning customer service. The comprehensive plan entails the closure of certain technical support and customer service facilities and the transition of inquiries previously handled by personnel at these facilities to our remaining call centers and existing outsourced call center providers.

Pursue selected acquisitions

        Over the past two years, we have acquired two businesses and purchased selected assets of another company, all of which expand our service offerings. In December 2001, we acquired Cidco, a developer, distributor and provider of email appliances and related services. The acquisition provides additional capability to deliver Internet services through home devices other than personal computers. The acquisition also extends the reach of our products and services to new segments of Internet users, including consumers who are new to the Internet or are not interested in purchasing personal computers and those seeking alternate ways to access email and personalized Internet content within their homes.

        In January 2002, we acquired the key assets of OmniSky Corporation ("OmniSky"), a provider of wireless data applications and services for use on mobile devices. The acquisition of the OmniSky platform and its award-winning wireless data service allows us to offer wireless Internet access services on selected handheld devices.

        In July 2002, we acquired PeoplePC, a provider of value-priced Internet access using a cost-efficient technology platform. PeoplePC also offers a customizable service for corporations, associations and other distribution opportunities. PeoplePC's product capabilities complement our existing offerings and provide us a technical and service platform to provide a compelling service to the value segment of the ISP market.

        We have acquired and continue to acquire customer bases from other telecommunications and Internet service providers. Excluding the subscribers acquired as a result of the OmniSky, Cidco and PeoplePC transactions, we acquired approximately 305,000 and 232,000 subscribers during the years ended December 31, 2001 and 2002, respectively. We have historically acquired narrowband subscribers, and we will continue to pursue selected customer base acquisitions across all service offerings, including narrowband, broadband and web hosting. However, the opportunities to acquire narrowband subscribers may be limited due to the decreasing number of providers in the dial-up access market with meaningful subscriber bases that are attractive acquisition targets.

Key Business Areas

        We continue to pursue four key business areas:

Narrowband access

        Narrowband access revenues consist of monthly fees charged to customers for dial-up and wireless Internet access; installation fees; early termination fees; equipment revenues associated with selling personal computers, handheld devices and other Internet access devices; and fees charged for the shipping and handling of the devices and other equipment. We had approximately 4.0 million narrowband customers at December 31, 2002. Narrowband revenues were $1,037.8 million for the year ended December 31, 2002, which represented 76% of total revenues for the year.

Broadband access

        Broadband access revenues consist of fees charged for high-speed, high-capacity access services including DSL, cable, satellite, fixed wireless and dedicated circuit services; installation fees; early

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termination fees; reactivation fees; shipping and handling fees; and proceeds from the sale of modems and consumer premise equipment to our subscribers. We expect broadband access to be the primary driver for future revenue growth as we continue to expand our broadband service offerings throughout our national footprint and across a wide variety of access methods. During the year ended December 31, 2002, we added 308,000 net new broadband subscribers to end the year at 779,000 broadband subscribers.

        We will continue our effort to expand the area in which we provide broadband services using each technology (cable, DSL, satellite and wireless) so most of our dial-up customers will have the option to upgrade to an EarthLink broadband service rather than use a competing provider. During the years ended December 31, 2001 and 2002, approximately 62,000 and 98,000 of our dial-up customers, respectively, upgraded to an EarthLink broadband service offering. For the year ended December 31, 2002, broadband access revenues were $250.6 million, or 19% of total revenues.

Web hosting

        We lease server space and provide web hosting services to companies and individuals wishing to have a web or electronic commerce presence. For the year ended December 31, 2002, web hosting revenues were $53.2 million, which represented 4% of total revenues for the year. The number of web sites hosted increased slightly from 169,000 at December 31, 2001 to 173,000 at December 31, 2002.

Content, commerce and advertising

        We generate content, commerce and advertising revenues by leveraging the value of our customer base and user traffic. We generate content, commerce and advertising revenues through the following: (i) paid placements for searches; (ii) fees generated through revenue sharing arrangements with online partners who are accessed through our properties; (iii) commissions received from partners for the sale of partners' services to our subscribers; and (iv) sales of advertising on our various online properties, such as the Personal Start Page™.

        During the quarter ended March 31, 2002, we launched a redesigned search function powered by the award-winning Google search engine. The search tools provide subscribers with relevant, up-to-date search results available from more than 2 billion web pages.

        Our content, commerce and advertising revenues were $15.8 million, or 1% of total revenues, for the year ended December 31, 2002.

Marketing Channels

        Our sales and marketing efforts consist of the following programs:

        Advertising.    We advertise our services in print, billboard, electronic and broadcast media. During 2002, we launched a new advertising campaign that encourages consumers to examine their current—often frustrating—Internet experience and move to EarthLink. The campaign tagline, "Why Wait? Move to EarthLink™," urges subscribers to seek an alternative to delays, drop-offs, pop-up ads and excessive spam. The campaign emphasizes what users should expect from their Internet experience: highest quality dial-up or high-speed connectivity, minimal drop-offs and ISP-generated intrusions, and customizable products and services that let individuals use and enjoy the Internet on their own terms. The campaign targets consumers who depend on the Internet in their daily lives and want a hassle-free ISP that makes Internet access simple and productive for them. The campaign includes national and regional television, radio, print and online ads.

        Direct Marketing.    We promote our services directly to customers in the form of direct mail offers, which include a free or discounted trial period or a free promotional item to attract consumers to sign up for our services; disk and coupon distribution through the mail; and through promotional inserts in packages, periodicals and newspapers.

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        Original Equipment Manufacturer Channels.    We have marketing arrangements with a number of leading hardware and software manufacturers to include our Internet access software pre-installed on or included with their products. Our hardware and software manufacturing partners include, among numerous others, Apple Computer, Hewlett Packard, Dell, IBM, and Sony.

        Apple Alliance.    Our alliance with Apple makes us the default ISP in Apple's setup software on the Macintosh branded line of computers through January 4, 2005. We are the exclusive default ISP for dial-up services on Macintosh computers sold in the U.S.

        Affinity Marketing Program.    Our affinity marketing partners include many AAA clubs, AARP, and several airlines including Delta, Northwest and America West. Partners typically bundle our Internet access software with their own goods or services to create a package that promotes EarthLink to potential customers.

        Retail.    We market our products and services through retail outlets such as Best Buy, Circuit City, Micro Center, Fry's and Office Max.

        Member Referral Program.    We believe existing customers are among our most important marketing tools. We currently waive one month of standard access service fees for each customer who refers a new customer to EarthLink's service.

Services

        Our primary service offerings include:

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narrowband Internet access, including premium and value-priced dial-up access over traditional telephone lines and wireless access through a variety of handheld and laptop devices;



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high-speed or broadband access via DSL, cable modem, satellite, fixed wireless or dedicated circuits;



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web hosting; and



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content, commerce and advertising.

        We currently provide services through telecommunications points of presence ("POPs"), located in various localities nationwide as well as over networks provided by our wholesale broadband access partners. We offer competitively priced plans designed to meet the needs of our customers. Our Internet access software incorporates a telephone dialer and email program with several leading third-party Internet access tools, including a proprietary browser as well as the latest browsers from Netscape and Microsoft. Our software provides a functional, easy-to-use Internet access solution for Windows and Macintosh platforms. The software automatically installs these and other software applications on customer computers. The simple point-and-click functionality of the software, combined with its easy-to-use multimedia registration and installation system, permits online credit card registration, allowing both novice and experienced customers to quickly set up access to the Internet.

Customer Service and Technical Support

        We believe reliable customer service and technical support are critical to retaining existing customers and attracting new ones. To that end, we provide the following services:

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toll-free, live telephone assistance available seven days a week, 24 hours a day;



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email-based assistance available seven days a week, 24 hours a day;



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live chat support 5 days a week from 7:00 a.m. to 2:45 a.m. (Eastern time);



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help sites and Internet guide files on the EarthLink web site; and

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printed reference material.

        We also provide support for businesses with dedicated access connections and web sites. In addition, we maintain newsgroups on the Internet where subscribers can post requests for help and other subscribers and support personnel can respond.

        During the year ended December 31, 2002, we handled an average of over 41,000 customer service and technical support calls a day through call centers located in Pasadena, California; Sacramento, California; Roseville, California; Atlanta, Georgia; Harrisburg, Pennsylvania; Phoenix, Arizona; Seattle, Washington; and Dallas, Texas. We also contract with call center services vendors whose EarthLink-trained employees provide additional technical support assistance, and during the year ended December 31, 2002, these vendors handled an average of 10,000 customer service and technical support calls a day. We believe the call centers' technology and systems are scaleable to accommodate call volume growth. We actively evaluate call center facilities in order to deliver more effective and efficient services to our customers.

        In November 2002, we closed our Phoenix, Arizona call center facility as a result of an opportunity to consolidate operations and reduce overall costs. During the first quarter of 2003, we announced a comprehensive plan to streamline our call center facilities to further increase operational efficiencies and reduce overall costs, while maintaining our commitment to customer service. In connection with the plan, we will close our technical support and customer call center operations in Dallas, Texas; Sacramento, California; Pasadena, California; and Seattle, Washington during February and March 2003. We expect a seamless transition as customer inquiries normally handled by these facilities will be routed to our remaining call centers in Atlanta, Georgia; Harrisburg, Pennsylvania; and Roseville, California as well as our existing outsourced call center providers. As a result, during the year ended December 31, 2003, we expect our outsource call center providers to handle a larger share of our customer service and technical support calls.

Technical Development and Service Enhancement

TotalAccess 2003

        In August 2002, we launched TotalAccess 2003, the newest version of EarthLink's Internet access software. TotalAccess 2003 provides new email features and a task panel that allows users to access favorite functions such as games and the EarthLink search engine powered by Google. Key features of TotalAccess 2003 include an email upgrade that lets users share their stored email addresses with our Web Mail application; a task panel that provides one-click access to the Web, email and personal web space; and a cleaner, faster-loading Personal Start Page. The profile/location manager feature of TotalAccess 2003 sets up and maintains multiple user and location profiles. For example, subscribers who frequently visit certain cities can establish settings for using their workplace connection in one place, a dial-up connection in the second, and a DSL connection at home. Also, the software allows multiple users to share the same computer and connection while maintaining each individual's preferences and settings.

EarthLink Extras

        During the third and fourth quarters of 2002, we launched additional value-added services to enhance and expand our customers' Internet experiences. These products and services fall into the following product suites: communications, entertainment, productivity and security.

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EarthLink Email-by-Phone. Subscribers can access their email by dialing the toll-free number and following the voice prompts.



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EarthLink Calling Card. The EarthLink Calling Card service allows consumers to make inexpensive long-distance calls to anywhere in the world from a personal computer or telephone.

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EarthLink Photo Center. The online photo service allows subscribers to get their film developed and share their pictures online.



