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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31,
    2003                                             
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the transition period
    from           to                                             

Commission file number: 000-26659



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Homestore, Inc.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                                                      |  |                                         
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                              |  | 95-4438337                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                                    |  | (I.R.S. Employer
    Identification No.)
|                                                                                                     
|30700 Russell Ranch Road
    Westlake Village, California(Address of Principal Executive
    Offices) |  | 91362(Zip Code)                         

Registrants telephone number, including
area code:

(805) 557-2300


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


Warrants to purchase Common Stock, par value
$.001 per share



---

Indicate
by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          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).     Yes þ          No o

|                                                                                                                    |  |   |             | 
|------------------------------------------------------------------------------------------------------------------- |  | - | ----------- | 
|Aggregate market value of voting common stock
    held by non-affiliates of the registrant as of June 30,
    2003* |  | $ | 135,397,371 | 
|Number of shares of common stock outstanding as
    of February 27, 2004.                                           |  |   | 121,334,360 | 



---



|  |                                                                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Based on the closing price of the common stock of
    $1.72 per share on that date, as reported on the Nasdaq Stock
    Markets SmallCap Market and, for purposes of this
    computation only, the assumption that all of the
    registrants directors, executive officers and beneficial
    owners of 10% or more of the registrants common stock are
    affiliates.



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DOCUMENTS INCORPORATED BY REFERENCE

In accordance with
General Instruction G(3) to Form 10-K, certain information
in the registrants definitive proxy statement to be filed
with the Securities and Exchange Commission relating to the
registrants 2004 Annual Meeting of Stockholders is
incorporated by reference into Part III.



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HOMESTORE, INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2003


INDEX

|              |  |                                                                                                        |     |      |     | 
|------------- |  | ------------------------------------------------------------------------------------------------------ | --- | ---- | --- | 
|              |  |                                                                                                        |     | Page
|              |  |                                                                                                        |     |     
|PART I       
|Item 1.       |  | Business                                                                                               |     |      | 2   | 
|Item 2.       |  | Properties                                                                                             |     |      | 28  | 
|Item 3.       |  | Legal Proceedings                                                                                      |     |      | 28  | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                |     |      | 33  | 
|PART II      
|Item 5.       |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |     |      | 34  | 
|Item 6.       |  | Selected Financial Data                                                                                |     |      | 36  | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |     |      | 38  | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |     |      | 66  | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                        |     |      | 67  | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |     |      | 123 | 
|Item 9A.      |  | Controls and Procedures                                                                                |     |      | 123 | 
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                 |     |      | 123 | 
|Item 11.      |  | Executive Compensation                                                                                 |     |      | 123 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |     |      | 123 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                     |     |      | 123 | 
|Item 14.      |  | Principal Accounting Fees
    and Services                                                             |     |      | 124 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |     |      | 124 | 
|SIGNATURES    |  |                                                                                                        | 130 |     
|EXHIBIT 10.25
|EXHIBIT 10.37
|EXHIBIT 21.01
|EXHIBIT 23.01
|EXHIBIT 23.02
|EXHIBIT 23.03
|EXHIBIT 23.04
|EXHIBIT 31.01
|EXHIBIT 31.02
|EXHIBIT 32.01
|EXHIBIT 32.02
|EXHIBIT 99.01



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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, Business, and elsewhere in
this Form 10-K, and the other documents we file with the
Securities and Exchange Commission, or SEC, including our
reports on Form 8-K and Form 10-Q, and any amendments
thereto. Other unknown or unpredictable factors also could have
material adverse effects on our future results. The
forward-looking statements included in this Annual Report on
Form 10-K are made only as of the date of this Annual
Report. We cannot guarantee future results, levels of activity,
performance or achievements. Accordingly, you should not place
undue reliance on these forward-looking statements. Finally, we
expressly disclaim any intent or obligation to update any
forward-looking statements to reflect subsequent events or
circumstances.




PART I






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

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.comTM, RENTNET.com®, 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 products and
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, home builders, 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
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations for a
further description of our history, including information
regarding the difficult challenges we have faced since our
discovery of accounting irregularities in late 2001 and our
subsequent restatement of certain of our historical financial
statements.

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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

As of the beginning of 2003, we realigned our
business to ensure that each of our products and services
directly support this vision, and we organized our operating
activities into three reporting segments:

Media Services.Media Services consists of products
and services that promote and connect real estate professionals
to consumers through our REALTOR.com®, HomeBuilder.com,
RENTNET.com and Homestore.com websites. In addition, we provide
advertising services, including banner ads, sponsorships,
integrated content and text based links and rich media
applications which we sell to those businesses interested in
reaching our targeted audience. This segment also includes our
limited international activities.

Software.Software
includes our property listing management and customer
relationship management applications for REALTORS®,
Multiple Listing Services, or MLSs, and home builders, offered
through our Top Producer®, WyldFyreTM, and
Computers For Tracts, or CFT, businesses, respectively.

Print.Print
incorporates the targeted, new-mover advertising products
provided by our Welcome Wagon® subsidiary, 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, brokers,
builders and apartment owners and managers. 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.

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
real estate professionals, including brokers, agents, property
managers, appraisers, counselors and others engaged in all
aspects of the real estate industry. NAR had approximately
950,000 members as of December 2003.

National Association of Home Builders.The NAHB is the second-largest real
estate trade association in the United States. As of
December 31, 2003, NAHB had approximately
215,000 members. Approximately one-third of NAHBs
members are home builders and/or remodelers and the remainder
work in closely

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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, 2003, 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 approximately 900 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; RENTNET.com, 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 websites
attracts approximately 9.8 million unique users per month,
according to January 2004 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 in January 2004 grew approximately 8% from
January 2003, 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
36 minutes per month on our sites. Individually,
REALTOR.com®, our flagship site, is the Internets
No. 1 real estate site with approximately
414.5 million page views and approximately 5.5 million
unique users recorded in January 2004, according to comScore.
REALTOR.com® visitors spend a great deal of time browsing
home listings  approximately 45 minutes per unique
user in a typical month. HomeBuilder.com is the No. 1
Internet destination for gathering information and contacting
home builders related to newly constructed and to-be-built
homes, having attracted approximately 912,000 unique users in
January 2004. RENTNET.com is a leading apartment website, having
attracted approximately 1.6 million unique users in January
2004. Homestore.com, which comprises all of our consumer traffic
not directed to one of our three property sites, attracted
approximately 3.4 million unique users in January 2004.

We are the exclusive provider of national
property listings across America Online, or AOL, Yahoo!,
Netscape, CompuServe and Digital City and soon to be the
exclusive provider on The Microsoft Network, or MSN. In
addition, we distribute moving, home and garden content for a
home and real-estate related channel on AOL and provide
AOLs over 24.7 million domestic subscribers an online
area to find home-related information, tools and services. Other
significant portal relationships for the Homestore network
include MSN, Yahoo! Inc., The Excite Network, Inc., iWon.com,
Internet Broadcast Systems, Inc. and its websites for
53 local network-affiliated TV stations, and United Online
through its NetZero and Juno brands.

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 800,000
REALTORS® to help guide buyers and sellers through the real
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 approximately 900 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.

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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 75,000 new and model homes for sale throughout more
than 8,300 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, telephone or fax for further information on
particular properties.

RENTNET.com.The
RENTNET.com website provides consumers with a large and
comprehensive rental housing database. As of December 31,
2003, our rental housing database consisted of more than 40,000
properties, representing approximately 6.1 million
apartment units located in more than 4,500 cities nationwide.
Our database also includes 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 four
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.Our Moving channel contains content,
    tools and interactive guides for consumers moving to new homes
    or relocating to another community. We also offer a database of
    self-serve storage to locations across the country. 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.
|
| |  | Homestore Senior Housing.Our Senior Housing channel offers a
    database of senior housing listings, including Independent
    Living, Assisted Living, Nursing Homes, Continuing Care and
    Alzheimers Care. The channel also contains content, tools
    and guides to assist users in selecting suitable housing and
    care types, together with information on health and wellness.                                                                                                                                                                                                                                



| |           
| | ----------
| | 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 technologies by relying on trademark, service mark,
patent, copyright and trade secret laws, restrictions on
disclosure and other methods. See  Intellectual
Property.

Our Software segment business has also developed
proprietary applications to enhance the productivity and
profitability of real estate professionals. 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

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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 and Software segments, is derived from
subscription-based products. See Note 13, Segment
Information, to our Consolidated Financial Statements
contained in Item 8 of this Form 10-K for financial
information by segment.



| |                       
| | ----------------------
| | Media Services Segment

Our Media Services segment provides 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 changed the way we offer many of
our products to customers, including a particularly significant
change to our REALTOR® product offering. Historically, we
required our REALTOR® customers to purchase a templated
website, or homepage, in order to connect themselves to the
listings displayed on REALTOR.com®. These 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 began 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 was
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 is expected to be
completed during the second quarter of 2004.

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.

We offer the following products and services
through our Media Services segment:

Classified Advertising.We offer a number of classified
advertising opportunities throughout our network of websites,
primarily in the form of property listing enhancements on
REALTOR.com®, Homebuilder.com, and RENTNET.com 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.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Online Brochures.Our primary product for rental,
    corporate housing and senior housing property owners and
    managers is an online brochure displayed on our RENTNET.com
    website. We also offer a similar product to our home builder
    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 RENTNET.com. 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 currently make up the
majority 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. Advertisers can also purchase
custom advertising units on our websites, including text-based
links and rich media products. We offer advertisers branding on
a fixed-price basis and performance-based opportunities,
generally sold on a cost per thousand basis.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Featured
    HomesTM.
    Featured HomesTM allows our REALTOR® subscribers
    to more prominently display their property listings on the
    REALTOR.com® website during geographically targeted
    property searches by consumers. Properties featured through the
    Featured HomesTM product are viewed first in any
    search of their respective zip codes.                                                        
|
| |  | Featured
    AgentTM.
    Featured AgentTM allows REALTORS® to promote
    themselves and their services on REALTOR.com® to a
    geographically targeted real estate audience.                                                                                                                                                                                                                                             
|
| |  | Featured
    CompanyTM.
    Featured CompanyTM allows brokers to promote
    themselves and their services to a geographically targeted real
    estate audience on REALTOR.com®.                                                                                                                                                                                                                                           
|
| |  | 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®, home builders, lenders, and
self-service storage facilities. We believe our directory
products offer advertisers the opportunity to reach qualified
consumers based upon the targeted audience that visits our
websites and are a cost-effective way for professionals to
generate leads from online consumers.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | XLeratorTM.
    Available to subscribers to our REALTOR® directory and
    website products, XLeratorTM is an online prospecting
    tool that enables real estate professionals 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, XLeratorTM gathers this data
    and helps REALTORS® to 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 á la carte features and functionality
basis or bundled

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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
    PlaceTM.
    One PlaceTM is a suite of products, including a
    website, that integrates with an interactive voice response
    system that is linked to a pager network. One PlaceTM
    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, and we do not expect any significant revenue from these
activities in the foreseeable future.



| |                 
| | ----------------
| | Software Segment

Our software businesses, Top Producer, WyldFyre
and CFT, provide software solutions and related services to real
estate professionals.

Top Producer.Top
Producer is a leading contact management software specific to
real estate agents. Our Top Producer products have an installed
customer base of more than 125,000 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
wireless devices. Products are privately 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, Internet
lead management 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 at more than 60
Multiple Listing Services (MLSs) (including 44 of the 50 largest
MLSs) representing more than 100,000 real estate professionals
throughout the U.S., Canada, and Australia. WyldFyres
products enable real estate professionals to access, display,
and manipulate property information, photos, and maps. WyldFyre
ListingsTM is our desktop listing productivity suite
that provides real estate professionals with tools to create
comprehensive listing presentations for buyers or sellers,
customized comparative market analysis reports, and property
marketing reports. Using the WyldFyre products, real estate
professionals can access information from MLSs and store the
information on their laptops so that they can later display this
information to their prospective clients. Our web-based,
MLSAllianceTM product enables real estate
professionals to use a single gateway to access listings
information from multiple neighboring MLSs. The product allows
each MLS to maintain its identity, reporting formats, and
control over its data, while facilitating streamlined access for
end users.

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 25%
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.

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Print 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. Additionally, Welcome Wagon
offers local merchants solo marketing opportunities through its
Pinpoint Mail product, which is sold both on an annual
subscription and on a per mailing basis.

Homestore Plans and Publications.Homestore Plans and Publications
offers both consumers and building 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 directly to
consumers and building professionals. These plans are sold
through magazines that are distributed at leading retailers and
newsstands nationwide. The Internet has become an increasingly
important channel of distribution for the sale of home plans,
and our Home Plans website, Homeplans.com, is one of the most
heavily trafficked websites in the home plans category,
distributing its home plan content through approximately
100 affiliate partner sites.

Competition

We face competition in each segment of our
business.

Media
Services Segment

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. A new competitive model has emerged where several of
these websites are seeking to increase visits to their sites by
offering rebates to homebuyers that purchase homes, by charging
the real estate professional a referral fee who was introduced
to them via such websites. Such websites charge referral fees to
real estate professionals that advertise on their sites to gain
access to the potential homebuyer 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. However, these sites
generally have a limited amount of real estate content and an
even more limited directory of qualified REALTORS®.

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 over 70% of all
homebuyers use the Internet as a starting point for their new
home search (according to the NAR), 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.

Our primary competitors for online real estate
advertising dollars include InterActiveCorp, AgentConnect.com (a
division of Next Phase Media, Inc.) and HomeGain.com, Inc. In
addition, RENTNET.com faces competition from ApartmentGuide.com,
Rent.com and Apartments.com, and our Homebuilder.com website
competes directly with NewHomeGuide.com and NewHomeSource.com.
Our Homestore.com

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website also faces competition from general
interest consumer websites that offer home, moving and finance
content, including MonsterMoving.com (a division of Monster
Worldwide, Inc.) and ServiceMagic, Inc.




| |                 
| | ----------------
| | Software Segment

While no single entity competes directly against
us in all of our software businesses, our software segment faces
broad competition from companies with a major presence in the
real estate industry, such as Fidelity National Information
Solutions, Inc. and the First American Corporation, 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 First
Americans MarketLinx solution, and Rapattonis
Rapattoni MLS solution.

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, either
as custom development efforts or by configuring software from
companies such as Onyx, Pivotal, and SAP.



| |              
| | -------------
| | Print 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 include Hanley-Wood, LLC,
The Garlinghouse Company and Meredith Corporation. We also face
competition from many companies offering home plans for sale
over the Internet, such as dreamhomesource.com and
coolhouseplans.com.

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 computers, causing slower response
times or outages. We host our Homestore.com, REALTOR.com®,
HomeBuilder.com, RENTNET.com 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

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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.

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;                                                                                                                                                                              
|
| |  | NAR could lose the use of the trademark
    REALTOR® or we could lose the use of such trademark or the
    REALTOR.com® domain name, or be unable to protect the other
    trademarks or 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 
Risks Related to Our Business for a more complete
description of the risks related to our intellectual property.

Seasonality

Our Welcome Wagon business in our Print segment
is affected by seasonality. Our revenue in this segment is
significantly impacted by the number of household moves in the
United States each year. Due to weather and school calendars, a
disproportionate percentage of moves take place in the second
and third calendar quarters than in the first and fourth
quarters. As a result, we ship a larger number of our Welcome
Wagon products in the second and third quarters each year. None
of our other businesses are exposed to this degree of
seasonality primarily due to the fact that much of our business
in the Media and Software segments is based on annual contracts.

Employees

As of December 31, 2003, we had
approximately 1,570 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.

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Available Information

We file annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, as well as our proxy statements and other
information, with the Securities and Exchange Commission, or
SEC. In most cases, those documents are available, without
charge, on our website at http://ir.homestore.com as soon
as reasonably practicable after they are filed electronically
with the SEC. Copies are also available, without charge, from
Homestore, Inc., Investor Relations, 30700 Russell Ranch Road,
Westlake Village, CA 91362. You may also read and copy these
documents at the SECs public reference room located at 450
Fifth Street, N.W., Washington, D.C. 20549 under our SEC file
number (000-26659), and you may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330. In most cases, these documents are available
over the Internet from the SECs web site at
http://www.sec.gov.

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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



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

Except for the first quarter of 2003, for which
we experienced a net profit due to a one-time non-cash gain on
the settlement of a distribution agreement, we have experienced
net losses in each quarterly and annual period since 1993. We
incurred net losses of $47.1 million, $163.4 million,
and $1.5 billion for the years ended December 31, 2003,
2002 and 2001, respectively. As of December 31, 2003, we
had an accumulated deficit of $2.0 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 subscription revenues from broker, agent, home
builder and rental property owner, 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, 2003, we had approximately $26.0 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;
|
| |  | the sale or disposition of assets; and                                                                                                                                  
|
| |  | the impact of fees paid to professional advisors
    in connection with litigation and accounting matters.                                                              



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Litigation relating to accounting
    irregularities could have an adverse effect on our financial
    condition.

Following the December 2001 announcement of the
discovery of accounting irregularities, approximately 20
lawsuits claiming to be class actions and six lawsuits claiming
to be brought derivatively on our behalf were commenced in
various courts against us and certain of our 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

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Retirement System has been named lead plaintiff,
or the Plaintiff, in the consolidated shareholder
lawsuits against us. In November 2002, the Plaintiff filed a
first amended consolidated class action complaint, or Securities
Class Action Lawsuit, 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 Time Warner, Inc., and Cendant Corporation as
defendants. 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
Time Warner, Inc. 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 advised that it does not intend to
amend the complaint. At the same time, the court denied the
motions to dismiss 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.

On August 12, 2003, we entered into a
settlement agreement with the Plaintiff to resolve all
outstanding claims related to the Securities Class Action
Lawsuit. On October 8, 2003, the District Court
preliminarily approved the settlement. A final hearing on the
settlement was heard on January 16, 2004, after delivery of
notice to class members. On February 5, 2004, the Court
issued an interim order approving the terms of the settlement as
fair, adequate and reasonable, but directing additional briefing
on two issues: (l) whether certain objectors proposal
to carve out certain claims from the settlement is
feasible; and (2) whether notice to class members was
potentially inadequate because of the short time period given to
file their claims. The Court has suggested that the parties
consider allowing additional time for class members to file
claims, which would not affect the total settlement fund. The
briefs were submitted on February 20, 2004. We are awaiting
the Courts determination whether to grant final approval
of the settlement.

As a part of the settlement, we agreed to pay
$13.0 million in cash and issue 20.0 million new
shares of our common stock valued at $50.6 million as of
August 12, 2003. In October 2003, we placed
$10.0 million in escrow upon preliminary approval by the
U.S. District Court, with an additional $3.0 million due
upon final judicial approval of the settlement. Following this
approval, the $13.0 million and 20.0 million shares of
newly issued common stock will be distributed to the class. The
issuance of the shares will be exempt from registration under
Section 3(a)(10) of the Securities Act of 1933. As a result
of the settlement, we recorded a litigation settlement charge of
$63.6 million in our operating results for the year ended
December 31, 2003. In addition, we have agreed to adopt,
within thirty days of final approval of the settlement, certain
corporate governance principles that have been approved by the
Board of Directors, including requirements for independent
directors and special committees, a non-classified Board of
Directors with two-year terms, appointment of a new
shareholder-nominated director, prohibition on the future use of
stock options for director compensation and minimum stock
retention by officers after exercise of future stock option
grants. We will also divide evenly with the class any future net
proceeds from insurance with respect to the litigation after
provision for legal expenses incurred by us. The Plaintiff has
agreed that any members of the class who participate in the
settlement will release and discharge all claims against us and
will request that the court issue a bar order providing for the
maximum protection to which we are entitled under the law with
respect to discharge and bar of all future claims for
contribution or indemnity by other persons, arising out of or in
any way related to the action, whether under federal, state or
common law, or any other principle of law or equity. Several
persons who purportedly acquired our shares during the class
period January 1, 2000 through December 21, 2002,
representing less than 1% of our outstanding shares, have
notified the Plaintiff that they wish to be excluded from the
settlement.

There are still additional risks to us related to
the Securities Class Action Lawsuit. These risks include failure
by the court to finally approve the settlement and suits by
persons who have elected to be excluded from the settlement or
whose claims against us may not be discharged or barred by the
settlement. See

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Note 21, Settlement of Disputes and
Litigation, to our Consolidated Financial Statements
contained in Item 8 of this Form 10-K for more
information.


In addition, we are subject to several other
shareholder and derivative lawsuits relating to accounting
irregularities that could have an adverse effect on our
business. See Item 3, Legal Proceedings,
contained in Part I to this Form 10-K for more information.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Limitations of our Director and Officer
    Liability Insurance and potential indemnification obligations
    may adversely affect our financial condition.

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 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 Item 3 of Part I, Legal
Proceedings  Other 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 financial condition.

Under Delaware and California law, our
certificate of incorporation and bylaws, 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. One of our
former officers has filed a lawsuit against us seeking to
recover $2.0 million of expenses incurred, plus further
expenses and liabilities that he may incur, in connection with
the SEC and Department of Justice investigations and lawsuits
that have been filed against him with respect to our prior
accounting irregularities. See Item 3 of Part I,
Legal Proceedings  Other Litigation. Other
former officers and directors likely have incurred and will
incur similar expenses and liabilities and those who have not
pled guilty to crimes may seek recovery of those amounts from
us. We may have to spend significant resources indemnifying
these officers and directors or paying for damages that they may
incur. Our financial condition could be materially and adversely
affected if we have to make significant payments for
indemnification.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | We continue to incur costs related to the
    SEC investigation of prior accounting
    irregularities.

In December 2001, we announced that the Audit
Committee of our Board of Directors was conducting an inquiry
into certain of our accounting practices and that the results of
the inquiry to date indicated 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
amended Form 10-Qs for the first three quarters of 2001.

In January 2002, we were notified that the SEC
had issued a formal order of private investigation in connection
with the accounting matters that resulted in the restatement of
our financial statements. The SEC requested that we provide them
with certain documents concerning the restatement. 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, March 2003 and September 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

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September 2002, the SEC and the Department of
Justice informed us that, in light of the actions taken by our
Board of Directors and our Audit Committee and our cooperation
in the SECs investigation, those agencies would not bring
any enforcement action against us. Because the investigation is
ongoing 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.




| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Contingent obligations to Cendant related
    to our Securities Class Action Lawsuit could have an
    adverse effect on our financial condition.

On August 5, 2003, we settled the dispute
with Cendant Corporation, or Cendant, arising out of our 2001
acquisition of Move.com, Inc. and Welcome Wagon International,
Inc., or the Move.com Group, from Cendant. See Note 21,
Settlement of Disputes and Litigation, to our
Consolidated Financial Statements contained in Item 8 of
this Form 10-K. Under the terms of the settlement
agreement, Cendant agreed not to sue us, or our officers,
directors and other related parties with respect to the
acquisition of the Move.com Group and the prior restatement of
our consolidated financial statements except in the following
limited circumstances. Cendant retained the right to sue us for
contribution, indemnification, or similar relief if Cendant is
held liable for or settles claims against it in the Securities
Class Action Lawsuit up to the amount for which it is held
liable or for which it settles. The court in the Securities
Class Action Lawsuit previously dismissed, with prejudice,
Cendant as a defendant. However, that dismissal is subject to
appeal to the United States Court of Appeals for the Ninth
Circuit. If Cendants dismissal as a defendant in the
Securities Class Action Lawsuit is reversed on appeal and
Cendant is subsequently found liable or settles claims against
it in the Securities Class Action Lawsuit, Cendant will
likely seek indemnification, contribution or similar relief from
us. However, as part of our settlement of the Securities
Class Action Lawsuit, the parties have requested that the
court enter an order barring claims by third parties against us
for indemnification, contribution and similar relief with
respect to liability such third parties may have in the
Securities Class Action Lawsuit. In the event that the
settlement is ultimately approved, we anticipate that the court
will enter the requested bar order.

Such an order may preclude Cendant from seeking
indemnification, contribution or similar relief from us in the
event Cendant is found liable or settles claims against it in
the Securities Class Action Lawsuit. However, we have been
advised by counsel that the law is unclear on whether Cendant
would be so precluded. Therefore, we would likely incur
significant expenses in defending such an action by Cendant and
could ultimately be found liable to Cendant or settle with
Cendant, notwithstanding the bar order. Such expenses, liability
or settlement could have a material adverse effect on our
financial position and results of operations.

In addition, if Cendant is not permitted to share
in any subsequent potential settlement of the Securities
Class Action Lawsuit (which would be the case if its
dismissal as a defendant is reversed on appeal), we have agreed
to pay or otherwise provide to Cendant the amount of money
and/or consideration that Cendant would have been entitled to
receive from that portion of the class action settlement fund
provided by us had Cendant been a class member and
Cendants proof of claim in respect of its shares had been
accepted in full. At this time, Cendant is still a member of the
class and has not been excluded. Because the proofs of claim
have not yet been accepted in the settlement of the Securities
Class Action Lawsuit, we are unable to estimate the amount
of cash and number of shares that Cendant could be entitled to
receive from us should Cendant be prevented from participating
in the settlement.



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 adversely affect the trading
price of our common

16



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##### Table of Contents



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.




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

The market price for our common stock decreased
substantially from 2001 through 2003. 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; and
|
| |  | adverse publicity relating to litigation.                                                                                                                                                                                     



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | The emergence of competitors and
    referral fee business models may adversely impact
    out business.

A number of competitors, including LendingTree,
have emerged over the last year offering or proposing to offer a
referral fee business model to its customers. This
model may be attractive to real estate professionals because it
requires no up front expenditures to obtain business prospects.
The model requires them to share their commission with the media
provider only upon the actual receipt of revenue from the
closing of a transaction. Our business model is a media model
that requires paid placement for advertising on our networks.
Under these newer models, the customer only incurs a cost when
revenue is generated, so our customers or potential customers
could find our model less attractive, which could adversely
impact our revenue in the Media segment.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | 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 Vice President and General
Counsel. Allan P. Merrill is our Executive Vice President of
Strategy and Corporate Development. 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 sold 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

17



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##### Table of Contents



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, as amended
contains a number of provisions that restrict how we operate our
business. These provisions include the following restrictions
and requirements:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | we must make quarterly fixed payments to NAR as
    follows:



| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                  
|
| |  | 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 entities that provide us the information for
    our real property listings (data content providers)
    to reduce or eliminate the amounts that we must pay to data
    content providers. 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.                                                                                                                                                                                                                                                                                          

18



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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 another 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 we obtain a consent, any
restrictive conditions in the consent. 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                 
|
| |  | 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 RENTNET.com 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
RENTNET.com website (formerly Homestore® Apartments &
Rentals 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
    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;                                            

19



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| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 RENTNET.com website.

NAR can revoke its consent to our operating our
RENTNET.com 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 (out of a current total of 8).

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 seven-eighths 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 the operating
budget 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 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.                                             



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | 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

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providers of real estate information. However,
beginning in 2003 we have attempted to renegotiate with each MLS
to renew our contract without requiring future payments from us.
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.


As described in Note 21, Settlement of
Disputes and Litigation, to our Consolidated Financial
Statements contained in Item 8 of this Form 10-K, we
recently entered into a new Listings License Agreement with
Cendant. The new Listings License Agreement with Cendant still
serves as a back-up source for listings and broker agent data
for us. However, Cendant may terminate the new Listings License
Agreement upon 90 days written notice, rather than upon the
more limited circumstances contained in the prior listings
license arrangement with Cendant, which had an initial term of
40 years. Consequently, our reliance on obtaining listings
from MLSs, real estate brokers and home builders has potentially
increased as a result of our new arrangement with Cendant.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | 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. In 2003, we began offering
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.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | 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 that 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!,
MSN, Excite, iWon.com, Internet Broadcast Systems, United 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

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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.




| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 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, sales personnel, 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. 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.

Also, during 2003 we executed workforce
reductions. 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 and reduced our staff by 190 employees. In December
2003, we implemented a restructuring focused on eliminating
duplicate resources and redundancies and reduced our workforce
by approximately 95 employees. 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.

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##### Table of Contents





| |                                                                                  
| | ---------------------------------------------------------------------------------
| | 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 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 currently 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.



| |                                                             
| | ------------------------------------------------------------
| | 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. Any legal action
that we may bring to protect our proprietary information could
be unsuccessful, 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

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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.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One of our landlords holds our funds
    because of our inability to extend a letter of credit securing
    our obligations under the lease of our corporate headquarters in
    March 2002.

In March 2002, we received a notice of default
under the office lease for our corporate offices because of our
inability to extend a letter of credit securing our obligations
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. The landlord has prohibited us from receiving the
reduction in the cash balance that should occur under the lease
of approximately $800,000 per year. We have attempted to restore
the letter of credit on two occasions, but have been denied. We
are currently in arbitration with the landlord to restore the
letter of credit, and to have the amount of required collateral
reduced to the amount specified in the lease and the excess cash
returned to us.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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,
RENTNET.com 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 new state and
local taxes on Internet based transactions through
November 1, 2003. Although Congress is currently
considering a further extension, this moratorium may not be
renewed. In that case, U.S., state and

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local governments would be free to impose new
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

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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 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 (C)(MS) |  |          | Westlake Village, CA |        |  |            | 137,762 |  |  |  | 2008  | 
|Technology facility (MS)                             |  |          | Thousand Oaks, CA    |        |  |            | 13,717  |  |  |  | 2006  | 
|Operations and customer service center (MS)          |  |          | Scottsdale, AZ       |        |  |            | 36,175  |  |  |  | 2007  | 
|Welcome Wagon (P)                                    |  |          | Westbury, NY         |        |  |            | 60,500  |  |  |  | owned | 
|Top Producer (SW)                                    |  |          | Richmond, BC         |        |  |            | 33,702  |  |  |  | 2008  | 
|Homestore Plans and Publications (P)                 |  |          | St. Paul, MN         |        |  |            | 24,645  |  |  |  | 2006  | 
|WyldFyre Technologies (SW)                           |  |          | Campbell, CA         |        |  |            | 19,492  |  |  |  | 2004  | 
|Enterprise (MS)                                      |  |          | Milwaukee, WI        |        |  |            | 13,016  |  |  |  | 2005  | 
|Computers for Tracts (SW)                            |  |          | Orange, CA           |        |  |            | 6,300   |  |  |  | 2006  | 

(MS  Media Services) (SW 
Software) (P  Print)
(C  Corporate)

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






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

We are party to various litigation and
administrative proceedings. 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. 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 sought
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 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
(Securities Class Action Lawsuit) 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 Time Warner, Inc. and Cendant.
The amended complaint makes various allegations, including that
we violated federal securities laws, and seeks an unspecified
amount of damages.

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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
Time Warner, Inc. 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 advised that it does not intend to amend the
complaint. 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.

On August 12, 2003, we entered into a
settlement agreement with the Plaintiff to resolve all
outstanding claims related to the Securities Class Action
Lawsuit. On October 8, 2003, the District Court
preliminarily approved the settlement. A final hearing on the
settlement was held on January 16, 2004, after delivery of
notice to class members. On February 5, 2004, the court
issued an interim order generally approving the terms of the
settlement as fair, adequate and reasonable, but directing
additional briefing from the parties on two issues:
(1) whether certain objectors proposal to carve
out certain claims from the settlement is feasible;
(2) whether notice to class members was potentially
inadequate because of the short time period given to file their
claims. The court has suggested that the parties consider
allowing additional time for class members to file claims, which
would not affect the total settlement fund. The briefs were
filed February 20, 2004, and we expect the court to
determine whether to grant final approval of the settlement in
the near future.

As a part of the settlement, we agreed to pay
$13.0 million in cash and issue 20.0 million new
shares of our common stock valued at $50.6 million as of
August 12, 2003. In October 2003, we placed
$10.0 million in escrow upon preliminary approval by the
U.S. District Court, with an additional $3.0 million due upon
final judicial approval of the settlement. Following this
approval, the $13.0 million and the 20 million shares
of newly issued common stock will be distributed to the class.
The issuance of the shares will be exempt from registration
under Section 3(a)(10) of the Securities Act of 1933. As a
result of the settlement, we have recorded a litigation
settlement charge of $63.6 million in our operating results
for the year ended December 31, 2003. In addition, we have
agreed to adopt, within thirty days of final approval of the
settlement, certain corporate governance principles that have
been approved by the Board of Directors, including requirements
for independent directors and special committees, a
non-classified Board of Directors with two-year terms,
appointment of a new shareholder-nominated director, prohibition
on the future use of stock options for director compensation and
minimum stock retention by officers after exercise of future
stock option grants. We will also divide evenly with the class
any future net proceeds from insurance with respect to the
litigation after provision for legal expenses incurred by us.
The Plaintiff has agreed that any members of the class who
participate in the settlement will release and discharge all
claims against us and will request that the court issue a bar
order providing for the maximum protection to which we are
entitled under the law with respect to discharge and bar of all
future claims for contribution or indemnity by other persons,
arising out of or in any way related to the action, whether
under federal, state or common law, or any other principle of
law or equity. Several persons who purportedly acquired our
shares during the class period January 1, 2000 through
December 21, 2002, representing less than 1% of our
outstanding shares, have notified the Plaintiff that they wish
to be excluded from the settlement.

There are still additional risks to us related to
the Securities Class Action Lawsuit. These risks include failure
by the court to finally approve the settlement and suits by
persons who have elected to be excluded from the settlement or
whose claims against us may not be discharged or barred by the
settlement.

In September 2002, Matt L. Brody filed a
purported class action complaint (Brody) 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. The complaint seeks
rescission or an unspecified amount of damages. In October 2002,
defendants removed the action to the United States District
Court, Central District of California. In June 2003, plaintiff
filed with the United States Court of Appeals for the Ninth
Circuit a Petition for Writ of Mandamus, asking

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the Ninth Circuit to direct the District Court to
vacate its order denying plaintiffs motion to remand the
action to state court. On August 15, 2003, the Ninth
Circuit issued an order directing the real parties in interest
to file a response. Defendants filed their response on
August 29, 2003.


On August 11, 2003, the District Court
issued an order dismissing without prejudice plaintiffs
claims against the defendants and striking his class action
allegations. Plaintiff filed an amended complaint on
September 12, 2003. We filed a motion to dismiss on
October 29, 2003. The motion was heard by the Court on
March 8, 2004. Brody has admitted that his claim will be
barred if the Court approves the settlement in the Securities
Class Action Lawsuit. His counsel filed a motion to amend
the complaint to add Ronald Drucker as a lead plaintiff.
Drucker, separately, filed a motion in the Securities
Class Action requesting that the class purportedly
represented by Brody and Drucker be carved out of the
settlement. The Court in the Securities Class Action
Lawsuit requested additional briefing. (See Note 21
Settlement of Disputes and Litigation to our
Consolidated Financial Statements contained in Item 8 of
this Form 10-K.) Although we believe that existing law
should result in denial of Druckers carve out
motion and dismissal of the Brody action, we are unable to
express an opinion as to the outcome of this case at this time.

In November 2002, 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. The Complaint has
been amended several times. We have recently answered the Third
Amended Complaint, which seeks an unspecified amount of general,
exemplary and punitive damages. Pyfrom is a class member in the
Securities Class Action Lawsuit, and we believe that, under
the law, his claim should be resolved if the settlement of the
Securities Class Action receives final judicial approval.
Nonetheless, we are unable to express an opinion as to the
probable outcome of this case at this time.

In November 2002, Stuart Siegel and certain other
former owners and directors of iPlace 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. The complaint seeks an unspecified amount of
damages in excess of $150,000. On March 19, 2003, the court
granted our motion to transfer this case to the United States
District Court, Central District of California. In May 2003, we
answered the complaint and filed a counterclaim for various
causes of action against Stuart Siegel, Jerome Meyer, David
Meyer, the Jill Siegel and Irving Siegel Trust, and
eNeighborhoods Acquisition Company. The plaintiffs agreed to
participate in the Securities Class Action Lawsuit
settlement with regard to their securities fraud claims.
Plaintiffs filed a motion for partial summary judgment in
District Court for breach of two registration rights agreements
as a result of our failure to register certain shares of our
stock acquired by the plaintiffs in the iPlace acquisition. The
parties have agreed to postpone the hearing on summary judgment
to pursue settlement. Trial has tentatively been scheduled for
July 6, 2004. Although we intend to vigorously defend
plaintiffs claims, we are unable to express an opinion at
this time as to the probable outcome of the litigation.

On September 11, 2003, we received
correspondence from an attorney representing certain former
shareholders of Top Producer Systems, Inc. alleging fraud,
breach of fiduciary duty and violations of securities laws by us
and certain of our officers in connection with our acquisition
of Top Producer in May 2000. On September 29, 2003, we were
scheduled to pay an installment of approximately
$6.8 million in either cash or Homestore common stock, at
our option, in partial consideration for the acquisition. See
Note 6, Acquisitions  Top Producer to our
Consolidated Financial Statements in Item 8 of this
Form 10-K. In investigating these allegations we discovered
facts indicating that we might have rights of offset with
respect to portions of the September 29, 2003 installment
and with respect to non-competition payments due to the former
president of Top Producer. Accordingly, we elected to postpone
making the installment and any further

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non-competition payments until we could more
thoroughly investigate these matters. On February 18, 2004,
two former shareholders of Top Producer filed a Statement of
Claim against Top Producer Systems Company, HSTPUS, Inc., and
Homestore, Inc., in the Supreme Court of British Columbia,
Canada, alleging that we breached our contract with the
plaintiffs by failing to pay them their portion of the scheduled
September 29, 2003 installment, which portion was
approximately $5.4 million of the total $6.8 million
installment. Also on February 18, 2004, the former
president of Top Producer filed a Statement of Claim in the
Supreme Court of British Columbia alleging that we breached our
contract to pay him two installments aggregating approximately
$500,000 under a non-competition agreement. Both claims seek
damages for breach of contract, interest, costs and such other
relief as the court may grant. We have previously accrued our
obligation to make these payments. We have not yet filed our
response to these claims, but anticipate that we will assert the
right to offset approximately $1.7 million against the
remaining amounts owed to Top Producer shareholders with respect
to that acquisition. We are unable to express an opinion on the
ultimate outcome of this case at this time.


In December 2002, Jeff Paradise and certain other
former employee optionholders of iPlace filed a complaint in the
United States 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. In October 2003, the
parties reached a settlement and the case was dismissed.

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 defendant. 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 complaint seeks an
unspecified amount of damages.

In January 2002, Jeff Joerg filed a complaint in
Delaware Chancery Court, derivatively on our behalf 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. The complaint seeks an unspecified
amount of damages. On January 28, 2004, we entered into a
settlement to resolve the California Superior Court and Delaware
Chancery Court derivative actions. In consideration for
plaintiffs release of all claims, we agreed: to adopt the
corporate governance reforms set forth in the Securities Class
Action Lawsuit settlement (see Note 21, Settlement of
Disputes and Litigation, to our Consolidated Financial
Statements contained in Item 8 of this Form 10-K);
that it was in our best interests to terminate our relationship
with PricewaterhouseCoopers LLP as our auditors (which the Audit
Committee did in September 2003); and to pay plaintiffs
attorneys fees in the sum of $150,000 in cash and
200,000 shares of our stock. The issuance of the shares
will be exempt from registration under Section 3(a)(10) of
the Securities Act of 1933. The conditions of the settlement
include approval by the United States District Court of the
Securities Class Action Lawsuit settlement, approval by the
California Superior Court of the consolidated shareholder
derivative action settlement and the dismissal with prejudice of
the California and Delaware actions. While the United States
District Court determined the terms of the settlement to be
fair, adequate and reasonable, there is no assurance that we
will receive court approval of the Securities Class Action
Lawsuit settlement and that the California Superior Court will
approve this settlement.

SEC Investigation

In January 2002, we were notified that the SEC
had issued a formal order of private investigation in connection
with accounting matters that resulted in the restatement of our
financial statements in March 2002. The SEC requested that we
provide it with certain documents concerning the restatement.
The SEC has

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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, March 2003, and September
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, in
light of the actions taken by our Board of Directors and our
Audit Committee and our cooperation in the SECs
investigation, those agencies would not bring any enforcement
action against us. Because the investigation is ongoing 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.

Insurance Coverage Litigation

Between September 2002 and November 2002, Genesis
Insurance Company (Genesis), Federal Insurance
Company (Federal), Clarendon National Insurance
Company (Clarendon), Royal Indemnity Company
(Royal) and TIG Insurance Company of Michigan
(TIG) sent us notices of rescission of the officers
and directors liability policies issued to us for the period of
August 4, 2001 through August 4, 2002. 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 and Genesis actions,
but those requests were denied in March 2003.

In October 2002, Lumbermens Mutual Casualty
Company rescinded and filed a similar complaint against us and
certain current and former officers, directors and employees to
confirm the rescission in the Superior Court of California,
County of Los Angeles.

In February 2003, TIG 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.

The TIG and Lumbermens cases recently were
reassigned to a single judge and, as a consequence, the trial
previously scheduled in the TIG case for January 2004 has been
postponed. TIG and Lumbermens each filed a motion for summary
judgment requesting the court to declare its directors and
officers liability policy rescinded as to all insureds. On
February 27, 2004, the court granted the TIG and Lumbermens
motions for summary judgment. We intend to appeal the rulings.

In May 2003, XL Insurance Limited
(Bermuda) sent us a notice of rescission of the
officers and directors liability policy issued to us for the
period August 4, 2001 to August 4, 2002. We are in
discussions with Bermuda about possibly deferring any
arbitration over the insurers purported rescission pending
the resolution of the underlying liability lawsuits.

In May 2003, the United States District Court for
the Central District of California denied our request that the
hearing on Federals motion for summary judgment be
continued to allow us to conduct discovery on the issues
presented by Federals motion, and granted Federals
motion for summary judgment declaring that the directors and
officers liability policy issued by Federal is rescinded as to
all insureds. In July 2003, the same court granted motions for
summary judgment declaring that the directors and officers
liability policies issued by Genesis, Royal and Clarendon are
rescinded as to all insureds. On January 21, 2004, we filed
our appellate briefs from each of the District Courts
judgments to the Ninth Circuit Court of Appeals. A date for oral
argument has not been scheduled.

We are unable to express an opinion at this time
as to the probable outcome of these lawsuits.

Other Litigation

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

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transfer certain shares of InfoTouch
Series B Preferred Stock to Dr. Agarwal.
Dr. Agarwal seeks substantial damages and a declaratory
judgment in connection with his claim 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. We are unable to
express an opinion at this time as to the probable outcome of
this lawsuit.


In November 2000, Amica Mutual Insurance Co.
(Amica) filed a demand for arbitration against GETKO
Group, Inc., (GETKO), one of our subsidiaries,
alleging breach of a Marketing Services Agreement effective
January 2000. Amica was 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 was completed in March 2003. The arbitrator
ruled that Amica was entitled to compensatory damages and
interest in the amount of $303,000. We appealed the
arbitrators ruling. The appeal was denied on
October 10, 2003 and we paid the assessed damages without
further appeal.

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 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.

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 alleged a claim for patent
infringement based on activities related to the websites
REALTOR.com® and HomeBuilder.com. Specifically, Tren
alleged 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 we have developed an
infringing technology for the NARs REALTOR.com® and
the NAHBs HomeBuilder.com websites. The complaint sought
unspecified damages and a permanent injunction against us using
the technology. In January 2003, counsel for Tren withdrew their
representation. On October 22, 2003, new counsel appeared
on behalf of Tren and discovery has resumed. We believe
Trens claims are without merit and intend to vigorously
defend the case.

On October 1, 2003, Plaintiff Kevin Keithley
(Keithley) filed, in pro se, a complaint against
defendants Homestore, Inc., the NAR and the NAHB in the United
States District Court for the Northern District of California
alleging infringement of U.S. Patent No. 5,584,025
pursuant to 35 U.S.C. Section 271. The complaint
sought unspecified damages and a permanent injunction against us
using the technology. In the complaint, Plaintiff asserts
exclusive license of the patent. Plaintiff has not served the
complaint upon any of the defendants. On February 2, 2004,
the court issued an order providing an additional 90 days
to serve the complaint. If Plaintiff serves the complaint on the
Defendants, we intend to move the court to transfer the case to
the Eastern District of Pennsylvania so that it can be
consolidated with the action previously commenced by Tren
Technologies Holdings LLC. We are unable to express an opinion
at this time as to the probable outcome of this case.

On October 29, 2003, Peter Tafeen, a former
officer of Homestore, filed suit in the Delaware Chancery Court
in New Castle County. Under Section 145 of the Delaware
General Corporation Law and our Bylaws, the complaint asserts a
claim for advancement of expenses incurred in the amount of
$2.0 million and for future expenses in connection with the
SEC and Department of Justice investigations and the civil
actions filed against Tafeen for his purported role in a scheme
to inflate our revenues. Tafeen and Homestore filed
cross-motions for summary judgment. The motions were fully
briefed, and the court held oral argument on the motions on
February 8, 2004. The court has not ruled on the motions.
While we intend to vigorously defend the case, we are unable to
express an opinion as to the outcome of this case at this time.




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 fiscal year
ended December 31, 2003.

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PART II




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

Market Information

Our common stock was traded on The NASDAQ
SmallCap Market under the symbol HOMS from
November 18, 2002 until January 2, 2004. Prior to that
time, our common stock was traded on The NASDAQ National Market.
On January 2, 2004, we resumed trading 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.

|     |                                           |      |   |      |  |  |   |      | 
|---- | ----------------------------------------- | ---- | - | ---- |  |  | - | ---- | 
|     |                                           | High |   | Low 
|     |                                           |      |   |     
|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                             |      |   | 1.51 |  |  |   | 0.51 | 
|     | Second Quarter                            |      |   | 2.03 |  |  |   | 0.48 | 
|     | Third Quarter                             |      |   | 3.95 |  |  |   | 1.62 | 
|     | Fourth Quarter                            |      |   | 4.93 |  |  |   | 2.51 | 
|2004 |                                           |      |   |      |  |  |   |     
|     | First Quarter (through February 27, 2004) |      |   | 5.58 |  |  |   | 4.03 | 

As of February 27, 2004, there were
approximately 1,043 record holders of our common stock.
Because many of these shares are held by brokers and other
institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these
record holders.

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.

Recent Sales of Unregistered
Securities

There were no sales of unregistered equity
securities by Homestore during 2003.

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Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information as of
December 31, 2003 regarding compensation plans (including
individual compensation arrangements) under which our equity
securities are authorized for issuance.

Equity Compensation Plan Information

|                                                               |  |                   |        |                   |  |                      |      |  |  |  |        |    
|-------------------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | -------------------- | ---- |  |  |  | ------ | ---
|                                                               |  |                   |        |                   |  | Number of           
|                                                               |  | Number of         |        |                   |  | Securities          
|                                                               |  | Securities to be  |        |                   |  | Remaining           
|                                                               |  | Issued Upon       |        | Weighted Average  |  | Available for       
|                                                               |  | Exercise of       |        | Exercise Price of |  | Future Issuance     
|                                                               |  | Outstanding       |        | Outstanding       |  | (excluding          
|                                                               |  | Options, Warrants |        | Options, Warrants |  | securities reflected
|Plan Category                                                  |  | and Rights        |        | and Rights        |  | in column (a))      
|                                                               |  |                   |        |                   |  |                     
|                                                               |  | (a)               |        | (b)               |  | (c)                 
|                                                               |  |                   |        |                   |  |                     
|                                                               |  | (In thousands)    |        |                   |  | (In thousands)      
|Equity compensation plans approved by security
    holders     |  |                   | 10,641 |                   |  | $                    | 3.63 |  |  |  | 8,817  | (1)
|Equity compensation plans not approved by
    security holders |  |                   | 11,908 |                   |  | $                    | 2.19 |  |  |  | 8,357  |    
|                                                               |  |                   |        |                   |  |                      |      |  |  |  |        |    
|Total                                                          |  |                   | 22,549 |                   |  | $                    | 2.87 |  |  |  | 17,174 | (1)
|                                                               |  |                   |        |                   |  |                      |      |  |  |  |        |    



---



|    |                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 801,007 shares of common stock reserved
    for issuance under our 1999 Employee Stock Purchase Plan. For
    additional information regarding the Employee Stock Purchase
    Plan, see Note 14 Stock Plans to our Consolidated
    Financial Statements contained in Item 8 of this
    Form 10-K.

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. Options
outstanding as of December 31, 2003 pursuant to
compensation plans assumed in connection with prior
acquisitions, in the aggregate, total 247,274 and the weighted
average exercise price of those option shares is $20.50.

The Homestore, Inc. 1999 Stock Incentive Plan, a
security-holder approved plan, contains a provision for an
automatic increase in the number of shares available for
issuance each January 1 (until January 1, 2009) by an
amount equal to 4.5% of the total number of outstanding shares
as of the preceding December 31; provided that the
aggregate number of shares that qualify as Incentive Stock
Options (as defined in the plan) must not exceed
20.0 million shares.

The Homestore, Inc. 1999 Employee Stock Purchase
Plan, a security-holder approved plan, also contains a provision
for an automatic increase in the number of shares available for
issuance each January 1 (until January 1, 2009) by an
amount equal to one-half of one percent (0.5%) of the total
number of outstanding shares as of the preceding
December 31; provided that the aggregate number of shares
reserved under this plan must not exceed 5.0 million shares.

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 plans assumed in connection with prior acquisitions:
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

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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. Each of these plans (i) was
intended to attract, retain and motivate employees,
(ii) was administered by the Board of the Directors or by a
committee of the Board of Directors of such entities, and
(iii) provided that options granted thereunder would be
exercisable as determined by such Board or committee, provided
that no option would be exercisable after the expiration of
10 years after the grant date. We did not grant options
under any of these plans in 2003, and we do not plan to do so in
the future.


For additional information regarding our equity
compensation plans, see Note 14, Stock Plans,
to our Consolidated Financial Statements contained in
Item 8 of this Form 10-K.




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, 2003, 2002 and 2001 and the
consolidated balance sheet data as of December 31, 2003 and
2002 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, 2000 and 1999 and the consolidated
balance sheet data as of December 31, 2001, 2000 and 1999
have been derived from our audited consolidated financial
statements not included in this Form 10-K.

|                                               |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |         |        | 
|---------------------------------------------- | ------------------------------------------------- | ---------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | --------- | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------ | 
|                                               |                                                   |                                         
|                                               |                                                   | Year Ended December 31,                 
|                                               |                                                   |                                         
|                                               |                                                   | 2003                                     |         | 2002    |         | 2001 |         | 2000    |         | 1999
|                                               |                                                   |                                          |         |         |         |      |         |         |         |     
|                                               |                                                   |                                         
|                                               |                                                   | (In thousands, except per share amounts)
|Consolidated Statement of Operations
    Data: |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |        
|Revenue(2)                                     |                                                   | $                                        | 211,015 |         |         | $    | 233,455 |         |         | $    | 265,436 |           |         | $ | 181,322 |         |         | $ | 62,580 |        
|Related party revenue                          |                                                   |                                          | 7,695   |         |         |      | 31,158  |         |         |      | 38,346  |           |         |   |        |         |         |   |       |        
|                                               |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |        
|                                               |                                                   | Total revenue                            |         |         | 218,710 |      |         |         | 264,613 |      |         |           | 303,782 |   |         |         | 181,322 |   |        |         | 62,580 | 
|Cost of revenue(2)                             |                                                   |                                          | 60,261  |         |         |      | 78,304  |         |         |      | 113,490 |           |         |   | 61,222  |         |         |   | 21,965 |        
|                                               |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |        
|                                               |                                                   | Gross profit                             |         |         | 158,449 |      |         |         | 186,309 |      |         |           | 190,292 |   |         |         | 120,100 |   |        |         | 40,615 | 
|Operating expenses:                            |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |        
|                                               | Sales and marketing(2)                            |                                          |         | 103,861 |         |      |         | 164,629 |         |      |         | 242,174   |         |   |         | 160,122 |         |   |        | 85,110  |       
|                                               | Product and website development(2)                |                                          |         | 21,659  |         |      |         | 30,279  |         |      |         | 35,722    |         |   |         | 15,554  |         |   |        | 5,380   |       
|                                               | General and administrative(2)                     |                                          |         | 67,257  |         |      |         | 84,813  |         |      |         | 174,363   |         |   |         | 59,610  |         |   |        | 26,892  |       
|                                               | Amortization of goodwill and intangible assets(1) |                                          |         | 22,366  |         |      |         | 37,165  |         |      |         | 199,291   |         |   |         | 42,868  |         |   |        | 10,192  |       
|                                               | In-process research and development               |                                          |         |        |         |      |         |        |         |      |         |          |         |   |         | 4,048   |         |   |        |        |       
|                                               | Acquisition and restructuring charges(2)          |                                          |         | 4,100   |         |      |         | 12,087  |         |      |         | 50,260    |         |   |         |        |         |   |        |        |       
|                                               | Impairment of long-lived assets                   |                                          |         | 29,580  |         |      |         | 7,335   |         |      |         | 925,094   |         |   |         |        |         |   |        |        |       
|                                               | Litigation settlement                             |                                          |         | 63,600  |         |      |         | 23,000  |         |      |         |          |         |   |         |        |         |   |        | 8,406   |       
|                                               |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |        
|                                               | Total operating expenses                          |                                          |         | 312,423 |         |      |         | 359,308 |         |      |         | 1,626,904 |         |   |         | 282,202 |         |   |        | 135,980 |       
|                                               |                                                   |                                          |         |         |         |      |         |         |         |      |         |           |         |   |         |         |         |   |        |        

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|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ---------------------------------------- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | -------- | - |  | - | ------- | -
|                                                                               |  |                                         
|                                                                               |  | Year Ended December 31,                 
|                                                                               |  |                                         
|                                                                               |  | 2003                                     |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                                               |  |                                          |          |      |  |      |          |      |  |     
|                                                                               |  |                                         
|                                                                               |  | (In thousands, except per share amounts)
|Loss from operations                                                           |  |                                          | (153,974 | )    |  |      | (172,999 | )    |  |      | (1,436,612 | ) |  |   | (162,102 | ) |  |   | (95,365 | )
|Interest income (expense), net                                                 |  |                                          | (424     | )    |  |      | 2,620    |      |  |      | 10,490     |   |  |   | 23,031   |   |  |   | 2,386   |  
|Gain on settlement of distribution agreement                                   |  |                                          | 104,071  |      |  |      |         |      |  |      |           |   |  |   |         |   |  |   |        |  
|Other income (expense), net                                                    |  |                                          | 673      |      |  |      | (5,682   | )    |  |      | (44,281    | ) |  |   | (6,982   | ) |  |   | (28     | )
|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|Loss from continuing operations                                                |  |                                          | (49,654  | )    |  |      | (176,061 | )    |  |      | (1,470,403 | ) |  |   | (146,053 | ) |  |   | (93,007 | )
|Gain on disposition of discontinued operations                                 |  |                                          | 2,530    |      |  |      | 11,790   |      |  |      |           |   |  |   |         |   |  |   |        |  
|Income from discontinued operations                                            |  |                                          |         |      |  |      | 846      |      |  |      | 4,814      |   |  |   |         |   |  |   |        |  
|Accretion of redemption value and dividends on
    convertible preferred stock |  |                                          |         |      |  |      |         |      |  |      |           |   |  |   |         |   |  |   | (2,299  | )
|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|Net loss                                                                       |  | $                                        | (47,124  | )    |  | $    | (163,425 | )    |  | $    | (1,465,589 | ) |  | $ | (146,053 | ) |  | $ | (95,306 | )
|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|Basic and diluted net loss per share applicable
    to common shareholder:     |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|Continuing operations                                                          |  | $                                        | (.42     | )    |  | $    | (1.49    | )    |  | $    | (13.69     | ) |  | $ | (1.83    | ) |  | $ | (2.32   | )
|Discontinued operations                                                        |  | $                                        | .02      |      |  | $    | 0.11     |      |  | $    | 0.04       |   |  | $ |         |   |  | $ |        |  
|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|Net loss                                                                       |  | $                                        | (.40     | )    |  | $    | (1.39    | )    |  | $    | (13.64     | ) |  | $ | (1.83    | ) |  | $ | (2.32   | )
|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  
|Shares used to calculate basic and diluted per
    share amounts               |  |                                          | 118,996  |      |  |      | 117,900  |      |  |      | 107,433    |   |  |   | 79,758   |   |  |   | 41,142  |  
|                                                                               |  |                                          |          |      |  |      |          |      |  |      |            |   |  |   |          |   |  |   |         |  



---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(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,
|                                      |  |                        
|                                      |  | 2003                    |       | 2002 |  | 2001 |        | 2000 |  | 1999
|                                      |  |                         |       |      |  |      |        |      |  |     
|                                      |  |                        
|                                      |  | (In thousands)         
|Stock-based Charges:                  |  |                         |       |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Revenue                               |  | $                       | 1,119 |      |  | $    | 1,501  |      |  | $    | 2,456  |  |  | $ | 6,233  |  |  | $ |       | 
|Cost of revenue                       |  |                         | 16    |      |  |      | 134    |      |  |      | 383    |  |  |   | 607    |  |  |   | 943    | 
|Sales and marketing                   |  |                         | 3,795 |      |  |      | 63,848 |      |  |      | 71,188 |  |  |   | 45,148 |  |  |   | 14,726 | 
|Product and website development       |  |                         | 15    |      |  |      | 127    |      |  |      | 361    |  |  |   | 572    |  |  |   | 447    | 
|General and administrative            |  |                         | 164   |      |  |      | 1,297  |      |  |      | 6,237  |  |  |   | 3,095  |  |  |   | 5,111  | 
|Acquisition and restructuring charges |  |                         | 2,140 |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|                                      |  |                         |       |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|                                      |  | $                       | 7,249 |      |  | $    | 66,907 |      |  | $    | 80,625 |  |  | $ | 55,655 |  |  | $ | 21,227 | 
|                                      |  |                         |       |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 

37



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##### Table of Contents



|                                 |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|-------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- |  |  | - | ------- | 
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2003           |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                 |  |                |         |      |  |      |         |      |  |     
|                                 |  |               
|                                 |  | (In thousands)
|Consolidated Balance Sheet Data: |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|Cash and short-term investments  |  | $              | 35,517  |      |  | $    | 80,463  |      |  | $    | 38,272  |   |  | $ | 167,576 |  |  | $ | 90,382  | 
|Working capital (deficiency)     |  |                | (70,729 | )    |  |      | (80,763 | )    |  |      | (31,888 | ) |  |   | 253,638 |  |  |   | 40,822  | 
|Total assets                     |  |                | 153,548 |      |  |      | 379,208 |      |  |      | 615,037 |   |  |   | 893,350 |  |  |   | 276,563 | 
|Obligation under capital lease   |  |                | 1,904   |      |  |      |        |      |  |      |        |   |  |   |        |  |  |   | 633     | 
|Total stockholders equity       |  |                | 328     |      |  |      | 38,730  |      |  |      | 183,256 |   |  |   | 603,479 |  |  |   | 195,473 | 




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, 2003, 2002 and 2001 and
related notes included in Part II 
Item 8. Financial Statements and Supplementary Data.

Overview



| |            
| | -----------
| | Our History

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. In 1996, we entered into a series of agreements with NAR
and several investors and transferred technology and assets to a
newly-formed subsidiary, which ultimately became RealSelect,
Inc. which, in turn 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® website 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 and we began actively
marketing our advertising products and services to real estate
professionals in January 1997. InfoTouch changed the corporate
name to Homestore.com, Inc. in August 1999. We changed our name
to Homestore, Inc. in May 2002.

In recent years, our company has faced a number
of difficult challenges. After discovering accounting
irregularities in late 2001, we restated our financial
statements for 2000 and the first three quarters of 2001. In the
wake of these accounting irregularities and subsequent
restatements, we have faced:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | numerous lawsuits, including a consolidated
    securities class action and derivative litigation;         
|
| |  | an SEC investigation of the company and our
    accounting practices;                                      
|
| |  | contractual disputes with our customers and
    partners;                                                  
|
| |  | limited financial resources and the need for cost
    reduction measures;                                  
|
| |  | listing maintenance issues with The NASDAQ
    National Market; and                                        
|
| |  | replacement of the former executive management
    team, some of whom have pled guilty to criminal charges.

We believe that we have addressed each of these
challenges, while recognizing that many risks persist. See
Item 1, Business  Risk Factors,
contained in Part I to this Form 10-K for more
information.

38



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##### Table of Contents



During this time of uncertainty, many of our
customers and potential customers have expressed concerns about
our ability to provide value-added products and services. At the
same time, we have modified our product and service offerings
and have introduced new pricing structures that we believe
better reflect the value of our products and services. We
believe that the changes in our products and service offerings
have begun to be accepted by our customers, despite initial
resistance by some.

We have implemented four restructurings during
the last nine quarters, the first of which was in the fourth
quarter of 2001. These restructurings were designed to focus our
business and to eliminate redundancies in our organization. We
believe these restructurings were necessary to address both our
product and service offerings and our cost structure. We believe
that our organizational structure now reflects our current
business strategy.



| |             
| | ------------
| | Our Business

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 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

Our consolidated financial statements reflect the
historical results of operations of Homestore, Inc and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Acquisitions.Shortly after going public in August
1999, we implemented a strategy of acquiring a number of
companies with real estate industry products and services. Since
August 2001, we have not made any acquisitions and are not
pursuing an acquisition strategy at this time. The acquisitions
described below have been accounted for under the purchase
method in accordance with generally accepted accounting
principles. A summary of our acquisition history since August
1999 is as follows:

In October 1999, we acquired all of the
outstanding capital stock of The Homebuyers Fair, Inc.,
National School Recruiting Services, Inc., The Centre for
Mobility Resources, Inc. and FAS-Hotline, Inc., collectively
Homefair, for $35.8 million in cash and other
acquisition-related expenses, a $37.5 million promissory
note and 250,000 shares of our common stock.

In 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 Systems,
Inc. (Top Producer), a leading provider of leads
management and marketing software for real estate professionals,
for $12.1 million in cash, 473,538 shares exchangeable into
our common stock with an estimated fair value of
$12.1 million and an amount contingent on future
performance of Top Producer. Because the exchangeable shares
vested over a three-year period and were contingent upon the Top
Producers chief executive officers employment over a
three-year period, the value of such shares was recorded in
deferred stock-based charges. During the year ended
December 31, 2002, we elected to pay cash of $521,000
instead of issuing our 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

39



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##### Table of Contents



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 us, and set at a fixed amount of
$10.2 million payable in installments of cash or stock, at
our option, of $3.1 million, $2.8 million and
$4.3 million in 2002, 2003 and 2004, respectively.
Recognition of this fixed obligation resulted in an increase in
goodwill and accrued expenses. We paid the $3.1 million
2002 installment in cash. We have not yet paid the 2003
installment. For information regarding the 2003 payments, see
Item 3, Legal Proceedings  Shareholder
Litigation. 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 except for goodwill, 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, 2003 and 2002, we
had net goodwill of $11.7 million and $11.7 million
and net intangible assets of $2.6 million and
$4.6 million, respectively.


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. We sold the operations of The
Hessel Group in the first quarter of 2003.

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. In connection with
our acquisition of Move.com, Inc., we acquired Welcome Wagon
International, Inc., and RENTNET®.

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

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
primary operations of iPlace, ConsumerInfo and eNeighborhoods
were sold in the first half of 2002.

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

40



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##### Table of Contents



Group, we entered into additional commercial
agreements with Cendant and RETT. The total contractual value of
all commercial agreements entered into during 2001 was
approximately $95.5 million, resulting in
$82.5 million in future revenue. Revenue of
$7.7 million, $31.2 million and $38.3 million
related to these transactions was recognized in 2003, 2002 and
2001, respectively. This revenue was reported separately as
revenue from related parties in these financial statements. It
is not practical to separately determine the costs of such
revenues. During the years ended December 31, 2003, 2002
and 2001, we had received approximately $1.2 million,
$12.0 million and $83.3 million of cash, respectively,
and had recorded at December 31, 2003 and 2002 deferred
revenue of approximately $6.9 million and
$13.5 million, respectively, related to these agreements.
This deferred revenue will be recognized principally 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. 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 were 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
do not expect Cendant or RETT to purchase any more products
directly from us. In order to continue providing these services
to these real estate professionals, we have had to negotiate
renewal terms with the individual professionals.

Business Trends and Conditions

In recent years, our business has been, and we
expect will continue to be, influenced by a number of
macroeconomic, industry-wide and product-specific trends and
conditions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market and economic conditions.In recent years, the U.S. economy has
    experienced low interest rates, and a severe downturn in the
    equities markets. Against this backdrop, housing starts have
    remained strong, while the supply of apartment housing has
    generally outstripped demand. At the same time, our business
    model has shifted from a technology offering to a media model.
    The foregoing conditions have meant that home builders have not
    had to spend as much money on advertising, given the strong
    demand for new houses. Conversely, apartment owners have not
    spent as much money on advertising, as they have sought to
    achieve cost savings during the difficult market for apartment
    owners. Both of these trends have impacted the ability to grow
    our business. The uncertainty related to a potential rise in
    interest rates, job creation and other economic factors makes it
    difficult to gauge whether these trends will continue.
|
| |  | Evolution of Our Product and Service Offerings
    and Pricing Structures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Media Segment:Our
    Media segment evolved as a business providing Internet
    applications to real estate professionals. In recent years, it
    became apparent that our customers valued the media exposure
    that the Internet offered them, but not the actual
    technology that we were offering. Many of our
    customers objected to our proposition that they purchase our
    website in order to gain access to our networks. In addition, we
    were charging a fixed price to all customers regardless of the
    market they operated in or the size of their business.
|
| | In 2003, we responded to our customers
    needs and revamped our product offerings. We began to price our
    product based on the size of the market and the number of
    properties they displayed. For many of our customers this change
    led to substantial price increases over our former technology
    pricing. This change has been reasonably well-accepted by our
    customers, however it has caused us to lose some customers. If
    this trend were to continue, it could materially and adversely
    impact our Media Segment revenue.                                 
|
| | Software segment:In
    our Software segment, our largest business, Top Producer,
    introduced a monthly subscription model of an online application
    in late 2002, to replace its former desktop license                                                                                                                                                                                                                                                                                                                                                                                 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | fees. This had a negative impact on our revenues
    over the first eighteen months of this offering as we attempted
    to build the subscriber base. While our desktop product is still
    attractive to some real estate professionals, our customer base
    continues to shift to the online application and we believe it
    will completely replace our desktop product over the next two
    years.                                                                                                                                                                                                                                                   
|
| | Print segment:The
    downturn in the economy over the past three years has had an
    adverse effect on our Welcome Wagon business. Our primary
    customers are small local merchants trying to reach new movers
    and the economic conditions have negatively impacted the small
    business more than other businesses. These economic conditions
    have caused a significant decline in our revenue in this segment
    over the past two years. Although we are starting to see some
    improvement in market conditions in some geographic areas, it
    could take considerable time before this segment yields
    meaningful growth, if at all.

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 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 to Experian, $10.0 million
of the purchase price was put in escrow to secure our
indemnification obligations. In the second quarter of 2003,
$2.3 million of escrow was release to us and recognized as
Gain on disposition of discontinued operations. As
of December 31, 2003, cash in escrow was $7.2 million.
To the extent the escrow is released to us, we will recognize
additional gain on disposition of discontinued operations. The
escrow was scheduled to terminate in the third quarter of 2003,
but in the third quarter of 2003, Experian demanded
indemnification from us for several claims made against Experian
or its subsidiaries. We are evaluating these indemnity claims
and are unable to express an opinion at this time as to their
merits. However, these potential claims against the escrow could
reduce or delay the release. 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.

42



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##### Table of Contents



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

|                         |                                                               |              |       |       |   |   |         |         |  
|------------------------ | ------------------------------------------------------------- | ------------ | ----- | ----- | - | - | ------- | ------- | -
|                         |                                                               |             
|                         |                                                               | Year Ended  
|                         |                                                               | December 31,
|                         |                                                               |             
|                         |                                                               | 2003         |       | 2002 
|                         |                                                               |              |       |      
|Gross proceeds from sale |                                                               | $            | 2,300 |       |   | $ | 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 |              |       | (230  | ) |   |         | (1,029  | )
|                         |                                                               |              |       |       |   |   |         |        
|                         | Gain recognized on the sale                                   |              | $     | 2,530 |   |   | $       | 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, Estimates and
Assumptions

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,
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; valuation of
goodwill, identified intangibles and other long-lived assets;
accounting for business combinations; and legal contingencies.

Management has discussed the development and
selection of the following critical accounting policies,
estimates and assumptions with the Audit Committee of our Board
of Directors and the Audit Committee has reviewed these
disclosures.

Revenue
Recognition We derive
our revenue primarily from two sources:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | software revenue, which includes software
    licenses, software development, hardware services and support
    revenue which includes software maintenance, training,
    consulting and website hosting revenue; and
|
| |  | advertising revenue for running online
    advertising 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 recognize revenue in accordance with
Securities and Exchange Commission Staff Accounting Bulletin
no. 104 Revenue Recognition, and Emerging
Issues Task Force Issue (EITF) 00-21
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized only when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable and collectibility
is reasonably assured.

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We assess collection based on a number of
factors, including past transaction history with the customer
and the credit worthiness of the customer. We 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. Cash received
in advance is recorded as deferred revenue until earned.

Software
revenue We generally
license our software products in three ways:



| |   |                           
| | - | --------------------------
| |  | on a one-year term basis; 
|
| |  | on a perpetual basis; and 
|
| |  | 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 apply 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. Software license
revenue is recognized upon all of the following criteria being
satisfied:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | the execution of a license agreement;                     
|
| |  | product delivery;                                         
|
| |  | fees are fixed or determinable;                           
|
| |  | collectibility is reasonably assured; and                 
|
| |  | all other significant obligations have been
    fulfilled.

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, 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
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. 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 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 as subscriptions, and
accordingly, revenue is deferred and recognized ratably over the
term of the contract which is typically based on a one-year
renewable term.

We recognize revenue from 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
maintenance services are generally made in advance and are
non-refundable. However, at the time of entering into a
transaction, we assess whether 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 the
arrangement and management is able to accurately estimate the
progression to completion, we recognizes the entire fee using
the percentage of completion method. We estimate the percentage
of completion based on an estimate of total costs incurred to
date as a percentage of estimated total costs to complete the
project, and we monitor our progress against plan to insure the
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 its
progression to completion, such revenue is

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recognized in the period in which the project is
completed. Percentage of completion projects ceased to become a
material amount of the our revenue in 2003.


Advertising
Revenue We sell
online and offline advertising. Online advertising revenue
includes three revenue streams:



| |   |                                    
| | - | -----------------------------------
| |  | impression based,                  
|
| |  | fixed fee subscriptions and        
|
| |  | 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.

We record 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. 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 2003 and 2002 and
there was no revenue from these types of transactions during the
year ended December 31, 2003 and 2002. During the year
ended December 31, 2001, revenue from equity-for-services
and advertising barter transactions was less than 5% of revenue.



| |                                
| | -------------------------------
| | 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
conservative and 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 under the
equity method when ownership is greater than 20% or we have the
ability to exercise significant influence. In 2001, we wrote
down substantially all of our remaining cost and equity
investments. We currently 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
    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
third quarter of 2003 and in the fourth quarter of 2003, 2002
and 2001, we recognized an impairment of our long-lived assets.
See Note 5, Impairment of Long-lived Assets, to our
Consolidated Financial Statements contained in Item 8 of
this Form 10-K.

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 each
reporting unit 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 respective reporting unit 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.

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| |                                     
| | ------------------------------------
| | Accounting for Business Combinations

As we described above, we have acquired a number
of companies from 1999 through 2001 and all have been accounted
for as purchase transactions. Under the purchase method of
accounting, the cost, including transaction costs, are 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. For those matters where we
have reached agreed-upon settlements, we have estimated the
amount of those settlements and accrued the amount of the
settlement in our financial statements. 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;

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| |   |                                                            
| | - | -----------------------------------------------------------
| |  | 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 our
early history, during 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.
In order to reduce our operating cost structure to a sustainable
level commensurate with our revenues, we have gone through four
restructurings during the last nine quarters. 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.

|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |         |           | 
|---------------------------------------------- | ------------------------------------------------- | ------------------------ | -------- | ------- | ------- | ---- | -------- | ------- | ------- | - | ---------- | ------- | --------- | 
|                                               |                                                   |                         
|                                               |                                                   | Year Ended December 31, 
|                                               |                                                   |                         
|                                               |                                                   | 2003                     |          | 2002    |         | 2001
|                                               |                                                   |                          |          |         |         |     
|                                               |                                                   |                         
|                                               |                                                   | (In thousands)          
|Consolidated Statement of Operations
    Data: |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|Revenue(2)                                     |                                                   | $                        | 211,015  |         |         | $    | 233,455  |         |         | $ | 265,436    |        
|Related party revenue                          |                                                   |                          | 7,695    |         |         |      | 31,158   |         |         |   | 38,346     |        
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|                                               | Total revenue                                     |                          |          | 218,710 |         |      |          | 264,613 |         |   |            | 303,782 |          
|Cost of revenue(2)                             |                                                   |                          | 60,261   |         |         |      | 78,304   |         |         |   | 113,490    |        
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|                                               | Gross profit                                      |                          |          | 158,449 |         |      |          | 186,309 |         |   |            | 190,292 |          
|Operating expenses:                            |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|                                               | Sales and marketing(2)                            |                          |          | 103,861 |         |      |          | 164,629 |         |   |            | 242,174 |          
|                                               | Product and website development(2)                |                          |          | 21,659  |         |      |          | 30,279  |         |   |            | 35,722  |          
|                                               | General and administrative(2)                     |                          |          | 67,257  |         |      |          | 84,813  |         |   |            | 174,363 |          
|                                               | Amortization of goodwill and intangible assets(1) |                          |          | 22,366  |         |      |          | 37,165  |         |   |            | 199,291 |          
|                                               | Acquisition and restructuring charges(2)          |                          |          | 4,100   |         |      |          | 12,087  |         |   |            | 50,260  |          
|                                               | Impairment of long-lived assets                   |                          |          | 29,580  |         |      |          | 7,335   |         |   |            | 925,094 |          
|                                               | Litigation settlement                             |                          |          | 63,600  |         |      |          | 23,000  |         |   |            |        |          
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|                                               |                                                   | Total operating expenses |          |         | 312,423 |      |          |         | 359,308 |   |            |         | 1,626,904 | 
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|Loss from operations                           |                                                   |                          | (153,974 | )       |         |      | (172,999 | )       |         |   | (1,436,612 | )      
|Interest income (expense), net                 |                                                   |                          | (424     | )       |         |      | 2,620    |         |         |   | 10,490     |        
|Gain on settlement of distribution agreement   |                                                   |                          | 104,071  |         |         |      |         |         |         |   |           |        
|Other income (expense), net                    |                                                   |                          | 673      |         |         |      | (5,682   | )       |         |   | (44,281    | )      
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|Loss from continuing operations                |                                                   |                          | (49,654  | )       |         |      | (176,061 | )       |         |   | (1,470,403 | )      
|Gain on disposition of discontinued operations |                                                   |                          | 2,530    |         |         |      | 11,790   |         |         |   |           |        
|Income from discontinued operations            |                                                   |                          |         |         |         |      | 846      |         |         |   | 4,814      |        
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        
|Net loss                                       |                                                   | $                        | (47,124  | )       |         | $    | (163,425 | )       |         | $ | (1,465,589 | )      
|                                               |                                                   |                          |          |         |         |      |          |         |         |   |            |        

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---



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(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, 
|                                               |                                                |                         
|                                               |                                                | 2003                     |       | 2002 |     | 2001
|                                               |                                                |                          |       |      |     |     
|                                               |                                                |                         
|                                               |                                                | (In thousands)          
|Revenue                                        |                                                | $                        | 1,119 |      |     | $    | 1,501  |     |     | $ | 2,456  |    
|Cost of revenue                                |                                                |                          | 16    |      |     |      | 134    |     |     |   | 383    |    
|Sales and marketing                            |                                                |                          | 3,795 |      |     |      | 63,848 |     |     |   | 71,188 |    
|Product and website development                |                                                |                          | 15    |      |     |      | 127    |     |     |   | 361    |    
|General and administrative                     |                                                |                          | 164   |      |     |      | 1,297  |     |     |   | 6,237  |    
|Acquisition and restructuring charges          |                                                |                          | 2,140 |      |     |      |       |     |     |   |       |    
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|                                               |                                                | $                        | 7,249 |      |     | $    | 66,907 |     |     | $ | 80,625 |    
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|As a Percentage of Revenue:                    |                                                |                          |       |      |     |      |        |     |     |   |        |    
|Revenue                                        |                                                |                          | 96    | %    |     |      | 88     | %   |     |   | 87     | %  
|Related party revenue                          |                                                |                          | 4     |      |     |      | 12     |     |     |   | 13     |    
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|                                               | Total revenue                                  |                          |       | 100  |     |      |        | 100 |     |   |        | 100 |    
|Cost of revenue                                |                                                |                          | 28    |      |     |      | 30     |     |     |   | 37     |    
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|                                               | Gross profit                                   |                          |       | 72   |     |      |        | 70  |     |   |        | 63  |    
|Operating expenses:                            |                                                |                          |       |      |     |      |        |     |     |   |        |    
|                                               | Sales and marketing                            |                          |       | 47   |     |      |        | 62  |     |   |        | 80  |    
|                                               | Product and website development                |                          |       | 10   |     |      |        | 11  |     |   |        | 12  |    
|                                               | General and administrative                     |                          |       | 31   |     |      |        | 32  |     |   |        | 57  |    
|                                               | Amortization of goodwill and intangible assets |                          |       | 10   |     |      |        | 14  |     |   |        | 66  |    
|                                               | Acquisition and restructuring charges          |                          |       | 2    |     |      |        | 5   |     |   |        | 17  |    
|                                               | Impairment of long-lived assets                |                          |       | 14   |     |      |        | 3   |     |   |        | 305 |    
|                                               | Litigation settlement                          |                          |       | 29   |     |      |        | 9   |     |   |        |    |    
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|                                               |                                                | Total operating expenses |       |      | 143 |      |        |     | 136 |   |        |     | 537 | 
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|Loss from operations                           |                                                |                          | (70   | )    |     |      | (66    | )   |     |   | (474   | )  
|Interest income (expense), net                 |                                                |                          |      |      |     |      | 1      |     |     |   | 3      |    
|Gain on settlement of distribution agreement   |                                                |                          | 48    |      |     |      |       |     |     |   |       |    
|Other income (expense), net                    |                                                |                          |      |      |     |      | (2     | )   |     |   | (15    | )  
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|Loss from continuing operations                |                                                |                          | (23   | )    |     |      | (67    | )   |     |   | (486   | )  
|Gain on disposition of discontinued operations |                                                |                          | 1     |      |     |      | 4      |     |     |   |       |    
|Income from discontinued operations            |                                                |                          |      |      |     |      |       |     |     |   | 2      |    
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    
|Net Loss                                       |                                                |                          | (22   | )%   |     |      | (63    | )%  |     |   | (484   | )% 
|                                               |                                                |                          |       |      |     |      |        |     |     |   |        |    

For the Years Ended December 31, 2003 and
2002



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

Revenue, including non-cash stock-based charges,
decreased approximately $45.9 million, or 17%, to
$218.7 million for the year ended December 31, 2003
from revenue of $264.6 million for the year ended
December 31, 2002. The decline in revenue was due to
decreases of $17.0 million in the Media Services segment, a
decrease in the Software segment of $19.0 million, and a
decrease in the Print segment of

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$9.9 million. These declines by segment are
explained in the segment information below. Of these declines,
$23.5 million was due to declines in related party revenues
with $15.1 million in the Media segment and
$8.4 million in the Software segment from the expiration of
legacy contracts. In the Software segment we sold the Hessel
Group in early 2003 resulting in an additional decrease in
revenue of $7.4 million. We expect these legacy contracts
will provide less than $5.0 million per year in revenue in
the next two years and negligible amounts thereafter.




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

Cost of revenue, including non-cash stock-based
charges, decreased approximately $18.0 million, or 23%, to
$60.3 million for the year ended December 31, 2003
from $78.3 million for the year ended December 31,
2002. The decrease was primarily due to our continued cost
cutting efforts over the past two years that have resulted in
restructuring charges in the first and third quarters of 2002
and the fourth quarter of 2003. The reductions consisted of
decreases in personnel related costs of $6.7 million,
royalties and fees of $3.8 million, consulting costs of
$1.2 million, hosting and imaging costs of
$2.6 million, and other direct costs of $3.7 million.
The decreases in both consulting costs and hosting and imaging
costs were due to the elimination of the full service virtual
tours business as we switched to a self-service model. The
decrease in royalties and fees was primarily due to changes in
certain royalty agreements from a percentage of revenue to a
fixed fee arrangement.

Gross margin percentage for the year ended
December 31, 2003 was 72%, compared to 70% for the year
ended December 31, 2002. The increase in gross margin
percentage was primarily due to the factors mentioned above. We
expect that our gross margin should continue to improve over the
next two years, as our royalty expense in the Media segment will
decline. The decline will occur as our existing contracts with
MLSs expire over that period and we renew them without
paying future royalties.

Operating Expenses

Each of our operating expense lines over the past
two years have declined due to our cost cutting efforts that
resulted in restructuring charges in the first and third
quarters of 2002 and the fourth quarter of 2003. Because of the
constant change in the business over the last two years, the
results are not comparable. However, we have provided the major
categories of changes in each of operating expenses so our
investors can understand the breadth of changes we have made to
our operating expense structure.

Sales and Marketing.Sales and marketing expenses,
including non-cash stock-based charges, decreased approximately
$60.8 million, or 37%, to $103.9 million for the year
ended December 31, 2003 from $164.6 million for the
year ended December 31, 2002. The overall decrease was
primarily due to decreases in personnel related costs of
$10.5 million, stock-based charges of $60.0 million,
telephone costs of $2.4 million and other direct costs of
$5.5 million, partially offset by increases in online
marketing costs of $17.6 million. Personnel and other
direct costs decreased, as we expected, primarily due to the
implementation of restructuring plans as described above. The
increase in online marketing costs was due to an increase in
distribution costs associated with traffic acquisition related
to our new agreements with AOL, MSN and Yahoo! Stock-based
charges primarily decreased due to the termination of the
previous agreement with AOL.

Product and Website Development.Product and website development
expenses, including non-cash stock-based charges, decreased
approximately $8.6 million, or 28%, to $21.7 million
for the year ended December 31, 2003 from
$30.3 million for the year ended December 31, 2002.
The decrease was primarily due to decreases in personnel related
costs of $1.5 million, decreases in depreciation expense of
$1.2 million and other direct costs of $5.9 million.
These decreases were as we expected and are primarily due to the
implementation of restructuring plans as described above.

General and Administrative.General and administrative expenses,
including non-cash stock-based charges, decreased approximately
$17.5 million, or 21%, to $67.3 million for the year
ended December 31, 2003 from $84.8 million for the
year ended December 31, 2002. The decrease was primarily
due to decreases in personnel related costs of
$6.4 million, bad debt expense of $2.9 million,
consulting expense of $1.3 million, rent expense of
$2.3 million, outside legal and accounting fees of
$6.2 million, stock-based charges of

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$1.1 million and partially offset by an
increase in other direct costs of $2.6 million. The
decreases in personnel related costs and other overhead were as
we expected and primarily due to the implementation of the
restructuring plans described above. The decrease in bad debt
expense related to a closer alignment between our sales force
compensation and tighter credit and collection policies. Our
general and administrative expenses continue to be larger as a
percentage of our revenues than many companies of our size.
These expenses have been impacted by our legal costs as well as
our costs to prepare for compliance in 2004 with
Section 404 (internal control over financial reporting) of
the new Sarbanes-Oxley legislation. We will continue to focus on
reducing these expenses, but some of these costs, such as our
corporate office costs, may not be reduced for a number of years
and some, like our legal expense, are not totally within our
control. In addition, in prior years, we had established an
accrual for legal costs for litigation directly resulting from
our financial restatement in 2002 based on deductibles under
insurance coverage at that time. Much of our litigation has
continued longer than expected and our accrual has been
exhausted. As a result, all future costs will be expensed as
incurred and our expenses could be higher in future periods.


Amortization of Goodwill and Intangible
Assets.Amortization of goodwill and
intangible assets was $22.4 million for the year ended
December 31, 2003 compared to $37.2 million for the
year ended December 31, 2002. The decrease in amortization
was due to the impairment of intangible assets charges under
SFAS No. 121, Accounting for the Impairment of
Long-lived Assets to be Disposed Of, in the quarters ended
December 31, 2002, and September 30, 2003 as well as
certain intangible assets becoming fully amortized during 2003.

Litigation Settlement.As a result of our settlement of the
Securities Class Action Lawsuit (as defined above), we have
recorded a litigation settlement charge of $63.6 million in
our operating results for the year ended December 31, 2003.
During 2002, we reached a settlement with MemberWorks and have
included the $23.0 million cost of the settlement in our
results of operations for the year ended December 31, 2002.

Impairment of Long-lived Assets.In conjunction with certain business
units continuing to perform below our expectations, as required
by SFAS Nos. 144 and 142, we performed an impairment
analysis as of September 30, 2003. Our analysis resulted in
a charge of $15.7 million comprised of impairments of
$11.8 million of identifiable intangible assets relating to
our acquisitions of SpringStreet and Move.com, Inc.,
$2.6 million of intangibles, goodwill and property and
equipment relating to the acquisition of CFT and
$1.3 million of prepaid distribution expense. In addition,
in conjunction with the settlement of the dispute with Cendant,
we relinquished certain exclusive data rights and other rights.
As a result, certain intangible assets associated with those
rights no longer have value to us and, accordingly, we have
recorded an impairment charge of $12.2 million. Both
charges were recorded in the quarter ended September 30,
2003. In the fourth quarter of 2003, specific events and changes
in circumstances indicated a potential impairment. Those
specific events included Homestore revising its implementation
plan of its enterprise resource planning system. As a result of
the revision, the decision was made to terminate the
implementation of one aspect of the application. This decision
resulted in a charge of $1.8 million.

In January 2002, we adopted SFAS No. 142 and
as a result, ceased to amortize goodwill. In lieu of
amortization, we were 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. 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 $4.1 million for the year ended December 31,
2003, related to restructuring plans approved in fourth quarter
of 2003. In the fourth quarter of 2003, our Board of Directors
approved a restructuring plan, and we took a charge of
$3.5 million

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relating to this plan. As part of this
restructuring and integration plan, we undertook a review of its
existing operations and elected to change our management
structure and identified and notified approximately 95 employees
whose positions with the Company were eliminated. The work force
reductions affected approximately 7 in research and development,
17 in production, 37 in sales and marketing and 34 in
administrative functions. In addition, we revised the estimates
on the first quarter 2002 and the fourth quarter 2001
restructuring plans and took an additional charge of $560,000 to
properly reflect our current estimates. The primary factor in
this change in estimate was the continued slow demand for office
space in San Francisco where we still have one floor of a large
facility available for sublease.


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, we took a charge
of $2.3 million. In the third quarter of 2002 we took a
charge of $3.6 million. We also revised the estimates on
previous 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.

Prior to the fourth quarter of 2003 restructuring
charge, we had taken three previous restructuring charges: in
the fourth quarter of 2001, the first quarter of 2002 and the
third quarter of 2002. All of the these charges were a part of
approved plans by our Board of Directors, with the objective of
eliminating duplicate resources and redundancies. A summary of
each is outlined below.

In the fourth quarter of 2001, we recorded a
charge of $35.8 million, which was included in acquisition
and restructuring charges in the Consolidated Statement of
Operations. As part of this restructuring and integration plan,
we undertook a review of our existing locations and elected to
close a number of satellite offices and identified and notified
approximately 700 employees whose positions with us 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. This
charge consisted of the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | employee termination benefits of
    $6.4 million;                                                                                                                                                                                                                                                                                                                       
|
| |  | 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;
|
| |  | non-cash write-offs of $2.9 million in other
    assets related to exited activities; and                                                                                                                                                                                                                                                                                
|
| |  | accrued future payments of $5.7 million for
    existing contractual obligations with no future benefits to us.                                                                                                                                                                                                                                                          

In the first quarter of 2002, we revised our
estimates related to a lease obligation and reduced the charge
by $488,000. During the three months ended September 30,
2002, we revised our estimates related to our contractual
obligations and reduced the charge by $459,000. Our original
estimate with respect to sublease income related primarily to a
lease commitment for office space in San Francisco that expires
in November 2006. We originally estimated that we would sublease
the facility by the second quarter of 2003 at a rate of
approximately two-thirds of the existing commitment. However,
declines in the demand for office space in the San Francisco
market led us to conclude these estimates must be revised.
Because we believed it would take at least one year longer than
was 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 $6.0 million charge in the quarter ended
September 30, 2002. We also reduced our estimates for
employee termination pay by $396,000 and our contractual
obligations by $339,000.

In the first quarter of 2002, we recorded a
charge of $2.3 million, which was included in acquisition,
restructuring and other one-time charges in the Consolidated
Statement of Operations. As part of this restructuring and
integration plan, we undertook a review of our existing
locations. As a result of this review, we 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

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research and development, 140 in sales and
marketing and 60 in administrative functions. This charge
consisted of employee termination benefits of $1.7 million
and facility closure charges of approximately $600,000. During
the period ended September 30, 2002, we evaluated our
original estimates and concluded we must increase our charge for
lease obligations by $1.6 million because of a decline in
market rates and reduced our estimate for employee termination
pay by $242,000.


In the third quarter of 2002, we recorded a
charge of $3.6 million, which was included in acquisition
and restructuring charges in the Consolidated Statement of
Operations. As part of this restructuring and integration plan,
we undertook a review of our existing locations. As a result of
this review, we 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, 2003, all of the planned 190 employees
have been terminated and paid severance. This charge consists of
employee termination benefits of $1.6 million and facility
closure charges of approximately $2.0 million.

A summary of activity related to the four
restructuring charges and the changes in our estimates is as
follows (in thousands):

|                                           |  |             |        |             |  |             |        |            |  |             |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|------------------------------------------ |  | ----------- | ------ | ----------- |  | ----------- | ------ | ---------- |  | ----------- | ------ | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                           |  |             |        |             |  | Lease       |        |            |  |             |        |      
|                                           |  |             |        | Stock-based |  | Obligations |        |            |  |             |        |      
|                                           |  | Employee    |        | Charges for |  | and         |        |            |  |             |        |      
|                                           |  | Termination |        | Accelerated |  | Related     |        | Asset      |  | Contractual |        |      
|                                           |  | Benefits    |        | Vesting     |  | Charges     |        | Write-offs |  | Obligations |        | Total
|                                           |  |             |        |             |  |             |        |            |  |             |        |      
|December 2001 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  |  
|March 2002 restructuring charge            |  |             | 1,720  |             |  |             |       |            |  |             | 309    |       |  |   | 260     |   |  |   |       |   |  |   | 2,289   |  
|September 2002 restructuring charge        |  |             | 1,590  |             |  |             |       |            |  |             | 2,033  |       |  |   |        |   |  |   |       |   |  |   | 3,623   |  
|Cash paid                                  |  |             | (4,916 | )           |  |             |       |            |  |             | (5,920 | )     |  |   |        |   |  |   | (3,631 | ) |  |   | (14,467 | )
|Sale of a subsidiary                       |  |             | (156   | )           |  |             |       |            |  |             |       |       |  |   |        |   |  |   |       |   |  |   | (156    | )
|Change in estimates                        |  |             | (638   | )           |  |             |       |            |  |             | 7,611  |       |  |   |        |   |  |   | (798   | ) |  |   | 6,175   |  
|Non-cash charges                           |  |             |       |             |  |             |       |            |  |             | 488    |       |  |   | (260    | ) |  |   |       |   |  |   | 228     |  
|                                           |  |             |        |             |  |             |        |            |  |             |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2002 |  |             | 453    |             |  |             |       |            |  |             | 17,166 |       |  |   |        |   |  |   | 1,163  |   |  |   | 18,782  |  
|December 2003 restructuring charge         |  |             | 1,401  |             |  |             | 2,140  |            |  |             |       |       |  |   |        |   |  |   |       |   |  |   | 3,541   |  
|Cash paid                                  |  |             | (797   | )           |  |             |       |            |  |             | (6,476 | )     |  |   |        |   |  |   | (576   | ) |  |   | (7,849  | )
|Changes in estimates                       |  |             | (156   | )           |  |             |       |            |  |             | 919    |       |  |   |        |   |  |   | (203   | ) |  |   | 560     |  
|Non-cash charges                           |  |             |       |             |  |             | (2,140 | )          |  |             |       |       |  |   |        |   |  |   |       |   |  |   | (2,140  | )
|                                           |  |             |        |             |  |             |        |            |  |             |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2003 |  | $           | 901    |             |  | $           |       |            |  | $           | 11,609 |       |  | $ |        |   |  | $ | 384    |   |  | $ | 12,894  |  
|                                           |  |             |        |             |  |             |        |            |  |             |        |       |  |   |         |   |  |   |        |   |  |   |         |  

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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, 2003 will be paid during 2004. 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.

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,
|                                      |  |             
|                                      |  | 2003         |       | 2002
|                                      |  |              |       |     
|Revenue                               |  | $            | 1,119 |      |  | $ | 1,501  | 
|Cost of revenue                       |  |              | 16    |      |  |   | 134    | 
|Sales and marketing                   |  |              | 3,795 |      |  |   | 63,848 | 
|Product and website development       |  |              | 15    |      |  |   | 127    | 
|General and administrative            |  |              | 164   |      |  |   | 1,297  | 
|Acquisition and restructuring charges |  |              | 2,140 |      |  |   |       | 
|                                      |  |              |       |      |  |   |        | 
|                                      |  | $            | 7,249 |      |  | $ | 66,907 | 
|                                      |  |              |       |      |  |   |        | 

Stock-based charges decreased by
$59.7 million to $7.2 million for the year ended
December 31, 2003 from $66.9 million for the year
ended December 31, 2002. The decrease was primarily due to
the termination of the previous agreement with AOL.



| |                                   
| | ----------------------------------
| | Interest Income (Expense),
    Net

Interest expense, net of $424,000 in 2003
decreased by $3.0 million from interest income of
$2.6 million for the year ended December 31, 2002.
This resulted from reduced cash balances and a general decline
in market interest rates as well as the recognition of imputed
interest on long-term arrangements.



| |                                                 
| | ------------------------------------------------
| | Gain on Settlement of Distribution
    Agreement

In 2003, we entered into a new marketing
agreement with AOL that resolved our dispute with AOL and
terminated our obligations under the old agreement. In
connection with the settlement, we reduced our accrued
distribution obligation and other accrued liabilities by
$189.9 million and $4.2 million, respectively, and
allowed AOL to fully draw down on an existing $90.0 million
letter of credit secured by restricted cash on our Consolidated
Balance Sheet at December 31, 2002. Accordingly, we
recorded a gain on settlement of the distribution agreement of
$104.1 million for the year ended December 31, 2003.



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Other income, net of $673,000 for the year ended
December 31, 2003 consists primarily of a gain from the
release of proceeds during the first quarter of 2003 from an
escrow on the sale of assets in previous quarters. Other
expense, net of $5.7 million for the year ended
December 31, 2002, consisted 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.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | 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. In
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the
Consolidated Financial Statements reflect this as discontinued
operations. We recorded a gain on disposition of discontinued
operations of $2.5 million during the year ended
December 31, 2003, as a result of our receipt of cash and
stock valued at $230,000 released from the escrow related to our
purchase of iPlace and our receipt of $2.3 million in cash
from the escrow related to the sale of our ConsumerInfo
division. During the year ended December 31, 2002, we
recorded a gain on the disposition of discontinued operations of

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$11.8 million as a result of our sale of the
ConsumerInfo division. The results of operations of the
ConsumerInfo division included operating income of $846,000 for
the year ended December 31, 2002.




| |             
| | ------------
| | 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, 2003 and December 31, 2002. As of
December 31, 2003, we had $872.6 million of net
operating loss carryforwards for federal income tax purposes,
which expire beginning in 2008. 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 2003, we combined the previously reported
Online Advertising segment with the Media Services segment as we
changed the way that we manage and evaluate our businesses. In
addition, we changed the names of the Software and Services
segment to Software and the Offline Advertising
segment to Print. As a result of these changes, we
now evaluate performance and allocate resources based on three
segments, consisting of Media Services, Software, and Print. 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.

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;
litigation settlement charges; impairment charges; 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.

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

|                                             |                      |                         |         |          |   |  |         |          |  
|-------------------------------------------- | -------------------- | ----------------------- | ------- | -------- | - |  | ------- | -------- | -
|                                             |                      |                        
|                                             |                      | Year Ended December 31,
|                                             |                      |                        
|                                             |                      | 2003                    |         | 2002    
|                                             |                      |                         |         |         
|Revenue:                                     |                      |                         |         |          |   |  |         |         
|                                             | Media Services       |                         | $       | 143,510  |   |  | $       | 160,506  |  
|                                             | Software             |                         |         | 27,806   |   |  |         | 46,804   |  
|                                             | Print                |                         |         | 47,394   |   |  |         | 57,303   |  
|                                             |                      |                         |         |          |   |  |         |         
|Total revenue                                |                      |                         | 218,710 |          |   |  | 264,613 |         
|                                             |                      |                         |         |          |   |  |         |         
|Cost of revenue and operating expenses:      |                      |                         |         |          |   |  |         |         
|                                             | Media Services       |                         |         | 132,961  |   |  |         | 137,642  |  
|                                             | Software             |                         |         | 32,963   |   |  |         | 53,506   |  
|                                             | Print                |                         |         | 49,000   |   |  |         | 57,110   |  
|                                             | Unallocated          |                         |         | 157,760  |   |  |         | 189,354  |  
|                                             |                      |                         |         |          |   |  |         |         
|Total cost of revenue and operating expenses |                      |                         | 372,684 |          |   |  | 437,612 |         
|                                             |                      |                         |         |          |   |  |         |         
|                                             | Loss from operations |                         | $       | (153,974 | ) |  | $       | (172,999 | )
|                                             |                      |                         |         |          |   |  |         |         

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| |               
| | --------------
| | Media Services

Media Services consists of products and media
services that promote and connect real estate professionals to
consumers through our REALTOR.com®, HomeBuilder.com,
RENTNET.com and Homestore.com websites. In addition, we sell
advertising services, including banner ads, sponsorships,
integrated text based links and rich media applications to
businesses interested in reaching our targeted audience. This
segment also includes our limited international activities.

Media Services revenue decreased approximately
$17.0 million, or 11%, to $143.5 million for the year
ended December 31, 2003, compared to $160.5 million
for the year ended December 31, 2002. The revenue decrease
was primarily due to a reduction in revenue from bulk purchases
by a related party (Cendant Corporation, or Cendant) that
expired in the fourth quarter of 2002 of $15.1 million.
Additionally, the revenue decrease was due to a reduction in
revenue from our Virtual Tour products of $8.4 million, a
reduction in revenue from our network-wide National Advertising
Sales products of $5.4 million, and a reduction in revenue
from our New Homes and Apartments verticals of $2.1 million
and $1.1 million, respectively. These decreases were offset
by increases in revenue from our Featured Home and our new
Featured Agent products of $7.9 million, our new
REALTOR.com Classified product offering of $4.5 million,
and our Find a Lender directory product of
$2.7 million, million, which was launched in late 2002.
Media Services revenue represented approximately 66% of total
revenue for the year ended December 31, 2003 compared to
61% of the total revenue for the year ended December 31,
2002.

Media Services expenses decreased
$4.6 million, or 3%, to $133.0 million for the year
ended December 31, 2003 from $137.6 million for the
year ended December 31, 2002. The decrease was primarily
due to decreases in personnel costs of $11.1 million,
royalties of $3.5 million, hosting costs of
$2.1 million, marketing costs of $1.7 million,
telephone costs of $1.7 million and other operating
expenses of $900,000. These decreases were partially offset by
an increase in online marketing costs of $16.3 million due
to our new agreements with AOL, MSN and Yahoo!. Personnel and
other direct costs decreased, as expected, primarily due to the
implementation of restructuring plans as described above.
Royalties decreased primarily due to a decrease in revenue and a
change in the royalty rates.

Media Services operating income decreased
primarily as a result of the decline in related party revenue.
Our operating income declined to $10.5 million for the year
ended December 31, 2003, compared to operating income of
$22.9 million for the year ended December 31, 2002. We
have reduced the cost structure of this segment and are
continuing to seek new revenue opportunities.

As a part of our evaluation of the business, we
changed the Media Services product offering beginning in April
2003. Historically, the product offerings have been provided for
a fixed subscription fee and required the purchase of a
templated website. In 2003, we began 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 and media purchased no longer requires the
purchase of a templated website. This change was implemented to
compete more effectively with traditional offline media products
and better align our pricing with the value we deliver.
Implementation of these changes has been reasonably
well-accepted by our customers.



| |         
| | --------
| | Software

Our Software segment is comprised of our Top
Producer, WyldFyre and Computers For Tracts businesses, and in
2002, The Hessel Group.

Software revenue decreased $19.0 million, or
41%, to $27.8 million for the year ended December 31,
2003, compared to $46.8 million for the year ended
December 31, 2002. The decrease was primarily due to a
$8.4 million reduction in revenue from a related party
(Cendant) for a custom development project that is now complete
and $7.4 million reduction in revenue due to the shutdown
and sale of assets of The Hessel Group at the end of 2002. The
remaining decrease was attributable to the introduction of a new
online version of our Top Producer product in the second half of
2002 that caused sales to shift from the desktop product with a
one-time license fee to the online product with a monthly
subscription fee. Software revenue

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represented approximately 13% of total revenue
for the year ended December 31, 2003, compared to 18% of
total revenue for the year ended December 31, 2002.


Software expenses decreased $20.5 million,
or 38%, to $33.0 million for the year ended
December 31, 2003 from $53.5 million for the year
ended December 31, 2002. The decrease was primarily due to
a $13.9 million reduction due to the shutdown and sale of
assets of The Hessel Group. The remaining decrease was in
personnel related costs as a result of our restructuring plans
described above.

Software generated an operating loss of
$5.2 million for the year ended December 31, 2003
compared to an operating loss of $6.7 million for the year
ended December 31, 2002. Excluding the effect of the
shutdown of The Hessel Group, the remaining operating loss was
primarily driven by the reduction in revenue outlined above
partially offset by the cost reductions implemented by
management. 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 and profitability until the number of online
subscriptions increases to offset the reduction in desktop
software sales. No assurance can be given that such an increase
in online subscriptions will occur.



| |      
| | -----
| | Print

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

Print revenue decreased $9.9 million, or
17%, to $47.4 million for the year ended December 31,
2003, compared to $57.3 million for the year ended
December 31, 2002. The decrease was primarily due to a
decline in the size of our local merchant sales force at Welcome
Wagon, a reduction in the number of books distributed and a
decline in the average revenue per book as advertising spending
by local merchants and consumers decreased. Print revenue
represented approximately 22% of total revenue both for the year
ended December 31, 2003, and the year ended
December 31, 2002.

Print expenses decreased $8.1 million, or
14%, to $49.0 million for the year ended December 31,
2003 compared to expenses of $57.1 million for the year
ended December 31, 2002. The decrease was directly
attributable to significant changes in the cost structure
resulting in reduced headcount and production costs.

Print generated operating losses of
$1.6 million for the year ended December 31, 2003,
compared to operating income of $193,000 for the year ended
December 31, 2002 primarily due to the revenue decline
discussed above not being fully offset by the cost reduction
efforts and production improvements.



| |            
| | -----------
| | Unallocated

Unallocated expenses decreased
$31.6 million, or 17% to $157.2 million for the year
ended December 31, 2003 from $189.4 million for the
year ended December 31, 2002. The decrease was primarily
due to decreases in stock-based charges of $57.5 million,
amortization of intangibles of $14.8 million, restructuring
charges of $8.0 million and other costs of
$14.2 million primarily related to a reduction in direct
costs due to the implementation of our restructuring plans
described above. The decrease was offset by litigation
settlement charge of $63.6 million (compared to
$23.0 million in 2002) and the impairment of long-lived
assets of $29.6 million (compared to $7.3 million in
2002). The reduction in stock-based charges was a direct result
of the settlement of our agreement with AOL. The reduction in
amortization of intangibles was primarily due to the impairment
charge taken in the fourth quarter of 2002 as well as certain
intangible assets becoming fully amortized during 2003. We
continue to assess reductions in our corporate overhead expenses
but cannot provide assurances that reductions will be achieved.

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

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December 31, 2001. The primary reasons for
the decline in revenue were a reduction in subscription renewals
and advertising revenue of $32.6 million in the Media
Services segment, a decrease in revenue in the Software segment
of $5.8 million, and a reduction in the Print segment 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 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 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

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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 included the cost of the settlement in
our results of operations for the year ended December 31,
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. 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 were 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 common stock, a revision
of our annual operating plan and a decision to sell The Hessel
Group 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 Group 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

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$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.

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 and
recognized a gain of $11.8 million during the year 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.

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| |             
| | ------------
| | 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 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 2003, we combined the previously reported
Online Advertising segment with the Media Services segment as we
changed the way that we manage and evaluate our businesses. In
addition, we changed the names of the Software and Services
segment to Software and the Offline Advertising
segment to Print. As a result of these changes, we
now evaluate performance and allocate resources based on three
segments, consisting of Media Services, Software, and Print. 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       |                         | $       | 160,506  |   |  | $         | 193,154    |  
|                                             | Software             |                         |         | 46,804   |   |  |           | 52,560     |  
|                                             | Print                |                         |         | 57,303   |   |  |           | 58,068     |  
|                                             |                      |                         |         |          |   |  |           |           
|Total revenue                                |                      |                         | 264,613 |          |   |  | 303,782   |           
|                                             |                      |                         |         |          |   |  |           |           
|Cost of revenue and operating expenses:      |                      |                         |         |          |   |  |           |           
|                                             | Media Services       |                         |         | 137,642  |   |  |           | 262,503    |  
|                                             | Software             |                         |         | 53,506   |   |  |           | 54,667     |  
|                                             | Print                |                         |         | 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

Media Services consists of products and media
services that promote and connect real estate professionals to
consumers through our REALTOR.com®, Homebuilder.com,
RENTNET.com and Homestore.com websites. In addition, we provide
advertising services, including banner ads, sponsorships,
integrated text based links and rich media applications we sell
to those businesses interested in reaching our targeted
audience. This segment also includes our limited international
activities.

Media Services revenue decreased approximately
$32.6 million, or 17%, to $160.5 million for the year
ended December 31, 2002, compared to $193.2 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 (Cendant) and a major franchise,
the reduction in services purchased by a strategic partner, and
discontinuing the publication of unprofitable regional
magazines. Also contributing to the decrease was a reduction in

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advertising revenue share from AOL of
$6.8 million and the expiration of large sponsorship
contracts that did not renew totaling $19.0 million. The
loss of the bulk subscription purchases was 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 and an increase in the sale of new advertising
contracts totaling $4.5 million. Media Services revenue
represented approximately 61% of total revenue for the year
ended December 31, 2002 compared to 64% of the total
revenue for the year ended December 31, 2001.


Media Services expenses decreased
$124.9 million, or 48%, to $137.6 million for the year
ended December 31, 2002 from $262.5 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 $30.6 million, bad
debt expense of $11.5 million and other overhead costs of
$25.3 million. Personnel related costs and other overhead
costs decreased as expected primarily due to the implementation
of our restructuring plans in the fourth quarter of 2001 and the
first quarter of 2002. The decrease in hosting, imaging and
fulfillment costs was 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 (Cendant) in
December 2001. The decrease in marketing costs was due to a
general reduction of all marketing related activities across all
channels and the elimination of all marketing expenses related
to the promotion of the Homestore brand, 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 in marketing costs 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. The decrease
in bad debt expense related to a closer alignment between our
sales force compensation and tighter credit and collection
policies.

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
$69.3 million for the year ended December 31, 2001 to
operating income of $22.9 million for the year ended
December 31, 2002.



| |         
| | --------
| | Software

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

Software 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, Cendant 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 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 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 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.

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| |      
| | -----
| | Print

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

Print 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. Print 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.

Print 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.

Print 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.



| |            
| | -----------
| | 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.

Liquidity and Capital Resources

Net cash used in continuing operating activities
of $42.7 million for the year ended December 31, 2003
was attributable to the net loss from continuing operations of
$49.7 million, offset by non-cash expenses including
depreciation, amortization of intangible assets, impairment of
long-lived assets, provision for doubtful accounts, stock-based
charges and other non-cash items, aggregating to
$73.9 million and increased by the non-cash gain on
settlement of the AOL distribution agreement of
$104.1 million. Reducing the cash used in continuing
operating activities were the variances in operating assets and
liabilities of approximately $37.1 million. These variances
were primarily the result of the accrual of the Securities
Class Action Lawsuit settlement and the settlement of the
AOL agreement. Because of the impact of our restructuring
efforts in 2003 and 2002 and the impairment and litigation
settlement charges in each year, the cash flow from operations
for the year ended December 31, 2002 is not comparable to
our current results. While our net cash from continuing
operations is still negative each quarter, we have implemented
substantial cost reductions over the past two years that have
resulted in restructuring charges. We believe that the effect of
these cost reductions, combined with continued focus on our cost
structure and future revenue growth, provides the opportunity
for positive cash flow from operations in the future.

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Net cash used by continuing operating activities
was $97.0 million for the year ended December 31,
2002. Net cash used in continuing operating activities was the
result of the operating loss from continuing operations of
$176.1 million, offset by non-cash expenses including
depreciation, amortization of intangible assets, accretion of
distribution obligation, provision for doubtful accounts,
stock-based charges and other non-cash items, 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 decreases in accounts payable balances
and deferred revenue.

Net cash used in investing activities of
$29.7 million for the year ended December 31, 2003 was
attributable to purchases of short-term investments of
$21.6 million and increased capital expenditures due to the
implementation of our new enterprise reporting system and
increased capacity for our data center of $9.4 million,
partially offset by the sale of assets of $1.3 million. The
actual use of cash for investing activities was only
$7.9 million, as the $21.6 million was a
classification requirement. These short-term investments should
be considered the equivalent of cash as there is minimal
principal risk and none of the instruments have a maturity
longer than 30 days. Net cash provided by investing
activities of $13.4 million for the year ended
December 31, 2002 was primarily attributable to the
maturities of short-term investments of $14.4 million and
proceeds from the sale of marketable equity securities of
$2.3 million, partially offset by capital expenditures of
$3.3 million.

Net cash provided by financing activities of
$3.4 million for the year ended December 31, 2003 was
primarily attributable to the exercise of stock options,
warrants and share issuances under the employee stock purchase
plan. Net cash provided by financing activities of
$3.8 million for the year ended December 31, 2002 was
primarily attributable to the repayment of stockholders
notes of $3.5 million and proceeds from the exercise of
stock options, warrants and share issuances under employee stock
purchase plan of $800,000 offset by $521,000 relating to a
settlement of a stock issuance obligation.

Since inception, we have incurred losses from
operations and have reported negative operating cash flows. As
of December 31, 2003, we had an accumulated deficit of
$2.0 billion and cash and short-term investments of
$35.5 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 contractual commitments as of
December 31, 2003 associated with the project were
$5.6 million of which $4.3 million was paid by
December 31, 2003. We have also entered into a settlement
agreement of our Securities Class Action Lawsuit that will
require us to pay an additional $3.0 million in cash upon
final judicial approval of the settlement. We have also stated
our intention to invest in our products and our infrastructure,
although we have not determined the actual amount of those
future expenditures. We have no material financial commitments
other than those under capital and operating lease agreements
and distribution and marketing agreements. We believe that our
existing cash and short-term investments, and any cash generated
from operations will be sufficient to fund our working capital
requirements, capital expenditures and other obligations through
the next 12 months.

Our contractual obligations as of
December 31, 2003 are as follows (in thousands):

|                                        |  |                        |        |              |  |               |        |               |  |           |        |  |  |   |       |  |  |   |    | 
|--------------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------- | ------ | ------------- |  | --------- | ------ |  |  | - | ----- |  |  | - | -- | 
|                                        |  |                       
|                                        |  | Payments Due by Period
|                                        |  |                       
|                                        |  | Total                  |        | Due in One   |  | Due in One to |        | Due in Three  |  | Over Five
|                                        |  | Payments Due           |        | Year or Less |  | Three Years   |        | to Five Years |  | Years    
|                                        |  |                        |        |              |  |               |        |               |  |          
|Capital lease obligations               |  | $                      | 1,926  |              |  | $             | 1,549  |               |  | $         | 376    |  |  | $ |      |  |  | $ |   | 
|Operating Lease obligations             |  |                        | 21,393 |              |  |               | 5,690  |               |  |           | 10,624 |  |  |   | 5,002 |  |  |   | 78 | 
|Obligations under restructuring charges |  |                        | 13,250 |              |  |               | 5,347  |               |  |           | 7,483  |  |  |   | 420   |  |  |   |   | 
|Distribution agreements                 |  |                        | 27,760 |              |  |               | 17,710 |               |  |           | 10,050 |  |  |   |      |  |  |   |   | 
|Other purchase obligations              |  |                        | 9,100  |              |  |               | 2,200  |               |  |           | 3,900  |  |  |   | 3,000 |  |  |   |   | 
|                                        |  |                        |        |              |  |               |        |               |  |           |        |  |  |   |       |  |  |   |    | 
|Total                                   |  | $                      | 73,429 |              |  | $             | 32,496 |               |  | $         | 32,433 |  |  | $ | 8,422 |  |  | $ | 78 | 
|                                        |  |                        |        |              |  |               |        |               |  |           |        |  |  |   |       |  |  |   |    | 

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We face significant risks associated with the
successful execution of our business strategy and may need to
raise additional capital in order to fund more rapid expansion,
to expand our marketing activities, to develop new, or enhance
existing, services or products 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. Our previously announced
settlement of the Securities Class Action Lawsuit will
further deplete our cash balance by $3.0 million and increase
the number of outstanding shares by 20 million, which may
make it more difficult to raise additional capital. This
additional capital, if needed, might not be available on terms
acceptable to us, or at all. 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 further 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 Note 21
Settlement of Disputes and Litigation and Note 22
Commitments and Contingencies to our Consolidated
Financial Statements contained in Item 8 of this
Form 10-K.

Off-Balance Sheet Arrangements

We have not entered into any transactions with
unconsolidated entities whereby we have financial guarantees,
subordinated retained interests, derivative instruments or other
contingent arrangements that expose Homestore to material
continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity
that provides financing, liquidity, market risk or credit risk
support to Homestore.

Recent Accounting Developments

In July 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (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 requires 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 adoption of SFAS No. 146 in the
first quarter of 2003 did not have a material impact on our
financial position, results of operations or cash flows.

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51 (FIN 46).
FIN 46 provides guidance for determining whether and how to
consolidate variable interest entities (VIEs).
Variable interests are contractual, ownership or other interests
in an entity that expose their holders to the risks and rewards
of the VIE. Variable interests include equity investments,
loans, leases, derivatives, guarantees and other instruments
whose values change with changes in the VIEs assets. Any
of these instruments may require its holder to consolidate the
VIE. FIN 46 requires certain VIEs to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is
effective immediately for all new VIEs created or acquired after
January 31, 2003. For entities created before
January 31, 2003, the provisions of FIN 46 have

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been delayed until March 31, 2004. We do not
expect the adoption of this statement in the first quarter of
2004 to have a material impact on our financial position,
results of operations or financial statement disclosure.


In January 2003, the EITF issued Issue
No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. 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.
The adoption of EITF No. 00-21 in the second quarter of
2003 did not have a material impact on our consolidated
financial position, results of operations or cash flows.






|         |                                                               
|-------- | --------------------------------------------------------------
|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 carry 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.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                  |                                                       |      |    |    | 
|------------------------------------------------- | ----------------------------------------------------- | ---- | -- | -- | 
|                                                  |                                                       | Page
|                                                  |                                                       |     
|Homestore, Inc. Consolidated Financial Statements |                                                       |      | 68 |   
|                                                  | Report of Ernst & Young LLP, Independent
    Auditors |      |    | 68 | 
|                                                  | Report of Independent Auditors                        |      |    | 69 | 
|                                                  | Consolidated Balance Sheets                           |      |    | 70 | 
|                                                  | Consolidated Statements of Operations                 |      |    | 71 | 
|                                                  | Consolidated Statements of Stockholders
    Equity   |      |    | 72 | 
|                                                  | Consolidated Statements of Cash Flows                 |      |    | 74 | 
|                                                  | Notes to Consolidated Financial Statements            |      |    | 75 | 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

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

We have audited the accompanying consolidated
balance sheet of Homestore, Inc. (the Company) as of
December 31, 2003, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended. 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 audit.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Homestore, Inc. at
December 31, 2003, and the results of its operations and
its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /S/ ERNST & YOUNG LLP

Los Angeles, California

March 10, 2004


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REPORT OF INDEPENDENT AUDITORS

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

In our opinion, the accompanying consolidated
balance sheet 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 the results
of their operations and their cash flows for each of the two
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

Los Angeles, California

March 25, 2003, except as to


Notes 13 and 21, as to


which the date is August 12, 2003


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HOMESTORE, INC.

CONSOLIDATED BALANCE SHEETS

|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |            |         | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ---------- | ------- |  | ------- | ---------- | ------- | 
|                                                         |                                                                                                                                                                                                                                                                           |                                           
|                                                         |                                                                                                                                                                                                                                                                           | December 31,                              
|                                                         |                                                                                                                                                                                                                                                                           |                                           
|                                                         |                                                                                                                                                                                                                                                                           | 2003                                       |         | 2002      
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |           
|                                                         |                                                                                                                                                                                                                                                                           |                                           
|                                                         |                                                                                                                                                                                                                                                                           | (In thousands)                            
|ASSETS                                                  
|Current assets:                                          |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         | Cash and cash equivalents                                                                                                                                                                                                                                                 |                                            | $       | 13,942     |         |  | $       | 80,463     |        
|                                                         | Restricted cash                                                                                                                                                                                                                                                           |                                            |         |           |         |  |         | 90,000     |        
|                                                         | Short-term investments                                                                                                                                                                                                                                                    |                                            |         | 21,575     |         |  |         |           |        
|                                                         | Accounts receivable, net of allowance for
    doubtful accounts of $5,377 and $10,698 at December 31,
    2003 and 2002, respectively                                                                                                                                     |                                            |         | 14,576     |         |  |         | 25,945     |        
|                                                         | Current portion of prepaid distribution expense                                                                                                                                                                                                                           |                                            |         | 10,509     |         |  |         | 21,863     |        
|                                                         | Other current assets                                                                                                                                                                                                                                                      |                                            |         | 10,585     |         |  |         | 12,739     |        
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total current assets                       |         |            | 71,187  |  |         |            | 231,010 | 
|Prepaid distribution expense, net of current
    portion |                                                                                                                                                                                                                                                                           |                                            |        |            |         |  | 13,150  |           
|Property and equipment, net                              |                                                                                                                                                                                                                                                                           |                                            | 21,454  |            |         |  | 25,933  |           
|Goodwill, net                                            |                                                                                                                                                                                                                                                                           |                                            | 20,477  |            |         |  | 23,258  |           
|Intangible assets, net                                   |                                                                                                                                                                                                                                                                           |                                            | 25,758  |            |         |  | 72,771  |           
|Other assets                                             |                                                                                                                                                                                                                                                                           |                                            | 14,672  |            |         |  | 13,086  |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total assets                               |         | $          | 153,548 |  |         | $          | 379,208 | 
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY                
|Current Liabilities:                                     |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         | Accounts payable                                                                                                                                                                                                                                                          |                                            | $       | 1,409      |         |  | $       | 3,419      |        
|                                                         | Accrued expenses                                                                                                                                                                                                                                                          |                                            |         | 42,576     |         |  |         | 59,732     |        
|                                                         | Accrued litigation settlement                                                                                                                                                                                                                                             |                                            |         | 53,600     |         |  |         |           |        
|                                                         | Accrued distribution obligation                                                                                                                                                                                                                                           |                                            |         | 7,406      |         |  |         | 211,973    |        
|                                                         | Obligation under capital leases                                                                                                                                                                                                                                           |                                            |         | 1,535      |         |  |         |           |        
|                                                         | Deferred revenue                                                                                                                                                                                                                                                          |                                            |         | 31,348     |         |  |         | 29,625     |        
|                                                         | Deferred revenue from related parties                                                                                                                                                                                                                                     |                                            |         | 4,042      |         |  |         | 7,024      |        
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total current liabilities                  |         |            | 141,916 |  |         |            | 311,773 | 
|Distribution obligation, net of current portion          |                                                                                                                                                                                                                                                                           |                                            |        |            |         |  | 7,500   |           
|Obligation under capital leases                          |                                                                                                                                                                                                                                                                           |                                            | 369     |            |         |  |        |           
|Deferred revenue from related parties                    |                                                                                                                                                                                                                                                                           |                                            | 2,869   |            |         |  | 6,510   |           
|Other non-current liabilities                            |                                                                                                                                                                                                                                                                           |                                            | 8,066   |            |         |  | 14,695  |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            | 153,220 |            |         |  | 340,478 |           
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|Commitments and contingencies (Note 22)                  |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         | