Excite@Home is to file for bankruptcy and sell its internet operations to At&T for £208M.
The crisis-hit firm is going bankrupt under chapter 11 rules, which give it protection from creditors, while allowing operations to continue.
As well as acquiring Excite@Home's broadband businesses, AT&T says it will hire a substantial number of the company's 1,600 staff.
At the height of the dot.com boom the company was one of the highest-profile US internet firms and a pioneer of high-speed internet access to the home.
Excite and AtHome merged in a £4.2bn deal to ally content and access.
It has about 3.2m customers taking its @Home service and 12,000 businesses subscribing to @Work.
Excite@Home chairman and chief executive officer Patti Hart said: "The bankruptcy filing is a tool to protect the value of the broadband business for the benefit of the company's financial stakeholders and will help reassure our customers that service will continue uninterrupted through the restructuring process."
The company says it has sufficient cash to continue its operations while the bankruptcy court reviews the proposed sale to AT&T and any other offers that may emerge.
The companies hope the deal, which has already been approved by both companies' boards, will close by early next year after regulatory approval.