ORGANIZATION

6 Months Ended

Jun. 30, 2012

ORGANIZATION

ORGANIZATION

NOTE 1—ORGANIZATION

Company Overview

        Tree.com, Inc. ("we", "Tree.com" or the "Company") is the parent of LendingTree, LLC, which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in consumers' lives. Our family of brands includes: LendingTree.com®, GetSmart®, DegreeTree®, LendingTreeAutos, DoneRight®, ServiceTree^SM, InsuranceTree® and HealthTree. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans and other services from multiple businesses and professionals who will compete for their business. We refer to the collection of these brands and businesses as our Exchanges business, which comprises our continuing operations, as detailed herein.

Segment Reporting

        Through the quarter ended March 31, 2011, we operated in two reportable business segments: LendingTree Loans and Exchanges. Until the completion on June 6, 2012 of the sale of substantially all of the operating assets of our LendingTree Loans business to a wholly-owned subsidiary of Discover Financial Services, discussed below and in Note 6, the LendingTree Loans segment originated, processed, approved and funded various residential real estate loans through Home Loan Center, Inc. dba LendingTree Loans ("HLC"). The business operated by HLC under the HLC and LendingTree Loans brand names is referred to in this report as "LendingTree Loans." Discover Financial Services and/or any of its affiliates are collectively referred to in this report as "Discover."

        The Exchanges segment consists of online lead generation networks and call centers that connect consumers and service providers principally in the lending, higher education, automobile, home services and insurance marketplaces.

        In connection with entering into the agreement in the second quarter of 2011 that provided for the sale of substantially all of the operating assets of our LendingTree Loans business, management re-evaluated its reporting segments based on our continuing operations and determined that our continuing operations were one reportable segment, which represents the previous "Exchanges" segment. Prior period results have been reclassified to conform with discontinued operations presentation and the change in reportable segments.

        We maintain operations solely in the United States.

Discontinued Operations

        The businesses of RealEstate.com and RealEstate.com, REALTORS® (which together represent the former Real Estate segment) and LendingTree Loans are presented as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations and cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect our continuing operations and, unless otherwise noted, exclude information related to the discontinued operations.

• Real Estate

        On March 10, 2011, management made the decision and finalized a plan to close all of the field offices of the proprietary full-service real estate brokerage business known as RealEstate.com, REALTORS®. We exited all markets in which we previously operated by March 31, 2011. In September 2011, we sold the remaining assets of RealEstate.com, which consisted primarily of internet domain names and trademarks, for $8.3 million and recognized a gain on sale of $7.8 million.

• LendingTree Loans

        On May 12, 2011, we entered into an asset purchase agreement, as amended by an amendment to the asset purchase agreement dated as of February 7, 2012, for the sale of substantially all of the operating assets of our LendingTree Loans business. We completed the sale on June 6, 2012.

        The asset purchase agreement as amended provided for a purchase price of approximately $55.9 million in cash for the assets, subject to certain conditions. Of this total purchase price, $8.0 million was paid prior to the closing, $37.9 million was paid upon the closing and $10.0 million is due on the first anniversary of the closing, subject to us meeting certain conditions.

        Discover generally did not assume liabilities of the LendingTree Loans business that arose before the closing date, except for certain liabilities directly related to assets Discover acquired. Approximately $17.1 million of the initial purchase price payment is being held in escrow pending resolution of certain actual and/or contingent liabilities that remain with us following the sale. The escrowed amount is recorded as restricted cash at June 30, 2012.

        Separate from the asset purchase agreement, we agreed to provide certain marketing-related services to Discover in connection with its mortgage origination business for approximately seventeen months following the closing, or such earlier point as the agreed-upon services are satisfactorily completed. Discover is also now a participating lender in our lending network.

        The unaudited pro forma financial information in the table below summarizes our results as if the sale of substantially all of the operating assets of LendingTree Loans had occurred as of January 1, 2011. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the results would have been had the sale occurred as of January 1, 2011.

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Revenue	$	30,205		$	30,850
Net loss from continuing operations		(5,022	)		(41,203	)
Net loss attributable to common shareholders		(5,022	)		(41,203	)
Basic earnings per share attributable to common shareholders		(0.45	)		(3.76	)
Diluted earnings per share attributable to common shareholders		(0.45	)		(3.76	)

• Business Combinations

        On March 15, 2011, our wholly-owned subsidiary, HLC, completed its acquisition of certain assets of First Residential Mortgage Network, Inc. dba SurePoint Lending, pursuant to an asset purchase agreement dated November 15, 2010. SurePoint, a LendingTree network lender for eleven years, was a full-service residential mortgage provider licensed in 45 states and employed over 500 people, including more than 300 licensed loan officers. HLC purchased certain specified assets and assumed certain liabilities of SurePoint related to its business of originating, refinancing, processing, underwriting, funding and closing residential mortgage loans; providing title and escrow services; and providing other mortgage-related services. The acquired assets also included the equity interests of Real Estate Title Services, LLC. HLC paid $8.0 million in cash upon the closing of the transaction, subject to certain adjustments as described in the asset purchase agreement, and $0.2 million in cash for contingent consideration subsequent to the close. HLC used available cash to fund the acquisition.

        This asset purchase was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair values at the acquisition date. The purchase price was allocated as $5.6 million to goodwill, $0.7 million to intangible assets with useful lives of three months to five years, and $1.7 million to equipment and other assets. The pro forma effect of this purchase was not material to our results of operations.

Correction of an Error

        As disclosed in our Form 10-K for the year ended December 31, 2011, during the process of preparing our financial statements for the year ended December 31, 2011, we determined that a $29.0 million impairment charge related to trade names and trademarks that we determined to exist as of October 1, 2011, as determined in our annual impairment testing, should have been recorded in the second quarter of 2011 pursuant to the impairment test we performed as a result of our entry into the asset purchase agreement for the sale of substantially all of the assets of our LendingTree Loans business. As a result of this error, certain previously reported amounts in the condensed consolidated financial statements for the quarter ended June 30, 2011 were materially misstated; accordingly we have restated the prior period financial statements.

        The restated condensed consolidated statement of operations for the three months ended June 30, 2011 is as follows:

	As Previously Presented			Impairment Correction			As Restated
Asset impairments	$	250		$	29,000		$	29,250
Total costs and expenses		24,899			29,000			53,899
Operating loss		(7,968	)		(29,000	)		(36,968	)
Loss before income taxes		(8,044	)		(29,000	)		(37,044	)
Income tax provision		(37	)		11,965			11,928
Net loss from continuing operations		(8,081	)		(17,035	)		(25,116	)
Loss from operations of discontinued operations, net of tax		(9,737	)		348			(9,389	)
Loss from discontinued operations		(9,737	)		348			(9,389	)
Net loss attributable to common shareholders		(17,818	)		(16,687	)		(34,505	)
Basic and diluted net loss per share from continuing operations		(0.73	)		(1.55	)		(2.28	)
Basic and diluted net loss per share from discontinued operations		(0.89	)		0.04			(0.85	)
Basic and diluted net loss per share attributable to common shareholders		(1.62	)		(1.51	)		(3.13	)

        The restated condensed consolidated statement of operations for the six months ended June 30, 2011 is as follows:

	As Previously Presented			Impairment Correction			As Restated
Asset impairments	$	250		$	29,000		$	29,250
Total costs and expenses		54,561			29,000			83,561
Operating loss		(23,711	)		(29,000	)		(52,711	)
Loss before income taxes		(23,866	)		(29,000	)		(52,866	)
Income tax provision		(302	)		11,965			11,663
Net loss from continuing operations		(24,168	)		(17,035	)		(41,203	)
Loss from operations of discontinued operations, net of tax		(33,145	)		348			(32,797	)
Loss from discontinued operations		(33,145	)		348			(32,797	)
Net loss attributable to common shareholders		(57,313	)		(16,687	)		(74,000	)
Basic and diluted net loss per share from continuing operations		(2.21	)		(1.55	)		(3.76	)
Basic and diluted net loss per share from discontinued operations		(3.04	)		0.04			(3.00	)
Basic and diluted net loss per share from attributable to common shareholders		(5.25	)		(1.51	)		(6.76	)

        The restated cash flows from operating activities section of the condensed consolidated statement of cash flows for the six months ended June 30, 2011 are as follows:

	As Previously Presented			Impairment Correction			As Restated
Cash Flows from Operating Activities:
Net loss	$	(57,313	)	$	(16,687	)	$	(74,000	)
Less loss from discontinued operations, net of tax		33,145			348			32,797
Net loss from continuing operations		(24,168	)		(17,035	)		(41,203	)
Intangible impairment		250			29,000			29,250
Deferred income taxes		278			(11,965	)		(11,687	)

Basis of Presentation

        The accompanying unaudited interim consolidated financial statements as of June 30, 2012 and 2011 and for the three and six months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our financial position for the periods presented. The results for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011.