UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2009

Commission File No. 001-34061





HSN, INC.

(Exact name of registrant as specified in
its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 26-2590893                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|1 HSN Drive, St. Petersburg, Florida                           |  | 33729                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(727)
872-1000

(Registrants telephone number, including area code)





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



|                                                                                            |  |                                                                                                                    
|------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------
|Title of each class                                                                         |  | Name of exchange on which registered                                                                               
|Common Stock, par value $0.01 Series A Junior Participating Preferred Stock
Purchase Rights |  | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) The NASDAQ Stock
Market LLC (NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

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  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, an Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files).    Yes   ̈    No   ̈

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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.



| |  |                         |  |   |  |                           |  |  
| |  | ----------------------- |  | - |  | ------------------------- |  | -
| |  | Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
| |  |                         |  |  
| |  | Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

The aggregate market value of the registrants outstanding common stock held by non-affiliates as of June 30, 2009 (the registrants most recently completed second fiscal quarter), was $594,104,269 (based on a closing price
of $10.57 per share for the registrants common stock on the NASDAQ Global Select Market).

As of March 1, 2010, the
registrant had 56,912,318 shares of common stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY
REFERENCE

Portions of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by
reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.









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TABLE OF CONTENTS



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|         |  | PART I                                                                                                       |  |     
|         |  |                                                                                                             
|ITEM 1.  |  | BUSINESS                                                                                                     |  | 2   
|ITEM 1A. |  | RISK FACTORS                                                                                                 |  | 9   
|ITEM 1B. |  | UNRESOLVED STAFF COMMENTS                                                                                    |  | 16  
|ITEM 2.  |  | PROPERTIES                                                                                                   |  | 16  
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                                            |  | 17  
|ITEM 4.  |  | RESERVED                                                                                                     |  | 17  
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |     
|         |  |                                                                                                             
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |  | 18  
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                                      |  | 20  
|ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 21  
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 35  
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  |  | 36  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 75  
|ITEM 9A. |  | CONTROLS AND PROCEDURES                                                                                      |  | 75  
|ITEM 9B. |  | OTHER INFORMATION                                                                                            |  | 78  
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |     
|         |  |                                                                                                             
|ITEM 10. |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                       |  | 78  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                                       |  | 78  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               |  | 78  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                     |  | 78  
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                       |  | 78  
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |     
|         |  |                                                                                                             
|ITEM 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 79  



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FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), which are based on managements exercise of business judgment, as well as assumptions made by and information
currently available to management. When used in this document, the words may, will, anticipate, believe, estimate, expect, intend and words of similar import, are
intended to identify any forward-looking statements. These forward-looking statements include, among other things, statements relating to the following: HSNis future financial performance, HSNis business prospects and strategy,
anticipated trends and prospects in the various markets in which HSNis businesses operate and other similar matters. These forward-looking statements are based on managements current expectations and assumptions about future events,
which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.

Should one
or more of these uncertainties, risks or changes in circumstances materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Factors that
could cause or contribute to such differences include but are not limited to those described under Risk Factors, and the following: the depth and duration of the current recession, and the continued impact of these conditions on consumer
confidence and spending levels; whether national economic stimulus initiatives and measures to stabilize the financial system will be successful in achieving their objectives within the expected timeframes; other changes in political, business and
economic conditions, particularly those that affect consumer confidence, consumer spending or internet growth; changes in the interest rate environment and developments in the overall credit markets; HSNis business prospects and strategy,
including whether HSNis initiatives will be effective; changes in our relationships with pay television operators, vendors, manufacturers and other third parties; technological or regulatory changes; changes in senior management; our ability
to offer new or alternative products and services in a cost effective manner and consumer acceptance of these products and services; and changes in product delivery costs. Other unknown or unpredictable factors that could also adversely affect
HSNis business, financial condition and results of operations may arise from time to time.

You should not place undue
reliance on these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof,
or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.



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PART I



|ITEM 1. | BUSINESS
|------- | --------

Unless
otherwise indicated in this Annual Report or the context otherwise requires, all references in this Annual Report to HSNi, the Company, us, our or we are to HSN, Inc. and/or its
subsidiaries and affiliates.

Business Overview

HSNi is an interactive multi-channel retailer offering retail experiences on TV, online, in catalogs and in retail and outlet stores through its two operating segments, HSN and Cornerstone. HSN is a
retailer and interactive lifestyle network offering a broad assortment of products through television home shopping programming on the HSN television network and through its business-to-consumer internet commerce site HSN.com. HSN strives to
transform the shopping experience by incorporating experts, entertainment, inspiration, solutions, tips and ideas in connection with the sale of products. Cornerstone comprises home and lifestyle brands, including Frontgate, Ballard Designs, Garnet
Hill, Smith+Noble, The Territory Ahead, TravelSmith and Improvements. Cornerstone distributes over 200 million catalogs annually, operates seven separate internet sites and operates 23 retail and outlet stores.

HSNi was incorporated in Delaware in May 2008. Our principal offices are located at 1 HSN Drive, St. Petersburg, Florida 33729 and our
main telephone number is 727-872-1000.

History

HSNis predecessor company began broadcasting television home shopping programming from its studios in St. Petersburg, Florida in 1981 and, by 1985, was broadcasting this programming through a
national network of cable and local television stations 24 hours a day, seven days a week. The company continued to broaden its national distribution network through a combination of cable, satellite and broadcast systems and, as of
December 31, 2009, the HSN television network reached approximately 94.4 million homes in the United States.

The
company began conducting business online in 1994 and formally launched HSN.com, the online shopping portal for the HSN television network, in 1999.

The company acquired Improvements, a catalog featuring thousands of innovative home, patio and outdoor products, in June 2001, and significantly grew its catalogs business through the acquisition of the
Cornerstone Brands portfolio of leading print catalogs and related websites in April 2005.

HSNi was incorporated in Delaware
in May 2008 in connection with the spin-off of several businesses previously owned by IAC/InterActiveCorp, or IAC. HSNi was formed to hold HSN and Cornerstone, the businesses that previously comprised most of IACs Retailing segment and are
referred to herein as the HSNi Businesses. The spin-off from IAC occurred after the close of The NASDAQ Stock Market on August 20, 2008 and occurred concurrent with the spin-offs from IAC of Interval Leisure Group, Inc.,
Ticketmaster Entertainment, Inc., and Tree.com, Inc. In this Annual Report, we refer to the separation transaction as the spin-off and each of these companies as Spincos. Effective August 21, 2008, HSNis shares
began trading on The NASDAQ Global Select Market under the symbol HSNI.

What We Do

HSNi markets and sells a wide range of third party and private label merchandise directly to consumers through HSN, which includes the HSN
television network and its related website, HSN.com, as well as through Cornerstones portfolio of catalogs and related websites.



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HSNi is committed to providing an evolving variety and mix of quality products at reasonable
prices and brands that resonate with its customers. Products offered through HSN include electronics and housewares, jewelry, beauty, apparel, health, home fashions, accessories, vitamins/supplements and other products. Featured products include
HSN-branded (or private label) products and third party-branded products, some of which are produced exclusively for HSN, as well as merchandise generally available through other retailers. Cornerstone primarily offers home and outdoor furnishings
and casual and leisure apparel with the majority produced exclusively for Cornerstone.

HSN

Overview

HSN includes the HSN television network and its related website, HSN.com. The HSN television network broadcasts live, customer interactive television home shopping programming 24 hours a day, seven days a week. This programming is intended
to promote sales and customer loyalty through a combination of product quality, value and selection, coupled with product information and entertainment. Programming is divided into separately televised segments, each of which has a host who presents
and conveys information regarding featured products, sometimes with the assistance of a representative from the product vendor or someone that we retain to aid in the sale of the goods. HSN.com is a business-to-consumer internet commerce site that
sells all of the merchandise offered on the HSN television network, together with complementary products and select merchandise sold exclusively on HSN.com. The HSN strategy continues to focus on defining a clear and differentiated brand and
creating an identity for itself as a lifestyle, editorial, programmed commerce network that provides great products with innovative and engaging presentation.

Reach

HSN produces live programming for the HSN television network
from its studios in St. Petersburg, Florida, and distributes this programming by means of satellite uplink facilities, which it owns and operates, to two transponders (one for the high definition feed and the other for the standard definition
feed) on the same satellite. The satellite transponders are leased on a full-time basis; one satellite transponder is leased through June 2011 and the other is leased through May 2019. Each satellite transponder lease provides for continued carriage
of the HSN television network on a replacement transponder and/or replacement satellite, as applicable, in the event of a failure of the transponder and/or satellite currently carrying the HSN television network. HSN has also designed business
continuity and disaster recovery plans to ensure its continued satellite transmission capability on a temporary basis in the event of inclement weather or a natural or other disaster.

As of December 31, 2009 and 2008, the HSN television network reached approximately 94.4 million and 91.9 million,
respectively, of the approximately 114.9 million and 114.5 million homes, respectively, in the United States with a television set. Television households reached by the HSN television network as of December 31, 2009 and 2008 primarily
include approximately 64.6 million and 63.3 million households capable of receiving cable and/or broadcast transmissions and approximately 29.8 million and 28.6 million direct broadcast satellite system, or DBS, households,
respectively.

Pay Television Distribution

HSN has entered into multi-year distribution and affiliation agreements with cable television and DBS operators, collectively referred to in
this document as pay television operators, in the United States to carry the HSN television network, as well as to promote the network by carrying related commercials and distributing related marketing materials to their respective subscriber bases.
HSN currently has contracts with many local and national pay television operators to distribute HSN television programming. Some of HSNs larger pay television operators include Comcast, DirecTV, Echostar/DISH and Time Warner. HSN television
network sales from customers residing in households that subscribed to these larger pay television operators accounted for approximately 30% of HSNis annual revenue in 2009.



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In exchange for this carriage and related promotional and other efforts, HSN generally pays
these pay television operators a fee consisting of a per subscriber fee plus commissions based on a percentage of the net merchandise sales to their subscriber bases. In some cases, pay television operators receive additional compensation in the
form of advertising insertion time on the HSN television network and commission guarantees in exchange for their commitments to deliver a specified number of subscribers.

HSN typically negotiates multi-year agreements that require HSN to pay monthly or annual fees. The weighted average overall length of the terms of the multi-year distribution and affiliation agreements in
effect as of December 31, 2009 is 4.6 years. All such agreements with major pay television operators are scheduled to expire between 2010 and 2011. Distribution and affiliation agreements with major and other pay television operators expire
from time to time and renewal and negotiation processes with major pay television operators are typically lengthy. At any given time in the ordinary course of business HSN is likely to be engaged in renewal and/or negotiation processes with one or
more pay television operators. In some cases, renewals are not agreed upon prior to the expiration of a given agreement and the HSN television network continues to be carried by the relevant pay television operator without an effective affiliation
agreement in place. This is currently the situation with a major cable pay television operator with which an agreement expired in 2005. The ongoing extension of this agreement is on economic terms that are substantially similar to the agreement that
expired in 2005. HSN expects that, as in the past, any long-term extension of the agreement will be on terms that, when taken as a whole, are commercially reasonable to HSN and competitive with the economics of other major cable pay television
operators.

Broadcast Television Distribution

As of December 31, 2009, HSN also had affiliation agreements with 47 low power broadcast television stations for leased carriage of the
HSN television network with terms ranging from several weeks to several years. In exchange for this carriage, HSN pays the broadcast television stations hourly or monthly fixed rates. HSNis subsidiary, Ventana Television, Inc.
(Ventana) owns 27 of the 47 low power broadcast television stations that carry the HSN network on a full-time basis.

HSN.com

HSN also includes HSN.com, a transactional internet site that sells merchandise offered on the HSN
television network, as well as select merchandise sold exclusively on HSN.com. HSN.com provides customers with additional content to support and enhance HSN television programming. For example, HSN.com provides users with an online program guide,
value-added video of product demonstrations, live streaming video of the HSN television network, customer-generated product reviews and additional information about HSN show hosts and guest personalities.

Cornerstone

Cornerstone
consists of a number of branded catalogs and related websites, the primary of which are Frontgate, Ballard Designs, Garnet Hill, Smith+Noble, The Territory Ahead, TravelSmith and Improvements, and 23 retail and outlet stores.

Frontgate features premium, high quality bed, bath and kitchen accessories, as well as outdoor, patio, garden and pool furnishings and
accessories. Ballard Designs features European-inspired bed, bath, dining and office furnishings and accessories, as well as rugs, shelving and architectural accents for the home. Garnet Hill offers bed and bath furnishings and soft goods, as well
as apparel and accessories for women and children, and Smith+Noble offers custom home furnishings and window treatments. The Territory Ahead offers casual apparel for men and women and TravelSmith offers travel wear for men and women and related
accessories. Improvements features thousands of innovative home, patio and outdoor products.



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The various brands within Cornerstone generally incorporate on-site photography and
real-life settings, coupled with related editorial content describing the merchandise and depicting situations in which it may be used. Branded catalogs are designed and produced in-house, which enables each individual brand to control the
production process and reduces the amount of lead time required to produce a given catalog.

New editions of full-color
catalogs are mailed to customers several times each year, with a total annual circulation in 2009 of more than 200 million catalogs. The timing and frequency of catalog circulation varies by brand and depends upon a number of factors, including
the timing of the introduction of new products, marketing campaigns and promotions and inventory levels, among other factors.

Cornerstone also operates Frontgate.com, BallardDesigns.com, GarnetHill.com, SmithandNoble.com, TheTerritoryAhead.com, TravelSmith.com and Improvementscatalog.com, among other branded websites. These websites serve as additional,
alternative storefronts for products featured in related print catalogs, as well as provide customers with additional content to support and enhance their shopping experience. Additional content provided by these websites, which differs across the
various websites, includes decorating tips, measuring and installation information, online design centers, gift registries and travel centers, as well as a feature that allows customers to browse the related catalog online.

Supply

HSN and Cornerstone
purchase products by way of short- and long-term contracts and purchase orders, including products made to their respective specifications, as well as name brand merchandise and lines from third party partners, typically under certain exclusive
rights. The terms of these contracts and purchase orders vary depending upon the underlying products, the retail channel in which the products will ultimately be sold and the method of sale. In some cases, these contracts provide for the payment of
additional amounts to partners in the form of commissions, the amount of which is based upon the achievement of agreed upon sales targets, among other milestones. In addition, in the case of some purchases, HSNi Businesses may have certain return,
extended payment and/or termination rights. The mix and source of products generally depends upon a variety of factors, including price and availability, and HSNi manages inventory levels through periodic, ongoing analyses of anticipated and current
sales. No single vendor accounted for more than 10% of HSNis consolidated net sales in 2009, 2008 or 2007.

Marketing and
Merchandising

HSN continuously works to bring customers a broad assortment of new and existing products in a compelling,
informative and entertaining format. For example, HSN frequently collaborates with experts in a variety of fields to present special events on the HSN television network featuring HSN products and relevant expert content. In most cases, these events
are staged at HSNs television studios, and to a lesser extent, staged at venues associated with featured products. Online versions of certain special events are also featured on HSN.com for a limited time period following their broadcast on
the HSN television network. Also featured on HSN.com are over 12,000 video demonstrations of products available for sale.

In
an effort to promote its own differentiated brand, HSN seeks to provide its customers with unique products that can only be purchased through HSN. HSN frequently partners with leading personalities and brands to develop product lines exclusive to
HSN and believes that these affiliations enhance the awareness of the HSN brand among consumers generally, as well as increase the extent to which HSN and/or products sold through HSN are featured in the media. In some cases, vendors have agreed to
market their HSN affiliation to their existing customers (i.e., by way of e-mail notifying customers when their products will be featured on the HSN television network).

HSN also engages in co-promotional partnerships with major media companies to secure print advertising in national fashion, style and/or
lifestyle publications to market HSN to prospective customers in its target demographic, as well as search engine marketing and targeted offline advertising around the holidays and other key promotional periods.



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The Cornerstone brands differentiate themselves by offering customers an assortment of
innovative proprietary and branded apparel and home products. In many cases, Cornerstone, seeks to secure exclusive distribution rights for certain products. Cornerstone also employs in-house designers or partners with leading manufacturers to
develop exclusive new technology, such as wrinkle free fabrics. The various Cornerstone brands use their respective websites to promote special sales events and e-mail marketing to promote special offers, including cross-promotions for other
Cornerstone brands. In addition, Cornerstone partners with third parties to offer promotional events such as sweepstakes and/or other advertising agreements. HSNi believes that these affiliations enhance the awareness of the Cornerstone brands among
consumers as well as strengthen its various brands overall.

Order Entry, Fulfillment and Customer Service

HSNi provides customers with convenient options in connection with the purchase, payment and shipment of merchandise, some of which vary by
brand, business or product. Merchandise may be purchased online or ordered using toll free phone numbers through live sales and service agents. HSN also offers the convenience of an automated attendant system and, in limited markets, remote control
ordering capabilities through pay television set-top boxes. Cornerstones catalog orders can also be made via traditional catalog sales order form submissions.

In addition to traditional payment options, such as credit and debit cards, payment options include private label credit cards and, in the case of HSN, Flexpay; pursuant to which customers may pay for
select merchandise in two to six interest-free, monthly credit or debit card payments. HSN also offers its customers the convenience of ordering products under the Autoship program, pursuant to which customers may arrange to have products
automatically shipped and billed at scheduled intervals. Standard and express shipping options are available and customers may generally return most merchandise for a full refund or exchange in accordance with applicable return policies (which vary
by brand and business), subject to restocking fees for custom merchandise in the case of products sold through Cornerstone. Returns generally must be received within specified time periods after purchase, ranging from a minimum of thirty days to a
maximum of one year, depending upon the applicable policy.

HSNi seeks to fulfill customer orders and process returns quickly
and accurately from a network of fulfillment centers located, for HSN, in Tennessee, California and Virginia, and for Cornerstone, in Ohio. HSNi contracts with several third party carriers and other fulfillment partners to ensure the reliable and
timely delivery of products to its customers and processing of returns.

Customers can also generally track the status of
their orders through HSN.com and the various websites operated by Cornerstone or through HSNis common carriers, confirm information regarding shipping and, in some cases, confirm the availability of inventory and establish and manage personal
accounts. Customers may communicate directly with customer service via e-mail or by telephone or with call center representatives available seven days a week.

Government Regulation

The manner in which we sell and promote merchandise
and related claims and representations made in connection with these efforts is regulated by federal and state law. Some examples of regulations that affect the manner in which we sell and promote merchandise include the following:



| |  |  | The Food and Drug Administration which has specific regulations regarding claims that can be made about food products and regulates marketing claims
that can be made for cosmetic beauty products and over-the-counter drugs, which include acne products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Environmental Protection Agency, or EPA, which requires products that make certain types of claims, such as anti-bacterial, be
registered with the EPA prior to making such claims, which products are also sold through HSN; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Each of the Federal Trade Commissions Telemarketing Sales Rule and the Federal Communication Commissions Telephone Consumer Protection Act
and similar state rules, which outline procedures that must be followed when telemarketing to customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since October 1996, HSN has been subject to a consent order issued by the Federal Trade Commission, or FTC, which terminates on the later of April 15, 2019, or 20 years from the most recent date that the United States or the FTC files
a complaint in federal court alleging any violation thereunder. Pursuant to this consent order, we are prohibited from making claims for specified categories of products, including claims that a given product can cure, treat or prevent any disease
or have an effect on the structure or function of the human body, unless we have competent and reliable scientific evidence to substantiate such claims. Violation of this consent order may result in the imposition of significant civil penalties for
non-compliance and related redress to consumers and/or the issuance of an injunction enjoining us from engaging in prohibited activities. The FTC periodically investigates our business and operation on an ongoing basis for purposes of determining
its compliance with the consent order.

We market and provide a broad range of merchandise through online and offline
channels. As a result, we are subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions which are subject to change at any time, including laws regarding consumer protection, privacy, the regulation
of retailers generally, the importation, sale and promotion of merchandise and the operation of retail stores and warehouse facilities, as well as laws and regulations applicable to the internet and businesses engaged in online commerce, such as
those regulating the sending of unsolicited, commercial electronic mail. Unfavorable changes in the laws, rules and regulations applicable to us could decrease demand for merchandise offered by us, increase costs and/or subject us to additional
liabilities.

Online sales must comply with a variety of existing and new federal and state laws dealing with privacy,
intellectual property, taxation, the provision of online payment services and electronic contracts. While U.S. Supreme Court decisions currently restrict the imposition of obligations to collect state and local sales and use taxes with respect to
sales made over the internet, a number of states have adopted or are considering initiatives that would impose sales and use tax collection obligations arising from internet-based transactions. The imposition by the federal or state and local
governments of various taxes and related obligations upon internet commerce could create administrative burdens for our businesses, could put our businesses at a competitive disadvantage to the extent that similar obligations are not imposed upon
our competitors and could decrease future sales.

While we believe that the practices of our businesses have been structured
in a manner to ensure compliance with these laws and regulations, federal or state regulatory authorities may take a contrary position. Our failure and/or the failure of any of our businesses to comply with these laws and regulations could result in
fines and/or proceedings against us and/or our businesses by governmental agencies and/or consumers, which could adversely affect our business, financial condition and results of operations.

Intellectual Property

We
regard our intellectual property rights, including patents, service marks, trademarks and domain names, copyrights, trade secrets and similar intellectual property (as applicable), as critical to our success. Our businesses also rely heavily upon
software codes, informational databases and other systemic components that are necessary to manage and support our operations. We rely on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others
to establish and protect these proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use trade secret or copyrighted intellectual property without authorization which, if discovered,
might require legal action to correct. In addition, third parties may independently and lawfully develop substantially similar intellectual properties.



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We have generally registered and continue to apply to register, or secure by contract when
appropriate, our trademarks and service marks as they are developed and used, and reserve and register domain names as we deem appropriate. We generally consider the protection of our trademarks to be important for purposes of brand maintenance and
reputation. While we vigorously protect our trademarks, service marks and domain names, effective trademark protection may not be available or may not be sought in every country in which products and services are made available, and contractual
disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available. Our failure to protect our intellectual property rights in a meaningful manner
or challenges to related contractual rights could result in erosion of brand names and limit our ability to control marketing on or through the internet using our various domain names or otherwise, which could adversely affect our business,
financial condition and results of operations.

Some of our businesses have been granted patents and/or have patent
applications pending with the United States Patent and Trademark Office and/or various foreign patent authorities for various proprietary technologies and other inventions. We consider applying for patents or for other appropriate statutory
protection when we develop valuable new or identify improved proprietary technologies or inventions, and will continue to consider the appropriateness of filing for patents to protect future proprietary technologies and inventions as circumstances
may warrant. The issuance or assessment of the validity of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, any patent application filed may not result in a patent being issued or
existing or future patents may not be adjudicated valid by a court or be afforded adequate protection against competitors with similar technology. In addition, third parties may create new products or methods that achieve similar results without
infringing upon patents that we own. Likewise, the issuance of a patent to us does not mean that our processes or inventions will not be found to infringe upon patents or other rights previously issued to third parties.

From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged
infringement of the trademarks, copyrights, patents and other intellectual property rights of third parties. In addition, litigation may be necessary in the future to enforce our intellectual property rights, protect trade secrets or determine the
validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our
business, financial condition and results of operations. Patent litigation tends to be particularly protracted and expensive.

Competition

HSNi brands and businesses operate in a highly competitive environment. These brands and businesses are in direct
competition for consumers with traditional offline and online retailers (both television and internet retailers), ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers, mail order and catalog
companies, infomercial retailers, wholesale clubs and discount retailers. In addition, the HSN television network competes for access to customers and audience share with other conventional forms of entertainment and content. The price and
availability of programming for pay television systems affect the availability of distribution for HSN television programming and the compensation that must be paid to pay television operators for related carriage and competition for channel
capacity and placement continues to increase. Principal competitive factors for HSNi brands and businesses include (i) brand recognition, (ii) value, quality and selection of merchandise, (iii) customer experience, including customer
service and reliability of fulfillment and delivery services and (iv) convenience and accessibility of sales channels.

Employees

As of March 1, 2010, HSNi employed 4,907 full-time employees and 900 part-time employees. No HSNi employees are
represented by unions or other similar organizations and HSNi considers its relations with its employees to be good.



8



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Available Information

Our website is located at http://www.hsni.com. We make available free of charge, on or through the website, our annual, quarterly and current reports, and any amendments to those reports, as soon
as reasonably practicable after electronically filing such reports with the SEC.

Our Code of Business Conduct and Ethics,
which applies to all employees, including executive officers and senior financial officers and directors, is also available on our website at http://www.hsni.com/governance.cfm. The code of conduct complies with Item 406 of SEC
Regulation S-K and the rules of The NASDAQ Global Select Market. Any changes to the code of conduct that affect the provisions required by Item 406 of Regulation S-K, and any waivers of the code of conduct for our executive officers, directors
or senior financial officers, will also be disclosed on our website.

Information contained on our website is not a part of
this Annual Report or any other report filed with the SEC.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The risks
and uncertainties described below are not the only risks that may have a material adverse effect on HSNi. Additional risks and uncertainties also could adversely affect our business and our results. If any of the following risks actually occur, our
business, financial condition or results of operations could be negatively affected, and the market price for our shares could decline. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes
forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the actual results of HSNi to differ materially from those expressed in any forward-looking statements made by
or on behalf of HSNi.

Risks Related to Our Business

We depend on relationships with pay television operators and adverse changes in these relationships could result in an interruption, material decrease or even the cessation of carriage of the HSN
television network.

We are dependent upon the pay television operators with whom we enter into distribution and
affiliation agreements to carry the HSN television network. We currently have contracts with many local and national pay television operators to distribute HSN television programming. Some of HSNs larger pay television operators include
Comcast, DirecTV, Echostar/DISH and Time Warner. The cessation of carriage of the HSN television network by a major pay television operator or a significant number of smaller pay television operators for a prolonged period of time could adversely
affect our business, financial condition and results of operations. While we believe that we will be able to continue to successfully manage the distribution process in the future, certain changes in distribution levels, as well as increases in
commission rates and/or other fees payable for carriage, could occur notwithstanding these efforts.

We typically seek to
enter into long-term distribution and affiliation agreements with these major pay television operators; however, in some cases, renewals are not agreed upon prior to the expiration of a given agreement and the HSN television network continues to be
carried by the relevant pay television operator without an effective agreement in place. We currently provide service to approximately 19% of our total subscribers pursuant to month-to-month contracts or contracts that have expired. In
addition, another 77% of our subscribers are represented by contracts that expire within one year. Renewal and negotiation processes with pay television operators are typically lengthy. No assurance can be given that we will be successful in
negotiating renewals with all these operators, or the financial and other terms of renewal will be on acceptable terms. The failure to successfully renew, or negotiate new distribution and affiliation agreements covering a material portion of these
existing cable and satellite households on acceptable terms could adversely affect our growth, sales revenue and earnings.



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Macroeconomic conditions have negatively impacted our business and may continue to
have additional negative impacts in the future.

Retailers generally are particularly sensitive to adverse economic and
business conditions, in particular to the extent they result in a loss of consumer confidence, rising unemployment and decreases in consumer spending, particularly discretionary spending. Beginning in 2008 and through 2009, we experienced weakness
across business segments in connection with the deteriorating macroeconomic conditions. We are not able to predict the timing of any recovery. The current recessionary environment may continue through 2010. If macroeconomic conditions do not improve
or continue to worsen, our business could be adversely affected. When macroeconomic conditions do improve, there can be no assurance that we will be able to regain the levels of revenue that we achieved prior to the recession.

Our level of indebtedness could limit our flexibility in responding to current market conditions, prevent us from meeting our
obligations under our debt instruments or otherwise restrict our business activities.

The existence of, and
limitations on the availability of HSNis debt could have important consequences. The existence of debt could, among other things:



| |  |  | require a substantial portion of HSNi cash flow from operations to be dedicated to the payment of principal and interest on HSNi indebtedness;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit HSNis ability to use cash flow or obtain additional financing for future working capital, capital expenditures or other general corporate
purposes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase HSNis vulnerability to general economic and industry conditions; or
| | - |  | -----------------------------------------------------------------------------



| |  |  | expose HSNi to the risk of increased interest rates because certain of its borrowings, including borrowings under its credit facilities, are at
variable interest rates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Limitations imposed as a part of the debt, such as the availability of credit and
the existence of restrictive covenants may, among other things, make it difficult for HSNi to satisfy its financial obligations; and/or limit HSNis ability to respond to business opportunities. The credit agreement relating to HSNis
credit facility and indenture with respect to the senior notes do include restrictive covenants, financial and non-financial.

We depend on relationships with vendors, manufacturers and other third parties; and any adverse changes in these relationships could result in a failure to meet customer expectations which could result in lost sales.

Our businesses purchase merchandise from a wide variety of third party vendors, manufacturers and other sources
pursuant to short- and long-term contracts and purchase orders. The ability of our businesses to identify and establish relationships with these parties, as well as access quality merchandise in a timely and efficient manner on acceptable terms and
cost, can be challenging. In particular, our businesses purchase a significant amount of merchandise from vendors and manufacturers abroad, and have experienced (and expect to continue to experience) increased costs for goods sourced in these
markets, particularly in China. We depend on the ability of vendors and manufacturers in the U.S. and abroad to produce and deliver goods that meet applicable quality standards, which is impacted by a number of factors not within the control of
these parties, such as political or financial instability, trade restrictions, tariffs, currency exchange rates and transport capacity and costs, among others. In particular, Cornerstone is dependent, in significant part, upon independent, third
party manufacturers to produce private label merchandise.

The failure of our businesses to identify new vendors and
manufacturers, maintain relationships with a significant number of existing vendors and manufacturers and/or access quality merchandise in a timely and efficient manner could cause our businesses to miss customer delivery dates or delay scheduled
promotions, which would result in the failure to meet customer expectations and could cause customers to cancel orders or cause our businesses to be unable to source merchandise in sufficient quantities, which could result in lost sales.



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The failure to secure suitable channel placement for the HSN television network
programming would adversely affect our ability to attract and retain television viewers and could result in a decrease in revenue.

We are dependent upon the continued ability of HSN to compete for television viewers. Effectively competing for television viewers is dependent, in substantial part, on the ability of HSN to secure
suitable placement of the HSN television network within a suitable programming tier at a low channel position. The advent of digital compression technologies and the adoption of digital cable has resulted in increased channel capacity, which
together with other changing laws, rules and regulations regarding cable television ownership, impacts the ability of HSN to secure suitable channel placement. While increased channel capacity could provide a means through which the HSN television
network could be more widely distributed, it could also adversely affect the ability to attract television viewers to the HSN television network to the extent it results in:



| |  |  | higher channel position placement for the HSN television network;
| | - |  | -----------------------------------------------------------------



| |  |  | placement of the HSN television network in digital programming tiers, which generally have lower levels of television viewer penetration than basic or
expanded basic programming tiers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | more competitors entering the marketplace; or
| | - |  | ---------------------------------------------



| |  |  | more programming options being available to the viewing public in the form of new television networks and time-shifted viewing (e.g., personal
video recorders, video-on-demand, interactive television and streaming video over broadband internet connections).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If the HSN television network is carried exclusively in a system on a digital programming tier, HSN will experience a reduction in revenue to the extent that the digital programming tier has less television viewer penetration than the basic
or expanded basic programming tier. In addition, HSN may experience a further reduction in revenue due to increased television viewing audience fragmentation and to the extent that not all television sets within a digital cable home are equipped to
receive television programming in a digital format. Our future success will also depend, in part, on the ability of HSN to anticipate and adapt to technological changes and to offer elements of the HSN television network via new technologies in a
cost-effective manner that meet customer demands and evolving industry standards.

Our long-term success depends, in
large part, on our continued ability to attract new and retain existing customers. We may not be able to do that in a cost-effective manner.

In an effort to attract and retain customers, we engage in various marketing and merchandising initiatives, which involve the expenditure of considerable money and resources, particularly in the case of
the production and distribution of HSN television programming and Cornerstone catalogs and, to a lesser but increasing extent, online advertising. We have spent, and expect to continue to spend, increasing amounts of money on, and devote greater
resources to, certain of these initiatives, particularly in connection with the growth and maintenance of our brands generally, as well as in the continuing efforts of our businesses to increasingly engage customers through online channels. These
initiatives, however, may not resonate with existing customers or consumers generally or may not be cost-effective. In addition, we believe that costs associated with the production and distribution of HSN television programming, paper and printing
costs for Cornerstone catalogs and costs associated with online marketing, including search engine marketing (primarily the purchase of relevant keywords) are likely to increase in the foreseeable future and, if significant, could have an adverse
effect on our business, financial condition and results of operations to the extent that they do not result in corresponding increases in sales.

Our businesses may not be able to accurately predict and/or respond in a timely manner to evolving customer preferences and trends and industry standards, which could result in excess inventory,
related markdowns and lost sales.

Our success depends, in significant part, on the ability of our businesses to
accurately predict, and respond in a timely manner to, changes in customer preferences and fashion, lifestyle and other trends and industry



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standards. While product mix and price points are continuously monitored and adjusted in an attempt to satisfy consumer demand and respond to changing economic and business conditions, our
businesses may not be successful in these efforts, and any sustained failure could result in excess inventory and related markdowns.

In addition, the internet industry is characterized by evolving industry standards, frequent new service and product introductions and enhancements, as well as changing customer demands. If our businesses are not able to adapt quickly
enough and/or in a cost-effective manner to these changes it could result in lost sales.

Failure to effectively manage
our Flexpay program could result in unplanned losses.

HSN offers Flexpay, pursuant to which customers may pay for
certain merchandise in two to six interest-free, monthly credit or debit card payments. We maintain allowances for estimated losses resulting from the inability of customers to make required payments. While actual losses due to the inability of
customers to make required payments have historically been within estimates, we may not continue to experience these losses at the same rate as we have historically or our actual losses in any given period may exceed related estimates. As Flexpay
usage grows, we may experience these losses at greater rates, which will require us to maintain greater allowances for doubtful accounts of estimated losses than we have historically.

Increased delivery costs could adversely impact our profits, particularly if we are unable to pass these increased costs on to
customers or offset them by increasing prices without a detrimental effect on customer demand.

Our businesses are
impacted by increases in shipping rates charged by various shipping vendors relating to the procurement of merchandise from vendors and manufacturers, the shipment of merchandise to customers and the mailing of catalogs, which over the past few
years have experienced volatility in comparison to historical levels. We currently expect that shipping and postal rates will continue to increase. In the case of deliveries to customers, we have negotiated favorable shipping rates, which increase
at agreed upon levels over time, with one independent, third party shipping company pursuant to a long-term contract. If this relationship were to terminate or if the shipping company was unable to fulfill its obligations under the contract for any
reason, we would have to work with other shipping companies to deliver merchandise to customers, which would most likely be at less favorable rates. Any increase in shipping rates and related fuel and other surcharges passed on to us by this or any
other shipping company may adversely impact profits, given that we may not be able to pass these increased costs directly to customers or offset them by increasing prices without a detrimental effect on customer demand.

The continued or permanent inability to broadcast the HSN television network would result in lost sales and could result in lost
customers.

Our success is dependent upon the continued ability of HSN to transmit the HSN television network to
broadcast and pay television operators from its satellite uplink facilities, which transmission is subject to Federal Communication Commission, or FCC, compliance. HSN has entered into a long-term satellite transponder lease to provide for continued
carriage of the HSN television network on a replacement transponder and/or replacement satellite, as applicable, in the event of a failure of the transponder and/or satellite currently carrying the HSN television network. Although we believe that
every reasonable measure is being taken to ensure continued satellite transmission capability, termination or interruption of satellite transmissions may occur.

HSN is affiliated with a number of low power broadcast television station licensees (the Low Power Licensees) that broadcast programming pursuant to licenses from the FCC. These Low Power
Licensees are subject to regulation by the FCC under the Communications Act of 1934, as amended, which prohibits the operation of broadcast television stations except in accordance with a license issued by the FCC and empowers the FCC to issue,
revoke, modify and renew broadcast television licenses, approve the transfer of control of any entity holding such licenses, determine the location of stations, regulate the equipment used by stations, adopt necessary regulations and impose
penalties for related violations. The failure of the Low Power Licensees to comply with the terms of the broadcast licenses could result in the inability to broadcast the HSN television



12



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network on over-the-air facilities, as well as penalties. The prolonged or permanent interruption of satellite transmission capability or other inability to transmit the HSN television network
for any reason, as well as related costs incurred, would result in lost sales and could result in lost customers.

We
are currently the subject of a consent order issued by the FTC and violation of this consent order could result in significant civil penalties and an injunction enjoining HSN from engaging in prohibited activities, among other things.

In October 1996, HSN became subject to a consent order issued by the FTC which terminates on the later of
April 15, 2019, or 20 years from the most recent date that the United States or the FTC files a complaint in federal court alleging any violation thereunder. Pursuant to this consent order, HSNi (including its subsidiaries and affiliates) is
prohibited from making claims for specified categories of products, including claims that a given product can cure, treat or prevent any disease or have an effect on the structure or function of the human body, unless it has competent and reliable
scientific evidence to substantiate such claims. Violation of this consent order may result in the imposition of significant civil penalties for non-compliance and related redress to consumers and/or the issuance of an injunction enjoining us from
engaging in prohibited activities. The FTC periodically investigates our business and operation on an ongoing basis for purposes of determining its compliance with the consent order.

Our businesses may be subject to claims for representations made in connection with the sale and promotion of merchandise or for harm
experienced by customers who purchase merchandise from our businesses.

The manner in which we sell and promote
merchandise and related claims and representations made in connection with these efforts is regulated by federal and state law. Our businesses may be exposed to potential liability from claims by purchasers or from federal, state and local
regulators and law enforcement agencies, including, but not limited to, for personal injury, wrongful death and damage to personal property relating to merchandise sold and misrepresentation of merchandise features and benefits. In certain
instances, our businesses have the right to seek indemnification for related liabilities from their vendors and may require such vendors to carry minimum levels of product liability and errors and omissions insurance. These vendors, however, may be
unable to obtain suitable coverage or maintain this coverage on acceptable terms, or this insurance may provide inadequate coverage against all potential claims or may not even be available with respect to any particular claim.

Failure to comply with existing laws, rules and regulations, or to obtain and maintain required licenses and rights, could subject us
to additional liabilities.

We market and provide a broad range of merchandise through online and offline channels. As
a result, we are subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions which are subject to change at any time, including laws regarding consumer protection, privacy, the regulation of retailers
generally, the importation, sale and promotion of merchandise and the operation of retail stores and warehouse facilities, as well as laws and regulations applicable to the internet and businesses engaged in online commerce, such as those regulating
the sending of unsolicited, commercial electronic mail. Our failure and/or the failure of any of our businesses to comply with these laws and regulations could result in fines and/or proceedings against us and/or our businesses by governmental
agencies and/or consumers, which could adversely affect our business, financial condition and results of operations. Moreover, unfavorable changes in the laws, rules and regulations applicable to us could decrease demand for merchandise offered by
us, increase costs and/or subject us to additional liabilities. Finally, certain of these regulations impact the marketing efforts of our brands and businesses.

We could be subject to additional sales tax liability, including liability for past sales.

U.S. Supreme Court decisions currently restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the internet. However, a number of states, as
well as the U.S. Congress, have adopted or are considering initiatives that would impose sales and use tax collection obligations



13



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arising from internet-based transactions. If these initiatives are successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local
governments of various taxes upon internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all online competitors and decrease our future sales.

In addition, certain states and local jurisdictions have attempted to collect sales and use tax from businesses without an obvious physical
presence in that state but with customers located in that state. The successful assertion by one or more states that we should collect sales, use or other taxes on sales in states for which we do not currently collect taxes could raise substantial
tax liabilities, decrease our ability to compete and otherwise harm our business.

System interruption and the lack of
integration and redundancy in these systems and infrastructures may adversely affect our ability to operate websites, process and fulfill transactions, respond to customer inquiries and generally maintain cost-efficient operations.

Our success depends, in part, on our ability to maintain the integrity of our systems and infrastructures, including
websites, information and related systems, call centers and fulfillment facilities. We may experience occasional system interruptions that make some or all systems or data unavailable or prevent our businesses from efficiently providing services or
fulfilling orders. We also rely on affiliate and third-party computer systems, broadband and other communications systems and service providers in connection with the provision of services generally, as well as to facilitate, process and fulfill
transactions. Any interruptions, outages or delays in our systems and infrastructures, our businesses, our affiliates and/or third parties, or deterioration in the performance of these systems and infrastructures, could impair the ability of our
businesses to provide services, fulfill orders and/or process transactions. Fire, flood, power loss, telecommunications failure, hurricanes, tornadoes, earthquakes, acts of war or terrorism, acts of God and similar events or disruptions may damage
or interrupt computer, broadband or other communications systems and infrastructures at any time. Any of these events could cause system interruption, delays and loss of critical data, and could prevent our businesses from providing services,
fulfilling orders and/or processing transactions. While we have backup systems for certain aspects of our operations, these systems are not fully redundant and disaster recovery planning is not sufficient for all eventualities. In addition, we may
not have adequate insurance coverage to compensate for losses from a major interruption.

Our business is subject to
online security risks, including security breaches and identity theft.

To succeed, we must be able to provide for
secure transmission of confidential information over public networks. Our failure, and/or the failure by the various third party vendors and service providers with which we do business, to comply with applicable privacy policies or federal, state or
similar international laws and regulations or any compromise of security that results in the unauthorized release of personally identifiable information or other user data could damage the reputation of these businesses, discourage potential users
from trying our products and services and/or result in fines and/or proceedings by governmental agencies and/or consumers, one or all of which could adversely affect our business, financial condition and results of operations. Any penetration of
network security or other misappropriation or misuse of personal consumer information could cause interruptions in the operations of our businesses and subject us to increased costs, litigation and other liabilities. Security breaches could also
significantly damage our reputation with consumers and third parties with whom we do business. We may be required to expend significant capital and other resources to protect against and remedy any potential or existing security breaches and their
consequences. We also face risks associated with security breaches affecting third parties with which we are affiliated or otherwise conduct business online.



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The processing, storage, use and disclosure of personal data could give rise to
liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.

In the processing of consumer transactions, our businesses receive, transmit and store a large volume of personally identifiable information and other user data. The sharing, use, disclosure and
protection of this information are governed by the privacy and data security policies maintained by us and our businesses. Moreover, there are federal, state and international laws regarding privacy and the storing, sharing, use, disclosure and
protection of personally identifiable information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations in numerous jurisdictions around the world, the intent of which is to protect
the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy
policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations.

We may fail to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of
third parties.

We regard our intellectual property rights, including patents, service marks, trademarks and domain
names, copyrights, trade secrets and similar intellectual property (as applicable), as critical to our success. Our businesses also rely heavily upon software codes, informational databases and other components that make up their products and
services.

From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including
claims of alleged infringement of the trademarks, copyrights, patents and other intellectual property rights of third parties. In addition, litigation may be necessary in the future to enforce our intellectual property rights, protect trade secrets
or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could
adversely affect our business, financial condition and results of operations. Patent litigation tends to be particularly protracted and expensive. Our failure to protect our intellectual property rights in a meaningful manner or challenges to
related contractual rights could result in erosion of brand names and limit our ability to control marketing on or through the internet using our various domain names or otherwise, which could adversely affect our business, financial condition and
results of operations.

Risks Related to Our Common Stock

The stockholders rights plan adopted by the Board of Directors in December 2008 may inhibit takeovers that would otherwise be beneficial to stockholders.

In the fourth quarter of 2008, our Board of Directors approved the creation of a Series A Junior Participating Preferred Stock, adopted a
stockholders rights plan and declared a dividend of one right for each outstanding share of common stock held by our stockholders. Initially, these rights, which will trade with the shares of our common stock, will not be exercisable. Under
the rights plan, these rights will be exercisable if a person or group acquires or commences a tender or exchange offer for 15% or more of our common stock (except for certain grandfathered persons to which higher thresholds apply). If the rights
become exercisable, each right will permit the holder, other than the acquiring person, to purchase from us shares of common stock at a 50% discount to the then prevailing market price. As a result, the rights will cause substantial
dilution to a person or group that becomes an acquiring person on terms not approved by our Board of Directors. The existence of these rights may prevent, discourage or delay an acquisition of us, even if such acquisition would be
beneficial to our stockholders.



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The market price and trading volume of our common stock may be volatile and may face
negative pressure.

Our stock price has experienced, and could continue to experience in the future, substantial
volatility as a result of many factors, including persistent adverse macroeconomic conditions, broad market fluctuations and public perception of the prospects for the retail industry. Our failure to meet market expectations would also likely result
in a decline in the market price of our stock. These and other factors may result in short-term or long-term negative pressure on the value of our common stock.

We do not intend to pay dividends for the foreseeable future.

We
have never paid any cash dividends and do not anticipate paying any cash dividends in the foreseeable future. Additionally, under the terms of our credit facility and senior notes, the payment of cash dividends is subject to certain restrictions.

Risks Related to Our Spin-Off from IAC

The tax sharing agreement with IAC restricts our ability to enter into certain transactions that might be advantageous to us and our stockholders.

In particular, the tax sharing agreement limits our ability to repurchase equity securities, dispose of certain assets or engage in mergers
and acquisitions. In addition, the tax sharing agreement generally provides that each Spinco will have to indemnify IAC and the other Spincos for any taxes resulting from the spin-off of such Spinco (and any related interest, penalties, legal and
professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the extent such amounts result from (i) any act or failure to act by such Spinco described in the covenants in the tax sharing
agreement, (ii) any acquisition of equity securities or assets of such Spinco or a member of its group, and (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents
or in the documents relating to the IRS private letter ruling and/or tax opinions.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not applicable.



|ITEM 2. | PROPERTIES
|------- | ----------

HSNi owns its
corporate headquarters in St. Petersburg, Florida, which consist of approximately 600,000 square feet of office space and include executive offices, television studios, showrooms, broadcast facilities and administrative offices for HSN. HSN leases
the HSN fulfillment centers in Piney Flats, Tennessee, Fontana, California and Roanoke, Virginia, as well as three retail stores and other properties in various locations in the United States for administrative offices and data centers pursuant to
leases that expire in 2010 through 2015. Cornerstone owns an office and storage facility in Franconia, New Hampshire. Otherwise, Cornerstone leases its properties, consisting of administrative offices, retail outlets and fulfillment centers in West
Chester, Ohio, as well as 23 retail stores and outlets in various locations throughout the United States, all pursuant to leases with expiration dates ranging from 2010 to 2020.

HSNi believes that the duration of each lease is adequate and does not anticipate any future problems renewing or obtaining suitable leases
for its principal properties. HSNi believes that its principal properties, whether owned or leased, are currently adequate for the purposes for which they are used and are suitably maintained for these purposes. From time to time HSNi considers
various alternatives related to its long term facilities needs. While HSNi management believes existing facilities are adequate to meet its short term needs, it may become necessary to lease or acquire additional or alternative space to accommodate
future growth.



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|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

From
time to time, we are involved in various legal matters arising out of our operations. These matters may relate to claims involving property, personal injury, contract, intellectual property, sales tax and other claims. At March 4, 2010, we are
not a party to any legal proceedings that are reasonably expected to have a material adverse effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty
and an unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial condition or cash flows.



|ITEM 4. | RESERVED
|------- | --------



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

Market Information

Effective August 12, 2008, our shares of common stock began trading on The NASDAQ Global Select Market under the symbol HSNI. Prior to August 12, 2008, our common stock was not publicly traded. The table below sets forth the high
and low per share sales prices of HSNis common stock on The NASDAQ Global Select Market beginning August 12, 2008 and through December 31, 2009.



|                                          |  |             |       |     |   |      
|----------------------------------------- |  | ----------- | ----- | --- | - | -----
|                                          |  | Sales Price
|Fiscal 2009                               |  | High        |       | Low
|Fourth Quarter                            |  | $           | 20.90 |     | $ | 13.99
|Third Quarter                             |  | $           | 16.60 |     | $ | 8.25 
|Second Quarter                            |  | $           | 12.09 |     | $ | 4.83 
|First Quarter                             |  | $           | 7.55  |     | $ | 3.33 
|                                         
|Fiscal 2008                              
|Fourth Quarter                            |  | $           | 12.49 |     | $ | 1.40 
|Third Quarter (beginning August 12, 2008) |  | $           | 16.54 |     | $ | 9.55 

Holders

As of March 1, 2010, there were 2,049 stockholders of record of our common stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are not able to estimate the total number of beneficial stockholders represented by these record holders.

Dividends

We have never paid any cash dividends and do not anticipate
paying any cash dividends in the foreseeable future. Instead we intend to retain any future earnings for reinvestment. Additionally, under the terms of our credit facility and senior notes, the payment of cash dividends is subject to certain
restrictions. Furthermore, any determination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our operating results, financial condition and capital requirements, general business conditions and such
other factors that the Board of Directors considers relevant.



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Performance Graph

The graph depicted below compares the performance of our common stock with the cumulative total return on the S&P 500 Retailing Index and the Russell 2000 Index from August 12, 2008, the first
day of trading of the Companys common stock after the spin-off through December 31, 2009, the last day of our fiscal year.

LOGO



|                        |  |           |  |           |  |            |  |           |  |           |  |           |  |           
|----------------------- |  | --------- |  | --------- |  | ---------- |  | --------- |  | --------- |  | --------- |  | ----------
|                        |  | 8/12/2008 |  | 9/30/2009 |  | 12/31/2008 |  | 3/31/2009 |  | 6/30/2009 |  | 9/30/2009 |  | 12/31/2009
|HSN, Inc.               |  | 100.00    |  | 101.01    |  | 66.70      |  | 47.16     |  | 96.97     |  | 149.36    |  | 185.23    
|S&P 500 Retailing Index |  | 100.00    |  | 103.36    |  | 80.07      |  | 84.66     |  | 93.38     |  | 109.73    |  | 119.94    
|Russell 2000 Index      |  | 100.00    |  | 95.36     |  | 70.45      |  | 59.92     |  | 72.31     |  | 86.25     |  | 89.60     

Issuer Purchases of Equity
Security

No purchases of our equity securities were made by or on behalf of us in fiscal 2009.



19



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following table presents selected consolidated financial data for HSNi. The information in this table is not necessarily indicative of future performance and should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations, and our audited consolidated financial statements and related notes included herein. Our consolidated financial statements present our results of operations, financial position,
shareholders equity and comprehensive income and cash flows on a combined basis up through the spin-off on August 20, 2008, and on a consolidated basis thereafter. However, this financial information does not necessarily reflect what the
historical financial position and results of operations of HSNi would have been had HSNi been a stand-alone company during the periods presented prior to the spin-off.

For information about the shares used in computing earnings per share, see Note 10 of Notes to Consolidated Financial Statements.



|                                                             |  |                                       |           |      |   |            |      |  |      |           |             |   |           |  |   |          
|------------------------------------------------------------ |  | ------------------------------------- | --------- | ---- | - | ---------- | ---- |  | ---- | --------- | ----------- | - | --------- |  | - | ---------
|                                                             |  | Year Ended December 31,              
|                                                             |  | 2009                                  |           | 2008 |   |            | 2007 |  | 2006 |           | 2005 (1)   
|                                                             |  |                                       |           |      |   |            |      |  |      |           | (unaudited)
|                                                             |  | (In thousands, except per share data)
|Statement of Operations Data:                                |  |                                       |           |      |   |            |      |  |      |           |             |   |           |  |   |          
|Net sales                                                    |  | $                                     | 2,749,609 |      | $ | 2,823,593  |      |  | $    | 2,908,242 |             | $ | 2,877,954 |  | $ | 2,670,951
|Asset impairments (2)                                        |  |                                       |          |      |   | 3,186,650  |      |  |      |          |             |   |          |  |   |         
|Operating income (loss)                                      |  |                                       | 155,654   |      |   | (3,102,311 | )    |  |      | 169,791   |             |   | 213,196   |  |   | 195,152  
|Income (loss) from continuing operations                     |  |                                       | 72,578    |      |   | (2,387,478 | )    |  |      | 105,233   |             |   | 133,532   |  |   | 127,077  
|Net income (loss) (3)                                        |  |                                       | 72,488    |      |   | (2,390,888 | )    |  |      | 164,804   |             |   | 122,817   |  |   | 223,221  
|                                                             |  |                                       |           |      |  
|Income (loss) from continuing operations per share:          |  |                                       |           |      |   |            |      |  |      |           |             |   |           |  |   |          
|Basic                                                        |  | $                                     | 1.29      |      | $ | (42.48     | )    |  | $    | 1.87      |             | $ | 2.38      |  | $ | 2.26     
|Diluted                                                      |  | $                                     | 1.27      |      | $ | (42.48     | )    |  | $    | 1.86      |             | $ | 2.36      |  | $ | 2.24     
|Net income (loss) per share:                                 |  |                                       |           |      |   |            |      |  |      |           |             |   |           |  |   |          
|Basic                                                        |  | $                                     | 1.29      |      | $ | (42.54     | )    |  | $    | 2.93      |             | $ | 2.19      |  | $ | 3.97     
|Diluted                                                      |  | $                                     | 1.26      |      | $ | (42.54     | )    |  | $    | 2.91      |             | $ | 2.17      |  | $ | 3.94     
|Shares used in computing earnings per share:                 |  |                                       |           |      |   |            |      |  |      |           |             |   |           |  |   |          
|Basic                                                        |  |                                       | 56,383    |      |   | 56,208     |      |  |      | 56,206    |             |   | 56,206    |  |   | 56,206   
|Diluted                                                      |  |                                       | 57,330    |      |   | 56,208     |      |  |      | 56,649    |             |   | 56,649    |  |   | 56,649   
|Dividends per common share                                   |  |                                       |          |      |   |           |      |  |      |          |             |   |          |  |   |         
|                                                             |  |                                       |           |      |  
|Balance Sheet Data (end of period):                          |  |                                       |           |      |   |            |      |  |      |           |             |   |           |  |   |          
|Working capital                                              |  | $                                     | 332,964   |      | $ | 306,354    |      |  | $    | 147,185   |             | $ | 340,592   |  | $ | 320,991  
|Total assets                                                 |  |                                       | 1,218,650 |      |   | 1,152,457  |      |  |      | 4,220,631 |             |   | 4,458,167 |  |   | 4,527,376
|Total debt, including current maturities                     |  |                                       | 338,722   |      |   | 408,528    |      |  |      |          |             |   |          |  |   |         
|Other long-term liabilities, including deferred income taxes |  |                                       | 90,372    |      |   | 96,392     |      |  |      | 828,902   |             |   | 846,280   |  |   | 845,840  



|(1) | Includes the results of Cornerstone Brands, Inc. since its acquisition on April 1, 2005.
|--- | ----------------------------------------------------------------------------------------

|(2) | See Note 3 of Notes to Consolidated Financial Statements for discussion of the goodwill and intangible assets impairment charges.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(3) | See Note 7 of Notes to Consolidated Financial Statements for discussion of the sale of HSE which is included in discontinued operations and net income.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



20



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Spin-Off

HSNi was
incorporated in Delaware in May 2008 in connection with the spin-off of several businesses previously owned by IAC/InterActiveCorp, or IAC. The spin-off from IAC occurred after the close of The NASDAQ Stock Market on August 20, 2008 and
occurred concurrent with the spin-offs from IAC of Interval Leisure Group, Inc., Ticketmaster Entertainment, Inc., and Tree.com, Inc. In this Annual Report, we refer to the separation transaction as the spin-off and each of these
companies as Spincos. Effective August 21, 2008, HSNis shares began trading on The NASDAQ Global Select Market under the symbol HSNI.

HSNi was formed to hold HSN and Cornerstone, the businesses that previously comprised most of IACs retailing segment. Prior to the spin-off, HSNi was a wholly owned subsidiary of IAC and did not
have any material assets or liabilities, nor did HSNi engage in any business or other activities and, other than in connection with the spin-off, did not acquire or incur any material assets or liabilities. HSN primarily consists of the HSN
television network and HSN.com, and Cornerstone includes the Cornerstone Brands portfolio of leading print catalogs, related websites and a limited number of retail and outlet stores. The businesses operated by HSNi following the spin-off are
referred to herein as the HSNi Businesses. HSNi also includes the entity classified as discontinued operations in the Management Overview under the heading Discontinued Operations.

Basis of Presentation

The
consolidated financial statements present our results of operations, financial position, shareholders equity and comprehensive income and cash flows on a combined basis up through the spin-off on August 20, 2008, and on a consolidated
basis thereafter. We prepared these financial statements relating to periods prior to the spin-off on a combined basis because they excluded certain investments and assets that were owned, either directly or indirectly, by legal entities that
comprise the HSNi Businesses. The ownership of these investments and assets were retained by IAC after the spin-off. The historical combined financial statements of HSNi and its subsidiaries reflect the contribution or other transfer to HSNi of all
of the subsidiaries and assets and the assumption by HSNi of all of the liabilities relating to the HSNi Businesses in connection with the spin-off and the allocation to HSNi of certain IAC corporate expenses relating to the HSNi Businesses.
Accordingly, the historical combined financial statements of HSNi reflect the historical financial position, results of operations and cash flows of the HSNi Businesses since their respective dates of acquisition by IAC, based on the historical
consolidated financial statements and accounting records of IAC and using the historical results of operations and historical bases of the assets and liabilities of the HSNi Businesses with the exception of accounting for income taxes. For purposes
of these financial statements, income taxes have been principally computed for HSNi on an as if stand-alone, separate tax return basis.

In the opinion of HSNis management, the assumptions underlying the consolidated statements are reasonable. However, this financial information does not necessarily reflect what the historical
financial position, results of operations and cash flows of HSNi would have been had HSNi been a stand-alone company during the periods presented prior to the spin-off.

Management Overview

HSNi markets and sells a wide range of third party and
private label merchandise directly to consumers through (i) television home shopping programming broadcast on the HSN television network; (ii) catalogs, which consist primarily of the Cornerstone portfolio of leading print catalogs which
includes Frontgate, Garnet Hill, Ballard Designs, Improvements, Smith+Noble, The Territory Ahead and TravelSmith; (iii) websites, which consist primarily of HSN.com and the seven branded websites operated by Cornerstone; (iv) retail
stores; and (v) mobile handheld devices. HSNis television home shopping business and related internet commerce is referred to herein as HSN and all catalog operations, including related internet commerce and retail stores, are
collectively referred to herein as Cornerstone.



21



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Sources of Revenue

HSN revenue includes merchandise sales originating from the live television broadcast of its programming 24 hours per day, seven
days a week, the HSN.com website and through mobile handheld devices. HSN also sells merchandise through its Autoship program under which customers receive scheduled merchandise shipments according to a pre-determined calendar.

Cornerstone sells private label and third party merchandise through its assortment of catalogs, internet sites and retail
stores. Cornerstone brands consist of Frontgate, Ballard Designs, Garnet Hill, Smith+Noble, The Territory Ahead, TravelSmith and Improvements.

Products

HSNi sells a wide array of merchandise across its various
channels of distribution. HSN merchandise categories primarily consist of jewelry, apparel & accessories, health & beauty and home & other (including housewares, home fashions, electronics, fitness and other). Cornerstone
merchandise categories generally consist of home furnishings (including indoor/outdoor furniture, window treatments and other home-related goods) and apparel & accessories.

HSNi management believes that merchandise diversification, combined with an interactive multi-channel distribution strategy, appeals to a
broader segment of potential customers and is an important part of its overall business strategy. HSNi is continually developing new merchandise offerings from existing, potential and future suppliers, to supplement its existing product lines.

Shut-Down of Americas Store

In April 2007, largely as a result of increasing cable and satellite distribution costs, HSN ceased operating Americas Store, a home shopping network that reached an average of 14.3 million
households during 2006. Americas Store sales were $15.9 million in 2007.

Discontinued Operations

On June 19, 2007, HSNi sold Home Shopping Europe GMbH & Co. KG, and its affiliated station HSE24
(HSE). Accordingly, HSE and HSNis other international subsidiaries are presented as a discontinued operation in the statement of operations. HSNi sold HSE for approximately $216.5 million, which resulted in a pre-tax gain of
$45.7 million and an after-tax gain of $30.6 million. The pre-tax gain included $22.8 million of foreign currency translation gains that were recognized into earnings at the time of the sale.

Economic and Other Trends

During 2009, HSNis business was impacted by the recession. Cornerstones business was particularly challenged, reporting a year-over-year net sales decline of 14%; although top line sales
improved during the fourth quarter with a sales decline of 2%. HSNs net sales grew 3% during the year, supported by fourth quarter sales growth of 12%.

Throughout the recession, HSNi has taken steps to reduce the impact of the U.S. economic environment on its results in the form of cost cutting initiatives, working capital improvements and organizational
changes. The benefits of several of these initiatives have been realized during 2009 and are evident in the form of lower operating costs and improved gross margins and cash flow.

Going forward, we believe that the recessionary environment will continue to impact HSNi. We believe that consumers will continue to
approach discretionary spending cautiously; in particular, we believe that the



22



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unemployment rate in the U.S. will need to improve before consumers discretionary spending increases in any significant fashion. Throughout the duration of the recession, we believe
that HSNis opportunities for sales growth will be realized through market share gains rather than an expansion of consumers spending habits.

Therefore, we continue to rely upon our business strategies of product assortment, innovation and brand development to grow market share. Concurrently, we will continue to manage our expenses and working
capital judiciously.

Results of Operations

Net Sales



|                |  |                         |           |         |     |    |      |   |           |  |     |      |  |   |          
|--------------- |  | ----------------------- | --------- | ------- | --- | -- | ---- | - | --------- |  | --- | ---- |  | - | ---------
|                |  | Year Ended December 31,
|                |  | 2009                    |           | %Change |     |    | 2008 |   | %Change   |  |     | 2007
|                |  | (Dollars in thousands) 
|HSN             |  | $                       | 2,007,897 |         | 3   | %  |      | $ | 1,956,871 |  | 3   | %    |  | $ | 1,892,582
|Cornerstone     |  |                         | 741,712   |         | (14 | )% |      |   | 866,722   |  | (15 | )%   |  |   | 1,015,660
|                |  |                         |           |         |     |    |      |   |           |  |     |      |  |   |          
|Total net sales |  | $                       | 2,749,609 |         | (3  | )% |      | $ | 2,823,593 |  | (3  | )%   |  | $ | 2,908,242
|                |  |                         |           |         |     |    |      |   |           |  |     |      |  |   |          

Net sales primarily relate to the sale of merchandise
and are reduced by incentive discounts and actual and estimated sales returns. Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of
ownership, which is generally on the date of shipment. HSNis sales policy allows customers to return virtually all merchandise for a full refund or exchange, subject to pre-established time restrictions and, in some cases, restocking fees.

HSNi net sales in 2009 decreased 3% or $74.0 million as compared to the same period in 2008 due to a 14% decline at
Cornerstone, partially offset by growth of 3% at HSN. Internet sales continued to grow in 2009 representing 37.4% of HSNi net sales as compared to 35.9% in the prior year. The number of units shipped in 2009 decreased less than 1% to
50.7 million from 50.9 million, and the average price point decreased to $60.49 from $61.99 in the prior year.

HSNi
net sales in 2008 decreased 3% or $84.6 million as compared to the same period in 2007 due to a 15% decline at Cornerstone, partially offset by growth of 3% at HSN. Internet sales grew in 2008 representing 35.9% of HSNi net sales as compared to
33.3% in the prior year. The number of units shipped in 2008 decreased 5% to 50.9 million from 53.3 million; however, this was offset by the 2% increase in the average price point to $61.99 as compared to the prior year.

HSN

HSN net sales increased 3% to $2.0 billion in 2009 as compared to the prior year. HSN.com net sales grew 9% and represented 30% of HSNs net sales. The growth in net sales is attributable to the 5% increase in units shipped to
38.8 million from 36.9 million, offset by the 2% decrease in average price point to $58.63 from $60.13. The decrease in the average price point is primarily a result of changes in merchandise offerings, sales of key items at lower price
points and product mix. HSN manages its product mix to provide a balance between satisfying existing customer demand, generating interest from potential viewers and customers, providing new merchandise or values to its viewership and maximizing
airtime and internet efficiency.

HSN net sales increased 3% to $2.0 billion in 2008 as compared to the prior year,
highlighted by HSN.com net sales which increased 16% and represented 28% of HSNs net sales. HSNs 12-month active customer file increased 3% from the prior year. The increase in net sales was attributable to the increase in the average
price point to $60.13 from $57.29, offset by the 2% decrease in units shipped to 36.9 million from 37.6 million. The



23



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increase in the average price point was primarily a result of a shift in product mix to the home & other division, particularly electronics, housewares, health and fitness. These
merchandise categories generally carry a higher average price point than fashion and beauty merchandise offerings.

Divisional
product mix at HSN is provided in the table below:



|                                |  |                         |   |  |       |   |  |       |  
|------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                |  | Year Ended December 31, |  
|                                |  | 2009                    |   |  | 2008  |   |  | 2007  |  
|Jewelry                         |  | 15.2                    | % |  | 16.2  | % |  | 17.9  | %
|Fashion (apparel & accessories) |  | 11.5                    | % |  | 12.7  | % |  | 13.4  | %
|Health & beauty                 |  | 18.5                    | % |  | 19.0  | % |  | 19.2  | %
|Home & other                    |  | 54.8                    | % |  | 52.1  | % |  | 49.5  | %
|                                |  |                         |   |  |       |   |  |       |  
|Total                           |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|                                |  |                         |   |  |       |   |  |       |  

Cornerstone

Cornerstones net sales for 2009 decreased 14% or $125.0 million from the prior year. The decrease was primarily the result of continued softness in consumer demand, particularly in the first
half of the year, for luxury home furnishings, outdoor products and apparel. The decrease is also attributable to the 24% strategic reduction in catalog circulation. The average price point and the number of units shipped decreased less than 1% and
15%, respectively.

Net sales for 2008 decreased 15% or $148.9 million from the prior year. The decrease was primarily
the result of slowing demand for Cornerstones merchandise caused by the significant deterioration of the U.S. economy, particularly its effect on the housing and apparel markets. As a result, average price points and the number of units
shipped decreased 3% and 11%, respectively.

Cost of Sales and Gross Profit

Cost of sales consists primarily of the cost of products sold, shipping and handling costs and compensation and other employee-related costs
(including stock-based compensation) for personnel engaged in warehouse functions. Cost of products sold includes merchandise cost, inbound freight and duties and, in the case of HSN, certain allocable general and administrative costs, including
certain warehouse costs.



|                                |  |                         |         |   |         |        |      |   |         |         |  |          |  |   |           |  
|------------------------------- |  | ----------------------- | ------- | - | ------- | ------ | ---- | - | ------- | ------- |  | -------- |  | - | --------- | -
|                                |  | Year Ended December 31, |        
|                                |  | 2009                    |         |   | %Change |        | 2008 |   |         | %Change |  | 2007     | 
|                                |  | (Dollars in thousands)  |        
|Gross profit:                   |  |                         |         |  
|HSN                             |  | $                       | 678,717 |   |         | 7%     |      | $ | 633,186 |         |  | (1)%     |  | $ | 640,915   |  
|HSN gross profit margin         |  |                         | 33.8    | % |         | 145 bp |      |   | 32.4    | %       |  | (151 bp) |  |   | 33.9      | %
|Cornerstone                     |  | $                       | 302,597 |   |         | (14)%  |      | $ | 352,244 |         |  | (21)%    |  | $ | 447,279   |  
|Cornerstone gross profit margin |  |                         | 40.8    | % |         | 16 bp  |      |   | 40.6    | %       |  | (340 bp) |  |   | 44.0      | %
|HSNi                            |  | $                       | 981,314 |   |         | (0)%   |      | $ | 985,430 |         |  | (9)%     |  | $ | 1,088,194 |  
|HSNi gross profit margin        |  |                         | 35.7    | % |         | 79 bp  |      |   | 34.9    | %       |  | (252 bp) |  |   | 37.4      | %



bp = basis points

HSN

HSN gross profit margin was 33.8% in 2009, a 145 bp increase from the prior year. The improvement in the gross profit
margin was primarily attributable to improved product margins due to less promotional activity,



24



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lower procurement costs and warehouse productivity improvements. Gross profit margin also benefited from a reduction in inventory reserves due to lower aged inventory levels. Continued efforts on
aligning inventory purchases with sales demand and reducing aged inventory resulted in an 11% decrease in inventory, or $24.9 million.

HSN gross profit margin was 32.4% in 2008, a 151 bp decrease from 2007. The decline in the gross profit margin was primarily the result of the product mix shift (principally from a product mix shift from jewelry and fashion to electronics,
housewares, health and fitness), increased promotional activity in fashion and, to a lesser extent, jewelry and increased shipping and handling costs. The increase in shipping and handling costs was due to the product mix shift, fuel and other
surcharges and annual rate increases. In a conscious effort to grow and maintain customer share in an increasingly competitive marketplace, HSN did not pass along all of these cost increases to its customers. In August 2008, HSN selectively
implemented price increases in shipping and handling charges to help offset a portion of the cost increases.

Cornerstone

Gross profit margin for Cornerstone was 40.8% in 2009 as compared to 40.6% in the previous
year. The increase in the gross profit margin was principally due to lower shipping and fulfillment costs and improved return rates, offset slightly by promotional pricing in the first half of the year. Continued focus on cash flow resulted in a 22%
or $25.1 million reduction in inventories compared to the prior year.

Gross profit margin for Cornerstone was 40.6% in 2008
as compared to 44.0% in the previous year. The decrease in the gross profit margin was principally due to an increase in promotional pricing and clearance activity and an increase in net shipping costs. Shipping and handling costs grew at a faster
rate than revenue primarily due to increased fuel surcharges charged by Cornerstones shipping partners and a shift in product mix to heavier merchandise.

Selling and Marketing Expense



|                                         |  |                         |         |   |         |          |      |   |         |         |  |         |  |   |         |  
|---------------------------------------- |  | ----------------------- | ------- | - | ------- | -------- | ---- | - | ------- | ------- |  | ------- |  | - | ------- | -
|                                         |  | Year Ended December 31, |        
|                                         |  | 2009                    |         |   | %Change |          | 2008 |   |         | %Change |  | 2007    | 
|                                         |  | (Dollars in thousands)  |        
|HSN                                      |  | $                       | 275,296 |   |         | 2%       |      | $ | 270,016 |         |  | (1)%    |  | $ | 272,896 |  
|As a percentage of HSN net sales         |  |                         | 14      | % |         | (9 bp)   |      |   | 14      | %       |  | (62 bp) |  |   | 14      | %
|Cornerstone                              |  | $                       | 232,273 |   |         | (22)%    |      | $ | 297,289 |         |  | (8)%    |  | $ | 323,015 |  
|As a percentage of Cornerstone net sales |  |                         | 31      | % |         | (298 bp) |      |   | 34      | %       |  | 250 bp  |  |   | 32      | %
|HSNi                                     |  | $                       | 507,569 |   |         | (11)%    |      | $ | 567,305 |         |  | (5)%    |  | $ | 595,911 |  
|As a percentage of HSNi net sales        |  |                         | 18      | % |         | (163 bp) |      |   | 20      | %       |  | (40 bp) |  |   | 20      | %

Selling and marketing
expense consists primarily of advertising and promotional expenditures, compensation and other employee-related costs (including stock-based compensation) for personnel engaged in customer service, sales and merchandising functions and on-air
distribution costs. Advertising and promotional expenditures primarily include catalog production and distribution costs and online marketing, including fees paid to search engines and third party distribution partners.

HSNis selling and marketing expense in 2009 decreased 11% or $59.7 million from 2008. This decrease is primarily due to a $54.9
million decline in catalog costs associated with a 24% planned reduction in catalog circulation. The decrease is also attributable to a $4.9 million decline in compensation and other employee-related costs in 2009 primarily due to headcount
reductions at Cornerstone. These decreases within selling and marketing expense were partially offset by an increase in on-air distribution costs. The increase in on-air distribution costs was due to a $5.0 million reduction of a liability in 2008
resulting from settlement of certain key contract conditions with a vendor.



25



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HSNis selling and marketing expense in 2008 decreased 5% or $28.6 million from
2007. This decrease was primarily due to a $29.8 million reduction in catalog costs at Cornerstone and an $11.1 million decrease in on-air distribution costs at HSN, partially offset by an increase of $12.5 million in compensation and other
employee-related costs. Catalog costs decreased primarily due to a 19% planned reduction in catalog circulation. The decrease in on-air distribution costs was primarily due to the $5.0 million adjustment to a previously recorded accrued liability
discussed above, elimination of distribution costs associated with Americas Store and other miscellaneous items. The increase in compensation and other employee-related costs in 2008 was primarily due to headcount additions and a $0.9 million
increase in stock-based compensation expense due to the modification of existing stock-based compensation awards in connection with the spin-off.

General and Administrative Expense



|                                         |  |                         |         |   |         |         |      |   |         |         |  |       |  |   |         |  
|---------------------------------------- |  | ----------------------- | ------- | - | ------- | ------- | ---- | - | ------- | ------- |  | ----- |  | - | ------- | -
|                                         |  | Year Ended December 31, |        
|                                         |  | 2009                    |         |   | %Change |         | 2008 |   |         | %Change |  | 2007  | 
|                                         |  | (Dollars in thousands)  |        
|HSN                                      |  | $                       | 159,869 |   |         | 1%      |      | $ | 158,218 |         |  | 12%   |  | $ | 141,379 |  
|As a percentage of HSN net sales         |  |                         | 8       | % |         | (12 bp) |      |   | 8       | %       |  | 62 bp |  |   | 7       | %
|Cornerstone                              |  | $                       | 62,595  |   |         | 0%      |      | $ | 62,426  |         |  | (12)% |  | $ | 70,576  |  
|As a percentage of Cornerstone net sales |  |                         | 8       | % |         | 124 bp  |      |   | 7       | %       |  | 25 bp |  |   | 7       | %
|HSNi                                     |  | $                       | 222,464 |   |         | 1%      |      | $ | 220,644 |         |  | 4%    |  | $ | 211,955 |  
|As a percentage of HSNi net sales        |  |                         | 8       | % |         | 28 bp   |      |   | 8       | %       |  | 53 bp |  |   | 7       | %

General and administrative
expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, human resources, information technology and executive management functions, bad debts,
facilities costs and fees for professional services.

HSNis general and administrative expense in 2009 increased less
than 1% or $1.8 million compared to the prior year. The increase was driven by an increase in compensation and other employee-related costs primarily due to performance driven incentives, offset by an $8.2 million decrease in stock-based
compensation expense. The decrease in stock-based compensation expense is primarily due to the charge recognized in 2008 related to the modification of existing stock-based compensation awards in connection with the spin-off.

HSNis general and administrative expense in 2008 increased 4% or $8.7 million compared to the prior year. This increase was
primarily due to a $6.6 million increase in stock-based compensation expense associated with the modification of existing stock-based compensation awards in connection with the spin-off, an increase in personnel related expenses at HSN and a $5.2
million increase in bad debt expense, partially offset by other cost reductions. HSN increased its bad debt provision in anticipation of write-offs associated with its Flexpay extended payment program. Flexpay, which is offered exclusively through
HSN, allows customers to pay for merchandise in interest free monthly payments over a two to six month period.

Production
and Programming Expense



|                                   |  |                         |        |   |         |         |      |   |        |         |  |        |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | - | ------- | ------- | ---- | - | ------ | ------- |  | ------ |  | - | ------ | -
|                                   |  | Year Ended December 31, |       
|                                   |  | 2009                    |        |   | %Change |         | 2008 |   |        | %Change |  | 2007   | 
|                                   |  | (Dollars in thousands)  |       
|Production and programming expense |  | $                       | 57,090 |   |         | (5)%    |      | $ | 60,217 |         |  | 2%     |  | $ | 59,051 |  
|As a percentage of HSN net sales   |  |                         | 3      | % |         | (23 bp) |      |   | 3      | %       |  | (4 bp) |  |   | 3      | %

Production and programming
expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in production and programming at HSN. Expenses associated with on-air distribution of HSN, including expenses
relating to pay television operators, are included in selling and marketing expense.



26



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Production and programming expense for 2009 decreased 5% to $57.1 million compared to $60.2
million in the prior year. The $3.1 million decline in production and programming costs is primarily due to a decrease in labor costs due to lower headcount.

Production and programming expense for 2008 increased 2% to $60.2 million compared to $59.1 million in the prior year. The increase in production and programming costs was the result of a $5.3 million
increase in labor costs due to higher rates, offset by a $4.2 million decrease in satellite costs. The decrease in satellite costs compared to 2007 was due to a termination fee assessed in 2007 for a satellite contract cancellation as a result of
the shutdown of Americas Store in April 2007. In addition, monthly satellite fees assessed in 2008 were less than 2007 as a result of this termination.

Depreciation



|                                  |  |                         |        |   |         |      |      |   |        |         |  |       |      |  |   |        |  
|--------------------------------- |  | ----------------------- | ------ | - | ------- | ---- | ---- | - | ------ | ------- |  | ----- | ---- |  | - | ------ | -
|                                  |  | Year Ended December 31, |       
|                                  |  | 2009                    |        |   | %Change |      | 2008 |   |        | %Change |  |       | 2007 | 
|                                  |  | (Dollars in thousands)  |       
|HSN                               |  | $                       | 28,666 |   |         | 5%   |      | $ | 27,348 |         |  | 8     | %    |  | $ | 25,404 |  
|Cornerstone                       |  |                         | 9,309  |   |         | (8)% |      |   | 10,090 |         |  | 13    | %    |  |   | 8,959  |  
|                                  |  |                         |        |   |         |      |      |   |        |         |  |       |      |  |   |        |  
|HSNi                              |  | $                       | 37,975 |   |         | 1%   |      | $ | 37,438 |         |  | 9     | %    |  | $ | 34,363 |  
|                                  |  |                         |        |   |         |      |      |   |        |         |  |       |      |  |   |        |  
|As a percentage of HSNi net sales |  |                         | 1      | % |         | 6 bp |      |   | 1      | %       |  | 14 bp |      |  |   | 1      | %

Depreciation for 2009 and
2008 increased $0.5 million and $3.1 million, respectively, as compared to the respective prior year, primarily due to the incremental depreciation associated with recent capital expenditures, partially offset by certain fixed assets becoming fully
depreciated during the periods. The capital expenditures were primarily at HSN in 2009 and were for investments in equipment relating to high-definition television programming, campus renovations and other information technology and
broadcast-related investments. The capital expenditures in 2008 were also primarily at HSN and were for campus renovations, information technology and broadcast-related expenditures.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure and is defined in Note 6 of Notes to Consolidated Financial Statements.



|                                         |  |                         |         |   |         |        |      |   |         |         |  |          |  |   |         |  
|---------------------------------------- |  | ----------------------- | ------- | - | ------- | ------ | ---- | - | ------- | ------- |  | -------- |  | - | ------- | -
|                                         |  | Year Ended December 31, |        
|                                         |  | 2009                    |         |   | %Change |        | 2008 |   |         | %Change |  | 2007     | 
|                                         |  | (Dollars in thousands)  |        
|HSN                                      |  | $                       | 196,139 |   |         | 22%    |      | $ | 160,279 |         |  | (8)%     |  | $ | 174,397 |  
|As a percentage of HSN net sales         |  |                         | 10      | % |         | 158 bp |      |   | 8       | %       |  | (102 bp) |  |   | 9       | %
|Cornerstone                              |  | $                       | 9,998   |   |         | NM     |      | $ | (1,375  | )       |  | NM       |  | $ | 59,316  |  
|As a percentage of Cornerstone net sales |  |                         | 1       | % |         | 151 bp |      |   | 0       | %       |  | (600 bp) |  |   | 6       | %
|HSNi                                     |  | $                       | 206,137 |   |         | 30%    |      | $ | 158,904 |         |  | (32)%    |  | $ | 233,713 |  
|As a percentage of HSNi net sales        |  |                         | 7       | % |         | 187 bp |      |   | 6       | %       |  | (241 bp) |  |   | 8       | %

HSNis Adjusted
EBITDA in 2009 increased 30% or $47.2 million from 2008 primarily driven by an increase in productivity at Cornerstone from the reduced catalog circulation, resulting in a $54.9 million reduction in catalog costs. These cost reductions were
offset by an $8.9 million increase in HSNis compensation and other employee-related costs. Adjusted EBITDA margins for HSNi increased 187 basis points to 7.5% from 5.6% in the prior year. HSNs Adjusted EBITDA increased 22% or $35.9
million primarily due to the $45.5 million increase in gross profit, offset by a $10.5 million increase in compensation and other employee-related costs. Cornerstones Adjusted EBITDA increased $11.4 million primarily as a result of
productivity improvements from the 24% planned reduction in catalog circulation, offset by a $49.6 million decrease in gross profit.



27



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HSNis Adjusted EBITDA in 2008 decreased 32% or $74.8 million from 2007 primarily
due to a decrease in gross profit margins. Gross profit margins at HSN were adversely impacted by the product mix shift to lower gross margin products, primarily electronics and housewares, promotional activity and shipping and handling costs.
Adjusted EBITDA at Cornerstone decreased $60.7 million to a loss of $1.4 million, primarily as a result of a decrease in sales and gross margins in a highly promotional retail environment, partially offset by reduced costs associated with a 19%
planned reduction in catalog circulation.

Operating Income (Loss)



|                                         |  |                         |         |   |         |    |      |   |            |         |  |      |  |   |         |  
|---------------------------------------- |  | ----------------------- | ------- | - | ------- | -- | ---- | - | ---------- | ------- |  | ---- |  | - | ------- | -
|                                         |  | Year Ended December 31, |        
|                                         |  | 2009                    |         |   | %Change |    | 2008 |   |            | %Change |  | 2007 | 
|                                         |  | (Dollars in thousands)  |        
|HSN                                      |  | $                       | 157,233 |   |         | NM |      | $ | (2,332,789 | )       |  | NM   |  | $ | 135,298 |  
|As a percentage of HSN net sales         |  |                         | 8       | % |         | NM |      |   | (119       | )%      |  | NM   |  |   | 7       | %
|Cornerstone                              |  | $                       | (1,579  | ) |         | NM |      | $ | (769,522   | )       |  | NM   |  | $ | 34,493  |  
|As a percentage of Cornerstone net sales |  |                         | 0       | % |         | NM |      |   | (89        | )%      |  | NM   |  |   | 3       | %
|HSNi                                     |  | $                       | 155,654 |   |         | NM |      | $ | (3,102,311 | )       |  | NM   |  | $ | 169,791 |  
|As a percentage of HSNi net sales        |  |                         | 6       | % |         | NM |      |   | (110       | )%      |  | NM   |  |   | 6       | %

NM = not meaningful

HSNis operating income for 2009 was $155.7 million as compared to $3.1 billion of operating loss in 2008. The increase in operating
income is primarily attributable to the $3.2 billion in asset impairment charges at HSN and Cornerstone during 2008, a decrease in catalog costs at Cornerstone related to the 24% reduction in circulation, a $14.9 million decrease in amortization of
non-cash marketing and intangible assets, a $9.0 million reduction in stock-based compensation expense, offset by an $8.9 million increase in HSNis compensation and other employee-related costs.

In the second quarter of 2008, HSNi recorded impairment charges related to goodwill and indefinite-lived intangible assets of $300.0
million. These impairment charges were recorded at the Cornerstone reporting unit and were due, in part, to the significant deterioration in the macroeconomic environment for retailers, particularly in the home and apparel categories (which are
Cornerstones primary markets), the negative impact of this environment on Cornerstones performance and the related reduction in market valuations for retailers.

In the fourth quarter of 2008, due to the deepening of the recession, the continuation of the weak conditions in the retail consumer market
and a significant decline in our stock price, we recognized an additional $2.9 billion of asset impairment charges related to the write down of goodwill and intangible assets at our HSN and Cornerstone reporting units.

The decrease in amortization of intangible assets is due to the impairment of customer lists recognized in the fourth quarter of 2008 and
certain intangibles becoming fully amortized during 2008. The amortization of non-cash marketing referred to in this report consists of non-cash marketing and advertising secured by IAC from Universal Television as part of a transaction with Vivendi
Universal Entertainment, LLLP (VUE). The decrease in stock-based compensation expense as compared to the previous year is primarily due to the charge recognized in 2008 related to the modification of stock-based compensation awards in
connection with the spin-off.

HSNis operating loss for 2008 was $3.1 billion as compared to $169.8 million of operating
income in 2007. The decrease in operating income is primarily attributable to the $3.2 billion in asset impairment charges at HSN and Cornerstone during 2008, the decline in gross profit for the reasons discussed previously under the heading
Adjusted EBITDA, and the $8.1 million increase in stock-based compensation expense. Stock-based compensation expense increased $8.1 million compared to the previous year due to the modification of stock-based compensation awards in
connection with the spin-off.



28



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Other Income (Expense)



|                                  |  |                         |         |    |         |         |      |   |         |         |  |         |  |   |      |  
|--------------------------------- |  | ----------------------- | ------- | -- | ------- | ------- | ---- | - | ------- | ------- |  | ------- |  | - | ---- | -
|                                  |  | Year Ended December 31, |        
|                                  |  | 2009                    |         |    | %Change |         | 2008 |   |         | %Change |  | 2007    | 
|                                  |  | (Dollars in thousands)  |        
|Interest income                   |  | $                       | 343     |    |         | (29)%   |      | $ | 480     |         |  | 90%     |  | $ | 252  |  
|Interest expense                  |  |                         | (35,283 | )  |         | 115%    |      |   | (16,420 | )       |  | NM      |  |   |     |  
|Other income (expense)            |  |                         |        |    |         | NM      |      |   |        |         |  | NM      |  |   | (256 | )
|                                  |  |                         |         |    |         |         |      |   |         |         |  |         |  |   |      |  
|Other (expense) income, net       |  | $                       | (34,940 | )  |         | 119%    |      | $ | (15,940 | )       |  | NM      |  | $ | (4   | )
|                                  |  |                         |         |    |         |         |      |   |         |         |  |         |  |   |      |  
|As a percentage of HSNi net sales |  |                         | (1      | )% |         | (71 bp) |      |   | (1      | )%      |  | (56 bp) |  |   | 0    | %

Interest expense for the
years ended December 31, 2009 and 2008 primarily relate to the $150 million five-year term loan and the $240 million of 11.25% senior notes which were issued in the third quarter of 2008 in connection with the spin-off from IAC. The increase in
the interest expense in 2009 compared to 2008 is due to the longer period in which the debt was outstanding, offset slightly by the lower interest rate on the term loan in 2009.

Income Tax Provision

For the year ended December 31, 2009, HSNi recorded a tax provision from continuing operations of $48.1 million, which represents an effective tax rate of 39.9%. The 2009 tax rate is higher than the
federal statutory rate of 35% due principally to state income taxes.

For the year ended December 31, 2008, HSNi recorded
a tax benefit from continuing operations of $730.8 million, which represents an effective tax rate of 23.4%. The 2008 tax rate is lower than the federal statutory rate of 35% due principally to the non-deductible impairment charges of goodwill and
intangible assets. This rate is also lower than the 35% federal statutory rate due to the reversal of an interest accrual on a tax liability and adjustments related to state income tax rates.

Included in the 2008 income tax benefit is the reversal of $753.3 million of deferred tax liabilities related to the goodwill and intangible
asset impairments. These deferred tax liabilities for both HSN and Cornerstone were recorded upon the acquisition of certain business operations and interests in prior years in accordance with the prescribed accounting rules. The remaining deferred
tax liability represents future taxes that could be owed upon a sale of the HSN and/or Cornerstone business operations.

In
2007, HSNi recorded an income tax provision for continuing operations of $64.6 million which represents an effective tax rate of 38%. This tax rate is higher than the federal statutory rate of 35% due principally to state and local income taxes.

Discontinued Operations

Discontinued operations in the accompanying consolidated statements of operations include Home Shopping Europe GMbH & Co. KG, and its affiliated station HSE24 (HSE) which was sold
June 19, 2007 and HSNis other international subsidiaries. (Losses) income from discontinued operations, net of tax, in 2009, 2008 and 2007 were losses of $0.1 million and $3.4 million and income of $29.0 million, respectively.
Loss from discontinued operations, net of tax, in 2008 primarily relates to 2007 income tax returns filed in 2008. Income from discontinued operations, net of tax, in 2007 primarily includes the income of HSE. Additionally, in 2007 HSNi recognized
an after-tax gain on the sale of HSE of $30.6 million.

Liquidity and Capital Resources

As of December 31, 2009, HSNi had $269.9 million of cash and cash equivalents, up from $177.5 million as of December 31, 2008.



29



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Net cash provided by operating activities attributable to continuing operations was
$202.6 million in 2009 and $137.1 million in 2008, an increase of $65.5 million. This increase was primarily due to improved operating performance and our concerted effort to increase inventory turns and days payable outstanding. As a
result, gross inventory balances have decreased 14% from December 31, 2008. Net cash provided by operating activities was also impacted by an increase in accounts receivable related to HSNs Flexpay program which supported sales growth in
the fourth quarter of 2009.

Net cash used in investing activities attributable to continuing operations in 2009 of
$41.4 million resulted from capital expenditures. The capital expenditures were primarily at HSN and were for investments in equipment relating to high-definition television programming, campus renovations and other information technology and
broadcast-related investments. Net cash used in investing activities attributable to continuing operations in 2008 of $22.9 million resulted primarily from capital expenditures of $39.7 million, partially offset by cash transfers of
$16.7 million from IAC. The cash transfers from IAC primarily relate to IACs centrally managed U.S. treasury function. The capital expenditures were primarily at HSN and were for campus renovations, information technology and
broadcast-related expenditures.

Net cash used in financing activities attributable to continuing operations in 2009 was $69.7
million related to the $50.0 million repayment of long-term debt under the term loan which included a voluntary prepayment of $35 million in December 2009, of which approximately $30 million would have been required to be paid in March 2010 through
an excess cash flow payment as required by the terms of the Credit Agreement. Since HSNis leverage ratio was below 1.75x as of December 31, 2009, an excess cash flow payment is not required in March 2010. In addition,
HSNi made a $20.0 million repayment of the revolving credit facility in the first quarter of 2009. In connection with the spin-off, HSNi raised $390 million of long-term debt through a combination of $240 million of privately issued debt
securities (the Senior Notes) and a $300 million secured credit agreement, consisting of a funded $150 million term loan and an undrawn $150 million revolving credit facility. As of December 31, 2009, $100 million was outstanding
under the term loan and $0 was outstanding under the revolving credit facility. Debt issuance costs, including the $1.6 million original issue discount on the issuance of the Senior Notes, totaled $16.1 million resulting in net proceeds of
$373.8 million. In connection with the spin-off, HSNi made a $333.8 million cash distribution to IAC in August 2008.

The
credit agreement contains two principal financial covenants consisting of a maximum leverage ratio of 2.75x and a minimum interest coverage ratio of 3.00x, among other covenants. HSNi was in compliance with all such covenants as of December 31,
2009, with a leverage ratio of 1.64x and an interest coverage ratio of 6.41x. The amount available to us under the credit agreement is reduced by the amount of commercial and standby letters of credit issued under the revolving credit facility
portion of the agreement. As of December 31, 2009, there were $19.2 million of outstanding commercial and standby letters of credit issued under the revolving credit facility. The ability to draw funds under the revolving credit facility is
dependent upon meeting the aforementioned financial covenants, which may limit HSNis ability to draw the full amount of the facility. As of December 31, 2009, the additional amount that could be borrowed under the revolving credit
facility, in consideration of the financial covenants, was approximately $130.8 million.

Net cash provided by (used in)
discontinued operations in 2009 and 2008 of $1.1 million and ($0.5) million, respectively, relates primarily to the operations of HSE and HSNis other international subsidiaries. HSNi does not expect future cash flows associated with
existing discontinued operations to be material.

HSNi anticipates that it will need to make capital and other expenditures in
connection with the development and operation of its business. HSNis ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations, the overall capacity and terms of its financing
arrangements as discussed above, and access to the capital markets. HSNi believes that its cash on hand, its anticipated operating cash flows, its available unused portion of the revolving credit facility and its access to capital markets will be
sufficient to fund its operating needs, capital, investing and other commitments and contingencies for the foreseeable future.



30



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Contractual Obligations and Commercial Commitments



|                                      |  |                        |         |                 |   |             |  |             |         |                  |   |        |  |   |        
|------------------------------------- |  | ---------------------- | ------- | --------------- | - | ----------- |  | ----------- | ------- | ---------------- | - | ------ |  | - | -------
|                                      |  | Payments Due by Period
|Contractual Obligations               |  | TotalAmountsCommitted  |         | Less Than 1Year |   | 1 - 3 Years |  | 3 - 5 Years |         | More Than5 Years
|                                      |  | (In thousands)        
|Short- and long-term debt obligations |  | $                      | 340,000 |                 | $ | 4,762       |  | $           | 50,794  |                  | $ | 44,444 |  | $ | 240,000
|Operating leases                      |  |                        | 116,641 |                 |   | 28,150      |  |             | 41,025  |                  |   | 23,402 |  |   | 24,064 
|Purchase obligations (a)              |  |                        | 111,218 |                 |   | 101,192     |  |             | 10,026  |                  |   |       |  |   |       
|                                      |  |                        |         |                 |   |             |  |             |         |                  |   |        |  |   |        
|Total contractual obligations         |  | $                      | 567,859 |                 | $ | 134,104     |  | $           | 101,845 |                  | $ | 67,846 |  | $ | 264,064
|                                      |  |                        |         |                 |   |             |  |             |         |                  |   |        |  |   |        



|(a) | The purchase obligations primarily relate to contracts with pay television operators and include obligations for future cable distribution and commission guarantees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                       |  |                                            |        |                 |   |             |  |             |    |                  |   |   |  |   |  
|-------------------------------------- |  | ------------------------------------------ | ------ | --------------- | - | ----------- |  | ----------- | -- | ---------------- | - | - |  | - | -
|                                       |  | Amount of Commitment Expiration Per Period
|Commercial Commitments                 |  | TotalAmountsCommitted                      |        | Less Than 1Year |   | 1 - 3 Years |  | 3 - 5 Years |    | More Than5 Years
|                                       |  | (In thousands)                            
|Letters of credit and surety bonds (b) |  | $                                          | 22,120 |                 | $ | 22,070      |  | $           | 50 |                  | $ |  |  | $ | 



|(b) | The letters of credit (LOCs) primarily consist of trade LOCs which are used for inventory purchases. Trade LOCs are guarantees of payment based upon the
delivery of goods. The surety bonds primarily consist of custom bonds which relate to the import of merchandise into the United States.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At December 31, 2009, we had $0.5 million recorded for uncertain tax positions under current accounting guidance. We are not able to reasonably estimate the timing of payments, or the amount by which
our liability will increase or decrease over time; therefore, the liability of $0.5 million has not been included in the contractual obligations table above.

Off-Balance Sheet Arrangements

Other than the items described above, HSNi
does not have any off-balance sheet arrangements as of December 31, 2009.

Seasonality

HSNi is affected by seasonality, although historically our business has exhibited less seasonality than many other retail businesses. Our
sales levels are generally higher in the fourth quarter. Reported revenues in the fourth quarter were 31%, 28% and 30% of total reported annual revenues in 2009, 2008 and 2007, respectively.

Non-GAAP Measure

HSNi
reports Adjusted EBITDA as a supplemental measure to generally accepted accounting principles (GAAP). This measure is one of the primary metrics by which HSNi evaluates the performance of its businesses, on which its internal budgets are
based and by which management is compensated. HSNi believes that investors should have access to the same set of tools that it uses in analyzing its results.

Adjusted EBITDA is defined as operating income excluding, if applicable: (1) non-cash compensation expense and amortization of non-cash marketing, (2) amortization of intangible assets,
(3) depreciation and gains and losses on asset dispositions, (4) goodwill, long-lived asset and intangible asset impairments, (5) pro forma adjustments for significant acquisitions, and (6) one-time items. Adjusted EBITDA is not
a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for operating income, net



31



---

income or any other measure determined in accordance with GAAP. Adjusted EBITDA is used as a measurement of operating efficiency and overall financial performance and HSNi believes it to be a
helpful measure for those evaluating companies in the retail industry. Adjusted EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. Adjusted EBITDA has certain
limitations in that it does not take into account the impact to HSNis statement of operations of certain expenses, including stock-based compensation, amortization of non-cash marketing, amortization of intangible assets, depreciation, gains
and losses on asset dispositions, asset impairment charges, acquisition-related accounting and one-time items.

Pro Forma Results

We will only present Adjusted EBITDA on a pro forma basis if we view a particular transaction as significant in size or
transformational in nature. For the periods presented in this report, there are no transactions that we have included on a pro forma basis.

One-Time Items

Adjusted EBITDA is presented before one-time items, if applicable. These items are truly
one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented in this report, there are no
one-time items.

Non-Cash Expenses That Are Excluded From HSNis Non-GAAP Measure

Stock-based compensation expense consists principally of expense associated with the grants of restricted stock, restricted stock
units, stock options and stock appreciation rights, including expense associated with the modification and acceleration of such awards in connection with the spin-off. These expenses are not paid in cash, and HSNi includes the related shares in its
calculations of diluted shares outstanding. Upon vesting of restricted stock and restricted stock units and the exercise of certain stock options and stock appreciation rights, the awards can be settled, at HSNis discretion, on a net basis,
with HSNi remitting the required tax withholding amount from its current funds.

Amortization of non-cash marketing
consists of non-cash advertising provided to HSNi by IAC. The non-cash marketing was secured by IAC from Universal Television as part of the IAC transaction pursuant to which VUE was created, and the subsequent transaction by which IAC sold its
partnership interests in VUE (collectively referred to as the NBC Universal Advertising). The NBC Universal Advertising is available for television advertising on various NBC Universal network and cable channels without any cash cost.

The NBC Universal Advertising is excluded from Adjusted EBITDA because it is non-cash and is incremental to the marketing and
advertising that HSNi would otherwise undertake as a result of its ordinary cost/benefit marketing planning process. Accordingly, HSNis aggregate level of advertising, and the increased concentration of that advertising on NBC Universal
network and cable channels, does not reflect what HSNis advertising effort would otherwise be without these credits. As a result, management believes that treating the NBC Universal Advertising as an expense does not appropriately reflect its
true cost/benefit relationship, nor does it best reflect HSNis long-term level of advertising expenditures. Nonetheless, while the benefits directly attributable to television advertising are always difficult to determine, and especially so
with respect to the NBC Universal Advertising due to its incrementality and heavy concentration, it is likely that HSNi does derive benefits from it, though management believes such benefits are generally less than those received through its regular
marketing and advertising for the reasons stated above. Adjusted EBITDA therefore has the limitation of including those benefits while excluding the associated expense.

Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as distribution agreements,
customer relationships and merchandise agreements, are valued and amortized over their estimated lives.



32



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Depreciation, gains and losses on asset dispositions and long-lived asset impairment
charges are non-cash items relating to our long-lived assets and have been excluded from Adjusted EBITDA. Goodwill and intangible asset impairment charges are also non-cash expenses that have been excluded from Adjusted EBITDA.

Reconciliation of Adjusted EBITDA

See Note 6 of Notes to Consolidated Financial Statements for the reconciliation between operating income (loss) and Adjusted EBITDA for the years ended December 31, 2009, 2008 and 2007.

Critical Accounting Policies and Estimates

The following disclosure is provided to supplement the descriptions of HSNis accounting policies contained in Note 2 of Notes to Consolidated Financial Statements in regard to significant areas
of judgment. HSNis management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net income during any period. Actual results could differ from those estimates.
Because of the size of the financial statement elements to which they relate, some of HSNis accounting policies and estimates have a more significant impact on its consolidated financial statements than others. What follows is a discussion of
some of HSNis more significant accounting policies and estimates.

Recoverability of Long-Lived Assets

HSNi reviews the carrying value of all long-lived assets, primarily property and equipment and definite-lived intangible
assets, for impairment whenever triggering events or changes in circumstances indicate that the carrying value of an asset may be impaired. In accordance with accounting guidance pertaining to the accounting for the impairment or disposal of
long-lived assets, impairment is considered to have occurred whenever the carrying value of a long-lived asset exceeds the sum of the undiscounted cash flows that is expected to result from the use and eventual disposition of the asset. The
impairment is measured by comparing the fair value of the asset to its carrying value. Our valuation methodologies include, but are not limited to, discounting the future cash flows from the asset being tested. Significant judgments include
determining if a triggering even has occurred, determining the future cash flows from the assets and applying the appropriate discount rate when measuring the fair value. The determination of cash flows is based upon assumptions that may not occur.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

HSNi assesses the impairment of goodwill and identifiable indefinite-lived intangible assets at least annually during the fourth quarter and
whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. In performing this review, HSNi is required to make an assessment of the implied fair value of its goodwill and intangible assets. If it is
determined that the implied fair value of goodwill and/or intangible assets is less than the carrying amount, an impairment charge, equal to the excess, is recorded. The implied fair value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including the unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. The fair value of the reporting unit is determined by using a combination of a discounted cash flow analysis and an equity analysis
based on the trading value of its common stock. The discounted cash flow analysis indicates the fair value of the reporting units based on the present value of the cash flows expected to be generated in the future. The equity analysis is based on
the trading value of its common stock as of the valuation date or the average stock price over a range of dates prior to the valuation date, plus an estimated control premium.



33



---

In assessing fair value, HSNi considers, among other indicators, differences between
estimated and actual cash flows, changes in the related discount rate and the relationship between the trading price of its common stock and its per-share book value. Determining fair value requires the exercise of significant judgments, including
judgments about discount rates, perpetual growth rates, royalty rates, terminal growth rates, control premiums and the amount and timing of future cash flows. These factors used in the determination of fair value, particularly estimated cash flows,
are sensitive to, among other things, changes in the retail consumer market and the general economy. For more information on the impairment charges recognized during 2008, see Note 3 of Notes to Consolidated Financial Statements.

Returns Reserves

Net sales from HSNi primarily consist of merchandise sales and are reduced by incentive discounts and sales returns. Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer
takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. HSNis sales policy allows customers to return virtually all merchandise for a full refund or exchange, subject to pre-established time
restrictions and, in some cases, restocking fees. Allowances for returned merchandise and other adjustments (including reimbursed shipping and handling costs) are provided based upon past experience. Actual levels of product returns may vary from
these estimates. HSNis estimated return rates were 17.8%, 18.4% and 18.4% in 2009, 2008 and 2007, respectively.

Allowance for Doubtful Accounts

HSNi makes judgments as to its ability to collect outstanding receivables and
provide allowances when it is assessed that all or a portion of the receivable will not be collected. HSNi determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, its previous loss
history and the condition of the general economy. HSNi writes off accounts receivable when they become uncollectible.

Income Taxes

Estimates of deferred income taxes and the significant items giving rise to the deferred assets
and liabilities are shown in Note 13 of Notes to Consolidated Financial Statements, and reflect managements assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both
timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment, as well as actual operating results of HSNi that vary significantly from
anticipated results. Valuation allowances are related to items for which it is more likely than not that the tax benefit will not be realized. In assessing the adequacy of a recorded valuation allowance, we consider all positive and negative
information and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income and feasible tax planning strategies. Effective January 1, 2007, HSNi recognizes liabilities for
uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on its
technical merits. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such
amounts to determine the probability of various possible outcomes. HSNi considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual
outcomes.

Inventory Valuation

Inventories are valued at the lower of cost or market, cost being determined based upon the first-in, first-out method. Market is determined on the basis of net realizable value, giving consideration to
obsolescence and other



34



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factors. Net realizable value is estimated by HSNi based upon historical sales data, the age of inventory, the quantity of goods on hand and the ability to return merchandise to vendors. The
actual net realizable value may vary from estimates due to changes in customer tastes or viewing habits, or judgmental decisions made by merchandising personnel when ordering new products.

Stock-Based Compensation

We measure compensation cost for stock awards at fair value and recognize compensation over the service period for awards expected to vest. The estimation of stock awards that will ultimately vest
requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating
expected forfeitures, including types of awards, employee class and historical experience. The fair value of restricted stock units is determined based on the number of shares granted and the closing price of our common stock at the grant date. The
fair value of stock options and stock appreciation rights are estimated on the grant date using the Black-Scholes option pricing model. This model incorporates various assumptions, including expected volatility and expected term. Expected stock
price volatilities are estimated based on the historical and implied volatilities of comparable publicly-traded companies. The expected term of awards granted is based on analyses of historical employee termination rates and option exercise
patterns, giving consideration to expectations of future employee behavior. Actual results and future estimates may differ substantially from our current estimates.

New Accounting Pronouncements

Refer to Note 2 of Notes to Consolidated
Financial Statements for a description of recent accounting pronouncements.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Interest Rate Risk

At December 31, 2009, approximately 29.4% of our
$338.7 million of outstanding long-term debt bore interest at variable rates, generally tied to a reference rate such as the LIBOR rate or the prime rate of interest of certain banks. Changes in interest rates on loans from these financial
institutions could affect our earnings as a result of interest rates charged on certain underlying obligations that are variable. A hypothetical 100 basis point increase in interest rates on our variable rate obligations would have resulted in
an increase of approximately $1.0 million and $1.7 million in annual pre-tax interest expense for the years ended December 31, 2009 and 2008, respectively.

Foreign Currency Exchange Risk

During the second quarter of 2003, one of
our foreign subsidiaries entered into a foreign exchange forward contract with a notional amount of $38.6 million which was used to hedge against the change in value of a liability denominated in a currency other than the subsidiarys
functional currency. In connection with the sale of HSE, we unwound the foreign exchange forward contract during June 2007. Prior to unwinding this contract, all foreign exchange remeasurement gains and losses related to the contract and liability
were recognized each period in the statements of operations and were offsetting. Subsequent to the sale of HSE, we do not have significant exposure to foreign currency risk and do not hold any foreign currency derivative instruments at
December 31, 2009.



35



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

Index to Consolidated Financial Statements



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Certified Public Accounting Firm                                    |  | 37  
|                                                                                                     | 
|Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007           |  | 38  
|                                                                                                     | 
|Consolidated Balance Sheets at December 31, 2009 and 2008                                            |  | 39  
|                                                                                                     | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2009, 2008 and 2007 |  | 40  
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007           |  | 41  
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | 42  
|                                                                                                     | 
|Schedule II  Valuation and Qualifying Accounts                                                      |  | 74  



36



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REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of HSN, Inc.

We have audited the accompanying consolidated balance sheets of HSN, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index as Schedule II. These financial statements and financial
statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of HSN, Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,
in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), HSN, Inc. and subsidiaries internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2010, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Tampa, Florida

March 4, 2010



37



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HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In
thousands, except per share data)



|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|------------------------------------------------------------ |  | ----------------------- | --------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                                                             |  | Years EndedDecember 31, |          
|                                                             |  | 2009                    |           |   | 2008 |   |            | 2007 | 
|Net sales                                                    |  | $                       | 2,749,609 |   |      | $ | 2,823,593  |      |  | $ | 2,908,242 |  
|Cost of sales                                                |  |                         | 1,768,295 |   |      |   | 1,838,163  |      |  |   | 1,820,048 |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Gross profit                                                 |  |                         | 981,314   |   |      |   | 985,430    |      |  |   | 1,088,194 |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Operating expenses:                                          |  |                         |           |   |      |   |            |      |  |   |           |  
|Selling and marketing                                        |  |                         | 507,569   |   |      |   | 567,305    |      |  |   | 595,911   |  
|General and administrative                                   |  |                         | 222,464   |   |      |   | 220,644    |      |  |   | 211,955   |  
|Production and programming                                   |  |                         | 57,090    |   |      |   | 60,217     |      |  |   | 59,051    |  
|Amortization of non-cash marketing                           |  |                         |          |   |      |   | 8,022      |      |  |   | 4,442     |  
|Amortization of intangible assets                            |  |                         | 562       |   |      |   | 7,465      |      |  |   | 12,681    |  
|Depreciation                                                 |  |                         | 37,975    |   |      |   | 37,438     |      |  |   | 34,363    |  
|Asset impairments                                            |  |                         |          |   |      |   | 3,186,650  |      |  |   |          |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Total operating expenses                                     |  |                         | 825,660   |   |      |   | 4,087,741  |      |  |   | 918,403   |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Operating income (loss)                                      |  |                         | 155,654   |   |      |   | (3,102,311 | )    |  |   | 169,791   |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Other income (expense):                                      |  |                         |           |   |      |   |            |      |  |   |           |  
|Interest income                                              |  |                         | 343       |   |      |   | 480        |      |  |   | 252       |  
|Interest expense                                             |  |                         | (35,283   | ) |      |   | (16,420    | )    |  |   |          |  
|Other expense                                                |  |                         |          |   |      |   |           |      |  |   | (256      | )
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Total other expense, net                                     |  |                         | (34,940   | ) |      |   | (15,940    | )    |  |   | (4        | )
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Income (loss) from continuing operations before income taxes |  |                         | 120,714   |   |      |   | (3,118,251 | )    |  |   | 169,787   |  
|Income tax (provision) benefit                               |  |                         | (48,136   | ) |      |   | 730,773    |      |  |   | (64,554   | )
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Income (loss) from continuing operations                     |  |                         | 72,578    |   |      |   | (2,387,478 | )    |  |   | 105,233   |  
|Gain on sale of discontinued operations, net of tax          |  |                         |          |   |      |   |           |      |  |   | 30,572    |  
|(Loss) income from discontinued operations, net of tax       |  |                         | (90       | ) |      |   | (3,410     | )    |  |   | 28,999    |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Net income (loss)                                            |  | $                       | 72,488    |   |      | $ | (2,390,888 | )    |  | $ | 164,804   |  
|                                                             |  |                         |           |   |      |   |            |      |  |   |           |  
|Income (loss) from continuing operations per share:          |  |                         |           |   |      |   |            |      |  |   |           |  
|Basic                                                        |  | $                       | 1.29      |   |      | $ | (42.48     | )    |  | $ | 1.87      |  
|Diluted                                                      |  | $                       | 1.27      |   |      | $ | (42.48     | )    |  | $ | 1.86      |  
|Net income (loss) per share:                                 |  |                         |           |   |      |   |            |      |  |   |           |  
|Basic                                                        |  | $                       | 1.29      |   |      | $ | (42.54     | )    |  | $ | 2.93      |  
|Diluted                                                      |  | $                       | 1.26      |   |      | $ | (42.54     | )    |  | $ | 2.91      |  
|Shares used in computing income (loss) per share:            |  |                         |           |   |      |   |            |      |  |   |           |  
|Basic                                                        |  |                         | 56,383    |   |      |   | 56,208     |      |  |   | 56,206    |  
|Diluted                                                      |  |                         | 57,330    |   |      |   | 56,208     |      |  |   | 56,649    |  

The accompanying
notes are an integral part of these consolidated financial statements.



38



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HSN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except
share data)



|                                                                                                                                                    |  |              |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                    |  | December 31, |           
|                                                                                                                                                    |  | 2009         |            |   | 2008 |  
|ASSETS                                                                                                                                              |  |              |            |   |      |   |            |  
|Current assets:                                                                                                                                     |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                                           |  | $            | 269,921    |   |      | $ | 177,463    |  
|Accounts receivable, net of allowance of $11,608 and $10,026, respectively                                                                          |  |              | 182,746    |   |      |   | 165,114    |  
|Inventories                                                                                                                                         |  |              | 261,473    |   |      |   | 304,172    |  
|Deferred income taxes                                                                                                                               |  |              | 21,960     |   |      |   | 21,777     |  
|Prepaid expenses and other current assets                                                                                                           |  |              | 47,152     |   |      |   | 42,080     |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total current assets                                                                                                                                |  |              | 783,252    |   |      |   | 710,606    |  
|Property and equipment, net                                                                                                                         |  |              | 157,051    |   |      |   | 157,832    |  
|Intangible assets, net                                                                                                                              |  |              | 261,185    |   |      |   | 261,747    |  
|Other non-current assets                                                                                                                            |  |              | 17,162     |   |      |   | 22,272     |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|TOTAL ASSETS                                                                                                                                        |  | $            | 1,218,650  |   |      | $ | 1,152,457  |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                |  |              |            |   |      |   |            |  
|Current liabilities:                                                                                                                                |  |              |            |   |      |   |            |  
|Accounts payable, trade                                                                                                                             |  | $            | 222,787    |   |      | $ | 198,464    |  
|Current maturities of long-term debt                                                                                                                |  |              | 4,762      |   |      |   | 15,000     |  
|Accrued expenses and other current liabilities                                                                                                      |  |              | 222,739    |   |      |   | 190,788    |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                           |  |              | 450,288    |   |      |   | 404,252    |  
|Long-term debt, less current maturities                                                                                                             |  |              | 333,960    |   |      |   | 393,528    |  
|Deferred income taxes                                                                                                                               |  |              | 76,413     |   |      |   | 83,276     |  
|Other long-term liabilities                                                                                                                         |  |              | 13,959     |   |      |   | 13,116     |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                   |  |              | 874,620    |   |      |   | 894,172    |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|Commitments and contingencies (Note 14)                                                                                                             |  |              |            |   |      |   |            |  
|SHAREHOLDERS EQUITY:                                                                                                                               |  |              |            |   |      |   |            |  
|Preferred stock $0.01 par value; 25,000,000 authorized shares; no issued shares                                                                     |  |              |           |   |      |   |           |  
|Common stock $0.01 par value; 300,000,000 authorized shares; 56,503,163 and 56,222,631 issued shares as of December 31, 2009
and 2008, respectively |  |              | 565        |   |      |   | 562        |  
|Additional paid-in capital                                                                                                                          |  |              | 2,419,765  |   |      |   | 2,406,503  |  
|Retained deficit                                                                                                                                    |  |              | (2,076,046 | ) |      |   | (2,148,534 | )
|Accumulated other comprehensive loss                                                                                                                |  |              | (254       | ) |      |   | (246       | )
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|Total shareholders equity                                                                                                                          |  |              | 344,030    |   |      |   | 258,285    |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                          |  | $            | 1,218,650  |   |      | $ | 1,152,457  |  
|                                                                                                                                                    |  |              |            |   |      |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



39



---

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(In thousands)



|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | -------------- |  | ------------ | - | --------------- | ------ | ------ | ---------------------------------- | --- |  | ------------------------ | ---------- | - | --------------- | - | ---------- | ------------------------------------------ |  | - | --------- | - |  | - | ---------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                              |  | PreferredStock |  | Common Stock |   | InvestedCapital |        |        | ReceivablesFrom IACandSubsidiaries |     |  | AdditionalPaid-inCapital |            |   | RetainedDeficit |   |            | AccumulatedOtherComprehensive(Loss) Income |  |   | Total     |  
|                                                                                              |  | Shares         |  | Amount       |   | Shares          |        | Amount |                                    |     |  |                          |            |  
|Balance as of December 31, 2006                                                               |  |               |  | $            |  |                 |       |        | $                                  |    |  | $                        | 4,569,019  |   |                 | $ | (1,483,873 | )                                          |  | $ |          |   |  | $ |           |   |  | $ | 38,570  |   |  | $ | 3,123,716  |  
|Comprehensive income:                                                                         |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Net income                                                                                    |  |               |  |              |  |                 |       |        |                                    |    |  |                          | 164,804    |   |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   |        |   |  |   | 164,804    |  
|Net losses of derivative contracts                                                            |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   | (2,355  | ) |  |   | (2,355     | )
|Foreign currency translation                                                                  |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   | (35,045 | ) |  |   | (35,045    | )
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Comprehensive income:                                                                         |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   | 127,404    |  
|Cumulative effect of adoption of FIN 48                                                       |  |               |  |              |  |                 |       |        |                                    |    |  |                          | (225       | ) |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   |        |   |  |   | (225       | )
|Net transfers to IAC                                                                          |  |               |  |              |  |                 |       |        |                                    |    |  |                          | (210,725   | ) |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   |        |   |  |   | (210,725   | )
|Net change in receivables from IAC and subsidiaries                                           |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   | (97,284    | )                                          |  |   |          |   |  |   |           |   |  |   |        |   |  |   | (97,284    | )
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Balance as of December 31, 2007                                                               |  |               |  | $            |  |                 |       |        | $                                  |    |  | $                        | 4,522,873  |   |                 | $ | (1,581,157 | )                                          |  | $ |          |   |  | $ |           |   |  | $ | 1,170   |   |  | $ | 2,942,886  |  
|Comprehensive loss:                                                                           |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Net loss prior to spin-off                                                                    |  |               |  |              |  |                 |       |        |                                    |    |  |                          | (242,354   | ) |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   |        |   |  |   | (242,354   | )
|Net loss after spin-off                                                                       |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   |          |   |  |   | (2,148,534 | ) |  |   |        |   |  |   | (2,148,534 | )
|Foreign currency translation                                                                  |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   | (1,416  | ) |  |   | (1,416     | )
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Comprehensive loss:                                                                           |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   | (2,392,304 | )
|Net change in transfers to and receivables from IAC                                           |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   | 22,531     |                                            |  |   |          |   |  |   |           |   |  |   |        |   |  |   | 22,531     |  
|Distribution to IAC                                                                           |  |               |  |              |  |                 |       |        |                                    |    |  |                          | (333,799   | ) |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   |        |   |  |   | (333,799   | )
|Stock-based compensation expense forequity awards                                             |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   | 16,314     |                                            |  |   | 3,972     |   |  |   |           |   |  |   |        |   |  |   | 20,286     |  
|Stock-based awards accounted for as a liability                                               |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   | (2,136     | )                                          |  |   | 718       |   |  |   |           |   |  |   |        |   |  |   | (1,418     | )
|Capitalization as a result of the spin-off, net of extinguishment of IAC receivables          |  |               |  |              |  |                 |       |        |                                    |    |  |                          | (3,946,720 | ) |                 |   | 1,544,448  |                                            |  |   | 2,402,272 |   |  |   |           |   |  |   |        |   |  |   |           |  
|Issuance of common stock at spin-off                                                          |  |               |  |              |  |                 | 56,206 |        |                                    | 562 |  |                          |           |   |                 |   |           |                                            |  |   | (562      | ) |  |   |           |   |  |   |        |   |  |   |           |  
|Board of Directors deferred compensation                                                      |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   | 29        |   |  |   |           |   |  |   |        |   |  |   | 29         |  
|Issuance of common stock upon exercise of stock options                                       |  |               |  |              |  |                 | 16     |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   | 74        |   |  |   |           |   |  |   |        |   |  |   | 74         |  
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Balance as of December 31, 2008                                                               |  |               |  | $            |  |                 | 56,222 |        | $                                  | 562 |  | $                        |           |   |                 | $ |           |                                            |  | $ | 2,406,503 |   |  | $ | (2,148,534 | ) |  | $ | (246    | ) |  | $ | 258,285    |  
|Comprehensive income:                                                                         |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Net income                                                                                    |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   |          |   |  |   | 72,488     |   |  |   |        |   |  |   | 72,488     |  
|Foreign currency translation                                                                  |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   |          |   |  |   |           |   |  |   | (8      | ) |  |   | (8         | )
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Comprehensive income:                                                                         |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   | 72,480     |  
|Stock-based compensation expense for equity awards                                            |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   | 11,264    |   |  |   |           |   |  |   |        |   |  |   | 11,264     |  
|Adjustment to capitalization as a result of the spin-off                                      |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   | 406       |   |  |   |           |   |  |   |        |   |  |   | 406        |  
|Board of Directors deferred compensation                                                      |  |               |  |              |  |                 |       |        |                                    |    |  |                          |           |   |                 |   |           |                                            |  |   | 127       |   |  |   |           |   |  |   |        |   |  |   | 127        |  
|Issuance of common stock upon exercise of stock options and release of restricted stock units |  |               |  |              |  |                 | 281    |        |                                    | 3   |  |                          |           |   |                 |   |           |                                            |  |   | 1,465     |   |  |   |           |   |  |   |        |   |  |   | 1,468      |  
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  
|Balance as of December 31, 2009                                                               |  |               |  | $            |  |                 | 56,503 |        | $                                  | 565 |  | $                        |           |   |                 | $ |           |                                            |  | $ | 2,419,765 |   |  | $ | (2,076,046 | ) |  | $ | (254    | ) |  | $ | 344,030    |  
|                                                                                              |  |                |  |              |   |                 |        |        |                                    |     |  |                          |            |   |                 |   |            |                                            |  |   |           |   |  |   |            |   |  |   |         |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



40



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HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In
thousands)



|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                                                                                      |  | Years EndedDecember 31, |        
|                                                                                                                                                      |  | 2009                    |         |   | 2008 |   |            | 2007 | 
|                                                                                                                                                      |  | (In thousands)          |        
|Cash flows from operating activities attributable to continuing operations:                                                                           |  |                         |         |   |      |   |            |      |  |   |          |  
|Net income (loss)                                                                                                                                     |  | $                       | 72,488  |   |      | $ | (2,390,888 | )    |  | $ | 164,804  |  
|Less: (Loss) income from discontinued operations, net of tax                                                                                          |  |                         | (90     | ) |      |   | (3,410     | )    |  |   | 59,571   |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Income (loss) from continuing operations                                                                                                              |  |                         | 72,578  |   |      |   | (2,387,478 | )    |  |   | 105,233  |  
|Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities attributable to
continuing operations: |  |                         |         |   |      |   |            |      |  |   |          |  
|Depreciation                                                                                                                                          |  |                         | 37,975  |   |      |   | 37,438     |      |  |   | 34,363   |  
|Amortization of intangible assets                                                                                                                     |  |                         | 562     |   |      |   | 7,465      |      |  |   | 12,681   |  
|Asset impairments                                                                                                                                     |  |                         |        |   |      |   | 3,186,650  |      |  |   |         |  
|Stock-based compensation expense                                                                                                                      |  |                         | 11,264  |   |      |   | 20,286     |      |  |   | 12,160   |  
|Amortization of cable and satellite distribution fees                                                                                                 |  |                         | 3,360   |   |      |   | 4,028      |      |  |   | 4,866    |  
|Amortization of non-cash marketing                                                                                                                    |  |                         |        |   |      |   | 8,022      |      |  |   | 4,442    |  
|Amortization of debt issuance costs                                                                                                                   |  |                         | 2,556   |   |      |   | 1,124      |      |  |   |         |  
|Loss on disposition of fixed assets                                                                                                                   |  |                         | 682     |   |      |   | 1,354      |      |  |   | 276      |  
|Deferred income taxes                                                                                                                                 |  |                         | (6,794  | ) |      |   | (742,053   | )    |  |   | (11,803  | )
|Bad debt expense                                                                                                                                      |  |                         | 18,460  |   |      |   | 19,775     |      |  |   | 14,598   |  
|Excess tax benefits from stock-based awards                                                                                                           |  |                         | (301    | ) |      |   | (135       | )    |  |   | (2,401   | )
|Changes in current assets and liabilities:                                                                                                            |  |                         |         |   |      |   |            |      |  |   |          |  
|Accounts receivable                                                                                                                                   |  |                         | (36,994 | ) |      |   | 8,787      |      |  |   | (53,130  | )
|Inventories                                                                                                                                           |  |                         | 42,699  |   |      |   | 13,239     |      |  |   | (3,498   | )
|Prepaid expenses and other current assets                                                                                                             |  |                         | (5,684  | ) |      |   | 12,816     |      |  |   | (2,212   | )
|Accounts payable, accrued expenses and other current liabilities                                                                                      |  |                         | 62,189  |   |      |   | (54,230    | )    |  |   | 22,009   |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Net cash provided by operating activities attributable to continuing operations                                                                       |  |                         | 202,552 |   |      |   | 137,088    |      |  |   | 137,584  |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Cash flows from investing activities attributable to continuing operations:                                                                           |  |                         |         |   |      |   |            |      |  |   |          |  
|Transfers from (to) IAC                                                                                                                               |  |                         |        |   |      |   | 16,738     |      |  |   | (91,560  | )
|Capital expenditures                                                                                                                                  |  |                         | (41,420 | ) |      |   | (39,662    | )    |  |   | (48,714  | )
|Other, net                                                                                                                                            |  |                         | 42      |   |      |   |           |      |  |   | 113      |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Net cash used in investing activities attributable to continuing operations                                                                           |  |                         | (41,378 | ) |      |   | (22,924    | )    |  |   | (140,161 | )
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Cash flows from financing activities attributable to continuing operations:                                                                           |  |                         |         |   |      |   |            |      |  |   |          |  
|Proceeds from issuance of long-term debt, net of issuance costs                                                                                       |  |                         |        |   |      |   | 373,833    |      |  |   |         |  
|Repayments of long-term debt                                                                                                                          |  |                         | (50,000 | ) |      |   |           |      |  |   |         |  
|Borrowings under revolving credit facility                                                                                                            |  |                         |        |   |      |   | 40,000     |      |  |   |         |  
|Repayments under revolving credit facility                                                                                                            |  |                         | (20,000 | ) |      |   | (20,000    | )    |  |   |         |  
|Distribution to IAC in connection with the spin-off                                                                                                   |  |                         |        |   |      |   | (333,799   | )    |  |   |         |  
|Excess tax benefits from stock-based awards                                                                                                           |  |                         | 301     |   |      |   | 135        |      |  |   | 2,401    |  
|Other, net                                                                                                                                            |  |                         | (26     | ) |      |   | (117       | )    |  |   | (10      | )
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Net cash (used in) provided by financing activities attributable to continuing operations                                                             |  |                         | (69,725 | ) |      |   | 60,052     |      |  |   | 2,391    |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Total cash provided by (used in) continuing operations                                                                                                |  |                         | 91,449  |   |      |   | 174,216    |      |  |   | (186     | )
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Cash flows from discontinued operations:                                                                                                              |  |                         |         |   |      |   |            |      |  |   |          |  
|Net cash provided by (used in) operating activities attributable to discontinued operations                                                           |  |                         | 1,009   |   |      |   | (501       | )    |  |   | (8,956   | )
|Net cash used in investing activities attributable to discontinued operations                                                                         |  |                         |        |   |      |   |           |      |  |   | (965     | )
|Net cash used in financing activities attributable to discontinued operations                                                                         |  |                         |        |   |      |   |           |      |  |   | (38,571  | )
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Total cash provided by (used in) discontinued operations                                                                                              |  |                         | 1,009   |   |      |   | (501       | )    |  |   | (48,492  | )
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                                                                                          |  |                         |        |   |      |   | (2,472     | )    |  |   | 1,531    |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                                                                  |  |                         | 92,458  |   |      |   | 171,243    |      |  |   | (47,147  | )
|Cash and cash equivalents at beginning of period                                                                                                      |  |                         | 177,463 |   |      |   | 6,220      |      |  |   | 53,367   |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  
|Cash and cash equivalents at end of period                                                                                                            |  | $                       | 269,921 |   |      | $ | 177,463    |      |  | $ | 6,220    |  
|                                                                                                                                                      |  |                         |         |   |      |   |            |      |  |   |          |  

The accompanying notes are an integral part of these consolidated financial statements.



41



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1ORGANIZATION

Company Overview

HSNi
markets and sells a wide range of third party and private label merchandise directly to consumers through (i) television home shopping programming broadcast on the HSN television network; (ii) catalogs, which consist primarily of the
Cornerstone portfolio of leading print catalogs which includes Frontgate, Garnet Hill, Ballard Designs, Improvements, Smith+Noble, The Territory Ahead and TravelSmith; (iii) websites, which consist primarily of HSN.com and the seven branded
websites operated by Cornerstone; (iv) retail stores; and (v) mobile handheld devices. HSNis television home shopping business and related internet commerce is referred to herein as HSN and all catalog operations,
including related internet commerce and retail stores, are collectively referred to herein as Cornerstone.

HSN
offerings primarily consist of jewelry, apparel & accessories, health & beauty and home & other. Merchandise offered by Cornerstone primarily consists of home furnishings (including indoor/outdoor furniture, window
treatments and other home related goods) and apparel & accessories.

Basis of Presentation

HSNi was incorporated in Delaware in May 2008 in connection with the spin-off of several businesses previously owned by IAC/InterActiveCorp,
or IAC. The spin-off from IAC occurred after the close of The NASDAQ Stock Market on August 20, 2008 and occurred concurrent with the spin-offs from IAC of Interval Leisure Group, Inc., Ticketmaster Entertainment, Inc., and Tree.com, Inc.
Throughout these financial statements, the separation transaction is referred to as the spin-off and each of these companies as Spincos. Effective August 21, 2008, HSNis shares began trading on the NASDAQ Global
Select Market under the symbol HSNI.

HSNi was formed to hold HSN and Cornerstone, the businesses that previously
comprised most of IACs Retailing segment. Prior to the spin-off, HSNi was a wholly owned subsidiary of IAC and did not have any material assets or liabilities, nor did HSNi engage in any business or other activities and, other than in
connection with the spin-off, did not acquire or incur any material assets or liabilities. The businesses operated by HSNi following the spin-off are referred to herein as the HSNi Businesses. HSNi also includes the entity classified as
discontinued operations in Note 7.

In conjunction with the spin-off, HSNi completed the following transactions:
(1) extinguished all intercompany receivable balances from IAC, which totaled $1.5 billion by recording a non-cash distribution to IAC, (2) recapitalized the invested equity balance with common stock, whereby holders of IAC common stock
and/or Class B common stock received one-fifth of a share of HSNi common stock for every share of IAC common stock and/or Class B common stock held at the close of business on August 11, 2008, the record date for the spin-off, as more fully
described in our Registration Statement on Form S-1, as amended, (3) raised $390 million through a combination of $240 million of privately issued debt securities and $150 million from a secured credit facility (See Note 11), and
(4) transferred to IAC all cash in excess of $50 million, which totaled $333.8 million.

These consolidated financial
statements present our results of operations, financial position, shareholders equity and cash flows on a combined basis up through the spin-off on August 20, 2008, and on a consolidated basis thereafter. We prepared these financial
statements relating to periods prior to the spin-off on a combined basis because they excluded certain investments and assets that were owned, either directly or indirectly, by legal entities that comprise the HSNi Businesses. The ownership of these
investments and assets were retained by IAC after the spin-off. The historical combined financial statements of HSNi and its subsidiaries reflect the



42



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



contribution or other transfer to HSNi of all of the subsidiaries and assets and the assumption by HSNi of all of the liabilities relating to the HSNi Businesses in connection with the spin-off
and the allocation to HSNi of certain IAC corporate expenses relating to the HSNi Businesses. Accordingly, the historical combined financial statements of HSNi reflect the historical financial position, results of operations and cash flows of the
HSNi Businesses since their respective dates of acquisition by IAC, based on the historical consolidated financial statements and accounting records of IAC and using the historical results of operations and historical bases of the assets and
liabilities of the HSNi Businesses with the exception of accounting for income taxes. For purposes of these financial statements, income taxes have been principally computed for HSNi on an as if stand-alone, separate tax return basis. Our income tax
payable, as well as deferred tax assets and liabilities, represent the estimated impact of filing a consolidated income tax return with IAC through the spin-off, and filing a stand-alone consolidated income tax return thereafter. Intercompany
transactions and accounts have been eliminated.

In the opinion of HSNis management, the assumptions underlying these
consolidated statements are reasonable. However, this financial information does not necessarily reflect what the historical financial position, results of operations and cash flows of HSNi would have been had HSNi been a stand-alone company during
the periods presented prior to the spin-off.

Reclassifications

Certain reclassifications were made to prior period amounts in the consolidated balance sheet to conform with the classifications of such
amounts for the most recent period. These reclassifications did not change previously reported total assets, liabilities or shareholders equity.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenue primarily consists of merchandise sales and is reduced by incentive discounts and sales returns to arrive at net sales. Revenue is
recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is on the date of shipment. HSNis sales policy allows customers to
return merchandise for a full refund or exchange, subject to pre-established time restrictions and, in some cases, restocking fees. Allowances for returned merchandise and other adjustments (including reimbursed shipping and handling costs) are
provided based upon past experience. HSNi believes that actual returns of product sales have not materially varied from estimates in any of the periods presented. HSNis estimated return rates were 17.8%, 18.4% and 18.4% in 2009, 2008 and 2007,
respectively. Sales taxes collected are not included in revenue.

Shipping and Handling Fees and Costs

Shipping and handling fees billed to customers are recorded as revenue. The costs associated with shipping goods to customers are recorded as
cost of sales.

Cash and Cash Equivalents

Cash and cash equivalents include cash and money market instruments with an original maturity of three months or less when purchased and are stated at cost.

Accounts Receivable

Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. HSN provides extended payment terms to its customers known as Flexpay. Flexpay is offered on certain products



43



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



sold by HSN. Revenue is recorded when delivery to the customer has occurred, at which time HSN collects the first payment, sales tax and all shipping and handling fees. Subsequent collections are
due from customers in 30-day increments, payable automatically upon authorization of the customers method of payment. HSN accepts most credit, and select debit cards. HSN offers Flexpay programs ranging from two to six interest-free payments.
Flexpay receivables consist of outstanding balances owed by customers, less a reserve for uncollectible balances. The balance of Flexpay receivables, net of allowance, at December 31, 2009 and 2008 was $154.7 million and
$130.3 million, respectively.

Accounts receivable outstanding longer than the contractual payment terms are considered
past due. HSNi determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, HSNis previous loss history and the condition of the general economy. HSNi writes off accounts
receivable when they are deemed uncollectible.

Inventories

Inventories, which primarily consist of finished goods, are valued at the lower of cost or market, with the cost being determined based upon
the first-in, first-out method. Cost includes inbound freight and duties and, in the case of HSN, certain allocable costs, including certain warehouse costs. Inventories include approximately $4.9 million and $5.4 million of these
allocable general and administrative overhead costs at December 31, 2009 and 2008, respectively, and approximately $19.0 million, $19.7 million and $17.8 million of such costs were included in the accompanying consolidated statements of
operations for the years ended December 31, 2009, 2008 and 2007, respectively. Market is determined on the basis of net realizable value, giving consideration to obsolescence and other factors.

Property and Equipment

Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in operations.

Depreciation is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over the shorter of the estimated
service life or lease period.



|                                            |  |                    
|------------------------------------------- |  | -------------------
|Asset Category                              |  | Depreciation Period
|Computer equipment and capitalized software |  | 3 to 6 Years       
|Buildings and leasehold improvements        |  | 3 to 39 Years      
|Furniture and other equipment               |  | 3 to 10 Years      

HSNi capitalizes certain qualified costs incurred in connection with the development of internal use software. Capitalization of internal use software costs begins when the preliminary project stage is completed; management with the
relevant authority authorizes and commits to the funding of the software project; and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalized internal use software is depreciated
on a straight-line basis over the estimated useful life of the software, not to exceed three years. Capitalized software costs, net of accumulated amortization, totaled $17.9 million and $23.6 million at December 31, 2009 and 2008,
respectively, and are included in Property and equipment, net in the accompanying consolidated balance sheets. Amortization expense related to the capitalized software costs was $13.9 million, $14.0 million and $12.9 million for the
years ended December 31, 2009, 2008 and 2007, respectively, and included in depreciation expense in the consolidated statements of operations.



44



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Goodwill and Indefinite-Lived Intangible Assets

Goodwill acquired in business combinations is assigned to the reporting units that are expected to benefit from the combination as of the
acquisition date. Goodwill and indefinite-lived intangible assets, primarily trade names and trademarks, are tested annually for impairment as of October 1 or upon the occurrence of certain events or substantive changes in circumstances.
See Note 3 for a further discussion on goodwill and indefinite-lived intangible assets.

Long-Lived Assets and Intangible Assets with
Definite Lives

Long-lived assets, including property and equipment and intangible assets with definite lives, are tested
for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Amortization
of definite-lived intangible assets is recorded on a straight-line basis over their estimated lives.

Cable and Satellite Distribution Fees

Cable and satellite distribution fees relate to fees paid in connection with annual or multi-year cable and satellite
contracts for carriage of HSNs programming. Fees that are paid upfront are amortized on a straight-line basis over the terms of the respective contracts. Unpaid fees are accrued.

Cable and satellite distribution fees and amortization totaled $89.7 million, $86.1 million and $91.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively, and are included in Selling and marketing expense in the accompanying consolidated statements of operations. Prepaid cable and satellite distribution fees due within 12 months were
$5.2 million and $1.6 million at December 31, 2009 and 2008, respectively, and are included in Prepaid expenses and other current assets in the accompanying consolidated balance sheets. The long-term portions of upfront
payments relating to multi-year cable and satellite contracts were $4.3 million and $7.6 million at December 31, 2009 and 2008, respectively, and are included in Other non-current assets in the accompanying consolidated balance
sheets.

Advertising

Advertising costs principally represent offline costs, including catalog production and distribution costs, and online advertising costs. Advertising costs are expensed in the period incurred, except for Cornerstones direct costs of
producing and distributing its catalogs, which are capitalized. These capitalized costs are amortized over the expected future revenue stream, which is generally three months from the date catalogs are mailed. Such capitalized costs totaled $17.2
million and $23.0 million at of December 31, 2009 and 2008, respectively, and are included in Prepaid expenses and other current assets in the accompanying consolidated balance sheets.

Of these amounts, $12.9 million and $13.6 million at December 31, 2009 and 2008, respectively, related to catalogs that had not
yet been mailed. Advertising expense was $196.7 million, $256.4 million and $282.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Amortization of Non-Cash Marketing

Amortization of non-cash marketing
consists of non-cash marketing and advertising provided to HSNi by IAC. The non-cash marketing was secured by IAC from Universal Television as part of the transaction pursuant



45



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



to which Vivendi Universal Entertainment LLLP (VUE) was created, and the subsequent transaction by which IAC sold its partnership interests in VUE. HSNi used the non-cash advertising
for television advertising on various NBC Universal network and cable channels through the third quarter of 2008 without any cash cost.

Income Taxes

HSNi accounts for income taxes under the liability method, and deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that
the deferred tax asset will not be realized. HSNi records interest and penalties on potential tax contingencies as a component of income tax expense and records interest net of any applicable related income tax benefit.

HSNi recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on its technical merits. The second step is to measure the tax benefit as the largest amount which is more than
50% likely of being realized upon ultimate settlement.

Foreign Currency Translation and Transaction Gains and Losses

The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the
functional currency. Local currency assets and liabilities are translated at the rates of exchange as of the balance sheet date, and local currency revenue and expenses are translated at average rates of exchange during the period. Resulting
translation gains or losses are included as a component of accumulated other comprehensive (loss) income, a component of equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of
the entity are included in the consolidated statements of operations.

Foreign currency transaction gains and losses arose
from entities that are presented in these statements as discontinued operations and, accordingly, are included in Loss from discontinued operations, net of tax in the accompanying consolidated statements of operations.

Stock-Based Compensation

HSNi recognizes compensation expense for stock-based awards, reduced for estimated forfeitures, on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the outstanding stock awards.
Tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the consolidated statement of operations are reported as a component of financing cash flows. HSNi issues new shares to satisfy equity
vestings and exercises. See Note 12 for a further description for our stock compensation plans.

Earnings (Loss) Per Share

We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding
during the period. We compute diluted earnings (loss) per share using the treasury stock or as if converted methods, as applicable.



46



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Accounting Estimates

HSNi prepares its financial statements in conformity with generally accepted accounting principles in the United States (GAAP).
These principles require management to make certain estimates and assumptions during the preparation of its consolidated financial statements. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or
market adjustment for inventory; sales returns and other revenue allowances; the allowance for doubtful accounts; the recoverability of long-lived assets; the impairment of goodwill and intangible assets; the determination of deferred income taxes,
including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of stock-based compensation.

Fair Value of Financial Instruments

Fair value accounting, as prescribed by GAAP, defines fair value and establishes a framework for measuring fair value based on a three-level hierarchy:

Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require
significant judgment.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate
fair value because of the short maturity of these items.

The $240.0 million of Senior Notes and the $100.0 million term loan
are carried at cost. As of December 31, 2009, the estimated fair values of the Senior Notes and term loan were approximately $264.0 million and $96.1 million, respectively. The fair value of the Senior Notes was based upon quoted market
information (level 1 criteria) and the fair value of the term loan was based upon discounted future cash flows (level 3 criteria).

HSNi measures certain assets, such as intangible assets and property and equipment, at fair value on a non-recurring basis. These assets are recognized at fair value if they are deemed to be impaired. During the year ended December 31,
2009, there were no assets that were required to be recorded at fair value since no impairment indicators were present.

Certain Risks and
Concentrations

HSNis business is subject to certain risks and concentrations including dependence on third-party
technology providers, exposure to risks associated with online commerce security, consumer credit risk and credit card fraud. HSNi also depends on third-party service providers for processing certain fulfillment services.



47



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Recent Accounting Pronouncements

In June 2009, the FASB issued guidance requiring a qualitative approach to identifying a controlling financial interest in a variable
interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The guidance is effective for annual reporting periods beginning
after November 15, 2009, and therefore, will be applicable to HSNi in the first quarter of fiscal year 2010. HSNi does not expect the adoption of this new standard to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued an update to the existing guidance for multiple-element revenue arrangements. This revised guidance
primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the
residual method to allocate the arrangement consideration. This accounting update is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is
retroactively applied to the beginning of the year of adoption. HSNi is currently assessing the future impact of this new accounting update but does not expect it to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued an accounting standard addressing how entities account for revenue arrangements that contain both hardware
and software elements. Due to the significant difference in the level of evidence required for separation of multiple deliverables within different accounting standards, this particular accounting standard will modify the scope of accounting
guidance for software revenue recognition. Many tangible products containing software and non-software components that function together to deliver the tangible products essential functionality will be accounted for under the revised
multiple-element arrangement revenue recognition guidance disclosed above. This accounting standard is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised
guidance is retroactively applied to the beginning of the year of adoption. HSNi is currently assessing the future impact of this new accounting update but does not expect it to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued an update regarding improving disclosures about fair value measurements. The update provides
amendments requiring entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition the update requires entities to present
separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements are
effective for HSNi in the first quarter of 2010 and the disclosures related to Level 3 fair value measurements are effective for HSNi in the first quarter of 2011. HSNi is currently assessing the future impact of this new accounting update but does
not expect it to have a material impact on its consolidated financial statements or disclosures.

NOTE 3GOODWILL AND INTANGIBLE
ASSETS

HSNi assesses the impairment of goodwill and indefinite-lived identifiable intangible assets at least annually
during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing this review, HSNi assesses the implied fair value of its goodwill and intangible assets. If it is
determined that the implied fair value of goodwill and/or indefinite-lived intangible assets is less than the carrying amount, an impairment charge, equal to the excess is recorded. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the



48



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



reporting unit (including the unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the
purchase price paid. The fair value of the reporting unit is determined by using a combination of a discounted cash flow analysis and an equity analysis based on the trading value of its common stock. The discounted cash flow analysis indicates the
fair value of the reporting units based on the present value of the cash flows expected to be generated in the future. The equity analysis is based on the trading value of its common stock as of the valuation date or the average stock price over a
range of dates prior to the valuation date, plus an estimated control premium.

In assessing fair value, HSNi considers, among
other indicators, differences between estimated and actual cash flows, changes in the related discount rate and the relationship between the trading price of its common stock and its per-share book value. Determining fair value requires the exercise
of significant judgments, including judgments about discount rates, perpetual growth rates, royalty rates, terminal growth rates, control premiums and the amount and timing of future cash flows. These factors used in the determination of fair value,
particularly estimated cash flows, are sensitive to, among other things, changes in the retail consumer market and the general economy.

In the second quarter of 2008, HSNi recorded impairment charges related to goodwill and indefinite-lived intangible assets of $221.5 million and $78.5 million, respectively. The impairment
charges were recorded at the Cornerstone reporting unit and were due, in part, to the deterioration in the macroeconomic environment for retailers, particularly in the home and apparel categories (which are Cornerstones primary markets), the
negative impact of this environment on Cornerstones performance and the related reduction in market valuations for retailers.

HSNi conducted its annual test for impairment as of October 1, 2008 during the fourth quarter of 2008. During the fourth quarter of 2008, the recession deepened and consumers were spending less. As a result of the deepening recession,
deteriorating consumer confidence and uncertainties with respect to the breadth, depth and duration of the economic downturn and its potential effects on HSNis business, HSNi revised its projections used to derive its future cash flows.
Further, HSNi employed and considered the input of specialists to aid in valuing assets and liabilities of its reporting units (including identified definite and indefinite-lived intangible assets) and in determining appropriate discount rates and
terminal growth rates to calculate HSNis discounted cash flows. The outcome of the annual impairment testing indicated the existence of impairment associated with both the HSN and Cornerstone reporting units.

Also, during the fourth quarter of 2008, HSNi determined that the downward trend of its stock price and the overall negative environment
regarding the expected performance of the retail sector were triggering events as defined in current accounting guidance. Accordingly, HSNi updated its impairment assessment as of December 31, 2008. As a part of this assessment, HSNi updated
its valuation as of December 31, 2008, and adjusted the rates used to discount its cash flows to support a valuation that was indicative of the 10-day average market value of HSNis stock plus an estimated control premium based upon
observable transactions of comparable companies.

As a result of the analyses, the goodwill impairment charges recorded in the
fourth quarter of 2008 at the HSN and Cornerstone reporting units were $2.4 billion and $271.1 million, respectively. The intangible asset impairment charges in the fourth quarter of 2008 at the HSN and Cornerstone reporting units were $50.0 million
and $174.0 million, respectively.

Charges related to the impairment of goodwill and intangible assets are included in asset
impairments in the accompanying consolidated statements of operations.



49



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



As a result of the impairment charges in 2008, HSNi no longer has goodwill recorded.
Based on the annual impairment test performed in the fourth quarter, there was no impairment of its intangible assets as of December 31, 2009. An increase in the discount rates or declines in the future estimated cash flows or the trading value
of HSNis common stock could result in material intangible asset impairment charges.

The balance of goodwill and
intangible assets, net, is as follows (in thousands):



|                                           |  |              |         |      |   |        
|------------------------------------------ |  | ------------ | ------- | ---- | - | -------
|                                           |  | December 31,
|                                           |  | 2009         |         | 2008
|Goodwill                                   |  | $            |        |      | $ |       
|Intangible assets with indefinite lives    |  |              | 260,248 |      |   | 260,248
|Intangible assets with definite lives, net |  |              | 937     |      |   | 1,499  
|                                           |  |              |         |      |   |        
|Total goodwill and intangible assets, net  |  | $            | 261,185 |      | $ | 261,747
|                                           |  |              |         |      |   |        

Intangible assets with indefinite lives relate
principally to trade names and trademarks acquired in various acquisitions. When definite-lived intangible assets are sold or expire, the cost of the asset and the related accumulated amortization are eliminated and any gain or loss is recognized at
such time.

At December 31, 2009 and 2008, the following is information on intangible assets with definite lives (in
thousands):



|                        |  |      |       |                         |   |        |     |  |                                         |       |  |     
|----------------------- |  | ---- | ----- | ----------------------- | - | ------ | --- |  | --------------------------------------- | ----- |  | ----
|                        |  | Cost |       | AccumulatedAmortization |   |        | Net |  | WeightedAverageAmortizationLife (Years)
|As of December 31, 2009 |  | $    | 5,622 |                         | $ | (4,685 | )   |  | $                                       | 937   |  | 10.0
|As of December 31, 2008 |  | $    | 5,666 |                         | $ | (4,167 | )   |  | $                                       | 1,499 |  | 10.0

Amortization of
intangible assets with definite lives is computed on a straight-line basis and, based on December 31, 2009 balances, such amortization for the next two years is estimated to be as follows (in thousands):



|                          |  |   |    
|------------------------- |  | - | ---
|Years Ending December 31, |  |  
|2010                      |  | $ | 562
|2011                      |  |   | 375
|                          |  |   |    
|                          |  | $ | 937
|                          |  |   |    

The following tables present the balance of goodwill
by reporting unit, including changes in the carrying amount of goodwill, for the years ended December 31, 2009 and 2008 (in thousands):



|            |  |                                   |           |                       |   |            |                                 |  |           |   |            |   |            |  |                                   |   |  |   |   |  |   |  
|----------- |  | --------------------------------- | --------- | --------------------- | - | ---------- | ------------------------------- |  | --------- | - | ---------- | - | ---------- |  | --------------------------------- | - |  | - | - |  | - | -
|            |  | GrossBalance as ofJanuary 1, 2009 |           | AccumulatedImpairment |   |            | NetBalance as ofJanuary 1, 2009 |  | Additions |   | Deductions |   | Impairment |  | NetBalance as
ofDecember 31, 2009
|HSN         |  | $                                 | 2,391,594 |                       | $ | (2,391,594 | )                               |  | $         |  |            | $ |           |  | $                                 |  |  | $ |  |  | $ | 
|Cornerstone |  |                                   | 492,606   |                       |   | (492,606   | )                               |  |           |  |            |   |           |  |                                   |  |  |   |  |  |   | 
|            |  |                                   |           |                       |   |            |                                 |  |           |   |            |   |            |  |                                   |   |  |   |   |  |   |  
|Total       |  | $                                 | 2,884,200 |                       | $ | (2,884,200 | )                               |  | $         |  |            | $ |           |  | $                                 |  |  | $ |  |  | $ | 
|            |  |                                   |           |                       |   |            |                                 |  |           |   |            |   |            |  |                                   |   |  |   |   |  |   |  



50



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|            |  |                                   |           |                       |   |                                 |  |           |           |            |   |       |            |   |        |                                   |  |   |            |   |  |   |  
|----------- |  | --------------------------------- | --------- | --------------------- | - | ------------------------------- |  | --------- | --------- | ---------- | - | ----- | ---------- | - | ------ | --------------------------------- |  | - | ---------- | - |  | - | -
|            |  |                                   |           |                       |   |                                 | 
|            |  | GrossBalance as ofJanuary 1, 2008 |           | AccumulatedImpairment |   | NetBalance as ofJanuary 1, 2008 |  | Additions |           | Deductions |   |       | Impairment |   |        | NetBalance as ofDecember 31, 2008
|HSN         |  | $                                 | 2,390,197 |                       | $ |                                |  | $         | 2,390,197 |            | $ | 1,397 |            | $ |       |                                   |  | $ | (2,391,594 | ) |  | $ | 
|Cornerstone |  |                                   | 494,192   |                       |   |                                |  |           | 494,192   |            |   |      |            |   | (1,586 | )                                 |  |   | (492,606   | ) |  |   | 
|            |  |                                   |           |                       |   |                                 |  |           |           |            |   |       |            |   |        |                                   |  |   |            |   |  |   |  
|Total       |  | $                                 | 2,884,389 |                       | $ |                                |  | $         | 2,884,389 |            | $ | 1,397 |            | $ | (1,586 | )                                 |  | $ | (2,884,200 | ) |  | $ | 
|            |  |                                   |           |                       |   |                                 |  |           |           |            |   |       |            |   |        |                                   |  |   |            |   |  |   |  

Deductions principally relate to a reduction in
acquired tax liabilities and the income tax benefit realized pursuant to the exercise of stock options assumed in a business acquisition that were vested at the transaction date and are treated as a reduction in goodwill when the income tax
deductions are realized.

NOTE 4PROPERTY AND EQUIPMENT

The balance of property and equipment, net, is as follows (in thousands):



|                                                |  |              |          |   |      |   |          |  
|----------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                |  | December 31, |         
|                                                |  | 2009         |          |   | 2008 |  
|Capitalized software                            |  | $            | 190,331  |   |      | $ | 185,107  |  
|Computer and broadcast equipment                |  |              | 89,001   |   |      |   | 87,757   |  
|Buildings and leasehold improvements            |  |              | 81,937   |   |      |   | 77,857   |  
|Furniture and other equipment                   |  |              | 66,861   |   |      |   | 60,910   |  
|Projects in progress                            |  |              | 13,207   |   |      |   | 16,370   |  
|Land and land improvements                      |  |              | 11,847   |   |      |   | 11,740   |  
|                                                |  |              |          |   |      |   |          |  
|                                                |  |              | 453,184  |   |      |   | 439,741  |  
|Less: accumulated depreciation and amortization |  |              | (296,133 | ) |      |   | (281,909 | )
|                                                |  |              |          |   |      |   |          |  
|Total property and equipment, net               |  | $            | 157,051  |   |      | $ | 157,832  |  
|                                                |  |              |          |   |      |   |          |  

NOTE 5ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following (in thousands):



|                                                     |  |              |         |      |   |        
|---------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                     |  | December 31,
|                                                     |  | 2009         |         | 2008
|Accrued sales returns                                |  | $            | 39,424  |      | $ | 37,340 
|Accrued cable and satellite related fees             |  |              | 37,915  |      |   | 39,959 
|Accrued freight and fulfillment expenses             |  |              | 15,366  |      |   | 21,966 
|Accrued compensation and benefits                    |  |              | 36,029  |      |   | 16,653 
|Income tax payable                                   |  |              | 26,982  |      |   | 1,606  
|Other accrued expenses and current liabilities       |  |              | 67,023  |      |   | 73,264 
|                                                     |  |              |         |      |   |        
|Total accrued expenses and other current liabilities |  | $            | 222,739 |      | $ | 190,788
|                                                     |  |              |         |      |   |        

NOTE 6SEGMENT INFORMATION

HSNi has determined to represent its operating segments and related financial information in a manner consistent with how the chief operating
decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of



51



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



products or services offered or the target market. HSNi has two operating segments, HSN and Cornerstone. Entities included in discontinued operations, as described in Note 7, are excluded
from the schedules below. The accounting policies of the segments are the same as those described in Note 2  Summary of Significant Accounting Policies. Intercompany accounts and transactions have been eliminated in consolidation.

HSNis primary metric is Adjusted EBITDA, which is defined as operating income excluding, if applicable: (1) stock-based
compensation expense and amortization of non-cash marketing, (2) amortization of intangibles, (3) depreciation and gains and losses on asset dispositions, (4) goodwill, long-lived asset and intangible asset impairments, (5) pro
forma adjustments for significant acquisitions, and (6) one-time items. Adjusted EBITDA is not a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for operating income, net income or any
other measure determined in accordance with GAAP. Adjusted EBITDA is used as a measurement of operating efficiency and overall financial performance and HSNi believes it to be a helpful measure for those evaluating companies in the retail industry.
Adjusted EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures. Adjusted EBITDA has certain limitations in that it does not take into account the impact to HSNis
consolidated statements of operations of certain expenses, including stock-based compensation, amortization of non-cash marketing, amortization of intangibles, depreciation, gains and losses on asset dispositions, asset impairment charges,
acquisition-related accounting and one-time items.

The following tables reconcile Adjusted EBITDA to operating income (loss)
for HSNis operating segments (in thousands):



|                                    |  |                              |            |   |             |   |          |       |  |   |            |  
|----------------------------------- |  | ---------------------------- | ---------- | - | ----------- | - | -------- | ----- |  | - | ---------- | -
|                                    |  | Year Ended December 31, 2009 |           
|                                    |  | HSN                          |            |   | Cornerstone |   |          | Total | 
|Operating income (loss)             |  | $                            | 157,233    |   |             | $ | (1,579   | )     |  | $ | 155,654    |  
|Stock-based compensation expense    |  |                              | 9,041      |   |             |   | 2,223    |       |  |   | 11,264     |  
|Amortization of non-cash marketing  |  |                              |           |   |             |   |         |       |  |   |           |  
|Amortization of intangible assets   |  |                              | 562        |   |             |   |         |       |  |   | 562        |  
|Asset impairments                   |  |                              |           |   |             |   |         |       |  |   |           |  
|Depreciation                        |  |                              | 28,666     |   |             |   | 9,309    |       |  |   | 37,975     |  
|Loss on disposition of fixed assets |  |                              | 637        |   |             |   | 45       |       |  |   | 682        |  
|                                    |  |                              |            |   |             |   |          |       |  |   |            |  
|Adjusted EBITDA                     |  | $                            | 196,139    |   |             | $ | 9,998    |       |  | $ | 206,137    |  
|                                    |  |                              |            |   |             |   |          |       |  |   |            |  
|                                    | 
|                                    |  | Year Ended December 31, 2008 |           
|                                    |  | HSN                          |            |   | Cornerstone |   |          | Total | 
|Operating loss                      |  | $                            | (2,332,789 | ) |             | $ | (769,522 | )     |  | $ | (3,102,311 | )
|Stock-based compensation expense    |  |                              | 14,197     |   |             |   | 6,089    |       |  |   | 20,286     |  
|Amortization of non-cash marketing  |  |                              | 8,022      |   |             |   |         |       |  |   | 8,022      |  
|Amortization of intangible assets   |  |                              | 568        |   |             |   | 6,897    |       |  |   | 7,465      |  
|Asset impairments                   |  |                              | 2,441,594  |   |             |   | 745,056  |       |  |   | 3,186,650  |  
|Depreciation                        |  |                              | 27,348     |   |             |   | 10,090   |       |  |   | 37,438     |  
|Loss on disposition of fixed assets |  |                              | 1,339      |   |             |   | 15       |       |  |   | 1,354      |  
|                                    |  |                              |            |   |             |   |          |       |  |   |            |  
|Adjusted EBITDA                     |  | $                            | 160,279    |   |             | $ | (1,375   | )     |  | $ | 158,904    |  
|                                    |  |                              |            |   |             |   |          |       |  |   |            |  



52



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|                                    |  |                              |         |             |   |        |  |   |        
|----------------------------------- |  | ---------------------------- | ------- | ----------- | - | ------ |  | - | -------
|                                    |  | Year Ended December 31, 2007
|                                    |  | HSN                          |         | Cornerstone |   | Total 
|Operating income                    |  | $                            | 135,298 |             | $ | 34,493 |  | $ | 169,791
|Stock-based compensation expense    |  |                              | 6,411   |             |   | 5,749  |  |   | 12,160 
|Amortization of non-cash marketing  |  |                              | 4,442   |             |   |       |  |   | 4,442  
|Amortization of intangible assets   |  |                              | 2,584   |             |   | 10,097 |  |   | 12,681 
|Asset impairments                   |  |                              |        |             |   |       |  |   |       
|Depreciation                        |  |                              | 25,404  |             |   | 8,959  |  |   | 34,363 
|Loss on disposition of fixed assets |  |                              | 258     |             |   | 18     |  |   | 276    
|                                    |  |                              |         |             |   |        |  |   |        
|Adjusted EBITDA                     |  | $                            | 174,397 |             | $ | 59,316 |  | $ | 233,713
|                                    |  |                              |         |             |   |        |  |   |        

Financial information by segment is as follows
(thousands):



|                        |  |                         |           |      |   |           |  |   |          
|----------------------- |  | ----------------------- | --------- | ---- | - | --------- |  | - | ---------
|                        |  | Year Ended December 31,
|                        |  | 2009                    |           | 2008 |   | 2007     
|                        |  | (In thousands)         
|Net sales:              |  |                         |           |      |   |           |  |   |          
|HSN                     |  | $                       | 2,007,897 |      | $ | 1,956,871 |  | $ | 1,892,582
|Cornerstone             |  |                         | 741,712   |      |   | 866,722   |  |   | 1,015,660
|                        |  |                         |           |      |   |           |  |   |          
|Total                   |  | $                       | 2,749,609 |      | $ | 2,823,593 |  | $ | 2,908,242
|                        |  |                         |           |      |   |           |  |   |          
|                        |  |                         |          
|Identifiable assets:    |  |                         |           |      |   |           |  |   |          
|HSN                     |  | $                       | 1,035,233 |      | $ | 940,515   |  | $ | 3,205,428
|Cornerstone             |  |                         | 183,417   |      |   | 210,949   |  |   | 1,011,923
|Discontinued operations |  |                         |          |      |   | 993       |  |   | 3,280    
|                        |  |                         |           |      |   |           |  |   |          
|Total                   |  | $                       | 1,218,650 |      | $ | 1,152,457 |  | $ | 4,220,631
|                        |  |                         |           |      |   |           |  |   |          
|                        |  |                         |          
|Capital expenditures:   |  |                         |           |      |   |           |  |   |          
|HSN                     |  | $                       | 35,258    |      | $ | 33,367    |  | $ | 34,288   
|Cornerstone             |  |                         | 6,162     |      |   | 6,295     |  |   | 14,426   
|                        |  |                         |           |      |   |           |  |   |          
|Total                   |  | $                       | 41,420    |      | $ | 39,662    |  | $ | 48,714   
|                        |  |                         |           |      |   |           |  |   |          

HSNi does not report revenue from external customers
for each product or each group of similar products as it is impracticable to do so. HSNi maintains operations principally in the United States with no long-lived assets and insignificant net sales in all other countries.

NOTE 7DISCONTINUED OPERATIONS

On June 19, 2007, HSNi sold Home Shopping Europe GMbH & Co. KG, and its affiliated station HSE24 (HSE). Accordingly, (loss) income from discontinued operations includes the income and losses for HSE and
HSNis other international subsidiaries for all periods presented. HSNi sold HSE for approximately $216.5 million, which resulted in a pre-tax gain of $45.7 million and an after-tax gain of $30.6 million. The pre-tax gain
included $22.8 million of foreign currency translation gains that were recognized into earnings at the time of the sale.



53



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The net sales and net (loss) income for the aforementioned discontinued operations for
the applicable periods are as follows (in thousands):



|                                                       |  |                         |      |   |      |   |        |      |  |   |        
|------------------------------------------------------ |  | ----------------------- | ---- | - | ---- | - | ------ | ---- |  | - | -------
|                                                       |  | Year Ended December 31,
|                                                       |  | 2009                    |      |   | 2008 |   |        | 2007
|Net sales                                              |  | $                       |     |   |      | $ |       |      |  | $ | 192,701
|                                                       |  |                         |      |   |      |   |        |      |  |   |        
|(Loss) income before income taxes                      |  | $                       | (145 | ) |      | $ | (749   | )    |  | $ | 28,786 
|Income tax benefit (expense)                           |  |                         | 55   |   |      |   | (2,661 | )    |  |   | 213    
|                                                       |  |                         |      |   |      |   |        |      |  |   |        
|(Loss) income from discontinued operations, net of tax |  | $                       | (90  | ) |      | $ | (3,410 | )    |  | $ | 28,999 
|                                                       |  |                         |      |   |      |   |        |      |  |   |        

NOTE 8COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of (in thousands):



|                                  |  |                         |        |   |      |   |            |      |  |   |         |  
|--------------------------------- |  | ----------------------- | ------ | - | ---- | - | ---------- | ---- |  | - | ------- | -
|                                  |  | Year Ended December 31, |       
|                                  |  | 2009                    |        |   | 2008 |   |            | 2007 | 
|Net income (loss)                 |  | $                       | 72,488 |   |      | $ | (2,390,888 | )    |  | $ | 164,804 |  
|                                  |  |                         |        |   |      |   |            |      |  |   |         |  
|Foreign currency translation loss |  |                         | (8     | ) |      |   | (1,416     | )    |  |   | (35,045 | )
|Net loss on derivative contracts  |  |                         |       |   |      |   |           |      |  |   | (2,355  | )
|                                  |  |                         |        |   |      |   |            |      |  |   |         |  
|Other comprehensive loss          |  |                         | (8     | ) |      |   | (1,416     | )    |  |   | (37,400 | )
|                                  |  |                         |        |   |      |   |            |      |  |   |         |  
|Comprehensive income (loss)       |  | $                       | 72,480 |   |      | $ | (2,392,304 | )    |  | $ | 127,404 |  
|                                  |  |                         |        |   |      |   |            |      |  |   |         |  

Accumulated other comprehensive income at December 31, 2009 and December 31, 2008 is solely
related to foreign currency translation and is recorded net of tax.

NOTE 9RETIREMENT AND SAVINGS PLAN

Through December 31, 2008, our employees continued to be eligible to participate in IACs retirement and savings plan in the U.S.
that qualifies under Section 401(k) of the Internal Revenue Code. Effective December 31, 2008, IAC transferred the assets of our participating employees into the HSN, Inc. Retirement Savings Plan that qualifies under
Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 50% of their pretax salary, up to the statutory limits. Through December 31, 2009, we contributed ten cents for each dollar a participant contributed
in this plan, with a maximum contribution of 6% of a participants contribution. Through December 31, 2008, we contributed fifty cents for each dollar a participant contributed in this plan, with a maximum contribution of 3% of a
participants earnings. Our matching contribution was $0.8 million, $4.2 million and $4.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.

NOTE 10EARNINGS PER SHARE

We compute basic earnings per share using
the weighted average number of common shares outstanding for the period. We compute diluted earnings per share using the treasury stock method or as if converted method, as applicable, which includes the weighted average number of common shares
outstanding for the period plus the potential dilution that could occur if various equity awards to issue common stock were exercised or restricted equity awards were vested resulting in the issuance of common stock that could share in our earnings.



54



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Basic Earnings Per Share

For the year ended December 31, 2009, basic earnings per share was computed using the number of weighted average shares of common stock
outstanding for the period.

For the year ended December 31, 2008, basic earnings per share was computed using the number
of shares of common stock outstanding immediately following the spin-off, as if such shares were outstanding for the entire period prior to the spin-off, plus the weighted average number of such shares outstanding following the spin-off date through
December 31, 2008.

For the year ended December 31, 2007, basic earnings per share was computed using the number of
shares of common stock outstanding immediately following the spin-off, as if such shares were outstanding for the entire period.

Diluted
Earnings Per Share

For the year ended December 31, 2009, diluted earnings per share was computed using the number of
shares of common stock outstanding for the year, and if dilutive, the incremental common stock that we would issue upon the assumed exercise of stock options and stock appreciation rights and the vesting of restricted stock units using the treasury
stock method.

For the year ended December 31, 2008, diluted earnings per share was computed using (i) the number of
shares of common stock outstanding immediately following the spin-off, (ii) the weighted average number of such shares outstanding following the spin-off date through December 31, 2008, and (iii) if dilutive, the incremental common
stock that we would issue upon the assumed exercise of stock options and stock appreciation rights and the vesting of restricted stock units using the treasury stock method.

For the year ended December 31, 2007, diluted earnings per share was computed using (i) the number of shares of common stock
outstanding immediately following the spin-off, and (ii) if dilutive, the incremental common stock that we would issue upon exercise of stock options and stock appreciation rights and the vesting of restricted stock units using the treasury
stock method.



55



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table presents our basic and diluted earnings (loss) per share (in
thousands, except per share data):



|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ---------- | ---- |  | - | -------
|                                                                                                                                                                                                 |  | Year Ended December 31,
|                                                                                                                                                                                                 |  | 2009                    |        |   | 2008 |   |            | 2007
|Net income (loss):                                                                                                                                                                               |  |                         |        |   |      |   |            |      |  |   |        
|Income (loss) from continuing operations                                                                                                                                                         |  | $                       | 72,578 |   |      | $ | (2,387,478 | )    |  | $ | 105,233
|(Loss) income from discontinued operations                                                                                                                                                       |  |                         | (90    | ) |      |   | (3,410     | )    |  |   | 59,571 
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|Net income (loss)                                                                                                                                                                                |  | $                       | 72,488 |   |      | $ | (2,390,888 | )    |  | $ | 164,804
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|                                                                                                                                                                                                 |  |                         |       
|Weighted average number of shares outstanding:                                                                                                                                                   |  |                         |        |   |      |   |            |      |  |   |        
|Basic                                                                                                                                                                                            |  |                         | 56,383 |   |      |   | 56,208     |      |  |   | 56,206 
|Dilutive effect of stock-based compensation awards                                                                                                                                               |  |                         | 947    |   |      |   |           |      |  |   | 443    
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|Diluted                                                                                                                                                                                          |  |                         | 57,330 |   |      |   | 56,208     |      |  |   | 56,649 
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|                                                                                                                                                                                                 |  |                         |       
|Net income (loss) per sharebasic:                                                                                                                                                               |  |                         |        |   |      |   |            |      |  |   |        
|Continuing operations                                                                                                                                                                            |  | $                       | 1.29   |   |      | $ | (42.48     | )    |  | $ | 1.87   
|Discontinued operations                                                                                                                                                                          |  |                         | (0.00  | ) |      |   | (0.06      | )    |  |   | 1.06   
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|Net income (loss)                                                                                                                                                                                |  | $                       | 1.29   |   |      | $ | (42.54     | )    |  | $ | 2.93   
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|                                                                                                                                                                                                 |  |                         |       
|Net income (loss) per sharediluted:                                                                                                                                                             |  |                         |        |   |      |   |            |      |  |   |        
|Continuing operations                                                                                                                                                                            |  | $                       | 1.27   |   |      | $ | (42.48     | )    |  | $ | 1.86   
|Discontinued operations                                                                                                                                                                          |  |                         | (0.01  | ) |      |   | (0.06      | )    |  |   | 1.05   
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|Net income (loss)                                                                                                                                                                                |  | $                       | 1.26   |   |      | $ | (42.54     | )    |  | $ | 2.91   
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        
|Unexercised employee stock options and stock appreciation rights and unvested restricted stock units excluded from the diluted
EPS calculation because their effect would have been antidilutive |  |                         | 4,372  |   |      |   | 6,318      |      |  |   | 5,242  
|                                                                                                                                                                                                 |  |                         |        |   |      |   |            |      |  |   |        

NOTE 11LONG-TERM DEBT



|                                                                                                                  |  |              |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                  |  | December 31, |        
|                                                                                                                  |  | 2009         |         |   | 2008 |  
|Secured credit agreement expiring July 25, 2013:                                                                  |  |              |         |   |      |   |         |  
|Term loan                                                                                                         |  | $            | 100,000 |   |      | $ | 150,000 |  
|Revolving credit facility                                                                                         |  |              |        |   |      |   | 20,000  |  
|11.25% Senior Notes due August 1, 2016; interest payable each February 1 and August 1 commencing February 1,
2009 |  |              | 240,000 |   |      |   | 240,000 |  
|Unamortized original issue discount on Senior Notes                                                               |  |              | (1,278  | ) |      |   | (1,472  | )
|                                                                                                                  |  |              |         |   |      |   |         |  
|Total long-term debt                                                                                              |  |              | 338,722 |   |      |   | 408,528 |  
|Less: current maturities                                                                                          |  |              | (4,762  | ) |      |   | (15,000 | )
|                                                                                                                  |  |              |         |   |      |   |         |  
|Long-term debt, net of current maturities                                                                         |  | $            | 333,960 |   |      | $ | 393,528 |  
|                                                                                                                  |  |              |         |   |      |   |         |  

On July 25, 2008, HSNi entered into a secured credit agreement with a syndicate of banks relating to a
$150 million term loan and a $150 million revolving credit facility, each having a five year maturity. Certain HSNi subsidiaries have unconditionally guaranteed HSNis obligation under the credit agreement, which is



56



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



secured by substantially all of HSNis assets. The credit agreement bears interest based on our financial leverage and, as of December 31, 2009, the term loan interest rate was equal to
LIBOR plus 2.75% (2.99%). The credit agreement contains two principal financial covenants consisting of a maximum leverage ratio of 2.75x and a minimum interest coverage ratio of 3.00x, among other covenants. HSNi was in compliance with all such
covenants as of December 31, 2009, with a leverage ratio of 1.64x and an interest coverage ratio of 6.41x. The amount available to us under the credit agreement is reduced by the amount of commercial and standby letters of credit issued under
the revolving credit facility portion of the agreement. As of December 31, 2009, there were $19.2 million of outstanding commercial and standby letters of credit issued under the revolving credit facility. The ability to draw funds under
the revolving credit facility is dependent upon meeting the aforementioned financial covenants, which may limit HSNis ability to draw the full amount of the facility. As of December 31, 2009, the additional amount that could be borrowed
under the revolving credit facility, in consideration of the financial covenants, was approximately $130.8 million. HSNi capitalized $7.3 million in financing costs related to the credit agreement, and HSNi will amortize these costs to interest
expense over the credit agreements five-year life. The annual fee to maintain the revolving credit facility is 50 basis points on the revolving credit facility portion of the credit agreement. As of December 31, 2009, there was $0
outstanding on the revolving credit facility and $100 million outstanding related to the term loan.

On July 28,
2008, HSNi issued $240 million of 11.25% senior notes due 2016 (the Senior Notes). The Senior Notes are unsecured and subordinated to all of HSNis secured debt. The Senior Notes were issued at a discount of $1.6 million,
which along with other issuance expenses of $7.3 million are being amortized to interest expense over the eight year term of the Senior Notes. At any time prior to August 1, 2012, we may redeem the Senior Notes at a redemption price equal
to the sum of the principal amount thereof, plus accrued interest and a make-whole premium. Thereafter, we may redeem the Senior Notes at the redemption prices set forth below, together with accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the 12-month period beginning on June 15 of the years indicated below:



|                    |  |            |  
|------------------- |  | ---------- | -
|Year                |  | Percentage |  
|2012                |  | 105.63     | %
|2013                |  | 102.81     | %
|2014 and thereafter |  | 100.00     | %

In addition,
prior to August 1, 2011, we may redeem up to 35% of the aggregate principal amount of the Senior Notes at a redemption price equal to 111.25% of the principal amount thereof, plus accrued interest with the net cash proceeds from certain equity
offerings. If we experience a change of control, we may be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued interest.

Substantially all of our domestic subsidiaries have unconditionally guaranteed the Senior Notes. The indenture governing the Senior Notes
contains covenants that limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem our stock, make investments, sell assets, incur
liens, enter into agreements restricting our subsidiaries ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of our assets.



57



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Aggregate contractual maturities of long-term debt are as follows (in thousands):



|                          |  |   |        
|------------------------- |  | - | -------
|Years ending December 31, |  |  
|2010                      |  |   | 4,762  
|2011                      |  |   | 25,397 
|2012                      |  |   | 25,397 
|2013                      |  |   | 44,444 
|2014                      |  |   |       
|Thereafter                |  |   | 240,000
|                          |  |   |        
|                          |  | $ | 340,000
|                          |  |   |        

NOTE 12STOCK-BASED AWARDS

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in
thousands):



|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                     |  | Year Ended December 31, |       
|                                                     |  | 2009                    |        |   | 2008 |   |        | 2007 | 
|Cost of sales                                        |  | $                       |       |   |      | $ | 1,412  |      |  | $ | 937    |  
|Selling and marketing                                |  |                         | 1,946  |   |      |   | 1,968  |      |  |   | 1,025  |  
|General and administrative                           |  |                         | 8,618  |   |      |   | 16,774 |      |  |   | 10,189 |  
|Production and programming                           |  |                         | 700    |   |      |   | 132    |      |  |   | 9      |  
|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Stock-based compensation expense before income taxes |  |                         | 11,264 |   |      |   | 20,286 |      |  |   | 12,160 |  
|Income tax benefit                                   |  |                         | (4,492 | ) |      |   | (7,709 | )    |  |   | (4,434 | )
|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Stock-based compensation expense after income taxes  |  | $                       | 6,772  |   |      | $ | 12,577 |      |  | $ | 7,726  |  
|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  

As of December 31, 2009, there was approximately $21.6 million of unrecognized compensation cost,
net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 2.2 years.

Second Amended and Restated 2008 Stock and Annual Incentive Plan

The Second Amended and Restated 2008 Stock and Annual Incentive Plan (the Plan) authorizes the issuance of 8.0 million shares of HSNi common stock for new awards granted by HSNi. As of
December 31, 2009, there were approximately 4.2 million shares of common stock available for grants under the Plan. The purpose of the Plan is to assist HSNi in attracting, retaining and motivating officers, employees, directors and
consultants, and to provide HSNi with the ability to provide incentives more directly linked to the profitability of HSNis business and increases in shareholder value.

HSNi can grant restricted stock units (RSUs), stock options, stock appreciation rights (SARs) and other stock-based
awards under the Plan. Stock-based awards have a maximum term of 10 years. The exercise price of options and SARs granted under the Plan are required to be priced at, or above, the fair market value of HSNis stock on the date of grant.



58



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Modification of Stock-Based Compensation Awards

In conjunction with the spin-off, IAC share-based awards were converted to equivalent share-based awards (Adjusted Awards) as
follows:



| |  |  | All unexercised stock option awards granted on or prior to December 31, 2007 to purchase shares of IAC common stock, whether vested or unvested,
converted into an option to purchase shares of common stock of each of the five publicly-traded companies resulting from the spin-off (the Spincos).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain unvested RSUs were accelerated immediately prior to the spin-off, with awards thereafter settled in shares of common stock of each of the
Spincos.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Performance-based RSUs granted in 2007 were converted into non-performance based RSUs with the same vesting schedules, with awards that will settle in
shares of common stock of each of the Spincos.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Unvested RSUs granted by IAC that provide for vesting of 100% of the award following passage of a multi-year period (cliff vesting awards) will settle
in shares of common stock of each of the Spincos.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All other IAC RSUs held by HSNi employees that did not convert or vest as described above converted into an RSU award of HSNi at the spin-off date.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All equity-based awards granted after December 31, 2007 to employees of HSNi converted into awards of common stock of HSNi.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

The adjustments to the number of shares subject to each award and the stock option exercise prices were
based on the relative market capitalization of IAC and each of the Spincos following the spin-off. The conversion was accounted for as a modification under the provisions of accounting guidance related to share-based payments, and resulted in
additional fair value that was recognized immediately for fully vested awards and is being amortized over the remaining service period for unvested awards. These modifications affected all current and former employees of HSNi, HSN and Cornerstone
who were holding vested and unvested stock-based compensation awards on August 11, 2008.

These modifications resulted in
additional compensation expense of $10.9 million which is being amortized ratably over the vesting period. For the years ended December 31, 2009 and 2008, $0.9 million and $8.3 million, respectively, of the additional compensation expense was
recognized in the accompanying consolidated statements of operations.

Approximately 197,000 fully vested RSUs that were
modified in connection with the spin-off were not released until January 2009. These deferred awards were settled in cash, stock or both as determined by the employee. HSNi accounted for these awards as liabilities, which were marked to market each
reporting period through earnings. As of December 31, 2008, a liability equal to their intrinsic value of approximately $1.4 million was recorded for these awards.

Restricted Stock Units

RSUs are awards in the form of phantom shares or
units that are denominated in a hypothetical equivalent number of shares of HSNis common stock. At the time of grant, HSNi determines if the RSUs will be settled in cash, stock or both. The value to the holder of the RSU is based upon the
market value of HSNis stock when the RSUs vest. Compensation expense for RSUs granted under the Plan is measured at the grant date as the fair market value of HSNis common stock and expensed ratably over the vesting term. Compensation
expense for RSUs granted prior to the spin-off was measured as the fair value of IAC common stock on the original grant



59



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



date plus any additional fair value measured at the spin-off date as a result of the modifications discussed previously. The RSUs are generally subject to service-based vesting over a three to
five year term. HSNis Board of Directors were granted approximately 118,000 and 136,000 RSUs during the years ended December 31, 2009 and 2008, respectively, which have graded vesting over a two year period.

A summary of the status of the nonvested RSUs, including the Adjusted Awards and awards granted under the Plan, as of December 31, 2009
and changes during the year ended December 31, 2009 is as follows:



|                          |  |                 |   |  |                                      |      
|------------------------- |  | --------------- | - |  | ------------------------------------ | -----
|                          |  | Number ofshares |   |  | WeightedAverage GrantDate Fair Value
|Nonvested at 1/1/09       |  | 1,435,052       |   |  | $                                    | 17.10
|Granted                   |  | 1,233,035       |   |  |                                      | 5.19 
|Vested                    |  | (315,213        | ) |  |                                      | 9.42 
|Forfeited                 |  | (189,185        | ) |  |                                      | 14.82
|                          |  |                 |   |  |                                      |      
|Nonvested at 12/31/09 (1) |  | 2,163,689       |   |  |                                      | 10.25
|                          |  |                 |   |  |                                      |      



|(1) | Approximately 127,000 of the nonvested awards outstanding as of December 31, 2009 were held by employees of the other Spincos.
|--- | ------------------------------------------------------------------------------------------------------------------------------

The weighted average fair value of RSUs granted during the years ended December 31, 2009 and 2008 based on market prices of HSNis
common stock on the grant date was $5.19 and $5.53, respectively.

A portion of the RSUs granted by IAC prior to the spin-off
accelerated at the date of the spin-off and were settled in HSNi common stock. In connection with these accelerated RSUs, approximately 240,000 shares of HSNi common stock were issued at the date of the spin-off to employees of all five Spincos
which had a total intrinsic value of approximately $3.0 million. The total intrinsic value of RSUs held by employees of all five Spincos that vested during the year ended December 31, 2009 and settled in HSNi common stock was $3.0 million. HSNi
realizes a tax benefit for RSUs held by its employees in the year in which the award vests. The tax benefit realized by HSNi related to RSUs was approximately $0.9 million for the year ended December 31, 2009.

As of December 31, 2009, there was approximately $11.3 million of unrecognized compensation cost, net of estimated forfeitures,
related to RSUs, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 2.1 years.

Stock Options and Stock-Settled SARs

Stock-settled SARs are similar to traditional stock options, except, upon
exercise, holders of stock-settled SARs will only receive shares with a value equal to the spread between the current market price per share of HSNi common stock and the exercise price. The exercise price for awards granted under the Plan is
required to be priced at, or above, the fair market value of HSNis stock at the date of grant. For stock options granted prior to the spin-off, the exercise price was based on the fair market value of IACs stock at the date of grant and
then adjusted based on the relative market capitalizations of IAC and HSNi following the spin-off. Awards typically vest periodically over a three or four year term.



60



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



A summary of the status of the outstanding stock options and SARs as of
December 31, 2009 is as follows:



|                                                 |  |                 |   |  |                               |  |                                                    |  |                          |           
|------------------------------------------------ |  | --------------- | - |  | ----------------------------- |  | -------------------------------------------------- |  | ------------------------ | ----------
|                                                 |  | Number ofshares |   |  | WeightedAverageExercise Price |  | WeightedAverageRemainingContractualTerm (in years) |  | AggregateIntrinsic Value
|Outstanding at January 1, 2009                   |  | 5,617,513       |   |  | 19.27                         |  |                                                    |  |                          |           
|Granted                                          |  | 519,471         |   |  | 6.11                          |  |                                                    |  |                          |           
|Exercised                                        |  | (94,679         | ) |  | 9.45                          |  |                                                    |  |                          |           
|Forfeited                                        |  | (188,641        | ) |  | 10.88                         |  |                                                    |  |                          |           
|Expired                                          |  | (280,097        | ) |  | 21.35                         |  |                                                    |  |                          |           
|                                                 |  |                 |   |  |                               |  |                                                    |  |                          |           
|Outstanding at December 31, 2009 (1)             |  | 5,573,567       |   |  | 18.39                         |  | 7.1                                                |  | $                        | 31,585,312
|                                                 |  |                 |   |  |                               |  |                                                    |  |                          |           
|Vested and expected to vest at December 31, 2009 |  | 5,142,261       |   |  | 18.56                         |  | 6.9                                                |  | $                        | 28,307,424
|                                                 |  |                 |   |  |                               |  |                                                    |  |                          |           
|Exercisable at December 31, 2009                 |  | 1,575,507       |   |  | 19.39                         |  | 4.6                                                |  | $                        | 5,704,741 
|                                                 |  |                 |   |  |                               |  |                                                    |  |                          |           



|(1) | Approximately 1.7 million stock options outstanding as of December 31, 2009 were held by employees of the other Spincos.
|--- | ------------------------------------------------------------------------------------------------------------------------

The aggregate intrinsic value in the table above represents the pre-tax difference between the closing price of HSNis common stock on
December 31, 2009 of $20.19 and the exercise price for all in the money awards at December 31, 2009. This amount changes based on the fair market value of HSNis common stock. The intrinsic value of the stock options and
stock-settled SARs exercised during the years ended December 31, 2009 and 2008 was approximately $0.7 million and less than $0.1 million, respectively. Cash received from stock option exercises and the related actual tax benefit realized for
the year ended December 31, 2009 was $0.9 million and $0.5 million, respectively, and was less than $0.1 million for the year ended December 31, 2008.

The fair value of each stock option and stock-settled SAR award is estimated on the grant date using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates various
assumptions, including expected volatility and expected term. For purposes of this model, no dividends have been assumed. Expected stock price volatilities are estimated based on the historical and implied volatilities of comparable publicly-traded
companies. The risk-free interest rates are based on U.S. Treasury yields for notes with comparable terms as the awards, in effect at the grant date. The expected term of options granted is based on analyses of historical employee termination rates
and option exercise patterns, giving consideration to expectations of future employee behavior. The following are the weighted average assumptions used in the Black-Scholes option pricing model for the year ended December 31, 2009: volatility
factor of 47.3%, risk-free interest rate of 2.31%, expected term of 5.5 years, and a dividend yield of zero.

The weighted
average fair values of stock options and stock-settled SARs granted from the Plan during the years ended December 31, 2009 and 2008 at market prices equal to HSNis common stock on the grant date were $2.94 and $2.76, respectively.

At the date of the spin-off, HSNi granted approximately 719,000 stock options to its Chief Executive Officer at exercise
prices greater than market value on the date of grant with a 10-year term and graded vesting over four years. The weighted average exercise price and the weighted average fair value related to these grants were $39.84 and $3.36, respectively. All
other awards granted under the Plan have exercise prices based on the fair market value of HSNis common stock at the date of grant.



61



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



As of December 31, 2009, there was approximately $10.4 million of unrecognized
compensation cost, net of estimated forfeitures, related to stock options and SARs, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 2.2 years.

The following table summarizes the information about stock options and stock-settled SARs outstanding and exercisable as of
December 31, 2009:



|                 |  |                                      |  |                               |       |                                                  |     |                                      |           |                              |   |      
|---------------- |  | ------------------------------------ |  | ----------------------------- | ----- | ------------------------------------------------ | --- | ------------------------------------ | --------- | ---------------------------- | - | -----
|                 |  | Outstanding                          |  | Exercisable                  
|                 |  | NumberOutstanding atDecember 31,2009 |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm in Years |     | NumberExercisable atDecember 31,2009 |           | WeightedAverageExercisePrice
|$0.00 to $9.99   |  | 1,477,517                            |  | $                             | 5.28  |                                                  | 8.5 |                                      | 128,899   |                              | $ | 5.14 
|$10.00 to $14.99 |  | 331,515                              |  |                               | 12.23 |                                                  | 5.9 |                                      | 175,089   |                              |   | 12.70
|$15.00 to $19.99 |  | 2,059,159                            |  |                               | 16.83 |                                                  | 6.7 |                                      | 865,290   |                              |   | 17.36
|$20.00 to $24.99 |  | 200,625                              |  |                               | 22.93 |                                                  | 3.3 |                                      | 200,625   |                              |   | 22.93
|$25.00 to $29.99 |  | 490,053                              |  |                               | 25.53 |                                                  | 5.4 |                                      | 10,090    |                              |   | 27.13
|$30.00 to $34.99 |  | 425,652                              |  |                               | 33.01 |                                                  | 6.5 |                                      | 38,783    |                              |   | 30.62
|$35.00 to $70.01 |  | 589,046                              |  |                               | 42.12 |                                                  | 8.5 |                                      | 156,731   |                              |   | 41.99
|                 |  |                                      |  |                               |       |                                                  |     |                                      |           |                              |   |      
|                 |  | 5,573,567                            |  |                               |       |                                                  |     |                                      | 1,575,507 |                              |   |      
|                 |  |                                      |  |                               |       |                                                  |     |                                      |           |                              |   |      

Restricted Common Equity in Cornerstone Brands

In connection with the acquisition of Cornerstone Brands by IAC in 2005 certain members of Cornerstone Brands management were granted
restricted common equity in Cornerstone Brands. These awards were granted on April 1, 2005 and were initially measured at fair value, which was amortized to expense over the vesting period. These awards vested ratably over four years, or
earlier based upon the occurrence of certain prescribed events. The awards vest in non-voting restricted common shares of Cornerstone Brands.

These shares are subject to a put right by the holders, which is not exercisable until the first quarter of 2010 and annually thereafter, and a call right by HSNi, which is not exercisable until the first
quarter of 2012 and annually thereafter. The value of these shares upon exercise of the put or call is equal to their fair market value, determined by negotiation or arbitration, reduced by the accreted value of the preferred interest that was taken
by IAC upon the purchase of Cornerstone Brands. The initial value of the preferred interest was equal to the acquisition price of Cornerstone Brands. The preferred interest accretes value at a 15% annual rate. Upon exercise of the put or call the
consideration is payable in HSNi shares or cash or a combination thereof at HSNis option. As of December 31, 2009, these awards were significantly out of the money and are not expected to result in any value.

NOTE 13INCOME TAXES

Prior to the spin-off, HSNis results were included in IACs consolidated federal and applicable state tax returns. In all periods presented, current and deferred tax expense has been computed for HSNi on a separate return basis.
HSNis share of IACs consolidated federal and state tax return liabilities have been reflected within cash flows from operating activities in the accompanying consolidated statements of cash flows.



62



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The components of the provision for income taxes attributable to continuing operations
are as follows (in thousands):



|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                               |  | Year Ended December 31, |        
|                               |  | 2009                    |         |   | 2008 |   |         | 2007 | 
|Current income tax provision:  |  |                         |         |   |      |   |         |      |  |   |         |  
|Federal                        |  | $                       | (47,188 | ) |      | $ | (10,727 | )    |  | $ | (68,969 | )
|State                          |  |                         | (7,742  | ) |      |   | (553    | )    |  |   | (7,388  | )
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Current income tax provision   |  |                         | (54,930 | ) |      |   | (11,280 | )    |  |   | (76,357 | )
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Deferred income tax benefit:   |  |                         |         |   |      |   |         |      |  |   |         |  
|Federal                        |  |                         | 5,813   |   |      |   | 674,789 |      |  |   | 10,683  |  
|State                          |  |                         | 981     |   |      |   | 67,264  |      |  |   | 1,120   |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Deferred income tax benefit    |  |                         | 6,794   |   |      |   | 742,053 |      |  |   | 11,803  |  
|                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Income tax (provision) benefit |  | $                       | (48,136 | ) |      | $ | 730,773 |      |  | $ | (64,554 | )
|                               |  |                         |         |   |      |   |         |      |  |   |         |  

Included in the 2008 income tax benefit is the reversal of $753.3 million of deferred tax liabilities
related to the goodwill and intangible asset impairments recognized in 2008. These deferred tax liabilities for both HSN and Cornerstone were recorded upon the acquisition of certain business operations and interests in prior years in accordance
with the prescribed accounting rules.

Current income taxes payable has been reduced by $1.5 million, $3.8 million and
$2.4 million for the years ended December 31, 2009, 2008 and 2007, respectively, for tax deductions attributable to stock-based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged
or credited to the income tax provision, additional paid in capital, invested capital or a reduction in goodwill.



63



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The tax effects of cumulative temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be
realized.



|                               |  |              |          |   |      |   |          |  
|------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                               |  | December 31, |         
|                               |  | 2009         |          |   | 2008 |  
|Deferred tax assets:           |  |              |          |   |      |   |          |  
|Provision for accrued expenses |  | $            | 39,305   |   |      | $ | 29,815   |  
|Inventories                    |  |              | 11,055   |   |      |   | 11,885   |  
|Foreign investment             |  |              | 6,921    |   |      |   | 6,917    |  
|Stock-based compensation       |  |              | 7,882    |   |      |   | 6,312    |  
|Net operating losses           |  |              | 6,812    |   |      |   | 6,901    |  
|Other                          |  |              | 2,580    |   |      |   | 197      |  
|                               |  |              |          |   |      |   |          |  
|Total deferred tax assets      |  |              | 74,555   |   |      |   | 62,027   |  
|Less valuation allowance       |  |              | (17,288  | ) |      |   | (17,229  | )
|                               |  |              |          |   |      |   |          |  
|Net deferred tax assets        |  |              | 57,267   |   |      |   | 44,798   |  
|                               |  |             
|Deferred tax liabilities:      |  |              |          |   |      |   |          |  
|Intangible and other assets    |  |              | (89,317  | ) |      |   | (87,904  | )
|Prepaid expenses               |  |              | (13,138  | ) |      |   | (9,561   | )
|Property and equipment         |  |              | (9,265   | ) |      |   | (8,832   | )
|                               |  |              |          |   |      |   |          |  
|Total deferred tax liabilities |  |              | (111,720 | ) |      |   | (106,297 | )
|                               |  |              |          |   |      |   |          |  
|Net deferred tax liability     |  | $            | (54,453  | ) |      | $ | (61,499  | )
|                               |  |              |          |   |      |   |          |  

At December 31, 2009, HSNi had $24.1 million of net operating loss carryforwards which begin expiring
in 2011. As of December 31, 2009 and 2008, HSNi had a valuation allowance of approximately $17.3 million and $17.2 million, respectively, related to the net operating losses, as well as unrealized capital losses and deferred assets
associated with uncertain tax positions for which it is more likely than not that the tax benefit will not be realized. During 2009, the valuation allowance was increased by $0.1 million primarily due to the increase in the deferred tax benefit of
net operating losses.

A reconciliation of the income tax provision to the amounts computed by applying the statutory federal
income tax rate to earnings from continuing operations before income taxes is shown as follows (in thousands):



|                                                                          |  |                         |         |   |      |   |           |      |  |   |         |  
|------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | --------- | ---- |  | - | ------- | -
|                                                                          |  | Year Ended December 31, |        
|                                                                          |  | 2009                    |         |   | 2008 |   |           | 2007 | 
|Income tax (provision) benefit at the federal statutory rate of 35%       |  | $                       | (42,250 | ) |      | $ | 1,091,388 |      |  | $ | (59,425 | )
|State income taxes, net of effect of federal tax benefit                  |  |                         | (4,382  | ) |      |   | 41,846    |      |  |   | (4,182  | )
|Nondeductible portion of goodwill and intangible asset impairment charges |  |                         |        |   |      |   | (404,034  | )    |  |   |        |  
|Other, net                                                                |  |                         | (1,504  | ) |      |   | 1,573     |      |  |   | (947    | )
|                                                                          |  |                         |         |   |      |   |           |      |  |   |         |  
|Income tax (provision) benefit                                            |  | $                       | (48,136 | ) |      | $ | 730,773   |      |  | $ | (64,554 | )
|                                                                          |  |                         |         |   |      |   |           |      |  |   |         |  

HSNi adopted the accounting standard guidance related to accounting for uncertainty in income taxes
effective January 1, 2007. The guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The guidance provides
clarification on derecognition, classification, interest and penalties, accounting in interim



64



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



periods, disclosure and transition. The cumulative effect of the adoption resulted in a decrease of $0.2 million to invested capital. A reconciliation of the beginning and ending amount of
unrecognized tax benefits, excluding interest, is as follows (in thousands):



|                                                             |  |      |      |   |      |   |        |      |  |   |      
|------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ------ | ---- |  | - | -----
|                                                             |  | 2009 |      |   | 2008 |   |        | 2007
|Balance at beginning of year                                 |  | $    | 414  |   |      | $ | 8,944  |      |  | $ | 4,316
|Additions based on tax positions related to the current year |  |      |     |   |      |   |       |      |  |   | 2,298
|Additions for tax positions of prior years                   |  |      | 312  |   |      |   | 289    |      |  |   | 2,330
|Reductions for tax positions of prior years                  |  |      | (212 | ) |      |   | (8,819 | )    |  |   |     
|                                                             |  |      |      |   |      |   |        |      |  |   |      
|Balance at end of year                                       |  | $    | 514  |   |      | $ | 414    |      |  | $ | 8,944
|                                                             |  |      |      |   |      |   |        |      |  |   |      

As of December 31, 2009 and 2008, the
unrecognized tax benefits, including interest, were $0.6 million and $0.5 million, respectively. During 2008, unrecognized tax benefits decreased by $8.8 million for tax positions included in IACs consolidated tax return filings. Liabilities
associated with these return filings are the responsibility of IAC pursuant to the terms of the spin-off. Included in unrecognized tax benefits at December 31, 2009 and 2008 is approximately $0.1 million and $0.3 million for tax positions
which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than the interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authorities to an earlier period.

HSNi recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. Interest on unrecognized tax benefits from continuing operations for the year ended
December 31, 2008 is a $0.7 million benefit, net of related deferred taxes of $0.4 million. There is no material interest on unrecognized tax benefits included in income tax expense from continuing operations for the year ended
December 31, 2009. At December 31, 2009 and 2008, HSNi has no material accrual for the payment of interest or penalties.

HSNi believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $0.2 million within twelve months of the current reporting date due to the lapse of applicable statutes of limitations. An
estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.

By virtue of
previously filed separate company and consolidated tax returns with IAC, HSNi is routinely under audit by federal, state, local and foreign tax authorities. These audits include questioning the timing and the amount of deductions and the allocation
of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ
from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.

As a result of the spin-off, HSNi entered into a Tax Sharing Agreement with IAC in which, among other things, each of the four publicly-traded companies resulting from the spin-off (the Spinco
or Spincos) has indemnified IAC and the other Spincos for any taxes resulting from the spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related
shareholder litigation or controversies) to the extent such amounts result from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity securities or assets of
such Spinco or a member of its group, and (iii) any breach by such Spinco or any member of its group of any



65



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



representation or covenant contained in the separation documents or in the documents relating to the IRS private letter ruling and/or tax opinions. Additionally, under the Tax Sharing Agreement,
with respect to the consolidated federal income tax return of IAC and its subsidiaries for any taxable year that includes HSNi, IAC shall determine in its sole discretion whether to elect ratable allocation under applicable U.S. Treasury
Regulations. HSNi shall, and shall cause each member of its group, to take all actions necessary to give effect to such election. In the event an adjustment with respect to a pre-spin-off period for which IAC is responsible results in a tax benefit
to HSNi in a post-spin-off period, HSNi will be required to pay such tax benefit to IAC. In general, IAC controls all audits and administrative matters and other tax proceedings relating to the consolidated federal income tax return of the IAC group
and any other tax returns for which the IAC group is responsible. The provisions set forth in the Tax Sharing Agreement could subject HSNi to future tax contingencies.

The Internal Revenue Service (IRS) is currently examining the IAC consolidated tax returns for the years ended December 31, 2001 through 2006, which includes the operations of HSNi. The
statute of limitations for these years has been extended to December 31, 2010. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are California,
New York and New York City, for various tax years after December 31, 2001. These examinations are expected to be completed by 2011. By virtue of the Tax Sharing Agreement with IAC, HSNi is indemnified with respect to additional tax liabilities
for consolidated or combined federal tax returns prepared and filed by IAC prior to the spin-off, but is liable for any additional tax liabilities for HSNi separately filed state income tax returns.

NOTE 14COMMITMENTS AND CONTINGENCIES

During January 2010, HSNi received a pre-assessment notification from a state alleging that one of HSNis subsidiaries was required to collect and remit sales tax into the state. HSNi does not
believe that its subsidiary is obligated to collect and remit these taxes, and intends to vigorously defend its position if the states notification results in an assessment. At this time, no assurances can be given as to the outcome nor
can a reasonable estimate of a liability, if any, be made.

In the ordinary course of business, HSNi is a party to various
other lawsuits. This litigation may relate to claims involving property, personal injury, contract, intellectual property and other claims. HSNi establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable
outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently
believes that an unfavorable resolution of claims against HSNi, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of HSNi, these
matters are subject to inherent uncertainties and managements view of these matters may change in the future. HSNi also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of
potential loss. See Note 13 for discussion related to income tax contingencies.

HSNi leases satellite transponders,
computers, warehouse and office space, equipment and services used in connection with its operations under various operating leases, many of which contain escalation clauses.



66



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Future minimum payments under operating lease agreements are as follows (in thousands):



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2010                      |  | $ | 28,150 
|2011                      |  |   | 22,093 
|2012                      |  |   | 18,932 
|2013                      |  |   | 13,079 
|2014                      |  |   | 10,323 
|Thereafter                |  |   | 24,064 
|                          |  |   |        
|Total                     |  | $ | 116,641
|                          |  |   |        

Expenses charged to operations under these agreements
were $25.1 million, $25.8 million and $29.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.

HSNi also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, as follows (in thousands):



|                                   |  |                                            |         |                 |   |             |  |             |        |                  |   |   |  |   |  
|---------------------------------- |  | ------------------------------------------ | ------- | --------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | - |  | - | -
|                                   |  | Amount of Commitment Expiration Per Period
|                                   |  | Total AmountsCommitted                     |         | Less Than 1Year |   | 1 - 3 Years |  | 3 - 5 Years |        | More Than5 Years
|Letters of credit and surety bonds |  | $                                          | 22,120  |                 | $ | 22,070      |  | $           | 50     |                  | $ |  |  | $ | 
|Purchase obligations               |  |                                            | 111,218 |                 |   | 101,192     |  |             | 10,026 |                  |   |  |  |   | 
|                                   |  |                                            |         |                 |   |             |  |             |        |                  |   |   |  |   |  
|Total commercial commitments       |  | $                                          | 133,338 |                 | $ | 123,262     |  | $           | 10,076 |                  | $ |  |  | $ | 
|                                   |  |                                            |         |                 |   |             |  |             |        |                  |   |   |  |   |  

The letters of credit (LOCs) primarily
consist of trade LOCs, which are used for inventory purchases. Trade LOCs are guarantees of payment based upon the delivery of goods. The surety bonds primarily consist of customs bonds, which relate to the import of merchandise into the United
States.

The purchase obligations primarily relate to cable contracts and include obligations for future cable distribution
and commission guarantees.

NOTE 15DERIVATIVE INSTRUMENTS

During the second quarter of 2003, one of HSNis foreign subsidiaries entered into a five-year foreign exchange forward contract with a
notional amount of $38.6 million, which was used to hedge against the change in value of a liability denominated in a currency other than the subsidiarys functional currency. This derivative contract was designated as a cash flow hedge for
accounting purposes and foreign exchange remeasurement gains and losses related to the contract and liability were recognized each period in the statement of operations and were offsetting. In addition, the remaining effective portion of the
derivative gain or loss was recorded in other comprehensive income until the derivative liability was extinguished in June 2007 in connection with the sale of HSE. Subsequent to the sale of HSE, HSNi does not have any significant exposure to foreign
currency risk and did not hold any derivative instruments at December 31, 2009 or 2008.

NOTE 16RELATED PARTY TRANSACTIONS

Relationship Between IAC and HSNi Prior to the Spin-off

HSNis expenses prior to the spin-off include allocations from IAC of costs associated with IACs accounting, treasury, legal, tax, corporate support, human resources and internal audit
functions. These expenses



67



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



were allocated in the pre-spin-off periods based on the ratio of HSNis revenue as a percentage of IACs total revenue. Allocated costs were $0, $3.3 million and $8.1 million for
the years ended December 31, 2009, 2008 and 2007, respectively, and are included in General and administrative expense in the accompanying consolidated statements of operations. It is not practicable to determine the amounts of
these expenses that would have been incurred had HSNi operated as an unaffiliated entity. In the opinion of management, the allocation method is reasonable.

The portion of the interest expense reflected in the consolidated statements of operations that is intercompany in nature was $1.7 million for the year ended December 31, 2007. There was no
interest expense that is intercompany for the years ended December 31, 2009 and 2008. This intercompany interest expense, which is included in discontinued operations, arose from the transfer of cash from IAC to HSE that occurred in connection
with IACs treasury operations.

During 2009, 2008 and 2007, IAC provided HSNi with non-cash advertising totaling $0,
$8.0 million and $4.4 million, respectively. See the amortization of non-cash marketing discussion in Note 2 for a further description of this arrangement.

In accordance with the terms of the spin-off, HSNi transferred its investment in ARO stock and related derivative asset to IAC. See Note 17 for a further description of this transfer.

Relationship Between IAC and HSNi After the Spin-off

For purposes of governing certain of the ongoing relationships between HSNi and IAC at and after the spin-off and to provide for an orderly transition, effective August 20, 2008, HSNi entered into
the following agreements (collectively, the Spin-Off Agreements):



| |  |  | a Separation and Distribution Agreement that sets forth the arrangements between IAC and HSNi regarding the principal transactions necessary to
separate HSNi from IAC, and that governs certain aspects of the relationship of HSNi with IAC and the other Spincos after the spin-off;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a Tax Sharing Agreement that governs the respective rights, responsibilities and obligations of IAC and HSNi after the Spin-Off with respect to tax
periods ending on or before the spin-off, including tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, other taxes and related tax returns;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an Employee Matters Agreement that covers a wide range of compensation and benefit issues, including the allocation among IAC and HSNi of
responsibility for the employment and benefit obligations and liabilities of each companys current and former employees (and their dependents and beneficiaries), as well as the provision of health and welfare benefits to employees of HSNi (the
costs of which will be borne by HSNi) pursuant to IACs employee benefit plans through the end of 2008; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a Transition Services Agreement that governs the provision of transition services among IAC and HSNi.
| | - |  | -----------------------------------------------------------------------------------------------------

Also in connection with the spin-off, pursuant to a Spinco Assignment and Assumption Agreement (the Spinco Agreement), dated as
of August 20, 2008, among HSNi, IAC, Liberty Media Corporation (Liberty) and a subsidiary of Liberty that holds shares of IAC common stock and IAC Class B common stock (together with Liberty, the Liberty Parties),
HSNi (i) assumed from IAC all rights and obligations providing for post-spin-off governance and other arrangements at HSNi under the Spinco Agreement, dated May 13, 2008, among



68



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



IAC, Liberty and affiliates of Liberty that held shares of IAC common stock and/or Class B common stock at the time such Spinco Agreement was entered into, and (ii) as required by the
Spinco Agreement, entered into a registration rights agreement with the Liberty Parties.

Relationship Between Liberty Media Corporation
and HSNi After the Spin-off

Spinco Agreement

Representation of Liberty on the Spinco Boards of Directors

The Spinco Agreement generally provides that so long as Liberty beneficially owns securities of HSNi representing at least 20% of the total
voting power of the HSNis equity securities, Liberty has the right to nominate up to 20% of the directors serving on HSNis Board of Directors (rounded up to the nearest whole number). Any director nominated by Liberty must be reasonably
acceptable to a majority of the directors on HSNis Board who were not nominated by Liberty. All but one of Libertys nominees serving on the Board of Directors must qualify as independent under applicable stock exchange rules.
In addition, the Nominating Committee of the Board may include only Qualified Directors, namely directors other than any who were nominated by Liberty, are officers or employees of HSNi or were not nominated by the Nominating Committee
of the HSNi Board in their initial election to the Board and for whose election any Liberty Party voted shares.

Until
the second anniversary of the spin-off, the Liberty Parties agreed to vote all of the equity securities of HSNi beneficially owned by them in favor of the election of the full slate of director nominees recommended to stockholders by the HSNi Board
of Directors so long as the slate includes the director-candidates that Liberty has the right to nominate.

Acquisition
Restrictions

The Liberty Parties have agreed not to acquire beneficial ownership of any equity securities of HSNi (with
specified exceptions) unless:



| |  |  | the acquisition was approved by a majority of the Qualified Directors;
| | - |  | ----------------------------------------------------------------------



| |  |  | the acquisition is permitted under the provisions described in Competing Offers below; or
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | after giving effect to the acquisition, Libertys ownership percentage of the equity securities of HSNi, based on voting power, would not exceed
the Applicable Percentage.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Applicable Percentage is Libertys ownership percentage
upon the spin-off of HSNi, based on voting power (approximately 30%), plus 5%, but in no event more than 35%. Following the spin-off, the Applicable Percentage for the Spinco will be reduced for specified transfers of equity securities of the Spinco
by the Liberty Parties. During the first two years following the spin-off, acquisitions by the Liberty Parties are further limited to specified extraordinary transactions and, otherwise, to acquisitions representing no more than one-third of HSNi
Common Stock received by the Liberty Parties in the spin-off.

Standstill Restrictions

Until the second anniversary of the spin-off, unless a majority of the Qualified Directors consent or to the extent permitted by the
provisions described under Acquisition Restrictions or Competing Offers or in certain other limited circumstances, no Liberty Party may:



| |  |  | offer to acquire beneficial ownership of any equity securities of such Spinco;
| | - |  | ------------------------------------------------------------------------------



69



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  |  | initiate or propose any stockholder proposal or seek or propose to influence, advise, change or control the management, Board of Directors, governing
instruments or policies or affairs of HSNi;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | offer, seek or propose, collaborate on or encourage any merger or other extraordinary transaction;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | subject any equity securities of HSNi to a voting agreement;
| | - |  | ------------------------------------------------------------



| |  |  | make a request to amend any of the provisions described under Acquisition Restrictions, Standstill Restrictions or
Competing Offers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make any public disclosure, or take any action which could reasonably be expected to require HSNi to make any public disclosure, with respect to any of
the provisions described under Standstill Restrictions; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | enter into any discussions, negotiations, arrangements or understandings with any third party with respect to any of the provisions described under
Standstill Restrictions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Transfer Restrictions

Unless a majority of the Qualified Directors consent, the Spinco Agreement prohibits transfers by the Liberty Parties of any equity
securities of HSNi to any person except for certain transfers, including:



| |  |  | transfers under Rule 144 under the Securities Act (or, if Rule 144 is not applicable, in broker transactions);
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | transfers pursuant to a third party tender or exchange offer or in connection with any merger or other business combination, which merger or business
combination has been approved by HSNi;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | transfers in a public offering in a manner designed to result in a wide distribution, provided that no such transfer is made, to the knowledge of the
Liberty Parties, to any person whose ownership percentage (based on voting power) of HSNis equity securities, giving effect to the transfer, would exceed 15%;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a transfer of all of the equity securities of HSNi beneficially owned by the Liberty Parties and their affiliates in a single transaction if the
transferees ownership percentage (based on voting power), after giving effect to the transfer, would not exceed the Applicable Percentage and only if the transferee assumes all of the rights and obligations (subject to limited exceptions) of
the Liberty Parties under the Spinco Agreement;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | specified transfers in connection with changes in the beneficial ownership of the ultimate parent company of a Liberty Party or a distribution of the
equity interests of a Liberty Party or certain similar events; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | specified transfers relating to certain hedging transactions or stock lending transactions in respect of the Liberty Parties equity securities in
HSNi, subject to specified restrictions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the first two years following the spin-off, transfers
otherwise permitted by the first and third bullets above will be prohibited, and transfers otherwise permitted by the fourth and sixth bullets above in respect of which IAC and HSNi do not make certain determinations with respect to the transferee
will be prohibited, unless such transfers represent no more than one-third of HSNi Common Stock received by the Liberty Parties in the spin-off.

Competing Offers

During the period when Liberty continues to have the
right to nominate directors to HSNis Board of Directors, if the Board of Directors determines to pursue certain types of transactions on a negotiated basis



70



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(either through an auction or with a single bidder), Liberty is granted certain rights to compete with the bidder or bidders, including the right to receive certain notices and
information, subject to specified conditions and limitations. In connection with any such transaction that HSNi is negotiating with a single bidder, the Board of Directors must consider any offer for a transaction made in good faith by Liberty but
is not obligated to accept any such offer or to enter into negotiations with Liberty.

If a third party (x) commences a
tender or exchange offer for at least 35% of the capital stock of HSNi other than pursuant to an agreement with HSNi or (y) publicly discloses that its ownership percentage (based on voting power) exceeds 20% and HSNis Board fails to take
certain actions to block such third party from acquiring an ownership percentage of HSNi (based on voting power) exceeding the Applicable Percentage, the Liberty Parties generally will be relieved of the obligations described under Standstill
Restrictions and Acquisition Restrictions above to the extent reasonably necessary to permit Liberty to commence and consummate a competing offer. If Libertys ownership percentage (based on voting power) as a result of the
consummation of a competing offer in response to a tender or exchange offer described in (x) above exceeds 50%, any consent or approval requirements of the Qualified Directors in the Spinco Agreement will be terminated, and, following the later
of the second anniversary of the spin-off and the date that Libertys ownership percentage (based on voting power) exceeds 50%, the obligations described under Acquisition Restrictions will be terminated.

Other

Following the spin-off, amendments to the Spinco Agreement and determinations required to be made thereunder (including approval of transactions between a Liberty Party and HSNi that would be reportable under the proxy rules) will require
the approval of the Qualified Directors.

Registration Rights Agreement

Under the registration rights agreement, the Liberty Parties and their permitted transferees (the Holders) will be entitled to
three demand registration rights (and unlimited piggyback registration rights) in respect of the shares of HSNi common stock received by the Liberty Parties as a result of the spin-off and other shares of HSNi common stock acquired by the Liberty
Parties consistent with the Spinco Agreement (collectively, the Registrable Shares). The Holders will be permitted to exercise their registration rights in connection with certain hedging transactions that they may enter into in respect
of the Registrable Shares.

HSNi will be obligated to indemnify the Holders, and each selling Holder will be obligated to
indemnify HSNi, against specified liabilities in connection with misstatements or omissions in any registration statement.

NOTE
17SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental Disclosure of Non-Cash Transactions for 2007

On June 19, 2007, in consideration for the sale of HSE to Arcandor AG (ARO), formerly known as KarstadtQuelle AG, HSNi
received approximately 5.5 million shares of ARO stock valued at 141 million (the ARO Shares), plus additional consideration in the form of a contingent value right, that has a value of up to 54 million within
three years. In accordance with the terms of the spin-off, the ARO Shares and the contingent value right were transferred to IAC in 2008. This transfer totaled approximately $217.2 million, of which $190.1 million related to the ARO Shares
and $27.1 million related to the contingent value right, and is included in Net transfers to IAC in the accompanying consolidated statements of shareholders equity.



71



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Supplemental Disclosure of Cash Flow Information:



|                                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                        |  | Year Ended December 31, |       
|                                                                                                                                        |  | 2009                    |        |   | 2008 |   |        | 2007 | 
|                                                                                                                                        |  | (in thousands)          |       
|Cash paid during the period for:                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Income tax payments including amounts paid to IAC for HSNis share of IACs consolidated tax liability in periods prior
to the spin-off |  | $                       | 29,416 |   |      | $ | 15,671 |      |  | $ | 84,516 |  
|Income tax refunds                                                                                                                      |  |                         | (234   | ) |      |   | (643   | )    |  |   | (761   | )
|Interest payments                                                                                                                       |  |                         | 33,488 |   |      |   | 3,064  |      |  |   |       |  

NOTE 18SHAREHOLDERS
EQUITY

In December 2008, HSNis Board of Directors approved the creation of a Series A Junior Participating Preferred
Stock, adopted a stockholders rights plan and declared a dividend of one right for each outstanding share of common stock held by our stockholders of record as of the close of business on January 5, 2009. The rights attach to any additional
shares of common stock issued after January 5, 2009. Initially, these rights, which will trade with the shares of HSNis common stock, will not be exercisable. Under the rights plan, these rights will be exercisable if a person or group
acquires or commences a tender or exchange offer for 15% or more of HSNis common stock. If the rights become exercisable, each right will permit its holder, other than the acquiring person, to purchase from us shares of common
stock at a 50% discount to the then prevailing market price. As a result, the rights will cause substantial dilution to a person or group that becomes an acquiring person on terms not approved by HSNis Board of Directors.



72



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HSN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 19QUARTERLY RESULTS (UNAUDITED)



|                                                    |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|--------------------------------------------------- |  | -------------- | ------- | - | -------- | - | -------- | ------------- |  | - | ------------ | - |  | - | ---------- | -
|                                                    |  | Quarter Ended  |        
|                                                    |  | March 31,      |         |   | June 30, |   |          | September 30, |  |   | December 31, |  
|                                                    |  |                |         |   | (a)      |   |          |               |  |   | (b)          |  
|                                                    |  | (In thousands) |        
|Year Ended December 31, 2009                        |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|Net sales                                           |  | $              | 629,620 |   |          | $ | 640,083  |               |  | $ | 641,244      |   |  | $ | 838,662    |  
|Gross profit                                        |  |                | 211,224 |   |          |   | 231,871  |               |  |   | 237,068      |   |  |   | 301,151    |  
|Operating income                                    |  |                | 13,902  |   |          |   | 30,740   |               |  |   | 36,078       |   |  |   | 74,934     |  
|Income from continuing operations                   |  |                | 2,982   |   |          |   | 13,638   |               |  |   | 16,585       |   |  |   | 39,373     |  
|Loss from discontinued operations, net of tax       |  |                | (28     | ) |          |   | (28      | )             |  |   | (13          | ) |  |   | (21        | )
|Net income                                          |  |                | 2,954   |   |          |   | 13,610   |               |  |   | 16,572       |   |  |   | 39,352     |  
|Income from continuing operations per share:        |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|Basic                                               |  | $              | 0.05    |   |          | $ | 0.24     |               |  | $ | 0.29         |   |  | $ | 0.70       |  
|Diluted                                             |  | $              | 0.05    |   |          | $ | 0.24     |               |  | $ | 0.29         |   |  | $ | 0.68       |  
|Net income per share:                               |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|Basic                                               |  | $              | 0.05    |   |          | $ | 0.24     |               |  | $ | 0.29         |   |  | $ | 0.70       |  
|Diluted                                             |  | $              | 0.05    |   |          | $ | 0.24     |               |  | $ | 0.29         |   |  | $ | 0.68       |  
|                                                    |  |                |         |  
|Year Ended December 31, 2008                        |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|Net sales                                           |  | $              | 676,886 |   |          | $ | 695,826  |               |  | $ | 672,348      |   |  | $ | 778,533    |  
|Gross profit                                        |  |                | 235,484 |   |          |   | 248,565  |               |  |   | 235,826      |   |  |   | 265,555    |  
|Operating income (loss)                             |  |                | 15,078  |   |          |   | (277,632 | )             |  |   | 12,316       |   |  |   | (2,852,073 | )
|Income (loss) from continuing operations            |  |                | 9,406   |   |          |   | (249,377 | )             |  |   | 5,018        |   |  |   | (2,152,525 | )
|Loss from discontinued operations, net of tax       |  |                | (78     | ) |          |   | (451     | )             |  |   | (2,837       | ) |  |   | (44        | )
|Net income (loss)                                   |  |                | 9,328   |   |          |   | (249,828 | )             |  |   | 2,181        |   |  |   | (2,152,569 | )
|Income (loss) from continuing operations per share: |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|Basic                                               |  | $              | 0.17    |   |          | $ | (4.44    | )             |  | $ | 0.09         |   |  | $ | (38.29     | )
|Diluted                                             |  | $              | 0.17    |   |          | $ | (4.44    | )             |  | $ | 0.09         |   |  | $ | (38.29     | )
|Net income (loss) per share:                        |  |                |         |   |          |   |          |               |  |   |              |   |  |   |            |  
|Basic                                               |  | $              | 0.17    |   |          | $ | (4.44    | )             |  | $ | 0.04         |   |  | $ | (38.29     | )
|Diluted                                             |  | $              | 0.16    |   |          | $ | (4.44    | )             |  | $ | 0.04         |   |  | $ | (38.29     | )



|(a) | The second quarter of 2008 includes $300.0 million of asset impairment charges related to goodwill and intangible assets and a $36.6 million tax benefit from the
release of the related deferred tax liabilities in the Cornerstone segment. These adjustments increased diluted loss per share by $4.65.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | The fourth quarter of 2008 includes $2.9 billion of asset impairment charges related to goodwill and intangible assets and $716.7 million of tax benefits from the
release of the related deferred tax liabilities in the HSN and Cornerstone segments. These adjustments increased diluted loss per share by $38.60.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The fourth quarter of 2008 also includes a $5.0 million accrual adjustment for liabilities associated with on-air distribution costs. This adjustment, after taxes, decreased loss per share by $0.06.

Subsequent to the reporting of the quarters ended March 31, 2008 and June 30, 2008, it was determined that two of
the entities previously included within HSNis discontinued operations would not be spun-off from IAC and, therefore, not included within HSNi. Quiz TV Limited and iBuy are entities that ceased operations in 2006 and were reported within
HSNis combined statements of operations as a discontinued operation through the Form 10-Q filed for the quarter ended June 30, 2008. Their results have been removed from HSNis 2008 results; however, balances prior to 2008 have not
been restated due to their immaterial impact relative to the combined results.



73



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Schedule II

HSN, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING
ACCOUNTS



|                                 |  |                              |        |                    |   |                         |  |            |       |  |                        |           |     |  |   |       
|-------------------------------- |  | ---------------------------- | ------ | ------------------ | - | ----------------------- |  | ---------- | ----- |  | ---------------------- | --------- | --- |  | - | ------
|Description                      |  | Balance atBeginningof Period |        | Charges toEarnings |   | Charges toOtherAccounts |  | Deductions |       |  | Balance atEnd ofPeriod
|                                 |  | (In thousands)              
|2009                             |  |                              |        |                    |   |                         |  |            |       |  |                        |           |     |  |   |       
|Allowance for doubtful accounts  |  | $                            | 10,026 |                    | $ | 18,460                  |  | $          | (170) |  | $                      | (16,708)  | (1) |  | $ | 11,608
|Sales returns accrual            |  |                              | 37,340 |                    |   | 530,464                 |  |            |      |  |                        | (528,380) |     |  |   | 39,424
|Deferred tax valuation allowance |  |                              | 17,229 |                    |   |                        |  |            | 59    |  |                        |          |     |  |   | 17,288
|Other reserves                   |  |                              | 726    |                    |   | 576                     |  |            |      |  |                        | (342)     |     |  |   | 960   
|                                 |  |                              |        |                    |  
|2008                             |  |                              |        |                    |   |                         |  |            |       |  |                        |           |     |  |   |       
|Allowance for doubtful accounts  |  | $                            | 8,112  |                    | $ | 19,775                  |  | $          | 100   |  | $                      | (17,961)  | (1) |  | $ | 10,026
|Sales returns accrual            |  |                              | 37,596 |                    |   | 580,306                 |  |            |      |  |                        | (580,562) |     |  |   | 37,340
|Deferred tax valuation allowance |  |                              | 12,862 |                    |   |                        |  |            | 4,367 |  |                        |          |     |  |   | 17,229
|Other reserves                   |  |                              | 331    |                    |   | 395                     |  |            |      |  |                        |          |     |  |   | 726   
|                                 |  |                              |        |                    |  
|2007                             |  |                              |        |                    |   |                         |  |            |       |  |                        |           |     |  |   |       
|Allowance for doubtful accounts  |  | $                            | 5,994  |                    | $ | 14,598                  |  | $          | (23)  |  | $                      | (12,457)  | (1) |  | $ | 8,112 
|Sales returns accrual            |  |                              | 35,942 |                    |   | 592,679                 |  |            |      |  |                        | (591,025) |     |  |   | 37,596
|Deferred tax valuation allowance |  |                              | 12,859 |                    |   |                        |  |            | 3     |  |                        |          |     |  |   | 12,862
|Other reserves                   |  |                              | 971    |                    |   | (640)                   |  |            |      |  |                        |          |     |  |   | 331   



|(1) | Write-off of uncollectible accounts receivable.
|--- | -----------------------------------------------



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Disclosure
Controls and Procedures

We maintain a system of disclosure controls and procedures designed to provide reasonable
assurance that the information required to be disclosed by HSNi in reports that it files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Disclosure controls also are designed to reasonably assure that such information is accumulated and communicated to management, including the Chief Executive Office and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Disclosure controls include components of internal control over financial reporting, which consists of control processes designated to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with United States generally accepted accounting principles.

We monitor and
evaluate on an ongoing basis our disclosure controls and procedures in order to improve their overall effectiveness. In the course of these evaluations, we modify and refine our internal processes as conditions warrant.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of December 31, 2009. Based on that evaluation, management has concluded that the disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and to ensure that
information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Managements Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) for the company. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States. Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance, that the control systems objectives will be met. The design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to their costs. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

As required by Rule 13a-15(b) under the Exchange Act, our management evaluated the effectiveness of our internal controls and
procedures (as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange Act). In making this assessment, our management used the criteria for effective internal control over financial reporting described in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, we concluded that as December 31, 2009, our internal control over financial reporting was effective.



75



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Our independent registered certified public accounting firm, Ernst & Young, LLP,
has issued an attestation report on our internal control over financial reporting. The attestation report is included herein.

Changes in
Internal Control Over Financial Reporting

We regularly monitor and evaluate on an ongoing basis our internal control over
financial reporting in order to improve its effectiveness. In the course of these evaluations, we modify and refine our internal processes as conditions warrant. In addition, we have been evaluating, designing and enhancing controls related to
processes that previously were handled by IAC, including equity transactions, treasury functions, and periodic reporting in accordance with SEC rules and regulations.

As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, also conducted an evaluation of our internal control over
financial reporting to determine whether any changes occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that
evaluation, management has concluded that there were no such changes during this period.



76



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REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of HSN, Inc.

We have audited HSN, Inc. and subsidiaries internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). HSN, Inc. and subsidiaries management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying managements annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, HSN, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of HSN, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders equity, and
cash flows for each of the three years in the period ended December 31, 2009 of HSN, Inc. and subsidiaries and our report dated March 4, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Tampa, Florida

March 4, 2010



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|ITEM 9B. | Other Information
|-------- | -----------------

None.

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2009.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2009.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2009.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|-------- | ------------------------------------------------------------------------

Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days
after the end of the year ended December 31, 2009.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2009.



78



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PART IV



|ITEM 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------



| | (a) | The following documents are filed as part of this report:
| | --- | ---------------------------------------------------------



| | 1. | Financial Statements.
| | -- | ---------------------

Financial
statements filed as part of this Form 10-K are listed under Item 8.



| | 2. | Financial Statement Schedules.
| | -- | ------------------------------

Financial statement schedules filed as part of this Form 10-K are listed under Item 8. All other schedules have been omitted because they are either not applicable or not required under the instructions contained in Regulation S-X
because the information called for is contained in the financial statements and notes thereto.



| | 3. | Exhibits.
| | -- | ---------

The documents set
forth below, numbered in accordance with Item 601 of Regulation S-K, are filed herewith or incorporated herein by reference to the location indicated.



|            |  |                                                                                                                                                                          |  |                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                  |  | Method of Filing                                                                
|3.1         |  | Amended and Restated Certificate of Incorporation of HSN, Inc.                                                                                                           |  | Exhibit 3.1 to the Companys Current Report on Form 8-K filed August 25, 2008   
|            |  |                                                                                                                                                                         
|3.2         |  | Amended and Restated By-laws of HSN, Inc.                                                                                                                                |  | Exhibit 3.2 to the Companys Current Report on Form 8-K filed August 25, 2008   
|            |  |                                                                                                                                                                         
|3.3         |  | Certificate of Designations, Preferences and Rights to Series A Junior Participating Preferred Stock                                                                     |  | Exhibits 3.3 to the Companys Annual Report on Form 10-K filed March 31, 2009   
|            |  |                                                                                                                                                                         
|4.1         |  | Rights Agreement, dated as of December 23, 2008, between HSN, Inc. and The Bank of New York Mellon, as Rights Agent.                                                     |  | Exhibit 4.1 to the Companys Current Report on Form 8-K filed December 29, 2008 
|            |  |                                                                                                                                                                         
|10.1        |  | Separation and Distribution Agreement, dated August 20, 2008, by and among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and
IAC/InterActiveCorp |  | Exhibit 10.1 to the Companys Current Report on Form 8-K filed August 25, 2008  
|            |  |                                                                                                                                                                         
|10.2        |  | Tax Sharing Agreement, dated August 20, 2008, among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Inc., Tree.com and IAC/InterActive Corp                       |  | Exhibit 10.2 to the Companys Current Report on Form 8-K filed August 25, 2008  
|            |  |                                                                                                                                                                         
|10.3        |  | Employee Matters Agreement, dated August 20, 2008, among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp                   |  | Exhibit 10.3 to the Companys Current Report on Form 8-K filed August 25, 2008  
|            |  |                                                                                                                                                                         
|10.4        |  | Transition Services Agreement, dated August 20, 2008, among HSN, Inc., Interval Leisure Group, Inc., Ticketmaster, Tree.com, Inc. and IAC/InterActiveCorp                |  | Exhibit 10.4 to the Companys Current Report on Form 8-K filed August 25, 2008  
|            |  |                                                                                                                                                                         
|10.5        |  | Registration Rights Agreement, dated as of August 20, 2008, among Liberty Media Corporation, the Liberty Parties (as defined in the Agreement) and HSN, Inc.             |  | Exhibit 10.5 to the Companys Current Report on Form 8-K filed December 29, 2008



79



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|            |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                                                                                                                                                    |  | Method of Filing                                                                                                                               
|10.6        |  | Spinco Assignment and Assumption Agreement, dated as of August 20, 2008, by and among IAC/InterActive Corp, HSN, Inc., Liberty Media Corporation and Liberty USA Holdings,
LLC                                                                                                                                                                                             |  | Exhibit 10.6 to the Companys Current Report on Form 8-K filed August 25, 2008                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.7        |  | Spinco Agreement, dated as of May 13, 2008, between IAC/InterActiveCorp, Liberty Media Corp., LMC Silver King, Inc., Liberty HSN II, Inc., LMC USA VIII, Inc.,
LMC USA IX, Inc., LMC USA XI, Inc., LMC USA XII, Inc., LMC USA XIII, Inc., LMC USA XIV, Inc., LMC USA XV, Inc., Liberty Tweety, Inc., BDTV Inc., BDTV II Inc., BDTV III Inc., BDTV IV Inc. and
Barry Diller |  | Exhibit 10.1 to IAC/InterActiveCorps Current Report on Form 8-K (SEC File No. 0-20570) dated May 16, 2008 and incorporated herein by
reference
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.8        |  | Employment Agreement between Mindy Grossman and HSN, Inc., dated as of July 29, 2008*                                                                                                                                                                                                                                                                                      |  | Exhibit 10.5 to the Companys Registration Statement on Form S-1 (Registration No. 333-152697) filed August 1, 2008                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.9        |  | Employment Agreement between William Lynch, HSN General Partner LLC and IAC/InterActiveCorp, dated as of November 19, 2007*                                                                                                                                                                                                                                                |  | Exhibit 10.6 to the Companys Registration Statement on Form S-1 (Registration No. 333-152697) filed August 1, 2008                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.10       |  | Employment Agreement between Lynne Ronon and HSN General Partner LLC, dated as of October 15, 2007*                                                                                                                                                                                                                                                                        |  | Exhibit 10.7 to the Companys Registration Statement on Form S-1 (Registration No. 333-152697) filed August 1, 2008                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.11       |  | Employment Agreement between Judy A. Schmeling and HSN, Inc. dated as of October 27, 2008, as amended by the Amendment to Employment Agreement effective as of December 31,
2008*                                                                                                                                                                                          |  | Exhibit 10.11 to the Companys Annual Report on Form 10-K filed March 31, 2009                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.12       |  | Employment Agreement between Jim Warner and HSN, Inc. dated as of October 27, 2008, as amended by the Amendment to Employment Agreement effective as of December 31,
2008*                                                                                                                                                                                                 |  | Exhibit 10.12 to the Companys Annual Report on Form 10-K filed March 31, 2009                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.13       |  | HSN, Inc. Amended and Restated 2008 Stock and Annual Incentive Plan*                                                                                                                                                                                                                                                                                                       |  | Exhibit 10.13 to the Companys Annual Report on Form 10-K filed March 31, 2009                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.14       |  | Amended and Restated Deferred Compensation Plan for Non-Employee Directors*                                                                                                                                                                                                                                                                                                |  | Exhibit 10.14 to the Companys Annual Report on Form 10-K filed March 31, 2009                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.15       |  | Credit Agreement among HSN, Inc., as Borrower, Certain Subsidiaries of the Borrower, as Guarantors, The Lenders Party thereto, Bank of America, N.A., as Administrative Agent
and Collateral Agent, dated as of July 25, 2008                                                                                                                                              |  | Exhibit 10.12 to the Companys Registration Statement on Form S-1 (Registration No. 333-152697) filed August 1, 2008                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                           
|10.16       |  | Indenture, dated as of July 28, 2008, between HSN, Inc., as Issuer, and The Bank of New York Mellon, as Trustee                                                                                                                                                                                                                                                            |  | Exhibit 10.13 to the Companys Registration Statement on Form S-1 (Registration No. 333-152697) filed August 1, 2008                           



|* | Reflects management contracts and management and director compensation plans.
|- | -----------------------------------------------------------------------------



80



---

|            |  |                                                                                                                                                                                                                                                 |  |                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                         |  | Method of Filing                                                                                                    
|10.17       |  | Employment Agreement between Mark Ethier and HSN General Partner LLC effective December 1, 2004, as amended by the First Amendment to Employment Agreement dated July 9,
2007 and Second Amendment to Employment Agreement dated June 23, 2008* |  | Exhibit 10.14 to the Companys Registration Statement on Form S-1 (Registration No. 333-152697) filed August 1, 2008
|            |  |                                                                                                                                                                                                                                                
|10.18       |  | Amendment to Employment Agreement between Mark Ethier and HSN, Inc. effective as of December 31, 2008*                                                                                                                                          |  | Exhibit 10.18 to the Companys Annual Report on Form 10-K filed March 31, 2009                                      
|            |  |                                                                                                                                                                                                                                                
|10.19       |  | Form of Stock Appreciation Rights Agreement*                                                                                                                                                                                                    |  | Exhibit 10.19 to the Companys Annual Report on Form 10-K filed March 31, 2009                                      
|            |  |                                                                                                                                                                                                                                                
|10.20       |  | Form of Stock Option Agreement*                                                                                                                                                                                                                 |  | Exhibit 10.20 to the Companys Annual Report on Form 10-K filed March 31, 2009                                      
|            |  |                                                                                                                                                                                                                                                
|10.21       |  | Form of Restricted Stock Units Agreement*                                                                                                                                                                                                       |  | Exhibit 10.21 to the Companys Annual Report on Form 10-K filed March 31, 2009                                      
|            |  |                                                                                                                                                                                                                                                
|10.22       |  | Form of Restricted Stock Units Agreement (for Non-Employee Directors)*                                                                                                                                                                          |  | Exhibit 10.22 to the Companys Annual Report on Form 10-K filed March 31, 2009                                      
|            |  |                                                                                                                                                                                                                                                
|10.23       |  | HSN, Inc. Second Amended and Restated 2008 Stock and Annual Incentive Plan*                                                                                                                                                                     |  | Exhibit 10.23 to the Companys Current Report on Form 8-K filed on May 22, 2009                                     
|            |  |                                                                                                                                                                                                                                                
|10.24       |  | Named Executive Officer and EVP Severance Plan*                                                                                                                                                                                                 |  | Exhibit 10.1 to the Companys Current Report on Form 8-K filed November 24, 2009                                    
|            |  |                                                                                                                                                                                                                                                
|10.25       |  | Executive Severance Plan*                                                                                                                                                                                                                       |  | Filed herewith                                                                                                      
|            |  |                                                                                                                                                                                                                                                
|12.1        |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                               |  | Filed herewith                                                                                                      
|            |  |                                                                                                                                                                                                                                                
|14.1        |  | Code of Ethics and Business Conduct                                                                                                                                                                                                             |  | Exhibit 14.1 to the Companys Annual Report on Form 10-K filed March 31, 2009                                       
|            |  |                                                                                                                                                                                                                                                
|21.1        |  | Subsidiaries of HSN, Inc.                                                                                                                                                                                                                       |  | Filed herewith                                                                                                      
|            |  |                                                                                                                                                                                                                                                
|31.1        |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act.                                                  |  | Filed herewith                                                                                                      



|* | Reflects management contracts and management and director compensation plans.
|- | -----------------------------------------------------------------------------



81



---

|            |  |                                                                                                                                                                                               |  |                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------
|Exhibit No. |  | Description of Document                                                                                                                                                                       |  | Method of Filing
|31.2        |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act |  | Filed herewith  
|            |  |                                                                                                                                                                                              
|32.1        |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act                                                  |  | Filed herewith  
|            |  |                                                                                                                                                                                              
|32.2        |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act                                                  |  | Filed herewith  



82



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |            |  |                                                                                        
|------------------- |  | ---------- |  | ---------------------------------------------------------------------------------------
|                    |  | HSNI, INC.
|                    |  |           
|Date: March 4, 2010 |  | By:        |  | /S/    MINDY
GROSSMAN                                                                  
|                    |  |            |  | Mindy Grossman, Chief Executive Officer (Principal Executive
Officer)                  
|                    |  |           
|                    |  |            |  |                                                                                        
|                    |  |           
|Date: March 4, 2010 |  | By:        |  | /S/    JUDY A.
SCHMELING                                                               
|                    |  |            |  | Judy A. Schmeling, Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on March 4, 2010.



|                                 |  |  |  |                                                                    
|-------------------------------- |  |  |  | -------------------------------------------------------------------
|/S/    MINDY
GROSSMAN            |  |  |  | Chief Executive Officer and Director(Principal Executive Officer)  
|Mindy Grossman                   |  |  | 
|/S/    JUDY A. SCHMELING         |  |  |  | Chief Financial Officer (Principal Financial andAccounting Officer)
|Judy A. Schmeling                |  |  | 
|                                 |  | 
|/S/    GREG
BLATT                |  |  |  | Director                                                           
|Greg Blatt                       |  |  |  |                                                                    
|                                 |  | 
|/S/    PATRICK
BOUSQUET-CHAVANNE |  |  |  | Director                                                           
|Patrick Bousquet-Chavanne        |  |  |  |                                                                    
|                                 |  | 
|/S/    MICHAEL C.
BOYD           |  |  |  | Director                                                           
|Michael C. Boyd                  |  |  |  |                                                                    
|                                 |  | 
|/S/    WILLIAM
COSTELLO          |  |  |  | Director                                                           
|William Costello                 |  |  |  |                                                                    
|                                 |  | 
|/S/    JAMES
FOLLO               |  |  |  | Director                                                           
|James Follo                      |  |  |  |                                                                    
|                                 |  | 
|/S/    STEPHANIE
KUGELMAN        |  |  |  | Director                                                           
|Stephanie Kugelman               |  |  |  |                                                                    
|                                 |  | 
|/S/    ARTHUR
MARTINEZ           |  |  |  | Chairman of the Board of Directors                                 
|Arthur Martinez                  |  |  |  |                                                                    
|                                 |  | 
|/S/    THOMAS
MCINERNEY          |  |  |  | Director                                                           
|Thomas McInerney                 |  |  |  |                                                                    
|                                 |  | 
|/S/    JOHN B. MORSE,
JR.        |  |  |  | Director                                                           
|John B. Morse, Jr.               |  |  |  |                                                                    



83



---

EXHIBIT INDEX



|            |  |                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                             
|10.25       |  | Executive Severance Plan*                                                                                                                                                           
|            | 
|12.1        |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                   
|            | 
|21.1        |  | Subsidiaries of HSN, Inc.                                                                                                                                                           
|            | 
|31.1        |  | Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         
|            | 
|31.2        |  | Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.



|* | Reflects management contracts and management and director compensation plans.
|- | -----------------------------------------------------------------------------