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EarthLink Digital Music Center. The Digital Music Center is a label-neutral distribution channel offering consumers a venue for downloading, streaming, renting and purchasing music.



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EarthLink Remote Access. Subscribers can access their electronic files from virtually anywhere with the Remote Access service.



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EarthLink Firewall. High-speed Internet subscribers using a cable or DSL connection can download ZoneAlarm® free-of-charge or purchase ZoneAlarm Pro.

Pop-Up Blocker

        In August 2002, we enhanced our service offering by becoming the first major ISP to include, at no additional charge, a new feature that lets subscribers block annoying pop-up advertisements. Our Pop-Up Blocker software is designed to prevent advertising windows from appearing above (pop-up) or under (pop-under) a customer's main browser window. Pop-Up Blocker lets users specify web sites where pop-up windows are permitted to appear. Future products similar to Pop-Up Blocker may include additional features such as blocking cookies and bugs that could be used to track a user's web history.

PeoplePC

        In July 2002, we acquired PeoplePC. At the time of the transaction, PeoplePC provided value-priced Internet access using a cost-efficient ISP technology platform to approximately 55,000 monthly paying customers and approximately 518,000 prepaid customers. PeoplePC's innovative client software, user interface and network management tools are tailored to the needs of the value segment. The acquisition of PeoplePC enables us to participate in the value segment offering value-priced Internet access services and bundled packages that include personal computers and prepaid, value-priced Internet access services.

EarthLink Everywhere

        The "EarthLink Everywhere" initiative focuses on enabling customers to access the Internet no matter where they are through both wired and wireless devices and appliances. Since the launch of the EarthLink Everywhere initiative in December 2000, we have launched wireless email solutions utilizing various handheld, two-way wireless devices. The service offerings give Internet users unlimited mobile access to their EarthLink email, among other features including an address book, task list, calendar functions, and the ability to direct mail going to existing email accounts to be delivered to their handheld device, where they can reply, forward, delete and store emails. In 2002, we extended our mobile service offerings onto additional wireless handheld devices, and we launched EarthLink Wireless High Speed service powered by Boingo Wireless, Inc. The service gives consumers high-speed Internet access through hundreds of public and private Wi-Fi networks, or "hot spots," nationwide through 802.11b-enabled wireless LANs (local area networks).

        In September 2002, we entered into a strategic alliance with GoAmerica, Inc. ("GoAmerica"), a wireless data solutions provider, to develop, market and support a comprehensive suite of enterprise and consumer wireless data services. As part of the GoAmerica-EarthLink alliance, we acquired certain GoAmerica wireless subscribers. In connection with the alliance, the companies will collaborate on technology development to meet the needs of both enterprise and consumer wireless data users, allowing us to provide mobile services to current and future customers on a comprehensive range of platforms.

POPs and Network Infrastructure

        We provide customers with Internet access through both EarthLink managed facilities and third-party POPs. Over 88% of the U.S. population can access EarthLink's Internet service through a local telephone

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call. We have access to third-party provider POPs through network service agreements with Level 3, Sprint, UUNet and other carriers.

        Using a combination of owned POPs and vendor-managed POPs, we provide Internet services on a nationwide basis, while managing the timing and magnitude of capital expenditures. We use a strategy of buying Internet access from third-party providers in locations where it is more economical to do so. These are typically less densely populated areas or regions where the provider can achieve greater economies of scale. We continually evaluate owned versus outsourced decisions and, if warranted, may install an EarthLink POP to replace or overlap a vendor-managed POP. Customers located in a geographic area not currently serviced by a local POP can access the Internet through a toll free service.

Regulatory Environment

Overview

        The regulatory environment relating to our business and operations is evolving. In addition, a number of legislative and regulatory proposals under consideration by federal, state, and local governmental entities may lead to the repeal, modification or introduction of laws or regulations which do or could affect our business. The significant areas of regulation for our business include telecommunications industry regulation in general, and specifically, broadband access as well as Internet taxation.

Telecommunications Regulation

        Neither the Federal Communications Commission ("FCC") nor any other governmental agency directly regulates ISPs, which are classified as unregulated providers of "information service" rather than regulated "telecommunications service" under the terms of the Telecommunications Act of 1996. Accordingly, most regulations that apply to telephone companies and other common carriers do not apply to us. We are not required to contribute a percentage of gross revenue to support "universal service" subsidies for local telephone services or other public policy objectives, such as advanced telecommunications systems for schools, health care providers and libraries. Such classification may discourage states from regulating ISPs as telecommunications carriers or imposing similar subsidy obligations.

        Nevertheless, Internet-related regulatory policies are continuing to develop, and it is possible that we could be exposed to regulation in the future. For example, the FCC could subject certain services offered by ISPs to regulation as telecommunications services. Among other things, the FCC could decide to regulate voice and fax telephony services provided over the Internet as "telecommunications" or a "telecommunications service" even though Internet access itself would not be regulated. A decision by the FCC to impose telecommunications carrier regulations on ISPs or on some of the services they offer could result in us being subject to universal service fees, regulatory fees and other fees imposed on regulated telecommunications providers as well as heightened costs of regulatory compliance.

        We could also be affected by any change in the ability of customers to reach our network through a dial-up telephone call without any additional charges. The FCC has ruled that ISPs are enhanced service providers and are thus exempt from the access charges that apply to traditional telecommunications companies. Local telephone companies assess charges on long-distance companies for the use of the local telephone network to originate and terminate long-distance calls, generally on a per-minute basis. We could be adversely affected by any regulatory change that would result in the imposition of access charges on ISPs because this would substantially increase the cost of using the Internet.

        State public utility commissions generally have declined to regulate enhanced or information services. Some states, however, have continued to regulate particular aspects of enhanced services in limited circumstances, such as where they are provided by incumbent local exchange carriers ("ILECs") that operate telecommunications networks. Moreover, the public service commissions of some states continue

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to review potential regulation of these services. There can be no assurance that state regulatory authorities will not seek to regulate aspects of these activities as telecommunications services.

Broadband Access

        We purchase "last mile" broadband access from ILECs; competitive local exchange carriers ("CLECs"); and cable providers. The term "last mile" generally refers to the element of telecommunications networks that is directly connected to homes and businesses (hereinafter referred to as the "last mile"). ILECs are required by current law to make last mile access available on a non-discriminatory basis to ISPs like EarthLink, although there are currently both regulatory and legislative proposals which could change this requirement. Cable providers are not required by current law to make last mile access available to ISPs like EarthLink; however, Time Warner Cable was required to make last mile access available over its cable facilities as a condition of completing a merger.

        In November 1999, the FCC issued an order which allowed CLECs, such as Covad Communications Group, Inc. ("Covad"), the ability to separately purchase from the ILECs the High Frequency Portion of the Loop (HFPL) used to provision DSL services. This is commonly known as line sharing. In May 2002, the U.S. Court of Appeals vacated and remanded the FCC's line sharing decision. On February 20, 2003, the FCC voted 3-2 to support an order which will eliminate line sharing, subject to a three-year phase-out period. At the end of that period, CLECs, including Covad, could be required to pay a full unbundled loop rate to the ILECs. Covad believes that it has an ongoing right to line-sharing under its contractual agreements with the ILECs, subject to change-in-law provisions. If Covad cannot continue to purchase line-shared services, we may move our customers provisioned on Covad's network to another wholesale broadband providers' network, including ILECs' and/or cable providers' networks. If we are required to move these customers or if the ILECs substantially increase the cost of such services, our business could be materially adversely affected.

        The availability of and charges for last mile broadband access with most ILECs are governed by contracts with up to four years remaining on current contract terms. One of our ILEC broadband providers sets availability and prices based on tariff rates, which are subject to change from time to time, rather than contract. We do not believe our contracts with the ILECs are subject to the aforementioned line-sharing regulations; however, regulatory actions regarding line-sharing as well as the competitive environment may adversely affect our ability to extend or renew our current contracts with ILECs on terms acceptable to us. We believe that, regardless of regulatory decisions that may be made, ILECs will continue to sell wholesale broadband access on economically reasonable terms to ISPs like EarthLink, although there can be no assurance of this. Our contracts with our cable providers and Covad, our principal CLEC, have up to four years remaining on current contract terms.

        EarthLink's strategy for gaining continuing access to wholesale broadband DSL and cable lines and for gaining increasingly favorable prices is to create active and healthy competition for EarthLink's business between ILECs and cable providers in major markets. To do this, EarthLink is attempting to gain access to a larger number of cable systems over which it can offer its services and to demonstrate its ability to deliver meaningful volumes of customers to its DSL and cable providers by continuing to actively grow its retail broadband business. EarthLink is also exploring the commercial feasibility of emerging alternative broadband access technologies to gain wholesale broadband access and as an added means of creating wholesale broadband access competition.

        The availability and/or pricing of last mile access with our wholesale broadband providers, including ILECs, CLECs, and cable providers, among others, at the expiration of current terms or tariffs cannot be assured, and may reflect regulatory or legislative as well as competitive and business factors. There can be no assurance that we will be able to extend our current contracts on terms acceptable to us or at all. Additionally, there can be no assurance that we will be able to gain access to and expand our last mile broadband access with DSL and cable providers to grow our retail broadband business. The inability to

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extend current contracts with last mile broadband access providers or to expand the availability of last mile broadband access could materially adversely affect our business.

Internet Taxation

        The tax treatment of electronic commerce and other activities on or relating to the Internet is currently unsettled. A number of proposals have been made at the federal and state levels that could impose taxes on the online sale of goods and services and other Internet activities. The federal Internet Tax Freedom Act was signed into law in 1998, placing a three-year moratorium on new state and local taxes on Internet commerce. In November 2001, the moratorium was extended for another two years until November 2003. This moratorium may not be extended beyond 2003, and future laws imposing taxes or other regulations on commerce over the Internet could substantially impair the growth of electronic commerce or increase the cost of providing services over the Internet and, as a result, could materially adversely affect our business.

Competition

ISP Market

        We operate in the Internet services market, which is extremely competitive. Current and prospective competitors include many large companies that have substantially greater market presence, financial, technical, marketing and other resources than we have. We compete directly or indirectly with the following categories of companies:

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established online services companies, such as AOL Time Warner and the Microsoft Network (MSN);



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local and regional ISPs;



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national telecommunications companies, such as AT&T and WorldCom;



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regional Bell operating companies, such as SBC, Verizon and BellSouth;



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fixed wireless service providers such as Sprint Broadband Services;



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content companies, such as Yahoo!, who are expanding their service offerings;



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free or value-priced ISPs such as United Online;



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cable television companies providing broadband access, including Comcast, Charter Communications and Cox Communications; and



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utility and local and long-distance telephone companies.

        Competition is likely to continue increasing, particularly as large diversified telecommunications and media companies acquire ISPs and otherwise provide ISP services and as ISPs consolidate into larger, more competitive companies. Diversified competitors may continue to bundle other content, services and products with Internet connectivity services, potentially placing us at a significant competitive disadvantage.

        Increased competition for users of Internet services and content may result in lower subscriber growth rates for our Internet services and lower advertising rates and decreased demand for advertising space on our online properties. Competitors may charge less for Internet services, causing us to reduce (or preventing us from raising) fees. As a result, our revenues may not grow at anticipated rates, and our business may suffer.

        As the ISP market continues to develop and competition intensifies, competitors may merge or form strategic alliances that would increase their ability to compete with us for subscribers, traffic and

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advertisers. These relationships may also negatively impact our ability to form or maintain our own strategic relationships with those companies.

Telecommunications Industry

        The intensity of competition in the telecommunications industry has resulted in significant declines in pricing for telecommunications services that we purchase, and such declines have had a favorable effect on our operating performance. However, the price declines have caused some telecommunications companies to experience financial difficulty. Our business could be negatively affected if one or more of our telecommunications providers were to experience serious enough difficulties to impact service availability or if telecommunications bankruptcies generally reduced the level of competition among telecommunications providers.

Relationship with Sprint Corporation

        Since June 1998, we have maintained a strategic alliance with Sprint Corporation ("Sprint"). As a part of this alliance, Sprint transferred approximately 130,000 customers to us and committed to generating at least 150,000 new customers for us during each of the succeeding five years through their channels. Additionally, we were co-branded as Sprint's exclusive consumer Internet access provider, and we had exclusive access to certain dial-up modem ports in Sprint's network. We also had access to Sprint's marketing and distribution channels and the right to use Sprint's widely recognized brand name.

        In February 2001, we renegotiated our commercial and governance arrangements with Sprint to reflect the evolution of both the relationship and the telecommunications-Internet market. While we continue to have a close relationship with Sprint, the following highlights the changes we made:

Commercial Relationship

        We continue to support a variety of Sprint-branded retail Internet services, such as Sprint's broadband services. We do this through a wholesale arrangement with Sprint. Sprint continues to sell EarthLink-branded dial-up Internet access service, though Sprint may now, at its election, create a Sprint-branded dial-up service, using EarthLink components on a wholesale basis. Although Sprint may continue to use the EarthLink brand in these wholesale services, it is not required to do so. We are likewise released from any obligation to co-brand any of our services with the Sprint brand.

        Both companies have removed all exclusivity provisions from the relationship. Sprint is free to pursue relationships with other ISPs, and EarthLink is free to enter into commercial relationships with other telecommunications service providers.

        As Sprint had already delivered nearly three quarters of the subscribers required under their five-year, 750,000 subscriber guarantee, EarthLink released Sprint from the remainder of its guarantee. However, during the year ended December 31, 2002, our ongoing relationship with Sprint generated in excess of 10% of our total gross organic subscriber additions, and Sprint provided us with gross subscriber additions in excess of the minimum commitment in the original arrangement.

Governance Relationship

        Among other changes in the governance relationship made in February 2001, Sprint no longer has the contractual right to acquire EarthLink. Sprint will continue to have the right to maintain its fully diluted equity ownership percentage by purchasing shares on the market or from third parties in the event that we dilute Sprint's interest by issuing voting securities in a financing, in an acquisition, or by the exercise of options or warrants or the conversion of convertible securities into voting stock. However, Sprint will, in most cases, have no other rights to acquire EarthLink securities. Sprint will retain the ability to make a counter-offer to buy all, but not less than all, of our equity interests in the event a third party seeks to

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acquire a controlling interest in EarthLink. In that case, our Board of Directors is not contractually obligated to accept Sprint's counter-offer, but will analyze Sprint's counter-offer in exercising its fiduciary duties to our stockholders.

        Sprint has also relinquished its right to appoint two members to our Board of Directors, and its representatives have resigned from their positions on our Board of Directors. This new governance arrangement terminates in the event that EarthLink consummates a change in control transaction with a third party, or if Sprint acquires all of the equity of EarthLink pursuant to a counter-offer that our Board of Directors accepts, or if Sprint's ownership of common and preferred stock falls below 5% of our total voting equity securities.

Changes in Sprint's Ownership of EarthLink

        Pursuant to a "shelf" registration created in August 2001, Sprint sold 18.4 million shares of EarthLink common stock. Of that amount, approximately 12.5 million shares were shares of EarthLink common stock held by Sprint and approximately 5.9 million shares were obtained by Sprint upon conversion of approximately 6.2 million shares of Series B convertible preferred stock. Sprint sold all 18.4 million shares in August 2001.

        In November 2001, Sprint obtained 3.0 million shares of EarthLink's common stock upon conversion of 3.1 million shares of EarthLink's Series A convertible preferred stock. The underlying shares were registered for sale through a Rule 144 filing.

        In four separate transactions during the year ended December 31, 2002, Sprint obtained an aggregate of 8.8 million shares of EarthLink's common stock upon conversion of 9.0 million shares of EarthLink's Series A convertible preferred stock. The underlying shares were registered for sale through a Rule 144 filing.

        At December 31, 2002, Sprint continued to hold approximately 18.0 million shares of EarthLink's convertible preferred stock.

Proprietary Rights

        General.    We rely on a combination of copyright, trademark, patent and trade secret laws and contractual restrictions to establish and protect technology and proprietary rights and information. We require employees and consultants and, when possible, suppliers and distributors to sign confidentiality agreements. However, there can be no assurance that the steps taken to protect technologies and trade secrets will be sufficient to prevent misappropriation of our technology and our proprietary rights and information or that competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. From time to time, third parties have alleged that certain of our trademarks and technologies infringe on their intellectual property rights. None of these claims has had an adverse effect on our ability to market and sell services. However, there can be no assurance that those claims will not have an adverse effect in the future or that others will not assert infringement claims against us in the future.

        Licenses.    We have licenses to distribute and/or use third-party software incorporated into our software. We also have an agreement with AOL Time Warner under which we distribute a co-branded EarthLink version of AOL Instant Messenger. We intend to maintain or negotiate renewals of existing software licenses and authorizations as necessary. We may also want or need to license other applications in the future. Our inability to renew existing software licenses or to license additional applications could materially adversely affect future results of operations.

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Employees

        As of December 31, 2002, EarthLink employed 5,106 permanent and temporary employees, including 1,499 sales and marketing personnel, 3,192 operations and customer support personnel, and 415 administrative personnel. None of our employees are represented by a labor union, and we have no collective bargaining agreement.

        In January 2003, we announced a comprehensive plan to streamline our call center facilities to increase operational efficiencies and reduce overall costs. We will execute the plan during the first quarter of 2003, including closing four call center facilities. We expect the implementation of the plan will result in a net reduction of approximately 920 employees, primarily customer support personnel.

Available Information

        EarthLink files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act. The public may read and copy any materials that EarthLink files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet web site that contains reports, proxy and information statements, and other information regarding issuers, including EarthLink, that file electronically with the SEC. The public can obtain any documents that EarthLink files with the SEC at http://www.sec.gov.

        EarthLink also makes available free of charge on or through its Internet web site (http://www.earthlink.net) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act as soon as reasonably practicable after EarthLink electronically files such material with, or furnishes it to, the SEC.

Item 2. Properties

        We maintain facilities and offices at various locations throughout the U.S. for general corporate purposes, including technology centers, customer call centers, office space and our corporate headquarters.

        Our principal executive offices are in Atlanta, Georgia. We lease approximately 328,000 square feet in our headquarters building at a current monthly rent of $373,000. We lease approximately 141,000 square feet of office space for administrative personnel in Pasadena, California at a current monthly rent of $243,000. We also lease a 110,000 square foot facility in Pasadena, California to house an equipment and technology center at a current monthly rent of $158,000.

        In addition, as of December 31, 2002, we maintained leased space for customer support call centers and office purposes in Atlanta, Georgia; Harrisburg, Pennsylvania; Pasadena, California; Sacramento, California; Roseville, California; Seattle, Washington; San Francisco, California; and Dallas, Texas.

        In January 2003, we announced a comprehensive plan to streamline our call center facilities to increase operational efficiencies and reduce overall costs. We will execute the plan during the first quarter of 2003, including closing four call center facilities in Sacramento, California; Seattle, Washington; Dallas, Texas; and Pasadena, California. We will continue to maintain limited staff unrelated to our call center operations in our Seattle, Washington and Dallas, Texas facilities, and two other facilities in Pasadena, California will be largely unaffected. We anticipate the leases associated with these facilities to remain in effect after closure, at least in the short-term; however, we will seek sub-tenants for the vacated space to reduce our net cash payments associated with the contractual commitments.

        Certain of the above leases include scheduled base rent increases over the respective lease terms. The total amount of base rent payments is being charged to expense on the straight-line method over the terms

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of the leases. In addition to the base rent payments, we generally pay a monthly allocation of the buildings' operating expenses. We believe we have adequate facilities to meet our future growth needs.

Item 3. Legal Proceedings

        We are involved in routine legal proceedings occurring in the ordinary course of business. We believe that our current legal proceedings in the aggregate are immaterial to our financial condition or results of operations and cash flows.

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

        During the quarter ended December 31, 2002, there were no matters submitted to a vote of security holders.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters

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

Price

        The last reported sale price of EarthLink's common stock on the Nasdaq National Market on February 28, 2003 was $4.97 per share.

Holders

        There were approximately 2,031 holders of record of EarthLink's common stock on February 28, 2003.

Dividends

        We have never declared or paid cash dividends on our common stock. We intend to retain all future earnings to finance future growth and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

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Item 6. Selected Financial Data

        The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Report.

Selected Consolidated Financial Information

(1)

Reflects the accretion of liquidation dividends on Series A and B convertible preferred stock at a 3% annual rate, compounded quarterly, and the accretion of a dividend related to the beneficial conversion feature in accordance with EITF Issue No. 98-5.

(2)

In February 2000, each outstanding share of then existing EarthLink Network, Inc. common stock was exchanged for 1.615 shares of the common stock of EarthLink and each outstanding share of then existing MindSpring Enterprises, Inc. common stock was exchanged for one share of the common stock of EarthLink. See Note 1 of the Notes to Consolidated Financial Statements for an explanation of the determination of the number of weighted average shares outstanding in the net loss per share computation.

(3)

In February 2001, EarthLink renegotiated its commercial and governance arrangements with Sprint Corporation, and EarthLink's exclusive marketing and co-branding arrangements with Sprint were terminated. Accordingly, management recorded a non-cash charge of approximately $11.3 million to write-off unamortized assets related to the marketing and co-branding agreements with Sprint.

