NOTE 1—ORGANIZATION

Company Overview

Tree.com, Inc. 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®, GetSmart®, DegreeTree®, LendingTreeAutos, DoneRight®, ServiceTreeSM and InsuranceTree®. Together, these brands serve as an ally for consumers who are looking to comparison-shop for loans, education programs, home services providers and other services from multiple businesses and professionals that will compete for their business.

Segment Reporting

Effective December 31, 2012, we expanded our reportable segments from one to two, consisting of mortgage and non-mortgage. The change was made as the convergence of economic similarities associated with our mortgage and non-mortgage operating segments was no longer expected. This decision was made in connection with the update of our annual budget and forecast, which occurs in the fourth quarter each year. The non-mortgage reportable segment consists of our auto, education and home services operating segments, which are not yet mature businesses and have been aggregated. Prior period results have been reclassified to conform with the change in reportable segments.

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 with Discover Bank, a wholly-owned subsidiary of Discover Financial Services, as amended on 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 (June 6, 2013), subject to 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. Of the initial purchase price payment, $17.1 million 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 March 31, 2013 and December 31, 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 has been a network lender on our mortgage exchange since closing of the transaction.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements as of March 31, 2013 and 2012 and for the three 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 months ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013, 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, 2012.

Revision of Prior Period Financial Statements

In connection with the preparation of our consolidated financial statements for the first quarter of 2013, we determined that the number of outstanding shares has been overstated in prior periods due to issuances of unrestricted shares upon satisfaction of vesting conditions on restricted shares from 2009 to 2012 without canceling the original restricted share certificates. This resulted in double counting of certain vested restricted shares in the calculation of shares outstanding. Management has determined that unrestricted shares issued upon vesting of restricted shares should not have been considered validly issued or outstanding until the associated restricted shares were canceled. All of the restricted stock awards that were double counted were issued to our Chairman and CEO. The error in shares noted above was not reflected in our Chairman and CEO’s filings made under Section 13(d) or Section 16 of the Securities Exchange Act of 1934 or in our disclosures of his holdings in public filings. In addition, our weighted average share calculation has erroneously included restricted shares, resulting in errors in the previously reported weighted average shares and earnings per share.

On December 26, 2012, we paid a special dividend of $1.00 per share to our shareholders of record on December 17, 2012. The dividend was paid on all shares shown as outstanding in our records, including the shares granted to our Chairman and CEO for which management has determined should not have been considered issued or outstanding. As a result, we unintentionally overpaid $0.4 million in dividends to our Chairman and CEO, which was presented as a financing cash outflow at December 31, 2012. Such amount was recorded as a receivable at March 31, 2013 and will be presented as a financing cash inflow when repaid to the Company. Other than that special dividend, we have not declared or paid any cash dividends on our common stock. There was also a related error in the dividend accrual recorded for unvested shares entitled to the dividend upon vesting, resulting in an over accrual of $0.2 million at December 31, 2012.

In accordance with ASC 250-10, we assessed materiality of the errors and concluded that the errors were not material to any of our previously issued financial statements. Accordingly, we will revise our previously issued financial statements prospectively to correct these errors.

The following table presents the effect of these corrections on the Company’s Consolidated Statements of Operations for the years ended December 31, 2012 and December 31, 2011 (in thousands, except per share amounts):

	Year Ended December 31, 2012									Year Ended December 31, 2011
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Weighted average basic shares outstanding	11,313			(618		)	10,695			10,995			(618		)	10,377
Weighted average diluted shares outstanding	11,313			(618		)	10,695			10,995			(618		)	10,377
Net loss per share from continuing operations
Basic	$	(0.20	)	$	(0.01	)	$	(0.21	)	$	(4.52	)	$	(0.27	)	$	(4.79	)
Diluted	$	(0.20	)	$	(0.01	)	$	(0.21	)	$	(4.52	)	$	(0.27	)	$	(4.79	)
Net income (loss) per share from discontinuing operations
Basic	$	4.32		$	0.25		$	4.57		$	(0.89	)	$	(0.05	)	$	(0.94	)
Diluted	$	4.32		$	0.25		$	4.57		$	(0.89	)	$	(0.05	)	$	(0.94	)
Net income (loss) per share attributable to common shareholders
Basic	$	4.12		$	0.24		$	4.36		$	(5.41	)	$	(0.32	)	$	(5.73	)
Diluted	$	4.12		$	0.24		$	4.36		$	(5.41	)	$	(0.32	)	$	(5.73	)

For the years ended December 31, 2012 and 2011, we had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted earnings per share because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute all earnings per share amounts.

The following tables present the effect of these corrections on the Company’s Consolidated Statements of Operations for each of the quarters in the year ended December 31, 2012 (in thousands, except per share amounts):

	Three months ended March 31, 2012									Three months ended June 30, 2012
	As Reported			Adjustment			As Revised			As Reported			Adjustment			As Revised
Weighted average basic shares outstanding	11,173			(618		)	10,555			11,303			(618		)	10,685
Weighted average diluted shares outstanding	11,414			(859		)*	10,555			11,303			(618		)	10,685
Net loss per share from continuing operations
Basic	$	(0.29	)	$	(0.02	)	$	(0.31	)	$	(0.16	)	$	(0.00	)	$	(0.16	)
Diluted	$	(0.29	)	$	(0.02	)	$	(0.31	)	$	(0.16	)	$	(0.00	)	$	(0.16	)
Net income per share from discontinuing operations
Basic	$	1.56		$	0.09		$	1.65		$	2.44		$	0.14		$	2.58
Diluted	$	1.53		$	0.12	*	$	1.65		$	2.44		$	0.14		$	2.58
Net income per share attributable to common shareholders
Basic	$	1.27		$	0.07		$	1.34		$	2.28		$	0.13		$	2.41
Diluted	$	1.24		$	0.10	*	$	1.34		$	2.28		$	0.13		$	2.41

* Includes correction of an error of 241 shares and $0.03 per share made during the first quarter of 2012 related to the control number utilized for diluted earnings per share.

	Three months ended September 30, 2012							Three months ended December 31, 2012
	As Reported		Adjustment			As Revised		As Reported			Adjustment			As Revised
Weighted average basic shares outstanding	11,389		(618		)	10,771		11,386			(618		)	10,768
Weighted average diluted shares outstanding	12,003		(618		)	11,385		12,175			(618		)	11,557
Net income per share from continuing operations
Basic	$	0.02	$	0.01		$	0.03	$	0.22		$	0.01		$	0.23
Diluted	$	0.02	$	0.00		$	0.02	$	0.21		$	0.01		$	0.22
Net income (loss) per share from discontinuing operations
Basic	$	0.36	$	0.02		$	0.38	$	(0.02	)	$	0.00		$	(0.02	)
Diluted	$	0.35	$	0.01		$	0.36	$	(0.02	)	$	0.00		$	(0.02	)
Net income per share attributable to common shareholders
Basic	$	0.38	$	0.03		$	0.41	$	0.20		$	0.02		$	0.22
Diluted	$	0.37	$	0.01		$	0.38	$	0.19		$	0.01		$	0.20

The following table presents the effect these errors have on the Consolidated Balance Sheet at December 31, 2012:

	December 31, 2012
	As Reported	Adjustment		As Adjusted
Issued shares	12,625,678	(430,469	)	12,195,209
Outstanding shares	11,437,199	(430,469	)	11,006,730