##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF
1934


For the fiscal year ended December 31,
2002



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HOMESTORE, INC.

(Exact Name of Registrant as Specified in its
Charter)


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

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



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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
o

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 or any amendment to this Form 10-K.
o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x No
o

|                                                                                                        |  |   |             | 
|------------------------------------------------------------------------------------------------------- |  | - | ----------- | 
|Aggregate market value of voting stock held by
    non-affiliates of the registrant as of June 28, 2002 |  | $ | 113,586,794 | 
|Number of shares of common stock outstanding as
    of February 28, 2003                                |  |   | 118,329,648 | 



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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 to the registrants proxy
statement relating to the annual meeting of stockholders to be
held on May 29, 2003.



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TABLE OF CONTENTS



|               |                                                                                               |  |  |  |  |  |  | 
|-------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                             
|               | Item 2. Properties                                                                           
|               | Item 3. Legal Proceedings                                                                    
|               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II       
|               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|               | Item 6. Selected Financial Data                                                              
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|               | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|               | Item 8. Financial Statements and Supplementary Data                                          
|               | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant                                  
|               | Item 11. Executive Compensation                                                              
|               | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|               | Item 13. Certain Relationships and Related Transactions                                      
|               | Item 14. Controls and Procedures                                                             
|PART IV       
|               | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|               | Item 16. Principal Accountant Fees and Services                                              
|SIGNATURES    
|CERTIFICATIONS
|Exhibit 4.03  
|Exhibit 10.10 
|Exhibit 21.01 
|Exhibit 23.01 
|Exhibit 23.02 
|Exhibit 99.01 
|Exhibit 99.02 



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##### Table of Contents



HOMESTORE, INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2002

INDEX

|               |  |                                                                                                    |     |      |     | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|               |  |                                                                                                    |     | Page
|               |  |                                                                                                    |     |     
|PART I        
|Item 1.        |  | Business                                                                                           |     |      | 2   | 
|Item 2.        |  | Properties                                                                                         |     |      | 26  | 
|Item 3.        |  | Legal Proceedings                                                                                  |     |      | 26  | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                            |     |      | 30  | 
|PART II       
|Item 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |     |      | 30  | 
|Item 6.        |  | Selected Financial Data                                                                            |     |      | 32  | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |     |      | 34  | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |     |      | 63  | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                        |     |      | 63  | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |     |      | 111 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                 |     |      | 111 | 
|Item 11.       |  | Executive Compensation                                                                             |     |      | 111 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |     |      | 111 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                     |     |      | 111 | 
|Item 14.       |  | Controls and Procedures                                                                            |     |      | 111 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |     |      | 112 | 
|Item 16.       |  | Principal Accountant Fees and Services                                                             |     |      | 116 | 
|SIGNATURES     |  |                                                                                                    | 117 |     
|CERTIFICATIONS |  |                                                                                                    | 118 |     

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This Annual Report on Form 10-K and the
documents incorporated herein by reference contain
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 actual results to be materially different from
those expressed or implied by these statements. These factors
include those listed under the Risk Factors section
contained in Item 1 and elsewhere in this Form 10-K,
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. We
cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these
forward-looking statements.




PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

We have created an online service that is the
leading consumer destination on the Internet for home and real
estate-related information, products and media services, based
on the number of visitors, time spent on our websites and number
of property listings. We provide a wide variety of information
and tools for consumers and are a 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.

Our consumer websites include REALTOR.com®,
HomeBuilder.com, Homestore® Apartments & Rentals,
and Homestore.com®. We also provide software and related
services to real estate industry professionals through several
industry leading applications, and provide printed advertising
and home plan products to pre-move and post-move consumers.

The emergence and acceptance of the Internet has
fundamentally changed the way that consumers and businesses
communicate, obtain information, purchase goods and services and
transact business. The real estate industry and home services
market is particularly well suited for the Internet because of
its complexity, fragmented nature, and reliance on the exchange
of information. Real estate professionals currently spend almost
nine billion dollars per year on marketing their services to
apartment hunters, homebuyers and homesellers. Traditional
methods of marketing for real estate professionals include
classified advertisements, print media and other offline
sources. These methods do not allow for interactivity and may
use data that is incomplete or outdated. Additionally, these
methods reach consumers only within specific local markets and
are often distributed on a weekly or less frequent basis. These
traditional marketing sources also lack content that can be
searched based on specific detailed criteria, and do not have
the ability to offer two way communication. The Internet
overcomes many of the limitations of traditional real estate
marketing methods by providing consumers with access to
information on market supply and demand and enabling consumers
to search for real estate information based on specified,
detailed criteria, without geographical limitations. The
Internet offers a compelling means for consumers, real estate
professionals, homebuilders, property managers and owners, and
ancillary service providers to communicate and transact business
together.

We were incorporated in the State of Delaware in
1993 under the name of InfoTouch Corporation, or InfoTouch. In
February 1999, we changed our corporate name to Homestore.com,
Inc. In May 2002, we changed our name to Homestore, Inc. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations for a further
description of our history.

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Our
Vision

Our vision statement incorporates the provision
of products and services to consumers, real estate professionals
and advertisers prior to, during and immediately following a
move:

We create media and technology solutions

to promote and connect


Real Estate Professionals


to Consumers


before, during and after a move.


Our Operating
Segments

During 2002, we realigned our business to ensure
that each of our products and services directly support this
vision, and we organized our operating activities into four
reporting segments:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Media Services.Media Services represents our products and media services that
    promote and connect real estate professionals to consumers
    through our REALTOR.com®, HomeBuilder.com, Homestore
    Apartments & Rentals and Homestore.com websites. This
    segment also includes our limited international activities.                                                                                                                                                                                                                                                                         
|
| | Online Advertising.Online Advertising is comprised of numerous online advertising
    products, including banner ads, sponsorships, integrated
    text-based links and rich media applications, which historically
    have been sold to those businesses interested in reaching our
    targeted audience. Starting in 2003, we expect that an
    increasing percentage of our advertising products will be
    purchased by real estate industry professionals. As a result, it
    is expected this segment will be combined with the Media
    Services segment in future financial presentations.
|
| | Software and
    Services.Software and Services
    includes our property listing management and customer
    relationship management applications for REALTORS®,
    Multiple Listing Services, or MLSs, and homebuilders, offered
    through our Top Producer®, WyldFyre, and Computers
    For Tracts, or CFT, businesses, respectively.                                                                                                                                                                                                                                                           
|
| | Offline Advertising.Offline Advertising incorporates the targeted, new-mover
    advertising products provided by our Welcome Wagon®unit,
    and sales of new home plans and related magazines through our
    Homestore Plans and Publications businesses.                                                                                                                                                                                                                                                                                                                                            

Key Characteristics

We believe there are several characteristics of
our business that help distinguish Homestore from other real
estate media and technology companies. These characteristics
include the strength and depth of our real estate industry
relationships, the high volume of visitors to our websites and
the technology that powers our websites and applications.

Industry
Relationships

To provide consumers with timely and
comprehensive 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®, or NAR; the National Association of Home
Builders, or NAHB; hundreds of MLSs; the Manufactured Housing
Institute, or MHI; and leading real estate franchisors,
including the six largest franchises, brokers, builders and
apartment owners. Under an agreement with NAR, we operate
NARs official website, REALTOR.com®. Under our
agreement with NAHB, we operate NAHBs official website,
HomeBuilder.com. Under our agreements with NAR, NAHB, and MHI we
receive preferential promotion in their marketing activities.
REALTOR® is a registered collective membership
mark which may be used only by real estate professionals who are
members of NAR and subscribe to its code of ethics.

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National Association of
REALTORS®. The NAR is the largest
trade association in the United States that represents real
estate professionals. NAR consists of residential and commercial
REALTORS®, including brokers, agents, property managers,
appraisers, counselors and others engaged in all aspects of the
real estate industry. NAR had approximately 840,000 members as
of December 31, 2002.

National Association of Home Builders.The NAHB is the second-largest real
estate trade association in the United States. As of
December 31, 2002, NAHB had approximately 205,000 members.
Approximately one-third of NAHBs members are homebuilders
and/or remodelers and the remainder work in closely related
fields within the residential real estate industry such as
mortgage, finance, building products and building services,
including subcontractors.

Manufactured Housing Institute.The MHI is a nonprofit national trade
association representing all segments of the manufactured
housing industry including manufactured home producers,
retailers, developers, community owners and managers, suppliers,
insurers and financial service providers. As of
December 31, 2002, the MHI had approximately 300 member
companies and approximately 100 affiliate members through its
affiliated state associations.

Multiple Listing Services.MLSs operate networks that provide
real estate professionals with listings of properties for sale
and are typically regulated by a governing body of local brokers
and/or agents. There are over 800 MLSs nationwide that aggregate
local property listings by geographic location.

Leading
Consumer Websites

The Homestore network of websites includes
REALTOR.com®, the official site of NAR; HomeBuilder.com,
the official new homes site of NAHB; Homestore Apartments &
Rentals, an apartments content and search site; and
Homestore.com, a home information resource site with an emphasis
on content related to mortgage financing, moving and storage,
and home and garden activities.

Collectively, the Homestore network of sites
attracts approximately 9.1 million unique users per month,
according to January 2003 data obtained from third party
Internet traffic auditor comScore Media Metrix. January is
seasonally one of the highest traffic months for each of our
sites. Our traffic grew approximately 10% from January 2002
(excluding traffic attributable to ConsumerInfo.com which we
sold in the second quarter of 2002), which we attribute to both
increasing consumer use of the Internet and greater reliance on
the Internet for real estate related content.

The typical visitor to the Homestore network
visits us more than two times per month and spends approximately
37 minutes per month on our sites. Individually,
REALTOR.com®, our flagship site, is the Internets
No. 1 real estate site with approximately
400.0 million page views and approximately 5.2 million
unique users recorded in January 2003, according to comScore.
REALTOR.com® visitors spend a great deal of time browsing
home listings  approximately 44 minutes per unique
user in a typical month. HomeBuilder.com is the No. 1
Internet destination for gathering information and contacting
homebuilders related to newly constructed and to-be-built homes,
having attracted approximately 555,000 unique users in January
2003. Homestore Apartments & Rentals is the No. 1
apartment website, having attracted approximately
1.5 million unique users in January 2003. Homestore.com,
which comprises all of our consumer traffic not directed to one
of our three property sites, attracted approximately
4.0 million unique users in January 2003.

We are the exclusive provider national property
listings across AOL, Netscape, CompuServe and Digital City. In
addition, we produce moving, home and garden content for a
home-related channel on AOL and provide AOLs over 26.5
million domestic subscribers an online area to find home-related
information, tools and services. Other significant portal
relationships include Yahoo! Inc., The Excite Network, Inc.,
iWon.com, Internet Broadcast Systems, Inc. and its websites for
52 local network-affiliated TV stations, United Online through
its Net Zero and Juno brands, Overture Services, Inc. and Google
Inc.

REALTOR.com®.
The REALTOR.com® website offers consumers a comprehensive
suite of services, tools and content for all aspects of the
residential real estate transaction. The REALTOR.com®
website includes a directory of approximately 110,000
REALTORS® to help guide buyers and sellers through the real

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estate transaction process. For buyers, there is
a searchable database of approximately two million existing
homes for sale. For sellers, there are tools and information
about understanding the value of their home, preparing the home
for sale, listing and advertising the home and completing the
sale. We receive listing content from over 800 MLSs across the
United States. Our property listings typically provide
information that is more detailed and timely than the
information included in other media channels, such as newspaper
classified advertisements and print magazines. In addition, we
offer consumers information and tools on mortgages, home
affordability, the offer process, applying for a loan, closing
the purchase, planning the move and neighborhood profiles.


HomeBuilder.com.The
HomeBuilder.com website offers consumers a comprehensive
resource for information on builders as well as information on
newly built homes and housing plans. We aggregate information on
more than 100,000 new and model homes for sale throughout more
than 7,100 new home communities and planned developments
throughout the United States. Homebuyers can browse through our
database under three types of search queries: new homes,
builders and manufactured homes. In addition to offering this
information, we also provide consumers with community profiles
and the ability to send detailed requests to builders via
electronic mail or fax for further information on particular
properties.

Homestore Apartments &
Rentals.Homestore Apartments &
Rentals provides consumers with a large and comprehensive rental
housing database. As of December 31, 2002, our rental
housing database consisted of more than 50,000 properties,
representing approximately 6.5 million apartment units
located in more than 6,000 cities nationwide. With the
acquisition in February 2001 of Move.com, Inc. and Welcome Wagon
International, Inc., collectively referred to as The Move.com
Group, we added Rent.net, which expanded our search services and
provided us with the capabilities to include senior housing,
corporate housing and self storage listings. We also provide
consumers with information relating to moving services,
renters insurance and neighborhood profiles. Additionally,
consumers can create personalized moving checklists and receive
email reminders.

Homestore.com.As a
complete home-information resource, Homestore.com offers a wide
range of content on a variety of home related topics including
mortgage financing, moving, and home and garden. The site
utilizes content prepared by our in-house editorial staff as
well as information obtained and displayed through third party
relationships. The Homestore.com site is organized into three
primary channels:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Homestore Home Finance.Our Home Finance channel contains
    information and decision support tools that help consumers
    understand and satisfy their home financing and mortgage needs.
    A variety of content, tools, and interactive guides are
    available to help consumers with mortgages, loans, credit,
    insurance, legal matters and taxes. Additionally, consumers have
    access to our Find a Lender directory, which
    provides access to a variety of lending professionals.                                                                                                                    
|
| | Homestore Moving & Storage.Our Moving & Storage channel
    contains content, tools and interactive guides for consumers
    moving to new homes or relocating to another community. These
    resources provide movers with custom moving quotes and other
    resources necessary for making moving decisions, such as salary
    calculators, school reports and neighborhood information.                                                                                                                                                                                                                                
|
| | Homestore Home & Garden.Our Home & Garden channel is an
    online resource for consumers seeking to make improvements to
    their existing home, including remodeling, home improvement,
    landscaping and home maintenance needs. It provides an online
    resource for consumers seeking decorating ideas and information.
    The channel includes information for planning, budgeting and
    visualizing options, as well as specific advice on a
    room-by-room basis. The channel is designed to help consumers
    locate qualified professionals as well as provide them with
    do-it-yourself information.

Technology

We seek to maintain and enhance our market
position with consumers and real estate professionals by
building proprietary systems and consumer features into our
websites, such as search engines for real estate listings and
the technologies used to aggregate real estate content. We
regard many elements of our websites and underlying technologies
as proprietary, and we attempt to protect these elements and
underlying

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technologies by relying on trademark, service
mark, patent, copyright and trade secret laws, restrictions on
disclosure and other methods. We have been issued a patent with
respect to the technology we use to enable searches of the real
estate listings posted on our property listing websites. See
  Intellectual Property.


Our Software and Services segment companies have
also developed proprietary applications to enhance the
productivity and profitability of real estate professionals. In
many instances we enjoy the largest installed base of customers
with respect to our applications. We are continually attempting
to add functionality and features to our applications, including
integration with our leading consumer websites. We believe that
our ability to assist real estate professionals in managing
relationships with their customers enables us to better
distinguish the value of our media properties.

Products and Services

Most of our revenue, including the majority of
our Media Services, Online Advertising and Software and Services
segments, is derived from subscription-based products. Although
our financial reporting comprises four distinct segments, the
products we offer can be described in three sections because our
Media Services and Online Advertising segments, which we expect
will be combined in future financial presentations as described
herein, share many of the same products.

Media
Services and Online Advertising Segments

Our Media Services and Online Advertising
segments provide marketing and website solutions that allow real
estate professionals to reach and connect with a highly targeted
potential customer audience represented by the consumer traffic
on our websites. We do this by allowing our customers to
personalize the personal, corporate and property listing
information contained on our websites and by allowing our
customers to connect their personal or corporate website
directly to our database of property information, our
professional directories and to traditional Internet advertising
products such as banner ads.

Our products enable real estate professionals to
manage their online content and branding presence through a
personal or corporate website, and to use our listing
enhancements such as virtual tours and printable brochures. We
also enable real estate professionals to market themselves and
their properties directly to anonymous potential buyers whose
search criteria match a set of listing criteria specified by the
real estate professional. We also design, host, and maintain
personal and corporate home pages for real estate professionals.
Through our websites, real estate professionals can increase
their visibility among prospective buyers and sellers,
especially those outside of their geographic area.

Because of our focus on home and real
estate-related information, we believe our websites draw an
attractive national target audience for advertisers and
providers of home-related products and services. We also believe
that because our websites attract a significant number of
consumers that are contemplating a real estate transaction or a
move, we provide businesses such as mortgage companies, home
improvement retailers and moving service providers with an
efficient way to find and communicate with their potential
customers.

During 2003, we will be changing the way we offer
many of our products to customers, including a particularly
significant change to our REALTOR® product offering.
Historically, we have required our REALTOR® customers to
purchase a templated website, or homepage, in order to connect
themselves to the listings displayed on REALTOR.com®. This
templated website and listing enhancements were generally
offered at the same price in different markets, and did not
provide for differential pricing based on the advertising value
delivered to the customer. Beginning in the second quarter of
2003, we intend to offer these services under a more traditional
media model where pricing is dependent upon geographic market,
placement, content and length or quantity of the media run. This
change is intended to permit us to compete more effectively with
traditional offline media products. The purchase of our
templated website is no longer a requirement, but is an optional
feature. Our implementation of these changes will be phased in
during 2003.

In addition, due to a new emphasis on selling our
online advertising inventory, consisting of impressions created
around our property listings and other content, to real estate
professionals, we expect that an increasing percentage of our
online advertising revenue will come from real estate
professionals. As a result of

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these changes in the business, our Online
Advertising segment is expected to combine with Media Services
as one segment in the first quarter of 2003.


We offer the following products and services
through our Media Services and Online Advertising segments:



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classified Advertising.We offer a number of classified
    advertising opportunities throughout our network of websites,
    primarily in the form of property listing enhancements on our
    REALTOR.com®, HomeBuilder.com, and Homestore.com Apartments
    & Rentals websites.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Enhanced Listings.We offer our professional customers the ability to enhance their
    listings on our websites by adding their own personal promotion
    in the forms of custom copy, photographs, text effects, links to
    their homepage and/or virtual tours, and more.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Featured HomesDeluxe. Featured Homes Deluxe allows our REALTOR®
    subscribers to more prominently display their property listings
    on the REALTOR.com® website during geographical property
    searches by consumers. Properties featured through the Featured
    Homes Deluxe product are viewed first in any search of
    their respective zip code.                                                                                                                                                                                                                                                                                                                                                
|
| | Online Brochures.Our primary product for rental,
    corporate housing and senior housing property owners and
    managers is an online brochure displayed on our Homestore
    Apartments & Rentals website. We also offer a similar
    product to our homebuilder customers for display on our
    Homebuilder.com website. Our online brochures include property
    photos, floor plan images, virtual tours, unit descriptions,
    community descriptions, interactive mapping, driving directions
    and links to property owners or managers websites. A
    variety of enhancements are also available to assist in
    increasing the visibility of specific properties to our online
    audience.
|
| | Virtual Tours.We
    are the exclusive provider of the patented iPIX® virtual
    tour technology to the residential real estate market through
    our HomeTour 360® product. Our professional customers may
    purchase HomeTour 360® to enhance their online listings on
    REALTOR.com®, Homebuilder.com and our Homestore.com
    Apartments & Rentals website. In addition, we integrate
    other virtual tour products into our websites. These products
    allow consumers to interact with 360-degree views of properties,
    essentially allowing them to walk through the home
    while viewing the property online.                                                                          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Display Advertising.A variety of online display advertising in the form of banners,
    vertical skyscraper ads, and other Internet
    Advertising Bureau, or IAB, standard ad sizes can be purchased
    for placement throughout the Homestore network of websites by
    companies or individuals wishing to reach the largest and most
    targeted real estate-oriented audience. While companies make up
    the bulk of our display advertising customers, we also offer a
    number of unique display advertising opportunities to individual
    real estate professionals to brand themselves online to
    consumers in their local market.



| |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General Advertising.Advertisers can purchase IAB standard
    advertising units as well as certain custom advertising units on
    our websites. We offer advertisers branding and
    performance-based opportunities, generally sold on a cost per
    thousand, or CPM, basis. Our advertising offerings include
    online ads, text based links and rich media.                                                        
|
| | Sponsorships.Sponsorships allow advertisers to
    maximize their exposure on our websites by featuring fixed
    buttons or other prominent placements on certain
    pages on our websites. These advertisements present users with
    the opportunity to click-through directly to the
    advertisers site. Sponsorships may also include other
    advertising components such as content or online advertisements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Directory Listings.Advertisers can purchase placement in
    our online directory products. Our network of websites includes
    directories of REALTORS®, homebuilders, lenders, storage
    facilities and moving companies. We believe our directory
    products offer advertisers the opportunity to reach qualified
    consumers based upon the targeted audience that visits our
    websites. Our directory advertisers receive a listing in our
    directory and a customized web page that can be used to market
    their products and services.

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| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | We believe our directory products are a
    cost-effective way for professionals to generate leads from
    online consumers.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | XLerator.
    Available to subscribers to our REALTOR® directory and
    website products, XLerator is an online prospecting tool
    that enables REALTORS® to market themselves to
    potential buyers during the earliest stages of the research
    process when they search for homes on REALTOR.com®.
    Consumers can select a checkbox on REALTOR.com® that
    indicates they would like to be contacted by a REALTOR®
    from the area in which they are searching. While protecting the
    consumers privacy, XLerator gathers this data and
    helps REALTORS® reach out to these prospects via the
    Internet and to create a proactive marketing campaign.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Websites. Our
    website product line is comprised of templated and custom
    websites for individuals as well as companies. We build websites
    based either on an a la carte features and functionality basis
    or bundled with pre-selected features based on industry
    segments, including websites designed specifically for
    REALTORS®, brokers, builders and manufactured
    housing retailers. For customers seeking websites with
    specialized features and expanded functionality we design and
    build customized websites. In addition to the design and set-up
    of the websites, we also offer hosting and maintenance services.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One Place. One
    Place is a suite of products, including a website, that
    integrates with an interactive voice response system that
    is linked to a pager network. One Place enables
    REALTORS® to be paged when a potential homebuyer or
    homeseller submits an inquiry about a specific property listing.
    Additionally, if a prospective buyer contacts the REALTOR®
    after viewing a for sale sign, the interactive voice
    response system will provide the consumer with details about the
    property and then page the REALTOR® with a notification of
    the callers telephone number and the property listing for
    which the consumer has inquired.

International.In
October 2001, we entered into an agreement with the
International Consortium of Real Estate Associations. This
consortium, formed in May 2001, consists of approximately 24
real estate associations worldwide and was created to provide
consumers with a single Internet-based source for real property
around the world. Pursuant to this agreement, we agreed to
operate the consortiums website and have been endorsed as
the exclusive provider of certain products and services to real
estate agents in the countries in which members of the
consortium have operations. To date, our international
activities have not generated any significant amounts of revenue.

Software and
Services Segment

Our software businesses, Top Producer, WyldFyre
and CFT, provide software solutions and related services to real
estate professionals. Each business has gained a strong position
in its relevant marketplace.

Top Producer.Top
Producer is the No. 1 contact management software specific
to real estate agents. The companys Top Producer products
have an installed customer base of more than 100,000 agents. Top
Producers line of desktop and Internet applications for
real estate agents features client management, appointment and
task scheduling, prospecting automation, comparative market
analysis, customer presentations and mobile data synchronization
for Palm and other wireless devices. Products are private
labeled for some of the countrys largest brokers and
franchise brands, such as GMAC, ERA, Coldwell Banker and
Prudential to offer to their affiliated agents and include
applications for back office management, listing and transaction
administration and recruiting and sales management tools.

WyldFyre.WyldFyre
offers a suite of products for real estate professionals
designed to help them access property listing information.
WyldFyres software products are used daily by more than
110,000 real estate professionals in more than 100 markets
throughout the U.S., Australia and Canada for access, display
and manipulation of property information, photos, and maps.
WyldFyre Listings is our listing productivity suite that
provides real estate professionals with tools to create
comprehensive listing presentations for buyers or sellers. This
suite of products provides real estate professionals web-based
access to MLS data. Using the WyldFyre products, real estate
professionals can access information from MLSs and store the
information on their laptops so that they can display this
information to their prospective clients. Additionally, WyldFyre

8



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products allow real estate professionals to
create customized comparative market analysis and presentations
that incorporate photographs and maps. WyldFyre products are
also sold under private labels to distributors and MLSs.


Computers for
Tracts.CFT is a leading provider of
sales force automation and warranty request management solutions
to the home building industry. The company serves approximately
30% of the Builder 100, which together sell approximately
100,000 new homes each year using CFT technology. CFTs
sales force automation products deliver sales office
presentation, contact management, sales contract generation and
change order management functionalities. CFT also sells a
warranty request management software product that manages
post-closing service requests from new homeowners.

Offline
Advertising Segment

Welcome Wagon.Welcome Wagon offers local merchants the opportunity to reach
new homeowners shortly after their move through a targeted
direct mail product. The Welcome Wagon New Mover Program
integrates local merchant information into a welcome gift
delivered to new homeowners through the mail. The welcome gift
contains a customized neighborhood address book with exclusive
merchant listings as well as coupons and special offers from
local advertisers. Additionally, local advertisers receive the
names and contact information of the new homeowners in their
selected area that have received the welcome gift. This allows
local merchants the opportunity to continue to build their
relationship with these new homeowners through their own direct
marketing initiatives. This product is sold to merchants on an
annual subscription basis.

Homestore Plans and
Publications.Homestore Plans and
Publications offers consumers, building professionals,
suppliers, and real estate professionals the ability to browse,
select, modify and purchase new home designs and project plans
from one of the largest selections of home plans and project
plans available. Homestore Plans and Publications has business
relationships with many designers that provide us the right to
sell the designers home plans on an exclusive or
non-exclusive basis directly to consumers. These plans are sold
through newsstands, distributors and retailers nationwide as
well as through its website, homeplans.com, and through
approximately 100 affiliate partner sites. We also produce home
design software that is distributed through major retailers.

Competition

We face competition in each segment of our
business.

Media
Services and Online Advertising Segments

Newspapers and home/apartment guide publications
are the two primary offline competitors to our media offerings.
We compete with newspapers and home/apartment guide publications
for the advertising dollars spent by real estate professionals
to advertise their offerings. Although more than half of all
homebuyers use the Internet as a starting point for their new
home search (according to Fannie Mae), real estate professionals
currently spend only a small percentage of their marketing
budget to display their listings on the Internet. In addition,
newspapers and the publishers of home/apartments guides,
including Classified Ventures, Inc., PRIMEDIA Inc., and Network
Communications Inc., have extended their media offerings to
include an Internet presence. We must continue to work to shift
more real estate advertising dollars online if we are to
successfully compete with newspapers and real estate guides.

We compete with a variety of online companies and
websites providing real estate content that sell classified
advertising opportunities to real estate professionals and sell
display advertising opportunities to other advertisers,
including real estate professionals, seeking to reach consumers
interested in products and services related to the home and real
estate. Several of these websites are seeking to increase visits
to their sites by offering rebates to homebuyers that purchase
homes with the assistance of a real estate professional who was
introduced to them via such websites. Such websites charge
referral fees to real estate professionals that advertise on
their sites and use a portion of those referral payments to
provide the rebate to the homebuyer. By attracting more users to
their sites, the operators of these sites are seeking to improve
the advertising value proposition they offer to real estate
professionals.

9



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Our primary competitors for online real estate
advertising dollars include Realestate.com, Microsoft Network
and Yahoo! Real Estate. In addition, our apartments and rentals
website faces competition from ApartmentGuide.com, Rent.com and
Apartments.com, and our home builder website competes directly
with NewHomeGuide.com and NewHomeSource.com. Our Homestore.com
website also faces competition from general interest consumer
websites that offer home and finance content.

We also face competition when selling virtual
tour enhancements to real estate professionals for their online
listings. We compete with a number of virtual tour providers in
the marketplace. Some of the larger competitors include
circlepix.com, Visual Tour, EGG Solution Optronics, Home Debut,
Inc. and VideoHome Tours.

Software and
Services Segment

While no single entity competes directly against
us in all of our software businesses, our software and services
segment faces broad competition from companies with a major
presence in the real estate industry, such as Fidelity National
Information Solutions, Inc., and also more direct competition
from software companies that offer products and solutions that
cater to specific segments of the real estate industry.

Top Producer Systems.Our Top Producer business faces
competition from Fidelity National Information Solutions, Inc.
which offers a competing solution to real estate professionals.
Top Producer also competes with a variety of software companies
that offer customer relationship management solutions to real
estate professionals, including Interealtys MLXchange
solution, Best Software Inc.s ACT! solution, FrontRange
Solution Inc.s GoldMine product, and Microsoft
Corporations Outlook solution. In addition, there are
several smaller start-up companies that have developed contact
management tools for real estate professionals.

WyldFyre Technologies.Our WyldFyre business also faces
competition from Fidelity National Information Solutions. In
addition, a variety of other real estate software companies
offer solutions that include features that are competitive with
portions of WyldFyres product offerings, including
Realigent, Inc. and Terra Soft Solutions, Inc.

Computers for Tracts.Our CFT business competes with a
number of custom software providers in the builder market,
including MH2 Technologies. Additionally, several national
homebuilders have developed their own similar solutions.

Offline
Advertising Segment

Welcome Wagon.Our
Welcome Wagon business competes with numerous direct marketing
companies that offer advertising solutions to local and national
merchants. Competitors include Imagitas, Inc., ADVO Inc., Valpak
Direct Marketing Systems, Inc., Pennysaver and MoneyMailer, LLC.
These competitors, like Welcome Wagon, target homeowners at
various stages of the home ownership life cycle with advertising
from third parties.

Homestore Plans and Publications.Our Plans and Publications business
faces direct competition from several large publishing companies
that print multiple publications, including home plan
publications. Our major competitors are Hanley-Wood, LLC, The
Garlinghouse Company and Meredith Corporation.

Infrastructure and Technology

Our websites are designed to provide fast, secure
and reliable high-quality access to our services, while
minimizing the capital investment needed for our computer
systems. We have made, and expect to continue to make,
technological improvements designed to reduce costs and increase
the efficiency of our systems. We expect that enhancements to
our family of websites, and to our products and services, will
come from internally and externally developed technologies.

Our systems supporting our websites must
accommodate a high volume of user traffic, store a large number
of listings and related data, process a significant number of
user searches and deliver frequently updated information. Any
significant increases in utilization of these services could
strain the capacity of our

10



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computers, causing slower response times or
outages. We host our Homestore.com, REALTOR.com®,
HomeBuilder.com, Homestore Apartments & Rentals and custom
broker web pages in Thousand Oaks, California. Because
substantially all of our computer and communications hardware
for each of our websites is located at this location, our
systems are vulnerable to fire, floods, telecommunications
failures, break-ins, earthquakes and other force majeure events.
Our operations are dependant on our ability to protect our
systems from such occurrences. See   Risk
Factors  Internet Industry Risks for a more
complete description of the risks related to our computer
infrastructure and technology.


Intellectual Property

We regard substantial elements of our websites
and underlying technology as proprietary. We attempt to protect
this intellectual property by relying on a combination of
trademark, service mark, patent, copyright and trade secret
laws, restrictions on disclosure and other methods. We have been
issued a patent with respect to the technology we use to enable
searches of the real estate listings posted on our family of
websites.

Despite our precautions, our intellectual
property is subject to a number of risks that may materially
adversely affect our business, including but not limited to:



| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it may be possible for a third party to copy or
    otherwise obtain and use our proprietary information without
    authorization or to develop similar technology independently;                                                                                                                               
|
| |  | we could lose the use of such trademark or the
    REALTOR.com® domain name, or be unable to protect the other
    website addresses that are important to our business, and
    therefore would need to devote substantial resources toward
    developing an independent brand identity;                       
|
| |  | we could be subject to litigation with respect to
    our intellectual property rights;                                                                                                                                                                                                                          
|
| |  | we may be required to license additional
    technology and information from others, which could require
    substantial expenditures by us; and                                                                                                                                                                 
|
| |  | legal standards relating to the validity,
    enforceability and scope of protection of proprietary rights in
    Internet-related businesses are uncertain and continue to
    evolve, and we can give no assurance regarding our ability to
    protect our intellectual property and other proprietary rights.

See   Risk Factors
for a more complete description of the risks related to our
intellectual property.

Employees

As of December 31, 2002, we had
approximately 1,800 full-time equivalent employees. We consider
our relations with our employees to be good. We have never had a
work stoppage, and no employee is represented by collective
bargaining agreements. We believe that our future success will
depend in part on our ability to attract, integrate, retain and
motivate highly qualified personnel and upon the continued
service of our senior management and key technical personnel.
See Risk Factors  Risks Related to Our
Business  Our business is dependent on our key
personnel.

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RISK FACTORS

The following risk factors and other
information included or incorporated by reference in this
Form 10-K should be considered carefully. The risks and
uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or
that we deem to be currently immaterial also may impair our
business operations. If any of the following risks actually
occur, our business, financial condition and operating results
could be materially adversely affected.

Risks Related to our Business

Litigation and an SEC investigation
relating to accounting irregularities could have an adverse
effect on our business.

In December 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 our unaudited
interim financial statements for 2001 would require restatement.
In February 2002, we announced that we would restate our
financial results for the year ended December 31, 2000. In
connection with the restatement, in March 2002 we filed an
amended Form 10-K for the year ended December 31,
2000, and in March 2002 we filed amended an Form 10-Qs
for each of the first three quarters of 2001. Following the
December 2001 announcement of the discovery of accounting
irregularities, approximately 20 lawsuits claiming to be class
actions and three lawsuits claiming to be brought derivatively
on our behalf were commenced in various courts against us and
certain of former officers, directors and employees by or on
behalf of persons purporting to be our stockholders and persons
claiming to have purchased or otherwise acquired securities
issued by us between May 2000 and December 2001. The
California State Teachers Retirement System has been named
lead plaintiff (the Plaintiff) in the consolidated
shareholder lawsuits against us. In November 2002, the
Plaintiff filed a first amended consolidated class action
complaint naming us, certain of our current officers and
employees, certain of our former officers, directors and
employees and various other parties, including among others
MaxWorldwide, Inc. (formerly L90, Inc.), PricewaterhouseCoopers
LLP, AOL, and Cendant Corporation. The amended complaint makes
various allegations, including that we violated federal
securities laws and seeks an unspecified amount of damages.

On March 7, 2003, the court dismissed, with
prejudice, the Plaintiffs claims against a number of
corporate and individual defendants whom the Plaintiff alleged
either assisted in the planning and execution of the purportedly
fraudulent transactions at issue, or who were parties to those
transactions. Those defendants included MaxWorldwide, Inc., AOL
and Cendant, among others. The court also dismissed, without
prejudice, the Plaintiffs claims against a number of our
current and former officers and employees. With regard to those
claims dismissed without prejudice, the Plaintiff has the
opportunity to file another amended complaint attempting to cure
the defects in the original claims against those defendants. At
the same time, the court denied the motions to dismiss of
PricewaterhouseCoopers LLP and our former chief executive
officer. We did not file a motion to dismiss the
Plaintiffs claims against us, but answered the complaint.
Accordingly, the March 7, 2003 decision did not make any
ruling with respect to the claims asserted against us.

It is possible that we may be required to pay
substantial damages or a substantial settlement amount in
connection with the litigation although, as is the case with any
litigation, it is difficult to predict the outcome of this
matter. However, in light of the fact that we determined that it
was necessary to restate our 2000 and 2001 financial results,
due to the circumstances forming the basis of the
Plaintiffs allegations, and the fact that four of our
former employees have pled guilty to violating federal
securities laws in connection with the financial results which
required restatement, this litigation poses a significant risk
of a material adverse effect on the conduct and scope of our
business, our results of operations and our financial position.
Because we are unable to estimate the amount of damages that we
might incur as a result of the outcome of this litigation, we
have not recorded any liability or reserve related to it. For
further description of the nature and status of the legal
proceedings in which we are involved, see
Part I  Item 3. Legal
Proceedings.

In January 2002, we were notified that the
SEC had issued a formal order of private investigation in
connection with matters relating to the restatement of our
financial results that occurred in March 2002. The SEC has
requested that we provide them with certain documents concerning
the restatement of our financial

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results. The SEC also requested access to certain
of our current and former employees for interviews. We have
cooperated and continue to cooperate fully with the SECs
investigation.


In September 2002 and March 2003, certain of
our former employees entered into plea agreements with the
United States Attorneys Office and the SEC in
connection with the investigation. Also in September 2002,
the SEC and the Department of Justice informed us that they
would not bring any enforcement action against us because of the
actions taken by our Board of Directors and our Audit Committee
and our cooperation in the SECs investigation. Because the
investigation is on-going and we are committed to cooperating
with the SEC, we will likely continue to incur additional costs
related to the investigation and management time and attention
may be diverted until the investigation concludes.

Our employees, investors, customers,
business partners and vendors may react adversely to the
restatement of our previous financial statements and to the
related litigation brought against us.

Our future success depends in large part on the
continued support of our key employees, investors, customers,
business partners and vendors who may react adversely to the
restatement of our 2000 and interim 2001 financial statements.
The restatement of our financial statements and the uncertainty
associated with substantial unresolved lawsuits referred to
above has resulted in substantial amounts of negative publicity
about us. We may not be able to motivate or retain key employees
or retain customers or key business partners if they lose
confidence in us, and our vendors may re-examine their
willingness to do business with us. In addition, investors may
lose confidence in us, which may continue to adversely affect
the trading price of our common stock. If we lose the services
of our key employees or are unable to retain our existing
customers, business partners and vendors or attract new
customers, our business, operating results and financial
condition could be materially and adversely affected.

Limitations of our Director and Officer
Liability Insurance and potential indemnification obligations
may adversely affect our business.

Several securities and derivative actions
currently are pending against us and certain of our former and
current officers and directors. During the relevant time period,
our liability insurance provided limited claims-made coverage
for allegations of wrongful acts by our officers and directors,
which allegations, in part, form the basis of the pending
actions. During the relevant time period, our insurers provided
a total of $80.0 million in primary and excess coverage. As
the policies are written  and subject to their unique
terms and provisions  our officers and directors are
insureds under the applicable policies. We, as an entity, also
are an insured party under those applicable policies, which
represents the first $30.0 million in coverage. The failure
of our policies to adequately cover liabilities or expenses
incurred in connection with the pending actions could materially
and adversely affect our business and financial condition.

Several of our insurance carriers 
representing $60.0 million in coverage  also
have purported to rescind their respective policies of insurance
and have filed lawsuits seeking judicial confirmation of their
actions. See Part I  Item 3. Legal
Proceedings  Insurance Coverage Litigation. The
failure of our policies to cover liabilities imposed or expenses
incurred in connection with the pending actions could materially
and adversely affect our business and financial condition.

Under Delaware and California law, our charter
documents, and certain indemnification agreements we entered
into with our executive officers and directors, we may have
certain obligations to indemnify our current and former officers
and directors. The indemnification may cover any expenses and/or
liabilities reasonably incurred in connection with the
investigation, defense, settlement or appeal of legal
proceedings. We may have to spend significant resources
indemnifying our officers and directors or paying for damages
caused by their conduct. Our business and financial condition
could be harmed if we have to make significant payments for
indemnification.

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Our common stock price may be volatile,
which could result in substantial losses for individual
stockholders.

The market price for our common stock has
decreased substantially in recent periods. It is likely to
continue to be highly volatile and subject to wide fluctuations
in response to many factors, including the factors described
herein and the following, some of which are beyond our control:



| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly
    operating results;                                                                                                                                                                                                     
|
| |  | announcements of technological innovations or new
    products or services by us or our competitors;                                                                                                                                                                         
|
| |  | changes in financial estimates by securities
    analysts;                                                                                                                                                                                                                   
|
| |  | conditions or trends in the Internet, technology
    and/or real estate and real estate-related industries;                                                                                                                                                                  
|
| |  | market prices for stocks of Internet companies
    and other companies whose businesses are heavily dependent on
    the Internet, which have generally proven to be highly volatile,
    particularly in recent quarters;                                                   
|
| |  | Cendants allegations that we may have
    breached certain representations and warranties made in our
    agreement with Cendant relating to our acquisition of the
    Move.com Group from Cendant as a result of the restatement of
    our 2000 financial statements; and
|
| |  | adverse publicity relating to litigation.                                                                                                                                                                                                                                    

The low price of our common stock could
result in the delisting of our common stock from the NASDAQ
SmallCap Market, which could cause our common stock to decline
and make trading in our common stock more difficult for
investors.

In November 2002, we filed an application
with NASDAQ to transfer our common stock to The NASDAQ SmallCap
Market from The NASDAQ National Market because our common stock
failed to maintain a minimum bid price of $1.00 per share as
required by the applicable NASDAQ Marketplace Rule. We began
trading on The NASDAQ SmallCap Market on November 18, 2002.
The NASDAQ SmallCap Market is viewed by some investors as a less
desirable and less liquid marketplace than The NASDAQ National
Market. We must satisfy the NASDAQ SmallCap Markets
minimum listing maintenance requirements to maintain our listing
on The NASDAQ SmallCap Market. The listing maintenance
requirements set forth in NASDAQs Marketplace Rules
include a series of financial tests relating to
stockholders equity, market capitalization, net income,
public float, market value of public float, number of market
makers and stockholders, and maintaining a minimum closing bid
price of $1.00 per share for shares of our common stock. On
March 11, 2003, NASDAQ notified us of our non-compliance
with such minimum closing bid price requirements. We now have to
demonstrate in the succeeding 180 days a closing bid price
of at least $1.00 per share for a period of ten consecutive
business days to regain compliance. If we are unable to achieve
a $1.00 per share bid price prior to the expiration of this
period, we may be eligible for an additional 180-day extension
of the bid price exception, provided that we demonstrate
stockholders equity of at least $5.0 million, a
market capitalization of at least $50.0 million or net
income of at least $750,000 from continuing operations for the
year ended 2003. We must also demonstrate compliance with
all requirements for continued listing on The NASDAQ SmallCap
Market. As of December 31, 2002, our stockholders
equity was $38.7 million. If our common stock is delisted
from The NASDAQ SmallCap Market, the common stock would trade on
either the OTC Bulletin Board or the pink sheets,
both of which are viewed by most investors as less desirable and
less liquid marketplaces than The NASDAQ SmallCap Market. Thus,
delisting from The NASDAQ SmallCap Market could make trading our
shares more difficult for investors, leading to further declines
in our share price.

Our future success depends upon our
managements ability to execute its business
plan.

In January and October 2002, we replaced
much of our senior management team. The current senior
management team includes W. Michael Long, our Chief
Executive Officer, Jack D. Dennison, our Chief Operating
Officer, and Lewis R. Belote, III, our Chief Financial
Officer. In addition, Allan Dalton was appointed as President of
the REALTOR.com® unit and Michael R. Douglas was
appointed as Executive

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Vice President and General Counsel. Allan
P. Merrill is our Executive Vice President of Strategy and
Corporate Development and Patrick R. Whelan is our
President of Media Services. Our future success will depend in
part on the continued integration of senior management with
other members of management and the rest of our employees and
business partners, their understanding of the business, and
their implementation of processes and procedures that allow us
to respond to our customers needs.


Focusing on our core business may require
sales of assets and/or discontinuing certain operations, which
could lead to write-offs or unusual/non-recurring items in our
financial statements.

In February 2002, we announced that we would
re-focus on our core business objective  to make
real estate professionals more productive and profitable. This
focus has involved and may continue to involve the disposition
of non-strategic business and corporate services. For example,
in February 2002, we sold our eNeighborhoods division, and
in March 2002 we entered into an agreement to sell all of
the capital stock of Homestore Consumer Information Corp., which
includes ConsumerInfo.com, for $130.0 million in cash to
Experian Holdings, Inc. In addition, in the first quarter of
2003, we sold substantially all of the assets of The Hessel
Group, our relocation tax software and services business. As a
result of this focus, we may incur significant write-offs or
one-time, non-recurring gains or losses or a reduction in
visitors to our websites.

Our agreement with the National Association
of REALTORS® could be terminated.

The REALTOR.com® trademark and website
address and the REALTOR® trademark are owned by NAR. NAR
licenses these trademarks to our subsidiary RealSelect under a
license agreement, and RealSelect operates the REALTOR.com®
website under an operating agreement with NAR.

Although the REALTOR.com® operating
agreement is a lifetime agreement, NAR may terminate it for a
variety of reasons. These include:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the acquisition of us or RealSelect by another
    party;                                                                                      
|
| |  | a substantial decrease in the number of property
    listings on our REALTOR.com® site; and                                                    
|
| |  | a breach of any of our other obligations under
    the agreement that we do not cure within 30 days of being
    notified by NAR of the breach.

Absent a breach by NAR, the agreement does not
contain provisions that allow us to terminate.

Our agreement with NAR contains a number of
provisions that could restrict our operations.

Our operating agreement with NAR contains a
number of provisions that restrict how we operate our business.
These provisions include the following restrictions and
requirements:



| |   |                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we must make quarterly royalty payments of up to
    15% of RealSelects operating revenue in the aggregate to
    NAR and the entities that provide us the information for our
    real property listings (data content providers).
    However, in 2002 we amended the operating agreement with NAR
    such that we now must make fixed payments to NAR as follows:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For 2003, we must pay $1.3 million in four
    installments of $325,000 due on the last day of each calendar
    quarter of 2003.                                                                                             
|
| |  | For 2004, we must pay $1.4 million in four
    installments of $350,000 due on the last day of each calendar
    quarter of 2004.                                                                                             
|
| |  | For 2005, we must pay $1.5 million in four
    installments of $375,000 due on the last day of each calendar
    quarter of 2005.                                                                                             
|
| |  | For 2006, we must pay $1.5 million plus or
    minus, as the case may be, the percentage change in the Consumer
    Price Index for 2005, in four equal installments due on the last
    day of each calendar quarter of 2006.

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| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For 2007 and beyond, we must pay the amount due
    during the prior calendar year plus or minus, as the case may
    be, the percentage change in the Consumer Price Index for the
    prior calendar year, in four equal installments due on the last
    day of each calendar quarter for that calendar year;



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we amended and continue to amend many of our
    agreements with the data content providers to change the method
    of payment to a fixed amount per listing rather than a
    percentage of our revenue and to reduce the amounts that we must
    pay to such entities. In exchange, in some cases, we shortened
    or are shortening the duration of these agreements, including
    those agreements under which we receive the real property
    listings on an exclusive basis;
|
| |  | we are restricted in the type and subject matter
    of, and the manner in which we display, advertisements on the
    REALTOR.com® website;                                                                                                                                                                                                                                                                                                                                           
|
| |  | NAR has the right to approve how we use its
    trademarks, and we must comply with its quality standards for
    the use of these marks;                                                                                                                                                                                                                                                                                                                                              
|
| |  | we must meet performance standards relating to
    the availability time of the REALTOR.com® website;                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | NAR has the right to review, approve and request
    changes to the content on certain pages of our REALTOR.com®
    website; and                                                                                                                                                                                                                                                                                                                                                      
|
| |  | we are restricted in our ability to create
    additional websites or pursue other lines of business that
    engage in displaying real property advertisements in electronic
    form.                                                                                                                                                                                                                                                                                                

In addition, our operating agreement with NAR
contains restrictions on how we can operate the
REALTOR.com® website. For instance, we can only enter into
agreements with entities that provide us with real estate
listings, such as MLSs, on terms approved by NAR. In addition,
NAR can require us to include on REALTOR.com® real estate
related content that it has developed.

If our operating agreement for
REALTOR.com® were terminated, NAR would be able to operate
the REALTOR.com® website.

If our operating agreement with NAR were
terminated, we would be required to transfer a copy of the
software that operates the REALTOR.com® website and assign
our agreements with data content providers, such as real estate
brokers or MLSs, to NAR. NAR would then be able to operate the
REALTOR.com® website itself or with a third party.

We are subject to non-competition
provisions with NAR, which could adversely affect our
business.

We were required to obtain the consent of NAR
prior to our acquisition of our SpringStreet, Inc., Move.com and
HomeBuilder.com websites. In the future, if we acquire or
develop another service that provides real estate listings on an
Internet site or through other electronic means, we will need to
obtain the prior consent of NAR. Any future consents from NAR,
if obtained, could be conditioned on our agreeing to operational
conditions for the new website or service. These conditions
could include paying fees to NAR, limiting the types of content
or listings on the websites or service or other terms and
conditions. Our business could be adversely affected if we do
not obtain consents from NAR, or, if a consent we obtain,
contains restrictive conditions. These non-competition
provisions and any required consent, if accepted by us at our
discretion, could have the effect of restricting the lines of
business that we may pursue.

Our agreement with the National Association
of Home Builders contains provisions that could restrict our
operations.

Our operating agreement with NAHB includes a
number of restrictions on how we operate our HomeBuilder.com
website:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if NAR terminates our REALTOR.com® operating
    agreement, for six months thereafter NAHB can terminate its
    operating agreement with us on three months prior notice;
|
| |  | we are restricted in the type and subject matter
    of advertisements on the pages of our HomeBuilder.com website
    that contain new home listings; and                 

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| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | NAHB has the right to approve how we use its
    trademarks and we must comply with its quality standards for the
    use of its marks.

Our Homestore Apartments & Rentals
website is subject to a number of restrictions on how it may be
operated.

In agreeing to our acquisition of SpringStreet,
NAR imposed a number of restrictions on how we can operate the
Homestore Apartments & Rentals website (formerly the
SpringStreet.com website). These include:



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if NAR terminates its consent for any reason, we
    will have to transfer to NAR all data and content, such as
    listings, on the rental site that were provided by real estate
    professionals who are members of NAR, known as REALTORS®;
|
| |  | listings for rental units in smaller
    non-apartment properties generally must be received from a
    REALTOR® or a REALTOR®-controlled MLS in order to be
    listed on the website;                                                         
|
| |  | if the consent is terminated, we could be
    required to operate our rental properties website at a different
    web address;                                                                                                                 
|
| |  | if the consent is terminated for any reason,
    other than as a result of a breach by NAR, NAR will be permitted
    to use the REALTOR®-branded web address, resulting in
    increased competition;                                          
|
| |  | we cannot list properties for sale on the rental
    website for the duration of our REALTOR.com® operating
    agreement and for an additional two years;                                                                                      
|
| |  | we are restricted in the type and subject matter
    of, and the manner in which we display, advertisements on the
    rental website; and                                                                                                      
|
| |  | we must offer REALTORS® preferred pricing
    for home pages or enhanced advertising on the rental website.                                                                                                                                     

NAR could revoke its consent to our
operating our Homestore Apartments & Rentals
website.

NAR can revoke its consent to our operating our
Homestore Apartments & Rentals website for reasons which
include:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the acquisition of us or RealSelect by another
    party;                                                                                                                          
|
| |  | a substantial decrease in property listings on
    our REALTOR.com® website; and                                                                                                   
|
| |  | a breach of any of our obligations under the
    consent or the REALTOR.com® operating agreement that we do
    not cure within 30 days of being notified by NAR of the
    breach.

The National Association of REALTORS®
has significant influence over aspects of our RealSelect
subsidiarys corporate governance and has a representative
on our Board.

NAR has significant influence over
RealSelects corporate governance.

Board Representatives.NAR is entitled to have one
representative as a member of our Board of Directors and two
representatives as members of RealSelects Board of
Directors.

Approval Rights.RealSelects certificate of
incorporation contains a limited corporate purpose, which
purpose is the operation of the REALTOR.com® website and
real property advertising programming for electronic display and
related businesses. Without the consent of six-sevenths of the
members of the RealSelect Board of Directors, which would have
to include at least one NAR-appointed director, this limited
purpose provision cannot be amended.

RealSelects bylaws also contain protective
provisions which could restrict portions of its operations or
require us to incur additional expenses. If the RealSelect Board
of Directors cannot agree on an annual operating budget for
RealSelect, it would use as its operating budget that from the
prior year, adjusted for inflation. Any expenditures in excess
of that budget would have to be funded by us. In addition, if
RealSelect

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desired to incur debt or invest in assets in
excess of $2.5 million without the approval of a majority
of its board, which would have to include at least one
NAR-appointed director, we would need to fund those expenditures.


RealSelect also cannot take the following actions
without the consent of at least one of NARs
representatives on its Board of Directors:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | amend its certificate of incorporation or bylaws;                                         
|
| |  | pledge its assets;                                                                        
|
| |  | approve transactions with affiliates,
    stockholders or employees in excess of $100,000;
|
| |  | change its executive officers;                                                            
|
| |  | establish, or appoint any members to, a committee
    of its Board of Directors; or       
|
| |  | issue or redeem any of its equity securities.                                             

The emergence of Virtual Office Websites
may adversely impact our business.

Operators of Virtual Office Websites, or VOWs,
currently can display aggregated property listings sourced from
MLSs regardless of whether the brokers that supplied the
listings to the MLSs have consented to such display. Such
listings typically can be viewed by consumers only after
completing a registration process. The NAR has convened a
special work group to analyze the impact of VOWs on the real
estate industry and to recommend NAR policy for governing the
use of VOWs. If VOWs are allowed to continue operating in their
current form, this could adversely affect our ability to
competitively secure relationships with online traffic
aggregators or portals.

We must continue to obtain listings from
Multiple Listing Services, real estate brokers and home
builders.

We believe that our success depends in large part
on the number of real estate listings received from MLSs,
brokers, home builders and rental owners. Many of our agreements
with MLSs to display property listings have fixed terms,
typically 12 to 36 months. At the end of the term of each
agreement, the other party may choose not to renew their
agreement with us. We incur significant expenditures to secure
agreements with providers of real estate information. We are
continuing our efforts to renegotiate our agreements with MLSs
to reduce our costs. If, as a result of our renegotiation
efforts, or otherwise, owners of large numbers of property
listings, such as MLSs or large brokers in key real estate
markets, choose not to renew their relationship with us, then
our websites could become less attractive to other real estate
industry participants or consumers.

It is important to our success that we
support our real estate professional customers.

Since many real estate professionals are not
sophisticated computer users and often spend limited amounts of
time in their offices, it is important that these customers find
that our software and website products significantly enhance
their productivity and are easy to use. To meet these needs, we
provide customer training and have developed a customer support
organization that seeks to respond to customer inquiries as
quickly as possible. If we do not maintain adequate support
levels, our customers may choose not to renew their
subscriptions for our software and website products.

Failure of real estate professionals to
accept online media-based pricing may adversely affect our
financial results.

We have adopted a new pricing strategy for the
media products that we sell to real estate professionals. In the
past we have sold products and media services at a single
national rate for all customers. Beginning in 2003, we intend to
offer these products and services under a more traditional media
model where pricing is dependent upon geographic market,
placement, content and length or quantity of the media run,
which will affect the pricing levels currently paid by our
customers. The success of our new pricing strategy will depend
on its acceptance by our customers. If real estate
professionals do not accept our new pricing structure this could
lead to a decrease in our sales which could have an adverse
affect on our financial results.

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We must dedicate significant resources to
market our subscription products and media services to real
estate professionals.

Real estate agents are generally independent
contractors rather than employees of brokers and typically spend
a majority of their time outside the office. As a result it is
often necessary for us to communicate with them on an individual
basis. This results in relatively high fixed costs associated
with our inside and field-based sales activities.
In addition, since we offer products and media services to
both real estate brokers and agents, we are often required to
contact them separately when marketing our products and media
services.

A failure to establish and maintain
strategic online relationships that generate a significant
amount of traffic could limit the growth of our
business.

We have established strategic relationships with
online companies that generate a significant amount of online
traffic for our websites. Failure to maintain these
relationships and create new ones could limit the growth of our
business. Although we expect a significant portion of our online
customers will continue to come to our websites directly, we
also continue to rely on third-party websites with which we have
relationships, including websites operated by AOL, Yahoo!,
Excite, iWon.com, Internet Broadcast Systems, Universal Online
through its Juno and NetZero brands, Overture and Google for
online traffic. We may also be required to pay significant fees
to establish, maintain and expand our existing online
relationships. As a result, our revenue may suffer if we fail to
enter into new relationships or maintain existing relationships
or if these relationships do not result in online traffic
sufficient to justify their costs.

We have a history of net losses and expect
net losses for the foreseeable future.

We have experienced net losses in each quarterly
and annual period since 1993. We incurred net losses of
$163.4 million, $1.5 billion and $146.1 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. As of December 31, 2002, we had an
accumulated deficit of $1.9 billion, and are unsure when or
if we will become profitable on a recurring basis. The size of
our future losses will depend, in part, on the rate of growth in
our revenues from broker, agent, home builder and rental
property owner web hosting fees, advertising sales and sales of
other products and services. The size of our future net losses
will also be impacted by non-cash stock-based charges relating
to deferred compensation and stock and warrant issuances, and
amortization of intangible assets. As of December 31, 2002,
we had approximately $82.4 million of stock-based charges
and intangible assets to be amortized. In addition, we will
continue to use cash to repay existing liabilities that have
arisen from prior contractual arrangements and recent
restructuring charges until those liabilities are satisfied.

Our quarterly financial results are subject
to significant fluctuations.

Our results of operations may vary significantly
from quarter to quarter. In the near term, we expect to be
substantially dependent on sales of our subscription and
advertising products and media services. We also expect to incur
significant sales and marketing expenses to promote our brand
and services. Therefore, our quarterly revenue and operating
results are likely to be particularly affected by the number of
customers purchasing subscription and advertising products and
media services as well as our expenditures on sales and
marketing for a particular period. If revenue falls below our
expectations, we will not be able to reduce our spending rapidly
in response to the shortfall.

Other factors that could affect our quarterly
operating results include those described below and elsewhere in
this Form 10-K:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of renewals for our subscription
    products and the purchase of media services by real estate
    agents, brokers and rental property owners and managers;  
|
| |  | the amount of advertising sold on our websites
    and the timing of payments for this advertising;                                                                     
|
| |  | the amount and timing of our operating expenses;                                                                                                                        
|
| |  | the amount and timing of non-cash stock-based
    charges, such as charges related to deferred compensation or
    warrants issued to real estate industry participants;

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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | the sale or disposition of assets; and                                                                    
|
| |  | the impact of fees paid to professional advisors
    in connection with litigation and accounting matters.

The market for web-based subscription and
advertising products and services relating to real estate is
competitive.

Our main existing and potential competitors
include websites offering real estate related content and
services as well as general purpose online services, and
traditional media such as newspapers, magazines and television
that may compete for advertising dollars.

The barriers to entry for web-based services and
businesses are low, making it possible for new competitors to
proliferate rapidly. In addition, parties with whom we have
listing and marketing agreements could choose to develop their
own Internet strategies or competing real estate sites. Many of
our existing and potential competitors have longer operating
histories in the Internet market, greater name recognition,
larger consumer bases and significantly greater financial,
technical and marketing resources than we do. The rapid pace of
technological change constantly creates new opportunities for
existing and new competitors and it can quickly render our
existing technologies less valuable.

Our future success depends largely on our
ability to attract, retain and motivate personnel.

Our future success depends on our ability to
attract, retain and motivate highly skilled technical,
managerial and sales personnel. Volatility or lack of positive
performance in our stock price may also adversely affect our
ability to retain key employees, many of whom have been granted
stock options. Due to the decline in the trading price of our
common stock, substantially all of the stock options held by our
employees have an exercise price that is higher than the current
trading price of our common stock, and therefore these stock
options may not be effective in helping us to retain valuable
employees.

Also, we have recently executed workforce
reductions and have announced that we are restructuring our
business operations. As a result, we will need to operate with
fewer employees and existing employees may have to perform new
tasks. These factors and our current financial health may create
concern about job security among existing employees that could
lead to increased turnover. We may have difficulties in
retaining and attracting employees. Employee turnover may result
in a loss of knowledge about our customers, our operations and
our internal systems, which could materially harm our business.
If any of our employees leave, we may not be able to replace
them with employees possessing comparable skills. Attracting and
retaining qualified personnel with experience in the real estate
industry, a complex industry that requires a unique knowledge
base, is an additional challenge for us. The loss of services of
any of our key personnel, excessive turnover of our work force,
the inability to retain and attract qualified personnel in the
future or delays in hiring required personnel may have a
material adverse effect on our business, operating results or
financial condition.

Our organizational realignment and cost
reduction plan may not meet its objectives and could adversely
affect our results of operations and financial
position.

In October 2001, we announced an organizational
realignment and cost reduction plan to focus us more closely on
our core customer segments and to allow for increased
operational efficiencies. This restructuring plan included a
reduction in workforce of up to 700 employees or about 20% of
our workforce. In February 2002, we announced plans to
reduce our staff by an additional 270 employees. In September
2002 we implemented a restructuring focused on our Media
Services division. If we do not meet our restructuring
objectives, we may have to implement additional plans for
restructuring in order to reduce our operating costs. Developing
and implementing restructuring plans are time consuming and
could divert managements attention, which could have an
adverse effect on our financial results.

We need to continue to develop our content
and product and service offerings.

To remain competitive, we must continue to
enhance and improve the ease of use, responsiveness,
functionality and features of our websites and products. These
efforts may require us to develop internally or to license
increasingly complex technologies. In addition, many companies
are continually introducing new

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Internet-related products, services and
technologies, which will require us to update or modify our
technology. Developing and integrating new products, services or
technologies into our websites could be expensive and time
consuming. Any new features, functions or services may not
achieve market acceptance or enhance our brand loyalty. If we
fail to develop and introduce or acquire new features, functions
or services effectively and on a timely basis, we may not
continue to attract new users and may be unable to retain our
existing users. Furthermore, we may not succeed in incorporating
new Internet technologies, or, in order to do so, we may incur
substantial additional expenses.


We may experience difficulty in integrating
our acquisitions.

During our history, a significant portion of our
growth was attributable to acquisitions. However, we may not
receive the desired benefits from these acquisitions. Risks
related to our acquisitions include:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | difficulties in assimilating the operations of
    the acquired businesses;                                  
|
| |  | potential disruption of our existing businesses;                                                             
|
| |  | assumption of unknown liabilities and litigation;                                                            
|
| |  | our inability to integrate, train, retain and
    motivate personnel of the acquired businesses;             
|
| |  | diversion of our management from our day-to-day
    operations;                                              
|
| |  | our inability to incorporate acquired products,
    services and technologies successfully into our websites;
|
| |  | potential impairment of relationships with our
    employees, customers and strategic partners; and          
|
| |  | inability to maintain uniform standards, controls
    procedures and policies.                               

Our inability to successfully address any of
these risks could materially harm our business.

Delaware law, our certificate of
incorporation and bylaws and other agreements contain provisions
that could discourage a takeover.

Delaware law, our certificate of incorporation
and bylaws, our operating agreement with NAR, other agreements
with business partners and a stockholders agreement could have
the effect of delaying or preventing a third party from
acquiring us, even if a change in control would be beneficial to
our stockholders. For example, we have a classified Board of
Directors. In addition, our stockholders are unable to act by
written consent or to fill any vacancy on the Board of
Directors. Our stockholders cannot call special meetings of
stockholders for any purpose, including to remove any director
or the entire Board of Directors without cause. In addition, NAR
could terminate the REALTOR.com® operating agreement if we
are or RealSelect is acquired.

Our business is dependent on our key
personnel.

Our future success depends to a significant
extent on the continued services of our senior management and
other key personnel. The loss of the services of key employees
would likely have a significantly detrimental effect on our
business. Several of our key senior management have employment
agreements that we believe will assist in our ability to retain
them. However, many other key employees do not have employment
agreements. Competition for qualified personnel in our industry
and geographical locations is intense. We can give no assurance
that we will be successful in attracting, integrating, retaining
and motivating a sufficient number of qualified employees to
conduct our business in the future.

We rely on intellectual property and
proprietary rights.

We regard substantial elements of our websites
and underlying technology as proprietary. Despite our
precautionary measures, third parties may copy or otherwise
obtain and use our proprietary information without authorization
or develop similar technology independently. Although we have
one patent, we may not achieve the desired protection from, and
third parties may design around, this patent or any other patent
that we may obtain in the future. In addition, in any litigation
or proceeding involving our patent, or any other patent that we
may obtain in the future, the patent may be determined to be
invalid or unenforceable. Any

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legal action that we may bring to protect our
proprietary information could be expensive and distract
management from day-to-day operations.


Other companies may own, obtain or claim
trademarks that could prevent or limit or interfere with use of
the trademarks we use. The REALTOR.com® website address and
trademark and the REALTOR® trademark are important to our
business and are licensed to us by NAR. If we were to lose the
REALTOR.com® domain name or the use of these trademarks,
our business would be harmed and we would need to devote
substantial resources toward developing an independent brand
identity.

Legal standards relating to the validity,
enforceability and scope of protection of proprietary rights in
Internet-related businesses are uncertain and evolving, and we
can give no assurance regarding the future viability or value of
any of our proprietary rights.

We may not be able to protect the website
addresses that are important to our business.

Our website addresses, or domain names, are
important to our business. However, the regulation of domain
names is subject to change, and it is also possible that the
requirements for holding domain names could change. Therefore,
we may not be able to obtain or maintain relevant domain names
for all of the areas of our business. It also may be difficult
for us to prevent third parties from acquiring domain names that
are similar to ours, that infringe our trademarks or that
otherwise decrease the value of our intellectual property.

Funds held by a letter of credit in
connection with the lease of our corporate headquarters have
been called upon because of our inability to extend the letter
of credit with a financial institution.

In March 2002, we received a notice of default
under the office lease for our corporate offices because of our
inability to extend our letter of credit under the lease. The
lease provides that the landlord has the ability to call upon
the letter of credit and to hold the proceeds as part of the
security deposit. The original amount of the letter of credit
required by the lease was $8.3 million. The landlord has
called upon the letter of credit and now holds $7.5 million
in cash. A deterioration in the financial condition of our
landlord could have a negative impact on our ability to recover
these funds under the terms of the lease. It is our intent to
restore the letter of credit as soon as our financial condition
will allow us.

We could be subject to litigation with
respect to our intellectual property rights.

Other companies may own or obtain patents or
other intellectual property rights that could prevent, limit or
interfere with our ability to provide our products and services.
Companies in the Internet market are increasingly making claims
alleging infringement of their intellectual property rights. We
could incur substantial costs to defend against these or any
other claims or litigation. If a claim were successful, we could
be required to obtain a license from the holder of the
intellectual property or redesign our advertising products and
services.

Our agreement with the International
Consortium of Real Estate Associations may expose us to higher
costs and greater risks.

In October 2001, we entered into an agreement
with the International Consortium of Real Estate Associations.
This consortium, formed in May 2001, consists of approximately
24 real estate associations worldwide. Pursuant to that
agreement, we agreed to operate the consortiums website
and have been endorsed as the exclusive provider of certain
products and services to real estate agents in the countries in
which members of the consortium have operations. As we expand
our service and product offerings to the consortiums
member associations, and if we begin to receive revenue from
them, our exposure to currency exchange rate fluctuations will
increase. In addition, we may be subject to the following risks:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | increased financial accounting and reporting
    burdens and complexities;
|
| |  | potentially adverse tax consequences;                                     
|
| |  | compliance with a wide variety of complex foreign
    laws and treaties;  
|
| |  | reduced protection for intellectual property
    rights in some countries;

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| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | licenses, tariffs and other trade barriers; and                                                                                     
|
| |  | disruption from political and economic
    instability in the countries in which the consortium member
    associations are located.

These factors may impose additional costs upon us.

Real Estate Industry Risks

Our business is dependent on the strength
of the real estate industry, which is both cyclical and
seasonal.

The real estate industry traditionally has been
cyclical. Recently, sales of real estate in the United States
have been at historically high levels. Economic swings in the
real estate industry may be caused by various factors. When
interest rates are high or general national and global economic
conditions are or are perceived to be weak, there is typically
less sales activity in real estate. A decrease in the current
level of sales of real estate and products and services related
to real estate could adversely affect demand for our family of
websites and our subscription and advertising products and
services. In addition, reduced traffic on our family of websites
would likely cause our subscription and advertising revenue to
decline, which would materially and adversely affect our
business. We may experience seasonality in our business. The
real estate industry generally experiences a decrease in
activity during the winter.

We may particularly be affected by general
economic conditions.

Purchases of real property and related products
and services are particularly affected by negative trends in the
general economy. Substantially all of our revenue has been, and
is expected to continue to be, derived from customers in the
United States. Recent economic indicators, including growth in
gross domestic product, reflect a decline in economic activity
in the United States from prior periods. The success of our
operations depends to a significant extent upon a number of
factors relating to discretionary consumer and business
spending, and the overall economy, as well as regional and local
economic conditions in markets where we operate, including:



| |   |                                                 
| | - | ------------------------------------------------
| |  | perceived and actual economic conditions;       
|
| |  | interest rates;                                 
|
| |  | taxation policies;                              
|
| |  | availability of credit;                         
|
| |  | employment levels;                              
|
| |  | wage and salary levels; and                     
|
| |  | fears of terrorist attacks or the threat of war.

In addition, because a consumers purchase
of real property and related products and services is a
significant investment and is relatively discretionary, any
reduction in disposable income in general may affect us more
significantly than companies in other industries.

Recessionary pressures traditionally impact
real estate markets.

During recessionary periods, there tends to be a
corresponding decline in demand for real estate, generally and
regionally, that could adversely affect certain segments of our
business. Such adverse effects typically are a general decline
in rents and sales prices, a decline in leasing activity, a
decline in the level of investments in, and the value of real
estate, and an increase in defaults by tenants under their
respective leases. All of these, in turn, adversely affect
revenue for fees and brokerage commissions, which are derived
from property sales, and annual rental payments and property
management fees.

We have risks associated with changing
legislation in the real estate industry.

Real estate is a heavily regulated industry in
the U.S., including regulation under the Fair Housing Act, the
Real Estate Settlement Procedures Act and state advertising
laws. In addition, states could enact

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legislation or regulatory policies in the future,
which could require us to expend significant resources to
comply. These laws and related regulations may limit or restrict
our activities. As the real estate industry evolves in the
Internet environment, legislators, regulators and industry
participants may advocate additional legislative or regulatory
initiatives. Should existing laws or regulations be amended or
new laws or regulations be adopted, we may need to comply with
additional legal requirements and incur resulting costs, or we
may be precluded from certain activities. For instance,
Homestore Apartments & Rentals was required to qualify and
register as a real estate agent/broker in the State of
California. To date, we have not spent significant resources on
lobbying or related government issues. Any need to significantly
increase our lobbying or related activities could substantially
increase our operating costs.


Internet Industry Risks

We depend on increased use of the Internet
to expand our real estate-related advertising products and
services.

If the Internet does not continue to be a viable
marketplace for real estate content and information or if the
pace of adoption by consumers of the Internet slows, our
business growth may suffer. Broad acceptance and adoption of the
Internet by consumers and businesses when searching for real
estate and related products and services will continue only if
the Internet continues to provide them with greater efficiencies
and improved access to information.

In addition to selling subscription products and
media services to real estate professionals, we depend on
selling other types of advertisements on our websites.

We have experienced a deterioration in the demand
for our advertising services due to the slowdown in the U.S.
economy, decreased corporate spending and concerns about the
effectiveness of Internet advertising. Our ability to generate
advertising revenue from selling banner advertising, display ads
and sponsorships on our websites will depend on, among other
factors, the development of the Internet as an advertising
medium, the amount of traffic on our websites and our ability to
achieve and demonstrate user demographic characteristics that
are attractive to advertisers. Most potential advertisers and
their advertising agencies have only limited experience with the
Internet as an advertising medium and have not devoted a
significant portion of their advertising expenditures to
Internet-based advertising. No standards have been widely
accepted to measure the effectiveness of web advertising. If
these standards do not develop, existing advertisers might
reduce their current levels of Internet advertising or eliminate
their spending entirely. The widespread adoption of technologies
that permit Internet users to selectively block out unwanted
graphics, including advertisements attached to the web pages,
could also adversely affect the growth of the Internet as an
advertising medium. In addition, advertisers in the real estate
industry, including real estate professionals, have
traditionally relied upon other advertising media, such as
newsprint and magazines, and have invested substantial resources
in other advertising methods. These persons may be reluctant to
adopt a new strategy and advertise on the Internet. If the
demand for the Internet advertising remains sluggish due to
current economic conditions or a weak U.S. economy, our revenue
and operating results could be harmed materially.

Government regulations and legal
uncertainties could affect the growth of the
Internet.

A number of legislative and regulatory proposals
under consideration by federal, state, local and foreign
governmental organizations may lead to laws or regulations
concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party
activities and jurisdiction. Additionally, it is uncertain how
existing laws will be applied to the Internet. The adoption of
new laws or the application of existing laws may decrease the
growth in the use of the Internet, which could in turn decrease
the usage and demand for our services or increase our cost of
doing business.

Taxation of Internet transactions could
slow the use of the Internet.

In November 2001, Congress extended the Internet
Tax Freedom Act, which placed a moratorium on state and local
taxes on Internet based transactions through November 1,
2003. If Congress chooses in the future, however, not to renew
this legislation, U.S., state and local governments would be
free to impose new

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taxes on electronically purchased goods. The
imposition of such taxes could impair the growth of electronic
commerce and thereby adversely affect the growth of our business.


We depend on continued improvements to our
computer network and the infrastructure of the
Internet.

Any failure of our computer systems that causes
interruption or slower response time of our websites or services
could result in a smaller number of users of our websites or the
websites that we host for real estate professionals. If
sustained or repeated, these performance issues could reduce the
attractiveness of our websites to consumers and our subscription
products and media services to real estate professionals,
providers of real estate-related products and services and other
Internet advertisers. Increases in the volume of our website
traffic could also strain the capacity of our existing computer
systems, which could lead to slower response times or system
failures. This would cause the number of real property search
inquiries, advertising impressions, other revenue producing
offerings and our informational offerings to decline, any of
which could hurt our revenue growth and our brand loyalty. We
may need to incur additional costs to upgrade our computer
systems in order to accommodate increased demand if our systems
cannot handle current or higher volumes of traffic. We may not
be able to project accurately the rate, timing or cost of any
increases in our business, or to expand and upgrade our systems
and infrastructure to accommodate any increases in a timely
manner.

Our ability to increase the speed with which we
provide services to consumers and to increase the scope of these
services is limited by and dependent upon the speed and
reliability of the Internet. Consequently, the emergence and
growth of the market for our services is dependent on the
performance of and future improvements to the Internet.

Our internal network infrastructure could
be disrupted.

Our operations depend upon our ability to
maintain and protect our computer systems, located at our
corporate headquarters in Westlake Village, California and our
technology facility in Thousand Oaks, California. Temporary or
permanent outages of our computers or software equipment could
have an adverse effect on our business. Although we have not
experienced any material outages to date, we currently do not
have a fully redundant system for our websites and other
services at an alternate site. Therefore, our systems are
vulnerable to damage from break-ins, unauthorized access,
vandalism, fire, earthquakes, power loss, telecommunications
failures and similar events. Although we maintain insurance
against fires, earthquakes and general business interruptions,
the amount of coverage may not be adequate in any particular
case.

Experienced computer programmers, or hackers, may
attempt to penetrate our network security from time to time.
Although we have not experienced any material security breaches
to date, a hacker who penetrates our network security could
misappropriate proprietary information or cause interruptions in
our services. We might be required to expend significant capital
and resources to protect against, or to alleviate, problems
caused by hackers. We also may not have a timely remedy against
a hacker who is able to penetrate our network security. In
addition to purposeful security breaches, the inadvertent
transmission of computer viruses could expose us to litigation
or to a material risk of loss.

We could face liability for information on
our websites and for products and services sold over the
Internet.

We provide third-party content on our websites,
particularly real estate listings. We could be exposed to
liability with respect to this third-party information. Persons
might assert, among other things, that, by directly or
indirectly providing links to websites operated by third
parties, we should be liable for copyright or trademark
infringement or other wrongful actions by the third parties
operating those websites. They could also assert that our
third-party information contains errors or omissions, and
consumers could seek damages for losses incurred if they rely
upon incorrect information.

We enter into agreements with other companies
under which we share with these other companies revenue
resulting from advertising or the purchase of services through
direct links to or from our family of websites. These
arrangements may expose us to additional legal risks and
uncertainties, including local, state, federal and foreign
government regulation and potential liabilities to consumers of
these services, even if we do

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not provide the services ourselves. We cannot
assure you that any indemnification provided to us in our
agreements with these parties, if available, will be adequate.


Even if these claims do not result in liability
to us, we could incur significant costs in investigating and
defending against these claims. Our general liability insurance
may not cover all potential claims to which we are exposed and
may not be adequate to indemnify us for all liability that may
be imposed.






|        |            
|------- | -----------
|Item 2. | Properties:

We maintain the following principal facilities:

|                                         |  |                      |  |         |  |            |       | 
|---------------------------------------- |  | -------------------- |  | ------- |  | ---------- | ----- | 
|                                         |  |                      |  | Square  |  | Lease     
|                                         |  | Location             |  | Feet    |  | Expiration
|                                         |  |                      |  |         |  |           
|Principal executive and corporate office |  | Westlake Village, CA |  | 137,762 |  |            | 2008  | 
|Technology facility                      |  | Thousand Oaks, CA    |  | 13,717  |  |            | 2006  | 
|Operations and customer service center   |  | Scottsdale, AZ       |  | 62,169  |  |            | 2007  | 
|Welcome Wagon                            |  | Westbury, NY         |  | 60,500  |  |            | owned | 
|Top Producer                             |  | Richmond, BC         |  | 29,098  |  |            | 2003  | 
|Homestyles                               |  | St. Paul, MN         |  | 24,645  |  |            | 2006  | 
|WyldFyre Technologies                    |  | Campbell, CA         |  | 19,492  |  |            | 2004  | 
|Enterprise                               |  | Milwaukee, WI        |  | 13,016  |  |            | 2005  | 
|Computers for Tracts                     |  | Orange, CA           |  | 6,300   |  |            | 2006  | 

We believe that our existing facilities and
office space are adequate to meet current requirements.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

From time to time, we are party to various
litigation and administrative proceedings relating to claims
arising from our operations in the ordinary course of business.
As of the date of this Form 10-K and except as set forth
herein, we are not a party to any litigation or administrative
proceedings that management believes will have a material
adverse effect on our business, results of operations, financial
condition or cash flows.

Shareholder Litigation

Beginning in December 2001, numerous separate
complaints purporting to be class actions were filed in various
jurisdictions alleging that we and certain of our current and
former officers and directors violated certain provisions of the
Securities Exchange Act of 1934, as amended. The complaints
contain varying allegations, including that we made materially
false and misleading statements with respect to our 2000 and
2001 financial results included in our filings with the SEC,
analysts reports, press releases and media reports. The
complaints seek an unspecified amount of damages. In March 2002,
the California State Teachers Retirement System was named
lead plaintiff (the Plaintiff), and the actions have
been consolidated in the United States District Court, Central
District of California. In July 2002, the Plaintiff filed a
consolidated amended class action complaint naming us, certain
of our former officers, directors and employees, along with
MaxWorldwide, Inc. (formerly L90, Inc.) and
PricewaterhouseCoopers LLP. In November 2002, the Plaintiff
filed a first amended consolidated class action complaint naming
us, certain of our current officers and employees, certain of
our former officers, directors and employees and various other
parties, including among others MaxWorldwide, Inc.,
PricewaterhouseCoopers LLP, AOL and Cendant. The amended
complaint makes various allegations, including that we violated
federal securities laws and seeks an unspecified amount of
damages.

On March 7, 2003, the court dismissed, with
prejudice, the Plaintiffs claims against a number of
corporate and individual defendants whom the Plaintiff alleged
either assisted in the planning and execution of the purportedly
fraudulent transactions at issue, or who were parties to those
transactions. Those defendants included MaxWorldwide, Inc., AOL
and Cendant, among others. The court also dismissed, without
prejudice, the Plaintiffs claims against a number of our
current and former officers and employees. With regard to those

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claims dismissed without prejudice, the Plaintiff
has the opportunity to file another amended complaint attempting
to cure the defects in the original claims against those
defendants. At the same time, the court denied the motions to
dismiss of PricewaterhouseCoopers LLP and our former chief
executive officer. We did not file a motion to dismiss the
Plaintiffs claims against us, but answered the complaint.
Accordingly, the March 7, 2003 decision did not make any
ruling with respect to the claims asserted against us.


It is possible that we may be required to pay
substantial damages or a substantial settlement amount in
connection with the litigation, although, as is the case with
any litigation, it is difficult to predict the outcome of this
matter. However, in light of the fact that we determined that it
was necessary to restate our 2000 and 2001 financial results,
due to the circumstances forming the basis of the
Plaintiffs allegations, and the fact that four of our
former employees have pled guilty to violating federal
securities laws in connection with the financial results which
required restatement, this litigation poses a significant risk
of a material adverse effect on the conduct and scope of our
business, our results of operations and our financial position.
Because we are unable to estimate the amount of damages that we
might incur as a result of the outcome of this litigation, we
have not recorded any liability or reserve related to it.

In September 2002, Matt L. Brody filed a class
action complaint in Superior Court for the State of California,
Los Angeles County against us, certain of our former officers
and directors, and certain underwriters, purporting to state
claims under Sections 11, 12(a)(2) and 15 of the Exchange
Act, alleging that our January 26, 2000 registration
statement contained materially false and misleading statements.
In October 2002, defendants removed the action to the United
District Court, Central District of California. As the case is
in a very early stage, we are unable to express an opinion at
this time as to its merits.

In November 2002, Stuart Siegel and certain other
former owners and directors of iPlace, Inc. filed a complaint
against us in the United States District Court, Eastern District
of Pennsylvania alleging fraudulent inducement and promissory
fraud due to misrepresentations by us of our financial condition
prior to our acquisition of iPlace, securities fraud pursuant to
Section 10(b) of the Exchange Act and Rule 10b-5
thereunder and Section 20(a) of the Exchange Act, common
law fraud, negligent misrepresentation, breach of contract, and
unjust enrichment in connection with our acquisition of iPlace
in August 2001. On March 19, 2003, the court granted our
motion to transfer this case to the United States District
Court, Central District of California. We believe this case is
without merit and intend to defend this claim vigorously.

In November 2002, plaintiff Gregory C. Pyfrom
filed a complaint in Superior Court for the State of California,
Ventura County against us and certain of our former officers and
directors, alleging violations of Section 10(b) of the Exchange
Act and Rule 10b-5 thereunder, as well as intentional
fraud, negligent misrepresentation, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing,
violations of California Corporation Code §§ 25400(d)
and 25500, violation of Business and Professions Code §
17200, and negligent and intentional infliction of emotional
distress. As the case is in a very early stage, we are unable to
express an opinion at this time as to its merits.

In December 2002, Jeff Paradise and certain other
former shareholders of iPlace filed a complaint in the United
Sates District Court, Central District of California against us,
alleging violations of Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder, as well as common law fraud and
negligent misrepresentation in connection with our acquisition
of iPlace in August 2001. As the case is in a very early stage,
we are unable to express an opinion at this time as to its
merits.

SEC Investigation

In January 2002, we were notified that the SEC
had issued a formal order of private investigation in connection
with matters relating to the restatement of our financial
results that occurred in March 2002. The SEC has requested that
we provide them with certain documents concerning the
restatement of our financial results. The SEC has also requested
access to certain of our current and former employees for
interviews. We have cooperated and continue to cooperate fully
with the SECs investigation.

In September 2002 and March 2003, certain of our
former employees entered into plea agreements with the United
States Attorneys Office and the SEC in connection with the
investigation. Also in September

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2002, the SEC and the Department of Justice
informed us that they would not bring any enforcement action
against us because of the actions taken by our Board of
Directors and our Audit Committee and our cooperation in the
SECs investigation. Because the investigation is on-going
and we are committed to cooperating with the SEC, we will likely
continue to incur additional costs related to the investigation,
and management time and attention may be diverted until the
investigation concludes.


Derivative Litigation

In January 2002, Robert Sparaco filed a complaint
in California Superior Court, Los Angeles County, derivatively
on our behalf as nominal defendant, against certain of our
current and former officers and directors. Two additional
shareholder derivative actions were filed against substantially
the same defendants on our behalf as nominal defendants. The
three derivative actions allege breaches of fiduciary duty,
negligence, abuse of control, misconduct, waste of corporate
assets and other violations of state law. In March 2002, the
court entered an order consolidating the three actions. In
November 2002, the plaintiffs filed a first-amended consolidated
shareholder derivative complaint. The parties have lodged with
the court a stipulation agreeing to defer all proceedings and
continue all responsive dates until further action by the
parties. As the case is in a very early stage, we are unable to
express an opinion at this time as to its merits.

In January 2002, Jeff Joerg filed a complaint in
Delaware Chancery Court, derivatively on behalf of us as nominal
defendant, against certain of our current and former officers
and directors. The complaint alleges that defendants breached
their fiduciary duties by failing to maintain adequate
accounting controls and by employing improper accounting
practices and procedures. As the case is in a very early stage,
we are unable to express an opinion at this time as to its
merits.

Insurance Coverage Litigation

Between September 2002 and November 2002, Genesis
Insurance Company, Federal Insurance Company, Clarendon National
Insurance Company, Royal Indemnity Company and TIG Insurance
Company of Michigan sent us notices of rescission of the
officers and directors liability policies issued to us for the
period from August 2000 through August 2001. The same carriers
filed complaints to judicially confirm the rescissions or for
declaratory relief in the United States District Court, Central
District of California against us and certain current and former
officers, directors and employees. The complaints allege
misrepresentations contained in the original applications for
insurance, the renewal applications and warranty letters. We
requested that the court stay the Federal Insurance Company and
Genesis Insurance Company actions but those requests were denied
in March 2003. We are in the process of responding to the
complaints. Federal Insurance Companys motion for summary
judgment is scheduled to be heard in May 2003.

In February 2003, TIG Insurance Company dismissed
its federal court rescission action and filed a new rescission
action against us and certain of our current and former officers
and directors in California State Superior Court. Responses are
due in April 2003.

In October 2002, Lumbermens Mutual Casualty
Company rescinded and filed a similar complaint against us and
certain of our current and former officers, directors and
employees to confirm the rescission in the Superior Court of
California, County of Los Angeles. We have filed an answer and
discovery is beginning. Trial has been set for January 2004.

We intend to defend these actions vigorously;
however, we are unable to form a judgment as to the ultimate
outcomes.

AOL Settlement

In April 2000, we entered into a distribution
agreement with AOL. In October 2001, we filed a demand for
arbitration with AOL alleging breaches of certain contractual
obligations. An arbitration hearing was held in July 2002, and
we and AOL submitted proposed findings of fact and conclusions
of law to the tribunal in September 2002. In January 2003, we
and AOL entered into a new marketing agreement that settled the
arbitration.

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As part of the new marketing agreement, which
continues through June 2004, we have the exclusive right to
provide AOL with its real estate listings, and AOL members
retain access to a wide array of our real estate content. AOL
will offer increased promotion and more prominent integration of
our content in a redesigned real estate area on the AOL service.
The parties will continue to share advertising revenue in
certain home-related categories. Over the term of the agreement,
we will make quarterly cash payments of $3.75 million,
totaling $22.5 million.

We and AOL have agreed to terminate our previous
marketing agreement, which would have ended in July 2003. We
will pay AOL $7.5 million in cash to terminate the previous
agreement and also will allow AOL to fully draw down on an
existing $90.0 million letter of credit secured by
restricted cash on our balance sheet. Termination of the
previous agreement also eliminates our responsibility to provide
AOL with an additional make-whole payment in July
2003 which would have been approximately $57.0 million,
payable in cash or stock. Transfer restrictions relating to the
approximately 3.9 million shares of our common stock issued
to AOL under the previous agreement also have been removed.

Other Litigation

In connection with our acquisition of Move.com,
Inc. and Welcome Wagon International, Inc., collectively
referred to as the Move.com Group, Cendant has alleged that we
may have breached certain representations and warranties made in
the acquisition agreement as a result of the restatement of our
2000 financial statements. In connection with the acquisition,
we entered into a series of related agreements with Cendant that
provided us with certain promotion and exclusive data rights and
placed certain restrictions on Cendants ability to dispose
of our shares. Cendant has proposed amendments to certain of the
related agreements in consideration of settling any potential
claims related to our acquisition of the Move.com Group. We have
been engaged with Cendant in discussions relating to
Cendants allegations, and we and Cendant have considered
certain amendments to the agreements that would materially alter
our rights and Cendants restrictions and obligations in
order to settle these potential claims. We cannot assure you
that these discussions will yield a satisfactory resolution.

In June 2000, Anil K. Agarwal filed a petition
for declaratory judgment against us in the District Court of
Douglas County, Nebraska. The lawsuit arises from a transaction
between Dr. Agarwal and Michael K. Luther, in relation to
which Mr. Luther directed InfoTouch Corporation
(InfoTouch), our predecessor, to transfer certain
shares of InfoTouch Series B Preferred Stock to
Dr. Agarwal. Dr. Agarwal seeks a declaratory judgment
that he should have been issued shares of Series B
Preferred stock of InfoTouch sufficient to entitle him to
receive 76,949 shares of common stock (on a pre-split basis),
and that there is a shortfall of 46,950 shares, pre-split
(or 104,375 shares of common stock, post-split) due and owing to
him. As the case is in the early stages of discovery, we are
unable to express an opinion at this time as to its merits.

In November 2000, Amica Mutual Insurance Co.
filed a demand for arbitration against GETKO Group, Inc., or
GETKO, one of our subsidiaries, alleging breach of a Marketing
Services Agreement effective January 2000. Amica is seeking
compensatory and consequential damages and lost profits due to
GETKOs alleged failure to comply with that agreement.
Arbitration of this matter began in February 2003 and should be
completed in April 2003. Although we intend to defend the claims
vigorously and believe that the allegations are without merit,
we are unable to express an opinion as to the probable outcome
of the arbitration.

In December 2001, Pentawave Inc. filed a suit for
fraud, breach of contract and defamation in Ventura County
Superior Court seeking $5.0 million in compensatory and
punitive damages. Although we believe that this case is without
merit and intend to defend this claim vigorously, we are unable
to express an opinion as to the probable outcome of the
litigation. No trial date is currently scheduled, however we
believe it will be set for late spring 2003.

In June 2002, Tren Technologies served a
complaint on us, the NAR and the NAHB in the United States
District Court, Eastern District of Pennsylvania. The complaint
alleges a claim for patent infringement based on activities
related to the websites REALTOR.com® and Homebuilder.com.
Specifically, Tren alleges that it owns a patent on an
application, method and system for tracking demographic customer

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information, including tracking information
related to real estate and real estate demographics information,
and that we have developed an infringing technology for the
NARs REALTOR.com® and the NAHBs Homebuilder.com
websites. The complaint seeks unspecified damages and a
permanent injunction against using the technology. In January
2003, counsel for Tren withdrew their representation. On
February 3, 2003, the court ordered that the case would be
dismissed twenty days later unless prior to that date an
attorney entered an appearance on behalf of Tren along with a
sworn statement that it was counsels intention to
prosecute the action through trial. No qualifying appearance was
entered on or before February 23, 2003, and the case was
dismissed without prejudice. However, we cannot assure you that
Tren will not assert the claim again in the future.







|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

We did not submit any matters to a vote of
security holders during the fourth quarter of the year ended
December 31, 2002.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market Information

Our common stock has been traded on The NASDAQ
SmallCap Market under the symbol HOMS since
November 18, 2002 and, prior to that time, on The NASDAQ
National Market. The following table shows the high and low sale
prices of the common stock as reported by The NASDAQ SmallCap
Market or The NASDAQ National Market, as applicable, for the
periods indicated.

|     |                                           |  |   |       |  |  |   |       | 
|---- | ----------------------------------------- |  | - | ----- |  |  | - | ----- | 
|2001 |                                           |  |   |       |  |  |   |      
|     | First Quarter                             |  | $ | 37.25 |  |  | $ | 16.38 | 
|     | Second Quarter                            |  |   | 37.16 |  |  |   | 21.31 | 
|     | Third Quarter                             |  |   | 36.99 |  |  |   | 6.52  | 
|     | Fourth Quarter                            |  |   | 8.58  |  |  |   | 2.10  | 
|2002 |                                           |  |   |       |  |  |   |      
|     | First Quarter                             |  |   | 3.02  |  |  |   | 0.53  | 
|     | Second Quarter                            |  |   | 2.70  |  |  |   | 1.19  | 
|     | Third Quarter                             |  |   | 1.48  |  |  |   | 0.14  | 
|     | Fourth Quarter                            |  |   | 1.70  |  |  |   | 0.25  | 
|2003 |                                           |  |   |       |  |  |   |      
|     | First Quarter (through February 28, 2003) |  |   | 1.51  |  |  |   | 0.69  | 

As of February 28, 2003, there were
approximately 1,100 record holders of our common stock.

Dividends

We have never declared or paid any cash dividends
on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future, except for an annual
dividend of $0.08 to be paid on the one share of our
Series A preferred stock held by NAR.

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Recent Sales of Unregistered
Securities

There were no sales of unregistered shares during
2002.

Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information as of
December 31, 2002 regarding compensation plans (including
individual compensation arrangements) under which our equity
securities are authorized for issuance.

Equity Compensation Plan Information

|                                                               |  |                   |        |                |  |                      |      |  |  |  |        | 
|-------------------------------------------------------------- |  | ----------------- | ------ | -------------- |  | -------------------- | ---- |  |  |  | ------ | 
|                                                               |  |                   |        |                |  | Number of           
|                                                               |  | Number of         |        | Weighted       |  | Securities          
|                                                               |  | Securities to be  |        | Average        |  | Remaining           
|                                                               |  | Issued Upon       |        | Exercise Price |  | Available for       
|                                                               |  | Exercise of       |        | of Outstanding |  | Future Issuance     
|                                                               |  | Outstanding       |        | Options,       |  | (excluding          
|                                                               |  | Options, Warrants |        | Warrants and   |  | securities reflected
|                                                               |  | and Rights        |        | Rights         |  | in column (a))      
|                                                               |  |                   |        |                |  |                     
|Plan Category                                                  |  | (a)               |        | (b)            |  | (c)                 
|                                                               |  |                   |        |                |  |                     
|                                                               |  |                   |        |                |  |                     
|                                                               |  | (In thousands)    |        |                |  | (In thousands)      
|Equity compensation plans approved by security
    holders     |  |                   | 9,877  |                |  | $                    | 2.67 |  |  |  | 6,557  | 
|Equity compensation plans not approved by
    security holders |  |                   | 14,438 |                |  | $                    | 3.84 |  |  |  | 8,176  | 
|                                                               |  |                   |        |                |  |                      |      |  |  |  |        | 
|Total                                                          |  |                   | 24,315 |                |  | $                    | 3.32 |  |  |  | 14,733 | 
|                                                               |  |                   |        |                |  |                      |      |  |  |  |        | 

Each of the above plans provides that the number
of shares with respect to which options may be granted, and the
number of shares of common stock subject to an outstanding
option, shall be proportionately adjusted in the event of a
subdivision or consolidation of shares or the payment of a stock
dividend on common stock, and the purchase price per share of
outstanding options shall be proportionately revised.

Non-Shareholder Approved Plans

Options are granted from the Homestore, Inc. 2002
Stock Incentive Plan, a new plan established in
January 2002 to attract and retain qualified personnel. No
more then 40% of the available securities granted under this
plan may be awarded to our directors or executive officers.
Option grants under this plan are non-qualified stock options
and generally have a 4-year vesting schedule and a 10-year life.

Other non-shareholder approved plans include the
following acquired plans: the 1997-1998 Stock Incentive
Plan of Cendant Corporation, the Cendant Corporation Move.com
Group 1999 Stock Option Plan, as amended and restated
effective as of March 21, 2000, the Move.com, Inc.
2000 Stock Incentive Plan, the HomeWrite Incorporated
2000 Equity Incentive Plan, the ConsumerInfo.com, Inc.
1999 Stock Option Plan, the iPlace 2000 Stock Option
Plan, the eNeighborhoods, Inc. 1998 Stock Option Plan, the
Qspace, Inc. 1999 Stock Option Plan, the iPlace, Inc.
2001 Equity Incentive Plan and The Hessel Group, Inc.
2000 Stock Option Plan. We did not grant options under any
of these plans in 2002, and we do not plan to do so in the
future.

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Item
6.Selected Financial
Data

You should read the following selected
consolidated financial data together with the consolidated
financial statements and related notes included in
Part II  Item 8. Financial Statements
and Supplementary Data and Part II 
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.

The consolidated statement of operations data for
the years ended December 31, 2002, 2001 and 2000 and the
consolidated balance sheet data as of December 31, 2002 and
2001 are derived from our audited consolidated financial
statements included in Part II 
Item 8. Financial Statements and Supplementary Data.
The consolidated statement of operations data for the years
ended December 31, 1999 and 1998 and the consolidated
balance sheet data as of December 31, 2000, 1999 and 1998
have been derived from our audited consolidated financial
statements not included in this Form 10-K.

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|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |   |   | 
|------------------------------------------------------------------------------ | ------------------------------------------------- | ---------------------------------------- | -------- | ------- | ------- | ---- | ---------- | --------- | ------- | ---- | -------- | ------- | ------- | - | ------- | ------- | ------ | - | ----- | - | - | 
|                                                                               |                                                   |                                         
|                                                                               |                                                   | Year Ended December 31,                 
|                                                                               |                                                   |                                         
|                                                                               |                                                   | 2002                                     |          | 2001    |         | 2000 |            | 1999      |         | 1998
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |     
|                                                                               |                                                   |                                         
|                                                                               |                                                   | (In thousands, except per share amounts)
|Consolidated Statement of Operations
    Data:                                 |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Revenue(2)                                                                     |                                                   | $                                        | 233,455  |         |         | $    | 265,436    |           |         | $    | 181,322  |         |         | $ | 62,580  |         |        | $ |      |  
|Related party revenue                                                          |                                                   |                                          | 31,158   |         |         |      | 38,346     |           |         |      |         |         |         |   |        |         |        |   |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|                                                                               |                                                   | Total revenue                            |          |         | 264,613 |      |            |           | 303,782 |      |          |         | 181,322 |   |         |         | 62,580 |   |       |   |  | 
|Cost of revenue(2)                                                             |                                                   |                                          | 78,304   |         |         |      | 113,490    |           |         |      | 61,222   |         |         |   | 21,965  |         |        |   |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|                                                                               |                                                   | Gross profit                             |          |         | 186,309 |      |            |           | 190,292 |      |          |         | 120,100 |   |         |         | 40,615 |   |       |   |  | 
|Operating expenses:                                                            |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|                                                                               | Sales and marketing(2)                            |                                          |          | 164,629 |         |      |            | 242,174   |         |      |          | 160,122 |         |   |         | 85,110  |        |   |       |  |  
|                                                                               | Product and website development(2)                |                                          |          | 30,279  |         |      |            | 35,722    |         |      |          | 15,554  |         |   |         | 5,380   |        |   |       |  |  
|                                                                               | General and administrative(2)                     |                                          |          | 84,813  |         |      |            | 174,363   |         |      |          | 59,610  |         |   |         | 26,892  |        |   |       | 3 |  
|                                                                               | Amortization of goodwill and intangible assets(1) |                                          |          | 37,165  |         |      |            | 199,291   |         |      |          | 42,868  |         |   |         | 10,192  |        |   |       |  |  
|                                                                               | In-process research and development               |                                          |          |        |         |      |            |          |         |      |          | 4,048   |         |   |         |        |        |   |       |  |  
|                                                                               | Acquisition and restructuring charges             |                                          |          | 12,087  |         |      |            | 50,260    |         |      |          |        |         |   |         |        |        |   |       |  |  
|                                                                               | Impairment of long-lived assets                   |                                          |          | 7,335   |         |      |            | 925,094   |         |      |          |        |         |   |         |        |        |   |       |  |  
|                                                                               | Litigation settlement                             |                                          |          | 23,000  |         |      |            |          |         |      |          |        |         |   |         | 8,406   |        |   |       |  |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|                                                                               | Total operating expenses                          |                                          |          | 359,308 |         |      |            | 1,626,904 |         |      |          | 282,202 |         |   |         | 135,980 |        |   |       | 3 |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Loss from operations                                                           |                                                   |                                          | (172,999 | )       |         |      | (1,436,612 | )         |         |      | (162,102 | )       |         |   | (95,365 | )       |        |   | (3    | )
|Interest income, net                                                           |                                                   |                                          | 2,620    |         |         |      | 10,490     |           |         |      | 23,031   |         |         |   | 2,386   |         |        |   |      |  
|Other expense, net                                                             |                                                   |                                          | (5,682   | )       |         |      | (44,281    | )         |         |      | (6,982   | )       |         |   | (28     | )       |        |   |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Loss from continuing operations                                                |                                                   |                                          | (176,061 | )       |         |      | (1,470,403 | )         |         |      | (146,053 | )       |         |   | (93,007 | )       |        |   | (3    | )
|Gain on disposition of discontinued operations                                 |                                                   |                                          | 11,790   |         |         |      |           |           |         |      |         |         |         |   |        |         |        |   |      |  
|Income from discontinued operations                                            |                                                   |                                          | 846      |         |         |      | 4,814      |           |         |      |         |         |         |   |        |         |        |   |      |  
|Accretion of redemption value and dividends on
    convertible preferred stock |                                                   |                                          |         |         |         |      |           |           |         |      |         |         |         |   | (2,299  | )       |        |   |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Net loss                                                                       |                                                   | $                                        | (163,425 | )       |         | $    | (1,465,589 | )         |         | $    | (146,053 | )       |         | $ | (95,306 | )       |        | $ | (3    | )
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Basic and diluted income (loss) per share:                                     |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Continuing operations                                                          |                                                   | $                                        | (1.49    | )       |         | $    | (13.69     | )         |         | $    | (1.83    | )       |         | $ | (2.32   | )       |        | $ |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Discontinued operations                                                        |                                                   | $                                        | 0.11     |         |         | $    | 0.04       |           |         | $    |         |         |         | $ |        |         |        | $ |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Net loss                                                                       |                                                   | $                                        | (1.39    | )       |         | $    | (13.64     | )         |         | $    | (1.83    | )       |         | $ | (2.32   | )       |        | $ |      |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  
|Shares used to calculate basic and diluted per
    share amounts               |                                                   |                                          | 117,900  |         |         |      | 107,433    |           |         |      | 79,758   |         |         |   | 41,142  |         |        |   | 9,173 |  
|                                                                               |                                                   |                                          |          |         |         |      |            |           |         |      |          |         |         |   |         |         |        |   |       |  



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We adopted SFAS No. 142 in 2002 and ceased
    amortizing goodwill as required by that standard.                                           
|   
|(2) | The following chart summarizes the stock-based
    charges that have been included in the following captions for
    the periods presented:

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|                           |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |   | 
|-------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | - | 
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  | 2002                    |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                           |  |                         |        |      |  |      |        |      |  |     
|                           |  |                        
|                           |  | (In thousands)         
|Stock-based Charges:       |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |   | 
|Revenue                    |  | $                       | 1,501  |      |  | $    | 2,456  |      |  | $    | 6,233  |  |  | $ |       |  |  | $ |  | 
|Cost of revenue            |  |                         | 134    |      |  |      | 383    |      |  |      | 607    |  |  |   | 943    |  |  |   |  | 
|Sales and marketing        |  |                         | 63,848 |      |  |      | 71,188 |      |  |      | 45,148 |  |  |   | 14,726 |  |  |   |  | 
|Product development        |  |                         | 127    |      |  |      | 361    |      |  |      | 572    |  |  |   | 447    |  |  |   |  | 
|General and administrative |  |                         | 1,297  |      |  |      | 6,237  |      |  |      | 3,095  |  |  |   | 5,111  |  |  |   |  | 
|                           |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |   | 
|                           |  | $                       | 66,907 |      |  | $    | 80,625 |      |  | $    | 55,655 |  |  | $ | 21,227 |  |  | $ |  | 
|                           |  |                         |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |   | 

|                                     |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |     |  
|------------------------------------ |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | --- | -
|                                     |  |               
|                                     |  | December 31,  
|                                     |  |               
|                                     |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                     |  |                |         |      |  |      |         |      |  |     
|                                     |  |               
|                                     |  | (In thousands)
|Consolidated Balance Sheet Data:     |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |     |  
|Cash and cash equivalents            |  | $              | 80,463  |      |  | $    | 38,272  |      |  | $    | 167,576 |  |  | $ | 90,382  |  |  | $ | 71  |  
|Working capital (deficiency)         |  |                | (80,763 | )    |  |      | (31,888 | )    |  |      | 253,638 |  |  |   | 40,822  |  |  |   | 1   |  
|Total assets                         |  |                | 379,208 |      |  |      | 615,037 |      |  |      | 893,350 |  |  |   | 276,563 |  |  |   | 71  |  
|Notes payable, long term             |  |                |        |      |  |      |        |      |  |      |        |  |  |   | 633     |  |  |   |    |  
|Total stockholders equity (deficit) |  |                | 38,730  |      |  |      | 183,256 |      |  |      | 603,479 |  |  |   | 195,473 |  |  |   | (95 | )




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

You should read the following discussion in
conjunction with our audited consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000 and
related notes included in Part II  Item 8.
Financial Statements and Supplementary Data.

Overview

We have created an online service that is the
leading consumer destination on the Internet for home and real
estate-related information, products and media services, based
on the number of visitors, time spent on the websites and number
of property listings. We provide a wide variety of information
and tools for consumers and are a 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 timely and
comprehensive 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 NAR, NAHB, hundreds of MLSs, the MHI, and
leading real estate franchisors, including the six largest
franchises, brokers, builders and apartment owners. Under our
agreement with NAR, we operate NARs official website,
REALTOR.com®. Under our agreement with NAHB, we operate its
new home listing website, HomeBuilder.com. Under our agreements
with NAR, NAHB, and MHI we receive preferential promotion in
their marketing activities.

Basis of
Presentation

Initial Business and Reorganization of Holding
Structure.We were incorporated in
1993 under the name of InfoTouch Corporation 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 November 26, 1996,
we entered into a series of agreements with NAR and several
investors and transferred technology and assets 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 in turn contributed the

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assets and technology contributed by InfoTouch as
well as the NSI capital to a newly formed entity, RealSelect,
Inc., or RealSelect, in exchange for common stock representing
an 85% ownership interest in RealSelect. Also effective
November 26, 1996, RealSelect entered into a number of
formation agreements with and issued cash and common stock
representing a 15% ownership interest in RealSelect to NAR in
exchange for the rights to operate the REALTOR.com® web
site and pursue commercial opportunities relating to the listing
of real estate on the Internet. Our initial operating activities
primarily consisted of recruiting personnel, developing our
website content and raising our initial capital. We developed
our first website, REALTOR.com®, in cooperation with NAR
and actively began marketing our advertising products and
services to real estate professionals in January 1997. 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. InfoTouch
changed the corporate name to Homestore.com, Inc. in August
1999. We changed our name to Homestore, Inc. in May 2002.


Our historical consolidated financial statements
reflect the results of operations of Homestore, Inc., formerly
InfoTouch. For the year ended December 31, 1998, and through the
reorganization on February 4, 1999, Homestore was a holding
company whose sole business was managing its investment in
RealSelect through LLC. 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. A comparison of our historical results of operations 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 2000, we acquired WyldFyre Technologies, Inc., or
WyldFyre, a leading developer of technology solutions for real
estate professionals to access MLS information via the Internet,
for $34.0 million in stock. In May 2000, we acquired 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
$7.9 million may also be paid in cash or stock, if certain
defined targets are met during the years ended December 31,
2002 through December 31, 2004. The selling stockholders
have earned approximately $5.0 million in contingent
consideration for performance targets related to the years ended
December 31, 2000 and 2001. 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. In
January 2001, we acquired certain assets and licenses and
assumed certain liabilities from Internet Pictures Corporation,
or iPIX, for $7.1 million in cash and a note in the amount
of $2.3 million. In January 2001, we acquired certain
assets and assumed certain liabilities from Computers for
Tracts, Inc., or CFT, for approximately $4.5 million in
cash and 162,850 shares of our common stock valued at
approximately $5.0 million.

In February 2001, we acquired all the outstanding
shares of HomeWrite, Inc., or HomeWrite, in exchange for
196,549 shares of our common stock valued at
$5.6 million and assumed the HomeWrite stock option plan
consisting of 196,200 outstanding stock options with an
estimated fair value of $4.5 million. In February 2001, we
acquired certain assets and assumed certain liabilities from
Homebid.com, Inc. for approximately $3.5 million in cash.
In February 2001, we acquired all of the outstanding shares of
the Move.com Group, from Cendant Corporation, or Cendant, valued
at approximately $745.7 million. In connection with the
acquisition, 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.
Cendant is restricted in its ability to sell the Homestore
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 shares
of our common stock. In connection with our acquisition of
Move.com, Inc. and Welcome Wagon International, Inc.,
collectively referred to as the Move.com Group, Cendant has
alleged that we may have breached certain representations and
warranties made in the acquisition agreement as a result of the
restatement of our 2000 financial statements. See
Item 3. Legal Proceedings  Other
Litigation for additional information.

In May 2001, we acquired certain assets and
assumed certain liabilities from Homestyles Publishing and
Marketing, Inc. for $14.5 million in cash.

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In August 2001, we acquired all the outstanding
shares of iPlace, Inc., or iPlace, for approximately
$73.0 million in cash and 3.5 million shares of our
common stock valued at $80.3 million. In connection with
the transaction, we assumed the iPlace stock option plan
consisting of approximately 1.1 million outstanding stock
options with an estimated fair value of $16.3 million. The
acquisitions described above have been accounted for under the
purchase method in accordance with generally accepted accounting
principles. The primary subsidiary of iPlace was sold in 2002.
See Dispositions section below.

Transaction with Cendant and Real Estate
Technology Trust.In connection with
and contingent upon the closing 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 by us.
Under the commercial agreements, RETT committed to purchase
$75.0 million in products and services to be delivered to
agents, brokers and other Cendant real estate franchisees over
the next three years. Subsequent to the closing of the
acquisition of the Move.com Group, we entered into additional
commercial agreements with Cendant and RETT. The total
contractual value of all commercial agreements entered into
during 2001 is approximately $95.5 million, resulting in
$82.5 million in future revenue. Revenue of
$31.2 million and $38.3 million related to these
transactions was recognized in 2002 and 2001, respectively. This
revenue was reported separately as revenue from related parties
in these financial statements. There were no revenues from
Cendant or RETT in 2000. It is not practical to separately
determine the costs of such revenues. During the years ended
December 31, 2002 and 2001, we had received approximately
$12.0 million and $83.3 million of cash, respectively,
and had recorded at December 31, 2002 and 2001 deferred
revenue of approximately $13.5 million and
$37.0 million, respectively, related to these agreements.
This deferred revenue will be recognized over the next two years.

The business purpose of these commercial
agreements was to extend our product and service offerings to a
significant concentration of real estate professionals and to
establish access to an effective and efficient distribution
channel for current and future product and service offerings.
The pricing under these commercial arrangements was negotiated
at arms length and on a discrete basis for each of the
various products and services. Products and services to be
provided under these arrangements include personalized
multi-page websites for real estate agents, subscription-based
products and services targeted at individual real estate
brokerage offices, virtual tour technology software, customized
real estate professional productivity software, as well as other
products and services such as marketing and training. Sales of
the subscription-based products are for specified periods of
time ranging between one and two years. At the end of the
contractual term for each of the subscription-based products, we
may have to negotiate renewal terms with the individual real
estate professionals.

Dispositions

On March 19, 2002, we entered into an
agreement to sell our ConsumerInfo division, a former subsidiary
of iPlace, to Experian Holdings, Inc., or Experian, for
$130.0 million in cash. The transaction closed on
April 2, 2002. The sale generated net proceeds of
approximately $117.1 million after transaction fees and
monies placed in escrow. On March 26, 2002, MemberWorks
Incorporated, or MemberWorks, one of the former owners of
iPlace, obtained a court order requiring us to set aside
$58.0 million of the proceeds against a potential claim
MemberWorks had against us.

On August 9, 2002, we reached a settlement
in the MemberWorks litigation, in which MemberWorks and certain
other former iPlace shareholders received $23.0 million,
with the remaining $35.0 million plus accrued interest
being transferred to us resulting in net proceeds to us of
$94.1 million. In addition, the litigation was dismissed
and MemberWorks released all claims against us relating to the
sale of iPlace. We have included the cost of the settlement in
our results of operations for the year ended December 31,
2002.

Pursuant to Statement of Financial Accounting
Standards, or SFAS, No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, our
consolidated financial statements reflect the disposition of our
ConsumerInfo division, as discontinued operations. Accordingly,
the revenue, costs and expenses, and cash flows of the
ConsumerInfo division through December 31, 2002, have been
excluded from the respective

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captions in the Consolidated Statements of
Operations and Consolidated Statements of Cash Flows and have
been reported as Income (loss) from discontinued
operations, and as Net cash provided by (used in)
discontinued operations. The $11.8 million gain
associated with the disposition of the ConsumerInfo division is
recorded as Gain on disposition of discontinued
operations, in the Consolidated Statement of Operations.
As part of the sale, $10.0 million of the purchase price
was put in escrow to secure our indemnification obligations. As
of December 31, 2002, cash in escrow was $9.3 million.
To the extent the escrow is released to us, we will recognize
additional gain on disposition of discontinued operations. The
escrow is scheduled to terminate in the third quarter of 2003. A
portion of the escrow can be released prior to the scheduled
termination date if both parties to the agreement agree to a
release of funds. Total revenue and income from discontinued
operations was $19.5 million and $846,000, respectively,
for the year ended December 31, 2002. Total revenue and
loss from discontinued operations was $21.3 million and
$4.8 million, respectively, for the year ended
December 31, 2001.


The calculation of the gain on the sale of the
ConsumerInfo division is as follows (in thousands):

|                         |                                                               |   |         |         |  
|------------------------ | ------------------------------------------------------------- | - | ------- | ------- | -
|Gross proceeds from sale |                                                               | $ | 130,000 |        
|Less:                    |                                                               |   |         |        
|                         | Cash subject to escrow                                        |   |         | 10,000  |  
|                         | Net assets of the ConsumerInfo division                       |   |         | 106,321 |  
|                         | Transaction costs                                             |   |         | 2,918   |  
|                         | Cash and Homestore stock received from purchase
    of iPlace |   |         | (1,029  | )
|                         |                                                               |   |         |        
|                         | Gain recognized on the sale                                   |   | $       | 11,790  |  
|                         |                                                               |   |         |        

The cash and stock received from the purchase of
iPlace relates to the settlement of the original escrow related
to our purchase of iPlace.

Critical
Accounting Policies

Our discussion and analysis of our financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those
related to revenue recognition, uncollectible receivables,
investment values, intangible and other long-lived assets and
contingencies. We base our estimates on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.

We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial
statements: revenue recognition; valuation allowances,
specifically the allowance for doubtful accounts; accounting for
investments; valuation of goodwill, identified intangibles and
other long-lived assets; accounting for business combinations;
and legal contingencies.

Revenue
Recognition

We derive our revenue primarily from three
sources: (i) subscription revenue, which includes monthly
and annual fees from licensed real estate professionals to
promote their product offerings on our websites or to utilize
our proprietary software; (ii) software revenue, which
includes software licenses, software development, hardware
services and support revenue which includes software
maintenance, training, consulting and website hosting revenue
and; (iii) advertising revenue for running on-line
advertising and sponsorships on our websites or offline
advertising placed in our publications. As described below,
significant management judgments and estimates must be made and
used in connection with the revenue recognized in any accounting
period.

We generate recurring revenue from several
sources, including the sale of subscriptions to be included on
our websites, from maintenance and support on our software
products and from our hosted solutions.

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Recurring revenue is typically based on one-year
renewable contracts and is recognized ratably over the contract
period. Cash received in advance is recorded as deferred
revenue. Recurring revenue from hosted solutions is billed
monthly over a contract term of typically one year.


We generally license our software products in
three ways: (i) on a one-year term basis; (ii) on a
perpetual basis; and (iii) on a monthly subscription. Our
hosting arrangements require customers to pay a fixed fee and
receive service over a period of time, generally one year. We
recognize revenue from the sale of software licenses when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed or determinable and collection
of the resulting receivable is reasonably assured. Delivery
generally occurs when product is delivered to a common carrier.

We apply the provisions of Statement of Position,
or SOP, 97-2, Software Revenue Recognition, as
amended by Statement of Position 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain
Transactions to all transactions involving the sale of
software. Software license revenue is recognized upon all of the
following criteria being satisfied: (i) the execution of a
license agreement; (ii) product delivery; (iii) fees
are fixed or determinable; (iv) collectibility is
reasonably assured; and (v) all other significant
obligations have been fulfilled. For software license agreements
in which customer acceptance is a condition of earning the
license fees, revenue is not recognized until acceptance occurs.
For arrangements containing multiple elements, such as software
license fees, consulting services and maintenance, and where
vendor-specific objective evidence, or VSOE, of fair value
exists for all undelivered elements, we account for the
delivered elements in accordance with the residual
method prescribed by SOP 98-9. For arrangements in which
VSOE does not exist for each element, including specified
upgrades, revenue is deferred and not recognized until delivery
of the element without VSOE has occurred. We also generate
non-recurring revenue from consulting fees for implementation,
installation, data conversion, and training related to the use
of our proprietary and third-party licensed products. We
recognize revenue for these services as they are performed, as
they are principally contracted for on a time and material
basis. Our arrangements do not generally include acceptance
clauses. However, if an arrangement includes an acceptance
provision, acceptance occurs upon the earlier of receipt of a
written customer acceptance or expiration of the acceptance
period. Certain software products are sold in annual
subscriptions, and accordingly, revenue is deferred and
recognized ratably over the term of the contract.

We recognize revenue for maintenance services
ratably over the contract term. Our training and consulting
services are billed based on hourly rates and we generally
recognize revenue as these services are performed. Payments for
support and services are generally made in advance and are
non-refundable. However, at the time of entering into a
transaction, we assess whether or not any services included
within the arrangement will require us to perform significant
work either to alter the underlying software or to build
additional complex interfaces so that the software performs as
the customer requests. If these services are included as part of
an arrangement, and management is able to accurately estimate
the progression to completion, we recognize the entire fee using
the percentage of completion method. We estimate the percentage
of completion based on the total costs incurred to date as a
percentage of estimated total costs to complete and we monitor
our progress against plan to insure our estimates are materially
accurate. We recognize estimated losses in the periods in which
such losses are reasonably expected. For projects in which we
are unable to estimate our progression to completion, such
revenue is recognized in the period in which the project is
completed.

We also sell online and offline advertising.
Online advertising revenue includes three revenue streams:
(i) impression based, (ii) fixed fee subscriptions and
(iii) affiliate revenue share agreements. The impressions
based agreements range from spot purchases to 12 month
contracts. The impression based revenue is recognized based upon
actual impressions delivered and viewed by a user in a period.
The fixed fee subscription revenue is recognized ratably over
the period in which the services are provided. The affiliate
revenue is recognized in the period in which the affiliate
partner provides the services. We measure performance related to
advertising obligations on a monthly basis prior to the
recording of revenue. Offline advertising revenue is recognized
when the publications in which the advertising is displayed are
shipped.

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We record and measure the fair value of equity
received in exchange for advertising services in accordance with
the provisions of EITF 00-8, Accounting by a Grantee for
an Equity Instrument to be Received in Conjunction with
Providing Goods or Services. We recognize revenue from
advertising barter transactions in accordance with EITF 99-17,
Accounting for Advertising Barter Transactions.
Revenue, from these transactions, is 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
transactions. We did not enter into any advertising barter
transactions during 2002. There was no revenue from these types
of transactions during the year ended December 31, 2002.
During the years ended December 31, 2001 and 2000, revenue
from equity-for-services and advertising barter transactions was
less than 5% of revenue.

We assess collection based on a number of
factors, including past transaction history with the customer
and the creditworthiness of the customer. We do not request
collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash.

Allowance for
Doubtful Accounts

Our estimate for the allowance for doubtful
accounts related to trade receivables is based on two methods.
The amounts calculated from each of these methods are combined
to determine the total amount to be reserved. First, we evaluate
specific accounts where we have information that the customer
may have an inability to meet its financial obligations. In
these cases, we use our judgment, based on the best available
facts and circumstances, and record a specific reserve for that
customer against amounts due to reduce the receivable to the
amount that is expected to be collected. These specific reserves
are reevaluated and adjusted as additional information is
received that impacts the amount reserved. Second, a general
reserve is established for all customers based on a range of
percentages applied to aging categories. These percentages are
based on historical collection and write-off experience. If
circumstances change (i.e. higher than expected defaults or an
unexpected material adverse change in a major customers
ability to meet its financial obligation to us), our estimates
of the recoverability of amounts due to us could be reduced by a
material amount.

Accounting for
Investments

In the past, we have invested in equity
instruments of privately-held companies for business and
strategic purposes. These investments were included in other
long-term assets and were accounted for under the cost method
when ownership is less than 20% and we do not have the ability
to exercise significant influence over operations and the equity
method when ownership is greater than 20% or we have the ability
to exercise significant influence.

We periodically reviewed our investments for
instances where fair value is less than cost and the decline in
value is determined to be other than temporary. Such evaluation
is dependent on the specific facts and circumstances. Factors
that we consider in determining whether an other-than-temporary
decline in value has occurred include: the market value of the
security in relation to its cost basis; the financial condition
of the investee; and the intent and ability to retain the
investment for a sufficient period of time to allow for recovery
in the market value of the investment.

If the decline in value was judged to be other
than temporary, the basis of the security is written down to
fair value and the resulting loss was charged to operations. In
evaluating the fair value of our equity investments our policy
includes, but is not limited to, reviewing each of the entities
cash positions, recent financing valuations, operational
performance, revenue and earnings forecasts, liquidity forecasts
and financing needs and general economic factors, as well as
management and ownership trends. Our evaluation of the fair
value of our investment in these entities is inherently
subjective and may contribute to significant volatility in our
reported results of operations based upon the timing and nature
of write-downs recorded. In 2001, we wrote down all of our
remaining cost and equity investments. We have no intention of
making similar investments of a material amount in the future.

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Valuation of
Goodwill, Identified Intangibles and Other Long-lived
Assets

We test goodwill and intangible assets for
impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets and test property, plant and
equipment for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. We assess the impairment of goodwill, identifiable
intangible assets and other long-lived assets whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | a significant decline in actual and projected
    advertising and software license revenue;                       
|
| |  | a significant decline in the market value of our
    common stock;                                                
|
| |  | a significant decline in performance of certain
    acquired companies relative to their original projection;     
|
| |  | a significant difference between our net book
    value and our market value;                                     
|
| |  | a significant decline in our operating results
    relative to our operating forecasts;                           
|
| |  | a loss of key customer relationships coupled with
    the renegotiation of existing arrangements;                 
|
| |  | a significant change in the manner of our use of
    the acquired assets or the strategy for our overall business;
|
| |  | a significant decrease in the market value of an
    asset;                                                       
|
| |  | a shift in technology demands and development; and                                                                
|
| |  | a significant turnover in key management or other
    personnel.                                                  

When we determine that the carrying value of
goodwill, other intangible assets and other long lived assets
may not be recoverable based upon the existence of one or more
of the above indicators of impairment, we measure any impairment
based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate
with the risk inherent in our current business model. In the
fourth quarter of 2001 and 2002, we recognized an impairment of
our long-lived assets.

We adopted SFAS No. 142, Goodwill and
Other Intangible Assets,on January 2002. Under SFAS
No. 142, goodwill is no longer amortized, but is tested for
impairment at a reporting unit level on an annual basis and
between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its carrying value amount. Events or
circumstances which could trigger an impairment review include a
significant adverse change in legal factors or in the business
climate, an adverse action or assessment by a regulator,
unanticipated competition, a loss of key personnel, significant
changes in the manner of our use of the acquired assets or the
strategy for our overall business, significant negative industry
or economic trends, significant declines in our stock price for
a sustained period or significant underperformance relative to
expected historical or projected future operating results.

In testing for a potential impairment of
goodwill, we first compare the estimated fair value of the
Company with book value, including goodwill. If the estimated
fair value exceeds book value, goodwill is considered not to be
impaired and no additional steps are necessary. If, however, the
fair value of the Company is less than book value, then we are
required to compare the carrying amount of the goodwill with its
implied fair value. The estimate of implied fair value of
goodwill may require independent valuations of certain
internally generated and unrecognized intangible assets such as
our subscriber base, software and technology and patents and
trademarks. If the carrying amount of our goodwill exceeds the
implied fair value of that goodwill, an impairment loss would be
recognized in an amount equal to the excess.

Accounting for
Business Combinations

We have acquired a number of companies over the
past four years and all have been accounted for as purchase
transactions. Under the purchase method of accounting, the cost,
including transaction costs, are

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allocated to the underlying net assets, based on
their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill.


The judgments made in determining the estimated
fair value and expected useful lives assigned to each class of
assets and liabilities acquired can significantly impact net
income. For example, different classes of assets will have
useful lives that differ (i.e., the useful life of acquired
technologies may not be the same as the useful life of acquired
content or customer lists). Consequently, to the extent a
longer-lived asset is ascribed greater value under the purchase
method than a shorter-lived asset, there may be less
amortization recorded in a given period.

Determining the fair value of certain assets and
liabilities acquired is judgmental in nature and often involves
the use of significant estimates and assumptions. As provided by
the accounting rules, we have used the one-year period following
the consummation of acquisitions to finalize estimates of the
fair value of assets and liabilities acquired. One of the areas
that requires more judgment in determining fair values and
useful lives is intangible assets. To assist in this process, we
have obtained appraisals from independent valuation firms for
certain intangible assets. While there were a number of
different methods used in estimating the value of the
intangibles acquired, there were two approaches primarily used:
discounted cash flow and market multiple approaches. Some of the
more significant estimates and assumptions inherent in the two
approaches include: projected future cash flows (including
timing); discount rate reflecting the risk inherent in the
future cash flows; perpetual growth rate; determination of
appropriate market comparables; and the determination of whether
a premium or a discount should be applied to comparables. Most
of the above assumptions were made based on available historical
information.

The value of our intangible and other long-lived
assets, including goodwill, is exposed to future adverse changes
if we experience declines in operating results or experience
significant negative industry or economic trends or if future
performance is below historical trends. We periodically review
intangible assets and goodwill for impairment using the guidance
of applicable accounting literature. We continually review the
events and circumstances related to our financial performance
and economic environment for factors that would provide evidence
of the impairment of goodwill.

Legal
Contingencies

We are currently involved in certain legal
proceedings, as discussed in
Part I  Item 3 Legal
Proceedings. Because of the uncertainties related to both
the amount and range of loss on the remaining pending
litigation, we are unable to make a reasonable estimate of the
liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the
potential liability related to our pending litigation and revise
our estimates. Such revisions in our estimates of the potential
liability could materially impact our results of operations and
financial position.

Results of Operations

We have only a limited operating history and our
business model has been modified over the past two years. Our
prospects should 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 our operational and financial systems. Although our
revenue grew significantly in recent periods, we have been
unable to sustain this growth and have had to reduce our expense
structure. 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 in
Part I  Item 1. Business  Risk
Factors.

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|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |         |         | 
|---------------------------------------------- | ------------------------------------------------- | ------------------------ | -------- | ------- | ------- | ---- | ---------- | ------- | --------- | - | -------- | ------- | ------- | 
|                                               |                                                   |                         
|                                               |                                                   | Year Ended December 31, 
|                                               |                                                   |                         
|                                               |                                                   | 2002                     |          | 2001    |         | 2000
|                                               |                                                   |                          |          |         |         |     
|                                               |                                                   |                         
|                                               |                                                   | (In thousands)          
|Consolidated Statement of Operations
    Data: |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|Revenue(2)                                     |                                                   | $                        | 233,455  |         |         | $    | 265,436    |         |           | $ | 181,322  |        
|Related party revenue                          |                                                   |                          | 31,158   |         |         |      | 38,346     |         |           |   |         |        
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|                                               | Total revenue                                     |                          |          | 264,613 |         |      |            | 303,782 |           |   |          | 181,322 |        
|Cost of revenue(2)                             |                                                   |                          | 78,304   |         |         |      | 113,490    |         |           |   | 61,222   |        
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|                                               | Gross profit                                      |                          |          | 186,309 |         |      |            | 190,292 |           |   |          | 120,100 |        
|Operating expenses:                            |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|                                               | Sales and marketing(2)                            |                          |          | 164,629 |         |      |            | 242,174 |           |   |          | 160,122 |        
|                                               | Product and website development(2)                |                          |          | 30,279  |         |      |            | 35,722  |           |   |          | 15,554  |        
|                                               | General and administrative(2)                     |                          |          | 84,813  |         |      |            | 174,363 |           |   |          | 59,610  |        
|                                               | Amortization of goodwill and intangible assets(1) |                          |          | 37,165  |         |      |            | 199,291 |           |   |          | 42,868  |        
|                                               | In-process research and development               |                          |          |        |         |      |            |        |           |   |          | 4,048   |        
|                                               | Acquisition and restructuring charges             |                          |          | 12,087  |         |      |            | 50,260  |           |   |          |        |        
|                                               | Impairment of long-lived assets                   |                          |          | 7,335   |         |      |            | 925,094 |           |   |          |        |        
|                                               | Litigation settlement                             |                          |          | 23,000  |         |      |            |        |           |   |          |        |        
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|                                               |                                                   | Total operating expenses |          |         | 359,308 |      |            |         | 1,626,904 |   |          |         | 282,202 | 
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|Loss from operations                           |                                                   |                          | (172,999 | )       |         |      | (1,436,612 | )       |           |   | (162,102 | )      
|Interest income, net                           |                                                   |                          | 2,620    |         |         |      | 10,490     |         |           |   | 23,031   |        
|Other expense, net                             |                                                   |                          | (5,682   | )       |         |      | (44,281    | )       |           |   | (6,982   | )      
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|Loss from continuing operations                |                                                   |                          | (176,061 | )       |         |      | (1,470,403 | )       |           |   | (146,053 | )      
|Gain on disposition of discontinued operations |                                                   |                          | 11,790   |         |         |      |           |         |           |   |         |        
|Income from discontinued operations            |                                                   |                          | 846      |         |         |      | 4,814      |         |           |   |         |        
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        
|Net loss                                       |                                                   | $                        | (163,425 | )       |         | $    | (1,465,589 | )       |           | $ | (146,053 | )      
|                                               |                                                   |                          |          |         |         |      |            |         |           |   |          |        



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We adopted SFAS No. 142 in 2002 and ceased
    amortizing goodwill as required by that standard.                                           
|   
|(2) | The following chart summarizes the stock-based
    charges that have been included in the following captions for
    the periods presented:

|                                |  |                         |        |      |  |      |        |  |  |   |        | 
|------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2002                    |        | 2001 |  | 2000
|                                |  |                         |        |      |  |     
|                                |  |                        
|                                |  | (In thousands)         
|Revenue                         |  | $                       | 1,501  |      |  | $    | 2,456  |  |  | $ | 6,233  | 
|Cost of revenue                 |  |                         | 134    |      |  |      | 383    |  |  |   | 607    | 
|Sales and marketing             |  |                         | 63,848 |      |  |      | 71,188 |  |  |   | 45,148 | 
|Product and website development |  |                         | 127    |      |  |      | 361    |  |  |   | 572    | 
|General and administrative      |  |                         | 1,297  |      |  |      | 6,237  |  |  |   | 3,095  | 
|                                |  |                         |        |      |  |      |        |  |  |   |        | 
|                                |  | $                       | 66,907 |      |  | $    | 80,625 |  |  | $ | 55,655 | 
|                                |  |                         |        |      |  |      |        |  |  |   |        | 

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|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |     |     | 
|---------------------------------------------- | ---------------------------------------------- | ------------------------ | --- | ---- | --- | ---- | ---- | --- | --- |  | --- | --- | --- | 
|                                               |                                                | 2002                     |     | 2001 |     | 2000
|                                               |                                                |                          |     |      |     |     
|As a Percentage of Revenue:                    |                                                |                          |     |      |     |      |      |     |     |  |     |    
|Revenue                                        |                                                |                          | 88  | %    |     |      | 87   | %   |     |  | 100 | %  
|Related party revenue                          |                                                |                          | 12  |      |     |      | 13   |     |     |  |    |    
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    
|                                               | Total revenue                                  |                          |     | 100  |     |      |      | 100 |     |  |     | 100 |    
|Cost of revenue                                |                                                |                          | 30  |      |     |      | 37   |     |     |  | 34  |    
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    
|                                               | Gross profit                                   |                          |     | 70   |     |      |      | 63  |     |  |     | 66  |    
|Operating expenses:                            |                                                |                          |     |      |     |      |      |     |     |  |     |    
|                                               | Sales and marketing                            |                          |     | 62   |     |      |      | 80  |     |  |     | 88  |    
|                                               | Product and website development                |                          |     | 11   |     |      |      | 12  |     |  |     | 9   |    
|                                               | General and administrative                     |                          |     | 32   |     |      |      | 57  |     |  |     | 33  |    
|                                               | Amortization of goodwill and intangible assets |                          |     | 14   |     |      |      | 66  |     |  |     | 24  |    
|                                               | In-process research and development            |                          |     |     |     |      |      |    |     |  |     | 2   |    
|                                               | Acquisition and restructuring charges          |                          |     | 5    |     |      |      | 17  |     |  |     |    |    
|                                               | Impairment of long-lived assets                |                          |     | 3    |     |      |      | 305 |     |  |     |    |    
|                                               | Litigation settlement                          |                          |     | 9    |     |      |      |    |     |  |     |    |    
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    
|                                               |                                                | Total operating expenses |     |      | 136 |      |      |     | 537 |  |     |     | 156 | 
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    
|Loss from operations                           |                                                |                          | (66 | )    |     |      | (474 | )   |     |  | (90 | )  
|Interest income, net                           |                                                |                          | 1   |      |     |      | 3    |     |     |  | 13  |    
|Other expense, net                             |                                                |                          | (2  | )    |     |      | (15  | )   |     |  | (4  | )  
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    
|Loss from continuing operations                |                                                |                          | (67 | )    |     |      | (486 | )   |     |  | (81 | )  
|Gain on disposition of discontinued operations |                                                |                          | 4   |      |     |      |     |     |     |  |    |    
|Income from discontinued operations            |                                                |                          |    |      |     |      | 2    |     |     |  |    |    
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    
|Net Loss                                       |                                                |                          | (63 | )%   |     |      | (484 | )%  |     |  | (81 | )% 
|                                               |                                                |                          |     |      |     |      |      |     |     |  |     |    

For the Years Ended December 31, 2002 and
2001



| |                                      
| | -------------------------------------
| | Revenue and Related Party
    Revenue

Revenue, including non-cash stock-based charges,
decreased approximately $39.2 million, or 13%, to
$264.6 million for the year ended December 31, 2002
from revenue of $303.8 million for the year ended
December 31, 2001. The primary reasons for the decline in
revenue were a decrease in Online Advertising of
$22.2 million, a reduction in subscription renewals of
$10.4 million in the Media Services segment, a decrease in
revenue in the Software and Services segment of
$5.8 million, and a reduction in Offline Advertising of
$800,000. Of these amounts, related party revenues decreased
$7.2 million to $31.2 million for the year ended
December 31, 2002, $3.4 million in the Media Services
segment and $3.8 million in the Software and Services
segment.



| |                
| | ---------------
| | Cost of Revenue

Cost of revenue, including non-cash stock-based
charges, decreased approximately $35.2 million, or 31%, to
$78.3 million for the year ended December 31, 2002
from $113.5 million for the year ended December 31,
2001. The decrease was primarily due to decreases in personnel
related costs of $20.1 million, production and fulfillment
costs of $1.6 million, hosting and imaging costs of
$8.4 million, and other direct costs of $6.4 million.
Personnel and other direct costs decreased as we expected
primarily due to the implementation of our restructuring plans
in the fourth quarter of 2001 and the first quarter of 2002.
Hosting and imaging costs decreased due to a change in the
method of selling and supporting virtual tours. The decrease was
partially

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offset by an increase in royalties and fees of
$1.3 million primarily due to a change in methodology in
the calculation of certain royalties from a percentage of
revenue to a fixed fee arrangement.


Gross margin percentage for the year ended
December 31, 2002 was 70%, 7% higher than the gross margin
percentage of 63% for the year ended December 31, 2001. The
increase in gross margin percentage was primarily due to the
implementation of our restructuring plans.



| |                   
| | ------------------
| | Operating Expenses

Sales and Marketing.Sales and marketing expenses,
including non-cash stock-based charges, decreased approximately
$77.6 million, or 32%, to $164.6 million for the year
ended December 31, 2002 from $242.2 million for the
year ended December 31, 2001. Of these amounts, stock-based
charges decreased by $7.3 million for the year ended
December 31, 2002 due to the expiration of previous
stock-based transactions during the first part of 2002. The
remaining decrease was primarily due to decreases in personnel
related costs of $21.9 million, marketing costs of
$38.5 million and other overhead costs of
$9.9 million. Personnel and other overhead costs decreased
as we expected primarily due to restructuring plans implemented
in the fourth quarter of 2001 and the first quarter of 2002.
Marketing costs decreased due to the elimination of all
marketing expenses related to the promotion of the Homestore
brand and a general reduction in marketing expenses in 2002
related to all other brands.

Product and Website Development.Product and website development
expenses, including non-cash stock-based charges, decreased
approximately $5.4 million, or 15%, to $30.3 million
for the year ended December 31, 2002 from
$35.7 million for the year ended December 31, 2001.
The decrease was primarily due to decreases in personnel related
costs of $6.8 million and other overhead costs of
$1.4 million offset by the termination of the marketing of
a software product and the write-off of the related capitalized
costs of $2.8 million. These decreases were as we expected
and primarily due to restructuring plans implemented in the
fourth quarter of 2001 and the first quarter of 2002 partially
offset by increases in costs relating to inclusion of a full
year of activity for the acquisitions of the Move.com Group,
assets from iPIX and Homestore Plans and Publications businesses.

General and Administrative.General and administrative expenses,
including non-cash stock-based charges, decreased approximately
$89.6 million, or 51%, to $84.8 million for the year
ended December 31, 2002 from $174.4 million for the
year ended December 31, 2001. Stock-based charges decreased
by $4.9 million for the year ended December 31, 2002.
The remaining decrease was primarily due to decreases in
personnel related costs of $13.4 million, rent expense of
$4.4 million, bad debt expense of $30.3 million, and
other overhead costs of $36.6 million. The decreases in
personnel related costs and other overhead were as we expected
and due to the implementation of restructuring plans in the
fourth quarter of 2001 and the first quarter of 2002. Rent
expense decreased as a direct result of the closing of certain
offices in conjunction with these restructuring plans. The
decrease in bad debt expense related to a closer alignment
between our sales force compensation and tighter credit and
collection policies in 2002. These overall decreases in costs
were partially offset by increases in costs relating to
inclusion for the full year of activity of the acquisitions of
the Move.com Group, assets from iPIX and the Homestore Plans and
Publications business in the first and second quarters of 2001.

Amortization of Goodwill and Intangible
Assets.Amortization of goodwill and
intangible assets was $37.2 million for the year ended
December 31, 2002 compared to $199.3 million for the
year ended December 31, 2001. The decrease in amortization
was due to the adoption of SFAS No. 142 in the first
quarter of 2002, which requires that we no longer amortize
goodwill as well as a reduction in intangible assets from our
impairment charge under SFAS No. 121, Accounting
for the Impairment of Long-lived Assets to be Disposed Of,
in the quarter ended December 31, 2001.

Litigation Settlement.On August 9, 2002, we reached a
settlement in the MemberWorks litigation, in which MemberWorks
and certain other former iPlace shareholders received
$23.0 million. We have included the cost of the settlement
in our results of operations for the year ended
December 31, 2002.

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Impairment of Long-lived Assets.In the fourth quarter of 2001, we
identified a number of events and circumstances that indicated a
potential impairment of our long-lived assets, consisting
primarily of goodwill and identified intangible assets totaling
approximately $1.1 billion and $139.5 million,
respectively. The culmination of these events and changes in
circumstances in the fourth quarter resulted in significant
operational and financial restructuring efforts which began in
2001 and continued into 2002. Accordingly, we performed an
assessment of the goodwill, identified intangible assets and
other long-lived assets pursuant to the provisions of SFAS,
No. 121, and Accounting Principles Board, or APB, Opinion
No. 17, Intangible Assets. This assessment
indicated that the carrying value of our long-lived assets may
not be recoverable, therefore asset impairment tests were
performed at the lowest level for which separately identifiable
cash flows existed. The impairment analysis resulted in a charge
of $925.1 million in the fourth quarter of 2001, comprised
of impairments of $659.1 million to goodwill,
$94.6 million to identified intangible assets,
$36.4 million to property and equipment and
$135.0 million primarily related to prepaid distribution
expenses.

In January 2002, we adopted SFAS No. 142 and
as a result, have ceased to amortize goodwill. In lieu of
amortization, we are required to perform an additional
impairment review of our goodwill in 2002 and an annual
impairment review thereafter. We evaluated the impact of our
adoption of SFAS No. 142 in the first quarter of 2002 and
determined that no impairment charge was required upon the
adoption of the standard. During the fourth quarter of 2002, we
performed an update of our evaluation due to specific events and
changes in the operations of our business including the
sustained decline in the value of our stock, revision of our
annual operating plan and a decision to sell our Hessel
businesses prompted by a loss of a significant customer. Our
impairment test compared the fair value of the reporting units
with the carrying value of their assets. Fair value was
determined in accordance with the provisions of SFAS
No. 142 using present value techniques similar to those we
use internally for evaluating acquisitions and comparisons to
market values. These valuation techniques, performed in
consultation with third party valuation professionals, involved
projections of cash flows which were discounted based on our
weighted average cost of capital. In testing for a potential
impairment of goodwill, we first compare the estimated fair
value of the Company with book value, including goodwill. If the
estimated fair value exceeds book value, goodwill is considered
not to be impaired and no additional steps are necessary. If,
however, the fair value of the Company is less than book value,
then we are required to compare the carrying amount of the
goodwill with its implied fair value. The estimate of implied
fair value of goodwill may require independent valuations of
certain internally generated and unrecognized intangible assets
such as our subscriber base, software and technology and patents
and trademarks. If the carrying amount of our goodwill exceeds
the implied fair value of that goodwill, an impairment loss
would be recognized in an amount equal to the excess. The
impairment analysis resulted in a charge of $7.3 million in
the fourth quarter of 2002, comprised of impairments of
$3.8 million to identified intangible assets relating to
our acquisition of WyldFyre, $1.9 million to property and
equipment relating to the shut down of the Hessel businesses and
$1.6 million to other assets.

Acquisition and Restructuring Charges.Acquisition and restructuring charges
were $12.1 million for the year ended December 31,
2002, related to restructuring plans approved in the first and
third quarters of 2002. In the first quarter of 2002, our Board
of Directors approved a restructuring plan and we took a charge
of $2.3 million relating to this plan. In the third quarter
of 2002, our Board of Directors approved an additional
restructuring and integration plan and we took a charge of
$3.6 million relating to this plan. We also revised the
estimates on the first quarter 2002 and the fourth
quarter 2001 restructuring plans and took an additional
charge of $6.2 million to properly reflect our current
expectations. The primary factor in this change in estimate was
the decline in demand for office space in San Francisco where we
have a large facility available for sublease.

Acquisition and restructuring charges were
$50.3 million for the year ended December 31, 2001
including $6.5 million related to the acquisition of the
Move.com Group, $8.2 million related to the dissolution of
one of our subsidiaries and $35.8 million relating to our
fourth quarter 2001 restructuring plan. Included in these
charges were severance, facilities shut-down costs and other
dissolution costs.

In the third quarter of 2002, our Board of
Directors approved a further restructuring and integration plan,
with the objective of eliminating duplicate resources and
redundancies.

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In connection with the third quarter 2002
restructuring and integration plan, we recorded a charge of
$3.6 million in the third quarter of 2002, which was
included in acquisition and restructuring charges in the
consolidated statement of operations. This charge consists of
employee termination benefits of $1.6 million and facility
closure charges of approximately $2.0 million.

As part of this restructuring and integration
plan, we undertook a review of our existing locations and
elected to close an office and identified and notified
approximately 190 employees whose positions with us were
eliminated. The work force reductions affected approximately 30
in research and development, 10 in production, 140 in sales and
marketing and 10 in administrative functions. As of
December 31, 2002, all of the planned 190 employees
have been terminated and a total of 31 have not yet been paid
severance.

A summary of activity related to the third
quarter 2002 restructuring charge is as follows (in
thousands):

|                                           |  |             |        |             |  |       |       |   |  |   |        |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ----- | ----- | - |  | - | ------ | -
|                                           |  |             |        | Lease       |  |      
|                                           |  |             |        | Obligations |  |      
|                                           |  | Employee    |        | and         |  |      
|                                           |  | Termination |        | Related     |  |      
|                                           |  | Benefits    |        | Charges     |  | Total
|                                           |  |             |        |             |  |      
|Initial restructuring charge               |  | $           | 1,590  |             |  | $     | 2,033 |   |  | $ | 3,623  |  
|Cash paid                                  |  |             | (1,190 | )           |  |       | (253  | ) |  |   | (1,443 | )
|                                           |  |             |        |             |  |       |       |   |  |   |        |  
|Restructuring accrual at December 31, 2002 |  | $           | 400    |             |  | $     | 1,780 |   |  | $ | 2,180  |  
|                                           |  |             |        |             |  |       |       |   |  |   |        |  

In connection with the first quarter 2002
restructuring and integration plan, we recorded a charge of
$2.3 million in the first quarter of 2002, which is
included in acquisition and restructuring charges in the
consolidated statement of operations. This charge consists of
employee termination benefits of $1.7 million and facility
closure charges of approximately $600,000. During the third
quarter of 2002, we evaluated our original estimates and
concluded we must increase our reserve for lease obligations by
$1.6 million and reduce our estimates for employee
termination pay by $242,000.

As part of this restructuring and integration
plan, we undertook a review of our existing locations and
elected to close offices and identified and notified
approximately 270 employees whose positions with us were
eliminated. The work force reductions affected approximately 30
members of management, 40 in research and development, 140 in
sales and marketing and 60 in administrative functions. As of
December 31, 2002, eight of the planned 270 employees
have not yet been paid severance.

A summary of activity related to the first
quarter 2002 restructuring charge is as follows (in thousands):

|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ---------- | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                           |  |             |        | Lease       |  |            |       |      
|                                           |  |             |        | Obligations |  |            |       |      
|                                           |  | Employee    |        | and         |  |            |       |      
|                                           |  | Termination |        | Related     |  | Asset      |       |      
|                                           |  | Benefits    |        | Charges     |  | Write-offs |       | Total
|                                           |  |             |        |             |  |            |       |      
|Initial restructuring charge               |  | $           | 1,720  |             |  | $          | 309   |       |  | $ | 260  |   |  | $ | 2,289  |  
|Non-cash charges                           |  |             |       |             |  |            |      |       |  |   | (260 | ) |  |   | (260   | )
|Cash paid                                  |  |             | (1,452 | )           |  |            | (187  | )     |  |   |     |   |  |   | (1,639 | )
|Change in estimates                        |  |             | (242   | )           |  |            | 1,585 |       |  |   |     |   |  |   | 1,343  |  
|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  
|Restructuring accrual at December 31, 2002 |  | $           | 26     |             |  | $          | 1,707 |       |  | $ |     |   |  | $ | 1,733  |  
|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  

In connection with our fourth quarter 2001
restructuring and integration plan, we recorded a charge of
$35.8 million in the fourth quarter of 2001, which was
included in acquisition and restructuring charges in the
consolidated statement of operations. This charge consists of
the following: (i) employee termination benefits of
$6.4 million; (ii) facility closure charges of $20.8
million, comprised of $12.8 million in future lease
obligations, exit costs and cancellation penalties, net of
estimated sublease income of $11.9 million, and
$8.0 million of non-cash fixed asset disposals related to
vacating duplicate facilities and decreased equipment
requirements due to lower headcount; (iii) non-cash write-offs
of $2.9 million in other assets related to exited
activities; and (iv) accrued future payments of
$5.7 million for existing contractual obligations with no
future benefits to us. Our estimate with respect to sublease
income relates primarily to a lease commitment for office

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space in San Francisco that expires in November
2006. We originally estimated that we could sublease the
facility by the second quarter of 2003 at a rate of
approximately two-thirds of the existing commitment. However,
recent declines in the demand for office space in the San
Francisco market have led us to conclude these estimates must be
revised. Because we believe it will take at least one year
longer than originally estimated to sublease the property and
the market rates are projected to be as low as 33% of our
current rent, we took an additional $6.5 million charge
during 2002 and reduced estimates for employee termination pay
by $396,000 and our contractual obligations by $798,000. As of
December 31, 2002, four of the planned 700 employees have
not yet been paid severance.


A summary of activity related to the fourth
quarter 2001 restructuring charge is as follows
(in thousands):

|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ---------- | ------ | ----------- |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                           |  |             |        | Lease       |  |            |        |             |  |      
|                                           |  |             |        | Obligations |  |            |        |             |  |      
|                                           |  | Employee    |        | and         |  |            |        |             |  |      
|                                           |  | Termination |        | Related     |  | Asset      |        | Contractual |  |      
|                                           |  | Benefits    |        | Charges     |  | Write-offs |        | Obligations |  | Total
|                                           |  |             |        |             |  |            |        |             |  |      
|Initial restructuring charge               |  | $           | 6,364  |             |  | $          | 12,782 |             |  | $     | 10,917  |   |  | $ | 5,733  |   |  | $ | 35,796  |  
|Cash paid                                  |  |             | (3,511 | )           |  |            | (137   | )           |  |       |        |   |  |   | (141   | ) |  |   | (3,789  | )
|Non-cash charges                           |  |             |       |             |  |            |       |             |  |       | (10,917 | ) |  |   |       |   |  |   | (10,917 | )
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2001 |  |             | 2,853  |             |  |            | 12,645 |             |  |       |        |   |  |   | 5,592  |   |  |   | 21,090  |  
|Cash paid                                  |  |             | (2,274 | )           |  |            | (5,480 | )           |  |       |        |   |  |   | (3,631 | ) |  |   | (11,385 | )
|Change in estimates                        |  |             | (396   | )           |  |            | 6,027  |             |  |       |        |   |  |   | (798   | ) |  |   | 4,833   |  
|Non-cash charges                           |  |             |       |             |  |            | 488    |             |  |       |        |   |  |   |       |   |  |   | 488     |  
|Sale of a subsidiary                       |  |             | (156   | )           |  |            |       |             |  |       |        |   |  |   |       |   |  |   | (156    | )
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2002 |  | $           | 27     |             |  | $          | 13,680 |             |  | $     |        |   |  | $ | 1,163  |   |  | $ | 14,870  |  
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  

With the exception of payments associated with
office lease commitments, substantially all of the remaining
restructuring liabilities at December 31, 2002 will be paid
during 2003. Any further changes to the accruals based upon
current estimates will be reflected through the acquisition and
restructuring charges line in the consolidated statement of
operations.

During the second quarter of 2001, we incurred a
charge of $8.2 million related to the dissolution of one of
our subsidiaries and included these costs in the acquisition and
restructuring charges line item in the Statement of Operations.
Included in these charges were severance and other
payroll-related expenses of $1.1 million associated with
the reduction in workforce of approximately 70 employees,
facilities shutdown costs of $1.2 million and other
dissolution costs of approximately $485,000. In addition, we
entered into a release agreement and made a one-time settlement
payment of $5.4 million to minority shareholders. At
December 31, 2001, all costs had been paid with no
liabilities remaining.

In connection with our acquisition of the
Move.com Group, we reviewed our operations and implemented a
plan to restructure various components of its operations. As
part of the restructuring, we accrued an acquisition liability
of approximately $13.4 million, related to estimated costs
to exit and consolidate certain operating activities of the
Move.com Group, as well as costs to terminate and relocate
employees. These amounts were recognized as liabilities assumed
in a purchase business combination and thus accounted for as
additional purchase price. At December 31, 2001, the
purchase price allocation related to the Move.com Group was
finalized.

The acquisition liability was comprised of
$9.8 million in exit costs related to contractual
obligations with no future benefits to the combined operations
as the services were redundant, $2.7 million in termination
benefits related to a work force reduction of approximately
170 employees and approximately $900,000 in costs incurred
in connection with the shut-down of various facilities. At
December 31, 2001, all restructuring costs have been paid
with no related liabilities remaining.

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Also related to the acquisition of the Move.com
Group, we incurred acquisition and reorganization charges of
$6.5 million that did not meet the criteria for
capitalization as a component of purchase price. These charges
were expensed as incurred and were included in acquisition and
restructuring charges on the statement of operations and were
comprised primarily of stay bonuses and severance payments of
$3.6 million, and facilities shutdown costs of
$1.9 million.

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

|                                |  |              |        |      |  |   |        | 
|------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                |  |             
|                                |  | Year Ended  
|                                |  | December 31,
|                                |  |             
|                                |  | 2002         |        | 2001
|                                |  |              |        |     
|Revenue                         |  | $            | 1,501  |      |  | $ | 2,456  | 
|Cost of revenue                 |  |              | 134    |      |  |   | 383    | 
|Sales and marketing             |  |              | 63,848 |      |  |   | 71,188 | 
|Product and website development |  |              | 127    |      |  |   | 361    | 
|General and administrative      |  |              | 1,297  |      |  |   | 6,237  | 
|                                |  |              |        |      |  |   |        | 
|                                |  | $            | 66,907 |      |  | $ | 80,625 | 
|                                |  |              |        |      |  |   |        | 

Stock-based charges decreased by
$13.7 million to $66.9 million for the year ended
December 31, 2002 from $80.6 million for the year
ended December 31, 2001. The decrease was primarily due to
the expiration of previous stock-based deals and the accelerated
vesting of stock options for a terminated employee in the period
ended December 31, 2001. Stock-based charges for the years
ended December 31, 2002 and December 31, 2001 consist
of $37.2 million and $37.2 million, respectively, of
amortization related to AOL, and $17.9 million and
$27.4 million, respectively, related to vendor agreements
with the remainder related to employee-based stock option
charges.

Interest Income,
Net

Interest income, net decreased $7.9 million
to $2.6 million for the year ended December 31, 2002
from $10.5 million for the year ended December 31,
2001 as a result of reduced cash balances and a general decline
in market interest rates.

Other Expense,
Net

Other expense, net of $5.7 million for the
year ended December 31, 2002 consists primarily of the
accretion of the AOL distribution obligation of $14.8 million
and other miscellaneous expense of $1.6 million, partially
offset by $10.8 million of income from an amendment of an
existing agreement in the quarter ended March 31, 2002.
During the year ended December 31, 2001, we recorded a
write-down of investments of $30.7 million. Also included
in other expense for the year ended December 31, 2001 is
the accretion of the AOL distribution obligation of
$14.8 million.

Income from Discontinued
Operations and Gain on Disposition of Discontinued
Operations

On April 2, 2002, we sold our ConsumerInfo
division for $130.0 million in cash to Experian Holdings,
Inc. and recognized a gain of $11.8 million during the
years ended December 31, 2002. In accordance with
SFAS No. 144, our consolidated financial statements
reflect this as discontinued operations. The results of
operations of the ConsumerInfo division included operating
income of $846,000 and $4.8 million for the years ended
December 31, 2002 and 2001, respectively.

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 for the years ended
December 31, 2002 and December 31, 2001. As of
December 31, 2002, we had $569.4 million of net
operating loss carryforwards for federal income

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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.


Segment
Information

Segment information is presented in accordance
with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This standard is based
on a management approach, which requires segmentation based upon
our internal organization and disclosure of revenue and
operating expenses based upon internal accounting methods. As of
the beginning of fiscal year 2002, we hired a new management
team and changed the way that we manage and evaluate our
businesses. As a result of this change, management now evaluates
performance and allocates resources based on four segments,
consisting of Media Services, Software and Services, Online
Advertising and Offline Advertising and excludes discontinued
operations. Due to this change, we have reclassified previously
reported segment data to conform to the current period
presentation. This is consistent with the data that is made
available to our management to assess performance and make
decisions. Summarized information by segment as excerpted from
internal management reports is as follows (in thousands):

|                                             |                       |                         |         |          |   |  |           |            |  
|-------------------------------------------- | --------------------- | ----------------------- | ------- | -------- | - |  | --------- | ---------- | -
|                                             |                       |                        
|                                             |                       | Year Ended December 31,
|                                             |                       |                        
|                                             |                       | 2002                    |         | 2001    
|                                             |                       |                         |         |         
|Revenue:                                     |                       |                         |         |          |   |  |           |           
|                                             | Media Services        |                         | $       | 141,485  |   |  | $         | 151,920    |  
|                                             | Software and Services |                         |         | 46,804   |   |  |           | 52,560     |  
|                                             | Online Advertising    |                         |         | 19,021   |   |  |           | 41,234     |  
|                                             | Offline Advertising   |                         |         | 57,303   |   |  |           | 58,068     |  
|                                             |                       |                         |         |          |   |  |           |           
|Total revenue                                |                       |                         | 264,613 |          |   |  | 303,782   |           
|                                             |                       |                         |         |          |   |  |           |           
|Cost of revenue and operating expenses:      |                       |                         |         |          |   |  |           |           
|                                             | Media Services        |                         |         | 117,086  |   |  |           | 206,737    |  
|                                             | Software and Services |                         |         | 53,506   |   |  |           | 54,667     |  
|                                             | Online Advertising    |                         |         | 20,556   |   |  |           | 55,766     |  
|                                             | Offline Advertising   |                         |         | 57,110   |   |  |           | 50,887     |  
|                                             | Unallocated           |                         |         | 189,354  |   |  |           | 1,372,337  |  
|                                             |                       |                         |         |          |   |  |           |           
|Total cost of revenue and operating expenses |                       |                         | 437,612 |          |   |  | 1,740,394 |           
|                                             |                       |                         |         |          |   |  |           |           
|                                             | Loss from operations  |                         | $       | (172,999 | ) |  | $         | (1,436,612 | )
|                                             |                       |                         |         |          |   |  |           |           

Media
Services

Our Media Services segment is comprised of our
REALTOR.com®, Homebuilder.com, Homestore Apartments &
Rentals, and other real estate related products and services.

Media Services revenue decreased approximately
$10.4 million, or 7%, to $141.5 million for the year
ended December 31, 2002, compared to $151.9 million
for the year ended December 31, 2001. The decrease was
primarily due to the expiration of bulk subscription purchases
made in 2001 by a related party and a major franchise, the
reduction in services purchased by a strategic partner and
discontinuing the publication of unprofitable regional
magazines. The loss of the bulk subscription purchases were
partially offset by direct sales to the real estate
professionals. These decreases were also partially offset by
higher subscription revenues and increases in revenue from our
Featured Home and Virtual Tour products. Media Services revenue
represented approximately 53% of total revenue for the year
ended December 31, 2002 compared to 50% of the total
revenue for the year ended December 31, 2001.

Media Services expenses decreased
$89.7 million, or 43%, to $117.1 million for the year
ended December 31, 2002 from $206.7 million for the
year ended December 31, 2001. The decrease was primarily
due to decreases in personnel related costs of
$52.3 million, hosting, imaging and fulfillment costs of
$10.0 million, marketing costs of $11.3 million and
other overhead costs of $20.8 million. Personnel related costs
decreased as expected primarily due to the implementation of our
restructuring plans in the fourth

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quarter of 2001 and the first quarter of 2002.
The decrease in hosting, imaging and fulfillment costs were due
to a change in the method of selling and supporting virtual
tours in our REALTOR.com® channel in 2002, higher costs on
products sold in 2001 to a strategic partner, and a settlement
made with a related party in December of 2001. The decrease in
marketing costs was due to a general reduction of all marketing
related activities across all channels, the shut-down of our
iMove business, the shutdown of certain of our international
operations and the shift in our virtual tour strategy. These
decreases were offset by an increase in royalties and fees of
$2.9 million primarily due to a change in methodology in
the calculation of certain royalties from a percentage of
revenue to a fixed fee basis.


Media Services operating income increased
primarily as a result of our restructuring efforts. Our cost
reduction efforts took this segment from an operating loss of
$54.8 million for the year ended December 31, 2001 to
operating income of $24.4 million for the year ended
December 31, 2002.

As a part of our evaluation of the business, we
plan to change the Media Services product offering.
Historically, the product offerings have been provided for a
fixed subscription fee and required the purchase of a templated
website. In the future, we plan to offer these services under a
traditional media model where pricing is dependent upon
geographic market, placement, content and length or quantity of
the media run. The success of our new pricing strategy will
depend upon acceptance by our customers. This change is
contemplated to compete more effectively with traditional
offline media products and implementation of these changes,
which will no longer require the purchase of a templated
website, will occur in the first half of 2003. It is expected
that as the changes are implemented, and as more of our online
advertising is purchased by real estate professionals, the
Online Advertising segment will combine with Media Services as
one segment in the first quarter of 2003.

We are also continuing our organizational changes
and these efforts may require additional investment, and may
have a short-term negative impact on operating results.

Software and
Services

Our Software and Services segment is comprised of
our Top Producer, WyldFyre, Computers For Tracts, and The Hessel
Group businesses.

Software and Services revenue decreased
$5.8 million, or 11%, to $46.8 million for the year ended
December 31, 2002, compared to $52.6 million for the
year ended December 31, 2001. The decrease was primarily
due to a one-time bulk sale to a related party in fiscal 2001
that was not repeated in fiscal 2002. WyldFyres revenues
were stronger in fiscal 2002 due to increased software license
revenue, however this was offset by a decrease in The Hessel
Group business driven by a slow down in corporate relocation
services. Software and Services revenue represented
approximately 18% of total revenue for the year ended
December 31, 2002 compared to 17% of total revenue for the
year ended December 31, 2001.

Software and Services expenses decreased
$1.2 million, or 2%, to $53.5 million for the year ended
December 31, 2002 from $54.7 million for the year
ended December 31, 2001 primarily due to the termination of
the marketing and development of a new software product that had
begun in fiscal 2000 and reductions in costs at The Hessel Group
as the operations were reduced in line with the declining
revenue. The decreases were partially offset by $2.8 million in
capitalized software costs written off due to an abandoned
product, $1.0 million in increased maintenance and support
costs associated with a new product that was launched in the
latter part of fiscal 2001, and a $1.2 million accrual for
lease termination, severance, and other charges associated with
the decision to shutdown The Hessel Group operations.

Software and Services generated an operating loss
of $6.7 million for the year ended December 31, 2002
compared to an operating loss of $2.1 million for the year
ended December 31, 2001 primarily due to the decline in
revenue outlined above. We introduced a new on-line version of
Top Producers leading product in the second half of 2002.
As sales shift from the desktop product with a one-time license
fee to an online product with a monthly subscription fee, we may
experience a temporary decline in revenue until the number of
online subscriptions increases to offset the reduction in
desktop software sales. We will also experience a decline in
2003 as we have substantially completed a custom development
project at Top Producer in 2002.

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Online
Advertising

Our Online Advertising segment is comprised of
online advertisements on various content areas of our websites.
Our advertising offerings include online ads, text-based links
and rich media.

Online Advertising revenue decreased
approximately $22.2 million, or 54%, to $19.0 million
for the year ended December 31, 2002, compared to $41.2
million for the year ended December 31, 2001. The decrease
was due to a decision to restructure this segment in early 2002
coupled with a reduction in revenue share from AOL of
$6.8 million and the expiration of large sponsorship
contracts that did not renew totaling $19.0 million. This
decrease was partially offset by an increase in the sale of new
online advertising contracts totaling $4.5 million. Online
Advertising revenue represented approximately 7% of total
revenue for the year ended December 31, 2002 compared to
14% of total revenue for the year ended December 31, 2001.

Online Advertising expenses decreased
approximately $35.2 million, or 63%, to $20.6 million
for the year ended December 31, 2002, compared to $55.8
million for the year ended December 31, 2001. The decrease
was primarily due to a decrease in marketing costs of
$19.3 million, bad debt expense of $11.5 million and
personnel related costs and other overhead of $4.5 million.
The decrease in marketing costs was the result of the
elimination of all marketing expenses related to the promotion
of the Homestore brand and a general reduction in marketing
programs in 2002. The decrease in bad debt expense related to a
closer alignment between our sales force compensation and
tighter credit and collection policies. The decrease in
personnel related costs and other overhead was as expected and
resulted from our restructuring plans in the fourth quarter of
2001 and the first quarter of 2002.

Online Advertising operating loss decreased
approximately 89% as a result of the changes discussed above.
These factors reduced the operating loss of $14.5 million
for the year ended December 31, 2001 to an operating loss
of $1.5 million for the year ended December 31, 2002. We
have reduced the cost structure and are continuing our efforts
to seek new revenue opportunities. As discussed in the Media
Services segment, it is expected that the Online Advertising
segment will combine with Media Services as one segment in the
first quarter of 2003 as more real estate professionals purchase
our available online advertising.

Offline
Advertising

Our Offline Advertising segment is comprised of
our Welcome Wagon and Homestore Plans and Publications
businesses.

Offline Advertising revenue decreased $765,000,
or 1%, to $57.3 million for the year ended
December 31, 2002, compared to $58.1 million for the
year ended December 31, 2001. The decrease was primarily
due to the fact that spending by both customer channels of this
segment, local merchants and consumers, was negatively affected
by the general downturn in economic conditions. This decrease
was partially offset by a full twelve months of operations for
Welcome Wagon, which was acquired in February 2001 as part of
the Move.com Group, and for Homestore Plans and Publications,
which was acquired in May 2001. Offline Advertising revenue
represented approximately 22% of total revenue for the year
ended December 31, 2002 compared to 19% of total revenue
for the year ended December 31, 2001.

Offline Advertising expenses increased
$6.2 million, or 12%, to $57.1 million for the year ended
December 31, 2002 compared to expenses of $50.9 million for
the year ended December 31, 2001. The increase was
primarily due to the full year impact of the Welcome Wagon and
Homestore Plans and Publications businesses.

Offline Advertising operating income decreased to
$193,000 for the year ended December 31, 2002 from
operating income of $7.2 million for the year ended
December 31, 2001 as a direct result of the decline in
profitability in the first half of 2002 at Welcome Wagon.
Welcome Wagon implemented significant changes to its cost
structure during the latter part of the year by reducing
headcount and production costs; however, the impact was not
enough to offset the revenue decline experienced during the
first half of fiscal 2002.

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Unallocated

Unallocated expenses decreased to
$189.4 million for the year ended December 31, 2002
from $1.4 billion for the year ended December 31,
2001. The decrease was primarily due to decreases in
amortization of goodwill and intangibles of $162.1 million,
acquisitions and restructuring charges of $38.2 million,
reduction of technology costs of $22.0 million, stock-based
charges of $13.7 million and charges of $925.1 million
relating to the impairment of long-lived assets in 2001 compared
to $7.3 million for the year ended December 31, 2002. These
decreases were offset by the $23.0 million litigation
settlement with MemberWorks. In addition, personnel related and
other overhead costs decreased during the year ended
December 31, 2002 due to the implementation of our
restructuring plans in the fourth quarter of 2001 and the first
quarter of 2002. The decrease in amortization of goodwill and
intangibles was due to the adoption of SFAS No. 142, which
requires that we no longer amortize goodwill, as well as a
reduction in intangible assets from our impairment charge under
SFAS No. 121 that was recorded in 2001. We are continuing
our efforts to reduce corporate overhead expenses but cannot
provide assurances that they will be successful.

For the Years Ended December 31, 2001 and
2000

Revenue and
Related Party Revenue

Revenue, including non-cash stock-based charges,
but excluding related party revenue, increased approximately
$84.1 million, or 46%, to $265.4 million for the year
ended December 31, 2001 from revenue of $181.3 million
for the year ended December 31, 2000. The increase was
primarily due to increased revenue from professional
subscriptions and various acquisitions, partially offset by a
decline in advertising revenue. Related party revenue of $38.3
million for the year ended December 31, 2001 is the result
of sales to RETT and Cendant related to a series of commercial
arrangements entered into in the first quarter of 2001 for the
sale of various professional subscription products. There were
no related party revenue transactions for the year ended
December 31, 2000.

Cost of
Revenue

Cost of revenue, including non-cash stock-based
charges, increased approximately $52.3 million, or 85%, to
$113.5 million for the year ended December 31, 2001
from cost of revenue of $61.2 million for the year ended
December 31, 2000. The increase was primarily due to our
overall increased sales volume as well as increases in personnel
related costs of $26.9 million, production and fulfillment
costs of $1.5 million, hosting and imaging costs of
$8.1 million, and other direct costs of $20.0 million
offset by a decrease in royalty expense of $4.2 million.
Also contributing to the increase in cost of revenue were our
acquisitions of the Move.com Group, iPIX and The Hessel Group
which had little or no impact on expense in 2000 as they were
acquired in late 2000 or early 2001.

Gross margin percentage for the year ended
December 31, 2001 was 63%, slightly below the gross margin
of 66% for the year ended December 31, 2000. The decrease
in gross margin percentage was primarily due to a decrease in
advertising revenue which historically have higher gross margins.

Operating
Expenses

Sales and Marketing.Sales and marketing expenses,
including non-cash stock-based charges, increased approximately
$82.1 million, or 51%, to $242.2 million for the year ended
December 31, 2001 from $160.1 million for the year
ended December 31, 2000. The increase was primarily due to
an increase in stock-based charges, personnel related costs of
$38.5 million, marketing costs of $7.7 million, and
other overhead costs of $9.8 million. Stock-based charges,
included in sales and marketing, increased by $26.0 million
to $71.2 million for the year ended December 31, 2001
from $45.1 million for the year ended December 31,
2000 primarily due to amortization of stock-based charges
relating to our distribution agreement with AOL. In April 2000,
in connection with that distribution agreement, we recorded
prepaid distribution in the amount of $185.9 million, which
represented the fair market value of the approximately
3.9 million shares issued to AOL and the fair market value
of the guaranteed stock price, which was determined using the
Black-Scholes option pricing model. The $185.9 million
stock-based charge was being

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expensed ratably to sales and marketing over the
five-year term of the agreement, resulting in an expense of
approximately $37.2 million for the year ended
December 31, 2001. Also contributing to the increase in
sales and marketing expenses were our acquisitions, primarily
the acquisitions of the Move.com Group and iPIX.


Product and Website Development.Product and website development
expenses, including non-cash stock-based charges, increased
approximately $20.2 million, or 130%, to $35.7 million for
the year ended December 31, 2001 from $15.6 million
for the year ended December 31, 2000. The increase was
primarily due to increased costs associated with the expansion
of our websites, as well as our development of professional
productivity tools. Also contributing to the increase in product
and website development expenses were our acquisitions of Top
Producer, WyldFyre and CFT which all had a full year of
operations in 2001 contributing to an increase in personnel
related costs of $18.0 million and other overhead costs of
$2.2 million.

General and Administrative.General and administrative expenses,
including non-cash stock-based charges, increased approximately
$114.8 million, or 193%, to $174.4 million for the
year ended December 31, 2001 from $59.6 million for the
year ended December 31, 2000. Stock-based charges increased
by $3.1 million for the year ended December 31, 2001.
The remaining increase was primarily due to an increase in
personnel related costs of $25.4 million, rent expense of
$6.3 million, bad debt expense of $31.8 million, and
other overhead of $48.1 million much of which was impacted
by our internal investigation launched in the fourth quarter of
2001, including the restatement of previously reported results
and the costs of that investigation. Facility costs increased
primarily due to our new corporate and central service offices.
Also contributing to the increase in general and administrative
expenses were the impact of our acquisitions many of which had a
full year of operations in 2001, or no corresponding costs in
2000.

Amortization of Goodwill and Intangible
Assets.Amortization of goodwill and
intangible assets was $199.3 million for the year ended
December 31, 2001 compared to amortization of
$42.9 million for the year ended December 31, 2000.
The increase in amortization was primarily due to our
acquisitions of the Move.com Group, iPIX, Top Producer,
HomeWrite and Hessel.

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. There were no IPR&D
charges in 2002.

Impairment of Long-lived Assets.In the fourth quarter of 2001, we
identified a number of events and circumstances that indicated a
potential impairment of our long-lived assets, consisting
primarily of goodwill and identified intangible assets totaling
approximately $1.1 billion and $139.5 million,
respectively. Accordingly, we performed an assessment of the
goodwill, identified intangible assets and other long-lived
assets pursuant to the provisions of SFAS No. 121, and APB
17, Intangible Assets. This assessment indicated
that the carrying value of our long-lived assets may not be
recoverable, therefore asset impairment tests were performed at
the lowest level for which separately identifiable cash flows
exist. The impairment analysis resulted in a charge of
$925.1 million in the fourth quarter of 2001, comprised of
impairments of $659.1 million to goodwill,
$94.6 million to identified intangible assets,
$36.4 million to property and equipment and
$135.0 million primarily related to prepaid distribution
expenses. There were no impairment charges in 2000.

Acquisition and Restructuring
Charges.Acquisition and restructuring
charges increased by $50.3 million for the year ended
December 31, 2001 compared to no charges in 2000. This was
primarily due to our restructuring efforts starting in the
fourth quarter of 2001 as described above.

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

|                                |  |                         |        |      |  |   |        | 
|------------------------------- |  | ----------------------- | ------ | ---- |  | - | ------ | 
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2001                    |        | 2000
|                                |  |                         |        |     
|Revenue                         |  | $                       | 2,456  |      |  | $ | 6,233  | 
|Cost of revenue                 |  |                         | 383    |      |  |   | 607    | 
|Sales and marketing             |  |                         | 71,188 |      |  |   | 45,148 | 
|Product and website development |  |                         | 361    |      |  |   | 572    | 
|General and administrative      |  |                         | 6,237  |      |  |   | 3,095  | 
|                                |  |                         |        |      |  |   |        | 
|                                |  | $                       | 80,625 |      |  | $ | 55,655 | 
|                                |  |                         |        |      |  |   |        | 

Stock-based charges increased by
$25.0 million or 45%, to $80.6 million for the year
ended December 31, 2001 from $55.6 million for the
year ended December 31, 2000. This increase was primarily
due to a full year of amortization relating to our AOL
distribution agreement. Stock-based charges for the years ended
December 31, 2001 and 2000 consist of $37.2 million
and $9.8 million, respectively, of amortization related to
AOL, and $27.4 million and $36.8 million,
respectively, related to vendor agreements with the remainder
related to employee-based stock option charges.

Interest
Income, Net

Interest income, net decreased to
$10.5 million in 2001 from interest income, net of
$23.0 million in 2000. The decrease was primarily due to
interest income earned on lower average cash balances as a
result of cash used in acquisitions and operations in 2001 and
lower market interest rates on deposits and investments.

Other
Expense, Net

Other expense, net increased to
$44.3 million for the year ended December 31, 2001 from
other expense, net of $7.0 million for the year ended
December 31, 2000. The increase primarily related to a
$30.7 million impairment of our portfolio of cost and
equity investments to reflect their net realizable values based
on our review of the companies financial conditions, cash
flow projections and operating performance. Also contributing to
the increase was accretion relating to our AOL distribution
agreement. In connection with the AOL distribution agreement, we
recorded a non-current distribution obligation in the amount of
$185.9 million, which represented the fair market value of
the approximately 3.9 million shares issued to AOL and the
fair market value of the guaranteed stock price, which was
determined using the Black-Scholes option pricing model. The
difference between the fair market value of the guaranteed stock
price and the distribution obligation recorded in April 2000 is
being expensed ratably to other expense over the five-year term
of the agreement, resulting in an expense of approximately
$14.8 million and $3.9 million for the years ended
December 31, 2001 and 2000, respectively.

Income from
Discontinued Operations and Gain on Disposition of Discontinued
Operations

On April 2, 2002, we sold our ConsumerInfo
division for $130.0 million in cash to Experian Holdings,
Inc. and recognized a gain of $11.8 million in 2002. In
accordance with SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets, our
consolidated financial statements reflect this as discontinued
operations. The results of operations of the ConsumerInfo
division included operating income of $4.8 million for the
year ended December 31, 2001. The ConsumerInfo division was
acquired during the third quarter of 2001.

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 for the years ended
December 31, 2001 and 2000.

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Segment
Information

Summarized information by segment as excerpted
from internal management reports is as follows
(in thousands):

|                                             |                       |                         |           |            |   |  |         |          |  
|-------------------------------------------- | --------------------- | ----------------------- | --------- | ---------- | - |  | ------- | -------- | -
|                                             |                       |                        
|                                             |                       | Year Ended December 31,
|                                             |                       |                        
|                                             |                       | 2001                    |           | 2000      
|                                             |                       |                         |           |           
|Revenue:                                     |                       |                         |           |            |   |  |         |         
|                                             | Media Services        |                         | $         | 151,920    |   |  | $       | 88,219   |  
|                                             | Software and Services |                         |           | 52,560     |   |  |         | 24,105   |  
|                                             | Online Advertising    |                         |           | 41,234     |   |  |         | 68,998   |  
|                                             | Offline Advertising   |                         |           | 58,068     |   |  |         |         |  
|                                             |                       |                         |           |            |   |  |         |         
|Total revenue                                |                       |                         | 303,782   |            |   |  | 181,322 |         
|                                             |                       |                         |           |            |   |  |         |         
|Cost of revenue and operating expenses:      |                       |                         |           |            |   |  |         |         
|                                             | Media Services        |                         |           | 206,737    |   |  |         | 124,446  |  
|                                             | Software and Services |                         |           | 54,667     |   |  |         | 21,638   |  
|                                             | Online Advertising    |                         |           | 55,766     |   |  |         | 22,346   |  
|                                             | Offline Advertising   |                         |           | 50,887     |   |  |         |         |  
|                                             | Unallocated           |                         |           | 1,372,337  |   |  |         | 174,994  |  
|                                             |                       |                         |           |            |   |  |         |         
|Total cost of revenue and operating expenses |                       |                         | 1,740,394 |            |   |  | 343,424 |         
|                                             |                       |                         |           |            |   |  |         |         
|                                             | Loss from operations  |                         | $         | (1,436,612 | ) |  | $       | (162,102 | )
|                                             |                       |                         |           |            |   |  |         |         

Media
Services

Our Media Services segment is comprised of our
REALTOR.com®, Homebuilder.com, Homestore Apartments &
Rentals, and other real estate related products and services.

Media Services revenue increased
$63.7 million, or 72%, to $151.9 million for the year
ended December 31, 2001, compared to $88.2 million for
the year ended December 31, 2000. The increase in Media
Services revenue was primarily due to the acquisition of our
virtual tours business in January of 2001, bulk subscription
purchases by a related party in February 2001 for
$27.2 million, the launch of our Featured Home 2.0 product
in mid-year 2001 and the acquisition of RentNet in 2001 as part
of the Move.com Group. Media Services revenue represented
approximately 50% of total revenue for the year ended
December 31, 2001 compared to 49% of total revenue for the
year ended December 31, 2000.

Media Services expenses increased
$82.3 million, or 66%, to $206.7 million for the year
ended December 31, 2001 from $124.4 million for the
year ended December 31, 2000. The increase was primarily
due to increases in personnel costs of $43.5 million,
hosting, imaging, and fulfillment costs of $7.5 million,
marketing costs of $7.9 million, and other overhead costs
of $32.3 million. These increases were offset by a decrease in
royalties and fees of $8.8 million. The increase in
personnel related costs is directly related to the acquisition
of our virtual tours and RentNet businesses and an overall
increase in headcount. The increase in hosting, imaging, and
fulfillment costs was primarily due to the acquisition of our
virtual tours business in January 2001 and an increase in costs
associated with the expansion of our international operations.
The increase in marketing costs was primarily due to increased
marketing activities including conventions and trade shows, the
launch of our iMove business in 2001, the purchase of the
virtual tours business and an increase in international
activities. The decrease in royalties was primarily due to a
change in methodology in the calculation of certain royalties
from a percentage of revenue to a fixed fee basis. The increase
in other overhead costs was primarily due to the purchase of our
virtual tours business, the acquisition of RentNet, an increase
in our international activities and an overall increase in
headcount as our operations were expanded.

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Media Services generated an operating loss of
$54.8 million for the year ended December 31, 2001
compared to an operating loss of $36.2 million for the year
ended December 31, 2000 as a result of the factors outlined
above.

Software and
Services

Our Software and Services segment is comprised of
our Top Producer, WyldFyre, Computers For Tracts, and The Hessel
Group businesses.

Software and Services revenue increased
$28.5 million, or 118%, to $52.6 million for the year ended
December 31, 2001, compared to $24.1 million for the
year ended December 31, 2000 as a direct result of a full
twelve months of operations for Top Producer, which was acquired
in May 2000; WyldFyre, which was acquired in March 2000;
Computers for Tracts, which was acquired in January 2001; and
Hessel, which was acquired in September 2000. Top Producer had
increased revenue in fiscal 2001 from a related party for a
custom development project and a one-time bulk sale of Top
Presenter software to the same related party. Software and
Services revenue represented approximately 17% of total revenue
for the year ended December 31, 2001 compared to 13% of
total revenue for the year ended December 31, 2000.

Software and Services expenses increased to
$54.7 million for the year ended December 31, 2001
from $21.6 million for the year ended December 31,
2000. The increase was primarily due to the full year impact of
the acquisitions discussed above as well as increased personnel
related costs due to anticipated growth in the business.

Software and Services operating income decreased
primarily as a result of the increase in expenses outlined
above, which took this segment from operating income of
$2.5 million for the year ended December 31, 2000 to
an operating loss of $2.1 million for the year ended
December 31, 2001.

Online
Advertising

Our Online Advertising segment is comprised of
online advertisements on various content areas of our websites.
Our advertising offerings include online ads, text-based links
and rich media.

Online Advertising revenue decreased
$27.8 million, or 40%, to $41.2 million for the year ended
December 31, 2001, compared to $69.0 million for the
year ended December 31, 2000. The decrease was primarily
due to contracts that did not renew in 2001 totaling
$41.5 million. This decrease was partially offset by an
increase in revenue share from AOL of $6.3 million, an
increase in the sale of impression based advertising units and
new contracts totaling $7.3 million. Online advertising revenue
represented approximately 14% of total revenue for the year
ended December 31, 2001 compared to 38% of total revenue
for the year ended December 31, 2000.

Online Advertising expenses increased
$33.4 million, or 150%, to $55.8 million for the year ended
December 31, 2001 from $22.3 million for the year
ended December 31, 2000. The increase was primarily due to
an increase in marketing costs of $15.2 million and an
increase in overhead of $18.0 million. The increase in
marketing costs was due to an increase in spending on online
marketing contracts for the purchase of content, our
distribution agreement with AOL that began in the third quarter
of 2000 and new distribution contracts starting in 2001. These
increases in marketing costs were offset by a decrease of
$2.4 million due to commissions paid in 2000 under a
re-sellers agreement that was not renewed in 2001. The increase
in overhead was primarily the result of an increase in bad debt
expense of $12.9 million, an increase in depreciation of
$2.1 million, and an increase in personnel related costs.

Online Advertising operating income decreased as
a result of the decline in revenue and the increased operating
expenses taking this segment from operating income of
$46.7 million for the year ended December 31, 2000
down to an operating loss of $14.5 million for the year
ended December 31, 2001.

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Offline
Advertising

Our Offline Advertising segment is comprised of
our Welcome Wagon and Homestore Plans and Publications
businesses. These businesses were acquired during 2001 and
generated operating income of $7.2 million. Our revenues in
this segment were $58.1 million in 2001, representing 19%
of total revenue for the year.

Unallocated

Unallocated expenses increased $1.2 billion
to $1.372 billion for the year ended December 31, 2001
from $175.0 million for the year ended December 31,
2000. The increase was primarily due to the $925.1 million
impairment of long-lived assets charge in 2001, an increase in
amortization of goodwill and intangibles of $156.4 million,
acquisitions and restructuring charges of $50.3 million,
and an increase in stock-based charges of $25.0 million.
These increases were offset by a decrease in costs of
$4.0 million relating to the write-off of in-process
research and development in connection with companies acquired
in 2000. The remaining increase was due to our overall growth
and expansion and the associated infrastructure expenses.

Liquidity and
Capital Resources

Net cash used in continuing operating activities
of $97.0 million for the year ended December 31, 2002
was attributable to the net loss from continuing operations of
$176.1 million, offset by non-cash expenses including
depreciation, amortization of intangible assets, accretion of
the AOL distribution obligation, impairment of long-lived
assets, provision for doubtful accounts, and stock-based
charges, aggregating to $153.7 million. Net cash used in
continuing operating activities was further increased by
variances in operating assets and liabilities of approximately
$74.6 million, principally relating to payments of accounts
payable and accrued expense balances and by recognition of
deferred revenue. The use of cash to reduce accounts payable and
accrued expenses in the year ended December 31, 2002 was
due, in part, to payments of accrued restructuring expenses in
the amount of $14.5 million as well as payment of other
one-time accrued charges from year end of $11.0 million for
investigation costs. The allowance for doubtful accounts
(included in accounts receivable, net) as a percentage of gross
accounts receivable was 29% and 43% at December 31, 2002
and 2001, respectively. This improvement in the allowance is a
result of a closer alignment between our sales force
compensation and our credit and collections policies in our
Welcome Wagon and our Homestore Apartments & Rentals
businesses. Net cash used in operating activities of
$57.6 million for the year ended December 31, 2001 was
attributable to the net loss of $1.5 billion, offset by non-cash
expenses including depreciation, amortization of goodwill and
intangible assets, impairment of long-lived assets, accretion of
the AOL distribution obligation, provision for doubtful
accounts, stock-based charges, acquisition and restructuring
charges and non-cash items related to the write-down of a
portion of our portfolio of cost investments, aggregating to
$1.3 billion. The impact of net cash used in operating
activities was reduced by favorable variances in operating
assets and liabilities of approximately $93.0 million,
principally relating to increases in accounts payable balances
and deferred revenue. Net cash used in operating activities was
$51.3 million for the year ended December 31, 2000.
Net cash used in operating activities was the result of the net
operating loss totaling $146.1 million, offset by non-cash
expenses including depreciation, amortization of goodwill and
intangible assets and stock-based charges, aggregating to $115.5
million. Adding to the cash used in operations were the changes
in operating assets and liabilities, net of acquisitions, of
$20.8 million.

Net cash provided by investing activities of
$13.4 million for the year ended December 31, 2002 was
primarily attributable to maturities of short-term investments
of $14.4 million and proceeds from the sale of marketable
equity securities of $2.3 million offset by capital
expenditures of $3.3 million. Net cash used in investing
activities of $57.8 million for the year ended December 31,
2001 was attributable to purchases of short-term investments of
$86.2 million offset by maturities of short-term investments of
$147.3 million, capital expenditures of $61.5 million
and cash paid for acquisitions of $57.1 million including
acquisition-related costs. Net cash used in investing activities
of $189.2 million for the year ended December 31, 2000
was attributable to the purchase of cost and equity investments
of $32.5 million, purchases of short-term investments of
$219.9 million offset by maturities of short-term
investments of $146.3 million, capital

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expenditures of $41.1 million and cash paid
for acquisitions of $42.0 million including
acquisition-related costs.


Net cash provided by financing activities of
$3.8 million for the year ended December 31, 2002 was
primarily attributable to the proceeds from the repayment of
stockholders notes of $3.5 million, from the exercise
of stock options, warrants and share issuances under the
employee stock purchase plan of $800,000, and a decrease in our
restricted cash balance of $243,000. The cash provided was
offset by $521,000 relating to a payment of cash in lieu of
stock related to the acquisition of Top Producer. Net cash
provided by financing activities of $59.0 million for the
year ended December 31, 2001 was primarily attributable to
the proceeds from the exercise of stock options, warrants and
share issuances under our employee stock purchase plan of
$56.5 million, proceeds from the payment of
stockholders notes of $2.9 million, deposits of
$4.9 million allocated as restricted cash balances offset
by the issuance of notes receivable of $4.8 million. Net
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, proceeds from exercise of stock options,
warrants and share issuances under our employee stock purchase
plan of $23.4 million, subsidiary equity transactions of
$10.9 million, offset by the repayment of notes payable of
$38.6 million, the transfer of $103.4 million to
restricted cash, and issuance of notes receivable of
$6.0 million. In January 2000, we completed our follow-on
public offering 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.

On April 2, 2002, we closed the sale of the
ConsumerInfo division to Experian for $130.0 million in
cash. This sale provided net proceeds of approximately
$117.1 million after transaction fees and monies placed in
escrow. However, on March 26, 2002, MemberWorks obtained a
court order requiring us to set aside $58.0 million of the
purchase price against a potential claim MemberWorks had against
us. On August 9, 2002, we reached a settlement in the
MemberWorks litigation, in which MemberWorks and certain other
former iPlace shareholders received $23.0 million from the
constructive trust, and the remaining $35.0 million plus
accrued interest was transferred to us, resulting in net
proceeds to us of $94.1 million.

Since inception, we have incurred losses from
operations and have reported negative operating cash flows. As
of December 31, 2002, we had an accumulated deficit of
$1.9 billion and cash and cash equivalents of
$80.5 million. During 2002, we purchased software and
entered into consulting agreements with service providers in
connection with the first phase of implementation of our new
enterprise reporting system. Total commitments as of
December 31, 2002 associated with the project were
$4.5 million. We have no material financial commitments
other than those under operating lease agreements and
distribution and marketing agreements discussed further herein.
We believe that our existing cash and cash equivalents, and any
cash generated from operations, coupled with the effect of our
previously announced cost reduction efforts, will be sufficient
to fund our working capital requirements, capital expenditures
and other obligations through at least the next 12 months.

We may 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 and 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. On November 4, 2002, we filed an application with
NASDAQ to transfer our common stock to The NASDAQ SmallCap
Market because our common stock failed to maintain a minimum bid
price of $1.00 per share as required by the applicable NASDAQ
Marketplace Rule. We began trading on The NASDAQ SmallCap Market
on November 18, 2002 under the current symbol HOMS.
The NASDAQ SmallCap Market is viewed by some investors as a less
desirable and less liquid marketplace than The NASDAQ National
Market. We must satisfy the NASDAQ SmallCap Markets
minimum listing maintenance requirements to maintain our listing
on The NASDAQ SmallCap Market. The listing maintenance
requirements set forth in NASDAQs Marketplace Rules
include a series of financial tests relating to
stockholders equity, market capitalization, net income,
public float, market value of public float, number of market
makers and stockholders, and maintaining a minimum closing bid
price of $1.00 per share

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for shares of our common stock. On March 11,
2003, NASDAQ notified us of our non-compliance with such minimum
closing bid price requirements. We now have to demonstrate in
the succeeding 180 days a closing bid price of at least
$1.00 per share for a period of ten consecutive business days to
regain compliance. If we are unable to achieve a $1.00 per share
bid price prior to the expiration of this period, we may be
eligible for an additional 180-day extension of the bid price
exception, provided that we demonstrate stockholders
equity of at least $5.0 million, a market capitalization of
at least $50.0 million or net income of at least $750,000
from continuing operations for the year ended 2003. We must also
demonstrate compliance with all requirements for continued
listing on The NASDAQ SmallCap Market. If adequate funds are not
available or not available on acceptable terms, we may be unable
to develop or enhance our products and services, take advantage
of future opportunities, or respond to competitive pressures or
unanticipated requirements which may have a material adverse
effect on our business, financial condition or operating
results. 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 securities might have rights, preferences or privileges
senior to those of our common and convertible preferred stock.
In addition, our liquidity could be adversely impacted by the
litigation referred to in Part I 
Item 3. Legal Proceedings.


We lease our facilities and certain equipment
under operating lease agreements that expire at various dates
through 2008. The following presents our future lease payments
under these agreements, net of actual sublease arrangements and
exclusive of estimated sublease income utilized in the 2001 and
2002 restructuring provisions (in thousands):

|                        |       |           |        |        | 
|----------------------- | ----- | --------- | ------ | ------ | 
|                        |       | Operating
|Year Ended December 31, |       | Leases   
|                        |       |          
|2003                    |       | $         | 12,788 |       
|2004                    |       |           | 10,447 |       
|2005                    |       |           | 10,144 |       
|2006                    |       |           | 9,887  |       
|2007 and thereafter     |       |           | 5,921  |       
|                        |       |           |        |       
|                        | Total |           | $      | 49,187 | 
|                        |       |           |        |       

Of the amounts above, $17.2 million has
already been accrued in restructuring accruals and is reflected
in accrued expenses and other non-current liabilities at
December 31, 2002.

Additionally, under our operating agreement with
NAR, we have an exclusive arrangement to operate
REALTOR.com® as well as a license to use the
REALTOR.com® domain name and trademark and the
REALTORS® trademark in exchange for minimum annual royalty
payments. We also have an operating agreement with the
International Consortium of Real Estate Associations under which
we agreed to operate the consortiums web site and have
been endorsed as the exclusive provider of certain products and
services to real estate agents in the countries in which members
of the consortium have operations. The following presents our
future minimum commitments under those agreements (in thousands):

|                         |       |           |       |       | 
|------------------------ | ----- | --------- | ----- | ----- | 
|                         |       | Operating
|Year Ending December 31, |       | Agreement
|                         |       |          
|2003                     |       | $         | 2,000 |      
|2004                     |       |           | 2,200 |      
|2005                     |       |           | 2,400 |      
|2006                     |       |           | 1,500 |      
|2007                     |       |           | 1,500 |      
|                         |       |           |       |      
|                         | Total |           | $     | 9,600 | 
|                         |       |           |       |      

We were operating under a previous agreement with
AOL that was terminated in January 2003. In conjunction with the
termination, a new agreement was entered into. The old agreement
called for the payment of $90.0 million that was included
in restricted cash at December 31, 2002 as well as a
termination

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fee of $7.5 million. The new agreement
requires certain quarterly payments. The payments to be made
over the next two years including the restricted cash,
termination and quarterly fees is as follows (in thousands):


|                         |       |           |         |         | 
|------------------------ | ----- | --------- | ------- | ------- | 
|                         |       | Operating
|Year Ending December 31, |       | Agreement
|                         |       |          
|2003                     |       | $         | 112,500 |        
|2004                     |       |           | 7,500   |        
|                         |       |           |         |        
|                         | Total |           | $       | 120,000 | 
|                         |       |           |         |        

Commitments for the years ending 2006 and beyond
will be calculated based on amounts paid in the prior year
adjusted for the Annual Consumer Price Index for the period
ending in the prior calendar year.

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 Group, Inc., or Budget, in
connection with entering into a ten-year strategic alliance
agreement that allows us to participate in online and offline
Budget marketing activities. In this agreement, we provided a
guarantee that the price of the shares issued to Budget would be
$64.50 per share during a certain future period. This agreement
was amended in October 2001. Under the amendment, we issued
approximately 4.8 million additional shares of common stock
in exchange for the cancellation and full settlement of the
$64.50 stock price guarantee. In addition, the amendment
extended the term of the agreement by one year. Sales and
marketing expense was being amortized over the additional year
of the agreement and certain amounts capitalized in connection
with this agreement were impaired in the fourth quarter of 2001.
We terminated this agreement with Budget in the fourth quarter
of 2002.

In April 2000, we entered into a five-year
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 guaranteed that the 30-day
average closing price, related to approximately 64%, 18% and 18%
of the shares we issued, would be $65.64 per share on
July 31, 2003 and $68.50 per share on July 31, 2004
and July 31, 2005, respectively. This guarantee only
applied to shares that continued to be held by AOL at the end of
each respective guarantee period. At December 31, 2002, we
had recorded a total of $219.5 million of distribution
obligation. The distribution obligation represented the fair
market value of approximately 3.9 million shares of our common
stock issued upon entering the agreement and the guarantee of
the stock. The difference between the total guaranteed amount
and the liability recorded was being recorded as other expense
over the term of the agreement. In connection with the
guarantee, we established a $90.0 million letter of credit
and were required to pledge an amount equal to the outstanding
portion of the letter of credit. As of December 31, 2002,
the cash pledged was classified as restricted cash on the
balance sheet. This letter of credit could have been drawn
against by AOL in the event that our 30-day average closing
price is less than $65.64 on July 31, 2003. The aggregate
amount of cash payments we would have been required to make in
performing under this agreement was limited to
$90.0 million. Any additional obligation to AOL could have
been paid in cash or our common stock at our discretion. If the
amount we were required to pay AOL at July 31, 2003
exceeded $90.0 million, the distribution agreement with AOL
would expire.

In October 2001, we filed a demand for
arbitration with AOL relating to the distribution agreement. Our
complaint claimed that AOL has breached the distribution
agreement by failing to meet its contractual obligations to
build 18 specific promotions for us and to deliver guaranteed
Homestore impressions to AOL users. We also claimed that AOL
breached the duty of good faith and fair dealing in the contract
by disregarding its contractual commitments. We also claimed
that AOLs conduct violated the contractual guarantees of
exclusivity, premier partnership and prominent partnership for
us. In the arbitration, we sought a declaration that AOL
breached the distribution agreement; that we may terminate or
rescind the contract and receive damages and other appropriate
relief; that we may terminate the contract without AOL having
any right to the $90.0 million letter of credit issued in
favor of AOL in connection with the distribution agreement; and
that we would have no further obligations under the distribution
agreement. An arbitration hearing was held in mid-July 2002 and
we submitted our proposed findings of fact and conclusions of
law to the arbitration panel in September 2002.

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On January 9, 2003, we entered into a new
marketing agreement with AOL that terminated our obligation
under the old agreement and settled the arbitration. As part of
the new marketing agreement, which continues through June 2004,
we have the exclusive right to provide AOL with real estate
listings, and AOL members also will retain access to a wide
array of our professional content. AOL will offer increased
promotion and more prominent integration of our content in a
redesigned real estate area on the AOL service. The parties will
continue to share advertising revenue in certain home-related
categories. We will pay AOL $7.5 million in cash to
terminate the previous agreement and also will allow AOL to
fully draw down on an existing $90.0 million letter of credit
secured by restricted cash on our balance sheet. Termination of
the previous agreement also eliminates our responsibility to
provide AOL with an additional make-whole payment in
July 2003 which would have been approximately
$57.0 million, payable in cash or stock. Transfer
restrictions relating to the approximately 3.9 million
shares of our common stock issued to AOL under the previous
agreement also have been removed. Over the term of the new
agreement, we will make quarterly cash payments of
$3.75 million, in six equal installments beginning January,
2003 and ending April, 2004.

Recent Accounting Developments

In June 2001 the FASB, issued SFAS Nos. 141
and 142, Business Combinations and Goodwill
and Other Intangible Assets, respectively. SFAS
No. 141 replaces APB Opinion No. 16, Business
Combinations. It also provides guidance on purchase
accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS No. 142 changes the
accounting for goodwill and other intangible assets with
indefinite useful lives from an amortization method to an
impairment-only approach. Under SFAS No. 142, goodwill will
be tested upon implementation of the standard, annually and
whenever events or circumstances occur indicating that goodwill
might be impaired. SFAS No. 141 and SFAS No. 142 are
effective for all business combinations completed after
June 30, 2001.

We adopted SFAS No. 142 in January 2002,
accordingly amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 has ceased,
and intangible assets acquired prior to July 1, 2001 that
do not meet the criteria for recognition under SFAS No. 141
have been reclassified to goodwill. In connection with the
adoption of SFAS No. 142, we performed a transitional
goodwill impairment assessment in the first quarter of 2002 and
determined that there is no impairment as a result of the
adoption of this standard.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations, which requires entities to record the fair
value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the liability
is initially recorded, the entity capitalizes the cost by
increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful
life of the related asset. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. We have no
asset retirement obligations and therefore believe there will be
no impact upon adoption of SFAS No. 143.

In January 2002, we adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which was issued in October 2001. The FASBs
new rules on asset impairment supersede SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and portions of APB
Opinion No. 30, Reporting the Results of
Operations. SFAS No. 144 provides a single accounting
model for long-lived assets to be disposed of and significantly
changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and
are stated at the lower of fair value and carrying amount. SFAS
No. 144 also requires expected future operating losses from
discontinued operations to be displayed in the period(s) in
which the losses are incurred, rather than as of the measurement
date as presently required. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be
distinguished from the rest of the entity, and (2) will be
eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of SFAS No. 144 in the
first quarter of 2002 did not have an impact on our financial
position, results of operations or cash flows, except for the
classification of the disposition of the ConsumerInfo division
as a discontinued operation included elsewhere in this
Form 10-K.

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In February 2002, the EITF issued EITF 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products). 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. We adopted this consensus early
and the effect on the years ended December 31, 2001 and
2000 was to reduce previously reported revenue and expense by
$4.7 million and $7.2 million, respectively, with no
effect on net loss or net loss per share.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which requires the liability for a disposal
obligation to be recognized and measured at its fair value when
the entity ceases using the leased property in operations. The
FASB decided the same approach should apply for similar disposal
obligations associated with other preexisting firmly committed
contracts. Additionally, SFAS No. 146 would require
severance pay in many cases to be recognized over time rather
than up front. If the benefit arrangement requires employees to
render future service beyond a defined minimum retention period,
a liability should be recognized as employees render service
over the future service period. If the benefit arrangement does
not require employees to render future service beyond the
minimum retention period, a liability should be recognized at
the date the termination is communicated to employees. SFAS
No. 146 is effective for disposal activities initiated
after December 31, 2002. The FASBs new rules on
liabilities for disposal obligations reconsiders the guidance in
EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring) and addresses the issue separately from the
scope of SFAS No. 144. This statement is not expected to
have a material impact on us.

On December 31, 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends
SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to the fair value method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of and
requires prominent disclosure about the effects on reported net
income of a companys accounting policy decisions with
respect to stock-based employee compensation. In addition, this
statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those
effects in interim financial information. SFAS No. 148 is
effective for financial statements for fiscal years ending after
December 15, 2002. The disclosure requirements for interim
financial statements containing condensed consolidated financial
statements are effective for interim periods beginning after
December 15, 2002. We do not intend on adopting the fair
value method of accounting for stock-based compensation of
SFAS 123 and accordingly SFAS 148 is not expected to
have a material impact on our financial position, results of
operations or cash flows.

In December 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires
that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee. This
interpretation is applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.
Management is currently evaluating the impact of recognizing
such liabilities on the Companys consolidated financial
position and results of operations. FIN 45 also contains
disclosure provisions surrounding existing guarantees, which are
effective for financial statements of interim or annual periods
ending after December 15, 2002.

In January 2003, the Emerging Issues Task Force
issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables (EITF
No. 00-21). This consensus addresses certain aspects of
accounting by a vendor of arrangements under which it will
perform multiple revenue-generating activities, specifically,
how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF
No. 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003 or
entities may elect to report the change in accounting as a
cumulative-effect adjustment in accordance with Opinion 20
and Statement 3, with early application of this consensus
permitted. We are currently evaluating the impact this consensus
will have on its financial statements.

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Item
7A.Quantitative and Qualitative
Disclosures About Market Risk

Interest Rate Risk.Our exposure to market rate risk for
changes in interest rates relates primarily to our investment
portfolio. We have not used derivative financial instruments in
our investment portfolio. We invest our excess cash in
money-market funds, debt instruments of high quality corporate
issuers and debt instruments the U.S. Government and its
agencies, and, by policy, this limits the amount of credit
exposure to any one issuer.

Investments in both fixed rate and floating rate
interest earning instruments carries a degree of interest rate
risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while
floating rate securities may produce less income than expected
if interest rates fall.




Item
8.Financial Statements and
Supplementary Data

Index to Consolidated Financial
Statements

|                                                  |                                                     |      |    |    | 
|------------------------------------------------- | --------------------------------------------------- | ---- | -- | -- | 
|                                                  |                                                     | Page
|                                                  |                                                     |     
|Homestore, Inc. Consolidated Financial Statements |                                                     |      | 64 |   
|                                                  | Report of Independent Accountants                   |      |    | 64 | 
|                                                  | Consolidated Balance Sheets                         |      |    | 65 | 
|                                                  | Consolidated Statements of Operations               |      |    | 66 | 
|                                                  | Consolidated Statements of Stockholders
    Equity |      |    | 67 | 
|                                                  | Consolidated Statements of Cash Flows               |      |    | 69 | 
|                                                  | Notes to Consolidated Financial Statements          |      |    | 70 | 

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of Homestore, 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, Inc. and its subsidiaries (the
Company) at December 31, 2002 and
December 31, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2002 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 2 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

/s/ PRICEWATERHOUSECOOPERS LLP

Century City, California

March 25, 2003


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HOMESTORE, INC.

CONSOLIDATED BALANCE SHEETS

|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |            |         | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ---------- | ------- |  | ------- | ---------- | ------- | 
|                                                         |                                                                                                                                                                                                                                                                           |                                           
|                                                         |                                                                                                                                                                                                                                                                           | December 31,                              
|                                                         |                                                                                                                                                                                                                                                                           |                                           
|                                                         |                                                                                                                                                                                                                                                                           | 2002                                       |         | 2001      
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |           
|                                                         |                                                                                                                                                                                                                                                                           |                                           
|                                                         |                                                                                                                                                                                                                                                                           | (In thousands)                            
|ASSETS                                                  
|Current assets:                                          |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         | Cash and cash equivalents                                                                                                                                                                                                                                                 |                                            | $       | 80,463     |         |  | $       | 38,272     |        
|                                                         | Restricted cash                                                                                                                                                                                                                                                           |                                            |         | 90,000     |         |  |         |           |        
|                                                         | Short-term investments                                                                                                                                                                                                                                                    |                                            |         |           |         |  |         | 14,190     |        
|                                                         | Marketable equity securities                                                                                                                                                                                                                                              |                                            |         |           |         |  |         | 2,432      |        
|                                                         | Accounts receivable, net of allowance for
    doubtful accounts of $10,698 and $24,225 at December 31,
    2002 and 2001, respectively                                                                                                                                    |                                            |         | 25,945     |         |  |         | 31,906     |        
|                                                         | Current portion of prepaid distribution expense                                                                                                                                                                                                                           |                                            |         | 21,863     |         |  |         | 48,793     |        
|                                                         | Other current assets                                                                                                                                                                                                                                                      |                                            |         | 12,739     |         |  |         | 43,743     |        
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total current assets                       |         |            | 231,010 |  |         |            | 179,336 | 
|Prepaid distribution expense, net of current
    portion |                                                                                                                                                                                                                                                                           |                                            | 13,150  |            |         |  | 35,007  |           
|Property and equipment, net                              |                                                                                                                                                                                                                                                                           |                                            | 25,933  |            |         |  | 44,759  |           
|Goodwill, net                                            |                                                                                                                                                                                                                                                                           |                                            | 23,258  |            |         |  | 107,769 |           
|Intangible assets, net                                   |                                                                                                                                                                                                                                                                           |                                            | 72,771  |            |         |  | 143,002 |           
|Restricted cash                                          |                                                                                                                                                                                                                                                                           |                                            |        |            |         |  | 98,519  |           
|Other assets                                             |                                                                                                                                                                                                                                                                           |                                            | 13,086  |            |         |  | 6,645   |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total assets                               |         | $          | 379,208 |  |         | $          | 615,037 | 
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY                
|Current Liabilities:                                     |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         | Accounts payable                                                                                                                                                                                                                                                          |                                            | $       | 3,419      |         |  | $       | 14,667     |        
|                                                         | Accrued expenses                                                                                                                                                                                                                                                          |                                            |         | 59,732     |         |  |         | 102,371    |        
|                                                         | Accrued distribution obligation                                                                                                                                                                                                                                           |                                            |         | 211,973    |         |  |         |           |        
|                                                         | Deferred revenue                                                                                                                                                                                                                                                          |                                            |         | 29,625     |         |  |         | 62,988     |        
|                                                         | Deferred revenue from related parties                                                                                                                                                                                                                                     |                                            |         | 7,024      |         |  |         | 31,198     |        
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total current liabilities                  |         |            | 311,773 |  |         |            | 211,224 | 
|Distribution obligation, net of current portion          |                                                                                                                                                                                                                                                                           |                                            | 7,500   |            |         |  | 204,660 |           
|Deferred revenue from related parties                    |                                                                                                                                                                                                                                                                           |                                            | 6,510   |            |         |  | 5,772   |           
|Other non-current liabilities                            |                                                                                                                                                                                                                                                                           |                                            | 14,695  |            |         |  | 10,125  |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            | 340,478 |            |         |  | 431,781 |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|Commitments and contingencies (Note 21)                  |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                        
|                                                         | Convertible preferred stock                                                                                                                                                                                                                                               |                                            |         |           |         |  |         |           |        
|                                                         | Common stock, $.001 par value;
    500,000 shares authorized, 124,319 and 123,416 shares
    issued at December 31, 2002 and December 31, 2001,
    respectively, and 117,839 and 117,509 shares outstanding at
    December 31, 2002 and December 31, 2001, respectively |                                            |         | 118        |         |  |         | 117        |        
|                                                         | Additional paid-in capital                                                                                                                                                                                                                                                |                                            |         | 1,990,755  |         |  |         | 1,987,405  |        
|                                                         | Treasury stock, at cost; 6,480 and
    5,907 shares at December 31, 2002 and
    December 31, 2001, respectively                                                                                                                                                          |                                            |         | (18,567    | )       |  |         | (18,062    | )      
|                                                         | Notes receivable from stockholders                                                                                                                                                                                                                                        |                                            |         | (106       | )       |  |         | (3,569     | )      
|                                                         | Deferred stock-based charges                                                                                                                                                                                                                                              |                                            |         | (2,246     | )       |  |         | (11,692    | )      
|                                                         | Accumulated other comprehensive loss                                                                                                                                                                                                                                      |                                            |         | (424       | )       |  |         | (3,568     | )      
|                                                         | Accumulated deficit                                                                                                                                                                                                                                                       |                                            |         | (1,930,800 | )       |  |         | (1,767,375 | )      
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total stockholders equity                 |         |            | 38,730  |  |         |            | 183,256 | 
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total liabilities and stockholders equity |         | $          | 379,208 |  |         | $          | 615,037 | 
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           

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

65



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##### Table of Contents



HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |         |         | 
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------- | -------- | ------- | ------- | ---- | ---------- | ------- | --------- | - | -------- | ------- | ------- | 
|                                                                                                    |                                                                                     |                                         
|                                                                                                    |                                                                                     | Year Ended December 31,                 
|                                                                                                    |                                                                                     |                                         
|                                                                                                    |                                                                                     | 2002                                     |          | 2001    |         | 2000
|                                                                                                    |                                                                                     |                                          |          |         |         |     
|                                                                                                    |                                                                                     |                                         
|                                                                                                    |                                                                                     | (In thousands, except per share amounts)
|Revenue (including non-cash equity charges, see
    note 2)                                         |                                                                                     | $                                        | 233,455  |         |         | $    | 265,436    |         |           | $ | 181,322  |        
|Related party revenue                                                                               |                                                                                     |                                          | 31,158   |         |         |      | 38,346     |         |           |   |         |        
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|                                                                                                    | Total revenue                                                                       |                                          |          | 264,613 |         |      |            | 303,782 |           |   |          | 181,322 |        
|Cost of revenue (including non-cash equity
    charges, see note 2)                                 |                                                                                     |                                          | 78,304   |         |         |      | 113,490    |         |           |   | 61,222   |        
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|                                                                                                    | Gross profit                                                                        |                                          |          | 186,309 |         |      |            | 190,292 |           |   |          | 120,100 |        
|Operating expenses:                                                                                 |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|                                                                                                    | Sales and marketing (including non-cash equity
    charges, see note 2)             |                                          |          | 164,629 |         |      |            | 242,174 |           |   |          | 160,122 |        
|                                                                                                    | Product and website development (including
    non-cash equity charges, see note 2) |                                          |          | 30,279  |         |      |            | 35,722  |           |   |          | 15,554  |        
|                                                                                                    | General and administrative (including non-cash
    equity charges, see note 2)      |                                          |          | 84,813  |         |      |            | 174,363 |           |   |          | 59,610  |        
|                                                                                                    | Amortization of goodwill and intangible assets                                      |                                          |          | 37,165  |         |      |            | 199,291 |           |   |          | 42,868  |        
|                                                                                                    | In-process research and development                                                 |                                          |          |        |         |      |            |        |           |   |          | 4,048   |        
|                                                                                                    | Acquisition and restructuring charges                                               |                                          |          | 12,087  |         |      |            | 50,260  |           |   |          |        |        
|                                                                                                    | Impairment of long-lived assets                                                     |                                          |          | 7,335   |         |      |            | 925,094 |           |   |          |        |        
|                                                                                                    | Litigation settlement                                                               |                                          |          | 23,000  |         |      |            |        |           |   |          |        |        
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|                                                                                                    |                                                                                     | Total operating expenses                 |          |         | 359,308 |      |            |         | 1,626,904 |   |          |         | 282,202 | 
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|Loss from operations                                                                                |                                                                                     |                                          | (172,999 | )       |         |      | (1,436,612 | )       |           |   | (162,102 | )      
|Interest income, net                                                                                |                                                                                     |                                          | 2,620    |         |         |      | 10,490     |         |           |   | 23,031   |        
|Other expense, net                                                                                  |                                                                                     |                                          | (5,682   | )       |         |      | (44,281    | )       |           |   | (6,982   | )      
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|Loss from continuing operations                                                                     |                                                                                     |                                          | (176,061 | )       |         |      | (1,470,403 | )       |           |   | (146,053 | )      
|Gain on disposition of discontinued operations                                                      |                                                                                     |                                          | 11,790   |         |         |      |           |         |           |   |         |        
|Income from discontinued operations                                                                 |                                                                                     |                                          | 846      |         |         |      | 4,814      |         |           |   |         |        
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|Net loss                                                                                            |                                                                                     | $                                        | (163,425 | )       |         | $    | (1,465,589 | )       |           | $ | (146,053 | )      
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|Basic and diluted net loss per share applicable
    to common stockholders Continuing operations    |                                                                                     | $                                        | (1.49    | )       |         | $    | (13.69     | )       |           | $ | (1.83    | )      
|Discontinued operations                                                                             |                                                                                     | $                                        | .11      |         |         | $    | .04        |         |           | $ |         |        
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|Net loss                                                                                            |                                                                                     | $                                        | (1.39    | )       |         | $    | (13.64     | )       |           | $ | (1.83    | )      
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        
|Shares used to calculate basic and diluted net
    loss per share applicable to common stockholders |                                                                                     |                                          | 117,900  |         |         |      | 107,433    |         |           |   | 79,758   |        
|                                                                                                    |                                                                                     |                                          |          |         |         |      |            |         |           |   |          |        

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

66



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##### Table of Contents



HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |   | 
|--------------------------------------------------------------------------------------------- | -------------------------------------- | --------------- | - | ------------ |  | ---------- | - | -------- |  | ------- | ------- | ----- |  | - | --- | - |  | - | --------- | - |  | - | ------- | - | 
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |        
|                                                                                              |                                        | Convertible     |   |              |  |            |   |         
|                                                                                              |                                        | Preferred Stock |   | Common Stock |  | Additional |   |         
|                                                                                              |                                        |                 |   |              |  | Paid-In    |   | Treasury
|                                                                                              |                                        | Shares          |   | Amount       |  | Shares     |   | Amount   |  | Capital |         | Stock
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |      
|                                                                                              |                                        |                
|                                                                                              |                                        | (in thousands) 
|Balance at December 31, 1999                                                                  |                                        |                 |  |              |  |            |  |          |  |         | 70,189  |       |  | $ | 70  |   |  | $ | 413,244   |   |  | $ | (13,676 | )
|Comprehensive income (loss):                                                                  |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|                                                                                              | Net loss                               |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              | Unrealized loss on marketable security |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              | Foreign currency translation           |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|                                                                                              | Comprehensive loss                     |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|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    |   |  |   |        |  
|Repayment from stockholders                                                                   |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|Repurchase of common stock                                                                    |                                        |                 |  |              |  |            |  |          |  |         | (471    | )     |  |   |    |   |  |   |          |   |  |   | (2,880  | )
|Deferred stock- based charges                                                                 |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | 31,520    |   |  |   |        |  
|Stock-based charges                                                                           |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|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                                                                  |                                        |                 |  |              |  |            |  |          |  |         | 82,761  |       |  |   | 83  |   |  |   | 1,027,423 |   |  |   | (16,556 | )
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Comprehensive loss:                                                                           |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Net loss                                                                                      |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|Unrealized loss on marketable securities                                                      |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|Foreign currency translation                                                                  |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Comprehensive loss                                                                            |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Issuance of common stock under employee stock
    purchase plan and exercise of stock options |                                        |                 |  |              |  |            |  |          |  |         | 4,427   |       |  |   | 4   |   |  |   | 56,250    |   |  |   |        |  
|Issuance of common stock for acquisitions                                                     |                                        |                 |  |              |  |            |  |          |  |         | 25,200  |       |  |   | 25  |   |  |   | 887,484   |   |  |   |        |  
|Issuance of common stock in settlement of stock
    price guarantee                           |                                        |                 |  |              |  |            |  |          |  |         | 4,805   |       |  |   | 5   |   |  |   | (5        | ) |  |   |        |  
|Issuance of common stock in connection with a
    marketing agreement                         |                                        |                 |  |              |  |            |  |          |  |         | 600     |       |  |   |    |   |  |   | 7,434     |   |  |   |        |  
|Repayment from stockholders                                                                   |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|Repurchase of common stock                                                                    |                                        |                 |  |              |  |            |  |          |  |         | (374    | )     |  |   |    |   |  |   |          |   |  |   | (1,506  | )
|Deferred stock- based charges                                                                 |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | 2,954     |   |  |   |        |  
|Stock-based charges                                                                           |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | 5,600     |   |  |   |        |  
|Exercise of warrants                                                                          |                                        |                 |  |              |  |            |  |          |  |         | 90      |       |  |   |    |   |  |   | 248       |   |  |   |        |  
|Reclassification to prepaid distribution expense
    and other assets (see note 2)            |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | 17        |   |  |   |        |  
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Balance at December 31, 2001                                                                  |                                        |                 |  |              |  |            |  |          |  |         | 117,509 |       |  | $ | 117 |   |  | $ | 1,987,405 |   |  | $ | (18,062 | )
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |          |  
|--------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ------- | ----------- |  | ------------- | ------- | ----------- |  | ------------- | ------ | ------ | - | - | ---------- | -------- | - | - | ---------- | -------- | -
|                                                                                              |                                        | Notes          |         |             |  | Accumulated   |         |             |  |              
|                                                                                              |                                        | Receivable     |         | Deferred    |  | Other         |         |             |  | Total        
|                                                                                              |                                        | From           |         | Stock-Based |  | Comprehensive |         | Accumulated |  | Stockholders
|                                                                                              |                                        | Stockholders   |         | Charges     |  | Income (loss) |         | Deficit     |  | Equity       
|                                                                                              |                                        |                |         |             |  |               |         |             |  |              
|                                                                                              |                                        |               
|                                                                                              |                                        | (in thousands)
|Balance at December 31, 1999                                                                  |                                        | $              | (13,350 | )           |  | $             | (38,947 | )           |  | $             | 3,865  |        |   | $ | (155,733   | )        |   | $ | 195,473    |         
|Comprehensive income (loss):                                                                  |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|                                                                                              | Net loss                               |                |         |            |  |               |         |            |  |               |        |       |   |   |            | (146,053 | ) |   |            | (146,053 | )
|                                                                                              | Unrealized loss on marketable security |                |         |            |  |               |         |            |  |               |        | (4,022 | ) |   |            |         |   |   |            | (4,022   | )
|                                                                                              | Foreign currency translation           |                |         |            |  |               |         |            |  |               |        | 134    |   |   |            |         |   |   |            | 134      |  
|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|                                                                                              | Comprehensive loss                     |                |         |            |  |               |         |            |  |               |        | (3,888 | ) |   |            |         |   |   |            | (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                                                               |                                        |                |        |             |  |               | (70,798 | )           |  |               |       |        |   |   |           |          |   |   | 44         |         
|Repayment from stockholders                                                                   |                                        |                | 2,532   |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   | 2,532      |         
|Repurchase of common stock                                                                    |                                        |                | 2,880   |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   |           |         
|Deferred stock- based charges                                                                 |                                        |                |        |             |  |               | (31,520 | )           |  |               |       |        |   |   |           |          |   |   |           |         
|Stock-based charges                                                                           |                                        |                |        |             |  |               | 43,541  |             |  |               |       |        |   |   |           |          |   |   | 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                                                                  |                                        |                | (7,938  | )           |  |               | (97,724 | )           |  |               | (23    | )      |   |   | (301,786   | )        |   |   | 603,479    |         
|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|Comprehensive loss:                                                                           |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|Net loss                                                                                      |                                        |                |        |             |  |               |        |             |  |               |       |        |   |   | (1,465,589 | )        |   |   | (1,465,589 | )       
|Unrealized loss on marketable securities                                                      |                                        |                |        |             |  |               |        |             |  |               | (3,118 | )      |   |   |           |          |   |   | (3,118     | )       
|Foreign currency translation                                                                  |                                        |                |        |             |  |               |        |             |  |               | (427   | )      |   |   |           |          |   |   | (427       | )       
|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|Comprehensive loss                                                                            |                                        |                |        |             |  |               |        |             |  |               | (3,545 | )      |   |   |           |          |   |   | (1,469,134 | )       
|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|Issuance of common stock under employee stock
    purchase plan and exercise of stock options |                                        |                |        |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   | 56,254     |         
|Issuance of common stock for acquisitions                                                     |                                        |                |        |             |  |               | (18,454 | )           |  |               |       |        |   |   |           |          |   |   | 869,055    |         
|Issuance of common stock in settlement of stock
    price guarantee                           |                                        |                |        |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   |           |         
|Issuance of common stock in connection with a
    marketing agreement                         |                                        |                |        |             |  |               | (7,434  | )           |  |               |       |        |   |   |           |          |   |   |           |         
|Repayment from stockholders                                                                   |                                        |                | 2,863   |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   | 2,863      |         
|Repurchase of common stock                                                                    |                                        |                | 1,506   |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   |           |         
|Deferred stock- based charges                                                                 |                                        |                |        |             |  |               | (2,954  | )           |  |               |       |        |   |   |           |          |   |   |           |         
|Stock-based charges                                                                           |                                        |                |        |             |  |               | 39,216  |             |  |               |       |        |   |   |           |          |   |   | 44,816     |         
|Exercise of warrants                                                                          |                                        |                |        |             |  |               |        |             |  |               |       |        |   |   |           |          |   |   | 248        |         
|Reclassification to prepaid distribution expense
    and other assets (see note 2)            |                                        |                |        |             |  |               | 75,658  |             |  |               |       |        |   |   |           |          |   |   | 75,675     |         
|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         
|Balance at December 31, 2001                                                                  |                                        | $              | (3,569  | )           |  | $             | (11,692 | )           |  | $             | (3,568 | )      |   | $ | (1,767,375 | )        |   | $ | 183,256    |         
|                                                                                              |                                        |                |         |             |  |               |         |             |  |               |        |        |   |   |            |          |   |   |            |         

67



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##### Table of Contents



HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY(Continued)

|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |   | 
|--------------------------------------------------------------------------------------------- | -------------------------------------- | --------------- | - | ------------ |  | ---------- | - | -------- |  | ------- | ------- | ----- |  | - | --- | - |  | - | --------- | - |  | - | ------- | - | 
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |        
|                                                                                              |                                        | Convertible     |   |              |  |            |   |         
|                                                                                              |                                        | Preferred Stock |   | Common Stock |  | Additional |   |         
|                                                                                              |                                        |                 |   |              |  | Paid-In    |   | Treasury
|                                                                                              |                                        | Shares          |   | Amount       |  | Shares     |   | Amount   |  | Capital |         | Stock
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |      
|                                                                                              |                                        |                
|                                                                                              |                                        | (in thousands) 
|Balance at December 31, 2001                                                                  |                                        |                 |  |              |  | $          |  |          |  |         | 117,509 |       |  | $ | 117 |   |  | $ | 1,987,405 |   |  | $ | (18,062 | )
|Comprehensive income (loss):                                                                  |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|                                                                                              | Net loss                               |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              | Realized loss on marketable securities |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              | Foreign currency translation           |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|                                                                                              | Comprehensive loss                     |                 |   |             |  |            |   |         |  |         |         |      |  |   |     |  |  |   |           |  |  |   |         |  | 
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Issuance of common stock under employee stock
    purchase plan and exercise of stock options |                                        |                 |  |              |  |            |  |          |  |         | 707     |       |  |   | 1   |   |  |   | 895       |   |  |   |        |  
|Settlement of stock issuance obligation                                                       |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | (521      | ) |  |   |        |  
|Issuance of common stock                                                                      |                                        |                 |  |              |  |            |  |          |  |         | 117     |       |  |   |    |   |  |   | 141       |   |  |   | (57     | )
|Repayment from stockholders                                                                   |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   |          |   |  |   |        |  
|Repurchase of common stock                                                                    |                                        |                 |  |              |  |            |  |          |  |         | (127    | )     |  |   |    |   |  |   |          |   |  |   | (169    | )
|Reversal of stock- based charges related to
    dispositions                                  |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | (2,124    | ) |  |   |        |  
|Stock-based charges                                                                           |                                        |                 |  |              |  |            |  |          |  |         |        |       |  |   |    |   |  |   | 4,959     |   |  |   |        |  
|Shares returned from escrow relating to
    discontinued operations                           |                                        |                 |  |              |  |            |  |          |  |         | (367    | )     |  |   |    |   |  |   |          |   |  |   | (279    | )
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  
|Balance at December 31, 2002.                                                                 |                                        |                 |  |              |  | $          |  |          |  |         | 117,839 |       |  | $ | 118 |   |  | $ | 1,990,755 |   |  | $ | (18,567 | )
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |         |         |       |  |   |     |   |  |   |           |   |  |   |         |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                              |                                        |                |        |             |  |               |         |             |  |               |        |       |   |   |            |          |   |   |         |          |  
|--------------------------------------------------------------------------------------------- | -------------------------------------- | -------------- | ------ | ----------- |  | ------------- | ------- | ----------- |  | ------------- | ------ | ----- | - | - | ---------- | -------- | - | - | ------- | -------- | -
|                                                                                              |                                        | Notes          |        |             |  | Accumulated   |         |             |  |              
|                                                                                              |                                        | Receivable     |        | Deferred    |  | Other         |         |             |  | Total        
|                                                                                              |                                        | From           |        | Stock-Based |  | Comprehensive |         | Accumulated |  | Stockholders
|                                                                                              |                                        | Stockholders   |        | Charges     |  | Income (loss) |         | Deficit     |  | Equity       
|                                                                                              |                                        |                |        |             |  |               |         |             |  |              
|                                                                                              |                                        |               
|                                                                                              |                                        | (in thousands)
|Balance at December 31, 2001                                                                  |                                        | $              | (3,569 | )           |  | $             | (11,692 | )           |  | $             | (3,568 | )     |   | $ | (1,767,375 | )        |   | $ | 183,256 |         
|Comprehensive income (loss):                                                                  |                                        |                |        |             |  |               |         |             |  |               |        |       |   |   |            |          |   |   |         |         
|                                                                                              | Net loss                               |                |        |            |  |               |         |            |  |               |        |      |   |   |            | (163,425 | ) |   |         | (163,425 | )
|                                                                                              | Realized loss on marketable securities |                |        |            |  |               |         |            |  |               |        | 3,292 |   |   |            |         |   |   |         | 3,292    |  
|                                                                                              | Foreign currency translation           |                |        |            |  |               |         |            |  |               |        | (148  | ) |   |            |         |   |   |         | (148     | )
|                                                                                              |                                        |                |        |             |  |               |         |             |  |               |        |       |   |   |            |          |   |   |         |         
|                                                                                              | Comprehensive loss                     |                |        |            |  |               |         |            |  |               |        | 3,144 |   |   |            |         |   |   |         | (160,281 | )
|                                                                                              |                                        |                |        |             |  |               |         |             |  |               |        |       |   |   |            |          |   |   |         |         
|Issuance of common stock under employee stock
    purchase plan and exercise of stock options |                                        |                |       |             |  |               | (90     | )           |  |               |       |       |   |   |           |          |   |   | 806     |         
|Settlement of stock issuance obligation                                                       |                                        |                |       |             |  |               |        |             |  |               |       |       |   |   |           |          |   |   | (521    | )       
|Issuance of common stock                                                                      |                                        |                |       |             |  |               |        |             |  |               |       |       |   |   |           |          |   |   | 84      |         
|Repayment from stockholders                                                                   |                                        |                | 3,463  |             |  |               |        |             |  |               |       |       |   |   |           |          |   |   | 3,463   |         
|Repurchase of common stock                                                                    |                                        |                |       |             |  |               |        |             |  |               |       |       |   |   |           |          |   |   | (169    | )       
|Reversal of stock- based charges related to
    dispositions                                  |                                        |                |       |             |  |               | 1,502   |             |  |               |       |       |   |   |           |          |   |   | (622    | )       
|Stock-based charges                                                                           |                                        |                |       |             |  |               | 8,034   |             |  |               |       |       |   |   |           |          |   |   | 12,993  |         
|Shares returned from escrow relating to
    discontinued operations                           |                                        |                |       |             |  |               |        |             |  |               |       |       |   |   |           |          |   |   | (279    | )       
|                                                                                              |                                        |                |        |             |  |               |         |             |  |               |        |       |   |   |            |          |   |   |         |         
|Balance at December 31, 2002.                                                                 |                                        | $              | (106   | )           |  | $             | (2,246  | )           |  | $             | (424   | )     |   | $ | (1,930,800 | )        |   | $ | 38,730  |         
|                                                                                              |                                        |                |        |             |  |               |         |             |  |               |        |       |   |   |            |          |   |   |         |         

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

68



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##### Table of Contents



HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |        |         |          |  
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | ---------- | ------- | ------- | ------- | -------- | ------ | ------- | -------- | -
|                                                                                                             |                                                                                                   |                                      
|                                                                                                             |                                                                                                   | Year Ended December 31,              
|                                                                                                             |                                                                                                   |                                      
|                                                                                                             |                                                                                                   | 2002                                  |                                                         | 2001   |         | 2000   
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |        
|                                                                                                             |                                                                                                   |                                      
|                                                                                                             |                                                                                                   | (In thousands)                       
|Cash flows from continuing operating
    activities:                                                         |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Loss from continuing operations                                                                              |                                                                                                   | $                                     | (176,061                                                | )      |         | $       | (1,470,403 | )       |         | $       | (146,053 | )     
|Adjustments to reconcile net loss to net cash
    used in continuing operating activities:                   |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|                                                                                                             | Depreciation                                                                                      |                                       |                                                         | 14,397 |         |         |            | 24,900  |         |         |          | 5,754  |        
|                                                                                                             | Amortization of goodwill and intangible assets                                                    |                                       |                                                         | 37,165 |         |         |            | 199,291 |         |         |          | 42,868 |        
|                                                                                                             | Accretion of distribution obligation                                                              |                                       |                                                         | 14,812 |         |         |            | 14,812  |         |         |          | 3,909  |        
|                                                                                                             | Impairment of long-lived assets                                                                   |                                       |                                                         | 7,335  |         |         |            | 925,094 |         |         |          |       |        
|                                                                                                             | Provision for doubtful accounts                                                                   |                                       |                                                         | 5,115  |         |         |            | 29,990  |         |         |          | 3,468  |        
|                                                                                                             | Stock-based charges                                                                               |                                       |                                                         | 66,907 |         |         |            | 80,625  |         |         |          | 55,655 |        
|                                                                                                             | In-process research and development                                                               |                                       |                                                         |       |         |         |            |        |         |         |          | 4,048  |        
|                                                                                                             | Write-down of investments                                                                         |                                       |                                                         |       |         |         |            | 30,744  |         |         |          | 3,400  |        
|                                                                                                             | Acquisition and restructuring charges                                                             |                                       |                                                         |       |         |         |            | 12,553  |         |         |          |       |        
|                                                                                                             | Realized loss on sale of marketable securities                                                    |                                       |                                                         | 3,168  |         |         |            |        |         |         |          |       |        
|                                                                                                             | Write-off of capitalized software                                                                 |                                       |                                                         | 2,849  |         |         |            |        |         |         |          |       |        
|                                                                                                             | Other non-cash items                                                                              |                                       |                                                         | 1,938  |         |         |            | 1,751   |         |         |          | (3,565 | )      
|                                                                                                             | Changes in operating assets and liabilities, net
    of acquisitions and discontinued operations: |                                       |                                                         |        |         |         |            |         |         |         |          |        |        
|                                                                                                             |                                                                                                   | Accounts receivable                   |                                                         |        | (1,240  | )       |            |         | (11,502 | )       |          |        | (19,065 | )       
|                                                                                                             |                                                                                                   | Prepaid distribution expense          |                                                         |        | 10,869  |         |            |         | (445    | )       |          |        | (18,204 | )       
|                                                                                                             |                                                                                                   | Other assets                          |                                                         |        | 4,782   |         |            |         | 12,498  |         |          |        | (14,308 | )       
|                                                                                                             |                                                                                                   | Accounts payable and accrued expenses |                                                         |        | (54,938 | )       |            |         | 66,567  |         |          |        | 18,889  |         
|                                                                                                             |                                                                                                   | Deferred revenue                      |                                                         |        | (10,679 | )       |            |         | (8,418  | )       |          |        | 11,918  |         
|                                                                                                             |                                                                                                   | Deferred revenue from related parties |                                                         |        | (23,436 | )       |            |         | 34,331  |         |          |        |        |         
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|                                                                                                             |                                                                                                   |                                       | Net cash used in continuing operating activities        |        |         | (97,017 | )          |         |         | (57,612 | )        |        |         | (51,286  | )
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Cash flows from investing
    activities:                                                                    |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Purchases of property and equipment                                                                          |                                                                                                   |                                       | (3,289                                                  | )      |         |         | (61,502    | )       |         |         | (41,132  | )     
|Purchases of cost and equity investments                                                                     |                                                                                                   |                                       |                                                        |        |         |         |           |         |         |         | (32,527  | )     
|Purchases of short-term investments                                                                          |                                                                                                   |                                       |                                                        |        |         |         | (86,176    | )       |         |         | (219,862 | )     
|Maturities of short-term investments                                                                         |                                                                                                   |                                       | 14,394                                                  |        |         |         | 147,284    |         |         |         | 146,320  |       
|Proceeds from sales of marketable securities                                                                 |                                                                                                   |                                       | 2,250                                                   |        |         |         |           |         |         |         |         |       
|Acquisitions, net of cash acquired                                                                           |                                                                                                   |                                       |                                                        |        |         |         | (57,100    | )       |         |         | (42,037  | )     
|Other assets                                                                                                 |                                                                                                   |                                       |                                                        |        |         |         | (326       | )       |         |         |         |       
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|                                                                                                             |                                                                                                   |                                       | Net cash provided by (used in) investing
    activities |        |         | 13,355  |            |         |         | (57,820 | )        |        |         | (189,238 | )
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Cash flows from financing
    activities:                                                                    |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Proceeds from payment of stockholders notes                                                                 |                                                                                                   |                                       | 3,463                                                   |        |         |         | 2,862      |         |         |         | 2,532    |       
|Proceeds from exercise of stock options, warrants
    and share issuances under employee stock purchase plan |                                                                                                   |                                       | 800                                                     |        |         |         | 56,501     |         |         |         | 23,358   |       
|Net proceeds from issuance of common and
    preferred stock                                                 |                                                                                                   |                                       |                                                        |        |         |         |           |         |         |         | 428,903  |       
|Repurchases of common stock                                                                                  |                                                                                                   |                                       | (169                                                    | )      |         |         |           |         |         |         |         |       
|Transfer from (to) restricted cash                                                                           |                                                                                                   |                                       | 243                                                     |        |         |         | 4,890      |         |         |         | (103,409 | )     
|Repayment of notes payable                                                                                   |                                                                                                   |                                       |                                                        |        |         |         | (482       | )       |         |         | (38,575  | )     
|Issuance of notes receivable                                                                                 |                                                                                                   |                                       |                                                        |        |         |         | (4,777     | )       |         |         | (6,034   | )     
|Settlement of stock issuance obligation                                                                      |                                                                                                   |                                       | (521                                                    | )      |         |         |           |         |         |         |         |       
|Subsidiary equity transactions                                                                               |                                                                                                   |                                       |                                                        |        |         |         |           |         |         |         | 10,943   |       
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Net cash provided by financing activities                                                                    |                                                                                                   |                                       | 3,816                                                   |        |         |         | 58,994     |         |         |         | 317,718  |       
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Net cash provided by (used in) continuing
    activities                                                     |                                                                                                   |                                       | (79,846                                                 | )      |         |         | (56,438    | )       |         |         | 77,194   |       
|Net cash provided by (used in) discontinued
    operations                                                   |                                                                                                   |                                       | 122,037                                                 |        |         |         | (72,866    | )       |         |         |         |       
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Change in cash and cash equivalents                                                                          |                                                                                                   |                                       | 42,191                                                  |        |         |         | (129,304   | )       |         |         | 77,194   |       
|Cash and cash equivalents, beginning of period                                                               |                                                                                                   |                                       | 38,272                                                  |        |         |         | 167,576    |         |         |         | 90,382   |       
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       
|Cash and cash equivalents, end of period                                                                     |                                                                                                   | $                                     | 80,463                                                  |        |         | $       | 38,272     |         |         | $       | 167,576  |       
|                                                                                                             |                                                                                                   |                                       |                                                         |        |         |         |            |         |         |         |          |       

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

69



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##### Table of Contents



HOMESTORE, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.  Business

Homestore, Inc., (Homestore or the
Company) has created an online service that is the
leading consumer destination on the Internet for home and real
estate-related information, products and media services, based
on the number of visitors, time spent on the websites and number
of property listings. The Company provides a wide variety of
information and tools for consumers, and is a 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. The Company derives
substantially all of its revenue from its North American
operations.

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® (NAR),
the National Association of Home Builders (NAHB),
hundreds of Multiple Listing Services (MLSs), the
Manufactured Housing Institute (MHI), and leading
real estate franchisors, including the six largest franchises,
brokers, builders, and apartment owners. Under an agreement with
NAR, the Company operates NARs official website,
REALTOR.com®. Under an agreement with NAHB, the Company
operates its new home listing website, HomeBuilder.com. Under
agreements with NAR, NAHB, and MHI, the Company receives
preferential promotion in their marketing activities.

Since inception, the Company has incurred losses
from operations and has reported negative operating cash flows.
As of December 31, 2002, the Company had an accumulated
deficit of $1.9 billion and cash and cash equivalents of
$80.5 million. The Company has no material financial
commitments other than those under operating lease agreements
and distribution and marketing agreements discussed further
herein. The Company believes that its existing cash and cash
equivalents, and any cash generated from operations will be
sufficient to fund its working capital requirements, capital
expenditures and other obligations through the next
12 months. Long term, the Company may face 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 and 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. If
additional capital were raised through the issuance of equity
securities, the percentage of the Companys stock owned by
its then-current stockholders would be reduced. Furthermore,
these equity securities might have rights, preferences or
privileges senior to those of the Companys common and
preferred stock. In addition, the Companys liquidity could
be adversely impacted by the litigation. (See 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.

In connection with the sale of stock by one of
the Companys subsidiaries in 2000, the Company recorded
the change in its proportionate share of the subsidiarys
equity as an equity transaction in consolidation, resulting in
an increase of $8.3 million to additional paid-in capital.

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, disclosure of contingent liabilities and
the reported amounts of revenue and expenses. Actual results
could differ from those estimates.

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HOMESTORE, 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 money-market funds, debt instruments of high quality
corporate issuers and debt instruments of the U.S. Government
and its agencies, and, by policy, this limits the amount of
credit exposure to any one issuer.

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
calculated using the specific identification method and are
reported in other income or expense as incurred. For the year
ended December 31, 2002, a realized loss of
$3.2 million was recognized on the sale of marketable
equity securities. For the years ended December 31, 2001
and 2000, realized gains and losses were insignificant.

Restricted
Cash Restricted cash
consists of cash equivalents pledged as collateral for
outstanding letters of credit (see Note 22).

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
securities and accounts and notes receivable. The Companys
accounts receivable are 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, 2002 and
2001, revenue from related party arrangements with Cendant
Corporation and Real Estate Technology Trust (RETT)
accounted for approximately 12% and 13%, respectively, of the
Companys revenue (see Note 12). During the year ended
December 31, 2000, the Company did not receive revenue from
related party arrangements and no customer accounted for more
than 10% of the Companys revenue. At December 31,
2002 and 2001, a major customer accounted for 24% and 14% of net
accounts receivable, respectively.

Fair Value of Financial
Instruments The
Companys financial instruments, including cash and cash
equivalents, 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 have been amortized ratably
over the term of the agreements, generally two to five years. As
of December 31, 2002, total prepaid distribution primarily
consists of prepaid distribution costs related to AOL of
$30.5 million. These costs will be amortized over the next
18 months, the term of the new agreement (see Note 22).

Property and
Equipment Property
and equipment are stated at historical cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which is
generally three years for computer software and equipment and
three to five years for furniture, fixtures and office
equipment. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful lives. Upon the sale
or retirement of property or equipment, the cost and related
accumulated depreciation and amortization are removed from the
Companys financial statements with the resulting gain or
loss reflected in the Companys results of operations.

Product and Website Development
Costs Costs incurred
by the Company to develop, enhance, manage, monitor and operate
the Companys websites are generally expensed as incurred,
except for certain

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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 $2.9 million and $6.1 million of
capitalized software costs and $940,000 and zero of accumulated
amortization included in computer software and equipment at
December 31, 2002 and 2001, respectively. During 2002, the
Company wrote off capitalized software of approximately
$2.8 million.

Identified Intangibles and
Goodwill Identifiable
intangible assets are amortized on a straight-line basis over
their estimated useful lives, ranging from three to fifteen
years. The Company assesses the impairment of long-lived assets,
which include property and equipment and identifiable intangible
assets, whenever events or changes in circumstances indicate
that such assets might be impaired and the carrying value may
not be recoverable. Events and circumstances that may indicate
that an asset is impaired may include significant decreases in
the market value of an asset or common stock, a significant
decline in actual and projected advertising and software license
revenue, loss of key customer relationships coupled with
renegotiation of existing arrangements, 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 Companys
operating model or strategy and competitive forces as well as
other factors.

If events and circumstances indicate that the
carrying amount of an asset may not be recoverable and the
expected undiscounted future cash flows attributable to the
asset are 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. Goodwill has been recorded in connection
with the Companys various acquisitions. The Company
accounts for its acquired goodwill in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). Upon adoption, this statement
eliminates systematic annual amortization of goodwill and
requires the Company to evaluate the carrying value goodwill on
an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable. Prior
to January 1, 2002, the date when the Company adopted this
statement, the Company was amortizing acquired goodwill on a
straight-line basis over the estimated period of benefit ranging
from four to five years, except for goodwill recognized in
connection with business combinations completed after
June 30, 2001, which was never amortized
(see Note 6).

In testing for a potential impairment of
goodwill, the Company will first compare the estimated fair
value of the total company with book value, including goodwill.
If the estimated fair value exceeds book value, goodwill is
considered not to be impaired and no additional steps are
necessary. If, however, the fair value of the Company is less
than book value, then the Company is required to compare the
carrying amount of the goodwill with its implied fair value. The
estimate of implied fair value of goodwill may require
independent valuations of certain internally generated and
unrecognized intangible assets such as its subscriber base,
software and technology and patents and trademarks. If the
carrying amount of the goodwill exceeds the implied fair value
of that goodwill, an impairment loss would be recognized in an
amount equal to the excess.

During the year ended December 31, 2002 and
2001, the Company recorded an impairment charge of
$7.3 million and $925.1 million, respectively (see
Note 5). No impairment charges were recorded for the year
ended December 31, 2000.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The following table summarizes the Companys
useful lives for significant intangible and long-lived assets:

|                                                  |  |          |      | 
|------------------------------------------------- |  | -------- | ---- | 
|                                                  |  | Range of
|Type                                              |  | Lives   
|                                                  |  |         
|Customer, merchant lists and relationships        |  |          | 2-5  | 
|Exclusive electronic listing and rights agreement |  |          | 9    | 
|NAR operating agreement                           |  |          | 15   | 
|Online traffic                                    |  |          | 3    | 
|Porting relationships                             |  |          | 5    | 
|Purchased content                                 |  |          | 5    | 
|Purchased technology                              |  |          | 3-5  | 
|Tradename, trademarks, brand name                 |  |          | 5-15 | 
|Other                                             |  |          | 2-15 | 

Other
Investments The
Company has invested in equity instruments of privately-held
companies for business and strategic purposes. These investments
were included in other long-term assets and were 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 over operations. For these investments in
privately-held companies, the Companys policy was to
regularly review and monitor the companies operating
performance, cash flow forecasts and other available information
in determining whether an other-than-temporary decline in value
exists. Indications of an other-than-temporary decline would
include the failure to meet operating budgets and cash flow
forecasts, inability to raise additional rounds of financing at
or above the carrying value of the investment and changes in
strategic direction or the underlying business model. If the
decline in value was judged to be other-than-temporary, the
basis of the security was written down to fair value and the
resulting loss was charged to operations in the period in which
the decline was identified and determined to be
other-than-temporary. In evaluating the fair value of
investments, the Companys policy included, but was not
limited to, reviewing each of the entities cash positions,
recent financing valuations, operational performance, revenue
and earnings forecasts, liquidity forecasts and financing needs
and general economic factors, as well as management and
ownership trends.

During the years ended December 31, 2001 and
2000, the Company recorded charges of $30.7 million and
$3.4 million, respectively, related to declines in the
value of its portfolio of investments determined to be
other-than-temporary which reduced its carrying cost of all
investments to zero at December 31, 2001. These charges are
included in other expense, net in the consolidated statement of
operations.

Revenue
Recognition The
Company derives its revenue primarily from three sources
(i) subscription revenue, which includes monthly and annual
fees from licensed real estate professionals to promote their
product offerings on the Companys websites or to utilize
its proprietary software, (ii) software revenue, which
includes software licenses, software development, hardware
services and support revenue which includes software
maintenance, training, consulting and website hosting revenue,
and (iii) advertising revenue for running online
advertising and sponsorships on the Companys websites or
offline advertising placed in its publications. As described
below, significant management judgments and estimates must be
made and used in connection with the revenue recognized in any
accounting period.

The Company generates recurring revenue from
several sources, including the sale of subscriptions to be
included on its websites, from maintenance and support on its
software products and from its hosted solutions. Recurring
revenue is typically based on one-year renewable contracts and
is recognized ratably over the contract period. Cash received in
advance is recorded as deferred revenue. Recurring revenue from
hosted solutions is billed monthly over a contract term of
typically one year.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Software revenue The Company generally licenses its software products in
three ways: (i) on a one-year term basis; (ii) on a
perpetual basis; and (iii) on a monthly subscription. The
Companys hosting arrangements require customers to pay a
fixed fee and receive service over a period of time, generally
one year. In general, the Company recognizes revenue related to
its various services and products when persuasive evidence of an
arrangement exists, the product has been delivered, the fee is
fixed or determinable, and collection of the resulting
receivable is reasonably assured. Delivery generally occurs when
product is delivered to a common carrier.

The Company applies the provisions of Statement
of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9 Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions, to all transactions involving the sale of
software. The Company recognizes license revenue upon all of the
following criteria being satisfied: (i) the execution of a
license agreement; (ii) product delivery; (iii) fees
are fixed or determinable; (iv) collectibility is
reasonably assured; and (v) all other significant
obligations have been fulfilled. For software license agreements
in which customer acceptance is a condition of earning the
license fees, revenue is not recognized until acceptance occurs.
For arrangements containing multiple elements, such as software
license fees, consulting services and maintenance, and where
vendor-specific objective evidence (VSOE), of fair
value exists for all undelivered elements, the Company accounts
for the delivered elements in accordance with the residual
method prescribed by SOP 98-9. For arrangements in which
VSOE does not exist for the undelivered element, including
specified upgrades, revenue is deferred and not recognized until
either VSOE is established or delivery of the element without
VSOE has occurred. The Company also generates non-recurring
revenue from consulting fees for implementation, installation,
data conversion and training related to the use of the
Companys proprietary and third-party licensed products.
The Company recognizes revenue for these services as they are
performed, as they are principally contracted for on a time and
material basis. The Companys arrangements generally do not
include acceptance clauses. However, if an arrangement includes
an acceptance clause, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period. Certain software products are sold in annual
subscriptions, and accordingly, revenue is deferred and
recognized ratably over the term of the contract.

Maintenance revenue is recognized ratably over
the contract term. The Companys training and consulting
services are billed based on hourly rates and it generally
recognizes revenue as these services are performed. Payments for
maintenance services are generally made in advance and are
non-refundable. However, at the time of entering into a
transaction, the Company assesses whether any services included
within the arrangement will require the Company to perform
significant work either to alter the underlying software or to
build additional complex interfaces so that the software
performs as the customer requests. If these services are
included as part of the arrangement and management is able to
accurately estimate the progression to completion, the Company
recognizes the entire fee using the percentage of completion
method. The Company estimates the percentage of completion based
on an estimate of total costs incurred to date as a percentage
of total costs to complete the project, and the Company monitors
its progress against plan to insure the Companys estimates
are materially accurate. The Company recognizes losses on
projects with estimated aggregate losses in the periods in which
such losses are reasonably expected. For projects in which the
Company is unable to estimate its progression to completion,
such revenue is recognized in the period in which the project is
completed.

Advertising Revenue The Company sells online and
offline advertising. Online advertising revenue includes three
revenue streams: (i) impression based, (ii) fixed fee
subscriptions and (iii) affiliate revenue share agreements.
The impressions based agreements range from spot purchases to 12
month contracts. The impression based revenue is recognized
based upon actual impressions delivered and viewed by a user in
a period. The fixed fee subscription revenue is recognized
ratably over the period in which the services are provided. The
affiliate revenue is recognized in the period in which the
affiliate partner provides the services. The Company measures
performance related to advertising obligations on a monthly
basis prior to the

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

recording of revenue. Offline advertising revenue
is recognized when the publications in which the advertising is
displayed are shipped.

The Company records and measures the fair value
of equity received in exchange for advertising services in
accordance with the provisions of EITF 00-8, Accounting by
a Grantee for an Equity Instrument to be Received in Conjunction
with Providing Goods or Services. The Company recognizes
revenue from advertising barter transactions in accordance with
EITF 99-17, Accounting for Advertising Barter
Transactions. Revenue from these transactions is
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 transactions. The Company did not
enter into any advertising barter transactions during 2002.
There was no revenue from these types of transactions during the
year ended December 31, 2002. During the years ended
December 31, 2001 and 2000, revenue from
equity-for-services and advertising barter transactions was less
than 5% of revenue.

The Company assesses collectibility based on a
number of factors, including past transaction history with the
customer and the credit worthiness of the customer. The Company
does not request collateral from its customers. If the Company
determines that collection of a fee is not reasonably assured,
the Company defers the fee and recognizes revenue at the time
collection becomes reasonably assured, which is generally upon
receipt of cash.

Advertising Expense Advertising costs are expensed
as incurred and totaled $4.8 million, $31.4 million
and $18.1 million during the years ended December 31, 2002,
2001 and 2000, respectively.

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 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 2002, 2001 and 2000, the pro forma amounts of
the Companys net loss and net loss per share for the years
ended December 31, 2002, 2001 and 2000 would have been as
follows (in thousands, except per share amounts):

|                                            |                          |      |   |          |   |      |   |            |   |  |   |          |  
|------------------------------------------- | ------------------------ | ---- | - | -------- | - | ---- | - | ---------- | - |  | - | -------- | -
|                                            |                          | 2002 |   | 2001     |   | 2000
|                                            |                          |      |   |          |   |     
|Net loss applicable to common stockholders: |                          |      |   |          |   |      |   |            |   |  |   |         
|                                            | As reported              |      | $ | (163,425 | ) |      | $ | (1,465,589 | ) |  | $ | (146,053 | )
|                                            | Stock-based compensation |      |   | (29,798  | ) |      |   | (92,965    | ) |  |   | (42,471  | )
|                                            |                          |      |   |          |   |      |   |            |   |  |   |         
|                                            | Pro forma                |      | $ | (193,223 | ) |      | $ | (1,558,554 | ) |  | $ | (188,524 | )
|                                            |                          |      |   |          |   |      |   |            |   |  |   |         
|Net loss per share-basic and diluted:       |                          |      |   |          |   |      |   |            |   |  |   |         
|                                            | As reported              |      | $ | (1.39    | ) |      | $ | (13.64     | ) |  | $ | (1.83    | )
|                                            | Pro forma                |      | $ | (1.64    | ) |      | $ | (14.51     | ) |  | $ | (2.36    | )

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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:

|                          |  |                        |     |      |  |      |     |   |  |  |     |  
|------------------------- |  | ---------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                          |  |                       
|                          |  | Year Ended December 31
|                          |  |                       
|                          |  | 2002                   |     | 2001 |  | 2000
|                          |  |                        |     |      |  |     
|Risk-free interest rates  |  |                        | 4   | %    |  |      | 5   | % |  |  | 6   | %
|Expected lives (in years) |  |                        | 4   |      |  |      | 4   |   |  |  | 4   |  
|Dividend yield            |  |                        | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected volatility       |  |                        | 147 | %    |  |      | 115 | % |  |  | 100 | %

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. In November 2001, the EITF reached a consensus
in EITF 00-18, Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees, that an asset acquired in exchange for the
issuance of fully vested, nonforfeitable equity instruments
should not be displayed as contra-equity by the grantor of the
equity instruments. In adopting this consensus in the fourth
quarter of 2001, the Company reclassified $75.7 million in
previously classified contra-equity to prepaid distribution
expense and other assets on the accompanying balance sheet, with
no effect on net loss or net loss per share. This
reclassification related to various marketing and content that
were acquired by the Company through the issuance of fully
vested, nonforfeitable equity instruments (see Notes 15 and 16).
At December 31, 2001, a portion of these amounts was
subject to impairment (see Note 5).

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

|                                |  |                         |        |      |  |      |        |  |  |   |        | 
|------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2002                    |        | 2001 |  | 2000
|                                |  |                         |        |      |  |     
|Revenue                         |  | $                       | 1,501  |      |  | $    | 2,456  |  |  | $ | 6,233  | 
|Cost of revenue                 |  |                         | 134    |      |  |      | 383    |  |  |   | 607    | 
|Sales and marketing             |  |                         | 63,848 |      |  |      | 71,188 |  |  |   | 45,148 | 
|Product and website development |  |                         | 127    |      |  |      | 361    |  |  |   | 572    | 
|General and administrative      |  |                         | 1,297  |      |  |      | 6,237  |  |  |   | 3,095  | 
|                                |  |                         |        |      |  |      |        |  |  |   |        | 
|                                |  | $                       | 66,907 |      |  | $    | 80,625 |  |  | $ | 55,655 | 
|                                |  |                         |        |      |  |      |        |  |  |   |        | 

Stock-based charges for the years ended
December 31, 2002, 2001 and 2000 consists of
$37.2 million, $37.2 million, and $9.8 million,
respectively, of amortization related to the AOL distribution
agreement, and $17.9 million, $27.4 million and
$36.8 million, respectively, related to vendor agreements
with the remainder related to employee-based stock option
charges.

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 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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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 reports segment information in accordance with SFAS
No. 131, Disclosures about Segments of an Enterprise
and Related Information. The Companys operating
segments are presented consistently with the way that the
Companys management organizes and evaluates financial
information for making internal operating decisions and
assessing performance. Certain prior year segment information
has been reclassified to conform to the current year
presentation (see Note 13).

Recent Accounting
Developments In June
2001, the FASB issued SFAS Nos. 141 and 142,
Business Combinations and Goodwill and Other
Intangible Assets, respectively. SFAS No. 141
replaces APB Opinion No. 16, Business
Combinations. It also provides guidance on purchase
accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS No. 142 changes the
accounting for goodwill and other intangible assets with
indefinite useful lives from an amortization method to an
impairment-only approach. Under SFAS No. 142, goodwill was
tested upon implementation of the standard, and will continue to
be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS No. 141
and SFAS No. 142 are effective for all business
combinations completed after June 30, 2001.

The Company adopted SFAS No. 142 in January
2002, accordingly amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 has ceased,
and intangible assets acquired prior to July 1, 2001 that
do not meet the criteria for recognition under SFAS No. 141 have
been reclassified to goodwill. In connection with the adoption
of SFAS No. 142, the Company performed a transitional goodwill
impairment assessment in the first quarter of 2002 and
determined that there was no impairment as a result of the
adoption of this standard.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations, which requires entities to record the fair
value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the liability
is initially recorded, the entity capitalizes the cost by
increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful
life of the related asset. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company
does not have asset retirement obligations and therefore
believes there will be no impact upon adoption of SFAS
No. 143.

In January 2002, the Company adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which was issued in October 2001. The
FASBs new rules on asset impairment supersede SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and
portions of APB Opinion No. 30, Reporting the Results
of Operations. SFAS No. 144 provides a single
accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as
of the measurement date as previously required.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Additionally, SFAS No. 144 expands the scope
of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from
the rest of the entity, and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The
adoption of SFAS No. 144 in the first quarter of 2002 did
not have an impact on the Companys financial position,
results of operations or cash flows, except for the
classification of the disposition of the ConsumerInfo division
as a discontinued operation (see Note 3).

In 2001, the Company early adopted EITF 01-09,
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 Company adopted this consensus and the effect on the years
ended December 31, 2001 and 2000 was to reduce revenue and
expense by $4.7 million and $7.2 million,
respectively, with no effect on net loss or net loss per share.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which requires the liability for a disposal
obligation to be recognized and measured at its fair value when
the entity ceases using the leased property in operations. The
FASB decided the same approach should apply for similar disposal
obligations associated with other preexisting firmly committed
contracts. Additionally, SFAS No. 146 would require
severance pay in many cases to be recognized over time rather
than up front. If the benefit arrangement requires employees to
render future service beyond a defined minimum retention period,
a liability should be recognized as employees render service
over the future service period. If the benefit arrangement does
not require employees to render future service beyond the
minimum retention period, a liability should be recognized at
the date the termination is communicated to employees. SFAS
No. 146 is effective for disposal activities initiated
after December 31, 2002. The FASBs new rules on
liabilities for disposal obligations reconsiders the guidance in
EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring) and addresses the issue separately from the
scope of SFAS No. 144. This statement is not expected to have a
material impact on the Company.

On December 31, 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to the fair value method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of and
requires prominent disclosure about the effects on reported net
income of a companys accounting policy decisions with
respect to stock-based employee compensation. In addition, this
statement amends APB No. 28, Interim Financial
Reporting, to require disclosure about those effects in
interim financial information. SFAS No. 148 is effective
for financial statements for fiscal years ending after
December 15, 2002. The disclosure requirements for interim
financial statements containing condensed consolidated financial
statements are effective for interim periods beginning after
December 15, 2002. The Company does not intend to adopt the
fair value method of accounting for stock-based compensation of
SFAS No. 123 and accordingly SFAS No. 148 is not
expected to have a material impact on the Companys
financial position, results of operations or cash flows.

In December 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires that at
the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee. This
interpretation is applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.
Management is currently evaluating the impact of recognizing
such liabilities on the Companys consolidated financial
position and

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

results of operations. FIN 45 also contains
disclosure provisions surrounding existing guarantees, which are
effective for financial statements of interim or annual periods
ending after December 15, 2002 (see Note 21).

In January 2003, the Emerging Issues Task Force
issued Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables (EITF No. 00-21).
This consensus addresses certain aspects of accounting by a
vendor of arrangements under which it will perform multiple
revenue-generating activities, specifically, how to determine
whether an arrangement involving multiple deliverables contains
more than one unit of accounting. EITF No. 00-21 is effective
for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003 or entities may elect to
report the change in accounting as a cumulative-effect
adjustment in accordance with Opinion 20 and Statement 3, with
early application of this consensus permitted. The Company is
currently evaluating the impact this consensus will have on its
financial statements.

Reclassifications Certain
reclassifications have been made to prior years financial
statements in order to conform to the 2002 presentation.

3.  Discontinued
Operations

On March 19, 2002, the Company entered into
an agreement to sell its ConsumerInfo division for
$130.0 million in cash to Experian Holdings, Inc. The
transaction closed on April 2, 2002. The sale generated net
proceeds of approximately $117.1 million after transaction
fees and monies placed in escrow. On March 26, 2002,
MemberWorks Incorporated (MemberWorks), one of the
former owners of iPlace, Inc. (iPlace), the parent
company of the ConsumerInfo division, obtained a court order
requiring the Company to set aside $58.0 million of the
proceeds against a potential claim MemberWorks had against the
Company.

On August 9, 2002, the Company reached a
settlement in the MemberWorks litigation, in which MemberWorks
and certain other former iPlace shareholders received
$23.0 million, with the remaining $35.0 million plus
accrued interest transferred to the Company resulting in net
proceeds to the Company of $94.1 million. In addition, the
litigation was dismissed and MemberWorks released all claims
against the Company relating to the sale of iPlace. The Company
has included the cost of the settlement in its results of
operations for the year ended December 31, 2002.

Pursuant to SFAS No. 144, the consolidated
financial statements of the Company reflect the disposition of
its ConsumerInfo division as discontinued operations.
Accordingly, the revenue, costs and expenses, and cash flows of
the ConsumerInfo division through December 31, 2002, have
been excluded from the respective captions in the Consolidated
Statements of Operations and Consolidated Statements of Cash
Flows and have been reported as Income from discontinued
operations, net of applicable income taxes of zero; and as
Net cash provided by (used in) discontinued
operations. The $11.8 million gain associated with
the disposition of the ConsumerInfo division has been recorded
as Gain on disposition of discontinued operations,
in the Consolidated Statement of Operations. As part of the
sale, $10.0 million of the purchase price was put in escrow
to secure the Companys indemnification obligations. As of
December 31, 2002, cash subject to the escrow was
$9.3 million. To the extent the escrow is released to the
Company, the Company will recognize additional gain on
disposition of discontinued operations. The escrow is scheduled
to terminate in the third quarter of 2003. A portion of the
escrow can be released prior to the scheduled termination date
if both the Company and the buyer agree to a release of funds.
Total revenue and income from discontinued operations was
$19.5 million and $846,000, respectively, for the year
ended December 31, 2002. Total revenue and loss from
discontinued operations was $21.3 million and
$4.8 million, respectively, for year ended
December 31, 2001. The Company purchased ConsumerInfo in
August 2001 as part of the acquisition of iPlace.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

The calculation of the gain on the sale of the
ConsumerInfo division is as follows (in thousands):

|                         |                                                               |   |         |         |  
|------------------------ | ------------------------------------------------------------- | - | ------- | ------- | -
|Gross proceeds from sale |                                                               | $ | 130,000 |        
|Less:                    |                                                               |   |         |        
|                         | Cash subject to escrow                                        |   |         | 10,000  |  
|                         | Net assets of the ConsumerInfo division                       |   |         | 106,321 |  
|                         | Transaction costs                                             |   |         | 2,918   |  
|                         | Cash and Homestore stock received from purchase
    of iPlace |   |         | (1,029  | )
|                         |                                                               |   |         |        
|                         | Gain recognized on the sale                                   |   | $       | 11,790  |  
|                         |                                                               |   |         |        

The cash and stock received from the purchase of
iPlace relates to the settlement of the original escrow related
to the Companys purchase of iPlace.

4.  Acquisition Costs and
Restructuring Charges

Acquisition
Costs

In connection with the acquisition of Move.com
Inc. and Welcome Wagon International, Inc. (collectively
referred to as the Move.com Group) (see Note 6), the
Company reviewed its operations and implemented a plan to
restructure various components of the acquired operations. As
part of the restructuring, the Company accrued an acquisition
liability of approximately $13.4 million, related to
estimated costs to exit and consolidate certain operating
activities of the Move.com Group, as well as costs to terminate
and relocate employees. These amounts were recognized as
liabilities assumed in a purchase business combination and thus
accounted for as additional purchase price. At December 31,
2001, the purchase price allocation related to the Move.com
Group was finalized.

The acquisition liability was comprised of
$9.8 million in exit costs related to contractual
obligations with no future benefits to the combined operations
as the services were redundant, $2.7 million in termination
benefits related to a work force reduction of approximately 170
employees and approximately $900,000 in costs incurred in
connection with the shut-down of various facilities. At
December 31, 2001, all restructuring costs have been paid
with no related liabilities remaining.

Also related to the acquisition of the Move.com
Group, the Company incurred acquisition and reorganization
charges of $6.5 million that did not meet the criteria for
capitalization as a component of purchase price. These charges
were expensed as incurred, were included in acquisition and
restructuring charges in 2001 in the Consolidated Statement of
Operations and were comprised primarily of stay bonuses and
severance payments of $3.6 million, and facilities shutdown
costs of $1.9 million.

Restructuring
Charges

During the second quarter of 2001, the Company
incurred a charge of $8.2 million related to the dissolution of
one of the Companys subsidiaries which is included in the
acquisition and restructuring charges line in the Consolidated
Statement of Operations. Included in these charges were
severance and other payroll-related expenses of
$1.1 million associated with the reduction in workforce of
approximately 70 employees, facilities shutdown costs of
$1.2 million and other dissolution costs of approximately
$485,000. In addition, the Company entered into a release
agreement and made a one-time settlement payment of
$5.4 million to minority shareholders. At December 31,
2001, all costs have been paid with no liabilities remaining.

In the fourth quarter of 2001, the Companys
Board of Directors approved a restructuring and integration
plan, with the objective of eliminating duplicate resources and
redundancies and implementing a new management structure to more
efficiently serve the Companys customers. The plan
included the unwinding of the Companys newly formed or
recently acquired international operations and a broad
restructuring of the Companys core operations.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

As part of this restructuring and integration
plan, the Company undertook a review of its existing locations
and elected to close a number of satellite offices and
identified and notified approximately 700 employees whose
positions with the Company were eliminated. The work force
reductions affected approximately 150 members of
management, 100 in research and development, 200 in sales and
marketing and 250 in administrative functions.

In connection with this restructuring and
integration plan, the Company recorded a charge of
$35.8 million in the fourth quarter of 2001, which was
included in acquisition and restructuring charges on the
Consolidated Statement of Operations. This charge consists of
the following: (i) employee termination benefits of
$6.4 million; (ii) facility closure charges of
$20.8 million, comprised of $12.8 million in future
lease obligations, exit costs and cancellation penalties, net of
estimated sublease income of $11.9 million, and
$8.0 million of non-cash fixed asset disposals related to
vacating duplicate facilities and decreased equipment
requirements due to lower headcount; (iii) non-cash
write-offs of $2.9 million in other assets related to
exited activities; and (iv) accrued future payments of
$5.7 million for existing contractual obligations with no
future benefits to the Company. The Companys original
estimate with respect to sublease income related primarily to a
lease commitment for office space in San Francisco that expires
in November 2006. The Company originally estimated that it would
sublease the facility by the second quarter of 2003 at a rate of
approximately two-thirds of the existing commitment. However,
recent declines in the demand for office space in the
San Francisco market have led the Company to conclude these
estimates must be revised. Because the Company believes it will
take at least one year longer than it originally estimated to
sublease the property and the market rates are projected to be
as low as 33% of the Companys current rent, the Company
took an additional $6.5 million charge during 2002. The
Company also reduced its estimates for employee termination pay
by $396,000 and its contractual obligations by $798,000 in 2002.
As of December 31, 2002, four of the planned
700 employees have not yet been paid severance.

A summary of activity related to the fourth
quarter 2001 restructuring charge is as follows (in thousands):

|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ---------- | ------ | ----------- |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                           |  |             |        | Lease       |  |            |        |             |  |      
|                                           |  |             |        | Obligations |  |            |        |             |  |      
|                                           |  | Employee    |        | and         |  |            |        |             |  |      
|                                           |  | Termination |        | Related     |  | Asset      |        | Contractual |  |      
|                                           |  | Benefits    |        | Charges     |  | Write-offs |        | Obligations |  | Total
|                                           |  |             |        |             |  |            |        |             |  |      
|Initial restructuring charge               |  | $           | 6,364  |             |  | $          | 12,782 |             |  | $     | 10,917  |   |  | $ | 5,733  |   |  | $ | 35,796  |  
|Cash paid                                  |  |             | (3,511 | )           |  |            | (137   | )           |  |       |        |   |  |   | (141   | ) |  |   | (3,789  | )
|Non-cash charges                           |  |             |       |             |  |            |       |             |  |       | (10,917 | ) |  |   |       |   |  |   | (10,917 | )
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2001 |  |             | 2,853  |             |  |            | 12,645 |             |  |       |        |   |  |   | 5,592  |   |  |   | 21,090  |  
|Cash paid                                  |  |             | (2,274 | )           |  |            | (5,480 | )           |  |       |        |   |  |   | (3,631 | ) |  |   | (11,385 | )
|Change in estimates                        |  |             | (396   | )           |  |            | 6,027  |             |  |       |        |   |  |   | (798   | ) |  |   | 4,833   |  
|Non-cash charges                           |  |             |       |             |  |            | 488    |             |  |       |        |   |  |   |       |   |  |   | 488     |  
|Sale of a subsidiary                       |  |             | (156   | )           |  |            |       |             |  |       |        |   |  |   |       |   |  |   | (156    | )
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2002 |  | $           | 27     |             |  | $          | 13,680 |             |  | $     |        |   |  | $ | 1,163  |   |  | $ | 14,870  |  
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  

With the exception of payments associated with
the San Francisco and other office lease commitments,
substantially all of the remaining restructuring liabilities at
December 31, 2002 will be paid during 2003. Any further
changes to the accruals based upon current estimates will be
reflected through the acquisition and restructuring charges line
in the consolidated statement of operations.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

In the first quarter of 2002, the Companys
Board of Directors approved an additional restructuring and
integration plan, with the objective of eliminating duplicate
resources and redundancies.

As part of this restructuring and integration
plan, the Company undertook a review of its existing locations
and elected to close offices and identified and notified
approximately 270 employees whose positions with the
Company were eliminated. The work force reductions affected
approximately 30 members of management, 40 in research and
development, 140 in sales and marketing and 60 in administrative
functions. As of December 31, 2002, eight of the planned
270 employees have not yet been paid severance.

In connection with this restructuring and
integration plan, the Company recorded a charge of
$2.3 million in the first quarter of 2002, which was
included in the acquisition and restructuring charges line in
the consolidated statement of operations. This charge consists
of the employee termination benefits of $1.7 million and
facility closure charges of approximately $600,000. In the third
quarter of 2002, the Company evaluated its original estimates
and concluded it must increase its charge for lease obligations
by $1.6 million because of a decline in market rates and
reduce its estimate for employee termination pay by $242,000.

A summary of activity related to the first
quarter 2002 restructuring charge is as follows (in thousands):

|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ---------- | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                           |  |             |        | Lease       |  |            |       |      
|                                           |  |             |        | Obligations |  |            |       |      
|                                           |  | Employee    |        | and         |  |            |       |      
|                                           |  | Termination |        | Related     |  | Asset      |       |      
|                                           |  | Benefits    |        | Charges     |  | Write-offs |       | Total
|                                           |  |             |        |             |  |            |       |      
|Initial restructuring charge               |  | $           | 1,720  |             |  | $          | 309   |       |  | $ | 260  |   |  | $ | 2,289  |  
|Non-cash charges                           |  |             |       |             |  |            |      |       |  |   | (260 | ) |  |   | (260   | )
|Cash paid                                  |  |             | (1,452 | )           |  |            | (187  | )     |  |   |     |   |  |   | (1,639 | )
|Change in estimates                        |  |             | (242   | )           |  |            | 1,584 |       |  |   |     |   |  |   | 1,342  |  
|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  
|Restructuring accrual at December 31, 2002 |  | $           | 26     |             |  | $          | 1,706 |       |  | $ |     |   |  | $ | 1,732  |  
|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  

Substantially all of the remaining restructuring
liabilities at December 31, 2002, with the exception of
those related to lease obligations, will be paid in 2003. Any
further changes to the accruals based upon current estimates
will be reflected through the acquisition and restructuring
charges line in the consolidated statement of operations.

In the third quarter of 2002, the Companys
Board of Directors approved a further restructuring and
integration plan, with the objective of eliminating duplicate
resources and redundancies.

As part of this restructuring and integration
plan, the Company undertook a review of its existing locations
and elected to close an office and identified and notified
approximately 190 employees whose positions with the
Company were eliminated. The work force reductions affected
approximately 30 in research and development, 10 in production,
140 in sales and marketing and 10 in administrative functions.
As of December 31, 2002, all of the planned
190 employees have been terminated and a total of 31 have
not yet been paid severance.

In connection with this restructuring and
integration plan, the Company recorded a charge of
$3.6 million in the third quarter of 2002, which was
included in the acquisition and restructuring charges line in
the consolidated statement of operations. This charge consists
of employee termination benefits of $1.6 million and
facility closure charges of approximately $2.0 million.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

A summary of activity related to the third
quarter 2002 restructuring charge is as follows (in thousands):

|                                           |  |             |        |             |  |       |       |   |  |   |        |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ----- | ----- | - |  | - | ------ | -
|                                           |  |             |        | Lease       |  |      
|                                           |  |             |        | Obligations |  |      
|                                           |  | Employee    |        | and         |  |      
|                                           |  | Termination |        | Related     |  |      
|                                           |  | Benefits    |        | Charges     |  | Total
|                                           |  |             |        |             |  |      
|Initial restructuring charge               |  | $           | 1,590  |             |  | $     | 2,033 |   |  | $ | 3,623  |  
|Cash paid                                  |  |             | (1,190 | )           |  |       | (253  | ) |  |   | (1,443 | )
|                                           |  |             |        |             |  |       |       |   |  |   |        |  
|Restructuring accrual at December 31, 2002 |  | $           | 400    |             |  | $     | 1,780 |   |  | $ | 2,180  |  
|                                           |  |             |        |             |  |       |       |   |  |   |        |  

Substantially all of the remaining restructuring
liabilities at December 31, 2002 will be paid in 2003.

5.  Impairment of Long-lived
Assets

In the fourth quarter of 2001, the Company
identified a number of factors indicating a potential impairment
of its long-lived assets, primarily related to goodwill and
identifiable intangible assets associated with various business
combinations completed over the past three years (see
Note 6). Specific events and changes in circumstances
indicating a potential impairment include the following: a
significant decline in the fair market value of the
Companys common stock in the fourth quarter of 2001; the
Companys net book value was significantly different from
the Companys market value; the underperformance of certain
acquisitions following their integration relative to original
projections; lower projected operating results for fiscal 2002
and beyond compared to earlier forecasts based on a realignment
of the Companys business in the fourth quarter of 2001;
significant turnover in key management positions in the fourth
quarter of 2001; the loss of certain key customer relationships
coupled with the renegotiation of certain existing arrangements;
significant declines in actual and projected advertising and
software license revenue; and a sustained decline in valuations
for the Internet sector.

The evaluation of these events and changes in
circumstances indicated that the carrying value of the
Companys long-lived assets might not be recoverable.
Accordingly, asset impairment tests were performed at the lowest
level for which separately identifiable cash flows exist. The
impairment tests were performed by comparing the expected
undiscounted cash flows over the estimated useful lives of the
related assets, plus a terminal value for future cash flows, to
the carrying amount of goodwill, identifiable intangible assets
and other long-lived assets initially recorded in connection
with various business combinations. As a result of these
comparisons, long-lived assets relating primarily to the
Companys acquisitions of the Move.com Group, , Homefair,
SpringStreet, HomeWrite, Inc. (HomeWrite), WyldFyre
Technologies, Inc. (WyldFyre), The Hessel Group
(Hessel) and the purchase of assets and assumption
of liabilities of Internet Pictures Corporation
(iPix), and Homestyles Publishing and Marketing,
Inc. (Homestyles) were determined to be impaired in
2001.

The amount of impairment loss recognized was
measured based on the amount by which the carrying amount of the
asset exceeded the fair value of the asset. With the assistance
of outside valuation specialists, fair value was determined
based on the present value of estimated expected future cash
flows using discount rates ranging from 12.5% to 25%. The
discount rate utilized was based upon the Companys
weighted average cost of capital adjusted for the risks
associated with its operations. Cash flows were prepared
primarily by business unit, which represented the lowest level
of separately identifiable cash flows. Assumptions used in
measuring impairment reflect managements best estimates of
future operating results and related cash flows, the most
significant of which are summarized as follows: revenue
assumptions were based primarily on factors including customer
churn and growth rates, number of customers/subscribers, price
increases, number of apartment listings, and number of
impressions; operating expense assumptions were based primarily
on a combination of expected percentage of revenue and estimated
year over year growth; working capital

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

adjustments were based on estimated working
capital needs to support growth in the business; and estimates
of capital expenditures were based on managements best
estimates.

The Companys impairment analysis resulted
in a charge of $925.1 million in the fourth quarter of
2001, comprised of impairments of $659.1 million to
goodwill, $94.6 million to identified intangible assets,
$36.4 million to property and equipment and
$135.0 million primarily related to non-current prepaid
distribution expense.

During the fourth quarter of 2002, the Company
decided to shut down Hessel and sell the remaining assets.
Operating expenses for the fourth quarter of fiscal 2002
include $1.2 million in accrued expenses associated with
the shutdown of these operations including lease termination
fees, severance, and other related costs. During the first
quarter of fiscal 2003, the Company entered into four
separate agreements to sell substantially all of the assets of
Hessel for a total of approximately $1.5 million in cash.
The operations of Hessel were not material and thus have not
been reclassified as discontinued operations.

In the fourth quarter of 2002, specific events
and changes in operations of the business indicated a potential
impairment of its long-lived assets. The specific events and
changes in circumstances indicating a potential impairment
including the Company revising the annual operating plan, the
sustained decline of the value of the Companys stock, and
the Company making the decision to shutdown Hessel. Pursuant to
SFAS No. 144, the Company performed an impairment
analysis. With the assistance of outside valuation specialists,
fair value was determined based on the present value of
estimated expected future cash flows using discount rates
ranging from 11% to 20%. The Companys impairment analysis
resulted in a charge of $7.3 million in the fourth quarter
of 2002 comprised of impairments of $3.8 million of
identified intangible assets relating to the Companys
acquisition of WyldFyre, $1.9 million of property and
equipment relating to the pending sale and shut down of the
Hessel businesses and $1.6 million of other assets.

6.  Acquisitions

For all acquisitions except iPlace, goodwill, to
the extent it has not been fully impaired, was amortized from
the date of acquisition on a straight-line basis over the useful
lives described below until December 31, 2001. On
January 1, 2002 the Company adopted SFAS No. 142,
which requires companies to cease goodwill amortization as of
that date. Intangible assets continue to be amortized over their
useful lives.

WyldFyre

In March 2000, the Company acquired
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 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. At
December 31, 2002 and 2001, the Company had net goodwill of
$975,000 and $850,000 and net intangible assets of zero and
$5.8 million, respectively.

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 exchangeable into to the Companys
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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

executive officers employment over a
three-year period, and accordingly, the value of such shares was
recorded in deferred stock-based charges. During the year ended
December 31, 2002, the Company elected to pay cash of
$521,000 instead of issuing the Companys common stock.
This payment was charged against additional paid-in capital. As
part of the original purchase agreement, an additional amount of
up to $14.8 million of contingent consideration
(earn-out) could be paid if certain defined
performance targets were met during the years ended
December 31, 2000 through December 31, 2004. During
2002, the earn-out was re-negotiated with the former owners,
several of whom are currently employed by the Company. The
additional purchase price was fixed at $10.2 million
resulting in an increase in goodwill and accrued expenses. The
installment payment feature of the original agreement was
retained. Payments made for the additional consideration may be
made in either cash or stock at the option of the Company. The
Company paid $3.1 million in cash in 2002 relating to this
earn-out. 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 $34.8 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. At
December 31, 2002 and 2001, the Company had net goodwill of
$11.7 million and $1.9 million and net intangible
assets of $4.6 million and $7.0 million, respectively.

The Hessel
Group

In September 2000, the Company acquired
Hessel, a leading provider of technology-driven solutions and
services to the relocation industry, for $15.0 million in
cash and assumption of Hessel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 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. At December 31, 2002 and 2001, the
Company had net goodwill of $1.5 million. During the first
quarter of 2003, the Company sold the assets of Hessel
(see Notes 5 and 22).

iPIX

In January 2001, the Company acquired
certain assets and licenses and assumed certain liabilities from
iPIX, a leading provider of dynamic imaging services for the
Internet, for $7.1 million in cash and a note in the amount
of $2.3 million. The acquisition has been accounted for as
a purchase. The acquisition cost has been allocated to the
assets acquired based on their respective fair values. The
excess of purchase consideration over net tangible assets
acquired and liabilities assumed of approximately
$13.7 million has been allocated to goodwill and other
identifiable intangible assets and is being amortized on a
straight-line basis over the estimated useful lives of the
assets over five years. There was no value for goodwill and
intangible assets at December 31, 2002 and 2001.

Computers for
Tracts

In January 2001, the Company acquired
certain assets and assumed certain liabilities from Computers
for Tracts, Inc. (CFT), a leading provider of sales
force automation and warranty request management solutions, for
approximately $4.5 million in cash and 162,850 shares
of the Companys common stock valued at $5.0 million.
The acquisition has been accounted for as a purchase. The
acquisition cost has been allocated to the assets acquired based
on their respective fair values. The excess of purchase
consideration over net tangible assets acquired of approximately
$8.9 million has been allocated to goodwill and other
identifiable intangible assets and is being amortized on a
straight-line basis over the estimated useful lives ranging from

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

three to five years. At December 31, 2002
and 2001, the Company had net goodwill of $1.3 million and net
intangible assets of $1.2 million and $347,000,
respectively.

HomeWrite

In February 2001, the Company acquired all of the
outstanding shares of HomeWrite, an application service provider
for cataloging home warranty information, in exchange for
196,549 shares of the Companys common stock valued at
$5.6 million and assumed the HomeWrite stock option plan
consisting of 196,200 outstanding stock options with an
estimated fair value of $4.5 million. The acquisition has been
accounted for as a purchase. The acquisition cost has been
allocated to the assets acquired based on their respective fair
values. The excess of purchase consideration over net tangible
assets acquired of approximately $11.8 million has been
allocated to goodwill and other identifiable intangible assets
and is being amortized on a straight-line basis over the
estimated useful lives of the assets ranging from three to five
years. There was no value for goodwill and intangible assets at
December 31, 2002 and 2001.

Homebid

In February 2001, the Company acquired certain
assets and assumed certain liabilities from Homebid.com, Inc.
(Homebid), an application service provider that
allows real estate professionals to manage, offer and negotiate
home sales over the Internet, for approximately
$3.5 million in cash. The acquisition has been accounted
for as a purchase. The acquisition cost has been allocated to
the assets acquired based on their respective fair values. The
excess of purchase consideration over net tangible assets
acquired amounting to approximately $2.5 million has been
allocated to goodwill and other identifiable intangible assets
and is being amortized on a straight-line basis over the
estimated useful lives of the assets ranging from three to five
years. There was no value for goodwill and intangible assets at
December 31, 2002 and 2001.

Move.com
Group

In February 2001, the Company acquired all of the
outstanding shares of the Move.com Group, from Cendant
Corporation (Cendant), valued at approximately
$745.7 million. The Move.com Group offered online and
offline marketing to consumers for the real estate industry. In
connection with the acquisition, the Company issued an aggregate
of 21.4 million shares of its 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 the Move.com Group. Cendant is restricted in
its ability to sell the Homestore 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 shares (see Notes 12
and 21). At December 31, 2002 and 2001, the Company had net
goodwill of $4.4 million and $2.7 million,
respectively, and net intangible assets of $50.2 million
and $76.3 million, respectively.

Homestyles

In May 2001, the Company acquired certain assets
and assumed certain liabilities from Homestyles, a leading
magazine publisher specializing in new home designs and project
plans, for approximately $14.5 million in cash. The
acquisition has been accounted for as a purchase. The
acquisition cost has been allocated to the assets acquired based
on their respective fair values. The excess of purchase
consideration over net tangible assets acquired of approximately
$15.2 million has been allocated to goodwill and other
identifiable intangible assets and is being amortized on a
straight-line basis over the estimated useful lives of the
assets ranging from three to five years. At December 31,
2002 and 2001, the Company had net goodwill of $2.6 million
and intangible assets of $3.5 million and
$4.4 million, respectively.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

iPlace

In August 2001, the Company acquired all the
outstanding shares of iPlace in exchange for approximately
3.5 million shares of the Companys common stock
valued at $80.3 million, $73.0 million in cash and the
assumption of 1.1 million outstanding stock options with an
estimated incremental fair value of $16.3 million.

iPlace is a leading provider of online credit and
neighborhood information to real estate professionals and
consumers. The primary reasons for the acquisition was the
expansion of the Companys product offerings to the
Companys core real estate professionals and to market to
consumers online credit information. Goodwill was generated in
this purchase as a result of a growing, profitable business
model with multiple bidders.

The acquisition has been accounted for using the
purchase method and the results of operations have been included
in the consolidated financial statements since the date of
acquisition. In accordance with SFAS No. 141, the Company
did not amortize goodwill recognized in connection with this
acquisition. The acquisition cost has been allocated to assets
acquired based on their respective fair values and resulted in
excess purchase consideration over the net tangible assets
acquired of approximately $191.7 million. With the
assistance of outside valuation specialists, the Company has
allocated the excess purchase price to goodwill and other
intangible assets, resulting in $153.8 million in goodwill
and $37.9 million in intangible assets subject to
amortization. Intangible assets are being amortized on a
straight-line basis over their estimated useful lives ranging
from three to seven years, with a weighted-average amortization
period of 5.6 years, and include an allocation of
$19.0 million to distribution network, $6.0 million to
subscriber list, $4.7 million to existing technology,
$3.2 million to customer contracts, $2.6 million to
non-compete agreements and $2.4 million to trademark and
trade names. At December 31, 2001, the Company had net
goodwill and intangible assets of $96.4 million and
$27.9 million, respectively. There were no goodwill or
intangible assets at December 31, 2002 as the Company sold
the ConsumerInfo division in the first quarter of 2002 (see Note
3).

The following condensed balance sheet data
represents the fair value assigned to each major asset and
liability category upon acquisition:

Estimated fair values (in thousands):

|                            |  |   |         | 
|--------------------------- |  | - | ------- | 
|Current assets              |  | $ | 3,927   | 
|Property and equipment, net |  |   | 1,641   | 
|Goodwill                    |  |   | 153,750 | 
|Intangible assets           |  |   | 37,900  | 
|Other assets                |  |   | 515     | 
|                            |  |   |         | 
|Total assets                |  | $ | 197,733 | 
|                            |  |   |         | 
|Current liabilities         |  | $ | 8,395   | 
|Deferred revenue            |  |   | 19,784  | 
|                            |  |   |         | 
|Total liabilities           |  | $ | 28,179  | 
|                            |  |   |         | 

The following summarized unaudited pro forma
financial information includes the acquisition of the Move.com
Group as if it had occurred at the beginning of 2001. This pro
forma financial information excludes the acquisitions of iPlace,
because of its classification as a discontinued operation, and
all other companies

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

acquired in 2001 and 2000 since the pro forma
effects of those transactions are immaterial for all periods
presented (in thousands, except per share amounts):

|                                                          |                         |              |            |              |  |   |          |         | 
|--------------------------------------------------------- | ----------------------- | ------------ | ---------- | ------------ |  | - | -------- | ------- | 
|                                                          |                         | Year Ended   |            | Year Ended  
|                                                          |                         | December 31, |            | December 31,
|                                                          |                         | 2001         |            | 2000        
|                                                          |                         |              |            |             
|                                                          |                         |             
|                                                          |                         | (Unaudited) 
|Revenue                                                   |                         | $            | 338,052    |              |  | $ | 274,638  |        
|Net loss                                                  |                         |              | (1,493,039 | )            |  |   | (407,189 | )      
|Net loss per share applicable to common
    stockholders: |                         |              |            |              |  |   |          |        
|Basic and diluted                                         |                         | $            | (13.56     | )            |  | $ | (4.03    | )      
|                                                          | Weighted average shares |              |            | 110,125      |  |   |          | 101,120 | 

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 based upon the purchase price valuation
performed 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 normal 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.

7.     Short-term
Investments and Marketable Equity Securities

The following table summarizes the Companys
investments in available-for-sale securities classified as
short-term investments and marketable equity securities at
December 31, 2001 (in thousands):

|                             |  |           |        |            |  |            |    |            |  |   |       |  |  |   |        | 
|---------------------------- |  | --------- | ------ | ---------- |  | ---------- | -- | ---------- |  | - | ----- |  |  | - | ------ | 
|                             |  | Amortized |        | Unrealized |  | Unrealized |    | Estimated 
|                             |  | Cost      |        | Gains      |  | Losses     |    | Fair Value
|                             |  |           |        |            |  |            |    |           
|Corporate notes              |  | $         | 9,100  |            |  | $          |   |            |  | $ | 204   |  |  | $ | 8,896  | 
|Debt securities              |  |           | 5,271  |            |  |            | 23 |            |  |   |      |  |  |   | 5,294  | 
|                             |  |           |        |            |  |            |    |            |  |   |       |  |  |   |        | 
|Short-term investments       |  | $         | 14,371 |            |  | $          | 23 |            |  | $ | 204   |  |  | $ | 14,190 | 
|                             |  |           |        |            |  |            |    |            |  |   |       |  |  |   |        | 
|Marketable equity securities |  | $         | 5,527  |            |  | $          |   |            |  | $ | 3,095 |  |  | $ | 2,432  | 
|                             |  |           |        |            |  |            |    |            |  |   |       |  |  |   |        | 

The contractual maturities of available-for-sale
debt securities at December 31, 2001 were less than one
year. Marketable equity securities consist of equity instruments
of publicly-held companies at December 31, 2001. The
Company did not hold marketable equity securities or short-term
investments as of December 31, 2002.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

8.     Property and
Equipment

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

|                                         |  |              |         |      |  |   |        |  
|---------------------------------------- |  | ------------ | ------- | ---- |  | - | ------ | -
|                                         |  |             
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2002         |         | 2001
|                                         |  |              |         |     
|Computer software and equipment          |  | $            | 24,952  |      |  | $ | 28,670 |  
|Furniture, fixtures and office equipment |  |              | 4,170   |      |  |   | 6,213  |  
|Leasehold improvements                   |  |              | 5,593   |      |  |   | 5,931  |  
|Machinery and equipment                  |  |              | 1,066   |      |  |   | 1,766  |  
|Land and building                        |  |              | 5,045   |      |  |   | 5,086  |  
|                                         |  |              |         |      |  |   |        |  
|                                         |  |              | 40,826  |      |  |   | 47,666 |  
|Less: accumulated depreciation           |  |              | (14,893 | )    |  |   | (2,907 | )
|                                         |  |              |         |      |  |   |        |  
|                                         |  | $            | 25,933  |      |  | $ | 44,759 |  
|                                         |  |              |         |      |  |   |        |  

Depreciation expense, excluding discontinued
operations, for the years ended December 31, 2002, 2001 and
2000 was $14.4 million, $24.9 million and
$5.8 million, respectively.

9.     Intangible
Assets

As described in Note 2, the Company adopted SFAS
No. 142 in January 2002. The following table reconciles the
reported net loss for the years ended December 31, 2002 and
2001, respectively, to its adjusted balance which excludes
previously reported goodwill amortization expense, which is no
longer recorded under the provisions of SFAS No. 142
(amounts in thousands, except per share amounts):

|                                             |                                     |                          |          |         |   |      |            |         |   |   |          |        |  
|-------------------------------------------- | ----------------------------------- | ------------------------ | -------- | ------- | - | ---- | ---------- | ------- | - | - | -------- | ------ | -
|                                             |                                     |                         
|                                             |                                     | Years Ended December 31,
|                                             |                                     |                         
|                                             |                                     | 2002                     |          | 2001    |   | 2000
|                                             |                                     |                          |          |         |   |     
|Reported net loss                            |                                     | $                        | (163,425 | )       |   | $    | (1,465,589 | )       |   | $ | (146,053 | )     
|Add back: goodwill amortization (net of tax) |                                     |                          |         |         |   |      | 136,048    |         |   |   | 19,074   |       
|                                             |                                     |                          |          |         |   |      |            |         |   |   |          |       
|Adjusted net loss                            |                                     |                          | (163,425 | )       |   |      | (1,329,541 | )       |   |   | (126,979 | )     
|                                             |                                     |                          |          |         |   |      |            |         |   |   |          |       
|Basic and diluted loss per share:            |                                     |                          |          |         |   |      |            |         |   |   |          |       
|                                             | As reported                         |                          | $        | (1.39   | ) |      | $          | (13.64  | ) |   | $        | (1.83  | )
|Add back: goodwill amortization:             |                                     |                          |         |         |   |      | 1.26       |         |   |   | 0.24     |       
|                                             |                                     |                          |          |         |   |      |            |         |   |   |          |       
|                                             | Adjusted net loss                   |                          | $        | (1.39   | ) |      | $          | (12.38  | ) |   | $        | (1.59  | )
|                                             |                                     |                          |          |         |   |      |            |         |   |   |          |       
|                                             | Weighted average shares outstanding |                          |          | 117,900 |   |      |            | 107,433 |   |   |          | 79,758 |  
|                                             |                                     |                          |          |         |   |      |            |         |   |   |          |       

The following changes in the net carrying amount
of goodwill for the year ended December 31, 2002 have been
made: reclassifications due to discontinued operations of
$96.4 million, additional contingent purchase price of Top
Producer of $9.3 million and reclassification of certain
intangible assets to goodwill upon the

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

adoption of SFAS No. 142 of
$2.7 million. Goodwill by segment, excluding discontinued
operations, as of December 31, 2002 and 2001 is as follows
(in thousands):

|                        |       |                    |        |        |  |   |        |         | 
|----------------------- | ----- | ------------------ | ------ | ------ |  | - | ------ | ------- | 
|                        |       |                   
|                        |       | As of December 31,
|                        |       |                   
|                        |       | 2002               |        | 2001  
|                        |       |                    |        |       
|Media services          |       | $                  | 1,307  |        |  | $ | 649    |        
|Software and services   |       |                    | 15,437 |        |  |   | 5,636  |        
|Online advertising      |       |                    |       |        |  |   |       |        
|Offline advertising     |       |                    | 6,514  |        |  |   | 5,096  |        
|Discontinued operations |       |                    |       |        |  |   | 96,388 |        
|                        |       |                    |        |        |  |   |        |        
|                        | Total |                    | $      | 23,258 |  |   | $      | 107,769 | 
|                        |       |                    |        |        |  |   |        |        

Intangible assets consist of purchased content,
porting relationships, purchased technology, and other
miscellaneous agreements entered into in connection with
business combinations and are amortized over expected periods of
benefits. There are no indefinite lived intangibles and no
expected residual values related to these intangible assets (in
thousands):

|                                                  |       |                    |        |              |  |        |        |              |  |   |        |         |  |   |       |        | 
|------------------------------------------------- | ----- | ------------------ | ------ | ------------ |  | ------ | ------ | ------------ |  | - | ------ | ------- |  | - | ----- | ------ | 
|                                                  |       |                   
|                                                  |       | As of December 31,
|                                                  |       |                   
|                                                  |       |                    |        |             
|                                                  |       | 2002               |        | 2001        
|                                                  |       |                    |        |             
|                                                  |       | Gross              |        | Accumulated  |  | Gross  |        | Accumulated 
|                                                  |       | Amount             |        | Amortization |  | Amount |        | Amortization
|                                                  |       |                    |        |              |  |        |        |             
|Customer lists and relationships                  |       | $                  | 27,661 |              |  | $      | 19,231 |              |  | $ | 35,088 |         |  | $ | 8,782 |       
|Trade name, trademarks, websites and brand names  |       |                    | 23,201 |              |  |        | 3,525  |              |  |   | 24,501 |         |  |   | 1,363 |       
|Online traffic                                    |       |                    | 18,636 |              |  |        | 8,601  |              |  |   | 18,636 |         |  |   |      |       
|Purchased technology                              |       |                    | 11,690 |              |  |        | 6,139  |              |  |   | 17,662 |         |  |   | 5,853 |       
|Purchased content                                 |       |                    | 15,604 |              |  |        | 5,900  |              |  |   | 15,604 |         |  |   |      |       
|Exclusive electronic listing and rights Agreement |       |                    | 13,220 |              |  |        | 1,442  |              |  |   | 13,220 |         |  |   |      |       
|Porting relationships                             |       |                    | 1,728  |              |  |        | 610    |              |  |   | 1,728  |         |  |   |      |       
|NAR® operating agreement                          |       |                    | 1,578  |              |  |        | 150    |              |  |   | 1,578  |         |  |   |      |       
|Other                                             |       |                    | 7,811  |              |  |        | 2,760  |              |  |   | 34,834 |         |  |   | 3,851 |       
|                                                  |       |                    |        |              |  |        |        |              |  |   |        |         |  |   |       |       
|                                                  | Total |                    | $      | 121,129      |  |        | $      | 48,358       |  |   | $      | 162,851 |  |   | $     | 19,849 | 
|                                                  |       |                    |        |              |  |        |        |              |  |   |        |         |  |   |       |       

At December 31, 2001, gross intangible
assets and accumulated amortization of $29.4 million and
$2.1 million, respectively, are reflected for the
ConsumerInfo division, which was sold in 2002.

Amortization expense, excluding discontinued
operations, for intangible assets for the years ended
December 31, 2002, 2001 and 2000 was $37.2 million,
$63.2 million and $23.8 million, respectively.
Amortization expense for the next five years is estimated to be
as follows (in thousands):

|                        |  |        |        | 
|----------------------- |  | ------ | ------ | 
|Year Ended December 31, |  | Amount
|                        |  |       
|2003                    |  | $      | 26,609 | 
|2004                    |  |        | 15,448 | 
|2005                    |  |        | 7,909  | 
|2006                    |  |        | 3,849  | 
|2007                    |  |        | 2,984  | 

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

10.     Other Current
Assets

Other current assets consist of the following (in
thousands):

|                                       |  |              |        |      |  |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2002         |        | 2001
|                                       |  |              |        |     
|Deferred selling and marketing expense |  | $            | 196    |      |  | $ | 9,622  | 
|Other                                  |  |              | 12,543 |      |  |   | 34,121 | 
|                                       |  |              |        |      |  |   |        | 
|                                       |  | $            | 12,739 |      |  | $ | 43,743 | 
|                                       |  |              |        |      |  |   |        | 

11.  Accrued Expenses

Accrued expenses, current, consist of the
following (in thousands):

|                                     |  |              |        |      |  |   |         | 
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |        | 2001
|                                     |  |              |        |     
|Accrued payroll and related benefits |  | $            | 14,723 |      |  | $ | 23,905  | 
|Accrued royalties                    |  |              | 2,472  |      |  |   | 4,502   | 
|Accrued restructuring charges        |  |              | 8,455  |      |  |   | 11,760  | 
|Accrued professional fees            |  |              | 7,023  |      |  |   | 12,916  | 
|Other                                |  |              | 27,059 |      |  |   | 49,288  | 
|                                     |  |              |        |      |  |   |         | 
|                                     |  | $            | 59,732 |      |  | $ | 102,371 | 
|                                     |  |              |        |      |  |   |         | 

12.  Related-party
Transactions

In February 2001, the Company acquired all of the
outstanding shares of the Move.com Group from Cendant valued at
$745.7 million. In connection with the acquisition, the
Company issued an aggregate of 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 the
Move.com Group. Cendant is restricted in its ability to sell the
Homestore 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 shares. The acquisition of the Move.com
Group has been accounted for as a purchase. The acquisition cost
has been allocated to assets acquired and liabilities assumed
based on estimates of their respective fair values. The excess
of purchase consideration over net tangible assets acquired of
$770.4 million has been allocated to goodwill and other
identifiable intangible assets and is being amortized on a
straight-line basis over estimated lives of the assets ranging
from two to fifteen years. The Companys impairment charge
as described in Note 5 reduced the Companys net goodwill
and intangible assets to $2.7 million and
$76.3 million, respectively, at December 31, 2001. In
connection with the Companys acquisition of the Move.com
Group, Cendant has alleged that the Company may have breached
certain representations and warranties made in the acquisition
agreement as a result of the restatement of the Companys
2000 financial statements (see Note 21).

In connection with and contingent upon the
closing 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 $75.0 million in products and
services to be delivered to agents, brokers and other Cendant
real estate franchisees over the next three

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

years. Subsequent to the closing of the
acquisition of the Move.com Group, the Company entered into
additional commercial agreements with Cendant and RETT. The
total contractual value of all commercial agreements entered
into during 2001 is approximately $95.5 million, resulting
in $82.5 million in future revenue. Revenue of
$31.2 million and $38.3 million related to these
transactions was recognized in 2002 and 2001, respectively. This
revenue was reported separately as revenue from related parties
in these financial statements. There was no revenue from Cendant
or RETT in 2000. It is not practical to separately determine the
costs of such revenues. During the years ended December 31,
2002 and 2001, the Company had received approximately
$12.0 million and $83.3 million of cash, respectively,
and had recorded at December 31, 2002 and 2001, deferred
revenue of approximately $13.5 million and
$37.0 million, respectively, related to these agreements.
This deferred revenue will be recognized over the next two years.

The business purpose of these commercial
agreements was to extend the Companys product and service
offerings to a significant concentration of real estate
professionals and to establish access to an effective and
efficient distribution channel for current and future product
and service offerings. The pricing under these commercial
arrangements was negotiated at arms-length and on a
discrete basis for each of the various products and services.
Products and services to be provided under these arrangements
include personalized multi-page websites for real estate agents,
subscription-based products and services targeted at individual
real estate brokerage offices, virtual tour technology software,
customized realtor productivity software, as well as other
products and services such as marketing and training. Sales of
the subscription-based products are for specified periods of
time ranging between one and two years.

During 2002, the Company amended certain of these
agreements and recorded other income of approximately
$10.8 million for the year ended December 31, 2002.
This other income resulted from amendments which relieved the
Company of certain future delivery obligations under those
agreements.

As part of an employment agreement, the Company
purchased a house in the fourth quarter of 2002 from an
executive officer for $1.95 million to facilitate his move
to the Companys headquarters. The house is included in
other assets at December 31, 2002, net of its expected
selling costs, at $1.8 million. The Company is currently
marketing the house for sale.

During the year ended December 31, 1999, the
Company received promissory notes from employees of the Company
totaling $13.0 million for the exercise of stock options
and related expenses. These notes were full recourse,
collateralized by the common stock of the Company and bear a
weighted average interest rate of 5.13% per annum. During 2002,
2001 and 2000, the Company received payments, including accrued
interest, of approximately $3.5 million, $2.9 million
and $2.5 million, respectively, in connection with these
notes. Additionally, the Company reacquired 373,959 and 471,007
shares, respectively, of unvested common stock at their original
issuance price during 2001 and 2000, in exchange for the
cancellation of the related promissory notes in the amount of
approximately $1.5 million and $2.9 million,
respectively. The outstanding balance of employee notes,
including accrued interest, amounted to $106,000 at
December 31, 2002.

During 2002, the Company also re-negotiated the
earn-out agreement with the former owners of Top Producer
that was tied to the original purchase agreement. Several of the
former owners are also employed by the Company (see Note 6).
This revised the contingent obligation of $14.8 million and
fixed it at $10.2 million. In connection with this
renegotiation, the Company recorded additional goodwill of
$9.3 million. The Company paid $3.1 million of this
earn-out during 2002 and $7.1 million is accrued as a
liability in the December 31, 2002 balance sheet.

During 2002, the Company reached an agreement
with the former owner and current employee of WyldFyre to
repurchase 127,262 shares of the Companys common stock
issued as part of the acquisition for approximately
$3.9 million resulting in $169,000 in treasury stock and
$3.7 million as a reduction to accrued expenses. This
agreement was entered into because the Company was unable to
register the shares as required

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

by the original purchase agreement. The
$3.8 million was accrued during the year ended
December 31, 2001 and is included in general and
administrative expenses.

As part of an employment agreement entered into
in 2002, the Company reimburses its chief executive officer for
the business use of an airplane which is owned indirectly by
him. Total expense incurred by the Company for reimbursement in
2002 was $1.3 million.

13.  Segment Information

Segment information is presented in accordance
with SFAS No. 131. This standard is based on a management
approach, which requires segmentation based upon the
Companys internal organization and disclosure of revenue
and operating expenses based upon internal accounting methods.
As of the beginning of fiscal year 2002, the Company hired a new
management team and changed the way that it manages and
evaluates its businesses. As a result of this change, management
now evaluates performance and allocates resources based on four
segments, consisting of Media Services, Software and Services,
Online Advertising and Offline Advertising, and excludes
discontinued operations and has reclassified previously reported
segment data to conform to the current period presentation. This
is consistent with the data that is made available to the
Companys management to assess performance and make
decisions.

The expenses presented below for each of the
business segments include an allocation of certain corporate
expenses that are identifiable and benefit those segments and
are allocated for internal management reporting purposes. The
unallocated expenses are those corporate overhead expenses that
are not directly attributable to a segment and include:
corporate expenses, such as finance, legal, internal business
systems, and human resources; amortization of intangible assets;
stock-based charges; and acquisition and restructuring charges.
There is no inter-segment revenue. Assets and liabilities are
not fully allocated to segments for internal reporting purposes.

The current segments of Media Services and
Software and Services are equivalent to the previously reported
Subscription segment. The Online Advertising segment is
consistent with the previously reported Advertising segment. The
Offline Advertising segment was included in the previously
reported Other segment, which included the ConsumerInfo division
which. was acquired in August 2001 as part of the acquisition of
iPlace, disposed of in April 2002 and has been classified as a
discontinued operation. Due to the sale of the ConsumerInfo
division and its classification as a discontinued operation, the
Company has excluded the financial results of the ConsumerInfo
division in the segment data presented for 2002 and 2001.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Summarized information, by segment, as excerpted
from the internal management reports is as follows (in
thousands):

|                                             |                       |                         |         |          |   |      |           |            |   |  |         |          |  
|-------------------------------------------- | --------------------- | ----------------------- | ------- | -------- | - | ---- | --------- | ---------- | - |  | ------- | -------- | -
|                                             |                       |                        
|                                             |                       | Year Ended December 31,
|                                             |                       |                        
|                                             |                       | 2002                    |         | 2001     |   | 2000
|                                             |                       |                         |         |          |   |     
|Revenue:                                     |                       |                         |         |          |   |      |           |            |   |  |         |         
|                                             | Media Services        |                         | $       | 141,485  |   |      | $         | 151,920    |   |  | $       | 88,219   |  
|                                             | Software and Services |                         |         | 46,804   |   |      |           | 52,560     |   |  |         | 24,105   |  
|                                             | Online Advertising    |                         |         | 19,021   |   |      |           | 41,234     |   |  |         | 68,998   |  
|                                             | Offline Advertising   |                         |         | 57,303   |   |      |           | 58,068     |   |  |         |         |  
|                                             |                       |                         |         |          |   |      |           |            |   |  |         |         
|Total revenue                                |                       |                         | 264,613 |          |   |      | 303,782   |            |   |  | 181,322 |         
|                                             |                       |                         |         |          |   |      |           |            |   |  |         |         
|Cost of revenue and operating expenses:      |                       |                         |         |          |   |      |           |            |   |  |         |         
|                                             | Media Services        |                         |         | 117,086  |   |      |           | 206,737    |   |  |         | 124,446  |  
|                                             | Software and Services |                         |         | 53,506   |   |      |           | 54,667     |   |  |         | 21,638   |  
|                                             | Online Advertising    |                         |         | 20,556   |   |      |           | 55,766     |   |  |         | 22,346   |  
|                                             | Offline Advertising   |                         |         | 57,110   |   |      |           | 50,887     |   |  |         |         |  
|                                             | Unallocated           |                         |         | 189,354  |   |      |           | 1,372,337  |   |  |         | 174,994  |  
|                                             |                       |                         |         |          |   |      |           |            |   |  |         |         
|Total cost of revenue and operating expenses |                       |                         | 437,612 |          |   |      | 1,740,394 |            |   |  | 343,424 |         
|                                             |                       |                         |         |          |   |      |           |            |   |  |         |         
|                                             | Loss from operations  |                         | $       | (172,999 | ) |      | $         | (1,436,612 | ) |  | $       | (162,102 | )
|                                             |                       |                         |         |          |   |      |           |            |   |  |         |         

Revenue for the years ended December 31,
2002 and 2001 included $31.2 million and
$38.3 million, respectively, of revenue from related
parties. The related party revenue for 2002 and 2001 consisted
of $21.0 million and $24.3 million in Media Services
and $10.2 million and $14.0 million in Software and
Services, respectively. There was no related party revenue
during 2000.

The Company has one customer, a related party,
within its Media Services and Software and Services segments
representing approximately 15% and 22%, respectively, of those
segments revenue for the year ended December 31,
2002. The same customer accounted for 16% and 27%, respectively,
of those segments revenue for the year ended
December 31, 2001. There were no customers representing
more than 10% of revenue of any segment in 2000.

The Company has another customer within its
Online Advertising segment for the years ended December 31,
2002 and 2001 representing approximately 16% and 24%,
respectively, of that segments revenue.

14.  Stock Plans



| |             
| | ------------
| | Option Plans

In general, options granted by the Company are
vested over a four year period and are granted at fair market
value at the date of grant. The life of an option grant cannot
exceed ten years. In January 1999, the Board of Directors
adopted, and in March 1999 the Companys stockholders
approved, the 1999 Equity Incentive Plan (1999 Plan)
to replace a pre-existing stock option plan (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 initial
number of shares of common stock reserved for issuance under the
1999 Plan was 10,000,000. 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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

In June 1999, the Board of Directors adopted, and
the stockholders approved, the 1999 Stock Incentive Plan
(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
preceding December 31; provided, however, that it does not
exceed 20.0 million shares. In accordance with the
provisions of the SIP, the number of options available for grant
was increased by 5,330,104 shares, 5,287,807 shares,
and 3,724,252 shares in January 2003, 2002 and 2001,
respectively.

In connection with the acquisitions of the
Move.com Group, SpringStreet, HomeWrite, Hessel and iPlace, the
Company assumed options of 3.2 million, 719,000, 196,000,
135,000, and 1.1 million, respectively.

On January 15, 2002, the Board of Directors
adopted the 2002 Stock Incentive Plan (2002 SIP).
The 2002 SIP reserves 15,000,000 shares of common stock for
future grants of nonqualified stock options to employees,
consultants, contractors and advisors as to be determined by the
Compensation Committee of the Board of Directors.

The following table summarizes the activities
under the option plans (including the Move.com Group,
SpringStreet, HomeWrite and Hessel options) for the years ended
December 31, 2002, 2001 and 2000 (shares in thousands):

|                                 |                                |           |        |                 |   |                |                |                |  |   |       |       | 
|-------------------------------- | ------------------------------ | --------- | ------ | --------------- | - | -------------- | -------------- | -------------- |  | - | ----- | ----- | 
|                                 |                                |           |        |                 |   | Weighted      
|                                 |                                | Number    |        |                 |   | Average       
|                                 |                                | of Shares |        | Price Per Share |   | Exercise Price
|                                 |                                |           |        |                 |   |               
|Outstanding at December 31, 1999 |                                |           | 10,269 |                 |   | $              | 0.06 to $69.63 |                |  | $ | 12.60 |      
|                                 | Hessel options assumed         |           |        | 135             |   |                |                | 36.00 to 47.13 |  |   |       | 39.77 | 
|                                 | Granted                        |           |        | 7,483           |   |                |                | 16.63 to 89.25 |  |   |       | 34.98 | 
|                                 | Exercised                      |           |        | (1,708          | ) |                |                | 0.30 to 34.50  |  |   |       | 4.44  | 
|                                 | Cancelled                      |           |        | (1,954          | ) |                |                | 0.36 to 89.25  |  |   |       | 25.16 | 
|                                 |                                |           |        |                 |   |                |                |                |  |   |       |      
|Outstanding at December 31, 2000 |                                |           | 14,225 |                 |   |                | 0.06 to 89.25  |                |  |   | 23.79 |      
|                                 | Move.com Group options assumed |           |        | 3,212           |   |                |                | 12.72 to 25.23 |  |   |       | 20.85 | 
|                                 | iPlace options assumed         |           |        | 1,124           |   |                |                | 0.02 to 14.16  |  |   |       | 10.86 | 
|                                 | HomeWrite options assumed      |           |        | 196             |   |                |                | 29.88 to 29.88 |  |   |       | 29.88 | 
|                                 | Granted                        |           |        | 7,011           |   |                |                | 16.57 to 34.96 |  |   |       | 25.18 | 
|                                 | Exercised                      |           |        | (4,130          | ) |                |                | 0.02 to 34.50  |  |   |       | 12.39 | 
|                                 | Cancelled                      |           |        | (6,980          | ) |                |                | 0.30 to 89.25  |  |   |       | 28.11 | 
|                                 |                                |           |        |                 |   |                |                |                |  |   |       |      
|Outstanding at December 31, 2001 |                                |           | 14,658 |                 |   |                | 0.02 to 89.25  |                |  |   | 24.16 |      
|                                 | Granted                        |           |        | 29,558          |   |                |                | 0.00 to 2.70   |  |   |       | 1.72  | 
|                                 | Exercised                      |           |        | (406            | ) |                |                | 0.00 to 2.00   |  |   |       | 0.48  | 
|                                 | Cancelled                      |           |        | (19,495         | ) |                |                | 0.06 to 89.25  |  |   |       | 16.42 | 
|                                 |                                |           |        |                 |   |                |                |                |  |   |       |      
|Outstanding at December 31, 2002 |                                |           | 24,315 |                 |   | $              | 0.03 to $89.25 |                |  | $ | 3.32  |      
|                                 |                                |           |        |                 |   |                |                |                |  |   |       |      

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 revenue,
sales and marketing, product development and general and
administrative expenses in the consolidated statement of
operations over the related vesting period

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

of the options. Common stock available for future
grants as of December 31, 2002 was 14.7 million shares
(see Note 22).

Additional information with respect to the
outstanding options at December 31, 2002 is as follows
(shares in thousands):

|                |  |           |        |                  |  |                |      |                     |  |                |       |  |  |  |       |  |  |   |       | 
|--------------- |  | --------- | ------ | ---------------- |  | -------------- | ---- | ------------------- |  | -------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |  |           |        | Options          |  |                |      |                    
|                |  |           |        | Outstanding      |  |                |      | Options Exercisable
|                |  |           |        | Weighted Average |  |                |      |                    
|                |  | Number    |        | Remaining        |  | Average        |      | Number              |  | Average       
|Prices          |  | of Shares |        | Contractual Life |  | Exercise Price |      | of Shares           |  | Exercise Price
|                |  |           |        |                  |  |                |      |                     |  |               
|$0.30           |  |           | 1,099  |                  |  |                | 9.75 |                     |  | $              | 0.30  |  |  |  | 54    |  |  | $ | 0.30  | 
|0.36 to 0.39    |  |           | 2,406  |                  |  |                | 9.76 |                     |  |                | 0.39  |  |  |  | 538   |  |  |   | 0.39  | 
|0.58 to 1.44    |  |           | 1,467  |                  |  |                | 9.02 |                     |  |                | 1.30  |  |  |  | 93    |  |  |   | 1.26  | 
|1.48 to 1.76    |  |           | 13,127 |                  |  |                | 8.98 |                     |  |                | 1.76  |  |  |  | 4,905 |  |  |   | 1.76  | 
|2.00 to 2.25    |  |           | 3,857  |                  |  |                | 8.91 |                     |  |                | 2.24  |  |  |  | 1,038 |  |  |   | 2.24  | 
|2.54 to 3.57    |  |           | 436    |                  |  |                | 7.29 |                     |  |                | 2.61  |  |  |  | 221   |  |  |   | 2.62  | 
|8.00 to 29.88   |  |           | 1,562  |                  |  |                | 7.18 |                     |  |                | 18.15 |  |  |  | 965   |  |  |   | 17.04 | 
|31.00 to 47.13  |  |           | 265    |                  |  |                | 6.05 |                     |  |                | 35.40 |  |  |  | 159   |  |  |   | 34.80 | 
|48.00 to 68.38  |  |           | 22     |                  |  |                | 7.57 |                     |  |                | 53.91 |  |  |  | 12    |  |  |   | 53.94 | 
|69.63 to 89.25  |  |           | 74     |                  |  |                | 3.27 |                     |  |                | 77.68 |  |  |  | 52    |  |  |   | 77.70 | 
|                |  |           |        |                  |  |                |      |                     |  |                |       |  |  |  |       |  |  |   |       | 
|$0.30 to $89.25 |  |           | 24,315 |                  |  |                | 8.89 |                     |  | $              | 3.32  |  |  |  | 8,037 |  |  | $ | 4.82  | 
|                |  |           |        |                  |  |                |      |                     |  |                |       |  |  |  |       |  |  |   |       | 

The weighted-average fair value of options
granted during the years ended December 31, 2002, 2001 and
2000 was $1.46, $18.87 and $25.47, respectively. The total
number of shares exercisable was 8.0 million,
5.8 million and 4.6 million at December 31, 2002, 2001
and 2000, respectively. The weighted average exercise price at
those dates was $4.82, $21.46 and $10.36, respectively.

During 2000, the Company accelerated the vesting
for five employees and remeasured the value of these options
under the intrinsic value model as required by FASB
Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation. In connection
with the separation from employment of two employees in the
third and fourth quarters of 2001, the Company recorded charges
of approximately $1.4 million and $2.1 million,
respectively, representing the proportional value of the vested
options that would not have vested under the original term of
the award at the termination date. Additionally, in 2001, the
Company accelerated the vesting of 246,797 options related to
various terminations of other employees. The difference in the
exercise price of such options and the fair market value of the
underlying common stock at the date of modification resulted in
non-cash charges amounting to approximately $2.1 million.
During 2001, $2.1 million and $3.5 million have been
included in sales and marketing expense and general and
administrative expense, respectively, in the Consolidated
Statement of Operations related to these modifications. In 2002,
as a result of previously established employment agreements, the
Company accelerated the vesting of 467,187 options and
extended the exercise period related to the departure of former
executive officers and recorded a non-cash charge amounting to
$4.9 million.

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 January 1, 2009 by
an amount equal to one-half of one 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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

exceed 5,000,000 shares. In January 2003, 2002
and 2001, the amount available under the plan was increased by
592,234, 587,534, and 413,806 shares, respectively. 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 2002, 2001 and 2000, the
Company issued 282,691, 296,173 and 230,590 shares,
respectively, of common stock under the ESPP at a weighted
issuance price of $0.77, $16.18 and $17.54 per share,
respectively.

During the year ended December 31, 2002, the
Company issued 36,000 shares of restricted stock to certain
members of the Companys Board of Directors. These shares
vest over one year. The charge associated with the issuance of
these shares was $90,000 and is being recognized over the
one-year vesting period.

15.     Warrants

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.
The Company incurred a total charge of $12.6 million which
was amortized to sales and marketing expense over the term of
the distribution agreement, approximately two years. In August
1999, warrants to purchase 107,527 shares of common stock were
exercised at an exercise price of $18.60 per share. 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 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 its 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 was recognized as expense over the term
of the initial two-year Broker Gold program agreements. Through
the year ended December 31, 2001, warrants to purchase
197,149 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 was 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 Companys initial public offering. 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 a non-cash charge of
$1.1 million which was 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 MLSs that agreed to provide their
real estate listings to the Company for publication on its
website. 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
agreements, ranging from one to two years. Through the year
ended December 31, 2002, warrants to purchase 368,859
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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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. During the year ended
December 31, 2001, warrants to purchase 33,780 shares of
common stock were exercised. None were exercised in 2002.

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 was
recognized over the one-year term of the marketing agreement.
The warrants expired without being exercised during 2001.

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 MLSs that agreed
to provide their real estate listings to the Company for
publication on its websites. 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, ranging from two to three
years. In October 2001, the Company reduced the exercise price
of the warrants to $27.95, and recognized an additional
$3.0 million charge which is being recognized over the
remaining term of the agreements.

During the year ended December 31, 2002, the
Company issued a warrant to purchase 240,000 shares at $2.07 as
part of a consulting agreement. The warrant was immediately
vested and the charge associated with this warrant was not
material to the Companys operations.

The Company recognized $9.4 million,
$18.9 million and $27.3 million in stock-based charges
for the years ending December 31, 2002, 2001 and 2000,
respectively, in connection with the issuance of all warrants.
At December 31, 2002, warrants to purchase 741,522 shares
of common stock were outstanding with a weighted-average
exercise price of $29.06.

16.     Capitalization

At December 31, 2002, the Company had
authorized the issuance of one share of Series A preferred
stock. At December 31, 2002, one share of Series A
preferred stock was issued and outstanding and held by NAR. 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 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
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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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.

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) 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
NAR of that certain Joint Ownership Agreement, dated as of
November 26, 1996, between NAR, and subsidiaries of the
Company, or the Trademark License dated as of November 26,
1996, by and between NAR and the Company, 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

During 2001 and 2000, the Company repurchased
373,959 and 471,007 shares of common stock for approximately
$1.5 million and $2.9 million, respectively, in
exchange for the cancellation of notes payable to the Company of
equal value.

During 2002, the Company reached an agreement
with the former owner and current employee of WyldFyre to
repurchase 127,262 shares of the Companys common stock
issued as part of the acquisition for approximately
$3.9 million resulting in $169,000 in treasury stock and
$3.7 million as a reduction to accrued liabilities. This
agreement was entered into because the Company was unable to
register the shares as required by the original agreement. The
$3.8 million was accrued during the year ended December 31,
2001 and is included in general and administrative expenses.

Issuance of
Common Stock

In March 2000 and May 2000, in connection with
acquisitions of WyldFyre Technologies, Inc. and Top Producer,
the Company issued 1,062,964 shares of the Companys common
stock (see Note 6).

In March 2000, in connection with a ten-year
marketing agreement, the Company issued 1,085,271 shares of
the Companys common stock with an estimated fair value of
$70.0 million to Budget Group, Inc. (Budget).
In this agreement, the Company provided a guarantee that the
price of the shares issued to Budget would be $64.50 per share
during a certain future period. This agreement was amended in
October 2001 and the Company issued approximately 4.8 million
additional shares of Company stock in exchange for the
cancellation and full settlement of the $64.50 stock price
guarantee. In addition, the amendment extended the term by one
year. Sales and marketing expense was being amortized over the
additional year of the agreement and certain amounts capitalized
in connection with this agreement were impaired in the fourth
quarter of 2001. The Company terminated this agreement in the
fourth quarter of 2002.

In April 2000, in connection with a distribution
agreement, the Company issued 3,894,343 shares of the
Companys common stock to AOL and entered into a five-year
distribution agreement. In exchange for

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

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 guaranteed that the 30-day average closing price,
related to approximately 64%, 18% and 18% of the shares it
issued, would be $65.64 per share on July 31, 2003 and
$68.50 per share on July 31, 2004 and July 31, 2005,
respectively. This guarantee only applied to shares that
continue to be held by AOL at the end of each respective
guarantee period. At December 31, 2002, the Company had
recorded a total of $219.5 million of distribution
obligation. This distribution obligation represented the
guaranteed fair market value of the approximately
3.9 million shares of the Companys common stock
issued upon entering the agreement. The difference between the
total guaranteed amount and the liability recorded was being
recorded as other expense over the term of the agreement. In
connection with the guarantee, the Company established a $90.0
million letter of credit and was required to pledge an amount
equal to the outstanding portion of the letter of credit. At
December 31, 2002, the cash pledged was classified as
restricted cash on the balance sheet. This letter of credit
could have been drawn against by AOL in the event the
Companys 30-day average closing price is less than $65.64
on July 31, 2003. The aggregate amount of cash payments the
Company would have been required to make in performing under
this agreement was limited to $90.0 million. Any additional
obligation to AOL could have been paid in cash or Company common
stock at the Companys discretion. If the amount the
Company was required to pay AOL at July 31, 2003 exceeded
$90.0 million, the distribution agreement with AOL would
expire.

In October 2001, the Company filed a demand for
arbitration with AOL relating to the distribution agreement. The
Companys complaint claimed that AOL has breached the
distribution agreement by failing to meet its contractual
obligations to build 18 specific promotions for the Company and
to deliver guaranteed Homestore impressions to AOL users. The
Company also claimed that AOL breached the duty of good faith
and fair dealing in the contract by disregarding its contractual
commitments. The Company also claimed that AOLs conduct
violated the contractual guarantees of exclusivity, premier
partnership and prominent partnership for Homestore. In the
arbitration, the Company sought a declaration that AOL breached
the distribution agreement; that it may terminate or rescind the
contract and receive damages and other appropriate relief; that
it may terminate the contract without AOL having any right to
the $90.0 million letter of credit issued in favor of AOL
in connection with the distribution agreement; and that the
Company would have no further obligations under the distribution
agreement. An arbitration hearing was held in mid-July 2002 and
the Company submitted its Proposed Findings of Fact and
Conclusions of Law to the Tribunal on September 20, 2002.

In January 2003, the Company entered into a new
marketing agreement with AOL that terminated its obligation
under the old agreement and settled the arbitration (see Note
22.)

In January 2001, the Company issued 600,000
shares of its common stock in connection with a five-year
marketing and distribution agreement, the fair value of which
was $11.1 million on the date of issuance. Concurrently,
the Company also entered into a marketing and web services
agreement with this same party for $15.0 million in cash
which is payable to the Company over the five-year term of the
agreement. The Company is recording these transactions over the
five-year term of the agreements on a net revenue basis.
Accordingly, variable charges associated with the fair value of
the common stock are recognized over the term of the agreement
and included as an offset to revenue recognized related to the
cash payments. In October 2001, the Company made certain
amendments to the marketing and web services agreement,
including the removal of performance requirements related to the
vesting of the 600,000 shares of common stock. As a result, the
charges associated with the common stock became fixed in
connection with the amendment. The net unamortized deferred
balance for this equity consideration of $6.0 million has
been recorded in prepaid distribution expense at
December 31, 2001 and will continue to be amortized as a
reduction of revenue over the remaining term of the agreement.
Net revenue recognized in connection with these agreements was
$(124,000) and $1.5 million for the years ended
December 31, 2002 and 2001, respectively.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

During the year ended December 31, 2002, the
Company issued 117,262 shares of its common stock in connection
with the purchase agreement for Homestyles for certain
performance objectives and recognized $141,000 in compensation
expense during 2002.

The Company recognized $45.7 million,
$48.5 million and $21.9 million in stock-based charges
in connection with the issuance of common stock for the years
ended December 31, 2002, 2001 and 2000, respectively.

17.     Net Loss per
Share

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

|             |                                              |                                                |   |          |          |      |   |            |            |   |   |          |          |  
|------------ | -------------------------------------------- | ---------------------------------------------- | - | -------- | -------- | ---- | - | ---------- | ---------- | - | - | -------- | -------- | -
|             |                                              |                                               
|             |                                              | Year Ended December 31,                       
|             |                                              |                                               
|             |                                              | 2002                                           |   | 2001     |          | 2000
|             |                                              |                                                |   |          |          |     
|Numerator:   |                                              |                                                |   |          |          |      |   |            |            |   |   |         
|             |                                              | Loss from continuing operations                |   | $        | (176,061 | )    |   | $          | (1,470,403 | ) |   | $        | (146,053 | )
|             |                                              | Gain on disposition of discontinued operations |   |          | 11,790   |      |   |            |           |   |   |          |         |  
|             |                                              | Income from discontinued operations            |   |          | 846      |      |   |            | 4,814      |   |   |          |         |  
|             |                                              |                                                |   |          |          |      |   |            |            |   |   |         
|             | Net loss                                     |                                                | $ | (163,425 | )        |      | $ | (1,465,589 | )          |   | $ | (146,053 | )       
|             |                                              |                                                |   |          |          |      |   |            |            |   |   |         
|Denominator: |                                              |                                                |   |          |          |      |   |            |            |   |   |         
|             | Weighted average shares outstanding          |                                                |   | 117,900  |          |      |   | 107,433    |            |   |   | 79,758   |         
|             |                                              |                                                |   |          |          |      |   |            |            |   |   |         
|             | Basic and diluted earnings (loss) per share: |                                                |   |          |          |      |   |            |            |   |   |          |         
|             | Loss from continuing operations              |                                                | $ | (1.49    | )        |      | $ | (13.69     | )          |   | $ | (1.83    | )       
|             | Income from discontinued operations          |                                                | $ | .11      |          |      | $ | .04        |            |   | $ |         |         
|             |                                              |                                                |   |          |          |      |   |            |            |   |   |         
|             | Net loss                                     |                                                | $ | (1.39    | )        |      | $ | (13.64     | )          |   | $ | (1.83    | )       
|             |                                              |                                                |   |          |          |      |   |            |            |   |   |         

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 25,056,743, 15,908,308, and 16,107,866
for the years ended December 31, 2002, 2001 and 2000,
respectively.

18.     Supplemental
Cash Flow Information

During the year ended December 31, 2002:



| |   |                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company paid $372,000 in interest.                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company also amended an agreement relating to
    earn-out payments of $14.8 million that were part of the
    original Top Producer purchase agreement. The amendment revised
    the contingent obligation of $14.8 million and fixed it at
    $10.2 million. In connection with the amendment, the
    Company recorded additional goodwill of $9.3 million.
|
| |  | The Company was required to accelerate 467,187
    options for terminated former executives and incurred a
    $4.9 million expense in 2002.                                                                                                                                                                                                                        
|
| |  | The Company issued 36,000 shares of restricted
    stock to certain members of the Companys Board of
    Directors. These shares vest over one year. The charge
    associated with the issuance of these shares was $90,000 and is
    being recognized over the one-year vesting period.                                                                         
|
| |  | The Company issued a warrant to purchase 240,000
    shares at $2.07 as part of a consulting agreement. The warrant
    was immediately vested and the charge associated with this
    warrant was not material to the Companys operations.                                                                                                                        

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

During the year ended December 31, 2001:



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company paid $589,000 in interest.                                                                                                                                                                                                                         
|
| |  | The Company acquired certain iPIX assets and
    licenses for $7.1 million in cash and a note in the amount
    of $2.3 million and assumed net liabilities of $2.4 million
    in connection with this purchase.                                              
|
| |  | The Company acquired certain assets and assumed
    certain liabilities from CFT for $4.5 million in cash and
    162,850 shares of stock valued at $5.0 million in
    connection with this purchase.                                                         
|
| |  | The Company issued 21.4 million shares of
    common stock valued at $745.7 million and assumed
    3.2 million options as part of the Move.com Group
    acquisition.                                                                                         
|
| |  | The Company issued 3.5 million common shares
    valued at $80.3 million and assumed 1.1 million
    options with an estimated incremental fair value of
    $16.3 million from the acquisition of iPlace.                                                     
|
| |  | The Company issued 196,549 common shares valued
    at $5.6 million and assumed 196,200 options valued at
    $4.5 million from the acquisition of HomeWrite.                                                                                                  
|
| |  | The Company issued 4,804,560 shares of common
    stock in connection with a marketing agreement.                                                                                                                                                              
|
| |  | The Company issued 600,000 shares of common stock
    valued at $11.1 million in connection with a marketing and
    distribution agreement.                                                                                                                   
|
| |  | The Company issued 470,089 warrants at $66.50 and
    incurred expense of $21.9 million over the two-year
    marketing agreement.                                                                                                                             
|
| |  | The Company issued 400,000 warrants at $35.63 for
    a marketing agreement and incurred expense of $5.0 million
    over one year.                                                                                                                            
|
| |  | The Company issued warrants to purchase 30,739
    shares at $84.45 and incurred expense of $1.8 million over
    3 years. The exercise price was later modified and an
    additional $3.0 million in expense is being recognized over
    the remaining term.
|
| |  | The Company repurchased 373,959 shares of common
    stock for approximately $1.5 million in exchange for the
    cancellation of promissory notes to the company of equal value.                                                                              
|
| |  | The Company accelerated 387,785 options for
    terminated employees and incurred a $5.6 million expense in
    2001.                                                                                                                                          

During the year ended December 31, 2000:



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company paid $1.4 million in 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 Hessel.                    
|
| |  | 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 distribution agreement.                                                                                                                              
|
| |  | 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.                                                 

102



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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | The Company received $10.4 million in equity
    securities from private companies in exchange for advertising
    services.

19.     Defined
Contribution Plan

The Company has a savings plan (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.

20.     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, 2002 and 2001 are as follows
(in thousands):

|                                     |                                            |              |         |              |   |   |         |          |  
|------------------------------------ | ------------------------------------------ | ------------ | ------- | ------------ | - | - | ------- | -------- | -
|                                     |                                            | December 31, |         | December 31,
|                                     |                                            | 2002         |         | 2001        
|                                     |                                            |              |         |             
|Deferred tax assets:                 |                                            |              |         |              |   |   |         |         
|                                     | Net operating loss carryforwards           |              | $       | 209,652      |   |   | $       | 173,142  |  
|                                     | Deferred expenses                          |              |         | 96,827       |   |   |         | 111,703  |  
|                                     | Impairment charges                         |              |         | 3,697        |   |   |         | 41,384   |  
|                                     | Other                                      |              |         | 53,491       |   |   |         | 18,388   |  
|                                     |                                            |              |         |              |   |   |         |         
|                                     |                                            |              | 363,667 |              |   |   | 344,617 |         
|                                     | Less: valuation allowance                  |              |         | (348,793     | ) |   |         | (323,619 | )
|                                     |                                            |              |         |              |   |   |         |         
|Net deferred tax assets              |                                            |              | 14,874  |              |   |   | 20,998  |         
|                                     |                                            |              |         |              |   |   |         |         
|Deferred tax liabilities:            |                                            |              |         |              |   |   |         |         
|                                     | Amortization of acquired intangible assets |              |         | (14,874      | ) |   |         | (20,998  | )
|                                     |                                            |              |         |              |   |   |         |         
|Total gross deferred tax liabilities |                                            |              | (14,874 | )            |   |   | (20,998 | )       
|                                     |                                            |              |         |              |   |   |         |         
|Net deferred tax asset (liability)   |                                            | $            |        |              |   | $ |        |         
|                                     |                                            |              |         |              |   |   |         |         

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 $25.2 million primarily as a result of a
change in estimate of acquired tax attributes related to the
Move.com Group acquisition offset by a net change in temporary
differences.

To the extent that the valuation allowance
recorded in connection with the acquisition of tax carryforwards
is subsequently released, it will be credited directly to
goodwill.

At December 31, 2002 and 2001, the Company
had net operating losses for federal income tax purposes of
approximately $569.4 million and $438.2 million,
respectively, which begin to expire in 2007. At
December 31, 2002 and 2001, the Company had net operating
losses for state income tax purposes of approximately
$313.9 million and $223.8 million, respectively, which
began to expire in 2002. Certain of the net operating loss
carryforwards for both federal and state tax purposes may be
subject to an annual limitation under relevant tax laws. At
December 31, 2002 and 2001, the net operating loss
carryforwards includes approximately $69.7 million and
$69.6 million, respectively, 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 carryforwards will be credited directly to equity.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

21.     Commitments
and Contingencies

Operating
Leases

The Company leases certain facilities and
equipment under non-cancelable 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.
Future minimum lease payments under these operating leases as of
December 31, 2002 are net of actual sublease arrangements
and exclusive of estimated sublease income used in the
restructuring provision (Note 4) are as follows
(in thousands):

|                        |       |   |        |        | 
|----------------------- | ----- | - | ------ | ------ | 
|Year ended December 31, |       |  
|                        |       |  
|2003                    |       | $ | 12,788 |       
|2004                    |       |   | 10,447 |       
|2005                    |       |   | 10,144 |       
|2006                    |       |   | 9,887  |       
|2007 and thereafter     |       |   | 5,921  |       
|                        |       |   |        |       
|                        | Total |   | $      | 49,187 | 
|                        |       |   |        |       

Of the amounts above, $17.2 million has
already been accrued in restructuring accruals and is reflected
in accrued expenses and other non-current liabilities at
December 31, 2002. Rental expense for the Company for
operating leases was $10.6 million, $18.9 million and
$7.5 million for the years ended December 31, 2002,
2001 and 2000, respectively.

Commitments for the years ending in 2007 and
beyond will be calculated based on amounts paid in the prior
year adjusted for the Annual Consumer Price Index for the period
ending in the prior calendar year.

The contractual provisions of one of the
Companys facility lease commitments required that the
Company collateralize the obligation with an outstanding letter
of credit, resulting in $7.9 million classified as
restricted cash at December 31, 2001. The Landlord called
$7.5 million upon the Letter of Credit during 2002 and as
of December 31, 2002 this amount is included as other long
term assets on the balance sheet.

Other
Commitments

Additionally, under the Companys operating
agreement with NAR, the Company has an exclusive arrangement to
operate REALTOR.com® as well as a license to use the
REALTOR.com® domain name and trademark and the
REALTORS® trademark in exchange for minimum annual royalty
payments. The Company also has an operating agreement with the
International Consortium of Real Estate Associations under which
the Company agreed to operate the consortiums web site and
has been endorsed as the exclusive provider of certain products
and services to real estate agents in the countries in which
members of the consortium have operations. The following
presents the Companys future minimum commitments under
those agreements (in thousands):

|                         |       |   |       |       | 
|------------------------ | ----- | - | ----- | ----- | 
|Year Ending December 31, |       |  
|                         |       |  
|2003                     |       | $ | 2,000 |      
|2004                     |       |   | 2,200 |      
|2005                     |       |   | 2,400 |      
|2006                     |       |   | 1,500 |      
|2007                     |       |   | 1,500 |      
|                         |       |   |       |      
|                         | Total |   | $     | 9,600 | 
|                         |       |   |       |      

104



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##### Table of Contents



HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

During 2002, the Company purchased software and
entered into consulting agreements with service providers in
connection with the implementation of the Companys new
enterprise reporting system. The initial commitment as of
December 31, 2002 associated with the project was
$4.5 million.

AOL

As part of the Companys new AOL agreement
the Company has the following financial commitments:

|                         |       |           |         |         | 
|------------------------ | ----- | --------- | ------- | ------- | 
|                         |       | Operating
|Year Ending December 31, |       | Agreement
|                         |       |          
|2002                     |       | $         | 112,500 |        
|2003                     |       |           | 7,500   |        
|                         |       |           |         |        
|                         | Total |           | $       | 120,000 | 
|                         |       |           |         |        

Legal
proceedings

Shareholder
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
current and former 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 the Companys 2000 and 2001 financial results
included in its filings with the SEC, analysts reports, press
releases and media reports. The complaints seek an unspecified
amount of damages. In March 2002, the California State
Teachers Retirement System was named lead plaintiff (the
Plaintiff), and the complaints have been
consolidated in the United States District Court, Central
District of California. In July 2002, the Plaintiff filed a
consolidated amended class action complaint naming the Company,
certain of the Companys former officers, directors and
employees, along with MaxWorldwide, Inc. (formerly L90, Inc.)
and PricewaterhouseCoopers LLP. In November 2002, the Plaintiff
filed a first amended consolidated class action complaint naming
the Company, certain of its current officers and employees,
certain of our former officers, directors and employees, and
various other parties, including among others MaxWorldwide,
Inc., PricewaterhouseCoopers LLP, AOL and Cendant. The amended
complaint makes various allegations, including that the Company
violated federal securities laws and seeks an unspecified amount
of damages.

On March 7, 2003, the court dismissed, with
prejudice, the Plaintiffs claims against a number of
corporate and individual defendants whom the Plaintiff alleged
either assisted in the planning and execution of the purportedly
fraudulent transactions at issue, or who were parties to those
transactions. Those defendants included MaxWorldwide, Inc., AOL
and Cendant, among others. The court also dismissed, without
prejudice, the Plaintiffs claims against a number of the
Companys current and former officers and employees. With
regard to those claims dismissed without prejudice, the
Plaintiff has the opportunity to file another amended complaint
attempting to cure the defects in the original claims against
those defendants. At the same time, the court denied the motions
to dismiss of PricewaterhouseCoopers LLP and the Companys
former chief executive officer. The Company did not file a
motion to dismiss the Plaintiffs claims against it, but
answered the complaint. Accordingly, the March 7, 2003
decision did not make any ruling with respect to the claims
asserted against the Company.

It is possible that the Company may be required
to pay substantial damages or a substantial settlement amount in
connection with the litigation although, as is the case with any
litigation, it is difficult to predict the outcome of this
matter. However, in light of the fact that the Company
determined that it was necessary to restate its 2000 and 2001
financial results, due to the circumstances forming the basis of
the Plaintiffs allegations, and the fact that four of the
Companys former employees have pled guilty to violating
federal

105



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##### Table of Contents



HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

securities laws in connection with the financial
results which required restatement, this litigation poses a
significant risk of a material adverse effect on the conduct and
scope of the Companys business, its results of operations
and its financial position. Because the Company is unable to
estimate the amount of damages that it might incur as a result
of the outcome of this litigation, no liability or reserve has
been recorded related to it.

In September 2002, Matt L. Brody filed a class
action complaint in Superior Court for the State of California,
Los Angeles County against the Company, certain of its former
officers and directors, and certain underwriters, purporting to
state claims under Sections 11, 12(a)(2) and 15 of the
Exchange Act, alleging that the Companys January 26,
2000 registration statement contained materially false and
misleading statements. In October 2002, defendants removed the
action to the United District Court, Central District of
California. As the case is in a very early stage, the Company is
unable to express an opinion at this time as to its merits.

In November 2002, Stuart Siegel and certain other
former owners and directors of iPlace filed a complaint against
the Company in the United States District Court, Eastern
District of Pennsylvania alleging fraudulent inducement and
promissory fraud due to misrepresentations by Homestore of its
financial condition prior to the Companys acquisition of
iPlace, securities fraud pursuant to Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder and
Section 20(a) of the Exchange Act, common law fraud,
negligent misrepresentation, breach of contract, and unjust
enrichment in connection with the Companys acquisition of
iPlace in August 2001. On March 19, 2003, the court granted
the Companys motion to transfer this case to the United
States District Court, Central District of California. The
Company believes this case is without merit and intends to
defend this claim vigorously.

In November 2002, plaintiff Gregory C. Pyfrom
filed a complaint in Superior Court for the State of California,
Ventura County against the Company and certain of its former
officers and directors, alleging violations of
Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, as well as intentional fraud, negligent
misrepresentation, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, violations of
California Corporation Code §§ 25400(d) and 25500,
violation of Business and Professions Code § 17200, and
negligent and intentional infliction of emotional distress. As
the case is in a very early stage, the Company is unable to
express an opinion at this time as to its merits.

In December 2002, Jeff Paradise and certain other
former shareholders of iPlace filed a complaint in the United
Sates District Court, Central District of California against the
Company, alleging violations of Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, as well as common
law fraud and negligent misrepresentation in connection with the
Companys acquisition of iPlace in August 2001. As the case
is in a very early stage, the Company is unable to express an
opinion at this time as to its merits.

SEC
Investigation

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 that occurred in March 2002.
The SEC has requested that the Company provide them with certain
documents concerning the restatement of the Companys
financial results. The SEC has also requested access to certain
of the Companys current and former employees for
interviews. The Company has cooperated and continues to
cooperate fully with the SECs investigation.

In September 2002 and March 2003, certain former
employees of Homestore entered into plea agreements with the
United States Attorneys Office and the SEC in connection
with the investigation. Also in September 2002, the SEC and the
Department of Justice informed the Company that they would not
bring any enforcement action against Homestore because of the
actions taken by its Board of Directors and its Audit Committee
and its cooperation in the SECs investigation. Because the
investigation is on-going and the Company is committed to
cooperating with the SEC, the Company will likely continue to
incur additional

106



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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

costs related to the investigation and management
time and attention may be diverted until the investigation
concludes.

Derivative
Litigation

In January 2002, Robert Sparaco filed a complaint
in California Superior Court, Los Angeles County, derivatively
on the Companys behalf as nominal defendant, against
certain of the Companys current and former officers and
directors. Two additional shareholder derivative actions were
filed against substantially the same defendants on the
Companys behalf as nominal defendants. The three
derivative actions allege breaches of fiduciary duty,
negligence, abuse of control, misconduct, waste of corporate
assets and other violations of state law. In March 2002, the
court entered an order consolidating the three actions. In
November 2002, the plaintiffs filed a first-amended consolidated
shareholder derivative complaint. The parties have lodged with
the court a stipulation agreeing to defer all proceedings and
continue all responsive dates until further action by the
parties. As the case is in a very early stage, the Company is
unable to express an opinion at this time as to its merits.

In January 2002, Jeff Joerg filed a complaint in
Delaware Chancery Court, derivatively on behalf of the Company
as nominal defendant, against certain of the Companys
current and former officers and directors. The complaint alleges
that defendants breached their fiduciary duties by failing to
maintain adequate accounting controls and by employing improper
accounting practices and procedures. As the case is in a very
early stage, the Company is unable to express an opinion at this
time as to its merits.

Insurance
Coverage Litigation

Between September 2002 and November 2002, Genesis
Insurance Company, Federal Insurance Company, Clarendon National
Insurance Company, Royal Indemnity Company and TIG Insurance
Company of Michigan sent the Company notices of rescission of
the officers and directors liability policies issued to
Homestore for the period of August 2000 through August 2001. The
same carriers filed complaints to judicially confirm the
rescissions or for declaratory relief in the United States
District Court, Central District of California against Homestore
and certain current and former officers, directors and
employees. The complaints allege misrepresentations contained in
the original applications for insurance, the renewal
applications and warranty letters. The Company requested that
the court stay the Federal Insurance Company and Genesis
Insurance Company actions but those requests were denied in
March 2003. The Company is in the process of responding to the
complaints. Federal Insurance Companys motion for summary
judgment is scheduled to be heard in May 2003.

In February 2003, TIG Insurance Company dismissed
its federal court rescission action and filed a new rescission
action against the Company and certain of its current and former
officers and directors in California State Superior Court.
Responses are due in April 2003.

In October 2002, Lumbermens Mutual Casualty
Company rescinded and filed a similar complaint against
Homestore and certain current and former officers, directors and
employees to confirm the rescission in the Superior Court of
California, County of Los Angeles. The Company has filed an
answer and discovery is beginning. Trial has been set for
January 2004.

The Company intends to defend these actions
vigorously; however, the Company is unable to form a judgment as
to the ultimate outcomes.

Other
Litigation

In connection with the Companys acquisition
of the Move.com Group, Cendant has alleged that the Company may
have breached certain representations and warranties made in the
acquisition agreement as a result of the restatement of the
Companys 2000 financial statements. In connection with the
acquisition, the

107



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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

Company entered into a series of related
agreements with Cendant that provided the Company with certain
promotion and exclusive data rights and placed certain
restrictions on Cendants ability to dispose of the
Companys shares. Cendant has proposed amendments to
certain of the related agreements in consideration of settling
any potential claims related to the Companys acquisition
of the Move.com Group. The Company has been engaged with Cendant
in discussions relating to Cendants allegations, and the
Company and Cendant have considered certain amendments to the
agreements that would materially alter the Companys rights
and Cendants restrictions and obligations in order to
settle these potential claims. The Company cannot assure that
these discussions will yield a satisfactory resolution.

In June 2000, Anil K. Agarwal filed a petition
for declaratory judgment against the Company in the District
Court of Douglas County, Nebraska. The lawsuit arises from a
transaction between Dr. Agarwal and Michael K. Luther, in
relation to which Mr. Luther directed InfoTouch Corporation
(InfoTouch), the Companys predecessor, to
transfer certain shares of InfoTouch Series B Preferred
Stock to Dr. Agarwal. Dr. Agarwal seeks a declaratory
judgment that he should have been issued shares of Series B
Preferred stock of InfoTouch sufficient to entitle him to
receive 76,949 shares of common stock (on a pre-split basis),
and that there is a shortfall of 46,950 shares, pre-split (or
104,375 shares of common stock, post-split) due and owing to
him. As the case is in the early stages of discovery, the
Company is unable to express an opinion at this time as to its
merits.

In November 2000, Amica Mutual Insurance Co.
(Amica) filed a demand for arbitration against GETKO
Group, Inc. (GETKO), one of the Companys
subsidiaries, alleging breach of a Marketing Services Agreement
effective January 2000. Amica is seeking compensatory and
consequential damages and lost profits due to GETKOs
alleged failure to comply with the Agreement. Arbitration of
this matter began in February 2003 and should be completed in
April 2003. Although the Company intends to defend the claims
vigorously and believes that the allegations are without merit,
the Company is unable to express an opinion as to the probable
outcome of the arbitration.

In December 2001, Pentawave Inc. filed a suit for
fraud, breach of contract and defamation in Ventura County
Superior Court seeking $5.0 million in compensatory and
punitive damages. Although the Company believes that this case
is without merit and intends to defend this claim vigorously,
the Company is unable to express an opinion as to the probable
outcome of the litigation. No trial date is currently scheduled,
however the Company believes that it will be set for late spring
2003.

In June 2002, Tren Technologies
(Tren) served a complaint on Homestore, NAR and NAHB
in the United States District Court, Eastern District of
Pennsylvania. The Complaint alleges a claim for patent
infringement based on activities related to the websites
REALTOR.com® and Homebuilder.com. Specifically, Tren
alleges that it owns a patent on an application, method and
system for tracking demographic customer information, including
tracking information related to real estate and real estate
demographics information, and that the Company has developed an
infringing technology for the NARs REALTOR.com® and
the NAHBs Homebuilder.com websites. The complaint seeks
unspecified damages and a permanent injunction against the
Company using the technology. In January 2003, counsel for Tren
withdrew their representation. On February 3, 2003, the
court ordered that the case would be dismissed twenty days later
unless prior to that date an attorney entered an appearance on
behalf of Tren along with a sworn statement that it was
counsels intention to prosecute the action through trial.
No qualifying appearance was entered on or before
February 23, 2003, and the case was dismissed without
prejudice. However, no assurance can be made that they will not
assert the claim again in the future.

Contingencies

From time to time, the Company is party to
various other litigation and administrative proceedings relating
to claims arising from its operations in the ordinary course of
business. As of the date of this Form 10-K and except as
set forth herein, the Company is not a party to any litigation
or administrative

108



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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

proceedings that management believes will have a
material adverse effect on the Companys business, results
of operations, financial condition or cash flows. In connection
with various purchase agreements and acquisitions, the Company
enters into contractual guarantees. In addition, in the normal
course of business the Company may periodically enter into
agreements that incorporate indemnification provisions. While
the maximum amount to which the Company may be exposed under
such agreements cannot be estimated, it is the opinion of
management that these guarantees and indemnifications are not
expected to have a material adverse effect on the Companys
consolidated results of operations or financial position.

22.     Subsequent
Events

Stock
Plans

In January 2003, in accordance with plan
provisions, the number of shares reserved for issuance under the
SIP and the ESPP were increased by an additional 5,330,104 and
592,234, shares, respectively.

AOL
Settlement

In January 2003, the Company entered into a new
marketing agreement with AOL that settled the arbitration and
terminated the obligation under the old agreement. As part of
the new marketing agreement, which continues through June 2004,
the Company has the exclusive right to provide AOL with real
estate listings, and AOL members also will retain access to a
wide array of the Companys professional content. AOL will
offer increased promotion and more prominent integration of the
Companys content in a redesigned real estate area on the
AOL service. The parties will continue to share advertising
revenue in certain home-related categories. The Company will pay
AOL $7.5 million in cash to terminate the previous
agreement and also will allow AOL to fully draw down on an
existing $90.0 million letter of credit secured by
restricted cash on the Companys balance sheet at
December 31, 2002. Termination of the previous agreement
also eliminates the Companys responsibility to provide AOL
with an additional make-whole payment in July 2003
which would have been approximately $57.0 million, payable
in cash or stock. Transfer restrictions relating to the
approximately 3.9 million shares of the Companys
common stock issued to AOL under the previous agreement also
have been removed. Over the term of the agreement, the Company
will make quarterly cash payments of $3.75 million, in six
equal installments beginning January 2003 and ending April 2004.

Hessel

In January 2003, the Company entered into four
separate agreements to sell substantially all of the assets of
Hessel for a total of approximately $1.5 million in cash. The
operations of Hessel were not material and thus have not been
reclassified as discontinued operations.

109



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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (continued)

23.     Quarterly
Financial Data (unaudited)

Provided below is the selected unaudited
quarterly financial data for 2001 and 2002:

|                                           |  |                                          |         |          |  |           |          |          |  |          |          |          |  |           |            |          |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | --------- | -------- | -------- |  | -------- | -------- | -------- |  | --------- | ---------- | -------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                           |  |                                         
|                                           |  | Three months Ended                      
|                                           |  |                                         
|                                           |  | Mar. 31,                                 |         | June 30, |  | Sept. 30, |          | Dec. 31, |  | Mar. 31, |          | June 30, |  | Sept. 30, |            | Dec. 31,
|                                           |  | 2001                                     |         | 2001     |  | 2001      |          | 2001     |  | 2002     |          | 2002     |  | 2002      |            | 2002    
|                                           |  |                                          |         |          |  |           |          |          |  |          |          |          |  |           |            |         
|                                           |  |                                         
|                                           |  | (In thousands, except per share amounts)
|Revenue                                    |  | $                                        | 63,818  |          |  | $         | 77,700   |          |  | $        | 80,790   |          |  | $         | 81,474     |          |  | $ | 74,116  |   |  | $ | 65,894  |   |  | $ | 63,779  |   |  | $ | 60,824  |  
|Gross profit                               |  |                                          | 36,013  |          |  |           | 44,349   |          |  |          | 50,290   |          |  |           | 59,640     |          |  |   | 51,916  |   |  |   | 44,548  |   |  |   | 45,956  |   |  |   | 43,889  |  
|Loss from continuing operations(1)         |  |                                          | (99,810 | )        |  |           | (120,868 | )        |  |          | (137,756 | )        |  |           | (1,111,969 | )        |  |   | (35,655 | ) |  |   | (62,436 | ) |  |   | (40,351 | ) |  |   | (37,619 | )
|Income (loss) from discontinued operations |  |                                          |        |          |  |           |         |          |  |          | (569     | )        |  |           | 5,383      |          |  |   | 846     |   |  |   | 10,179  |   |  |   | 582     |   |  |   | 1,029   |  
|Net loss                                   |  | $                                        | (99,810 | )        |  | $         | (120,868 | )        |  | $        | (138,325 | )        |  | $         | (1,106,586 | )        |  | $ | (34,809 | ) |  | $ | (52,257 | ) |  | $ | (39,769 | ) |  | $ | (36,590 | )
|Basic and diluted income (loss) per share: |  |                                          |         |          |  |           |          |          |  |          |          |          |  |           |            |          |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Continuing operations                      |  | $                                        | (1.05   | )        |  | $         | (1.12    | )        |  | $        | (1.25    | )        |  | $         | (9.56      | )        |  | $ | (0.30   | ) |  | $ | (0.53   | ) |  | $ | (0.34   | ) |  | $ | (0.32   | )
|Discontinued operations                    |  | $                                        |        |          |  | $         |         |          |  | $        | (0.01    | )        |  | $         | 0.05       |          |  | $ | 0.01    |   |  | $ | 0.09    |   |  | $ |        |   |  | $ | 0.01    |  
|Net loss                                   |  | $                                        | (1.05   | )        |  | $         | (1.12    | )        |  | $        | (1.25    | )        |  | $         | (9.51      | )        |  | $ | (0.29   | ) |  | $ | (0.44   | ) |  | $ | (0.34   | ) |  | $ | (0.31   | )



---



|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | The Company adopted SFAS No. 142 in 2002 and
    ceased amortizing goodwill as required by that standard.

110



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.




PART III

Pursuant to Paragraph G(3) of the General
Instructions to Form 10-K, the information required by
Part III of Form 10-K, to the extent not set forth
herein, is incorporated by reference to our proxy statement
relating to our annual meeting of stockholders to be held on
May 29, 2003.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information concerning our directors and
executive officers appears in our proxy statement under the
caption Election of Directors is incorporated herein
by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information concerning executive compensation
appears in our proxy statement, under the caption
Executive Compensation and is incorporated herein by
reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Information concerning the security ownership of
certain beneficial owners and management appears in our proxy
statement under the caption Election of Directors
and is incorporated herein by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information concerning certain relationships and
related transactions appears in our proxy statement under the
captions Election of Directors under the headings
Director Compensation, Executive
Compensation, and Related Party Transactions
and is incorporated herein by reference.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within the 90-day period prior to the date of
this report, an evaluation was carried out, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15
of the Securities Exchange Act of 1934. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.

There have been no significant changes in our
internal controls or other factors that could significantly
affect those controls since the date of our last evaluation of
its internal controls, and there have been no corrective actions
with regard to significant deficiencies and material weaknesses
in those controls.

111



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PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | 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 58 of this report.
|
| | (2) Financial Statement Schedule,
    Exhibit Number 99.01.                                                                                              

(b) Reports on Form 8-K



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Current report of Form 8-K filed
    October 9, 2002 reporting the resignation of
    Barbara T. Alexander from our Board of Directors.
|
| | (2) Current report of Form 8-K filed
    December 23, 2002 reporting the appointment of
    Bruce G. Willison to our Board of Directors.   

(c) Exhibits

112



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|       |        |               |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------ | ------ | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        | Exhibit Title
|       |        |              
|       | 2.01   |               |  | Agreement and Plan of Merger dated
    December 31, 1998 between NetSelect, Inc. and InfoTouch
    Corporation. (Incorporated by reference to Exhibit 2.01 to
    our registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                              
|       | 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. (Incorporated by reference to Exhibit 2.02
    to our registration statement on Form S-1
    (File No. 333-79689).)                                                                                    
|       | 2.03   |               |  | Exchange Agreement dated March 31, 1998
    among NetSelect, Inc., The Enterprise of America, Ltd., and
    Roger Scommegna. (Incorporated by reference to Exhibit 2.03
    to our registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                 
|       | 2.04   |               |  | Agreement and Plan of Reorganization/ Merger
    dated May 19, 1999 between NetSelect, Inc. and
    SpringStreet.com, Inc. (Incorporated by reference to
    Exhibit 2.04 to our registration statement on Form S-1
    (File No. 333-79689).)                                                                                                                                                   
|       | 2.05   |               |  | Stock Purchase Agreement dated October 12,
    1999 among Homestore.com, Inc., The Homebuyers Fair, Inc.,
    certain shareholders of The Homebuyers Fair, Inc., and
    Central Newspapers, Inc., as Shareholder Agent. (Incorporated by
    reference to Exhibit 2.01 to our current report on
    Form 8-K/ A filed December 7, 1999.)                                                      
|       | 2.06   |               |  | Stock Purchase Agreement dated October 12,
    1999 among Homestore.com, Inc., FAS-Hotline, Inc., the
    shareholders of FAS-Hotline, Inc., and Central Newspapers, Inc.,
    as Shareholder Agent. (Incorporated by reference to
    Exhibit 2.02 to our current report on Form 8-K/ A
    filed December 7, 1999.)                                                                            
|       | 2.07   |               |  | Agreement and Plan of Reorganization dated
    October 26, 2000 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. (Incorporated by reference herein
    to the Annex A to the definitive proxy statement filed
    November 29, 2000.)
|       | 3.01   |               |  | Amended and Restated Certificate of Incorporation
    dated February 2, 1998. (Incorporated by reference to
    Exhibit 3.01 to our registration statement on Form S-1
    (File No. 333-79689).)                                                                                                                                                                                                
|       | 3.02   |               |  | Amended and Restated Bylaws dated
    February 4, 1999. (Incorporated by reference to
    Exhibit 3.03 to our registration statement on Form S-1
    (File No. 333-79689).)                                                                                                                                                                                                                      
|       | 3.03.1 |               |  | RealSelect, Inc.s Certificate of
    Incorporation dated October 25, 1996. (Incorporated by
    reference to Exhibit 3.05.1 to our registration statement
    on Form S-1 (File No. 333-79689).)                                                                                                                                                                                                
|       | 3.03.2 |               |  | RealSelect, Inc.s Certificate of Amendment
    to Certificate of Incorporation dated November 25, 1996.
    (Incorporated by reference to Exhibit 3.05.2 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                               
|       | 3.04   |               |  | RealSelect, Inc.s Amended By-laws dated
    December 1999. (Incorporated by reference to Exhibit 3.07
    of our Form 10-K for the year ended December 31, 1999.)                                                                                                                                                                                                                               
|       | 4.01   |               |  | Form of Specimen Certificate for Homestore.com,
    Inc. common stock. (Incorporated by reference to
    Exhibit 4.01 to our registration statement on Form S-1
    (File No. 333-79689).)                                                                                                                                                                                                       
|       | 4.02.1 |               |  | NetSelect, Inc. Second Amended and Restated
    Stockholders Agreement dated January 28, 1999.
    (Incorporated by reference to Exhibit 4.02.1 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                                         
|       | 4.02.2 |               |  | Amendment No. 1 to NetSelect, Inc. Second
    Amended and Restated Stockholders Agreement dated April 9,
    1999. (Incorporated by reference to Exhibit 4.02.2 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                         
|       | 4.03   |               |  | Registration Rights Agreement dated
    October 26, 2000 between Homestore.com, Inc., Cendant
    Corporation and the Shelf Stockholders signatory thereto.(2)                                                                                                                                                                                                                                   

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|       |         |               |  |                                                                                                                                                                                                                                                                                                                                                                            
|------ | ------- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |         | Exhibit Title
|       |         |              
|       | 10.01.1 |               |  | Operating Agreement dated November 26, 1996,
    between REALTORS® Information Network, Inc. and RealSelect,
    Inc. (Incorporated by reference to Exhibit 10.02.1 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                               
|       | 10.01.2 |               |  | First Amendment to Operating Agreement dated
    December 27, 1996 between REALTORS®Information
    Network, Inc. and RealSelect, Inc. (Incorporated by reference to
    Exhibit 10.02.2 to our registration statement on
    Form S-1 (File No. 333-79689).)                                                                                                              
|       | 10.01.3 |               |  | Amendment No. 2 to Operating Agreement dated
    May 28, 1999 between REALTORS® Information Network,
    Inc. and RealSelect, Inc. (Incorporated by reference to
    Exhibit 10.02.3 to our registration statement on
    Form S-1 (File No. 333-79689).)                                                                                                                  
|       | 10.02   |               |  | 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® Information
    Network, Inc. (Incorporated by reference to Exhibit 10.03
    to our registration statement on Form S-1 (File
    No. 333-79689).)
|       | 10.03   |               |  | Joint Ownership Agreement dated November 26,
    1996, among National Association of REALTORS®, NetSelect,
    L.L.C., and NetSelect, Inc. (Incorporated by reference to
    Exhibit 10.04 to our registration statement on
    Form S-1 (File No. 333-79689).)                                                                                                            
|       | 10.04   |               |  | Trademark License dated November 26, 1996,
    between National Association of REALTORS® and RealSelect,
    Inc. (Incorporated by reference to Exhibit 10.05 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                     
|       | 10.05   |               |  | Agreement dated August 21, 1998 among
    RealSelect, REALTORS® Information Network, Inc., National
    Association of REALTORS®, NetSelect and NetSelect L.L.C.
    (Incorporated by reference to Exhibit 10.29 to our
    registration statement on Form S-1
    (File No. 333-79689).)                                                                                  
|       | 10.06   |               |  | Agreement dated May 28, 1999 among
    NetSelect, Inc., RealSelect, Inc., REALTORS®Information
    Network, Inc. and National Association of REALTORS®.
    (Incorporated by reference to Exhibit 10.30 to our
    registration statement on Form S-1
    (File No. 333-79689).)                                                                                           
|       | 10.07   |               |  | Letter Agreement Regarding Rental Site
    Acquisition dated May 17, 1999 among National Association
    of REALTORS®, REALTORS® Information Network, Inc. and
    RealSelect, Inc. (Incorporated by reference to
    Exhibit 10.32 to our registration statement on
    Form S-1 (File No. 333-79689).)(1)                                                                
|       | 10.08   |               |  | 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. (Incorporated by reference to Exhibit 10.06 to
    our registration statement on Form S-1 (File
    No. 333-79689).)                                                                   
|       | 10.09   |               |  | Stock Purchase Agreement dated March 16,
    2002 between Experian Holdings, Inc. and Homestore.com, Inc.
    (Incorporated by reference to Exhibit 2.1 to our
    Form 8-K filed March 19, 2002.)                                                                                                                                                                         
|       | 10.10   |               |  | Distribution Agreement dated January 9, 2003
    between America Online, Inc. and Homestore, Inc.(2),(3)                                                                                                                                                                                                                                                                   
|       | 10.11.1 |               |  | Office Lease dated September 18, 1998
    between RealSelect, Inc. and WHLNF Real Estate Limited
    Partnership for 225 West Hillcrest, Suite 100,
    Thousand Oaks, California. (Incorporated by reference to
    Exhibit 10.24.1 to our registration statement on
    Form S-1 (File No. 333-79689).)                                                                  
|       | 10.11.2 |               |  | 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. (Incorporated by
    reference to Exhibit 10.24.2 to our registration statement
    on Form S-1 (File No. 333-79689).)                                                   

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|       |       |               |  |                                                                                                                                                                                                                                                                                                                             
|------ | ----- | ------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 10.12 |               |  | Standard Office Lease Form, Westlake North
    Business Park dated March 7, 2000 between Westlake North
    Associates, LLC, and Homestore, Inc. for 30700 Russell Ranch
    Road, Westlake Village, California. (Incorporated by reference
    to Exhibit 10.33 to our Form 10-K for the year ended
    December 31, 2001.)
|       | 10.13 |               |  | NetSelect, Inc. 1996 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 10.16 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                         
|       | 10.14 |               |  | NetSelect, Inc. 1999 Equity Incentive Plan.
    (Incorporated by reference to Exhibit 10.17 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                        
|       | 10.15 |               |  | Homestore.com, Inc. 1999 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 10.18 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                     
|       | 10.16 |               |  | Homestore.com, Inc. 1999 Employee Stock Purchase
    Plan. (Incorporated by reference to Exhibit 10.19 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                             
|       | 10.17 |               |  | Homestore.com, Inc. 2002 Employee Stock
    Purchase Plan. (Incorporated by reference to Exhibit 4.04
    to our registration statement on Form S-8 (File
    No. 333-89172).)                                                                                                                                              
|       | 10.18 |               |  | InfoTouch Corporation 1994 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 10.20 to our
    registration statement on Form S-1 (File
    No. 333-79689).)                                                                                                                                                   
|       | 10.19 |               |  | Move.com, Inc. Stock Incentive Plan.
    (Incorporated by reference herein to Exhibit 4.04 to our
    Registration Statement on Form S-8 (File
    No. 333-55828).) Cendant Corporation Move.com Group 1999
    Stock Option Plan as assumed by Cendant Corporation from                                                    
|       | 10.20 |               |  | Move.com, Inc. and amended and restated effective
    as of March 21, 2000. (Incorporated by reference herein to
    Exhibit 4.05 to our Registration Statement on Form S-8
    (File No. 333-55828).)                                                                                                                      
|       | 10.21 |               |  | 1997 Stock Initiative Plan of Cendant Corporation
    as amended and restated through October 14, 1998.
    (Incorporated by reference herein to Exhibit 4.06 to our
    Registration Statement on Form S-8 (File
    No. 333-55828).)                                                                                      
|       | 10.22 |               |  | Amendment to Amended and Restated 1997 Stock
    Incentive Plan of Cendant Corporation dated March 27, 2000.
    (Incorporated by reference herein to Exhibit 4.07 to our
    Registration Statement on Form S-8 (File
    No. 333-55828).)                                                                                 
|       | 10.23 |               |  | Amendment to Amended and Restated 1997 Stock
    Incentive Plan of Cendant Corporation dated March 28, 2000.
    (Incorporated by reference herein to Exhibit 4.08 to our
    Registration Statement on Form S-8 (File
    No. 333-55828).)                                                                                 
|       | 10.24 |               |  | Homestore 401(k) Plan. (Incorporated by reference
    to Exhibit 10.25 to our registration statement on
    Form S-1 (File No. 333-79689).)                                                                                                                                                                                 
|       | 10.25 |               |  | Form of Indemnity Agreement between
    Homestore.com, Inc. and each of its directors and executive
    officers. (Incorporated by reference to Exhibit 10.01 to
    our registration statement on Form S-1 (File
    No. 333-79689).)                                                                                      
|       | 10.26 |               |  | Employment Agreement dated March 6, 2002
    between Homestore.com, Inc. and W. Michael Long. (Incorporated
    by reference to Exhibit 6.01(A) to our Form 10-Q for
    the quarter ended March 31, 2002.)                                                                                                                 
|       | 10.27 |               |  | Employment Agreement dated March 6, 2002
    between Homestore.com, Inc. and Jack D. Dennison. (Incorporated
    by reference to Exhibit 6.03(A) to our Form 10-Q for
    the quarter ended March 31, 2002.)                                                                                                                
|       | 10.28 |               |  | Memorandum dated March 29, 2002 to Jack
    Dennison. (Incorporated by reference to Exhibit 6.07(A) to
    our Form 10-Q for the quarter ended March 31, 2002.)                                                                                                                                                             
|       | 10.29 |               |  | Employment Agreement dated March 6, 2002
    between Homestore.com, Inc. and Lewis R. Belote III.
    (Incorporated by reference to Exhibit 6.02(A) to our
    Form 10-Q for the quarter ended March 31, 2002.)                                                                                                             
|       | 10.30 |               |  | Executive Retention and Severance Agreement dated
    April 24, 2002 between Homestore.com, Inc. and Allan
    Merrill. (Incorporated by reference to Exhibit 6.06(A) to
    our Form 10-Q for the quarter ended March 31, 2002.)                                                                                           

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|       |       |               |  |                                                                                                                                                                                                                                                 
|------ | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 10.31 |               |  | Executive Retention and Severance Agreement dated
    April 24, 2002 between Homestore.com, Inc. and
    Patrick R. Whelan. (Incorporated by reference to
    Exhibit 6.10(A) to our Form 10-Q for the quarter ended
    March 31, 2002.)       
|       | 10.32 |               |  | Memorandum dated March 29, 2002 to
    Patrick R. Whelan. (Incorporated by reference to
    Exhibit 6.11(A) to our Form 10-Q for the quarter ended
    March 31, 2002.)                                                                         
|       | 10.33 |               |  | Executive Retention and Severance Agreement dated
    September 30, 2002 between Homestore.com, Inc. and Allan
    Dalton. (Incorporated by reference to Exhibit 10.1 to our
    Form 10-Q for the quarter ended September 30, 2002.)           
|       | 10.34 |               |  | Offer Letter dated September 30, 2002
    between Homestore.com, Inc. and Allan Dalton. (Incorporated by
    reference to Exhibit 10.2 to our Form 10-Q for the
    quarter ended September 30, 2002.)                                          
|       | 10.35 |               |  | Annual Bonus Plan, 2002 of Allan Dalton.
    (Incorporated by reference to Exhibit 10.3 to our
    Form 10-Q for the quarter ended September 30, 2002.)                                                                                         
|       | 10.36 |               |  | Executive Retention and Severance Agreement dated
    September 30, 2002 between Homestore.com, Inc. and Michael
    Douglas. (Incorporated by reference to Exhibit 10.4 to our
    Form 10-Q for the quarter ended September 30, 2002.)        
|       | 10.37 |               |  | Offer Letter dated September 30, 2002
    between Homestore.com, Inc. and Michael Douglas. (Incorporated
    by reference to Exhibit 10.5 to our Form 10-Q for the
    quarter ended September 30, 2002.)                                       
|       | 10.38 |               |  | Annual Bonus Plan, 2002 of Michael Douglas.
    (Incorporated by reference to Exhibit 10.3 to our
    Form 10-Q for the quarter ended September 30, 2002.)                                                                                      
|       | 10.39 |               |  | Employment Agreement between NetSelect, Inc. and
    Stuart H. Wolff, Ph.D. (Incorporated by reference
    to Exhibit 10.21 to our registration statement on
    Form S-1 (File No. 333-79689).)                                                
|       | 21.01 |               |  | Subsidiaries of Homestore, Inc.(2)                                                                                                                                                                                                              
|       | 23.01 |               |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.(2)                                                                                                                                                                          
|       | 23.02 |               |  | Report of Independent Accountants on Financial
    Statement Schedule.(2)                                                                                                                                                                       
|       | 99.01 |               |  | Schedule II  Valuation and
    Qualifying Accounts.(2)                                                                                                                                                                                         
|       | 99.02 |               |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
    U.S.C. §1350(a) and (b)).(2)



---



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Confidential treatment has been granted with
    respect to certain information in these exhibits pursuant to a
    confidential treatment request.
|   
|(2) | Filed herewith.                                                                                                                                    
|   
|(3) | Confidential treatment has been requested with
    respect to certain information in this exhibit pursuant to a
    confidential treatment request.






|         |                                           
|-------- | ------------------------------------------
|Item 16. | Principal Accountant Fees and
    Services

Information concerning principal accountant fees
and services appears in our proxy statement, under the caption
Report of the Audit Committee and is incorporated
herein by reference.

116



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##### Table of Contents






SIGNATURES

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



| |                
| | ---------------
| | HOMESTORE, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ W. MICHAEL LONG

| |                        
| | -----------------------
| |                        
| | W. Michael Long        
| | Chief Executive Officer



| |     |                         
| | --- | ------------------------
| | By: | /s/ LEWIS R. BELOTE, III

| |                        
| | -----------------------
| |                        
| | Lewis R. Belote, III   
| | Chief Financial Officer

Date: March 25, 2003

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.

|                                                                  |  |                                      |  |                |  | 
|----------------------------------------------------------------- |  | ------------------------------------ |  | -------------- |  | 
|                                                                  |  |                                      |  |               
|Signature                                                         |  | Title                                |  | Date          
|                                                                  |  |                                      |  |               
|Principal Executive Officer:                                      |  |                                      |  |               
|                                                                 
|/s/ W. MICHAEL LONGW. Michael Long                                |  | Chief Executive Officer and Director |  | March 25, 2003
|Principal Financial Officer and Principal
    Accounting Officer: |  |                                      |  |               
|                                                                 
|/s/ LEWIS R. BELOTE, IIILewis R. Belote, III                      |  | Chief Financial Officer              |  | March 25, 2003
|Additional Directors:                                             |  |                                      |  |               
|                                                                 
|/s/ JOE F. HANAUERJoe F. Hanauer                                  |  | Chairman of the Board and Director   |  | March 25, 2003
|                                                                 
|/s/ TERRENCE M. MCDERMOTTTerrence M. McDermott                    |  | Director                             |  | March 25, 2003
|                                                                 
|/s/ L. JOHN DOERRL. John Doerr                                    |  | Director                             |  | March 25, 2003
|                                                                 
|/s/ WILLIAM E. KELVIEWilliam E. Kelvie                            |  | Director                             |  | March 25, 2003
|                                                                 
|/s/ KENNETH K. KLEINKenneth K. Klein                              |  | Director                             |  | March 25, 2003
|                                                                 
|/s/ BRUCE G. WILLISONBruce G. Willison                            |  | Director                             |  | March 25, 2003

117



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##### Table of Contents






I, W. Michael Long, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Homestore, Inc.;                                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                           



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.     designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    annual report is being prepared;
|
| | b.     evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this annual report (the Evaluation Date);
    and,                                                                                                     
|
| | c.     presented in this
    annual report our conclusions about the effectiveness of the
    disclosure controls and procedures based on our evaluation as of
    the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.     all significant
    deficiencies in the design or operation of internal controls
    which could adversely affect the registrants ability to
    record, process, summarize and report financial data and have
    identified for the registrants auditors any material
    weaknesses in internal controls; and,
|
| | b.     any fraud,
    whether or not material, that involves management or other
    employees who have a significant role in the registrants
    internal controls; and,                                                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/ W. MICHAEL LONG    
| |                        
| | W. Michael Long        
| | Chief Executive Officer

Date: March 25, 2003

118



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##### Table of Contents



I, Lewis R. Belote, III certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Homestore, Inc.;                                                                                                                                                                                                                                                                         
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                           



| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.     designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    annual report is being prepared;
|
| | b.     evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this annual report (the Evaluation Date);
    and,                                                                                                     
|
| | c.     presented in this
    annual report our conclusions about the effectiveness of the
    disclosure controls and procedures based on our evaluation as of
    the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.     all significant
    deficiencies in the design or operation of internal controls
    which could adversely affect the registrants ability to
    record, process, summarize and report financial data and have
    identified for the registrants auditors any material
    weaknesses in internal controls; and,
|
| | b.     any fraud,
    whether or not material, that involves management or other
    employees who have a significant role in the registrants
    internal controls; and,                                                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                         
| | ------------------------
| | /s/ LEWIS R. BELOTE, III
| |                         
| | Lewis R. Belote, III    
| | Chief Financial Officer 

Date: March 25, 2003

119