(4)

In November 2002, EarthLink recorded facility exit costs associated with the closing of its Phoenix call center. The $3.5 million of facility exit costs incurred included $1.3 million of non-cash costs associated with the write-off of the net book value of fixed assets, primarily leasehold improvements.

(5)

Represents earnings (loss) before depreciation and amortization, interest income and expense, income tax expense, investment write-offs, and non-cash facility exit costs. EBITDA is not determined in accordance with accounting principles generally accepted in the United States, is not indicative of cash provided or used by operating activities, and may differ from comparable information provided by other companies. EBITDA should not be considered in isolation, as an alternative to, or more meaningful than measures of performance determined in accordance with accounting principles generally accepted in the United States. EBITDA is a measure commonly used in our industry and is included herein because we believe EBITDA provides relevant and useful information to our investors. Since the elements of EBITDA are determined using the accrual basis of accounting and EBITDA excludes the effects of capital and financing related costs, investors should use it to analyze and compare companies on the basis of operating performance. We utilize and have disclosed EBITDA to provide additional information with respect to our ability to meet future capital expenditures and working capital requirements, to incur additional indebtedness, and to fund continued growth.

(6)

Investments in marketable securities consist of debt securities classified as available-for-sale and have maturities greater than 90 days from the date of acquisition. EarthLink has invested primarily in U.S. corporate notes and asset-backed securities, all of which have a minimum investment rating of A, and government agency notes.

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

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

Safe Harbor Statement

        The Management's Discussion and Analysis and other portions of this report 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, the company seeks the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation, (1) that we may not be able to successfully implement our broadband strategy which would materially and adversely affect our subscriber growth rates and future overall revenues; (2) that we may not successfully enhance existing or develop new products and services in a cost-effective manner to meet customer demand in the rapidly evolving market for Internet services; (3) that our service offerings may fail to be competitive with existing and new competitors; (4) that competitive product, price or marketing pressures could cause us to lose existing customers to competitors, or may cause us to reduce, or prevent us from raising, prices for our services; (5) that our commercial and alliance arrangements, including marketing arrangements with Apple and Sprint, may be terminated or may not be as beneficial to us as management anticipates; (6) that declining levels of economic activity, increasing maturity of the market for Internet access, or fluctuations in the use of the Internet could negatively impact our subscriber growth rates and incremental revenue levels; (7) that we may experience other difficulties that limit our growth potential or lower future overall revenues; (8) that service interruptions could harm our business; (9) that we are not profitable and may never achieve profitability; (10) that our third-party network providers may be unwilling or unable to provide Internet access; (11) that we may be unable to maintain or increase our customer levels if we do not have uninterrupted and reasonably priced access to local and long-distance telecommunications systems for delivering dial-up and/or broadband access, including, specifically, that integrated local exchange carriers and cable companies may not provide last mile broadband access to the company on a wholesale basis or on terms or at prices that allow the company to grow and be profitable in the broadband market; (12) that we may not be able to protect our proprietary technologies or successfully defend infringement claims and may be required to enter licensing arrangements on unfavorable terms; (13) that government regulations could force us to change our business practices; (14) that we may not experience the level of benefits we expect in connection with streamlining our call centers and may not otherwise be able to contain our costs; and (15) that some other unforeseen difficulties may occur. This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein. These factors are not intended to represent a complete list of all risks and uncertainties inherent in the company's business, and should be read in conjunction with the more detailed cautionary statements included in EarthLink's other filings with the Securities and Exchange Commission.

Overview

        EarthLink, Inc. ("EarthLink," "we," "us" or "our") is a leading Internet service provider ("ISP"), providing reliable nationwide Internet access and related value-added services to our individual and business subscribers. EarthLink was formed in February 2000 as a result of the merger of EarthLink Network, Inc. ("EarthLink Network") and MindSpring Enterprises Inc. ("MindSpring"). The word "Network" was dropped from the name of the combined company to differentiate it from the former EarthLink Network. Our base of approximately 5.0 million paying subscribers makes us one of the largest ISPs in the U.S. Our primary service offerings are narrowband and broadband or high-speed Internet

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access, web hosting, and advertising and e-commerce services. In addition, we offer mobile wireless Internet access through various handheld devices. We provide our broad range of products and services to thousands of communities through a nationwide network of dial-up points of presence ("POPs"), a nationwide broadband footprint, and wireless technologies.

        Our objective is to provide subscribers the highest quality access to the Internet and related Internet-based services, which together make the Internet not only relevant but indispensable in the daily lives of our subscribers. Success in achieving this objective will be measured by achieving the highest subscriber ratings for quality and the highest subscriber loyalty in the industry, steady growth in subscribers and revenues, and high rates of profitability as measured by return on sales and equity. We are intensely focused on improving margins by capitalizing on the continuing decline in telecommunications costs, leveraging the benefits of scale throughout our business, reducing the number of calls to our call centers due to the quality of our software and reliability of our services, and streamlining our internal processes and operations.

        Our subscriber base grew from approximately 4.8 million paying subscribers at December 31, 2001 to approximately 5.0 million paying subscribers at December 31, 2002. We have added subscribers organically through (i) strategic alliances with partners and original equipment manufacturers (OEMs), (ii) traditional marketing channels such as direct marketing, (iii) retail outlets, and (iv) word of mouth and referral marketing. We have also grown our customer base through acquisitions of businesses and customer bases.

        While our overall subscriber base grew slightly over the last year, the mix of customers has shifted toward broadband services, reflecting the growth of this segment of the Internet access market and our expanding broadband footprint and offerings, and toward non-traditional narrowband services, resulting from the acquisitions of Cidco Incorporated ("Cidco") (email appliance service) and PeoplePC Inc. ("PeoplePC") (a value-priced narrowband service). Our traditional, premium-priced narrowband customer base has declined slightly reflecting the increasing maturity of this service and the effects of an increase in our price for our unlimited dial-up service, generally from $19.95 to $21.95 per month. The increase became effective on July 2, 2001 for all new unlimited dial-up subscribers and on the first billing on or after August 1, 2001 for the majority of our existing unlimited dial-up subscribers. We also increased prices at varying times during 2001 and 2002 for subscribers acquired during 2000 and 2001, and such increases were by somewhat greater amounts and were up to a monthly price of $21.95.

        Our goal is to sustain and build upon our strong position in the U.S. Internet access market by providing a high-quality customer experience; focusing on high growth opportunities, such as broadband; increasing the range of services offered, including new and differentiated forms of access as well as value-added services; leveraging the scale of our large customer base and existing infrastructure to improve profitability; and pursuing acquisitions to supplement the growth achieved through traditional sales and marketing channels.

Key Business Areas

        We derive substantially all revenues from services and related fees, and such revenues represented 97% or more of total revenues for all periods presented. The remaining revenue relates to sales of equipment and devices used by our subscribers to access our services. EarthLink continues to realize revenue in four key business areas:

•

Narrowband access revenues, which consist of monthly fees charged to customers for dial-up and wireless Internet access, certain usage and termination fees, equipment revenues derived from the sale of personal computers bundled with Internet access, and any associated equipment revenues for Internet appliances and wireless access devices;



•

Broadband access revenues, which consist of fees charged for high-speed, high-capacity access services, including digital subscriber line ("DSL"), cable, satellite and dedicated circuit services; installation fees; termination fees; and fees for equipment;

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•

Web hosting revenues, which consist of fees charged for web services to companies and individuals for whom we host a web or electronic commerce presence; and



•

Content, commerce and advertising revenues, which represent (i) paid placements for searches; (ii) fees generated through revenue sharing arrangements with online partners who are accessed through our properties; (iii) commissions received from partners for the sale of partners' services to our subscribers; and (iv) sales of advertising on our various online properties, such as the Personal Start Page™.

Strategic Alliances and Recent Acquisitions

        In June 1998, we entered into a strategic alliance with Sprint Corporation ("Sprint"), which included EarthLink being co-branded as Sprint's exclusive consumer Internet access provider. In February 2001, we renegotiated our arrangement with Sprint. While we continue to have a close relationship with Sprint, we agreed to release Sprint from its minimum commitment to provide us with 150,000 new subscribers per year. In 2002, our relationship with Sprint generated in excess of 10% of EarthLink's total gross organic subscriber additions, and Sprint provided us with gross subscriber additions in excess of the minimum commitment in the original arrangement. However, Sprint is free to pursue relationships with other Internet providers, and a significant decrease in the number of gross subscriber additions generated through our relationship with Sprint would adversely affect our results of operations.

        In January 2000, we entered into a strategic alliance with Apple Computer, Inc. In connection with this alliance, we expanded our existing commercial relationship with Apple so that we serve as the default ISP in Apple's setup software on its Macintosh branded line of computers for a minimum of two years and our overall commercial relationship extends through January 4, 2005. We are the exclusive default ISP for dial-up, ISDN and DSL services on Macintosh computers sold in the U.S., and we pay Apple for each gross organic subscriber addition generated as a result of our alliance. In addition, Apple purchased $200 million of our Series C convertible preferred stock. There can be no assurance that we will be able to extend our arrangement with Apple beyond January 4, 2005, and a significant decrease in the number of gross subscriber additions generated through our relationship with Apple would adversely affect our results of operations.

        In September 2000, we acquired OneMain.com, Inc. ("OneMain"), including approximately 732,000 individual narrowband access accounts, approximately 20,000 web hosting accounts and approximately 6,000 broadband accounts. The aggregate purchase price for OneMain was approximately $315.8 million, including $168.0 million in cash and cash transaction costs, $16.4 million of non-cash transaction charges, EarthLink common stock valued at $106.7 million and the assumption of net liabilities of $24.7 million.

        In November 2000, we entered into an agreement with Time Warner Cable, a company whose networks pass approximately 20 million homes and directly serve approximately 13 million cable television subscribers, for EarthLink to offer its broadband Internet services over Time Warner Cable systems. In connection with the agreement, Time Warner Cable receives compensation from EarthLink for providing last mile broadband access to certain broadband subscribers. In the third quarter of 2001, we started providing services to subscribers via the Time Warner Cable network, and as of June 30, 2002, our full package of high-speed Internet access, content, applications and functionality was available in all 39 markets served, including the New York and Los Angeles markets.

        In December 2001, we acquired Cidco, a developer, distributor and provider of email appliances and related services. The acquisition gives us additional capability to deliver Internet services through home devices other than personal computers. The acquisition also extends the reach of our products and services to new segments of Internet users, including consumers who are new to the Internet or are not interested in purchasing personal computers and those seeking alternate ways to access email and personalized Internet content within their homes. Since our acquisition of Cidco in December 2001, we have provided Cidco's affordable, portable and easy-to-use email appliances such as the MailStation and related Internet services.

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        In January 2002, we acquired the proprietary software platform of OmniSky Corporation ("OmniSky") in a Bankruptcy Code Section 363 purchase of assets out of bankruptcy. OmniSky was a provider of wireless data applications and services for use on mobile devices. The acquisition of the OmniSky platform allows EarthLink to extend its mobile service offerings onto popular Palm OS and other wireless handheld devices. The costs to acquire the OmniSky platform consisted of $2.7 million in cash, the assumption of $2.7 million in liabilities and transaction charges of $785,000. In connection with the acquisition of the OmniSky platform, EarthLink recorded $6.0 million in computer software and related hardware and $0.2 million in other assets. The transaction also included approximately 30,000 subscribers deemed to have no fair market value based on a discounted cash flow analysis.

        In March 2002, we entered into an agreement with AT&T Broadband (now part of Comcast Corporation) under which EarthLink gained access to AT&T Broadband's cable network to offer high-speed Internet access services in the Seattle and Boston area markets. In connection with the agreement, AT&T Broadband receives compensation from EarthLink for providing last mile broadband access to certain broadband subscribers. EarthLink launched high-speed service in the Seattle and Boston area markets over AT&T Broadband's network in July 2002 and October 2002, respectively.

        In July 2002, we acquired PeoplePC. PeoplePC provides a membership package that includes a brand-name computer, unlimited Internet access, customer support and an in-home warranty ("Membership Package"). As a result of the transaction, we acquired approximately 518,000 PeoplePC prepaid, bundled subscribers ("Membership Customers") and approximately 55,000 value-priced, monthly billed subscribers. As of December 31, 2002, we continued to provide service to approximately 487,000 acquired Membership Customers. For the year ended December 31, 2002, we excluded the acquired Membership Customers from subscriber amounts reported because they are non-paying customers. We will include the acquired Membership Customers in our reported subscriber amounts if and when they elect to convert to paying subscribers at the end of their prepaid terms. The PeoplePC business gives us the opportunity to create and market a value-priced access service and to compete in the value segment of the Internet access market. We paid approximately $12.9 million cash for the outstanding shares of PeoplePC and assumed approximately $24.6 million in deferred service liabilities to PeoplePC subscribers who purchased Membership Packages prior to the acquisition date. The deferred service liability and other liabilities assumed and the identifiable assets acquired are based on preliminary estimates and are subject to adjustment for up to one year from the date of acquisition. Any adjustments to the liabilities assumed and identifiable assets acquired would result in an adjustment to goodwill.

        In September 2002, we entered into a strategic alliance with GoAmerica, Inc. ("GoAmerica"), a wireless data solutions provider, to develop, market and support a comprehensive suite of enterprise and consumer wireless data services. As part of the GoAmerica-EarthLink alliance, EarthLink purchased approximately 31,000 GoAmerica wireless subscribers, including its cellular digital packet data (CDPD)—networked subscribers and a segment of its Cingular and Motient network subscribers. In connection with the alliance, we will collaborate with GoAmerica on technology development to meet the needs of both enterprise and consumer wireless data users, allowing us to provide mobile services to current and future customers on a comprehensive range of platforms. We will utilize GoAmerica's Go.Web technology as a key component for our next-generation wireless web offerings, and GoAmerica will further develop EarthLink-branded wireless data services for the wireless consumer market.

        In October 2002, we entered into an agreement with subsidiaries of SBC Communications, Inc. ("SBC") to offer DSL services in 53 mid-sized markets covering approximately 12 million households in the west, southwest and upper midwest. In connection with the agreement, SBC receives compensation from EarthLink for providing last mile broadband access to certain broadband subscribers. To date, we have launched services in more than 28 of the 53 markets and anticipate completing the rollout of DSL services to the remaining markets during the first half of 2003.

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Results of Operations

        The following table sets forth the percentage of total revenues represented by certain items in our Consolidated Statements of Operations for the periods indicated:

(1)

Represents the amortization of intangible assets other than software acquired in the acquisitions of other companies and customer bases.

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(2)

Represents facility exit costs associated with closing the Phoenix call center facility. In connection with the closing of the facility, we incurred approximately $3.5 million of costs, including $2.2 million of cash costs associated with personnel, employee related, and contract termination costs and $1.3 million of non-cash costs associated with the write-off of fixed assets associated with the facility, primarily leasehold improvements.

(3)

In February 2001, we renegotiated our commercial and governance arrangements with Sprint. Our exclusive marketing and co-branding arrangements with Sprint have been terminated. Accordingly, we recorded a non-cash charge of approximately $11.3 million to write-off unamortized assets related to the marketing and co-branding agreements with Sprint.

(4)

Represents merger and restructuring costs incurred during the quarter ended March 31, 2000. These costs were primarily attributable to fees associated with investment banking, legal and accounting services, the acceleration of unamortized costs associated with a line of credit and convertible debt, severance costs and non-cash accelerated compensation expense resulting from the merger of EarthLink Network and MindSpring.

(5)

We have made investments in a number of other companies including eCompanies Venture Group, L.P., ("EVG"), a limited partnership formed to invest in domestic emerging Internet-related companies. Sky Dayton, EarthLink's founder and Chairman of the Board of Directors, is a founding partner in EVG. Management regularly evaluates the recoverability of its investments in other companies based on the performance and the financial position of those companies as well as other evidence of market value. The write-off of investments in other companies represents losses incurred to write those investments down to their estimated realizable value. This included charges of $2.5 million, $6.0 million and $0.6 million during the years ended December 31, 2000, 2001 and 2002, respectively, to write-down EarthLink's investment in EVG. EVG has an affiliation with eCompanies, LLC ("eCompanies"). Sky Dayton is a founder and director of eCompanies.

(6)

Represents earnings (loss) before depreciation and amortization, interest income and expense, income tax expense, investment write-offs, and certain facility exit costs. EBITDA is not determined in accordance with accounting principles generally accepted in the United States, is not indicative of cash provided or used by operating activities, and may differ from comparable information provided by other companies. EBITDA should not be considered in isolation, as an alternative to, or more meaningful than measures of performance determined in accordance with accounting principles generally accepted in the United States. EBITDA is a measure commonly used in our industry and is included herein because we believe EBITDA provides relevant and useful information to our investors. Since the elements of EBITDA are determined using the accrual basis of accounting and EBITDA excludes the effects of capital and financing related costs, investors should use it to analyze and compare companies on the basis of operating performance. We utilize and have disclosed EBITDA to provide additional information with respect to our ability to meet future capital expenditures and working capital requirements, to incur additional indebtedness, and to fund continued growth.

(7)

The amount of acquired subscribers reported for the year ended December 31, 2002 does not include the approximately 518,000 Membership Customers that purchased a Membership Package prior to the date of our acquisition of PeoplePC, and the reported amount of subscribers as of December 31, 2002 excludes the approximately 487,000 Membership Customers that purchased Membership Packages prior to the acquisition date that we continued to provide service to as of December 31, 2002. We have excluded these Membership Customers because they prepaid for service for periods of up to four years prior to the date of our acquisition of PeoplePC.

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Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Narrowband access revenues

        Narrowband access revenues consist of monthly fees charged to customers for dial-up Internet access. In addition, narrowband access revenues include monthly service fees, any associated equipment revenues for Internet appliances, and wireless access services provided as part of our "EarthLink Everywhere" initiative as well as revenues derived from the sale of personal computers and related products. Narrowband revenues increased $38.5 million, or 4%, from $999.3 million during the year ended December 31, 2001 to $1,037.8 million during the year ended December 31, 2002. The increase in narrowband revenues was due to an increase in average monthly service revenue per narrowband subscriber, an increase in equipment-related revenue from $4.6 million during the year ended December 31, 2001 to $17.9 million during the year ended December 31, 2002, and the inclusion of revenue related to the deferred service liability for PeoplePC Membership Customers noted below. The effect of the increase in average monthly service revenue per narrowband subscriber was largely offset by a decrease in the average number of subscribers during the year ended December 31, 2002 as compared to the year ended December 31, 2001.

        Average monthly narrowband access service revenue per subscriber was $19.42 and $20.70 during the years ended December 31, 2001 and 2002, respectively. Average narrowband subscribers decreased 199,000, or 5%, from 4.3 million during the year ended December 31, 2001 to 4.1 million during the year ended December 31, 2002.

        The following is a summary of our narrowband subscriber activity for the years ended December 31, 2001 and 2002:

        The amount of acquired subscribers reported for the year ended December 31, 2002 does not include the approximately 518,000 Membership Customers that purchased a Membership Package prior to the date of our acquisition of PeoplePC, and the reported amount of subscribers as of December 31, 2002 excludes the approximately 487,000 Membership Customers that purchased Membership Packages prior to the acquisition date and to whom we continued to provide service as of December 31, 2002. We have excluded these Membership Customers because they generally prepaid for service for periods of up to four years prior to the date of our acquisition of PeoplePC. At the acquisition date, we established a liability for the estimated direct cost to deliver services to these Membership Customers pursuant to their contract terms, and we reduce the liability and record non-cash revenue as we deliver services to these Membership Customers. Such reduction is intended to offset the cost of delivering the services. EarthLink recorded revenue during the year ended December 31, 2002 of $9.1 million associated with the delivery of services to Membership Customers acquired. EarthLink expects to record approximately $13.8 million of revenue during the year ended December 31, 2003 associated with the acquired Membership Customers, and then lesser amounts in following years.

        In July 2001, we increased the price of our unlimited dial-up service, generally from $19.95 to $21.95 per month. The increase became effective on July 2, 2001 for all new subscribers and on the first billing on or after August 1, 2001 for the majority of our existing subscribers. While the 2001 price increase had a positive impact on revenues, it negatively impacted our narrowband subscriber growth, among certain other factors. On December 31, 2002, we had 4.0 million narrowband subscribers, a decrease of 168,000 from December 31, 2001. This decrease resulted from (i) increased churn in the latter half of 2001 caused by the price increase to traditional EarthLink customers as well as the conversion of acquired subscribers

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to standard EarthLink pricing plans, (ii) the migration of narrowband subscribers to our broadband service, and (iii) the continued maturing and ongoing competitiveness of the market for narrowband Internet access, resulting in fewer new customers from our sales and marketing programs. The number of narrowband subscribers we are able to add may continue to decline and/or the cost of acquiring new subscribers through our own sales and marketing efforts may increase as the market continues to mature or if competition becomes more intense.

        Our results of operations are significantly affected by subscriber cancellations, or "churn." Narrowband churn increased during the second half of 2001. Our quarterly average monthly churn rates for narrowband subscribers were 4.0%, 4.0%, 5.4% and 4.9% for the four quarters in the year ended December 31, 2001 and 4.5%, 4.1%, 4.1% and 4.0% for the four quarters in the year ended December 31, 2002. A return to churn at the levels incurred during the third and fourth quarters of 2001 could cause our narrowband business to shrink at an increased rate. Certain factors causing churn, such as the repricing of service for legacy EarthLink and acquired subscribers, have had a diminished effect in 2002, and we have implemented plans to address other potential causes of churn. However, we can provide no assurance that our plans will be successful in mitigating the adverse impact increased churn may have on our subscriber base. In addition, competitive factors outside our control may also adversely affect future rates of customer churn.

Broadband access revenues

        Broadband access revenues consist of fees charged for high-speed, high-capacity access services including DSL, cable, satellite and dedicated circuit services; installation fees; termination fees; and fees for equipment. Broadband revenues increased $82.7 million, or 49%, from $167.9 million during the year ended December 31, 2001 to $250.6 million during the year ended December 31, 2002. The increase in broadband revenues was due to an increase in the average number of broadband subscribers from 355,000 during the year ended December 31, 2001 to 610,000 during the year ended December 31, 2002. The increase in average subscribers was due to the continued growth in market demand for broadband access via DSL and cable, the introduction of EarthLink broadband service over the Time Warner Cable system late in 2001, and continued EarthLink marketing efforts to promote broadband services.

        The effect of the increase in subscribers was partially offset by a decrease in average monthly revenue per broadband subscriber during the same period. Average monthly revenue per subscriber declined 13% from $39.38 during the year ended December 31, 2001 to $34.23 during the year ended December 31, 2002. The decrease in average monthly revenue per broadband subscriber was due to a continued shift in the mix of our broadband subscriber base from frame relay and dedicated circuit subscribers to retail DSL, retail cable, and wholesale broadband relationships. The decrease also resulted from introductory pricing offered to new retail broadband customers in 2002 to stimulate increased sales.

        The following is a summary of our broadband subscriber activity for the years ended December 31, 2001 and 2002:

        Our broadband business consists of both retail and wholesale customers. In a retail relationship, EarthLink markets the service directly to consumers under the EarthLink brand, has latitude in establishing price, and is responsible for most aspects of providing the service, including first tier customer support. In a wholesale relationship, a telecommunications or cable company partner markets the service, has the direct billing relationship with the customer, has latitude in establishing price, provides the communications link to the consumer's home, and pays EarthLink to provide underlying Internet services

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such as authentication, email, web space, news and varying degrees of customer support. While retail services are generally priced above $40 per month per subscriber to cover all of the costs of the service, wholesale relationships are priced between $4 and $15 per month recognizing the more limited set of activities performed by EarthLink. In a retail relationship, EarthLink recognizes the amount the subscriber is billed as revenue, but in a wholesale relationship, EarthLink recognizes the net amount due it from the wholesale partner as revenue. We have wholesale relationships with Sprint and Charter Communications, which together represent approximately 215,000 and 336,000 of our broadband subscribers at December 31, 2001 and 2002, respectively. The number of customers being added or served at any point in time through our wholesale efforts is subject to the business and marketing circumstances of our telecommunications and cable partners.

        We have agreements with varying terms with all of our significant broadband network providers. Our contract with Sprint to provide wholesale broadband services is not exclusive and has annual windows for termination and renegotiation. Our contract with Charter Communications to provide wholesale broadband services is scheduled to expire in July of 2003. Our contract with Time Warner Cable for retail broadband services extends through December 31, 2006, and our contract with AT&T Broadband (now part of Comcast Corporation) for retail broadband services extends through July 2005. Our contract with Covad Communications Group, Inc. ("Covad") expires in July 2004. We cannot be certain of renewal or non-termination of our contracts with these channel partners. The availability of and charges for last mile access with these and our other "last mile" broadband network providers at the expiration of current terms cannot be assured and may reflect legislative or regulatory as well as competitive and business factors. EarthLink's business could be materially, adversely affected if we are unable to renew or extend contracts with our current broadband network providers on acceptable terms, renew or extend current contracts with broadband network providers at all, acquire similar broadband network capacity from competing telecommunications service providers, or otherwise extend our broadband footprint.

Web hosting revenues

        We earn web hosting revenues by leasing server space and providing web services to individuals and businesses wishing to present a web or e-commerce presence on the Internet. Web hosting revenues decreased 10% from $59.3 million during the year ended December 31, 2001 to $53.2 million during the year ended December 31, 2002. The decrease in web hosting revenues was due to a decrease in average revenue per subscriber during the year ended December 31, 2002 as compared to the year ended December 31, 2001.

        Average monthly revenue per user declined 11% from $28.70 during the year ended December 31, 2001 to $25.61 during the year ended December 31, 2002. The decline in average monthly web hosting revenue per user reflects the migration to lower price points to be competitive in the SOHO (small office/ home office) business market. Average web hosting subscribers were 172,000 during the year ended December 31, 2001 and 173,000 during the year ended December 31, 2002.

Content, commerce and advertising revenues

        Content, commerce and advertising revenues consist of revenues from our partnerships, which are promotional arrangements with advertisers, retailers, service providers and content providers. We earn these revenues by (i) paid placements for searches; (ii) delivering traffic to our partners in the form of subscribers, page views or e-commerce revenues; (iii) advertising our partners' products and services in our various online properties and electronic publications, including the Personal Start Page; and (iv) referring our customers to our partners' products and services.

        Content, commerce and advertising revenues decreased $2.7 million, or 15%, from $18.5 million during the year ended December 31, 2001 to $15.8 million during the year ended December 31, 2002 due to continued declines in the market for Internet advertising.

Cost of revenues

        We frequently offer sales incentives such as free Internet access on a trial basis, cameras, modems and starter kits as introductory offers. Historically, the costs of these incentives were recorded as sales and marketing expenses. Effective January 1, 2002, we adopted Issue No. 00-14 of the Financial Accounting

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Standards Board's ("FASB") Emerging Issues Task Force ("EITF"), "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 was subsequently amended by EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The issues address, among other matters, the recognition, measurement and income statement classification for various types of consideration provided to customers, including discounts, coupons, rebates and free products and services ("Sales Incentives"), and requires the costs of Sales Incentives to be classified as cost of revenues in the statements of operations. In accordance with the classification guidelines contained in these pronouncements, comparative financial statements for the years ended December 31, 2000 and 2001 have been reclassified to reflect the costs of Sales Incentives as a component of cost of revenues.

        Sales Incentives decreased 45% from $67.9 million during the year ended December 31, 2001 to $37.7 million during the year ended December 31, 2002. The decrease in Sales Incentives is attributable to declines in the prices of broadband modems provided to new customers, a shift in emphasis from Sales Incentives to reduced price introductory offers to attract new subscribers, and a decline in the amount of free equipment provided to attract narrowband subscribers.

        Telecommunications service and equipment costs represent EarthLink's cost of revenues on a historical basis (prior to the adoption of guidance regarding Sales Incentives) and consist of telecommunications fees, set-up fees and network equipment costs incurred to provide our Internet access service. Telecommunications service and equipment costs also include the cost of Internet appliances sold, including wireless devices and personal computers. Telecommunications service and equipment costs increased 7% from $509.5 million during the year ended December 31, 2001 to $544.0 million during the year ended December 31, 2002. Telecommunications service and equipment costs as a percentage of revenues decreased slightly from 40.9% for the year ended December 31, 2001 to 40.1% for the year ended December 31, 2002.

        The increase in telecommunications service and equipment costs during the year ended December 31, 2002 as compared to the year ended December 31, 2001 was due to a slight increase in average subscribers combined with a 5% increase in average monthly telecommunications service and equipment cost per subscriber.

        Average monthly telecommunications service and equipment costs per subscriber increased due to the increasing portion of our business represented by broadband subscribers. Broadband access has both a higher price and a higher cost of revenue per subscriber than the company average, as broadband is a more costly service to deliver. Broadband subscribers were 10% and 16% of total subscribers at December 31, 2001 and 2002, respectively. Average monthly telecommunications service and equipment costs per subscriber also increased due to costs associated with personal computers recorded in connection with the sale of Membership Packages. PeoplePC offers Membership Packages allowing customers to purchase a personal computer and prepaid Internet access. Revenues and costs associated with the personal computers are recognized upon sale, and the revenues and costs associated with the prepaid Internet access are recognized over the prepaid term. Revenues and costs of personal computers, including peripheral products, sold pursuant to Membership Packages totaled $8.2 million and $8.3 million, respectively, for the year ended December 31, 2002.

        The increases in average monthly telecommunications service and equipment costs resulting from the larger portion of our business attributable to broadband and the inclusion of equipment associated with Membership Packages were offset by a decline in average monthly telecommunications service costs per narrowband subscriber. In general, the telecommunications cost per subscriber has declined over time, particularly for our narrowband services. The decline has resulted from improvements in communications technology, the increasing scale of Internet-related business, and competition among telecommunications providers. However, the intensity of competition and wholesale telecommunications pricing, which have benefited EarthLink, has caused some telecommunications companies to experience financial difficulty. EarthLink's prospects for maintaining or further improving narrowband telecommunications costs could be negatively affected if one or more of EarthLink's key telecommunications providers were to experience serious enough difficulties to impact service availability, or if telecommunications bankruptcies generally reduced the level of competition among telecommunications providers. EarthLink's principal providers for narrowband telecommunications services are Level 3 and Sprint, and our largest provider of broadband

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connectivity is Covad. We also do lesser amounts of business with a wide variety of local, regional and other national providers.

        Prior to the inclusion of Sales Incentives, gross margins were 59.1% and 59.9% for the years ended December 31, 2001 and 2002, respectively. Gross margins on narrowband; web hosting; and content, commerce and advertising revenues all exceeded the company average, while gross margins on our broadband business were well below the company average. On a fully costed basis, broadband gross margins are not yet sufficient to generate positive earnings before interest income and expense, income tax expense, and depreciation and amortization (EBITDA, a non-GAAP measure). Gross margins will need to be improved and other operating costs per subscriber per month will need to be reduced for the broadband business to achieve positive returns. We expect that opportunities to reduce telecommunications costs, particularly for narrowband services, by eliminating higher cost providers, reducing costs from the remaining vendors, and achieving higher utilization of existing telecom capacity will help offset the negative percentage gross margin effect of broadband becoming a larger portion of our overall business and allow gross margin percentages overall to increase modestly from current levels. Margins for both narrowband and broadband services are expected to increase over the next several quarters, but the offsetting effects of the larger proportional share of broadband business will keep overall margin improvement to modest levels. Over time, it will be necessary to reduce broadband line charges from telecommunications and cable companies or utilize emerging alternative broadband access technologies with lower cost structures in order to achieve attractive margins on broadband services and to continue maintaining stable overall margins. Reducing line charges may be facilitated by gaining access to a larger number of cable systems over which EarthLink can offer its high-speed Internet services and creating more wholesale competition between telecommunications and cable companies for EarthLink's high-speed business. There can be no assurance EarthLink will be able to achieve a reduction in line charges in the short-term, if ever.

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

Sales and marketing

        Sales and marketing expenses consist of (i) advertising, (ii) direct response mailings, (iii) bounties paid to channel partners, (iv) sales and marketing personnel costs, and (v) promotional materials. Historically, sales and marketing expenses included Sales Incentives. In accordance with the classification guidelines of recent accounting pronouncements, the costs of Sales Incentives are included in cost of revenues.

        Sales and marketing expenses increased 14% from $328.0 million during the year ended December 31, 2001 to $373.5 million during the year ended December 31, 2002. The increase was primarily due to sales and marketing expenses incurred during the year ended December 31, 2002 associated with the products acquired and developed in connection with the acquisitions of Cidco, the OmniSky platform and PeoplePC in December 2001, January 2002 and July 2002, respectively, as well as an increase in sales and marketing costs associated with our "EarthLink Everywhere" initiative. The increase was also due to an increase in expenses associated with enhancing the customer relationship in an effort to reduce churn as well as direct and performance-based sales and marketing expenses. As a percentage of revenues, sales and marketing expenses increased from 26% to 28% of total revenues for the years ended December 31, 2001 and 2002, respectively.

Operations and customer support

        Operations and customer support expenses consist of costs associated with (i) technical support and customer service, (ii) providing our subscribers with toll-free access to our technical support and customer service centers, (iii) maintenance of customer information systems, (iv) software development, and (v) network operations. Operations and customer support expenses decreased from $339.5 million during the year ended December 31, 2001 to $324.6 million during the year ended December 31, 2002. The decrease in operations and customer support costs was a result of efforts to carefully manage operating costs, particularly customer support costs, in order to improve profitability.

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        During the first quarter of 2003, we announced a comprehensive plan to streamline our call center facilities to further increase operational efficiencies and reduce overall costs, while maintaining our commitment to customer service. In connection with the plan, we will close our technical support and customer call center operations in Dallas, Texas; Sacramento, California; Pasadena, California; and Seattle, Washington during February and March of 2003. We will transition customer inquiries normally handled by these facilities to our remaining customer support facilities as well as to existing outsourced call center providers. We anticipate the plan will result in a net reduction of approximately 920 employees, primarily customer support personnel.

General and administrative

        General and administrative expenses consist of fully burdened costs associated with the executive, finance, legal and human resource departments; outside professional services; payment processing; credit card fees; collections; and bad debt. General and administrative expenses decreased $4.4 million from $127.8 million during the year ended December 31, 2001 to $123.4 million during the year ended December 31, 2002. The decrease is due to a reduction in personnel, occupancy and tax expenses offset by higher professional fees and higher payment processing and bad debt costs, which are largely variable to revenue.

        The reduction in personnel and related overhead costs during the year ended December 31, 2002 as compared to the same period of the prior year is due to the integration of OneMain during the first quarter of 2001. A substantial portion of the integration costs incurred in the first quarter of 2001 represented the salaries and benefits paid to legacy OneMain personnel and the overhead associated with the personnel during the integration period. Our recent acquisitions have been significantly smaller, and we incurred minimal incremental integration costs during the year ended December 31, 2002.

Acquisition-related amortization

        Acquisition-related amortization represents the amortization of intangible assets acquired in conjunction with the purchase of businesses as well as the purchase of customer bases from smaller ISPs. Generally, such intangible assets are amortized on a straight-line basis over three years from the date of their respective acquisitions. Following is a summary of our acquisition-related amortization during the years ended December 31, 2001 and 2002:

        Acquisition-related amortization decreased 49% from $217.5 million during the year ended December 31, 2001 to $110.9 million during the year ended December 31, 2002. Acquisition-related amortization declined $77.4 million as a result of the intangible assets acquired in the Spry, Inc. and NETCOM transactions in October 1998 and February 1999, respectively, becoming fully amortized in November 2001 and February 2002, respectively. Acquisition-related amortization also decreased $42.3 million as a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which required us to cease amortization of goodwill and other indefinite life intangibles on January 1, 2002. The impact of the adoption of SFAS No. 142 was to eliminate amortization expense of approximately $50.5 million in the year ending December 31, 2002 associated with indefinite life intangibles that otherwise would have been recorded assuming a three-year life of such intangible assets. These decreases were offset by the amortization of intangibles resulting from

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the acquisitions of Cidco and PeoplePC in December 2001 and July 2002, respectively, and other smaller subscriber acquisitions.

        Acquisition-related amortization is expected to decline in 2003 as the customer base acquired in the acquisition of OneMain in September 2000 becomes fully amortized.

        The carrying value of intangible assets as of December 31, 2002 is as follows:

        The cost basis of goodwill and other indefinite life intangible assets are as follows:

Facility exit costs

        On October 30, 2002, EarthLink announced it would close its Phoenix, Arizona call center facility to consolidate operations and reduce overall costs. The plan for the closure of the Phoenix facility called for the elimination of approximately 259 positions. The Phoenix facility was closed on November 15, 2002, and in connection with the closing, EarthLink recorded facility exit costs of $3.5 million. These costs included approximately $1.7 million for employee, personnel and related costs; $0.5 million for real estate and telecommunications contract termination costs; and approximately $1.3 million in asset write-downs. As of December 31, 2002, EarthLink had eliminated all 259 positions.

Intangible asset write-off

        In February 2001, EarthLink renegotiated its commercial and governance arrangements with Sprint Corporation. Under the renegotiated arrangements, EarthLink's exclusive marketing and co-branding arrangements with Sprint were terminated. Accordingly, EarthLink recorded a non-cash charge of approximately $11.3 million to write-off unamortized intangible assets related to the marketing and co-branding arrangements with Sprint.

Write-off of investments in other companies

        EarthLink made equity investments in several companies prior to December 31, 2001. During the years ended December 31, 2001 and 2002, EarthLink management determined that the full recovery of certain investments was unlikely. Accordingly, EarthLink recorded a charge of $10.0 million and $0.6 million during the years ended December 31, 2001 and 2002, respectively, to write investments down

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to their estimated net realizable value. The current carrying value of investments in other companies at December 31, 2002 is $0.9 million.

Interest income, net

        Net interest income decreased 50% from $25.5 million during the year ended December 31, 2001 to $12.6 million during the year ended December 31, 2002. The decrease was due to a decrease in our average cash and marketable securities balances and a decrease in investment yields. Our cash and investment balances decreased as a result of (i) the purchases of subscriber bases from several companies; (ii) the acquisitions of Cidco, the OmniSky platform and PeoplePC; (iii) the repurchase of 2.6 million shares of our common stock; and (iv) capital expenditures. Our weighted average investment yields have decreased from approximately 4.2% during the year ended December 31, 2001 to approximately 2.6% during the year ended December 31, 2002 as the U.S. Federal Reserve Bank has reduced interest rates. The decrease in net interest income was partially offset by a reduction in interest expense attributable to a decrease in the average balance of obligations under capital lease from $22.5 million during the year ended December 31, 2001 to $8.7 million during the year ended December 31, 2002.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Narrowband access revenues

        Narrowband access revenues increased $165.9 million, or 20%, from $833.4 million during the year ended December 31, 2000 to $999.3 million during the year ended December 31, 2001. The increase in narrowband revenues was due to an increase in the average number of subscribers during the year ended December 31, 2001 as compared to the year ended December 31, 2000 and an increase in average monthly revenue per narrowband subscriber.

        Average narrowband subscribers increased 605,000, or 16%, from 3.7 million during the year ended December 31, 2000 to 4.3 million during the year ended December 31, 2001. The acquisition of OneMain accounted for 57% of this growth, with organic growth and acquisitions of smaller ISPs contributing the remainder. Average monthly narrowband access revenues per subscriber were $18.96 and $19.51 during the years ended December 31, 2000 and 2001, respectively.

        The following is a summary of our narrowband subscriber activity for the years ended December 31, 2000 and 2001:

        While the August 2001 price increase had a positive impact on revenues, it negatively impacted EarthLink's narrowband subscriber growth during the year ended December 31, 2001, among certain other factors. On December 31, 2001, we had 4.2 million narrowband subscribers, a decrease of 100,000 from December 31, 2000. This decrease resulted from (i) increased churn caused by the price increase to traditional EarthLink customers as well as the conversion of OneMain and other acquired subscribers to standard EarthLink pricing plans, (ii) the migration of narrowband subscribers to our broadband service, and (iii) the continued maturing of the market for narrowband Internet access, resulting in fewer new customers from EarthLink's sales and marketing programs.

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Broadband access revenues

        Broadband access revenues increased $110.1 million, or 190%, from $57.8 million during the year ended December 31, 2000 to $167.9 million during the year ended December 31, 2001. The increase in broadband revenues was due to an increase in the average number of broadband subscribers during the year ended December 31, 2001 compared to the year ended December 31, 2000. Average broadband subscribers increased 253,000, or 248%, from 102,000 during the year ended December 31, 2000 to 355,000 during the year ended December 31, 2001. The increase in subscribers was due to the increasing acceptance and availability of broadband access via DSL and cable offered at prices significantly less expensive than dedicated circuits.

        However, the effect of the increase in subscribers was partially offset by a decrease in average monthly revenues per broadband subscriber during the same period. Average monthly revenues per broadband subscriber declined 16% from $47.05 during the year ended December 31, 2000 to $39.38 during the year ended December 31, 2001. The decrease in average monthly revenues per broadband subscriber was due to a significant shift in the mix of our broadband subscriber base from frame relay and dedicated circuit subscribers to retail DSL, retail cable, and wholesale broadband relationships. At the beginning of 2000, subscribers using dedicated circuits with average monthly revenues per user in excess of $500 comprised 14% of our broadband subscriber base. As of December 31, 2001, subscribers with dedicated circuits had declined to less than 1% of our broadband subscriber base. Both retail DSL and wholesale broadband relationships increased as proportions of our base.

        The following is a summary of our broadband subscriber activity for the years ended December 31, 2000 and 2001:

Web hosting revenues

        Web hosting revenues decreased 10% from $65.8 million during the year ended December 31, 2000 to $59.3 million during the year ended December 31, 2001. The decrease in web hosting revenues was due to a decrease in average monthly revenue per subscriber during the year ended December 31, 2001 compared to the year ended December 31, 2000.

        Average monthly revenues per subscriber declined 27% from $39.36 during the year ended December 31, 2000 to $28.70 during the year ended December 31, 2001. The decline in average monthly web hosting revenues per subscriber reflects the migration to lower price points to be competitive in the SOHO (small office/home office) business market and lower domain fee revenue. The effect of the decrease in average monthly revenues per subscriber was partially offset by an increase in the number of average subscribers. Average web hosting subscribers increased 24% from 139,000 during the year ended December 31, 2000 to 172,000 during the year ended December 31, 2001.

Content, commerce and advertising revenues

        Content, commerce and advertising revenues decreased 38% from $29.7 million during the year ended December 31, 2000 to $18.5 million during the year ended December 31, 2001 due to a general decline in the market for Internet advertising.

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Cost of revenues

        In accordance with the classification guidelines contained in EITF Issue Nos. 00-14 and 01-09, the statements of operations for the years ended December 31, 2000 and 2001 have been reclassified to reflect the costs of Sales Incentives as a component of cost of revenues. Sales Incentives increased 21% from $56.3 million during the year ended December 31, 2000 to $67.9 million during the year ended December 31, 2001. The increase in Sales Incentives is attributable to increases in DSL modem and installation expenses during the year ended December 31, 2001 due to an increase in gross organic broadband subscriber additions during the year ended December 31, 2001 compared to the year ended December 31, 2000.

        Telecommunications service and equipment costs increased 38% from $368.1 million during the year ended December 31, 2000 to $509.5 million during the year ended December 31, 2001. Telecommunications service and equipment costs as a percentage of revenues increased from 37.3% to 40.9% for the years ended December 31, 2000 and 2001, respectively. Accordingly, gross margins excluding Sales Incentives were 62.7% and 59.1%, respectively, for the years ended December 31, 2000 and December 31, 2001. The increase in telecommunications service and equipment costs during the year ended December 31, 2001 as compared to the year ended December 31, 2000 is due to a 23% increase in average subscribers combined with a 13% increase in average telecommunications service and equipment costs per subscriber.

        Average telecommunications service and equipment costs per subscriber increased due to the increasing portion of our business represented by broadband access and the inclusion of the OneMain dial-up subscribers. Broadband access has both a higher price and a higher telecommunications service cost per subscriber than the company average, as broadband access is a more costly service to deliver. Broadband subscribers were 5% and 10% of total subscribers as of December 31, 2000 and 2001, respectively. Also, OneMain incurred higher telecommunications service and equipment costs compared to EarthLink's traditional business due to the significant number of subscribers in smaller, rural markets where lower subscriber density and less competition among telecommunications infrastructure providers results in higher telecommunications costs per subscriber.

Sales and marketing

        Sales and marketing expenses decreased 15% from $387.4 million during the year ended December 31, 2000 to $328.0 million during the year ended December 31, 2001. As a percentage of revenues, sales and marketing decreased from 39% to 26% of total revenues for the years ended December 31, 2000 and 2001, respectively. The reduction in sales and marketing expenses is due to reduced spending on less cost-effective channels, particularly in narrowband. The effect of this decrease was partially offset by increased broadband marketing in support of the roll-out of our retail cable offering in the fourth quarter of 2001.

Operations and customer support

        Operations and customer support expenses increased $42.5 million, or 14%, from $297.0 million during the year ended December 31, 2000 to $339.5 million during the year ended December 31, 2001. Operations expenses increased due to the increasing diversity and complexity of our product lines. Customer support expenses increased as we hired additional customer support staff to cope with increased call volume resulting from our price increase and the increase in our average customer count of approximately 891,000, or 23%, and the complexities of integrating legacy OneMain customers.

General and administrative

        General and administrative expenses increased $21.7 million, or 21%, from $106.1 million during the year ended December 31, 2000 to $127.8 million during the year ended December 31, 2001. Our credit card fees increased approximately $4.0 million, or 20%, as a result of the increase in our average subscriber

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count. Bad debt expense increased as result of (i) the increase in our average subscriber base and (ii) the repricing of a significant portion of former OneMain customers from lower rate plans to our new pricing. We experienced significantly higher churn for this group. Professional fees increased approximately $1.7 million as a result of costs associated with the offering of 18.4 million shares of EarthLink stock by Sprint and certain other non-recurring expenses.

Acquisition-related amortization

        Acquisition-related amortization increased 64% from $132.4 million during the year ended December 31, 2000 to $217.5 million during the year ended December 31, 2001. The increase in acquisition-related amortization was due to the full year amortization of intangible assets recorded in conjunction with the acquisition of OneMain in September 2000 and also to the amortization of customer bases acquired from several other smaller companies.

Intangible asset write-off

        In February 2001, EarthLink renegotiated its commercial and governance arrangements with Sprint Corporation. Under the renegotiated arrangements, EarthLink's exclusive marketing and co-branding arrangements with Sprint have been terminated. Accordingly, EarthLink recorded a non-cash charge of approximately $11.3 million to write-off unamortized intangible assets related to the marketing and co-branding arrangements with Sprint.

Merger related charges

        During the quarter ended March 31, 2000, EarthLink recorded merger related charges of $34.0 million related to the merger of EarthLink Network and MindSpring. The charge included investment banking fees of $16.4 million; legal, accounting, and other professional and printing services of $6.1 million; severance costs of $2.7 million; acceleration of unamortized costs associated with a line of credit and convertible debt of $6.8 million; and other related charges in connection with the transaction of $2.0 million.

Write-off of investments in other companies

        During the years ended December 31, 2000 and 2001, management determined that the full recovery of certain investments was unlikely. Accordingly, EarthLink recorded charges of $3.9 million and $10.0 million during the years ended December 31, 2000 and 2001, respectively, to write investments down to their estimated net realizable value. The amounts for the years ended December 31, 2000 and 2001 include $2.5 million and $6.0 million, respectively, to write-down EarthLink's investment in EVG.

Interest income, net

        Net interest income decreased 49% from $50.4 million during the year ended December 31, 2000 to $25.5 million during the year ended December 31, 2001. The decrease was due to a decrease in our average cash and marketable securities balances and a decrease in investment yields. Our cash and investment balances decreased as a result of (i) our purchase of OneMain in September 2000 and (ii) the purchase of subscriber bases from several companies during 2001. Our monthly investment yields have decreased from approximately 6.7% as of December 2000 to approximately 2.7% as of December 2001 as the U.S. Federal Reserve Bank has reduced interest rates. The decrease in net interest income during the year ended December 31, 2001 as compared to the same period of the prior year was partially offset by a reduction in net interest expense due to the repayment of $180.0 million in convertible debt in April 2000 and a reduction in obligations under capital leases of $18.1 million.

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Merger and Restructuring Charges and Facility Exit Costs

EarthLink Network and MindSpring merger

        During the three months ended March 31, 2000, EarthLink recognized approximately $34.0 million in merger related charges in connection with the merger of EarthLink Network and MindSpring. These expenses were associated with fees for investment banking, legal and accounting services, severance costs, acceleration of unamortized costs associated with a line of credit and convertible debt, and other related charges in connection with the transaction. All of these costs were paid as of December 31, 2000. The following table summarizes the status of the merger related charges as of and for the year ended December 31, 2000:

OneMain

        Prior to being acquired by EarthLink, OneMain had acquired 27 ISPs and was working to consolidate the operating and administrative functions of the acquired ISPs. As part of this consolidation, OneMain had developed a restructuring plan (the "OneMain Plan") and had recognized a restructuring charge related to employee termination benefits and certain real estate contracts. The OneMain Plan called for the net reduction of approximately 650 positions in operations and customer support, sales and marketing, and in general and administrative departments. On September 12, 2000, EarthLink assumed OneMain's remaining restructuring liabilities of $5.4 million. As of December 31, 2001, all of the 650 employees had been terminated in accordance with the OneMain Plan.

        EarthLink's acquisition of OneMain included costs related to a formal EarthLink plan (the "EarthLink Plan") to integrate OneMain's operations into EarthLink's operations. The EarthLink Plan called for the net reduction of approximately 500 additional positions in operations and customer support, sales and marketing, and in general and administrative departments. As of December 31, 2001, all of these positions had been terminated as a result of the EarthLink Plan. These costs included $6.4 million related to employee termination benefits, $1.0 million related to the consolidation of facilities, and $4.3 million related to the write-off of the duplicative OneMain accounting and management information systems.

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        The following table summarizes the status of the restructuring costs and the related reserves for the OneMain and EarthLink Plans as of and for the years ended December 31, 2000 and 2001:

Cidco

        EarthLink's acquisition of Cidco included costs related to a formal EarthLink plan (the "Cidco Plan") to integrate Cidco's operations into EarthLink's operations. The Cidco Plan called for the net reduction of approximately 49 positions in operations and customer support, sales and marketing, and in general and administrative departments. As of December 31, 2002, EarthLink had paid all severance amounts in conjunction with the termination of all 49 positions. In addition, the costs associated with the Cidco Plan included (i) $1.2 million related to the write-off of duplicative assets, (ii) $2.0 million related to employee termination benefits and (iii) $2.0 million related to non-cancelable leases for Cidco's facilities. During the year ended December 31, 2002, EarthLink increased its reserve related to the non-cancelable leases by $0.8 million resulting in an increase in goodwill attributable to the purchase of Cidco. The costs of the Cidco Plan are included in the purchase price of Cidco and are included in the fair values of tangible assets acquired and liabilities assumed in the acquisition. The following table summarizes the status of the restructuring costs and the related reserves for the Cidco Plan as of and for the years ended December 31, 2001 and 2002:

PeoplePC

        EarthLink's acquisition of PeoplePC included costs related to a formal EarthLink plan (the "PeoplePC Plan") to integrate PeoplePC's operations into EarthLink's operations and to exit PeoplePC's international operations. The PeoplePC Plan called for the net reduction of approximately 13 positions in

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operations and customer support, sales and marketing, and in general and administrative departments. As of December 31, 2002, 11 of these positions had been terminated as a result of the PeoplePC Plan. The costs associated with the PeoplePC Plan included (i) $2.1 million related to the write-off of duplicative and abandoned assets, (ii) $0.8 million related to employee termination benefits and (iii) $1.8 million related to exiting PeoplePC's international operations, including $0.6 million for the write-off of abandoned assets and $1.2 million related to costs associated with a non-cancelable lease. The costs of the PeoplePC Plan are included in the purchase price of PeoplePC and are included in the fair values of liabilities assumed in the acquisition. The following table summarizes the status of the restructuring and exit costs and the related reserves for the PeoplePC Plan as of and for the year ended December 31, 2002:

Phoenix call center

        On October 30, 2002, EarthLink announced it would close its Phoenix, Arizona call center facility as a result of an opportunity to consolidate operations and reduce overall costs. The plan for the closure of the Phoenix facility called for the elimination of approximately 259 positions. In connection with the closing, EarthLink recorded facility exit costs of $3.5 million. These costs included approximately $1.7 million for employee, personnel and related costs; $0.5 million for real estate and telecommunications contract termination costs; and approximately $1.3 million in asset write-downs. As of December 31, 2002, EarthLink had eliminated all 259 positions and had accrued but unpaid severance related to the eliminated positions of $0.3 million. The following table summarizes the status of the exit costs associated with the closure of the Phoenix call center facility as of and for the year ended December 31, 2002: