<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                  FORM 10-K/A

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 2000

                               ----------------

                              HOMESTORE.COM, INC.
            (Exact Name of Registrant as Specified in its Charter)

<TABLE>
 <S>                              <C>                            <C>
            Delaware                        000-26659                      95-4438337
  (State or Other Jurisdiction
               of                          (Commission                  (I.R.S. Employer
 Incorporation or Organization)            File Number)                Identification No.)
</TABLE>

                           30700 Russell Ranch Road
                      Westlake Village, California 91362
                                (805) 557-2300
  (Address, Including Zip Code, and Telephone Number, Including Area Code, of
                   Registrant's Principal Executive Offices)

          Securities Registered Pursuant to Section 12(b) of the Act:

                                     None

          Securities Registered Pursuant to Section 12(g) of the Act:

                    Common Stock, par value $.001 per share

                               ----------------

  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 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [X]

<TABLE>
   <S>                                                          <C>
   Aggregate market value of voting stock held by non-
    affiliates of the registrant as of February 28, 2001......  $2,050,176,207
   Number of shares of common stock outstanding as of February
    28, 2001..................................................     106,971,997
</TABLE>

                               ----------------

                      DOCUMENTS INCORPORATED BY REFERENCE

  The information required by Part III of this Annual Report, to the extent
not set forth herein, is incorporated herein by reference from the
registrant's definitive proxy statement relating to the annual meeting of
stockholders which was held on May 10, 2002.

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<PAGE>

                              Homestore.com, Inc.

                                  Form 10-K/A

                  For the Fiscal Year Ended December 31, 2000

                                     Index

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>       <C>                                                                                     <C>
PART II

Item 6.   Selected Financial Data................................................................   1

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations..   4

Item 8.   Financial Statements and Supplementary Data............................................  19

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K........................  61

SIGNATURES......................................................................................   64
</TABLE>

                                       i
<PAGE>

This 10-K/A is being filed for the purpose of amending and restating Items 6,
7, 8 and 14 of Form 10-K to reflect the restatement of our consolidated
financial statements for the year ended December 31, 2000.

WE HAVE MADE NO FURTHER CHANGES TO THE PREVIOUSLY FILED FORM 10-K. ALL
INFORMATION IN THIS FORM 10-K/A IS AS OF DECEMBER 31, 2000 AND DOES NOT
REFLECT ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THE AFOREMENTIONED
RESTATEMENT.

  This report contains forward-looking statements based on our current
expectations, estimates and projections about our industry, beliefs and
certain assumptions made by us. Words such as "believes," "anticipates,"
"estimates," "expects," "projections," "may," "potential," "plan," "continue"
and words of similar import, constitute "forward-looking statements." The
forward-looking statements contained in this report involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these statements. These factors
include those listed under the "Risk Factors" section contained in Item 1 and
elsewhere in our Annual Report on Form 10-K for the fiscal year ended December
31, 2000 as well as elsewhere herein, and the other documents we file with the
Securities and Exchange Commission, or SEC, including our most recent reports
on Form 8-K and Form 10-Q, and amendments thereto. Although we believe that
the expectations reflected in the forward-looking statements are reasonable,
we cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements.

ITEM 6. SELECTED FINANCIAL DATA

  You should read the following selected consolidated financial data with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K/A.

  On December 21, 2001, we announced that the Audit Committee of our Board of
Directors was conducting an inquiry of certain of our accounting practices and
that the results of the inquiry to date determined that certain of our
financial statements would require restatement. The Audit Committee retained
independent counsel and independent accountants to assist in connection with
the inquiry. On February 13, 2002, we concluded, based on preliminary findings
of the inquiry, that our financial statements, as of, and for the year ended,
December 31, 2000 would be restated and on March 11, 2002, the Audit Committee
concluded its inquiry. The results of the inquiry determined that in the year
2000, certain transactions resulting in the recognition of $36.4 million in
revenue, had been improperly recorded as independent cash transactions, when,
in fact, they were reciprocal exchanges that should have been evaluated as
barter transactions. We determined that there was insufficient support to
establish the fair value of these barter exchanges and thus the related
revenue has been reversed. Although the ultimate impact of these adjustments
will be to reduce both revenues and expenses, because some of the transactions
take place over several accounting periods, and because certain payments for
goods and services by us were capitalized when initially recorded, operating
results for the year 2000 and future periods are impacted. The effect of
reversing the revenue associated with certain of these transactions required
offsetting adjustments to various asset and liability accounts, including:
accounts receivable, notes receivable, property and equipment, other assets,
accrued liabilities and deferred revenue. In addition, the shipment of certain
software products, previously recorded as revenue in 2000, did not meet the
revenue recognition requirements of SOP 97-2 and, accordingly, $5 million of
revenue should have been deferred at December 31, 2000.

  The restated financial statements also include the effects of our early
adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)" which was issued in
February 2002. This consensus requires us to report certain consideration
given by a vendor to a customer as a reduction in revenue. Upon adoption, we
are required to retroactively reclassify such amounts in previously issued
financial statements to comply with the income statement display requirements
of the consensus. The effect of adoption in the year 2000 was to reduce
previously reported revenue and expense by $7.2 million, with no effect on net
loss or net loss per share. The effects of adoption were not material in years
prior to 2000.

                                       1
<PAGE>

  The consolidated financial statements for the year ended December 31, 2000
contained herein have been restated to incorporate all these adjustments as
described in Note 3 to the Consolidated Financial Statements. As a result of
these items, we have reduced our reported revenue by $48.6 million and
increased our net loss from $115.2 million to $146.1 million and our net loss
per share of $(1.44) to $(1.83).

  Additionally, we reclassified $13.4 million in previously reported cash and
cash equivalents to restricted cash as a result of certain collateralized
lease and other obligations.

  The consolidated statement of operations data for the years ended December
31, 2000, 1999 and 1998, and the consolidated balance sheet data as of
December 31, 2000 and 1999, are derived from the audited consolidated
financial statements of Homestore.com included elsewhere in this Form 10-K/A.
The consolidated statement of operations data for the years ended December 31,
1997 and 1996, and the consolidated balance sheet data as of December 31,
1998, 1997 and 1996, have been derived from our audited and unaudited
consolidated financial statements not included in this Form 10-K/A. The
unaudited consolidated financial statements have been prepared on
substantially the same basis as the consolidated audited financial statements
and include all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of the financial position
and results of operations for the period. The unaudited pro forma data for the
year ended December 31, 1999 is derived from unaudited pro forma condensed
consolidated statement of operations included elsewhere in this Form 10-K/A.

  As a result of the reorganization of our holding company structure and due
to the fact that our historical results of operations, financial condition and
cash flows were insignificant prior to December 4, 1996, management believes
that a pro forma presentation, which includes a comparison of results of
operations and financial condition of NetSelect, Inc., NetSelect, LLC,
Homestore.com and RealSelect on a combined basis for 1998 and 1999 is the only
meaningful basis of presentation for investors in evaluating our historical
financial performance. See the basis of presentation described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

  The unaudited pro forma condensed consolidated statement of operations data
assume that the following transactions occurred on January 1, 1999, except for
preferred stock issued in connection with an acquisition. For this preferred
stock, the weighted average shares reflect the preferred stock as if it had
been issued as of January 1, 1999, or the date of issuance, if later:

  .  conversion of preferred stock in connection with the initial public
     offering;

  .  our acquisition of SpringStreet for common stock and convertible
     preferred stock equivalent to an aggregate of 5,309,058 shares of our
     common stock, with an estimated fair value of $51.7 million;

  .  our acquisition of Homefair for 250,000 shares of our common stock, with
     an estimated fair value of $11.2 million, a $37.5 million promissory
     note and $35.8 million in cash and other acquisition-related expenses;
     and

  .  the reorganization of our holding company structure in February 1999 by
     merging NetSelect, Inc. and NetSelect, LLC with InfoTouch.

  The unaudited consolidated pro forma data may not, however, be indicative of
the consolidated results of operations of Homestore.com that actually would
have occurred had the transactions reflected in the unaudited consolidated pro
forma results of operations occurred at the beginning of the period presented,
or of the consolidated results of operations that we may achieve in the
future. The comparison to 1999 and 1998 results are on a pro forma basis, as
historical results without pro forma presentation are not comparable or
meaningful. No pro forma results for 2000 have been presented as pro forma
results of acquired companies in 2000 were not material.

                                       2
<PAGE>

<TABLE>
<CAPTION>
                                          Actual                       Pro Forma
                          ------------------------------------------  ------------
                                 Year Ended December 31,               Year Ended
                          ------------------------------------------  December 31,
                           2000 (1)     1999    1998   1997    1996       1999
                          ----------  --------  -----  -----  ------  ------------
                          (Restated)
                               (in thousands, except per share amounts)
<S>                       <C>         <C>       <C>    <C>    <C>     <C>
Consolidated Statement
 of Operations Data:
Revenues (2)............  $ 181,322   $ 62,580  $ --   $  42  $1,360   $  73,367
Cost of revenues (2)....     61,222     21,965    --       6      42      25,753
                          ---------   --------  -----  -----  ------   ---------
Gross profit............    120,100     40,615    --      36   1,318      47,614
Operating expenses:
 Sales and marketing
  (2)...................    160,122     85,110    --      14     479      98,386
 Product development
  (2)...................     15,554      5,380    --     --      629       7,381
 General and
  administrative (2)....     59,610     26,892      3     38     441      34,167
 Amortization of
  intangible assets.....     42,868     10,192    --     --      --       28,476
 In-process research and
  development...........      4,048        --     --     --      --          --
 Litigation settlement..        --       8,406    --     --      --        8,406
                          ---------   --------  -----  -----  ------   ---------
 Total operating
  expenses..............    282,202    135,980      3     52   1,549     176,816
                          ---------   --------  -----  -----  ------   ---------
Loss from operations....   (162,102)   (95,365)    (3)   (16)   (231)   (129,202)
Interest income
 (expense), net.........     23,031      2,386    --      (1)    (21)     (2,844)
Other expense, net......     (6,982)       (28)   --     --      --          --
                          ---------   --------  -----  -----  ------   ---------
Net loss................   (146,053)   (93,007)    (3)   (17)   (252)   (132,046)
Accretion of redemption
 value and dividends on
 convertible preferred
 stock                          --      (2,299)   --     --      --          --
                          ---------   --------  -----  -----  ------   ---------
Net loss applicable to
 common stockholders....  $(146,053)  $(95,306) $  (3) $ (17) $ (252)  $(132,046)
                          =========   ========  =====  =====  ======   =========
Net loss per share
 applicable to common
 stockholders
Basic and diluted.......  $   (1.83)  $  (2.32) $ --   $ --   $ (.07)  $   (2.11)
                          =========   ========  =====  =====  ======   =========
Weighted average
 shares--basic and
 diluted................     79,758     41,142  9,173  8,650   3,477      62,474
                          =========   ========  =====  =====  ======   =========
</TABLE>
--------
(1) Since there were no significant acquisitions in 2000, no pro forma
    consolidated statement of operations data for that year has been
    presented.

(2) The following chart summarizes the stock-based charges that have been
    included in the following captions for the periods presented:

<TABLE>
<CAPTION>
                                         Actual                     Pro Forma
                          ---------------------------------------  ------------
                                 Year Ended December 31,            Year Ended
                          ---------------------------------------  December 31,
                             2000      1999   1998   1997   1996       1999
                          ---------- -------- -----  -----  -----  ------------
                          (Restated)
                                     (in thousands)
<S>                       <C>        <C>      <C>    <C>    <C>    <C>
Revenues................   $  6,233  $    --  $ --   $ --   $ --     $   --
Cost of revenues........        607       943   --     --     --       1,432
Sales and marketing.....     45,148    14,726   --     --     --      16,383
Product development.....        572       447   --     --     --         677
General and
 administrative.........      3,095     5,111   --     --     --       5,547
                           --------  -------- -----  -----  -----    -------
                           $ 55,655  $ 21,227 $ --     --     --     $24,039
                           ========  ======== =====  =====  =====    =======

<CAPTION>
                                      December 31,
                          ---------------------------------------
                             2000      1999   1998   1997   1996
                          ---------- -------- -----  -----  -----
                          (Restated)
                                     (in thousands)
<S>                       <C>        <C>      <C>    <C>    <C>    <C>
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............   $167,576  $ 90,382 $  71  $ 155  $  36
Working capital
 (deficiency)...........    253,638    40,822     1    (37)   (46)
Total assets............    893,350   276,563    71    155     77
Notes payable, long term
 and current............        411    38,576   --     --     --
Redeemable convertible
 preferred stock........        --        --    --     --     --
Total stockholders'
 equity (deficit).......    603,479   195,473   (95)  (133)  (116)
</TABLE>

                                       3
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

  You should read the following discussion in conjunction with the unaudited
pro forma condensed combined consolidated financial data for the years ended
December 31, 1998 and 1999 and the restated audited consolidated financial
statements for the year ended December 31, 2000 and related notes of
Homestore.com appearing elsewhere in this Form 10-K/A.

  On December 21, 2001, we announced that the Audit Committee of our Board of
Directors was conducting an inquiry of certain of our accounting practices and
that the results of the inquiry to date determined that certain of our
financial statements would require restatement. The Audit Committee retained
independent counsel and independent accountants to assist in connection with
the inquiry. On February 13, 2002, we concluded, based on preliminary findings
of the inquiry, that our financial statements, as of, and for the year ended,
December 31, 2000 would be restated and on March 11, 2002, the Audit Committee
concluded its inquiry. The results of the inquiry determined that in the year
2000, certain transactions resulting in the recognition of $36.4 million in
revenue, had been improperly recorded as independent cash transactions, when,
in fact, they were reciprocal exchanges that should have been evaluated as
barter transactions. We determined that there was insufficient support to
establish the fair value of these barter exchanges and thus the related
revenue has been reversed. Although the ultimate impact of these adjustments
will be to reduce both revenues and expenses, because some of the transactions
take place over several accounting periods, and because certain payments for
goods and services by us were capitalized when initially recorded, operating
results for the year 2000 and future periods are impacted. The effect of
reversing the revenue associated with certain of these transactions required
offsetting adjustments to various asset and liability accounts, including:
accounts receivable, notes receivable, property and equipment, other assets,
accrued liabilities and deferred revenue. In addition, the shipment of certain
software products, previously recorded as revenue in 2000, did not meet the
revenue recognition requirements of SOP 97-2 and, accordingly, $5 million of
revenue should have been deferred at December 31, 2000.

  The restated financial statements also include the effects of our early
adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)" which was issued in
February 2002. This consensus requires us to report certain consideration
given by a vendor to a customer as a reduction in revenue. Upon adoption, we
are required to retroactively reclassify such amounts in previously issued
financial statements to comply with the income statement display requirements
of the consensus. The effect of adoption in the year 2000 was to reduce
previously reported revenue and expense by $7.2 million, with no effect on net
loss or net loss per share. The effects of adoption were not material in years
prior to 2000.

  The consolidated financial statements for the year ended December 31, 2000
contained herein have been restated to incorporate these adjustment. (See Note
3 to the Consolidated Financial Statements). As a result of these items, we
have reduced our reported revenue by $48.6 million and increased our net loss
from $115.2 million to $146.1 million and our net loss per share of $(1.44) to
$(1.83). In addition, we have taken disciplinary action by effecting the
separation or resignation of seven individuals from the Company.

                                       4
<PAGE>

  Additionally, we reclassified $13.4 million in previously reported cash and
cash equivalents to restricted cash as a result of certain collateralized
lease and other obligations.

<TABLE>
<CAPTION>
                                           Year Ended December 31, 2000
                                    -------------------------------------------
                                       As                  Accounting
                                    Reported   Adjustments   Change   Restated
                                    ---------  ----------- ---------- ---------
<S>                                 <C>        <C>         <C>        <C>
Revenues..........................  $ 229,967   $(41,395)   $(7,250)  $ 181,322
Cost of revenues..................     62,239                (1,017)     61,222
                                    ---------   --------    -------   ---------
Gross profit......................    167,728    (41,395)    (6,233)    120,100
                                    ---------   --------    -------   ---------
Operating expenses:
  Sales and marketing.............    175,044     (8,689)    (6,233)    160,122
  Product development.............     15,554                            15,554
  General and administrative......     60,700     (1,090)                59,610
  Amortization of intangible
   assets.........................     42,900        (32)                42,868
  In-process research and
   development....................      4,048                             4,048
                                    ---------   --------    -------   ---------
  Total operating expenses........    298,246     (9,811)    (6,233)    282,202
                                    ---------   --------    -------   ---------
Loss from operations..............   (130,518)   (31,584)       --     (162,102)
Interest income, net..............     23,031                            23,031
Other expense, net................     (7,682)       700        --       (6,982)
                                    ---------   --------    -------   ---------
Net loss applicable to common
 stockholders.....................  $(115,169)  $(30,884)   $   --    $(146,053)
                                    =========   ========    =======   =========
Basic and diluted net loss per
 share applicable to common
 Stockholders.....................  $   (1.44)  $   (.39)   $   --    $   (1.83)
                                    =========   ========    =======   =========
Shares used to calculate basic and
 diluted net loss per share
 applicable to common
 stockholders.....................     79,758     79,758     79,758      79,758
                                    =========   ========    =======   =========
</TABLE>

  Homestore.com, Inc., or Homestore, has created an online marketplace that is
the leading destination on the Internet for home and real estate-related
information, products and services, based on the number of visitors, time
spent on the web sites and number of property listings. Through our family of
web sites, Homestore provides a wide variety of information and tools for
consumers, and is the leading supplier of online media and technology
solutions for real estate industry professionals, advertisers and providers of
home and real estate-related products and services. To provide consumers with
real estate listings, access to real estate professionals and other home and
real estate-related information and resources, we have established
relationships with key industry participants. These participants include real
estate market leaders such as the National Association of REALTORS(R), or the
NAR, the National Association of Home Builders, or the NAHB, the largest
Multiple Listing Services, or MLSs, the NAHB Remodelors Council, the National
Association of the Remodeling Industry(R), or NARI, the American Institute of
Architects, or AIA, the Manufactured Housing Institute, or MHI, real estate
franchises, brokers, builders and agents. We also have distribution agreements
with a number of leading Internet portal web sites.

 Basis of Presentation

  Initial Business and RealSelect Holding Structure. We were incorporated in
1993 under the name of InfoTouch Corporation, or InfoTouch, with the objective
of establishing an interactive network of real estate "kiosks" for consumers
to search for homes. In 1996, we began to develop the technology to build and
operate real estate related Internet sites. Effective December 4, 1996, we
entered into a series of agreements with the NAR and several investors. Under
these agreements, we transferred technology and assets relating to advertising
the listing of residential real estate on the Internet to a newly-formed
company, NetSelect, LLC., or LLC, in exchange for a 46% ownership interest in
LLC. The investors contributed capital to a newly-formed Company, NetSelect,
Inc., or NSI, which owned 54% of LLC. LLC received capital funding from NSI
and in turn contributed the assets and technology contributed by InfoTouch as
well as the NSI capital to a newly formed

                                       5
<PAGE>

entity, RealSelect, Inc., or RealSelect, in exchange for common stock
representing an 85% ownership interest in RealSelect. Also effective December
4, 1996, RealSelect entered into a number of formation agreements with and
issued cash and common stock representing a 15% ownership interest in
RealSelect to the NAR in exchange for the rights to operate the REALTOR.com(R)
web site and pursue commercial opportunities relating to the listing of real
estate on the Internet.

  The agreements governing RealSelect required us to terminate our remaining
activities, which were insignificant at that time, and dispose of our
remaining assets and liabilities, which we did in early 1997. Accordingly,
following the formation, NSI, LLC and InfoTouch were shell holding companies
for their investments in RealSelect.

  Our initial operating activities primarily consisted of recruiting
personnel, developing our web site content and raising our initial capital. We
developed our first web site, REALTOR.com(R), in cooperation with the NAR and
actively began marketing our advertising products and services to real estate
professionals in January 1997.

  Reorganization of Holding Structure. Under the formation agreements of
RealSelect, the reorganization of the initial holding structure was provided
for at an unspecified future date. On February 4, 1999, NSI stockholders
entered into a non-substantive share exchange with and were merged into
InfoTouch. In addition, LLC was merged into InfoTouch. We refer to this
transaction as the Reorganization. The share exchange lacked economic
substance and, therefore, was accounted for at historical cost. For a further
discussion relating to the accounting for the Reorganization, see Notes 1, 2
and 3 of Homestore.com's Notes to the Consolidated Financial Statements. We
(InfoTouch) changed our corporate name to Homestore.com, Inc. in August 1999.

  Our historical consolidated financial statements reflect the results of
operations of Homestore.com, Inc., formerly InfoTouch. For the years ended
December 31, 1997 and 1998, and through the Reorganization on February 4,
1999, Homestore.com was a holding company whose sole business was managing its
investment in RealSelect through LLC. This investment was accounted for under
the equity method, and accordingly, Homestore.com did not record the results
of operations related to the operating entity, RealSelect, until the
Reorganization occurred on February 4, 1999. Prior to February 4, 1999, the
results of operations of RealSelect were consolidated by NSI. Thus, all
revenues through February 4, 1999, were recorded by NSI. Pro forma financial
information that includes a comparison of the results of operations of NSI,
LLC, Homestore.com and RealSelect on a combined basis for the twelve months
ended December 31, 1998 and 1999 has been presented to assist investors in
evaluating our historical financial performance. This pro forma financial
information also includes the effect of the acquisitions in 1999 and 1998
described in the following section titled "Acquisitions." A comparison of the
historical results of operations of Homestore.com has not been presented
because the financial position, results of operations and cash flows were
insignificant for all periods presented prior to the Reorganization.

  Acquisitions. In March 1998, we acquired The Enterprise of America, Ltd., or
The Enterprise, a provider of web hosting services for real estate brokers,
for $3.0 million in cash, notes and stock. In July 1998, we acquired
MultiSearch Solutions, Inc., or MultiSearch, the initial developer of the
HomeBuilder.com web site, for $8.7 million in cash, notes and stock. In June
1999, we acquired SpringStreet, Inc., or SpringStreet, for common stock and
convertible preferred stock equivalent to an aggregate of 5,309,058 shares of
common stock. In October 1999, we acquired all of the outstanding capital
stock of The Homebuyer's Fair, Inc. and FAS-Hotline, Inc., collectively
Homefair, for $35.8 million in cash and other acquisition-related expenses, a
$37.5 million promissory note and 250,000 shares of our common stock. In May
2000, we acquired WyldFyre Technologies, Inc., or WyldFyre, a leading
developer of technology solutions for real estate professionals to access
multiple listing service (MLS) information via the Internet, for $34.0 million
in stock. In June 2000, we acquired Top Producer Systems, Inc., or Top
Producer, a provider of leads management and marketing software for real
estate professionals, for $24.2 million in cash and stock. Contingent purchase
price payments of approximately $16.2 million may also be paid in cash or
stock, if certain defined targets are met during the years ended December 31,
2000 through December 31, 2004. In September 2000, we acquired The Hessel
Group, a leading provider of technology-driven solutions and services to the
relocation industry, for $15.0 million in cash and assumption of The Hessel
Group's options with an estimated fair value of $4.5 million.

                                       6
<PAGE>

  In February 2001, we completed the acquisitions of Move.com, Inc. and
Welcome Wagon International, Inc, or collectively referred to as the Move.com
Group, from Cendant Corporation, or Cendant, in an all stock transaction
valued at approximately $757.3 million. In connection with the acquisitions,
we issued an aggregate of 21.4 million shares of our common stock in exchange
for all the outstanding shares of capital stock of the Move.com Group, and
assumed approximately 3.2 million outstanding stock options of Move.com, Inc.
Cendant is restricted in its ability to sell the Homestore.com shares it
received in the acquisition and has agreed to vote such shares on all
corporate matters in proportion to the voting decisions of all other
stockholders. In addition, Cendant has agreed to a ten-year standstill
agreement that, under most conditions, prohibits Cendant from acquiring
additional Homestore.com shares. The acquisition will be accounted for as a
purchase in accordance with generally accepted accounting principles.

  In connection with and contingent upon the close of the acquisition of the
Move.com Group, we entered into a series of commercial agreements for the sale
of various technology and subscription-based products to Real Estate
Technology Trust ("RETT"), an independent trust established in 1996 to provide
technology services and products to Cendant's real estate franchisees that is
considered a related party of the Company. Under the commercial agreements,
RETT committed to purchase $75 million in products to be delivered to agents,
brokers and other Cendant real estate franchisees over the next three years.

  We anticipate an increase in absolute dollars for revenues, cost of
revenues, operating expenses and amortization of intangibles in connection
with the Move.com Group acquisition.

  We may seek to continue to expand our current offerings by acquiring
additional businesses, technologies, product lines or service offerings from
third parties. We may be unable to identify future acquisition targets and may
be unable to complete future acquisitions. Even if we complete an acquisition,
we may have difficulty in integrating it with our current offerings, and any
acquired features, functions or services may not achieve market acceptance or
enhance our brand loyalty. Integrating newly acquired organizations and
products and services could be expensive, time consuming and a strain on our
resources.

 Accounting Policies

  Revenues. We derive significant revenues from the sale of subscription
products, consisting of online media and technology solutions for home and
real estate professionals, including web site development, to real estate
agents and brokers, home builders, financial service companies and property
owners and managers. Revenue from technology solutions are derived from the
following: (i) software license revenue (ii) support and service revenues, and
(iii) web site development revenues. We recognize revenues from software
transactions in accordance with provisions of Statement of Position, or SOP,
97-2, "Software Revenue Recognition." Revenues from the sale of software
products are recognized upon delivery of the products and satisfaction of
related obligations, if any, provided that persuasive evidence of an
arrangement exists, the fee is fixed and determinable and collection of the
resulting receivable is probable. For contracts with multiple elements (e.g.,
delivered and undelivered products, support and other services), we allocate
revenues to the undelivered elements of the contract based on vendor-specific
objective evidence of its fair value. This vendor-specific objective evidence
of fair value is the sales price of the element when sold separately or the
renewal rate specified in the arrangement for licensing arrangements with
terms of one year to 18 months that include customer support and unspecified
software updates. Revenues allocated to undelivered elements are recognized
when all revenue recognition criteria are met. Support and services revenues
are recognized ratably over the period of the support contract. Payments for
support and services are generally made in advance and are non-refundable. The
products are sold in annual subscriptions and, accordingly, we defer these
revenues and recognize them ratably over the life of the contract, generally
12 months. These prepayments appear on our balance sheet as deferred revenues.
Contracts involving web site development are accounted for using the
percentage-of-completion method which is generally determined based on
development costs incurred relative to total estimated costs.

                                       7
<PAGE>

  We also sell advertising banners and traditional Internet sponsorships on
our web sites. We sell banner advertising pursuant to contracts with terms
varying from a few days up to three years, which may include the guarantee of
a minimum number of impressions or times that an advertisement appears in
pages viewed by the users. This advertising revenue is recognized ratably
based upon the lesser of impressions delivered over the total number of
guaranteed impressions or ratably over the period in which the advertisement
is displayed. Equity exchanged for services is recognized during the period in
which the services are provided. We record and measure the value of equity
received in exchange for services in accordance with Emerging Issues Task
Force, or EITF, 00-8 "Accounting by a Grantee for an Equity Instrument to Be
Received in Conjunction with Providing Goods or Services." We recognize
revenues from advertising barter transactions in accordance with EITF 99-17,
"Accounting for Advertising Barter Transactions." Revenues from these
transactions are recognized during the period in which the impressions are
delivered. The services provided are valued based on similar cash transactions
which have occurred within six months prior to the date of the barter
transaction. During the year ended December 31, 2000, revenues from equity-
for-services and advertising barter transactions were less than 5% of
revenues. There were no revenues from these type of transactions during the
year ended December 31, 1999.

  Cost of revenues. Cost of revenues consists of salaries, benefits,
consulting fees and equipment costs related to our web site operations, credit
card processing fees and data aggregation costs. Cost of revenues also
includes royalties paid to third-party real estate listings providers. These
royalties are capitalized and amortized over the related contract period and
are classified on our balance sheet as deferred royalties. Also included in
cost of revenues are stock-based charges attributed to cost of revenues.

  Real estate listings providers generally receive 10% to 12% of the gross
revenues that we generate from their listings. Some real estate listings
providers have entered into national arrangements with us, under which we have
the exclusive right to list their properties on the Internet. The royalty rate
for agreements with these real estate listings providers is slightly higher
than for other providers. We also make royalty payments to the NAR under the
terms of our Operating Agreement. We anticipate continuing increases in cost
of revenues in absolute dollars as our revenues increase. We also expect that
cost of revenues will increase as we continue to make investments to increase
the capacity and speed of our family of web sites.

  Sales and marketing. Sales and marketing expenses include salaries, sales
commissions, benefits, travel and related expenses for our direct sales force,
customer service, marketing, and sales support functions. Sales and marketing
expenses also include fees associated with our Internet portal distribution
agreements and marketing and listing agreements with real estate franchises.
These fees are amortized on a pro rata basis over the terms of the agreements.
We expect to increase the absolute dollar amount of spending in sales and
marketing activities over the next year in an effort to drive consumer traffic
to our family of web sites and increase brand awareness. Also included in
sales and marketing are stock-based charges attributed to sales and marketing
activities.

  Product development. Product development costs include expenses for the
development of new or improved technologies designed to enhance the
performance of our family of web sites, including salaries and related
expenses for our web site design staff, as well as costs for contracted
services, facilities and equipment. We believe that a significant level of
product development activity and expense is required in order to remain
competitive with new and existing web sites. Accordingly, we anticipate that
we will continue to devote substantial resources to product development and
that the absolute dollar amount of these costs will increase in future
periods. Also included in product development are stock-based charges
attributed to product development activities.

  General and administrative. General and administrative expenses include
salaries, benefits and expenses for our executive, finance, legal and human
resources personnel. In addition, general and administrative expenses include
occupancy costs, fees for professional service, and other general corporate
related costs. We expect general and administrative expenses to increase in
absolute dollars as we continue to expand our administrative

                                       8
<PAGE>

infrastructure to support the anticipated growth of our business. Also
included in general and administrative expenses are stock-based charges
attributed to general and administrative activities.

  Amortization of intangible assets. Amortization of intangible assets
consists of goodwill and other purchased intangibles resulting from our
acquisition activities. Goodwill and all other purchased intangibles are being
amortized on a straight-line basis over the estimated periods of benefit
ranging from three to fifteen years. We anticipate an increase in amortization
of intangible assets in connection with the acquisition of the Move.com Group.

  We have only a limited operating history under our current business model.
Our prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as the Internet. To address these risks, we must, among other
things, be able to continue to respond to highly competitive developments,
attract, retain and motivate qualified personnel, implement and successfully
execute our marketing plans, continue to upgrade our technologies, develop new
distribution channels, and improve operational and financial systems. Although
our revenues have grown significantly in recent periods, we may be unable to
sustain this growth. Therefore, you should not consider our historical growth
indicative of future revenue levels or operating results. We may never achieve
net income, and, if we do, we may not be able to sustain it. A more complete
description of other risks relating to our business is set forth under the
caption "Risk Factors."

Results of Operations

  The following tables set forth certain pro forma and actual consolidated
statement of operations data. As there was no material impact on pro forma
results from acquisitions in 2000, no pro forma consolidated statement of
operations for the year ended December 31, 2000 has been presented. The pro
forma consolidated statement of operations data for the periods indicated
assumes that the following transactions had occurred as of January 1, 1998:

  .  our acquisition of The Enterprise for 525,000 shares of common stock,
     with an estimated fair value of $525,000, a $2.2 million note payable,
     and $705,000 in cash and other acquisition-related expenses;

  .  our acquisition of MultiSearch for convertible preferred stock
     equivalent to 1,625,000 shares of our common stock, with an estimated
     fair value of $4.8 million, a $3.6 million note payable and $875,000 in
     cash and other acquisition-related expenses;

  .  our acquisition of SpringStreet for common stock and convertible
     preferred stock equivalent to an aggregate of 5,309,058 shares of our
     common stock, with an estimated fair value of $51.7 million;

  .  our acquisition of Homefair for 250,000 shares of our common stock, with
     an estimated fair value of $11.2 million, a $37.5 million promissory
     note, and $35.8 million in cash and other acquisition-related expenses;
     and

  .  the reorganization of our holding company structure as previously
     described.

  The unaudited consolidated pro forma data may not, however, be indicative of
the consolidated results of operations of Homestore that actually would have
occurred had the transactions reflected in the unaudited consolidated pro
forma results of operations occurred at the beginning of the periods
presented, or of the consolidated results of operations that we may achieve in
the future. The comparison to 1999 and 1998 results are on a pro forma basis,
as historical results without pro forma presentation are not comparable or
meaningful. No pro forma results for 2000 have been presented as pro forma
results of acquired companies in 2000 were not material.

                                       9
<PAGE>

<TABLE>
<CAPTION>
                                                 Actual        Pro Forma
                                              ------------ -------------------
                                                               Year Ended
                                               Year Ended     December 31,
                                              December 31, -------------------
                                                  2000       1999       1998
                                              ------------ ---------  --------
                                               (Restated)
                                                      (in thousands)
<S>                                           <C>          <C>        <C>
Consolidated Statement of Operations Data:
Revenues (1).................................  $ 181,322   $  73,367  $ 23,123
Cost of revenues (1).........................     61,222      25,753    10,274
                                               ---------   ---------  --------
Gross profit.................................    120,100      47,614    12,849
Operating expenses:
  Sales and marketing (1)....................    160,122      98,386    35,066
  Product development (1)....................     15,554       7,381     5,663
  General and administrative (1).............     59,610      34,167    31,338
  Amortization of intangible assets..........     42,868      28,476    27,897
  In-process research and development........      4,048         --        --
  Litigation settlement......................        --        8,406       --
                                               ---------   ---------  --------
  Total operating expenses...................    282,202     176,816    99,964
                                               ---------   ---------  --------
Loss from operations.........................   (162,102)   (129,202)  (87,115)
Interest income (expense), net...............     23,031      (2,844)   (6,090)
Other expense, net...........................     (6,982)        --        --
                                               ---------   ---------  --------
Net loss.....................................  $(146,053)  $(132,046) $(93,205)
                                               =========   =========  ========
</TABLE>
--------
(1) The following chart summarizes the stock-based charges that have been
    included in the following captions for the periods presented:

<TABLE>
<CAPTION>
                                                      Actual       Pro Forma
                                                   ------------ ---------------
                                                                  Year Ended
                                                    Year Ended   December 31,
                                                   December 31, ---------------
                                                       2000      1999    1998
                                                   ------------ ------- -------
                                                    (Restated)
                                                          (in thousands)
<S>                                                <C>          <C>     <C>
Revenues..........................................   $ 6,233    $   --  $   --
Cost of revenues..................................       607      1,432     141
Sales and marketing...............................    45,148     16,383     506
Product development...............................       572        677      78
General and administrative........................     3,095      5,547  19,730
                                                     -------    ------- -------
                                                     $55,655    $24,039 $20,455
                                                     =======    ======= =======
</TABLE>

                                      10
<PAGE>

<TABLE>
<CAPTION>
                                                         Actual    Pro Forma
                                                         ------    -----------
                                                          2000     1999   1998
                                                          ----     ----   ----
                                                        (Restated)
<S>                                                     <C>        <C>    <C>
As a Percentage of Revenues:
Revenues...............................................    100%     100%   100%
Cost of revenues.......................................     34       35     44
                                                           ---     ----   ----
Gross profit...........................................     66       65     56
                                                           ---     ----   ----
Operating expenses:
  Sales and marketing..................................     88      134    152
  Product development..................................      8       10     24
  General and administrative...........................     33       47    135
  Amortization of intangible assets....................     24       39    121
  In process research and development..................      2      --     --
  Litigation settlement................................    --        11    --
                                                           ---     ----   ----
Total operating expenses...............................    155      241    432
                                                           ---     ----   ----
Loss from operations...................................    (89)    (176)  (376)
Interest income (expense), net.........................     13       (4)   (27)
Other expense, net.....................................     (4)     --     --
                                                           ---     ----   ----
Net loss...............................................    (80)%   (180)% (403)%
                                                           ===     ====   ====
</TABLE>

For the Years Ended December 31, 2000 and 1999

 Revenues

  Revenues increased to $181.3 million in 2000 from pro forma revenues of
$73.4 million in 1999. The increase was primarily due to increased revenue
from professional subscriptions.

  Subscription revenues, which represented approximately 62% of total revenues
for 2000, grew 167% from 1999. The growth in revenue from professional
subscriptions was due to increases in the number of professionals on the
Homestore.com family of web sites as well as an increase in the average
revenue per subscription. Also contributing to the increase was sales of
technology products as well as web development fees. The number of
professional subscriptions increased by 52% to approximately 145,000 compared
to totals at December 31, 1999 and was driven, in part, by bulk purchases from
national franchises. We anticipate that we will have an increase in the number
of professional subscribers and corresponding increases to revenues in
connection with the acquisition of the Move.com Group, resulting in
subscriptions representing a larger percentage of total anticipated revenues
in 2001.

  Advertising revenues, which represented approximately 38% of total revenues
for 2000, grew 233% from 1999. The increase was driven primarily by increases
in advertising and sponsorship arrangements. Although our advertising revenue
has grown significantly in recent periods, we may be unable to sustain growth
as there has been a softening in the online advertising market in general. If
this softening continues or worsens, our advertising revenues could be
adversely affected.

 Cost of Revenues

  Cost of revenues, including non-cash stock-based charges, increased to $61.2
million in 2000 from pro forma cost of revenues of $25.7 million in 1999. The
increase was due primarily to our overall increased sales volume, increased
salaries, increase in royalties, and hosting costs during 2000 as compared to
1999. We anticipate continuing increases in cost of revenues in absolute
dollars as our revenues increase and we continue to make capital investments
to increase the capacity of our web sites in order to accommodate traffic
increases.

                                      11
<PAGE>

  Gross margin percentage for 2000 was 66.2%, up from pro forma gross margin
percentage of 64.9% for 1999. The increase in gross margin percentage was
primarily due to renewal of subscriptions as well as the continuing effort to
leverage our existing web site operations.

 Operating Expenses

  Sales and marketing. Sales and marketing expenses increased to $160.1
million in 2000 from pro forma sales and marketing of $98.4 million in 1999.
The increase was primarily attributable to a significant increase in costs
associated with Internet portal distribution agreements and marketing and
listing agreements, which we entered into during the third and fourth quarter
of 1999. The increase was also due to increased salaries and commissions.
Increases in advertising for our branding campaign, promotional material, and
trade show expenses during 2000 also contributed to the increase. The increase
was also due to the inclusion of stock-based charges in sales and marketing.
These stock-based charges increased by $30.4 million to $45.1 million in 2000
from $14.7 million in 1999.

  Product development. Product development expenses increased to $15.6 million
in 2000 from pro forma product development of $7.4 million in 1999. The
increase in product development costs was due to increased costs associated
with the continuing expansion of the Homestore.com web sites and the
integration of our acquisitions into our family of web sites, as well as
product development costs from our acquisitions of WyldFyre, Top Producer and
The Hessel Group in 2000.

  General and administrative. General and administrative expenses increased to
$59.6 million in 2000 from pro forma general and administrative expenses of
$34.2 million in 1999. The increase was primarily due to hiring key management
personnel and increased staffing levels required to support our significant
growth and expanded operations and infrastructure as well as increases in
legal and other professional fees. Facility costs increased primarily due to
our new corporate and central service offices. The increase was partially
offset by a decrease in stock-based charges in general and administrative
expenses. These stock-based charges decreased by $2.0 million to $3.1 million
in 2000 from $5.1 million in 1999.

  Amortization of intangible assets. Amortization of intangible assets was
$42.9 million in 2000 compared to pro forma amortization of $28.5 million in
1999. The increase in amortization was due to the acquisitions of WyldFyre,
Top Producer and The Hessel Group in 2000.

  In-process research and development. During 2000, our acquisitions of
WyldFyre and Top Producer resulted in write-offs of in-process research and
development, or IPR&D, of $4.0 million. The fair value of the IPR&D for each
of the acquisitions was determined using the income approach. The income
approach included assumptions relating to revenue estimates, operating
expenses, income taxes and discount rates. The IPR&D was comprised of seven
projects and was charged to expense during the year ended December 31, 2000.

  Litigation Settlement. On October 22, 1999, we announced a settlement of
litigation with Cendant. As part of the settlement, Cendant received 250,000
shares of our common stock. We incurred a non-cash charge of $8.4 million in
connection with the issuance of the 250,000 shares of our common stock in the
year ended December 31, 1999.

 Interest Income, Net

  Interest income, net increased to $23.0 million in 2000 from interest
income, net of $2.4 million in 1999. The increase was primarily due to
interest income earned on a higher average cash balances as a result of
proceeds received from our follow-on public offering which was completed in
January 2000.

 Other Expense, Net

  Other expense, net increased to $7.0 million in 2000 from other expense, net
of $28,000 in 1999. The increase was primarily due to the accretion of the
distribution obligation relating to a marketing and distribution agreement.

                                      12
<PAGE>

 Income Taxes

  As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes in 2000 and 1999. As of December 31, 2000, we had $190.8 million of net
operating loss carryforwards for federal income tax purposes, which expire
beginning in 2007. We have provided a full valuation allowance on our deferred
tax assets, consisting primarily of net operating loss carryforwards, due to
the likelihood that we may not generate sufficient taxable income during the
carry-forward period to utilize the net operating loss carryforwards.

 Stock-Based Charges

  Stock. In March 2000, we issued 1,085,271 shares of our common stock valued
for accounting purposes at approximately $70.0 million to Budget Group, Inc.,
or BGI, in connection with entering into a ten-year strategic alliance
agreement that allows us to participate in online and offline BGI marketing
activities.

  In April 2000, we entered into a five-year marketing and distribution
agreement with AOL. In exchange for entering into this agreement, we paid AOL
$20.0 million in cash and issued to AOL approximately 3.9 million shares of
our common stock. In the agreement, we have guaranteed that the 30-day average
closing price, related to 60%, 20% and 20% of the shares we issued, will be
$68.50 per share on the third, fourth and fifth anniversaries of the
agreement, respectively. This guarantee only applies to shares that continue
to be held by AOL at the end of each respective year. In connection with this
agreement, we recorded $186 million in prepaid distribution expense included
in current and non-current assets that will be recognized as stock-based
charges over the five-year marketing agreement.

  Warrants. In February 2000, we issued warrants to purchase up to 470,089
shares of our common stock at an exercise price of $66.50 to the Broker Gold
program members who elected to renew their existing listing agreements with us
for an additional two years at the end of their existing two-year term. All
warrants issued were fully vested, non-forfeitable and were immediately
exercisable. We incurred a charge of approximately $21.9 million which is
being recognized as expense over the remaining term of the initial two year
Broker Gold program agreements.

  In March 2000, in connection with a marketing agreement we issued warrants
to purchase 400,000 shares of our common stock at an exercise price of $35.63
per share. All warrants issued were fully vested, non-forfeitable and were
immediately exercisable. We incurred a non-cash charge of $5.0 million which
is being recognized over the one-year term.

  Throughout 2000, we issued warrants to purchase 30,739 shares of our common
stock at a weighted average price of $85.45 per share to Multiple Listing
Services, or MLSs, that agreed to provide their real estate listings to us for
publication on the Internet on a national basis. All warrants issued were
fully vested, non-forfeitable and were immediately exercisable. We incurred a
total non-cash charge of approximately $1.8 million which is being recognized
as expense over the term of the applicable MLS agreement, approximately two to
three years.

Pro Forma for the Years Ended December 31, 1999 and 1998

 Revenues

  Pro forma revenues increased to $73.4 million in 1999 from $23.1 million in
1998. The increase was primarily due to increased revenue from professional
subscriptions as well as an increase in advertising revenue. The growth in
revenue from professional subscriptions was due to an increase in the number
of subscribers on our web sites. The growth in advertising revenue was
primarily driven by increased sponsorships, including various alliance
agreements. Banner advertising revenues also increased primarily as a result
of increased traffic to our web sites in 1999 as compared to 1998.

                                      13
<PAGE>

 Cost of Revenues

  Pro forma cost of revenues increased to $25.8 million in 1999 from $10.3
million in 1998. The increase was due primarily to our overall increased sales
volume and increased activity during 1999 as compared to 1998.

  Our pro forma gross margin percentage in 1999 was 65%, up from 56% for 1998,
primarily due to increased advertising revenue. The increase was partially
offset by the inclusion of stock-based charges in cost of revenues. These
stock-based charges increased by $1.3 million to $1.4 million in 1999 from
$141,000 in 1998.

 Operating Expenses

  Sales and marketing. Pro forma sales and marketing expenses increased to
$98.4 million in 1999 from $35.1 million in 1998. The increase was primarily
attributable to a significant increase in costs associated with Internet
portal distribution agreements and marketing and listing agreements, which we
entered into throughout 1998 and 1999. The increase was also due to the
significant growth of our direct sales force in the third and fourth quarters
of 1998, resulting in increased salaries and commissions and related travel
and entertainment expenses. Increased sales volume also contributed to an
increase in sales related collateral materials. Increases in advertising,
promotional material and trade show expenses also contributed to the increase.
The increase was also due to the inclusion of stock-based charges in sales and
marketing. These stock-based charges increased by $15.9 million to $16.3
million in 1999 from $506,000 in 1998.

  Product development. Pro forma product development expenses increased to
$7.4 million in 1999 from $5.7 million in 1998. The increase was primarily due
to costs associated with the launch of Remodel.com and the re-launch of the
Homestore.com web site, including salaries and related expenses for staff, as
well as contracted services. The increase was also due to the inclusion of
stock-based charges in product development. These stock-based charges
increased by $599,000 to $677,000 in 1999 from $78,000 in 1998.

  General and administrative. Pro forma general and administrative expenses
increased to $34.2 million in 1999 from $31.3 million in 1998. The increase
was primarily due to hiring key management personnel and increased staffing
levels required to support our significant growth and expanded operations and
infrastructure as a public company. Facility costs associated with our new
corporate office also increased. This increase was offset by the inclusion of
stock-based charges in general and administrative expenses. These stock-based
charges decreased by $14.2 million to $5.5 million in 1999 from $19.7 million
in 1998.

  Amortization of intangible assets. Pro forma amortization of intangible
assets was $28.5 million in 1999 compared to $27.9 million in 1998.

 Stock-Based Charges

  Stock Options. In connection with the grant of stock options to employees
during 1997, 1998 and 1999, we recorded aggregate deferred compensation of
approximately $23.9 million. This deferred compensation represented the
difference between the deemed fair value of our common stock for accounting
purposes and the exercise price of these options at the date of grant.
Deferred compensation is presented as a reduction of stockholders' equity and
amortized over the vesting period of the applicable options, generally four
years.

  Stock. In August 1998, we sold convertible preferred stock equivalent to
8,320,245 shares of common stock at a purchase price of $4.80 per share and
8,369,955 shares of common stock at a purchase price of $1.26 per share. We
incurred a non-cash charge of $18.9 million for the year ended December 31,
1998, which represents the difference between the deemed fair value of the
stock and the price paid by the investors as stock-based compensation in 1998.
This stock-based charge is included in the stock-based charges line item.

  During 1999, we recorded as pro forma deferred compensation the $6.0 million
difference between the deemed fair value of the stock sold in connection with
our Broker Gold program and the price paid. We are amortizing this amount
ratably over the two-year term of the Broker Gold agreements, resulting in a
non-cash charge of $2.8 million in 1999.

                                      14
<PAGE>

  Warrants. In April 1998, in connection with a web portal distribution
agreement, we issued warrants to purchase 792,752 shares of our common stock
at a weighted average exercise price of $7.00 per share. We incurred a total
charge of $12.6 million which is being amortized over the remaining term of
the distribution agreement, approximately two years.

  In February 1999, we closed a private equity offering to real estate brokers
under our Broker Gold program. We also issued warrants to purchase up to
364,110 shares of our common stock with an exercise price of $20.00 per share.
All warrants issued are fully vested, non-forfeitable and are immediately
exercisable. We incurred a charge of approximately $4.1 million which is being
recognized as expense over the remaining term of the initial two-year Broker
Gold program agreements.

  Throughout 1999, we issued warrants to purchase 910,844 shares of common
stock at a weighted average exercise price of $21.18 per share to MLSs that
agreed to provide their real estate listings to us for publication on the
Internet on a national basis. All warrants issued are fully vested, non-
forfeitable and were immediately exercisable. We incurred a total charge of
approximately $11.2 million which is being recognized over the term of the
applicable MLS agreement, approximately one to two years.

  In August 1999, in connection with a marketing agreement,, we issued
warrants to purchase 500,000 shares of our common stock at an exercise price
of $20.00 per share. All warrants are fully vested, non-forfeitable and were
immediately exercisable. We incurred a total charge of approximately $3.5
million which is being recognized over the two-year term of the agreement.

  In October 1999, in connection with a marketing agreement, we issued
warrants to purchase 119,048 shares of our common stock at an exercise price
of $42.00 per share. All warrants are fully vested, non-forfeitable and were
immediately exercisable. We incurred a total charge of approximately $1.1
million which is being recognized over the two-year term of the agreement.

  Litigation Settlement. On October 22, 1999, we announced a settlement of
litigation with Cendant. As part of the settlement, Cendant received 250,000
shares of our common stock. We incurred a non-cash charge of $8.4 million in
connection with the issuance of the 250,000 shares of our common stock in the
year ended December 31, 1999.

 Interest and Other Expense, Net

  Pro forma interest income consists of earnings on our cash and cash
equivalents, net of (1) imputed interest expense on the notes payable issued
in connection with our acquisitions of The Enterprise and MultiSearch and (2)
interest expense incurred on the note payable issued in connection with our
Homefair acquisition. Interest and other expense decreased to $2.8 million in
1999 from $6.1 million in 1998. The decrease was primarily due to interest
income earned on a higher average cash balances as a result of our initial
public offering proceeds.

 Income Taxes

  As a result of operating losses and our inability to recognize a benefit
from our deferred tax assets, we have not recorded a provision for income
taxes in 1999 and 1998.

 Liquidity and Capital Resources

  The cash flow information presented below includes the combined cash flow
statements derived from the combined financial statements for the years ended
December 31, 1999 and 1998 of Homestore.com and NetSelect.

  Since 1993, we have funded our operations and met our capital expenditure
requirements through the sale of equity securities, cash generated from the
sale of our products and services and, to a lesser extent, equipment

                                      15
<PAGE>

lease financing. At December 31, 2000, we had cash equivalents of
approximately $167.6 million, short-term investments of approximately $75.3
million and restricted cash of $103.4 million totaling approximately
$346.3 million as compared to $90.4 million at December 31, 1999.

  Cash used in operating activities of $51.3 million for the year ended
December 31, 2000 was primarily attributable to the net loss of $146.1
million, increases in accounts receivable of $19.1 million, prepaid
distribution expense of $18.2 million and other assets of $14.3 million. This
decrease in cash used in operating activities was primarily offset by
depreciation, amortization and accretion of $52.5 million, stock-based charges
of $55.7 million, in-process research and development of $4.0 million and
increases in accounts payable and accrued liabilities of $18.9 million and
deferred revenue of $11.9 million. Net cash used in operating activities was
$51.0 million in 1999 and $28.2 million in 1998. Net cash used in operating
activities in each of these periods was primarily the result of net operating
losses and payments required to be made relating to our Internet portal
distribution and marketing and listing agreements entered into in 1998. These
operating cash outflows were partially offset by depreciation, amortization
and non-cash equity charges and increases in accounts payable, accrued
liabilities and deferred revenues.

  Cash used in investing activities of $189.2 million for the year ended
December 31, 2000 was attributable to capital expenditures of $41.1 million,
net purchases of short-term investments consisting primarily of commercial
paper of $73.5 million and other investments of $32.5 million. Cash of $42.0
million was also used for acquisitions. Net cash used in investing activities
was $29.0 million in 1999, compared to $5.3 million in 1998. To date, our
investing activities have consisted of acquisitions, purchases of property and
equipment and strategic operating agreements. In June 1999, we acquired
SpringStreet for common stock and convertible preferred stock and assumed
$10.2 million in cash. In October 1999, we used $35.0 million in cash to fund
part of the purchase price for Homefair. In March 1998 and July 1998, we
acquired The Enterprise and MultiSearch, respectively for an aggregate
purchase price of $11.7 million, of which $1.6 million represented cash
payments. Capital expenditures for property and equipment totaled $3.9 million
and $4.0 million in 1998 and 1999, respectively. During 1999, an additional
$3.0 million of capital expenditures were funded through an equipment lease
financing arrangement.

  Cash provided by financing activities of $317.7 million for the year ended
December 31, 2000 was attributable to our follow-on public offering of common
stock of $428.9 million, repayment of notes from stockholders of $2.5 million,
the effect of subsidiary equity transactions of $10.9 million, and proceeds
from the exercise of options and warrants and the employee stock purchases of
$23.3 million. In January 2000, we completed our follow-on public offering to
the public in which we sold 4,073,139 shares of our common stock at a price of
$110 per share, raising approximately $428.9 million, after deducting
underwriting discounts, commissions and offering expenses. This increase was
offset by the transfer of $103.4 million to restricted cash in conjunction
with a distribution agreement and security for office space leases, repayment
of notes payable of $38.6 million, and issuance of notes receivable of $6.0
million. Net cash provided by financing activities was $155.6 million in 1999
and $45.1 million in 1998. Cash was provided primarily from net proceeds from
the sale of our common and preferred stock. In April 1999, we issued
convertible preferred stock equivalent to 1,704,775 shares of common stock for
$17.0 million. In August 1999, we completed our initial public offering in
which we sold 8,050,000 shares of our common stock at a price of $20.00 per
share, raising approximately $145.6 million, after deducting underwriting
discounts and commissions and offering expenses. We also repurchased shares of
our common and preferred stock in 1998 and 1999 and repaid notes payable.

  In March 2000, we issued 1,085,271 shares of our common stock with an
estimated fair value of approximately $70.0 million to Budget, Inc., or BGI,
in connection with entering into a ten-year strategic alliance agreement that
allows us to participate in online and offline BGI marketing activities. In
this agreement, we have guaranteed that the price of the shares issued to BGI
will be $64.50 per share on any trading day during the six month period after
the second anniversary of the agreement. BGI has the right, during this
period, to require us, with respect to each share as to which the right is
exercised, in our discretion, to i) pay to BGI an amount in cash equal to the
excess of the guaranteed price over the average price of the period ("the Put
Amount"), ii) issue

                                      16
<PAGE>

and deliver to BGI the number of common stock with a value per share equal to
the Put Amount, or iii) repurchase all of the shares of the stock at the
guaranteed price.

  In April 2000, we entered into a five-year marketing and distribution
agreement with America Online, Inc., or AOL. In exchange for entering into
this agreement, we paid AOL $20.0 million in cash and issued to AOL
approximately 3.9 million shares of our common stock. In the agreement, we
have guaranteed that the 30-day average closing price, related to 60%, 20% and
20% of the shares we issued, will be $68.50 per share on the third, fourth and
fifth anniversaries of the agreement, respectively. This guarantee only
applies to shares that continue to be held by AOL at the end of each
respective year. At December 31, 2000, we recorded $189.8 million in other
non-current liabilities, which represents the fair market value of the 3.9
million shares of our stock issued upon entering the agreement and the
guarantee of the stock. The difference between the total guaranteed amount and
the liability recorded is being recorded as other expense over the term of the
agreement. In connection with the guarantee, we have established a $90.0
million letter of credit and are required to pledge an amount equal to the
unused portion of the letter of credit. As of December 31, 2000, we have
pledged $94.7 million in cash equivalents towards this letter of credit which
is classified as restricted cash on the balance sheet. This letter of credit
can be drawn against by AOL in the event that our 30-day average closing price
is less than $68.50 at the end of each respective guarantee date. The letter
of credit will be reduced to $50.0 million at the end of the third anniversary
of the agreement. The term of the agreement may be reduced if AOL draws more
than $40.0 million from the letter of credit at the end of the third year
anniversary of the agreement.

  In February 2001, we completed the acquisition of the Move.com Group from
Cendant in an all stock transaction valued at approximately $757.3 million. In
connection with the acquisition, we issued an aggregate of approximately 21.4
million shares of our common stock in exchange for all the outstanding shares
of capital stock of Move.com, Inc. and Welcome Wagon International, Inc. and
assumed approximately 3.2 million outstanding stock options of Move.com, Inc.

  In connection with and contingent upon the close of the acquisition of the
Move.com Group, we entered into a series of commercial agreements for the sale
of various technology and subscription-based products to Real Estate
Technology Trust ("RETT"), an independent trust established in 1996 to provide
technology services and products to Cendant's real estate franchisees that is
considered a related party of the Company. Under the commercial agreements,
RETT committed to purchase $75 million in products to be delivered to agents,
brokers and other Cendant real estate franchisees over the next three years.

  Since inception, we have incurred losses from operations and negative
operating cash flows. At December 31, 2000, we had an accumulated deficit of
$301.8 million, cash and cash equivalents of approximately $167.6 million,
short-term investments of approximately $75.3 million and restricted cash of
$103.4 million. We have no material commitments for capital expenditures over
the next twelve months. We have total minimum lease obligations of
approximately $44.0 million under certain noncancelable operating leases
through 2005 and approximately $11.5 million in internet portal distribution
obligations through December 2003. We currently anticipate that our existing
cash and cash equivalents and any cash generated from operations will be
sufficient to fund our operating activities, capital expenditures and other
obligations through at least December 31, 2001. However, in the longer term,
we face significant risks associated with the successful execution of our
business strategy and may need to raise additional capital in order to fund
more rapid expansion, to expand our marketing activities, to develop new or
enhance existing services or products, to satisfy our obligations to BGI or
AOL as described above, to respond to competitive pressures or to acquire
complementary services, businesses or technologies. If we are not successful
in generating sufficient cash flow from operations, we may need to raise
additional capital through public or private financing, strategic
relationships or other arrangements. This additional capital, if needed, might
not be available on terms acceptable to us, or at all. Our failure to raise
sufficient capital when needed could have a material adverse effect on our
business, results of operations and financial condition. If additional capital
were raised through the issuance of equity securities, the percentage of our
stock owned by our then-current stockholders would be reduced. Furthermore,
these equity

                                      17
<PAGE>

securities might have rights, preferences or privileges senior to those of our
common and preferred stock. In addition, our liquidity could be adversely
impacted by the litigation referred to in Note 21 of our consolidated
financial statements.

Recent Accounting Developments

  In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
planned use of the derivative and the resulting designation. Because we do not
currently hold any derivative instruments and do not engage in hedging
activities, the impact of the adoption of SFAS No. 133 is not currently
expected to have a material impact on our financial position, results of
operations or cash flows. We will be required to implement SFAS No. 133 in the
first quarter of fiscal 2001.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 provides guidance for revenue recognition under
certain circumstances. The adoption of SAB No. 101 in the fourth quarter of
2000 did not have a significant impact on our financial position, results of
operations or cash flows.

  In March 2000, the FASB issued FASB Interpretation No. 44, or FIN No. 44,
Accounting for Certain Transactions Involving Stock Compensation an
Interpretation of APB Opinion No. 25. FIN No. 44 clarifies the application of
Opinion No. 25 for (a) the definition of employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 became effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January
12, 2000. The adoption of FIN No. 44 did not have a significant impact on our
financial position, results of operations or cash flows.

                                      18
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Unaudited Pro Forma Condensed Consolidated Financial Information
  Statement of Operations Overview........................................  20
  Unaudited Pro Forma Condensed Consolidated Statement of Operations......  21
  Notes to Unaudited Pro Forma Condensed Consolidated Statement of
   Operations.............................................................  22

Homestore.com, Inc. Consolidated Financial Statements
  Report of Independent Accountants.......................................  23
  Consolidated Balance Sheets.............................................  24
  Consolidated Statements of Operations...................................  25
  Consolidated Statements of Stockholders' Equity (Deficit)...............  26
  Consolidated Statements of Cash Flows...................................  27
  Notes to Consolidated Financial Statements..............................  28
</TABLE>

                                       19
<PAGE>

                              HOMESTORE.COM, INC.

                  UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
                            STATEMENT OF OPERATIONS

                                   Overview

  On February 4, 1999, NetSelect, Inc. ("NSI") was merged with and into
Homestore.com, Inc. ("Company" or "Homestore") in a non-substantive share
exchange, which was provided for in the agreements governing the formation and
operation of RealSelect, Inc. ("RealSelect"), the operating company. The share
exchange lacked substance since both the Company and NSI were shell companies
for their respective investments in RealSelect, and because the respective
underlying ownership interests of the individual investors were unaffected.
Accordingly, the non-substantive share exchange was accounted for at
historical cost. The share exchange between the Company and NSI is referred to
herein as the "Reorganization". This Reorganization was completed solely to
simplify the Company's legal structure prior to its initial public offering.
See Note 1 of Homestore.com, Inc. Notes to Consolidated Financial Statements
for further discussion about the Reorganization.

  In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet") for
common stock and convertible preferred stock equivalent to an aggregate of
5,309,058 shares of common stock. The aggregate acquisition cost of $51.7
million was based on terms and preferences of the shares issued in the
transaction relative to the value received by the Company in the April 1999
Series G preferred stock financing. The acquisition has been accounted for as
a purchase. The acquisition cost has been allocated to the assets acquired and
liabilities assumed based on estimates of their respective fair values. The
excess of purchase consideration over net tangible assets acquired of $41.3
million has been allocated to goodwill and other purchased intangible assets
which are being amortized on a straight-line basis over estimated lives
ranging from three to five years.

  In October 1999, the Company acquired Homebuyer's Fair, Inc. and FAS-
Hotline, Inc. (collectively referred to as "Homefair" or "Homefair Group") for
$35.8 million in cash and other acquisition related expenses, a $37.5 million
note payable and 250,000 shares of common stock, with an estimated fair value
of $11.2 million, for a total aggregate purchase price of $83.7 million. The
acquisition has been accounted for as a purchase. The acquisition cost has
been allocated to the assets acquired and liabilities assumed based on
estimates of their respective fair values. The excess of purchase
consideration over net tangible assets acquired of $83.3 million has been
allocated to goodwill and other purchased intangible assets which are being
amortized on a straight-line basis over estimated lives ranging from three to
five years.

  Homestore's unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1999 gives effect to the
Reorganization and the acquisitions of Springstreet and Homefair as if they
had occurred on January 1, 1999.

  The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of the operating results that would have been
achieved had the transactions been in effect as of January 1, 1999 and should
not be construed as being representative of future operating results.

  The audited historical financial statements of the Company, NSI, The
Enterprise, MultiSearch, SpringStreet, The Homebuyer's Fair, Inc., FAS-
Hotline, Inc. and The Center For Mobility Resources, Inc. and National School
Services, Inc. are incorporated by reference under the caption "Index to
Financial Statements" on Form S-1 (No. 333-94467) as filed with the Securities
and Exchange Commission on January 26, 2000 and to the Form 8K/A filed on
December 7, 1999. The unaudited pro forma condensed consolidated statement of
operations presented herein should be read in conjunction with those financial
statements and related notes.

                                      20
<PAGE>

                              HOMESTORE.COM, INC.

       UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1999
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                             Pro Forma
                            Homestore    NSI    Adjustments  Homestore  SpringStreet Homefair Adjustments    Pro Forma
                            ---------  -------  -----------  ---------  ------------ -------- -----------    ---------
<S>                         <C>        <C>      <C>          <C>        <C>          <C>      <C>            <C>
Revenues..................  $ 62,580   $ 2,433    $  --      $ 65,013     $  2,346    $6,159   $   (151)(1)  $  73,367
Cost of revenues
 (including $1,432 in non-
 cash equity charges)........ 21,965       853       --        22,818        2,109       826        --          25,753
                            --------   -------    ------     --------     --------    ------   --------      ---------
Gross Profit..............    40,615     1,580       --        42,195          237     5,333       (151)        47,614
                            --------   -------    ------     --------     --------    ------   --------      ---------
Operating expenses:
 Sales and marketing
  (including $16,383 in
  non-cash equity charges)... 85,110     4,252       --        89,362        6,975     2,200       (151)(1)     98,386
 Product development
  (including $677 in non-
  cash equity charges).......  5,380       200       --         5,580        1,338       463        --           7,381
 General and
  administrative
  (including $5,547 in
  non-cash equity charges)... 26,892     1,353       --        28,245        4,552     1,370        --          34,167
 Amortization of
  intangible assets.......    10,192       261       --        10,453          --      1,810     (1,810)(2)     28,476
                                                                                                 18,023 (3)
 Litigation settlement....     8,406       --        --         8,406          --        --         --           8,406
                            --------   -------    ------     --------     --------    ------   --------      ---------
Total operating expenses..   135,980     6,066       --       142,046       12,865     5,843     16,062        176,816
                            --------   -------    ------     --------     --------    ------   --------      ---------
Loss from operations......   (95,365)   (4,486)      --       (99,851)     (12,628)     (510)   (16,213)      (129,202)
Other income (expense),
 net......................     2,358        (5)      --         2,353           44       (89)    (5,152)(4)     (2,844)
                            --------   -------    ------     --------     --------    ------   --------      ---------
Net loss..................   (93,007)   (4,491)      --       (97,498)     (12,584)     (599)   (21,365)      (132,046)
Accretion of redemption
 value and dividends on
 convertible preferred
 stock....................    (2,299)     (207)    2,506(5)       --           --        --         --             --
                            --------   -------    ------     --------     --------    ------   --------      ---------
Net loss applicable to
 common stockholders......  $(95,306)  $(4,698)   $2,506     $(97,498)    $(12,584)   $ (599)  $(21,365)     $(132,046)
                            ========   =======    ======     ========     ========    ======   ========      =========
Historical basic and
 diluted net loss per
 share applicable to
 common stockholders......  $  (2.32)
                            --------
Shares used to calculate
 historical basic and
 diluted net loss per
 share applicable to
 common stockholders......    41,142
                            ========
Pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders......                                                                                   $   (2.11)
                                                                                                             =========
Shares used to calculate
 pro forma basic and
 diluted net loss per
 share applicable to
 common stockholders......                                                                                    62,474(6)
                                                                                                             =========
</TABLE>

 See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
                                  Information.

                                       21
<PAGE>

                              HOMESTORE.COM, INC.

                    NOTES TO UNAUDITED PRO FORMA CONDENSED
                     CONSOLIDATED STATEMENT OF OPERATIONS

  Pro forma adjustments reflect the following in the unaudited pro forma
condensed consolidated statement of operations:

(1) Elimination of intercompany revenues and expenses

(2) Elimination of amortization of intangible assets

(3) Amortization of goodwill and other purchased intangible assets on a
    straight-line basis

(4) Reduction in interest income related to cash paid as part of the purchase
    price and an increase in interest expense related to the $37.5 million
    promissory note which bears interest at 10.875% issued in connection with
    the acquisition

(5) Elimination of the accretion of redemption value and dividends on
    convertible preferred stock resulting from the assumed conversion of the
    Company's preferred stock into common stock in connection with the IPO.

(6) Additional weighted average shares used in the calculation of pro forma
    basic and diluted net loss per share applicable to common stockholders
    reflect the following, as if they been issued as of January 1, 1999,
    except for preferred stock that was not issued in connection with an
    acquisition. For this preferred stock, the weighted average shares reflect
    the preferred stock as if it had been issued as of January 1, 1999 or the
    date of issuance, if later:

<TABLE>
<CAPTION>
                                                                   Year ended
                                                                  December 31,
                                                                      1999
                                                                  ------------
   <S>                                                            <C>
   SpringStreet acquisition......................................     2,725
   Homefair acquisition..........................................       208
   NSI Reorganization............................................     1,163
   Conversion of preferred stock in connection with IPO..........    14,918
   Conversion of NAR's RealSelect shares into HomeStore.com
    shares.......................................................     2,318
</TABLE>

                                      22
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Homestore.com, Inc.

  In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Homestore.com and its subsidiaries (the "Company") at December 31, 2000 and
December 31, 1999, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

  As discussed in Note 3 to the accompanying consolidated financial
statements, the Company has restated its financial statements for the year
ended December 31, 2000.

/s/ PricewaterhouseCoopers LLP

Century City, California
March 16, 2001, except as to
 Notes 3 and 21, which are as of March 11, 2002

                                      23
<PAGE>

                              HOMESTORE.COM, INC.

                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                              December 31,
                                                           --------------------
                                                              2000       1999
                                                           ----------  --------
                                                           (Restated)
<S>                                                        <C>         <C>
                         ASSETS
Current assets:
  Cash and cash equivalents..............................  $  167,576  $ 90,382
  Short-term investments.................................      75,295       --
  Marketable equity security.............................         247     4,230
  Accounts receivable, net of allowance for doubtful
   accounts of $4,477 and $1,627 at December 31, 2000 and
   1999, respectively....................................      32,028    13,428
  Current portion of notes receivable....................       5,123       --
  Current portion of prepaid distribution expense........      49,140     7,868
  Other current assets...................................      16,710     5,371
                                                           ----------  --------
Total current assets.....................................     346,119   121,279
Prepaid distribution expense, net of current portion.....     159,226     6,167
Property and equipment, net..............................      43,483     6,305
Intangible assets, net...................................     194,274   138,612
Restricted cash..........................................     103,409       --
Other assets.............................................      46,839     4,200
                                                           ----------  --------
   Total assets..........................................  $  893,350  $276,563
                                                           ==========  ========
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.......................................  $   13,162  $  5,349
  Accrued liabilities....................................      45,062    23,687
  Deferred revenue.......................................      33,846    13,478
  Current portion of notes payable.......................         411    37,943
                                                           ----------  --------
Total current liabilities................................      92,481    80,457
Distribution obligation..................................     189,848       --
Deferred revenue.........................................       2,896       --
Notes payable, net of current portion....................         --        633
Other non-current liabilities............................       4,646       --
                                                           ----------  --------
                                                              289,871    81,090
                                                           ----------  --------
Commitments and contingencies (Note 20)
Stockholders' equity:
  Convertible preferred stock............................         --        --
  Common stock, $.001 par value; 500,000 shares
   authorized, 88,294 and 75,251 shares issued at
   December 31, 2000 and December 31, 1999, respectively,
   and 82,761 and 70,189 shares outstanding at December
   31, 2000 and December 31, 1999, respectively..........          83        70
  Additional paid-in capital.............................   1,027,423   413,244
  Treasury stock, at cost; 5,533 and 5,062 shares at
   December 31, 2000 and December 31, 1999,
   respectively..........................................     (16,556)  (13,676)
  Notes receivable from stockholders.....................      (7,938)  (13,350)
  Deferred stock-based charges...........................     (97,724)  (38,947)
  Accumulated other comprehensive income.................         (23)    3,865
  Accumulated deficit....................................    (301,786) (155,733)
                                                           ----------  --------
   Total stockholders' equity............................     603,479   195,473
                                                           ----------  --------
   Total liabilities and stockholders' equity............  $  893,350  $276,563
                                                           ==========  ========
</TABLE>

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

                                       24
<PAGE>

                              HOMESTORE.COM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                     ---------------------------
                                                        2000       1999    1998
                                                     ----------  --------  -----
                                                     (Restated)
<S>                                                  <C>         <C>       <C>
Revenues (including non-cash equity charges, see
 note 2)...........................................  $ 181,322   $ 62,580  $ --
Cost of revenues (including non-cash equity
 charges, see note 2)..............................     61,222     21,965    --
                                                     ---------   --------  -----
Gross profit.......................................    120,100     40,615    --
                                                     ---------   --------  -----
Operating expenses:
  Sales and marketing (including non-cash equity
   charges, see note 2)............................    160,122     85,110    --
  Product development (including non-cash equity
   charges, see note 2)............................     15,554      5,380    --
  General and administrative (including non-cash
   equity charges, see note 2).....................     59,610     26,892      3
  Amortization of intangible assets................     42,868     10,192    --
  In-process research and development..............      4,048        --     --
  Litigation settlement............................        --       8,406    --
                                                     ---------   --------  -----
Total operating expenses...........................    282,202    135,980      3
                                                     ---------   --------  -----
Loss from operations...............................   (162,102)   (95,365)    (3)
Interest income, net...............................     23,031      2,386    --
Other expense, net.................................     (6,982)       (28)   --
                                                     ---------   --------  -----
Net loss...........................................   (146,053)   (93,007)    (3)
Accretion of redemption value and dividends on
 convertible preferred stock.......................        --      (2,299)   --
                                                     ---------   --------  -----
Net loss applicable to common stockholders.........  $(146,053)  $(95,306) $  (3)
                                                     =========   ========  =====
Basic and diluted net loss per share applicable to
 common stockholders...............................  $   (1.83)  $  (2.32) $ --
                                                     =========   ========  =====
Shares used to calculate basic and diluted net loss
 per share applicable to common stockholders.......     79,758     41,142  9,173
                                                     =========   ========  =====
</TABLE>


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

                                       25
<PAGE>

                              HOMESTORE.COM, INC.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (in thousands)

<TABLE>
<CAPTION>
                    Convertible
                     Preferred                                            Notes                  Accumulated
                       Stock      Common Stock   Additional             Receivable   Deferred       Other
                   -------------- --------------  Paid-In    Treasury      From     Stock-Based Comprehensive Accumulated
                   Shares  Amount Shares  Amount  Capital     Stock    Stockholders   Charges   Income(loss)    Deficit
                   ------  ------ ------  ------ ----------  --------  ------------ ----------- ------------- -----------
<S>                <C>     <C>    <C>     <C>    <C>         <C>       <C>          <C>         <C>           <C>
Balance at
December 31,
1997.............     --    $--    8,650   $ 9   $    2,721  $    --     $   --      $    --       $   --      $  (2,863)
Exercise of stock
options..........     --     --    1,330     1          591       --        (551)         --           --            --
Net loss.........     --     --      --    --           --        --         --           --           --             (3)
                   ------   ----  ------   ---   ----------  --------    -------     --------      -------     ---------
Balance at
December 31,
1998.............     --     --    9,980    10        3,312       --        (551)         --           --         (2,866)
Reorganization
(Note 1).........   4,528      5  12,480    12       98,119    (1,770)    (3,230)     (10,079)         --        (60,860)
Comprehensive
income (loss):
 Net loss........     --     --      --    --           --        --         --           --           --        (93,007)
 Unrealized gain
 on marketable
 security........     --     --      --    --           --        --         --           --         3,865           --
                                                                                                   -------
 Comprehensive
 income (loss)...     --     --      --    --           --        --         --           --         3,865           --
                                                                                                   -------
Issuance of
common stock and
Series F
preferred stock..      96    --      643   --         3,553       --         --           --           --            --
Issuance of
common stock to
minority
interest.........     --     --      --    --           --        --         --           --           --          1,000
Exercise of stock
options..........     --     --    5,959     5       12,906       --     (11,465)         --           --            --
Other notes
receivable from
shareholders.....     --     --      --    --           --        --      (1,521)         --           --            --
Repurchase of
common stock.....     --     --   (2,903)  --           --    (11,906)     3,630          --           --            --
Issuance of
common stock.....     --     --      660   --        15,767       --        (238)         --           --            --
Repayment from
shareholder......     --     --      --    --           --        --          25          --           --            --
Issuance of
Series G
preferred stock..     341    --      --    --        17,007       --         --           --           --            --
Issuance of
Series H
preferred stock..     845      1     365   --        51,433       --         --           --           --            --
Deferred stock-
based charges....     --     --      --    --        44,095       --         --       (50,095)         --            --
Stock-based
charges..........     --     --      --    --         6,000       --         --        21,227          --            --
Accretion of
Series E
redemption
value............     --     --      --    --          (159)      --         --           --           --            --
Conversion of
convertible
preferred stock..  (5,810)    (6) 29,050    29          (23)      --         --           --           --            --
Conversion of
redeemable
convertible
preferred stock..     --     --    1,625     2        5,122       --         --           --           --            --
Conversion of NAR
shares...........     --     --    3,917     4           (4)      --         --           --           --            --
Issuance of
common stock in
initial public
offering.........     --     --    8,050     8      145,585       --         --           --           --            --
Exercise of
warrants.........     --     --      113   --         2,125       --         --           --           --            --
Litigation
settlement.......     --     --      250   --         8,406       --         --           --           --            --
                   ------   ----  ------   ---   ----------  --------    -------     --------      -------     ---------
Balance at
December 31,
1999.............     --     --   70,189    70      413,244   (13,676)   (13,350)     (38,947)       3,865      (155,733)
Comprehensive
income (loss):
 Net loss
 (Restated)......     --     --      --    --           --        --         --           --           --       (146,053)
 Unrealized loss
 on marketable
 security........     --     --      --    --           --        --         --           --        (4,022)          --
 Foreign currency
 translation.....     --     --      --    --           --        --         --           --           134           --
                                                                                                   -------
 Comprehensive
 loss
 (Restated)......     --     --      --    --           --        --         --           --        (3,888)          --
                                                                                                   -------
Issuance of
common stock
under employee
stock purchase
plan and exercise
of stock
options..........     --     --    1,942     2       11,512       --         --           --           --            --
Issuance of
common stock for
acquisitions.....     --     --      613     1       51,275       --         --           --           --            --
Other issuances
of common stock..     --     --    4,992     5       70,837       --         --       (70,798)         --            --
Repayment from
stockholders.....     --     --      --    --           --        --       2,532          --           --            --
Repurchase of
common stock.....     --     --     (471)  --           --     (2,880)     2,880          --           --            --
Deferred stock-
based charges....     --     --      --    --        31,520       --         --       (31,520)         --            --
Stock-based
charges..........     --     --      --    --           --        --         --        43,541          --            --
Issuance of
common stock in
public offering..     --     --    4,073     4      428,899       --         --           --           --            --
Effect of
subsidiary equity
transactions.....     --     --      --    --         8,337       --         --           --           --            --
Exercise of
warrants.........     --     --    1,423     1       11,799       --         --           --           --            --
                   ------   ----  ------   ---   ----------  --------    -------     --------      -------     ---------
Balance at
December 31, 2000
(Restated).......     --    $--   82,761   $83   $1,027,423  $(16,556)   $(7,938)    $(97,724)     $   (23)    $(301,786)
                   ======   ====  ======   ===   ==========  ========    =======     ========      =======     =========
<CAPTION>
                       Total
                   Stockholder's
                       Equity
                     (Deficit)
                   -------------
<S>                <C>
Balance at
December 31,
1997.............    $    (133)
Exercise of stock
options..........           41
Net loss.........           (3)
                   -------------
Balance at
December 31,
1998.............          (95)
Reorganization
(Note 1).........       22,197
Comprehensive
income (loss):
 Net loss........      (93,007)
 Unrealized gain
 on marketable
 security........        3,865
                   -------------
 Comprehensive
 income (loss)...      (89,142)
                   -------------
Issuance of
common stock and
Series F
preferred stock..        3,553
Issuance of
common stock to
minority
interest.........        1,000
Exercise of stock
options..........        1,446
Other notes
receivable from
shareholders.....       (1,521)
Repurchase of
common stock.....       (8,276)
Issuance of
common stock.....       15,529
Repayment from
shareholder......           25
Issuance of
Series G
preferred stock..       17,007
Issuance of
Series H
preferred stock..       51,434
Deferred stock-
based charges....       (6,000)
Stock-based
charges..........       27,227
Accretion of
Series E
redemption
value............         (159)
Conversion of
convertible
preferred stock..          --
Conversion of
redeemable
convertible
preferred stock..        5,124
Conversion of NAR
shares...........          --
Issuance of
common stock in
initial public
offering.........      145,593
Exercise of
warrants.........        2,125
Litigation
settlement.......        8,406
                   -------------
Balance at
December 31,
1999.............      195,473
Comprehensive
income (loss):
 Net loss
 (Restated)......     (146,053)
 Unrealized loss
 on marketable
 security........       (4,022)
 Foreign currency
 translation.....          134
                   -------------
 Comprehensive
 loss
 (Restated)......     (149,941)
                   -------------
Issuance of
common stock
under employee
stock purchase
plan and exercise
of stock
options..........       11,514
Issuance of
common stock for
acquisitions.....       51,276
Other issuances
of common stock..           44
Repayment from
stockholders.....        2,532
Repurchase of
common stock.....          --
Deferred stock-
based charges....          --
Stock-based
charges..........       43,541
Issuance of
common stock in
public offering..      428,903
Effect of
subsidiary equity
transactions.....        8,337
Exercise of
warrants.........       11,800
                   -------------
Balance at
December 31, 2000
(Restated).......    $ 603,479
                   =============
</TABLE>

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

                                       26
<PAGE>

                              HOMESTORE.COM, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                     ---------------------------
                                                        2000       1999    1998
                                                     ----------  --------  -----
                                                     (Restated)
<S>                                                  <C>         <C>       <C>
Cash flows from operating activities:
Net loss...........................................  $(146,053)  $(93,007) $  (3)
Adjustments to reconcile net loss to net cash used
 in operating activities:
Depreciation and amortization......................     48,622     11,579    --
Accretion of distribution obligation...............      3,909        --     --
Provision for doubtful accounts....................      3,468      1,121    --
Amortization of discount on notes payable..........        --         581    --
Stock-based charges................................     55,655     21,227    --
In-process research and development................      4,048        --     --
Litigation settlement..............................        --       8,406    --
Other non-cash items...............................       (165)       544    --
Changes in operating assets and liabilities, net of
 acquisitions:
  Accounts receivable..............................    (19,065)   (10,025)   --
  Prepaid distribution expense.....................    (18,204)    (3,481)   --
  Other assets.....................................    (14,308)    (3,780)   --
  Accounts payable and accrued liabilities.........     18,889     12,668   (122)
  Deferred revenue.................................     11,918      6,030    --
                                                     ---------   --------  -----
Net cash used in operating activities..............    (51,286)   (48,137)  (125)
                                                     ---------   --------  -----
Cash flows from investing activities:
Purchases of property and equipment................    (41,132)    (3,941)   --
Purchases of cost and equity investments...........    (32,527)       --     --
Purchases of short-term investments................   (219,862)       --     --
Maturities of short-term investments...............    146,320        --     --
Acquisitions, net of cash acquired.................    (42,037)   (23,845)   --
Other assets.......................................        --      (2,390)   --
                                                     ---------   --------  -----
Net cash used in investing activities..............   (189,238)   (30,176)   --
                                                     ---------   --------  -----
Cash flows from financing activities:
Proceeds from payment of stockholders' notes.......      2,532      3,655    --
Proceeds from exercise of stock options, warrants
 and share issuances under employee stock purchase
 plan..............................................     23,358      1,570    --
Net proceeds from issuance of common and preferred
 stock.............................................    428,903    167,596     41
Repurchases of common stock........................        --     (11,906)   --
Transfer to restricted cash........................   (103,409)       --     --
Repayment of notes payable.........................    (38,575)    (4,578)   --
Issuance of notes receivable.......................     (6,034)      (750)   --
Subsidiary equity transactions.....................     10,943        --     --
                                                     ---------   --------  -----
Net cash provided by financing activities..........    317,718    155,587     41
                                                     ---------   --------  -----
Change in cash and cash equivalents................     77,194     77,274    (84)
Cash assumed from NetSelect, Inc. .................        --      13,037    --
Cash and cash equivalents, beginning of period.....     90,382         71    155
                                                     ---------   --------  -----
Cash and cash equivalents, end of period...........  $ 167,576   $ 90,382  $  71
                                                     =========   ========  =====
</TABLE>

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

                                       27
<PAGE>

                              HOMESTORE.COM, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS:

  Homestore.com, Inc. ("Homestore" or the "Company") has created an online
marketplace that is the leading destination on the Internet for home and real
estate-related information, products and services, based on the number of
visitors, time spent on the web sites and number of property listings. Through
its network of web sites, the Company provides a wide variety of information
and tools for consumers, and is the leading supplier of online media and
technology solutions for real estate industry professionals, advertisers and
providers of home and real estate-related products and services. To provide
consumers with real estate listings, access to real estate professionals and
other home and real estate-related information and resources, the Company has
established relationships with key industry participants. These participants
include real estate market leaders such as the National Association of
REALTORS(R) ("NAR"), the National Association of Home Builders ("NAHB"), the
largest Multiple Listing Services ("MLSs"), the NAHB Remodelors Council, the
National Association of the Remodeling Industry ("NARI"), the American
Institute of Architects ("AIA"), the Manufactured Housing Institute ("MHI"),
real estate franchises, brokers, builders and agents. The Company also has
distribution agreements with a large number of leading Internet portal web
sites.

  The accompanying consolidated financial statements and footnotes for the
year ended December 31, 2000 have been restated. See Note 3 for a discussion
of the restatement and a reconciliation of the Company's financial position
and results of operations from financial statements previously filed to these
restated financial statements.

 Company History

  Initial Business--Homestore was incorporated in the State of Delaware in
1993 under the name of InfoTouch Corporation ("InfoTouch") with the objective
of establishing an interactive network of real estate "kiosks" for consumers
to search for homes. In 1996, the Company began to develop the technology to
build and operate high traffic Internet sites with content related to real
estate.

  The RealSelect Venture--Effective December 4, 1996, the Company entered into
a series of agreements with the National Association of REALTORS(R) and its
wholly owned subsidiary REALTORS(R) Information Network (together referred to
as the "NAR") and several investors (the "Investors"). Under these agreements,
the Company transferred its recently developed technology and certain of its
assets relating to advertising the listing of residential real estate on the
Internet into NetSelect, LLC ("LLC"), a Delaware limited liability
corporation, in exchange for a 46% ownership interest. The Investors
contributed capital to a newly formed company, NetSelect, Inc. ("NSI"). LLC
received capital funding from NSI and in-turn contributed the assets,
intellectual property and the NSI capital to RealSelect, Inc. ("RealSelect"),
a Delaware corporation, in exchange for common stock representing an 85%
ownership interest.

  Also effective December 4, 1996, RealSelect entered into a number of
agreements with and issued cash and RealSelect common stock representing a 15%
ownership interest to the NAR in exchange for the rights to operate the web
site REALTOR.com(R) and pursue commercial opportunities relating to the
listing of real estate on the Internet.

  Pursuant to the agreements governing RealSelect, the Company was required to
terminate its remaining activities, which were insignificant, and dispose of
its remaining assets and liabilities. Accordingly, following the formation of
RealSelect, NSI, LLC and the Company were only shell companies as they had no
liabilities and no assets other than their respective ultimate investments in
RealSelect. In addition, under the agreements, NSI was the only entity
permitted to raise capital to support RealSelect which, once invested,
increased NSI's ownership interests and diluted the ownership interests of the
Company and the NAR.

                                      28
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Reorganization of RealSelect Holding Structure--Under the RealSelect
agreements, the reorganization of the initial holding structure was provided
for at an unspecified future date. On February 4, 1999, NSI stockholders
entered into a non-substantive share exchange with and were merged into the
Company (the "Reorganization"). The share exchange lacked economic substance
since both the Company and NSI were shell companies for their respective
investments in RealSelect, and because the respective underlying ownership
interests of individual investors were unaffected. Accordingly, the non-
substantive exchange was accounted for at historical cost (Note 4).

  Since inception, the Company has incurred losses from operations and
negative operating cash flows. At December 31, 2000, the Company had an
accumulated deficit of $301.8 million, cash and cash equivalents of
approximately $167.6 million, short-term investments of approximately $75.3
million and restricted cash of $103.4 million. The Company has no material
commitments for capital expenditures over the next twelve months, has total
minimum lease obligations of approximately $44.0 million under certain
noncancelable operating leases through 2005 and approximately $11.5 million in
internet portal distribution obligations through December 2003. The Company
currently anticipates that its existing cash and cash equivalents and any cash
generated from operations will be sufficient to fund its operating activities,
capital expenditures and other obligations through at least December 31, 2001.
However, in the longer term, the Company faces significant risks associated
with the successful execution of its business strategy and may need to raise
additional capital in order to fund more rapid expansion, to expand its
marketing activities, to develop new or enhance existing services or products,
to satisfy its obligations to BGI or AOL as described in Note 20, to respond
to competitive pressures or to acquire complementary services, businesses or
technologies. If the Company is not successful in generating sufficient cash
flow from operations, it may need to raise additional capital through public
or private financing, strategic relationships or other arrangements. This
additional capital, if needed, might not be available on terms acceptable to
the Company, or at all. The failure to raise sufficient capital when needed
could have a material adverse effect on the Company's business, results of
operations and financial condition. If additional capital were raised through
the issuance of equity securities, the percentage of stock owned by then-
current stockholders would be reduced. Furthermore, these equity securities
might have rights, preferences or privileges senior to those of existing
common and preferred stock. In addition, our liquidity could be adversely
impacted by the litigation referred to in Note 21.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of the parent company and all of its
majority owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.

  The Company's consolidated financial statements reflect the financial
position, results of operations and cash flows of Homestore, formerly
InfoTouch. The consolidated financial statements for 1998 primarily reflect
the Company's investment in LLC accounted for under the equity method (Note
4). The consolidated financial statements following the date of the
Reorganization include the accounts of RealSelect and its majority owned
subsidiaries, in which the Company held a 99% ownership interest at December
31, 2000.

  Use of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.

  Certain Reclassifications--Certain reclassifications have been made to prior
years' financial statements in order to conform to the 2000 presentation.

                                      29
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Cash and Cash Equivalents, Short and Long-Term Investments--All highly
liquid instruments with an original maturity of three months or less are
considered cash and cash equivalents, those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments. The Company invests its excess cash in debt
instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and money market funds.

  The Company's marketable securities and short-term investments are
classified as available-for-sale and are reported at fair value, with
unrealized gains and losses, net of tax, recorded in stockholders' equity.
Realized gains or losses and declines in value that are other than temporary,
if any, on available-for-sale securities are reported in other income or
expensed as incurred.

  Other Investments--The Company also invests in equity instruments of
privately-held companies for business and strategic purposes. These
investments are included in other long-term assets and are accounted for under
the cost method when ownership is less than 20% and the Company does not have
the ability to exercise significant influence over operations and the equity
method when ownership is greater than 20% or the Company has the ability to
exercise significant influence. For these investments in privately-held
companies, the Company's policy is to regularly review and monitor the
companies' operating performance and assumptions underlying the cash flow
forecasts in assessing the carrying values. The Company identifies and records
impairment losses when events and circumstances indicate that such assets
might be impaired.

  Restricted Cash--Restricted cash consists of cash equivalents pledged as
collateral for unused letters of credit. See Note 20.

  Concentration of Credit Risk--Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents, short and long term investments, marketable equity security and
accounts and notes receivable. The Company's accounts receivable is derived
primarily from revenue earned from customers located in the United States. The
Company maintains an allowance for doubtful accounts based upon the expected
collectibility of accounts and notes receivable.

  During the years ended December 31, 2000 and 1998, no customer accounted for
more than 10% of the Company's net revenues. During the year ended December
31, 1999, one customer accounted for approximately 11% of the Company's net
revenues. At December 31, 2000 and 1999, no customer accounted for more than
10% of net accounts receivable.

  Fair Value of Financial Instruments--The Company's financial instruments,
including cash and cash equivalents, short-term investments, accounts and
notes receivable, accounts payable, and notes payable are carried at cost,
which approximates their fair value due to the short-term maturity of these
instruments and the relatively stable interest rate environment.

  Prepaid Distribution--The Company has entered into various web portal
distribution and preferred alliance agreements, which are being amortized
ratably over the term of the agreement, generally two to five years. See Note
20.

  Property and Equipment--Property and equipment are stated at historical
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which is generally 3 years for computer
software and equipment and 3 to 5 years for furniture, fixtures and office
equipment. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful lives.

                                      30
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Product Development Costs--Costs incurred by the Company to develop,
enhance, manage, monitor and operate the Company's web sites are generally
expensed as incurred, except for certain costs relating to the acquisition and
development of internal-use software that are capitalized and depreciated over
estimated economic lives, generally three years or less in accordance with SOP
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The Company had $6.5 million of capitalized software costs and
$179,000 of accumulated amortization included in computer software and
equipment at December 31, 2000. There were no capitalized software costs at
December 31, 1999.

  Intangible Assets--Intangible assets resulting from the acquisitions of
entities accounted for using the purchase method of accounting are estimated
by management based on the fair value of assets received. Goodwill and all
other purchased intangibles are being amortized on a straight-line basis over
the estimated periods of benefit ranging from three to five years (Note 4). In
addition, in connection with its formation, RealSelect made various payments
and issued common stock to the NAR for the right to use the REALTOR.com(R)
trademark and domain name, the "REALTORS(R)" trademark and the exclusive
rights to use the web site for real estate listings under an exclusive
lifetime operating agreement. The stock issued and payments made to the NAR,
as well as certain milestone-based amounts subsequently earned by the NAR are
being amortized on a straight-line basis over the estimated period of benefit
of 15 years.

  The Company identifies and records impairment losses on long-lived assets,
including goodwill that is not identified with an impaired asset, when events
and circumstances indicate that such assets might be impaired. Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the extent or manner in
which an asset is used, shifts in technology, loss of key management or
personnel, changes in the operating model or strategy and competitive forces.

  If events and circumstances indicate that the carrying amount of an asset
may not be recoverable and the expected undiscounted future cash flow
attributable to the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its
fair value is recorded. Fair value is determined based on the present value of
estimated expected future cash flows using a discount rate commensurate with
the risk involved, quoted market prices or appraised values, depending on the
nature of the assets.

  Revenue Recognition--The Company derives it's revenues from the sale of
subscription products consisting of online media and technology solutions for
home and real estate professionals including web site development to real
estate agents and brokers, home builders, financial service companies and
property owners and managers. Revenue from technology solutions are derived
from the following: (i) software license revenue, (ii) support and service
revenues and (iii) web site development revenues. The Company recognizes
revenues from software transactions in accordance with provisions of Statement
of Position ("SOP") 97-2, "Software Revenue Recognition". Revenues from the
sale of software products are recognized upon delivery of the products and
satisfaction of related Company obligations, if any, provided that persuasive
evidence of an arrangement exists, the fee is fixed and determinable and
collection of the resulting receivable is probable. For contracts with
multiple elements (e.g., delivered and undelivered products, support and other
services), the Company allocates revenues to the undelivered elements of the
contract based on vendor-specific objective evidence of its fair value. This
vendor-specific objective evidence of fair value is the sales price of the
element when sold separately or the renewal rate specified in the arrangement
for licensing arrangements with terms of one year to 18 months that include
customer support and unspecified software updates. Revenues allocated to
undelivered elements are recognized when all revenue recognition criteria are
met. Support and services revenues are recognized ratably over the period of
the support contract. Payments for support and services are generally made in
advance and are non-refundable. The products are sold in annual subscriptions
and, accordingly, revenues are deferred and recognized ratably over the life
of the contract, generally 12 months. These prepayments appear on the balance
sheet as deferred revenues. Contracts involving web site development are
accounted for using the percentage-of-

                                      31
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

completion method which is generally determined based on development costs
incurred relative to total estimated costs.

  The Company also sells advertising banners and traditional Internet
sponsorships on our web sites. The Company also sells banner advertising
pursuant to contracts with terms varying from a few days to three years, which
may include the guarantee of a minimum number of impressions or times that an
advertisement appears in pages viewed by the users. This advertising revenue
is recognized ratably based upon the lesser of impressions delivered over the
total number of guaranteed impressions or ratably over the period in which the
advertisement is displayed. Equity exchanged for services is recognized during
the period in which the services are provided. The Company records and
measures the value of equity received in exchange for services in accordance
with Emerging Issues Task Force ("EITF") 00-8 "Accounting by a Grantee for an
Equity Instrument to Be Received in Conjunction with Providing Goods or
Services." The Company recognizes revenues from advertising barter
transactions in accordance with EITF 99-17, "Accounting for Advertising Barter
Transactions." Revenues from these transactions are recognized during the
period in which the impressions are delivered. The services provided are
valued based on similar cash transactions which have occurred within six
months prior to the date of the barter transaction. During the year ended
December 31, 2000, revenues from equity-for-services and advertising barter
transactions were less than 5% of revenues. There were no revenues from these
type of transactions during the year ended December 31, 1999.

  Advertising Expense--Advertising costs are expensed as incurred and totaled
$18.1 million and $10.8 million during the years ended December 31, 2000 and
1999, respectively. No advertising costs were incurred during the year ended
December 31, 1998.

  Stock-Based Charges--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is recognized over the
vesting period based on the difference, if any, on the date of grant between
the deemed fair value for accounting purposes of the Company's stock and the
exercise price on the date of grant. The Company accounts for stock issued to
non-employees in accordance with the provisions of SFAS No. 123 and EITF 96-18
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods and Services."

  The following chart summarizes the stock-based charges that have been
included in the following captions for each of the periods presented (in
thousands):

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       ------------------------
                                                          2000     1999   1998
                                                       ---------- ------- -----
                                                       (Restated)
<S>                                                    <C>        <C>     <C>
Revenues..............................................  $ 6,233   $   --  $ --
Cost of revenues......................................      607       943   --
Sales and marketing...................................   45,148    14,726   --
Product development...................................      572       447   --
General and administrative............................    3,095     5,111   --
                                                        -------   ------- -----
                                                        $55,655   $21,227 $ --
                                                        =======   ======= =====
</TABLE>

  Income Taxes--Income taxes are accounted for under SFAS No. 109, "Accounting
for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis
of assets and liabilities, and are measured using the enacted tax rates and
laws that will

                                      32
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred taxes to the
amount expected to be realized.

  Net Loss Per Share--Net loss per share is computed by dividing the net loss
applicable to common stockholders for the period by the weighted average
number of common shares outstanding. Shares associated with stock options,
warrants and convertible preferred stock are not included to the extent they
are anti-dilutive.

  Foreign Currency Translation--The financial statements of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rate of exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange prevailing during the year.
The resulting translation adjustments are included in accumulated other
comprehensive income as a separate component of stockholders' equity.

  Comprehensive Income--Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. For the Company, comprehensive
income consists of its reported net income or loss, the change in the foreign
currency translation adjustments during a period and the net unrealized gains
or losses on short-term investments and marketable equity securities.

  Segments--The Company operates in one business segment, an Internet
technology solution provider for home and real estate-related information and
advertising products and services. Substantially all of the Company's
operating results and identifiable assets are in the United States.

  Recent Accounting Developments--In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The statement requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative
and the resulting designation. Because the Company does not currently hold any
derivative instruments and does not engage in hedging activities, the impact
of the adoption of SFAS No. 133 is not currently expected to have a material
impact on financial position, results of operations or cash flows. The Company
will be required to implement SFAS No. 133 in the first quarter of fiscal
2001.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance for revenue recognition under
certain circumstances. The adoption of SAB No. 101 in 2000 did not have a
significant impact on the Company's financial position, results of operations
or cash flows.

  In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of APB
Opinion No. 25." FIN No. 44 clarifies the application of APB Opinion No. 25
for (a) the definition of an employee for purposes of applying APB Opinion No.
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 became effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January
12, 2000. The adoption of FIN No. 44 did not have a significant impact on the
Company's financial position, results of operations or cash flows.

                                      33
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. RESTATEMENT AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT:

  On December 21, 2001, the Company announced that the Audit Committee of its
Board of Directors was conducting an inquiry of certain of the Company's
accounting practices and that the results of the inquiry to date determined
that certain of its financial statements would require restatement. The Audit
Committee retained independent counsel and independent accountants to assist
in connection with the inquiry. On February 13, 2002, the Company concluded,
based on preliminary findings of the inquiry, that its financial statements,
as of, and for the year ended, December 31, 2000 would be restated and on
March 11, 2002, the Audit Committee concluded its inquiry. The results of the
inquiry determined that in the year 2000, certain transactions resulting in
the recognition of $36.4 million in revenue, which had been recorded based
upon the belief that they were independent cash transactions, were, in fact,
reciprocal exchanges that should have been evaluated as barter transactions.
The Company determined that there was insufficient support to establish the
fair value of these barter exchanges and thus the related revenue has been
reversed. Although the ultimate impact of these adjustments will be to reduce
both revenues and expenses, because some of the transactions take place over
several accounting periods, and because certain payments for goods and
services by the Company were capitalized when initially recorded, operating
results for the year 2000 and future periods are impacted. The effect of
reversing the revenue associated with certain of these transactions required
offsetting adjustments to various asset and liability accounts, including:
accounts receivable, notes receivable, property and equipment, other assets,
accrued liabilities and deferred revenue. In addition, the shipment of certain
software products, previously recorded as revenue in 2000, did not meet the
revenue recognition requirements of SOP 97-2 and, accordingly, $5 million of
revenue should have been deferred at December 31, 2000.

  The restated financial statements also include the effects of the Company's
early adoption of EITF 01-9, "Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products)" which was
issued in February 2002. This consensus requires companies to report certain
consideration given by a vendor to a customer as a reduction in revenue. Upon
adoption, companies are required to retroactively reclassify such amounts in
previously issued financial statements to comply with the income statement
display requirements of the consensus. The effect of adoption in the year 2000
was to reduce previously reported revenue and expense by $7.2 million, with no
effect on net loss or net loss per share. The effects of adoption were not
material in years prior to 2000.

  As a result of these items, we have reduced our reported revenue by $48.6
million and increased our net loss from $115.2 million to $146.1 million and
our net loss per share of $(1.44) to $(1.83).

  Additionally, the Company reclassified $13.4 million in previously reported
cash and cash equivalents to restricted cash as a result of certain
collateralized lease and other obligations.

  Following are reconciliations of the Company's financial position and
results of operations and cash flows from financial statements previously
filed to these restated financial statements.

                                      34
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


                           CONSOLIDATED BALANCE SHEET
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                              Year Ended December 31, 2000
                                           -----------------------------------
                                           As Reported  Adjustments  Restated
                                           -----------  ----------- ----------
   <S>                                     <C>          <C>         <C>
                   ASSETS
   Current assets:
     Cash and cash equivalents...........  $  180,985    $(13,409)  $  167,576
     Short-term investments..............      75,295                   75,295
     Marketable equity security..........         247                      247
     Accounts receivable.................      44,472     (12,444)      32,028
     Current portion of notes
      receivable.........................       5,598        (475)       5,123
     Current portion of prepaid
      distribution expense...............      49,140                   49,140
     Other current assets................      23,567      (6,857)      16,710
                                           ----------    --------   ----------
   Total current assets..................     379,304     (33,185)     346,119
   Prepaid distribution expense, net of
    current portion......................     159,226                  159,226
   Property and equipment, net...........      45,061      (1,578)      43,483
   Intangible assets, net................     194,742        (468)     194,274
   Restricted cash.......................      90,000      13,409      103,409
   Other assets..........................      50,322      (3,483)      46,839
                                           ----------    --------   ----------
       Total assets......................  $  918,655    $(25,305)  $  893,350
                                           ==========    ========   ==========

   LIABILITIES, AND STOCKHOLDERS' EQUITY
   Current liabilities:
     Accounts payable....................  $   13,062    $    100   $   13,162
     Accrued liabilities.................      49,235      (4,173)      45,062
     Deferred revenue....................      24,194       9,652       33,846
     Current portion of notes payable....         411                      411
                                           ----------    --------   ----------
   Total current liabilities.............      86,902       5,579       92,481
   Distribution obligation...............     189,848                  189,848
   Deferred revenue......................       2,896                    2,896
   Other non-current liabilities.........       4,646                    4,646
                                           ----------    --------   ----------
                                              284,292       5,579      289,871
                                           ----------    --------   ----------
   Commitments and contingencies (Note
    20)

   Stockholders' equity:
     Common stock........................          83                       83
     Additional paid-in capital..........   1,027,423                1,027,423
     Treasury stock......................     (16,556)                 (16,556)
     Notes receivable from stockholders..      (7,938)                  (7,938)
     Deferred stock-based charges........     (97,724)                 (97,724)
     Accumulated other comprehensive
      income.............................         (23)                     (23)
     Accumulated deficit.................    (270,902)    (30,884)    (301,786)
                                           ----------    --------   ----------
       Total stockholders' equity........     634,363     (30,884)     603,479
                                           ----------    --------   ----------
       Total liabilities and
        stockholders' equity.............  $  918,655    $(25,305)  $  893,350
                                           ==========    ========   ==========
</TABLE>

                                       35
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                           Year Ended December 31, 2000
                                    -------------------------------------------
                                       As                  Accounting
                                    Reported   Adjustments   Change   Restated
                                    ---------  ----------- ---------- ---------
<S>                                 <C>        <C>         <C>        <C>
Revenues..........................  $ 229,967   $(41,395)   $(7,250)  $ 181,322
Cost of revenues..................     62,239                (1,017)     61,222
                                    ---------   --------    -------   ---------
Gross profit......................    167,728    (41,395)    (6,233)    120,100
                                    ---------   --------    -------   ---------
Operating expenses:
  Sales and marketing.............    175,044     (8,689)    (6,233)    160,122
  Product development.............     15,554                            15,554
  General and administrative......     60,700     (1,090)                59,610
  Amortization of intangible
   assets.........................     42,900        (32)                42,868
  In-process research and
   development....................      4,048                             4,048
                                    ---------   --------    -------   ---------
Total operating expenses..........    298,246     (9,811)    (6,233)    282,202
                                    ---------   --------    -------   ---------
Loss from operations..............   (130,518)   (31,584)       --     (162,102)
Interest income, net..............     23,031                            23,031
Other expense, net................     (7,682)       700                 (6,982)
                                    ---------   --------    -------   ---------
Net loss applicable to common
 stockholders.....................  $(115,169)  $(30,884)       --    $(146,053)
                                    =========   ========    =======   =========
Basic and diluted net loss per
 share applicable to common
 Stockholders.....................  $   (1.44)  $   (.39)   $   --    $   (1.83)
                                    =========   ========    =======   =========
Shares used to calculate basic and
 diluted net loss per share
 applicable to common
 stockholders.....................     79,758     79,758     79,758      79,758
                                    =========   ========    =======   =========
</TABLE>

                                       36
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                Year Ended December 31, 2000
                                              ---------------------------------
                                              As Reported Adjustments Restated
                                              ----------- ----------- ---------
<S>                                           <C>         <C>         <C>
Cash flows from operating activities:
Net loss....................................   $(115,169)  $(30,884)  $(146,053)
Adjustments to reconcile net loss to net
 cash used in operating
 activities:
Depreciation and amortization...............      49,064       (442)     48,622
Accretion of distribution obligation........       3,909                  3,909
Provision for doubtful accounts.............       3,468                  3,468
Stock-based charges.........................      55,655                 55,655
In-process research and development.........       4,048                  4,048
Other non-cash items........................        (165)                  (165)
Changes in operating assets and liabilities,
 net of acquisitions:
Accounts receivable.........................     (31,509)    12,444     (19,065)
Prepaid distribution expense................     (18,204)               (18,204)
Other assets................................     (23,248)     8,940     (14,308)
Accounts payable and accrued liabilities....      22,961     (4,072)     18,889
Deferred revenue............................       2,266      9,652      11,918
                                               ---------   --------   ---------
Net cash used in operating activities.......     (46,924)    (4,362)    (51,286)
                                               ---------   --------   ---------
Cash flows from investing activities:
Purchases of property and equipment.........     (43,119)     1,987     (41,132)
Purchases of cost and equity investments....     (33,927)     1,400     (32,527)
Purchases of short-term investments.........    (219,862)              (219,862)
Maturities of short-term investments........     146,320                146,320
Acquisitions, net of cash acquired..........     (42,537)       500     (42,037)
                                               ---------   --------   ---------
Net cash used in investing activities.......    (193,125)     3,887    (189,238)
                                               ---------   --------   ---------
Cash flows from financing activities:
Proceeds from payment of stockholders'
 notes......................................       2,532                  2,532
Proceeds from exercise of stock options,
 warrants and share issuances under employee
 stock purchase plan........................      23,358                 23,358
Net proceeds from issuance of common and
 preferred stock............................     428,903                428,903
Transfer to restricted cash.................     (90,000)   (13,409)   (103,409)
Repayment of notes payable..................     (38,575)               (38,575)
Issuance of notes receivable................      (6,509)       475      (6,034)
Subsidiary equity transactions..............      10,943                 10,943
                                               ---------   --------   ---------
Net cash provided by financing activities...     330,652    (12,934)    317,718
                                               ---------   --------   ---------
Change in cash and cash equivalents.........      90,603    (13,409)     77,194
Cash and cash equivalents, beginning of
 period.....................................      90,382        --       90,382
                                               ---------   --------   ---------
Cash and cash equivalents, end of period....   $ 180,985   $(13,409)  $ 167,576
                                               =========   ========   =========
</TABLE>

                                       37
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. REORGANIZATION OF REALSELECT:

  As described in Note 1, on February 4, 1999, RealSelect was reorganized
through a non-substantive exchange of the Company's capital stock for all of
the outstanding capital stock of NSI, including the assumption of warrants and
options to acquire common stock. Accordingly, the Company issued the following
capital stock to NSI stockholders in exchange for an equivalent number of
shares (in thousands, unaudited):

<TABLE>
   <S>                                                                    <C>
   Common stock.......................................................... 12,480
   Series A convertible preferred stock..................................  1,378
   Series B convertible preferred stock..................................    191
   Series C convertible preferred stock..................................    614
   Series D convertible preferred stock..................................    681
   Series E redeemable convertible preferred stock.......................    325
   Series F convertible preferred stock..................................  1,664
   Options to purchase common stock......................................  6,560
   Warrants to purchase common stock.....................................    775
   Warrants to purchase preferred stock..................................      5
</TABLE>

                                       38
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Because the exchange did not affect the economic interests of NSI and
Company stockholders, the Reorganization has been accounted for as a
combination of the historical assets and liabilities of the two individual
companies at February 4, 1999. At the date of the Reorganization, NSI assets,
liabilities and stockholders' equity were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   February 4,
                                                                      1999
                                                                   -----------
                                                                   (unaudited)
   <S>                                                             <C>
                               ASSETS
   Current assets:
     Cash and cash equivalents....................................  $ 13,037
     Other current assets.........................................     8,952
                                                                    --------
   Total current assets...........................................    21,989
   Prepaid distribution expense...................................     7,072
   Property and equipment, net....................................     2,373
   Intangible assets, net.........................................    19,463
   Other..........................................................       286
                                                                    --------
                                                                    $ 51,183
                                                                    ========

       LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                         STOCKHOLDERS' EQUITY
   Current liabilities:
     Accounts payable and accrued liabilities.....................  $ 12,473
     Deferred revenue.............................................     6,065
   Current portion of notes payable...............................     1,746
                                                                    --------
   Total current liabilities......................................    20,284
   Notes payable..................................................     3,265
                                                                    --------
   Total liabilities..............................................    23,549
                                                                    --------
   Redeemable convertible preferred stock.........................     4,963
                                                                    --------
   Convertible preferred stock....................................         5
   Common stock...................................................         2
   Additional paid-in capital.....................................    98,129
   Treasury stock at cost.........................................    (1,770)
   Notes receivable from stockholders.............................    (3,230)
   Deferred stock charges.........................................   (10,079)
   Accumulated deficit............................................   (60,386)
                                                                    --------
     Total stockholders' equity...................................    22,671
                                                                    --------
                                                                    $ 51,183
                                                                    ========
</TABLE>

5. ACQUISITIONS:

 The Enterprise

  In March 1998, NSI acquired all the outstanding stock of The Enterprise of
America, Ltd. ("The Enterprise"), a provider of web hosting services for real
estate brokers, in exchange for aggregate consideration consisting of 525,000
shares of common stock with an estimated fair value of $525,000, which is
based on the terms and preferences of the shares issued in the transaction
relative to the value received by the Company in its most recent financing
prior to the acquisition, a note payable in the amount of $2.2 million,
$705,000 in cash

                                      39
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and other acquisition-related expenses and the assumption of $946,000 of net
liabilities. The acquisition has been accounted for as a purchase. The excess
of purchase consideration over net tangible assets of $3.9 million has been
allocated to goodwill which is being amortized on a straight-line basis over
five years. The purchase agreement also provides for certain contingent
payments in the event that predetermined levels of sales are achieved. Such
payments, if any, will be accounted for as compensation expense in the period
earned and in no event shall such aggregate payments exceed $1.0 million. For
the years ended December 31, 1998 and 1999, no contingent payments were
required under the terms of the agreement.

 MultiSearch

  In July 1998, NSI acquired all the outstanding stock of MultiSearch
Solutions, Inc. ("MultiSearch"), the initial developer of the HomeBuilder.com
web site, in exchange for issuing 325,000 shares of Series E redeemable
convertible preferred stock with an estimated fair value of $4.8 million,
which is based on the terms and preferences of the shares issued in the
transaction relative to the value received by the Company in its most recent
financing prior to the acquisition, a note payable in the amount of $3.6
million, $875,000 in cash and other acquisition-related expenses and the
assumption of $657,000 of net liabilities. The acquisition has been accounted
for as a purchase. The excess of total purchase consideration over net
tangible assets acquired of $9.4 million has been allocated to goodwill which
is being amortized on a straight-line basis over five years. The purchase
agreement also provides for certain contingent payments in the event that
predetermined levels of sales and earnings are achieved. Such payments, if
any, will be accounted for as compensation expense in the period earned. For
the year ended December 31, 1998, $360,000 of expense was recognized under the
terms of the agreement.

 SpringStreet

  In June 1999, the Company acquired SpringStreet, Inc. ("SpringStreet"), a
leading provider of online listings of homes for rent, for common stock and
convertible preferred stock equivalent to an aggregate of 5,309,058 shares of
common stock. The acquisition costs aggregated approximately $51.7 million and
were based on the privileges and preferences of the shares issued in the
transaction relative to the value received by the Company in its April 1999
Series G financing and certain acquisition expenses. The SpringStreet
acquisition was accounted for using the purchase method of accounting. The
excess of total purchase consideration over net tangible assets acquired of
$41.3 million has been allocated to goodwill and other purchased intangible
assets which are being amortized on a straight-line basis over estimated lives
ranging from three to five years.

 Homefair

  In October 1999, the Company acquired The Homebuyers Fair, Inc. and FAS-
Hotline, Inc., collectively Homefair, one of the largest moving and relocation
sites on the Internet, for $35.8 million in cash and other acquisition related
expenses, a $37.5 million note payable and 250,000 shares of common stock,
with an estimated fair value of $11.2 million, for a total aggregate purchase
price of $83.7 million. The acquisition has been accounted for as a purchase.
The acquisition cost has been allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values. The excess of
purchase consideration over net tangible assets acquired of $83.3 million has
been allocated to goodwill and other purchased intangible assets and is being
amortized on a straight-line basis over estimated lives ranging from three to
five years.

 WyldFyre

  In March 2000, the Company acquired WyldFyre Technologies, Inc.
("WyldFyre"), a leading developer of technology solutions for real estate
professionals to access MLS information via the Internet, for 589,426 shares
of its common stock with an estimated fair value for accounting purposes of
$34.0 million. The acquisition has

                                      40
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

been accounted for as a purchase. The acquisition cost has been allocated to
the assets acquired and liabilities assumed based on their respective fair
values. The excess of purchase consideration over net tangible assets acquired
of $34.3 million has been allocated to goodwill and other identifiable
intangible assets and is being amortized on a straight-line basis over
estimated lives ranging from three to five years. During the year ended
December 31, 2000, a portion of the purchase price was charged to acquired in-
process research and development ("IPR&D") upon completion of the purchase
price valuation by a third party.

 Top Producer

  In May 2000, the Company acquired Top Producer Systems, Inc. ("Top
Producer"), a leading provider of leads management and marketing software for
real estate professionals, for $12.1 million in cash and 473,538 shares of its
common stock with an estimated fair value of $12.1 million. The shares vest
over a three-year period and are contingent upon the Top Producer's chief
executive officer's employment over a three-year period, and accordingly, the
value of such shares has been recorded in deferred stock-based charges.
Contingent purchase price of approximately $16.2 million may also be paid in
cash or stock, if certain defined performance targets are met during the years
ending December 31, 2000 through December, 31 2004. The acquisition has been
accounted for as a purchase. The acquisition cost has been allocated to the
assets acquired and liabilities assumed based on their respective fair values.
The excess of purchase consideration over net tangible assets acquired of
$27.3 million has been allocated to goodwill, deferred compensation and other
identifiable intangible assets and is being amortized on a straight-line basis
over estimated lives ranging from three to five years. During the year ended
December 31, 2000, a portion of the purchase price was charged to acquired
IPR&D upon completion of the purchase price valuation by an independent third
party.

 The Hessel Group

  In September 2000, the Company acquired The Hessel Group ("THG"), a leading
provider of technology-driven solutions and services to the relocation
industry, for $15.0 million in cash and assumption of THG's option plan
consisting of 135,421 options with an estimated fair value of $4.5 million.
The acquisition has been accounted for as a purchase. The acquisition cost has
been preliminarily allocated to the assets acquired and liabilities assumed
based on estimates of their respective fair values. The excess of purchase
consideration over net tangible assets acquired of $19.3 million has been
allocated to goodwill and other identifiable intangible assets and is being
amortized on a straight-line basis over estimated lives of five years.

  The following summarized unaudited pro forma financial information excludes
the acquisitions of WyldFyre, Top Producer and THG. The pro forma effect of
the WyldFyre, Top Producer and THG transactions are immaterial for all periods
presented and therefore are not included in the pro forma information. As
such, for the year ended December 31, 2000 no pro-forma information has been
presented. This information assumes the Reorganization and the acquisitions of
SpringStreet and Homefair occurred at the beginning of the period (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                     Year Ended
                                                                    December 31,
                                                                        1999
                                                                    ------------
                                                                    (Unaudited)
   <S>                                                              <C>
   Revenues........................................................  $  73,367
   Net loss applicable to common stockholders......................   (132,046)
   Net loss per share applicable to common stockholders:
   Basic and diluted...............................................  $   (2.92)
   Weighted average shares.........................................     45,238
</TABLE>

                                      41
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 In-process Research and Development

  During the year ended December 31, 2000, approximately $4.0 million of the
purchase price from the acquisitions of WyldFyre and Top Producer was charged
to acquired IPR&D upon completion of the purchase price valuation by a third
party.

  The amounts allocated to the IPR&D represented the purchased IPR&D for seven
projects that had not yet reached technological feasibility and had no
alternative future use. The value of these projects was determined by using
the income approach. The income approach values an asset based on the earnings
capacity of the asset based on the future cash flows that could potentially be
generated by the asset over its estimated remaining life. The future cash
flows are discounted to their present value utilizing a discount rate which
would provide sufficient return to a potential investor to estimate the value
of the subject asset. The present value of the cash flows over the life of the
asset are summed to equal the estimated value of the asset.

  To determine the value of IPR&D, the expected future cash flows, including
costs to achieve technological feasibility, were discounted at a rate of 28%,
taking into account risks associated with timely development and roll-out of
the Company's in-process products, as well as strong growth and profit
margins. At the acquisition date, it was estimated that the seven projects
under development ranged from 5% to 81% complete. At the time of the
valuation, these projects were expected to be completed within twelve months.

6. SHORT-TERM INVESTMENTS:

  The following table summarizes the Company's investments in available-for-
sale securities (in thousands):

<TABLE>
<CAPTION>
                                                 December 31, 2000
                                     ------------------------------------------
                                     Amortized Unrealized Unrealized Estimated
                                       Cost      Gains      Losses   Fair Value
                                     --------- ---------- ---------- ----------
   <S>                               <C>       <C>        <C>        <C>
   Short-term investments...........  $75,334    $  --      $  39     $75,295
   Marketable equity security.......  $   365    $  --      $ 118     $   247
<CAPTION>
                                                 December 31, 1999
                                     ------------------------------------------
                                     Amortized Unrealized Unrealized Estimated
                                       Cost      Gains      Losses   Fair Value
                                     --------- ---------- ---------- ----------
   <S>                               <C>       <C>        <C>        <C>
   Marketable equity security.......  $   365    $3,865     $ --      $ 4,230
</TABLE>

  Short-term investments consists primarily of commercial paper. There were no
short-term investments at December 31, 1999. The contractual maturities of
available-for-sale debt securities at December 31, 2000 are all due within one
year. Marketable equity security consists of equity instruments of a publicly-
held company.

                                      42
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. PROPERTY AND EQUIPMENT:

  Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                             ------------------
                                                                2000     1999
                                                             ---------- -------
                                                             (Restated)
   <S>                                                       <C>        <C>
   Computer software and equipment..........................  $30,950   $ 5,522
   Furniture, fixtures and office equipment.................    4,962     1,588
   Leasehold improvements...................................   15,332     1,421
                                                              -------   -------
                                                               51,244     8,531
   Less: accumulated depreciation...........................   (7,761)   (2,226)
                                                              -------   -------
                                                              $43,483   $ 6,305
                                                              =======   =======
</TABLE>

  Depreciation expense for the years ended December 31, 2000 and 1999 was $5.5
million and $1.4 million, respectively. The Company held no depreciable assets
in 1998.

                                      43
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. INTANGIBLE ASSETS:

  Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                            -------------------
                                                               2000      1999
                                                            ---------- --------
                                                            (Restated)
     <S>                                                    <C>        <C>
     Purchased content.....................................  $ 64,680  $ 64,680
     Goodwill..............................................   117,160    56,642
     Porting relationships.................................    10,000    10,000
     Purchased technology..................................    21,580     5,000
     NAR operating agreement...............................     7,405     7,405
     Other.................................................    30,072     7,614
                                                             --------  --------
                                                              250,897   151,341
     Less: accumulated amortization........................   (56,623)  (12,729)
                                                             --------  --------
                                                             $194,274  $138,612
                                                             ========  ========
</TABLE>

9. OTHER ASSETS:

  Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                 2000     1999
                                                              ---------- ------
                                                              (Restated)
     <S>                                                      <C>        <C>
     Cost and equity investments.............................  $41,931   $3,123
     Other...................................................    4,908    1,077
                                                               -------   ------
                                                               $46,839   $4,200
                                                               =======   ======
</TABLE>

10. ACCRUED LIABILITIES:

  Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                             ------------------
                                                                2000     1999
                                                             ---------- -------
                                                             (Restated)
     <S>                                                     <C>        <C>
     Accrued payroll and related benefits...................  $16,705   $ 7,306
     Accrued distribution fees..............................    5,576     5,724
     Accrued royalties......................................   11,161     3,091
     Other..................................................   11,620     7,566
                                                              -------   -------
                                                              $45,062   $23,687
                                                              =======   =======
</TABLE>

11. RELATED-PARTY TRANSACTIONS:

  In March 1999, the NAR received shares of RealSelect common stock convertible
into 297,620 shares of Company common stock in satisfaction of certain
obligations under the NAR operating agreement totaling $1.0 million.

                                       44
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During the year ended December 31, 1999, the Company issued promissory notes
to employees of the Company totaling $13.0 million for the exercise of stock
options and related expenses. These notes are full recourse and collateralized
by common stock of the Company and bear a weighted average interest of 5.13%
per annum. These notes are classified as a component of stockholders' equity.
Approximately $126,000 and $12.8 million of these notes are due in 2003 and
2004, respectively.

  During 2000, the Company received payments, net of accrued interest, of
approximately $2.5 million in connection with the issuance of these notes.
Additionally, the Company repurchased 471,007 shares of common stock for
approximately $2.9 million in exchange for the cancellation of promissory
notes of equal value.

12. NOTES PAYABLE:

  The Company repaid approximately $38.6 million in notes payable during 2000.
At December 31, 2000, the Company had a $411,000 non-interest bearing note
payable outstanding, which has been discounted at 10%. This note is due in
2001.

13. STOCK PLANS:

 Option Plans

  Prior to the Reorganization, the Company granted stock options under the
InfoTouch 1994 Stock Incentive Plan. In connection with the formation of
RealSelect, options to purchase 1,326,000 shares of common stock, representing
all outstanding options granted prior to December 4, 1996, became fully
vested. In December 1996, the Company granted options to purchase 275,000
shares of common stock with an exercise price per share of $.06. In 1997,
options to purchase 258,000 shares at $.45 per share were canceled. In 1998,
options to purchase 1,328,000 shares at a weighted average exercise price of
$.45 were exercised. Accordingly, at December 31, 1998 and up through the date
of the Reorganization, options to purchase 15,000 shares were outstanding with
a weighted average exercise price of $.64 per share.

  In connection with the Reorganization, the Company assumed the NSI 1996
Stock Incentive Plan (the "1996 Plan") which provides for the grant of options
to purchase up to 10,000,000 common shares. Under the terms of the plan,
options and other equity incentive awards may be granted to employees,
officers, directors and consultants at the then-current market value of the
Company's common shares, as determined by the Board of Directors. Options
granted generally vest over four years, 25% for the first year and monthly
thereafter over the remaining three years, and expire 10 years after the date
of grant.

  In January 1999, the Board of Directors adopted, and in March 1999 the
Company's stockholders approved, the 1999 Equity Incentive Plan (the "1999
Plan") to replace the 1996 Plan. The 1999 Plan provides for the issuance of
both non-statutory and incentive stock options to employees, officers,
directors and consultants of the Company. The total number of shares of common
stock reserved for issuance under the 1999 Plan is equal to that number
previously reserved and available for grant under the 1996 Plan. The Company
will not issue new options under the 1996 Plan. In April 1999 and June 1999,
the Board of Directors authorized, and the stockholders approved, an increase
in the number of shares reserved for issuance under the 1999 Plan by an
additional 3,000,000 shares and 625,000 shares, respectively.

  In June 1999, the Board of Directors adopted, and the stockholders approved,
the 1999 Stock Incentive Plan (the "SIP"). The SIP reserves 4,900,000 shares
of common stock for future grants. The SIP contains a provision for an
automatic increase in the number of shares available for grant starting
January 1, 2000 and each January thereafter by an amount equal to 4.5% of the
outstanding shares as of the preceeding December 31; provided however that it
does not exceed 20 million shares. In accordance with the provisions of the
1999 Stock Incentive Plan, the number of options available for grant was
increased by 3,158,509 shares in January 2000.

                                      45
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In September 2000, in connection with the acquisition of THG, the Company
assumed the Hessel 2000 Stock Option Plan. This Plan has 400,000 shares
authorized for issuance with 135,421 options issued and outstanding. Options
to be granted under this Plan will be nonqualified options and generally vest
20% after one year and monthly thereafter over the remaining four years and
expire ten years after the date of grant.

  The following table summarizes the activities under the option plans
(including the InfoTouch, SpringStreet, and THG options) for the years ended
December 31, 1998, 1999 and 2000 (shares in thousands):

<TABLE>
<CAPTION>
                                                                        Weigted
                                              Number                    Average
                                                of        Price Per     Exercise
                                              Shares        Share        Price
                                              ------  ----------------- --------
   <S>                                        <C>     <C>               <C>
   Outstanding at December 31, 1997.........   4,453   $ 0.05 to $ 0.90  $ 0.26
     Granted................................   4,782     1.00 to   1.60    1.21
     Exercised..............................  (2,434)    0.06 to   1.00     .31
     Cancelled..............................    (426)    0.30 to   1.00     .71
   Outstanding at December 31, 1998.........   6,375      .05 to   1.60     .91
                                              ------  -----------------  ------
     SpringStreet options assumed...........     719      .36 to   9.83    3.36
     Granted................................  10,214     2.00 to  69.63   13.52
     Exercised..............................  (5,967)     .05 to   9.83    2.20
     Cancelled..............................  (1,072)     .30 to  50.50    4.29
   Outstanding at December 31, 1999.........  10,269      .06 to  69.63   12.60
                                              ------  -----------------  ------
     The Hessel Group options assumed.......     135    36.00 to  47.13   39.77
     Granted................................   7,483    16.63 to  89.25   34.98
     Exercised..............................  (1,708)     .30 to  34.50    4.44
     Cancelled..............................  (1,954)     .36 to  89.25   25.16
                                              ------  -----------------  ------
   Oustanding at December 31, 2000..........  14,225  $   .06 to $89.25  $23.79
                                              ======  =================  ======
</TABLE>

  NSI options granted during the years ended December 31, 1997 and 1998 and
options granted by the Company during the year ended December 31, 1999
resulted in total compensation of $1.0 million, $9.5 million and $13.4
million, respectively, and were recorded as deferred stock compensation in
stockholders' equity. This deferred compensation represented the difference
between the deemed fair value of the Company's common stock for accounting
purposes and the exercise price of these options at the date of grant. The
deferred stock compensation is included in cost of revenues, sales and
marketing, product development and general and administrative expenses in the
consolidated statement of operations over the related vesting period of the
options. Common stock available for future grants as of December 31, 2000 was
149,270 shares.

                                      46
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Additional information with respect to the outstanding options at December
31, 2000 is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                                                     Options
                                      Options Outstanding          Exercisable
                                -------------------------------- ---------------
                                Number Weighted Average Average  Number Average
                                  of      Remaining     Exercise   of   Exercise
Prices:                         Shares Contractual Life  Price   Shares  Price
-------                         ------ ---------------- -------- ------ --------
<S>                             <C>    <C>              <C>      <C>    <C>
$  .30 to  1.60................  1,305       7.5         $ 1.09    975   $ 1.04
$ 2.00 to  3.57................    460       8.1           2.68    376     2.64
$ 8.00 to  9.83................  4,047       8.3           8.87  2,589     8.81
$16.63 to 24.63................  1,144       9.2          21.49     81    20.00
$25.13 to 36.00................  4,929       9.4          29.74    430    29.82
$45.00 to 54.00................  1,765       9.4          47.85     75    48.04
$68.38 to 89.25................    575       9.1          76.67     62    74.27
                                ------       ---         ------  -----   ------
$  .30 to 89.25................ 14,225       8.9         $23.79  4,588   $10.36
                                ======       ===         ======  =====   ======
</TABLE>

  The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 2000, 1999 and 1998, the pro forma
amounts of the Company's net loss and net loss per share for the years ended
December 31, 2000, 1999 and 1998 would have been as follows:

<TABLE>
<CAPTION>
                                                      2000       1999     1998
                                                   ----------  ---------  ----
                                                   (Restated)
   <S>                                             <C>         <C>        <C>
   Net loss applicable to common stockholders:
     As reported.................................. $(146,053)  $ (95,306) $ (3)
     Pro forma.................................... $(218,888)  $(104,669) $ (3)
   Net loss per share-basic and diluted:
     As reported.................................. $   (1.83)  $   (2.32) $--
     Pro forma.................................... $   (2.74)  $   (2.54) $--
</TABLE>

  The fair value for each option granted was estimated at the date of grant
using a Black-Scholes option pricing model, assuming no expected dividends and
the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                  Year Ended December 31
                                                  ---------------------------
                                                   2000      1999      1998
                                                  -------   -------   -------
     <S>                                          <C>       <C>       <C>
     Risk-free interest rates....................       6%        6%        5%
     Expected lives (in years)...................       4         5         4
     Dividend yield..............................       0%        0%        0%
     Expected volatility.........................     100%       85%        0%
</TABLE>

  Options granted prior to the Company's initial public offering were valued
using the minimum value method and therefore volatility was not applicable.
The weighted-average fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 was $25.47, $6.74 and $0.97, respectively.

 Employee Stock Purchase Plan

  In July 1999, the Company adopted, and the stockholders approved, the 1999
Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, the
initial aggregate number of shares of stock that may be issued is 750,000,
cumulatively increased on January 1, 2000 and each January 1 thereafter until
and including

                                      47
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

January 1, 2009 by an amount equal to half of a percent (.5%) of the
outstanding shares of stock as of the preceding December 31; provided,
however, that the aggregate shares reserved under the plan shall not exceed
5,000,000 shares. In January 2000, the amount available under the plan was
increased by 413,806. Employees can choose to have up to 15% of their annual
base earnings withheld, but not to exceed $15,000, to purchase the Company's
common stock. The purchase price of the common stock is 85% of the lesser of
the fair market value as of the beginning or ending of the offering period in
February and August, as defined in the Plan. The first offering period started
on August 1, 1999. During 2000, the Company issued 230,590 shares of common
stock under the ESPP at a weighted issuance price of $17.54 per share.

14. WARRANTS:

  In connection with the Reorganization, the Company assumed warrants to
purchase common stock. The warrants issued can be converted at the election of
the holder, without the payment by the holder of any additional consideration,
into shares of the Company's common stock having a value equal to the fair
market value of the total number of shares subject to the warrant less the
exercise price for that number of shares. The following describes the terms of
and accounting for the warrants assumed in the Reorganization and issued
subsequently.

  In connection with entering into a web portal distribution agreement in
April 1998, the Company issued warrants to purchase 792,752 shares of the
Company's common stock at a weighted average exercise price of $7.00 per
share. In August 1999, warrants to purchase 107,527 shares of common stock
were exercised at an exercise price of $18.60 per share. The Company incurred
a total charge of $12.6 million which is being amortized to sales and
marketing expense over the term of the distribution agreement, approximately
two years. During the year ended December 31, 2000, warrants to purchase
665,064 shares of the Company's common stock were exercised at a weighted
average exercise price of $4.46 per share.

  In January 1999, NSI entered into an equipment leasing arrangement which
provided for the sale and leaseback of certain existing equipment and lease
financing for additional equipment needs. At December 31, 1999, the Company
had leased $3.0 million of equipment, which covers the total availability
under the agreement. In addition, the agreement provides the lessor with
warrants to purchase up to 5,000 shares of Series F preferred stock at an
exercise price of $24.00 per share, which currently represent warrants to
purchase 25,000 shares of common stock at an exercise price of $4.80 per
share. The Company determined that the fair value of the warrants approximated
$115,000 on the date of grant.

  In February 1999, the Company closed a private equity offering to real
estate brokers under the Company's Broker Gold program. The Company also
issued warrants to purchase up to 364,110 shares of our common stock with an
exercise price of $20.00 per share. All warrants issued are fully vested, non-
forfeitable and are immediately exercisable. The Company incurred a non-cash
charge of approximately $4.1 million which is being recognized as expense over
the remaining term of the initial two year Broker Gold program agreements.
During the year ended December 31, 2000, warrants to purchase 165,901 shares
of the Company's common stock were exercised.

  In August 1999, in connection with a marketing agreement, the Company issued
warrants to purchase 500,000 shares of the Company's common stock at an
exercise price of $20.00 per share. The Company incurred a non-cash charge of
$3.5 million which is being recognized over the two-year term of the marketing
agreement. All warrants issued were fully vested, non-forfeitable and were
immediately exercisable upon the closing of the IPO. These warrants were
exercised in July 2000.

  In October 1999, in connection with a marketing agreement, the Company
issued warrants to purchase 119,048 shares of the Company's common stock at an
exercise price of $42.00 per share. The Company incurred

                                      48
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

a non-cash charge of $1.1 million which is being recognized over the two-year
term of the marketing agreement. All warrants issued were fully vested, non-
forfeitable and were immediately exercisable. These warrants expired in April
2000.

  Throughout 1999, the Company issued warrants to purchase 910,844 shares of
common stock at a weighted average price of $21.18 per share to Multiple
Listing Services ("MLS") that agreed to provide their real estate listings to
us for publication on the Internet on a national basis. All warrants issued
were fully vested, non-forfeitable and were immediately exercisable. The
Company incurred a total non-cash charge of approximately $11.2 million which
is being recognized as expense over the term of the applicable MLS agreement,
approximately one to two years. During the year ended December 31, 2000,
warrants to purchase 201,034 shares of the Company's common stock were
exercised at a weighted average exercise price of $20.00 per share.

  In February 2000, the Company issued warrants to purchase 470,089 shares of
the Company's common stock at an exercise price of $66.50 per share to the
Broker Gold program members who elected to renew their existing listing
agreements with the Company for an additional two years at the end of their
existing two-year term. All warrants issued were fully vested, non-forfeitable
and were immediately exercisable. The non-cash charge for the warrants totaled
approximately $21.9 million which is being recognized as expense over three
years.

  In March 2000, in connection with a marketing agreement, the Company issued
warrants to purchase 400,000 shares of the Company's common stock at an
exercise price of $35.63 per share. All warrants issued were fully vested,
non-forfeitable and were immediately exercisable. The Company incurred a non-
cash charge of $5.0 million which is being recognized over the one-year term
of the marketing agreement.

  Throughout 2000, the Company issued warrants to purchase 30,739 shares of
the Company's common stock at a weighted average price of $85.45 per share to
Multiple Listing Services ("MLS") that agreed to provide their real estate
listings to the Company for publication on the Internet on a national basis.
All warrants issued were fully vested, non-forfeitable and were immediately
exercisable. The Company incurred a total non-cash charge of approximately
$1.8 million which is being recognized as expense over the term of the
applicable MLS agreement, approximately two to three years.

  The Company recognized $27.3 million and $8.7 million in stock-based charges
for the years ending December 31, 2000 and 1999, respectively in connection
with the issuance of warrants. There were no stock-based charges for 1998. At
December 31, 2000 the aggregate number of warrants outstanding were 1,882,607
with a weighted-average exercise price of $38.03.

15. CAPITALIZATION:

  On April 5, 1999, the Board of Directors effected a two-for-one stock split
of the outstanding shares of common stock. All share and per share information
included in these consolidated financial statements have been retroactively
adjusted to reflect this stock split.

  On August 4, 1999, the Board of Directors effected a five-for-two stock
split of the outstanding shares of common stock. All share and per share
information included in these consolidated financial statements have been
retroactively adjusted to reflect this stock split.

                                      49
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Convertible preferred stock immediately prior to the initial public offering
on August 4, 1999 was composed of the following (in thousands):

<TABLE>
<CAPTION>
                                                      Shares
                                              ---------------------- Liquidation
                                              Authorized Outstanding   Amount
                                              ---------- ----------- -----------
     <S>                                      <C>        <C>         <C>
     Series A................................   1,647       1,378     $  4,561
     Series B................................     353         191        1,379
     Series C................................     614         614        5,054
     Series D................................     681         681       10,991
     Series F................................   2,100       1,760       44,686
     Series G................................     341         341       17,231
     Series H................................     845         845       42,358
     Undesignated............................   3,094         --           --
                                                -----       -----     --------
                                                9,675       5,810     $126,260
                                                =====       =====     ========
</TABLE>

  On August 4, 1999, the Company completed its initial public offering of
common stock. At that time, all issued and outstanding shares of the Company's
convertible preferred stock, except for one share of Series A preferred stock
issued to the NAR, were converted into an aggregate of 29,049,369 shares of
common stock.

  Immediately prior to the initial public offering, the holders of the
convertible preferred stock had the following rights:

  Voting--Each share of convertible preferred stock has a number of votes
equal to the number of shares of common stock then issuable upon its
conversion. The convertible preferred stock generally votes together with the
common stock and not as a separate class.

  Dividends--The holders of each series of convertible preferred stock are
entitled to receive dividends when, as and if declared by the Board of
Directors at a rate of 6.5% of the respective issuance price per share per
annum. The holders of Series D and Series F are entitled to receive cumulative
dividends in preference to the holders of Series A, Series B, and Series C
preferred stock and Series E redeemable convertible preferred stock and the
common stock. In the event of a public offering of the Company's equity
securities meeting certain minimum size requirements and timing, as defined in
the Certificate of Incorporation, dividends declared, if any, will not be
payable and will lapse. The holders of the Series D and Series F convertible
preferred stock are entitled to dividends at their stated rate whether or not
earned which are payable upon conversion provided the Company's public
offering does not meet certain minimum size requirements and timing.
Accordingly, the Company has recorded accretion from the date of the
Reorganization of $2.3 million for the year ended December 31, 1999 related to
the Series D and Series F dividends. No dividends have been declared or paid
from inception.

  Liquidation--In the event of any liquidation or winding up of the Company,
the holders of each series of convertible preferred stock will be entitled to
receive, in preference to the holders of common stock, any distribution of
assets of the Company equal to the sum of the respective issuance price of
such shares plus any accrued and unpaid dividends. The holders of Series D and
Series F are entitled to receive any distribution of assets of the Company
before the holders of Series A, Series B, and Series C convertible preferred
stock and Series E redeemable convertible preferred stock. The holders of
Series A, Series B, Series C and Series E preferred stock are also entitled to
receive an amount equal to the dividend rate (6.5%) accruing on a quarterly
basis on the last day of each calendar quarter for the period from the
respective date of issuance of such shares to the date of liquidation.

                                      50
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  After the full liquidation preference on all outstanding shares of
convertible preferred stock has been paid, any remaining funds and assets of
the Company will be distributed pro rata among the holders of the common
stock.

  Redemption--If a liquidation or initial public offering has not occurred by
June 30, 2002, the holders of Series E redeemable convertible preferred stock
are entitled to a redemption out of the assets of the Company equal to the
Series E liquidation preference. The Company recorded accretion from the date
of the Reorganization of $154,000 for the year ended December 31, 1999 related
to the Series E redeemable convertible preferred stock redemption value.

  Conversion--Each share of convertible preferred stock is convertible at the
holder's option at any time into common stock, according to a ratio which is
five-for-one, subject to adjustment for dilution. Each share of convertible
preferred stock automatically converts into common stock at the then
applicable conversion rate for each upon (i) the closing of an underwritten
public offering pursuant to which the post-closing enterprise value is at
least $300 million of Company stock at a price of at least $9.97 per share,
(ii) the consent of at least two-thirds of the outstanding preferred stock, or
(iii) as to each series of convertible preferred stock, upon the date that
less than 100 shares of such series are outstanding.

  On August 10, 1999, the Company amended its certificate of incorporation
authorizing the Company to issue two classes of shares which are designated as
common stock, $0.001 par value per share, and preferred stock, $0.001 par
value per share. The total number of shares the Company is authorized to issue
is 500 million shares of common stock and 10 million shares of preferred
stock. At December 31, 2000, the Company had authorized the issuance of one
share of Series A preferred stock. At December 31, 2000, one share of Series A
preferred stock was issued and outstanding. The holder of Series A preferred
stock has the following rights:

  Voting--Except as provided in this paragraph, the Series A preferred
stockholder is not entitled to notice of any stockholders' meetings and shall
not be entitled to vote on any matters with respect to any question upon which
holders of common stock or preferred stock have the right to vote, except as
may be required by law (and, in any such case, the Series A preferred shall
have one vote per share and shall vote together with the common stock as a
single class). The holder of Series A preferred is entitled to elect one (1)
director of the Company. If there is any vacancy in the office of a director
elected by the holder of the Series A preferred, then a director to hold
office for the unexpired term of such directorship may be elected by the vote
or written consent of the holder of the Series A preferred stock. The
provisions of the Article dealing with preferred stockholders rights included
in the certificate of incorporation may not be amended without the approval of
the holder of the Series A preferred stock.

  Dividends--In each calendar year, the holder of the Series A preferred is
entitled to receive, when, as and if declared by the Board, non-cumulative
dividends in an amount equal to $0.08 per share (as appropriately adjusted for
stock splits, stock dividends, recapitalizations and the like), prior and in
preference to the payment of any dividend on the common stock in such calendar
year. If, after dividends in the full preferential amounts specified in this
Section for the Series A Preferred have been paid or declared and set apart in
any calendar year of the Company, the holder of Series A preferred shall have
no further rights to receive any further dividends that the Board may declare
or pay in that calendar year.

  Liquidation--In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the Series A preferred is
entitled to receive, prior and in preference to any payment or distribution on
any shares of common stock, an amount per share equal to $1.00 per share of
Series A preferred. After payment of such amount, any further amounts
available for distribution shall be distributed among the holders of common
stock and the holders of preferred stock other than Series A preferred, if
any, entitled to receive such distributions.

                                      51
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Redemption--Upon the earlier to occur of (i) termination of that certain
Operating Agreement dated November 26, 1996, as the same may be amended from
time to time (the "Operating Agreement"), or (ii) the National Association of
REALTORS ("NAR") ceases to own at least 149,778 shares of common stock of the
Company, or (iii) the existence and continuance of a material breach by the
NAR of that certain Joint Ownership Agreement, dated as of November 26, 1996,
among the NAR, NetSelect and NetSelect, L.L.C., or the Trademark License dated
as of November 26, 1996, by and between NAR and RealSelect, at any time
thereafter the Company may, at the option of the Board, redeem the Series A
preferred. The redemption price for each share of Series A preferred shall be
$1.00 per share.

  Conversion--Each share of Series A preferred stock shall automatically be
converted into one share of common stock upon any sale, transfer, pledge, or
other disposition of the share of Series A preferred to any person or entity
other than the initial holder of such share of Series A preferred, or any
successor by operation of law that functions as a non-profit trade association
for REALTORS under Section 501(c)(6) of Internal Revenue Code of 1986, as
amended, that owns the REALTOR trademark, or any wholly-owned affiliate of
such holder as long as the holder continues to own such affiliate.

 Repurchase of Common Stock

  In February 1999, the Company repurchased 2,903,865 shares of common stock
for $11.9 million.

  During 2000, the Company repurchased 471,007 shares of common stock for
approximately $2.9 million in exchange for the cancellation of notes payable
to the Company of equal value.

 Sale of Common Stock and Series F Convertible Preferred Stock

  In February 1999, the Company closed a private equity offering to real
estate brokers under its Broker Gold program. In the aggregate, the Company
sold 94,248 shares of Series F convertible preferred stock and 628,760 shares
of common stock for approximately $3.5 million. The Company recorded the $6.0
million difference between the deemed fair value of the stock for accounting
purposes and the price paid by the brokers as deferred compensation, which is
being amortized ratably over the two-year term of the Broker Gold agreement,
resulting in a non-cash charge of $2.0 million for the year ended December 31,
1999. Under the terms of the Broker Gold agreement, brokers provide the
Company with the right to display their property listings on an exclusive
basis.

  In March 2000 and May 2000, in connection with acquisitions of WyldFyre
Technologies, Inc. and Top Producer Systems Inc., the Company issued 1,062,964
shares of the Company's common stock (Note 4).

  In March 2000, in connection with a marketing agreement, the Company issued
1,085,271 shares of the Company's common stock to Budget Group, Inc. The
Company recorded the $70 million difference between the fair value of the
stock and the price paid by the Budget Group as deferred stock charges, which
is being amortized ratably over the ten-year term of the marketing agreement
(Note 20).

  In April 2000, in connection with a marketing and distribution agreement,
the Company issued 3,894,343 shares of the Company's common stock to AOL (Note
20).

  The Company recognized $21.9 million and $2.8 million in stock-based charges
in connection with the issuance of common stock for the years ended December
31, 2000 and 1999, respectively. There were no stock-based charges for 1998.

                                      52
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


16. NET LOSS PER SHARE:

  The following table sets forth the computation of basic and diluted net loss
per share applicable to common stockholders per share for the periods
indicated (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    --------------------------
                                                      2000       1999    1998
                                                    ---------  --------  -----
                                                    (Restated)
   <S>                                              <C>        <C>       <C>
   Historical presentation numerator:
     Net loss.....................................  $(146,053) $(93,007) $  (3)
     Accretion of redemption value and dividends
      on convertible preferred stock..............        --     (2,299)   --
                                                    ---------  --------  -----
     Net loss applicable to common stockholders...  $(146,053) $(95,306) $  (3)
                                                    =========  ========  =====
   Denominator:
     Weighted average shares......................     79,758    41,142  9,173
                                                    =========  ========  =====
   Basic and diluted net loss per share applicable
    to common stockholders........................  $   (1.83) $  (2.32) $ --
                                                    =========  ========  =====
</TABLE>

  The per share computations exclude preferred stock, options and warrants
which are anti-dilutive. The number of such shares excluded from the basic and
diluted net loss per share computation were 16,107,866, 12,892,571 and 15,000
for the years ended December 31, 2000, 1999 and 1998, respectively.

17. SUPPLEMENTAL CASH FLOW INFORMATION:

  During the year ended December 31, 2000:

  .  The Company paid $1.4 million for interest.

  .  The Company acquired Top Producer for $12.1 million in cash and 473,538
     shares of common stock with an estimated fair value of $12.1 million and
     assumed net liabilities of $522,000 in connection with this purchase.

  .  The Company issued 589,426 shares of common stock valued at $34.3
     million as part of the WyldFyre acquisition.

  .  The Company paid cash of $15.0 million and assumed an option plan
     consisting of 135,421 options with an estimated fair value of $4.5
     million and assumed net assets of $747,220 as part of the The Hessel
     Group acquisition.

  .  The Company issued 1,085,271 shares of common stock in connection with a
     marketing agreement.

  .  The Company issued 3,894,343 shares of common stock in connection with a
     marketing and distribution agreement.

  .  During 2000, the Company repurchased 471,007 shares of common stock for
     approximately $2.9 million in exchange for the cancellation of
     promissory notes to the Company of equal value.

  .  The Company received $10.4 million in equity securities for services.

                                      53
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  During the year ended December 31, 1999:

  .  The Company issued shares of RealSelect common stock convertible into
     297,620 shares of Company common stock to the NAR in satisfaction of
     certain obligations under the operating agreement totaling $1.0 million.

  .  The Company issued notes receivable to stockholders for $12.1 million in
     connection with exercising stock options and issuing restricted common
     stock.

  .  The Company issued 364,000 shares of common stock valued at $3.3
     million, 844,569 shares of Series H convertible preferred stock valued
     at $42.1 million and assumed net assets of $10.1 million as part of the
     SpringStreet acquisition.

  .  The Company issued 187,500 shares of common stock to the NAR in
     satisfaction of certain obligations under the operating agreement
     totaling $1.3 million.

  .  The Company issued 162,500 shares of common stock totaling $488,000 to
     an employee for cash of $250,000 and a note receivable of $238,000.

  .  The Company converted all of the shares of RealSelect held by the NAR
     into 3,917,265 shares of its common stock.

  .  The Company issued 250,000 shares of common stock valued at $11.2
     million, a $37.5 million promissory note, and assumed $911,000 net
     liabilities as part of the Homefair acquisition.

  .  The Company funded $3.0 million of capital expenditures through an
     equipment lease financing arrangement.

  .  The Company issued 250,000 shares of common stock in satisfaction of the
     Cendant Litigation.

  .  The Company issued 18,604 shares of common stock in exchange for a $1.0
     million investment in a company.

  .  The Company paid $79,000 for interest.

During the year ended December 31, 1998:

  .  The Company paid $1,000 for interest.

18. DEFINED CONTRIBUTION PLAN:

  The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution plan under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a percentage (not to
exceed 15%) of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. All full-time employees on the payroll of
the Company are eligible to participate in the Plan. The Company is not
required to contribute to the Savings Plan and has made no contributions since
the inception of the Savings Plan.

                                      54
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


19. INCOME TAXES:

  As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets and
related valuation allowance at December 31, 2000 and 1999 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                      December 31, December 31,
                                                          2000         1999
                                                      ------------ ------------
                                                       (Restated)
   <S>                                                <C>          <C>
   Deferred tax assets:
     Net operating loss carryforwards................   $ 75,636     $ 44,571
     Equity compensation.............................     19,053        5,106
     Deferred expenses...............................     10,805          --
     Other...........................................      3,594        1,723
                                                        --------     --------
                                                         109,088       51,400
     Less: valuation allowance.......................    (74,611)     (16,570)
                                                        --------     --------
   Net deferred tax assets...........................     34,477       34,830
                                                        --------     --------
   Deferred tax liabilities:
     Amortization of acquired intangible assets......    (34,477)     (34,830)
                                                        --------     --------
   Total gross deferred tax liabilities..............    (34,477)     (34,830)
                                                        --------     --------
   Net deferred tax asset (liability)................   $    --      $    --
                                                        ========     ========
</TABLE>

  Based on management's assessment, the Company has placed a valuation
allowance against its otherwise recognizable deferred tax assets due to the
likelihood that the Company may not generate sufficient taxable income during
the carryforward period to utilize the net operating loss carryforwards. The
valuation allowance for net deferred taxes was increased by $58,041 in 2000.
The increase was the result of net changes in temporary differences as well as
adjustments attributable to acquisitions.

  At December 31, 2000 and 1999, the Company had net operating losses for
federal income tax purposes of approximately $190.8 million and $116.7
million, respectively, which begin to expire in 2007. At December 31, 2000 and
1999, the Company had net operating losses for state income tax purposes of
approximately $100.1 million and $63.3 million, respectively, which begin to
expire in 2001. At December 31, 2000 and 1999, the net operating loss includes
approximately $56.3 million and $1.0 million related to the exercise of
employee stock options and warrants, respectively. Any benefit resulting from
the utilization of this portion of the net operating loss will be credited
directly to equity.

                                      55
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


20. COMMITMENTS AND CONTINGENCIES:

 Operating Leases

  The Company leases certain facilities and equipment under noncancellable
operating leases with various expiration dates through 2008. The leases
generally contain renewal options and payments that may be adjusted for
increases in operating expenses and increases in the Consumer Price Index. The
company also assumed noncancellable operating leases from NSI in conjunction
with the Reorganization. Future minimum lease payments under these operating
leases as of December 31, 2000 are as follows (in thousands):

<TABLE>
   <S>                                                                   <C>
   2001................................................................. $10,522
   2002.................................................................   8,565
   2003.................................................................   7,499
   2004.................................................................   4,819
   2005 and thereafter..................................................  12,633
                                                                         -------
     Total.............................................................. $44,038
                                                                         =======
</TABLE>

  Rental expense for the Company for operating leases was $7.5 million and
$3.8 million for the years ended December 31, 2000 and 1999, respectively.
Total NSI rental expense for operating leases was $749,000 for the year ended
December 31, 1998.

 Distribution Agreements

  In connection with the Reorganization, the Company assumed various Internet
portal distribution agreements and marketing and listing agreements with real
estate franchises. Payments remaining over the next five years for these
agreements at December 31, 2000 are as follows (in thousands):

<TABLE>
   <S>                                                                   <C>
   2001................................................................. $ 7,202
   2002.................................................................   3,750
   2003.................................................................     500
   2004.................................................................     --
   2005 and thereafter..................................................     --
                                                                         -------
     Total.............................................................. $11,452
                                                                         =======
</TABLE>

 AOL Agreement and Letter of Credit

  In April 2000, the Company entered into a five-year marketing and
distribution agreement with AOL. In exchange for entering into this agreement,
the Company paid AOL $20.0 million in cash and issued to AOL approximately 3.9
million shares of its common stock. In the agreement, the Company has
guaranteed that the 30-day average closing price, related to 60%, 20% and 20%
of the shares it issued, will be $68.50 per share on the third, fourth and
fifth anniversaries of the agreement, respectively. This guarantee only
applies to shares that continue to be held by AOL at the end of each
respective year. As of December 31, 2000, the Company has recorded $189.8
million in other non-current liabilities, which represents the fair market
value of the 3.9 million shares of the Company's stock issued upon entering
the agreement and the guarantee of the stock. The difference between the total
guaranteed amount and the liability recorded is being recorded as other
expense over the term of the agreement and was $3.9 million in the year ended
December 31, 2000. In connection with the guarantee, the Company established a
$90.0 million letter of credit and is required to pledge an amount equal to
the unused portion of the letter of credit. As of December 31, 2000, the
Company had pledged $94.7 million in cash equivalents towards this letter of
credit which is classified as restricted cash on the balance sheet. This
letter of

                                      56
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

credit can be drawn against by AOL in the event that our 30-day average
closing price is less than $68.50 at the end of each respective guarantee
date. The letter of credit will be reduced to $50.0 million at the end of the
third anniversary of the agreement. The term of the agreement may be reduced
if AOL draws more than $40.0 million from the letter of credit at the end of
the third year anniversary of the agreement.

 Budget Agreement

  In March 2000, the Company issued 1,085,271 shares of its common stock with
an estimated fair value of approximately $70.0 million to Budget Group, Inc.,
or BGI, in connection with entering into a ten-year strategic alliance
agreement that allows the Company to participate in online and offline BGI
marketing activities. In this agreement, the Company has guaranteed that the
price of the shares issued will be $64.50 per share on any trading day during
the six month period after the second anniversary of the agreement. BGI has
the right, during this period, to require Homestore, with respect to each
share as to which the right is exercised, at Homestore's discretion elects, to
i) pay to BGI an amount in cash equal to the excess of the guaranteed price
over the average price of the period ("the Put Amount"); ii) issue and deliver
to BGI the number of shares of common stock with a value per share equal to
the Put Amount; or iii) repurchase all of the shares of the stock at the
guaranteed price.

 Contingencies

  From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in
the normal course of business. Based on the advice of counsel, management
believes that the resolution of these matters will not have a material adverse
effect on the Company's business, results of operations, financial condition
or cash flows.

 Legal Proceedings

  On October 22, 1999, the Company and Cendant Corporation ("Cendant")
announced a settlement of the pending litigation between the two companies. As
part of the settlement, Cendant received 250,000 shares of the Company's
common stock and agreed to take various actions to reaffirm various alliance
agreements with the Company. In connection with the issuance of the 250,000
shares, the Company recorded a non-cash charge of $8.4 million in 1999.

  On April 25, 2000, the Company received a request for information pertaining
to its business from the Antitrust Division of the U.S. Department of Justice,
or DOJ. The request sought information about the Company's business as it
relates to Internet realty sites in the United States, and has responded to
that request. Following their review under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 of the Company's acquisition of Move.com, Inc.
("Move.com") and Welcome Wagon International, Inc. ("Welcome Wagon"),
collectively referred to as the Move.com Group from Cendant, the DOJ notified
the Company in February 2001 that it would not oppose the closing of the
acquisition, but intended to continue its investigation of certain
Homestore.com agreements, including certain agreements between Homestore.com
and Cendant. Homestore.com is continuing to cooperate with the DOJ with
respect to that investigation.

21. SUBSEQUENT EVENTS:

 Acquisitions

  In February 2001, the Company completed the acquisitions of Move.com, Inc.
and Welcome Wagon International, Inc., or collectively referred to as to the
Move.com Group from Cendant in an all stock transaction valued at $757.3
million. In connection with the acquisition, the Company issued an aggregate
of

                                      57
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

21.4 million shares of the Company's common stock in exchange for all the
outstanding shares of capital stock of the Move.com Group and assumed
approximately 3.2 million outstanding stock options of Move.com, Inc. Cendant
is restricted in its ability to sell the Homestore.com shares it received in
the acquisition and has agreed to vote such shares on all corporate matters in
proportion to the voting decisions of all other stockholders. In addition,
Cendant has agreed to a ten-year standstill agreement that, under most
conditions, prohibits Cendant from acquiring additional Homestore.com shares.
The acquisition will be accounted for as a purchase, in accordance with
generally accepted accounting principles.

  In connection with and contingent upon the close of the acquisition of the
Move.com Group, the Company entered into a series of commercial agreements for
the sale of various technology and subscription-based products to Real Estate
Technology Trust ("RETT"), an independent trust established in 1996 to provide
technology services and products to Cendant's real estate franchisees that is
considered a related party of the Company. Under the commercial agreements,
RETT committed to purchase $75 million in products to be delivered to agents,
brokers and other Cendant real estate franchisees over the next three years.

 Stock Plans

  In January 2001, in accordance with plan provisions, the number of shares
reserved for issuance under the 1999 Stock Incentive Plan and the 1999
Employee Stock Purchase Plan were increased by an additional 3,724,252 and
413,806, shares, respectively.

  Litigation

  Beginning in December 2001 numerous separate complaints purporting to be
class actions were filed in various jurisdictions alleging that the Company
and certain of its officers and directors violated certain provisions of the
Securities Exchange Act of 1934. The complaints contain varying allegations,
including that the Company made materially false and misleading statements
with respect to our 2000 and 2001 financial results in our filings with the
SEC, analysts reports, press releases and media reports. The complaints seek
an unspecified amount of damages. These cases are still in the preliminary
stages, and it is not possible for the Company to quantify the extent of its
potential liability, if any. An unfavorable outcome in these cases could have
a material adverse effect on our business, financial condition and results of
operations. In addition, the costs of defending any litigation can be high and
divert management's attention from the day to day operations of the Company's
business.

  In January 2002 the Company was notified that the SEC had issued a formal
order of private investigation in connection with matters relating to the
restatement of the Company's financial results. The SEC has requested that the
Company provide them with certain documents concerning the restatement of the
Company's financial results. The Company is cooperating with the SEC in
connection with this investigation and its outcome cannot be determined.

  In February 2002, the Company was notified by Nasdaq of its intent to
institute proceedings against the Company to delist its stock from the Nasdaq
National Stock Market because, as a result of the restatement, its financial
statements were not been filed with the SEC on a timely basis. The Company has
requested a hearing on the matter and is working to update its financial
statements prior to the hearing. However, the Company cannot assure you that
its common stock will continue to be traded on the Nasdaq National Stock
Market. In the event the Company's common stock is delisted from the Nasdaq
National Market, it could be more difficult to trade the Company's common
stock, and the Company cannot assure that a market for its common stock will
develop or be sustained.

                                      58
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


22. QUARTERLY FINANCIAL DATA (UNAUDITED):

  Provided below is the selected unaudited quarterly financial data for 1999
and 2000, with the quarters ended March 31, June 30, September 30 and December
31, 2000 as restated to reflect the adjustments and the early adoption of the
accounting pronouncement as described in Note 3.

<TABLE>
<CAPTION>
                                                       Three months Ended
                         -----------------------------------------------------------------------------------
                         Mar. 31,  June 30,   Sept.    Dec. 31,   Mar. 31,   June 30,  Sept. 30,   Dec. 31,
                           1999      1999    30, 1999    1999       2000       2000       2000       2000
                         --------  --------  --------  --------  ---------- ---------- ---------- ----------
                                                                 (Restated) (Restated) (Restated) (Restated)
                                            (in thousands, except per share amounts)
<S>                      <C>       <C>       <C>       <C>       <C>        <C>        <C>        <C>
Revenues................ $  5,570  $ 11,016  $ 18,625  $ 27,369   $ 37,662   $ 42,244   $ 48,835   $ 52,581
Gross profit............    2,655     6,388    12,460    19,112     26,904     28,811     32,998     31,387
Loss from operations....  (10,415)  (18,317)  (35,534)  (31,099)   (33,607)   (35,558)   (40,439)   (52,498)
Net loss................ $(10,486) $(18,280) $(34,226) $(30,015)  $(29,212)  $(29,284)  $(33,946)  $(53,611)
Net loss applicable to
 common stockholders.... $(10,900) $(19,343) $(35,048) $(30,015)  $(29,212)  $(29,284)  $(33,946)  $(53,611)
Basic and diluted net
 loss per share
 applicable to common
 stockholders........... $  (0.66) $  (0.79) $  (0.66) $  (0.43)  $  (0.39)  $  (0.37)  $  (0.41)  $  (0.65)
</TABLE>

  The following statements provide a reconciliation of the Company's results
of operations for the three restated quarters from financial statements
previously filed to these restated financial statements.

  Quarter Ended March 31, 2000

<TABLE>
<CAPTION>
                                                          Accounting
                                  As Reported Adjustments   Change   Restated
                                  ----------- ----------- ---------- --------
<S>                               <C>         <C>         <C>        <C>
Revenues.........................  $ 38,599                $  (937)  $ 37,662
Gross profit.....................    27,841                   (937)    26,904
Loss from operations.............   (33,607)                          (33,607)
Net loss applicable to common
 shareholders....................  $(29,212)                         $(29,212)
Basic and diluted net loss per
 share applicable to common
 stockholders....................  $  (0.39)                         $  (0.39)

  Quarter Ended June 30, 2000

<CAPTION>
                                                          Accounting
                                  As Reported Adjustments   Change   Restated
                                  ----------- ----------- ---------- --------
<S>                               <C>         <C>         <C>        <C>
Revenues.........................  $ 50,152     $(6,143)   $(1,765)  $ 42,244
Gross profit.....................    36,719      (6,143)    (1,765)    28,811
Loss from operations.............   (30,986)     (4,572)              (35,558)
Net loss applicable to common
 shareholders....................  $(24,712)    $(4,572)             $(29,284)
Basic and diluted net loss per
 share applicable to common
 stockholders....................  $  (0.31)    $ (0.06)             $  (0.37)
</TABLE>

                                      59
<PAGE>

                              HOMESTORE.COM, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Quarter Ended September 30, 2000

<TABLE>
<CAPTION>
                                                          Accounting
                                  As Reported Adjustments   Change   Restated
                                  ----------- ----------- ---------- --------
<S>                               <C>         <C>         <C>        <C>
Revenues.........................  $ 62,203    $(11,115)   $(2,253)  $ 48,835
Gross profit.....................    45,878     (11,115)    (1,765)    32,998
Loss from operations.............   (32,851)     (7,588)              (40,439)
Net loss applicable to common
 shareholders....................  $(27,058)   $ (6,888)             $(33,946)
Basic and diluted net loss per
 share applicable to common
 stockholders....................  $  (0.33)   $  (0.08)             $  (0.41)

  Quarter Ended December 31, 2000

<CAPTION>
                                                          Accounting
                                  As Reported Adjustments   Change   Restated
                                  ----------- ----------- ---------- --------
<S>                               <C>         <C>         <C>        <C>
Revenues.........................  $ 79,013    $(24,137)   $(2,295)  $ 52,581
Gross profit.....................    57,290     (24,138)    (1,765)    31,387
Loss from operations.............   (33,074)    (19,424)              (52,498)
Net loss applicable to common
 shareholders....................  $(34,187)   $(19,424)             $(53,611)
Basic and diluted net loss per
 share applicable to common
 stockholders....................  $  (0.41)   $  (0.24)             $  (0.65)
</TABLE>

                                       60
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

  (1) Consolidated Financial Statements and Supplementary Data: See Index to
   Consolidated Financial Statements at Item 8 on page 19 of this report.

  (2) Financial Statement Schedule: See Item 14, "Exhibits" on Form 10-K/A
   Exhibit Number 99.02.

  (b) Reports on Form 8-K

  On October 27, 2000, the Company filed a report on Form 8-K with the
Securities and Exchange Commission in connection with the proposed acquisition
of the Move.com Group.

  (c) Exhibits

<TABLE>
<CAPTION>
   Number                              Exhibit Title
   ------                              -------------
   <C>      <S>
    2.01    Agreement and Plan of Merger dated December 31, 1998, between
             NetSelect, Inc. and InfoTouch Corporation.(1)
    2.02    Agreement and Plan of Reorganization dated June 20, 1998, among
             NetSelect, Inc., National New Homes Co., Inc., MultiSearch
             Solutions, Inc., Fred White, and R. Fred White III.(1)
    2.03    Exchange Agreement dated March 31, 1998, among NetSelect, Inc., The
             Enterprise of America, Ltd., and Roger Scommegna.(1)
    2.04    Agreement and Plan of Reorganization/Merger between NetSelect, Inc.
             and SpringStreet.com.(1)
    2.05    Stock Purchase Agreement dated as of October 12, 1999 by and among
             Homestore.com, a Delaware Corporation, The Homebuyer's Fair, Inc.,
             an Arizona corporation ("HBF"), the current shareholders of HBF as
             of the date thereof and certain persons who will become
             shareholders of HBF prior to the Closing, and Central Newspapers,
             Inc., an Indiana corporation ("CNI"), as Shareholder Agent.(2)
    2.06    Stock Purchase Agreement dated as of October 12, 1999 by and among
             Homestore.com, Inc., FAS-Hotline, Inc., an Arizona corporation
             ("FAS"), the shareholders of FAS, and CNI, as Shareholder
             Agent.(2)
    2.07    Agreement and Plan of Reorganization, by and among Homestore.com,
             Inc., Metal Acquisition Corp., WW Acquisition Corp., Move.com,
             Inc., Welcome Wagon International, Inc., Cendant Membership
             Services Holdings, Inc. and Cendant Corporation, dated as of
             October 26, 2000.(5)
    3.01    Registrant's Amended and Restated Certificate of Incorporation.(1)
    3.02    Registrant's Bylaws.(1)
    3.05.1  RealSelect, Inc.'s Certificate of Incorporation dated October 25,
             1996.(1)
    3.05.2  RealSelect, Inc.'s Certificate of Amendment to Certificate of
             Incorporation dated November 25, 1996.(1)
    3.06    RealSelect, Inc.'s Bylaws dated November 26, 1996.(1)
    3.07    Amended By-Laws of RealSelect, Inc.(1)
    4.01    Form of Specimen Certificate for Registrant's common stock.(1)
    4.02.1  NetSelect, Inc. Second Amended and Restated Stockholders Agreement
             dated January 28, 1999.(1)
    4.02.2  Amendment No. 1 to NetSelect, Inc. Second Amended and Restated
             Stockholders Agreement dated January 28, 1999.(1)
   10.01    Form of Indemnity Agreement between Registrant and each of its
             directors and executive officers.(1)
   10.02.1  Operating Agreement dated November 26, 1996, between REALTORS(R)
             Information Network, Inc. and RealSelect, Inc.(1)
</TABLE>

                                       61
<PAGE>

<TABLE>
<CAPTION>
   Number                              Exhibit Title
   ------                              -------------
   <C>      <S>
   10.02.2  First Amendment to Operating Agreement between REALTORS(R)
             Information Network, Inc. and RealSelect, Inc. dated December 27,
             1996.(1)
   10.02.3  Amendment No. 2 to Operating Agreement between REALTORS(R)
             Information Network, Inc. and RealSelect, Inc. dated May 28,
             1999.(1)
   10.03    Master Agreement dated November 26, 1996, among NetSelect, Inc.,
             NetSelect, L.L.C., RealSelect, Inc., CDW Internet, L.L.C., Whitney
             Equity Partners, L.P., Allen & Co., InfoTouch Corporation, and
             REALTORS(R) Information Network, Inc.(1)
   10.04    Joint Ownership Agreement dated November 26, 1996, among the
             National Association of REALTORS(R), NetSelect, L.L.C., and
             NetSelect, Inc.(1)
   10.05    Trademark License dated November 26, 1996, between the National
             Association of REALTORS(R) and RealSelect, Inc.(1)
   10.06    Stock and Interest Purchase Agreement (NetSelect Series A and B
             Preferred) dated November 26, 1996, among NetSelect, Inc.,
             NetSelect L.L.C., and InfoTouch Corporation.(1)
   10.07    NetSelect, Inc. 1996 Stock Incentive Plan.(1)
   10.08    NetSelect, Inc. 1999 Equity Incentive Plan.(1)
   10.09    Homestore.com, Inc. 1999 Stock Incentive Plan.(1)
   10.10    Homestore.com, Inc. 1999 Employee Stock Purchase Plan.(1)
   10.11    InfoTouch Corporation 1994 Stock Incentive Plan.(1)
   10.12    Move.com, Inc. Stock Incentive Plan.(6)
   10.13    Cendant Corporation Move.com Group 1999 Stock Option Plan as
             assumed by Cendant Corporation from Move.com, Inc. and amended and
             restated effective as of March 21, 2000.(6)
   10.14    1997 Stock Initiative Plan of Cendant Corporation as amended and
             restated through October 14, 1998.(6)
   10.15    Amendment to Amended and Restated 1997 Stock Incentive Plan of
             Cendant Corporation dated March 27, 2000.(6)
   10.16    Amendment to Amended and Restated 1997 Stock Incentive Plan of
             Cendant Corporation dated March 28, 2000.(6)
   10.17    Employment Agreement between NetSelect, Inc. and Stuart H. Wolff,
             Ph.D.(1)
   10.18    Employment Agreement between NetSelect, Inc. and Richard
             Janssen.(1)
   10.19    Employment Agreement between NetSelect, Inc. and Michael A.
             Buckman.(1)
   10.20    Office Lease dated September 18, 1998 between RealSelect, Inc. and
             WHLNF Real Estate Limited Partnership for 225 West Hillcrest,
             Suite 100, Thousand Oaks, California.(1)
   10.21    First Amendment to Office Lease dated March 31, 1999 between
             RealSelect, Inc. and WHLNF Real Estate Limited Partnership for 225
             West Hillcrest, Suite 100, Thousand Oaks, California(1)
   10.22    401(k) Plan.(1)
   10.23    Employment Agreement between NetSelect, Inc. and Peter Tafeen.(1)
   10.24    Amendment to Employment Contract between NetSelect, Inc. and Peter
             Tafeen.(1)
   10.25    Employment Agreement between NetSelect, Inc. and John M.
             Giesecke.(1)
   10.26    Employment Agreement between NetSelect, Inc. and David
             Rosenblatt.(1)
   10.27    Agreement dated August 21, 1998 among RealSelect, RIN, the NAR,
             NetSelect and NetSelect L.L.C.(1)
   10.28    Agreement among NetSelect, Inc., RealSelect, Inc., RIN and NAR
             dated May 28, 1999.(1)
   10.29    Second Amended and Restated Interactive Marketing Agreement among
             RealSelect, Inc., NetSelect, Inc. and America Online, Inc. dated
             April 8, 1998.(1)(3)
   10.30    Letter Agreement regarding rental site acquisition among the NAR,
             RIN and RealSelect, Inc. dated May 17, 1999.(1)(3)
   10.31    Employment Agreement between Homestore.com, Inc. and M. Jeffrey
             Charney.(1)
   10.32    Employment Agreement between Homestore.com, Inc. and Catherine
             Kwong Giffen.(1)
</TABLE>

                                       62
<PAGE>

<TABLE>
<CAPTION>
   Number                             Exhibit Title
   ------                             -------------
   <C>    <S>
   10.33  Standard Office Lease Form, Westlake North Business Park, dated March
           7, 2000, between Westlake North Associates, LLC, and Homestore.com,
           Inc. for 30700 Russell Ranch Road, Westlake Village, California*
   21.01  Subsidiaries of Registrant.*
   23.01  Consent of PricewaterhouseCoopers LLP, independent accountants.**
   23.02  Report on Independent Accountants on Financial Statement Schedules.**
   99.01  Information Incorporated by Reference Concerning Recent Sales of
           Unregistered Securities.*
   99.02  Schedule II--Valuation and Qualifying Accounts.**
</TABLE>
--------
 * Filed with the original Form 10-K

 ** Filed herewith.

(1) Incorporated by reference to exhibits previously filed with the Company's
    Registrant Statement on Form S-1 (File No. 333-79689).

(2) Incorporated by reference to exhibits previously filed with the Company's
    Current Report on Form 8-K/A filed with the Securities and Exchange
    Commission on December 7, 1999.

(3) Confidential treatment has been granted with respect to certain information
    in these exhibits pursuant to a previous confidential treatment request.

(4) Incorporated by reference to exhibits previously filed with the Company's
    Registration Statement on Form S-1 (File No. 333-94467).

(5) Incorporated by reference herein to the Appendix to the Definitive Proxy
    Statement filed with the Securities and Exchange Commission on November 29,
    2000.

(6) Incorporated by reference herein to the Company's Form S-8 filed with the
    Securities and Exchange Commission on February 16, 2001.

                                       63
<PAGE>

                                  SIGNATURES

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

Date: March 11, 2002
                                          Homestore.com, Inc.

                                                   /s/  W. Michael Long
                                          By: _________________________________
                                                      W. Michael Long
                                                  Chief Executive Officer

                                                 /s/  Lewis R. Belote, III
                                          By: _________________________________
                                                   Lewis R. Belote, III
                                                  Chief Financial Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----
Principal Executive Officer:

<S>                                  <C>                           <C>
     /s/  W. Michael Long            Chief Executive Officer and   March 11, 2002
____________________________________ Director
          W. Michael Long

Principal Financial Officer and
Principal Accounting Officer:

   /s/  Lewis R. Belote, III         Chief Financial Officer       March 11, 2002
____________________________________
        Lewis R. Belote, III

Additional Directors:

   /s/ Terrence M. McDermott         Director                      March 11, 2002
____________________________________
       Terrence M. McDermott

       /s/ L. John Doerr             Director                      March 11, 2002
____________________________________
           L. John Doerr

       /s/ Joe F. Hanauer            Director                      March 11, 2002
____________________________________
           Joe F. Hanauer

     /s/ William E. Kelvie           Director                      March 11, 2002
____________________________________
         William E. Kelvie
</TABLE>

                                      64
<PAGE>

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----
<S>                                  <C>                           <C>
      /s/ Kenneth K. Klein           Director                      March 11, 2002
____________________________________
          Kenneth K. Klein
     /s/ Barbara Alexander           Director                      March 11, 2002
____________________________________
         Barbara Alexander

</TABLE>

                                       65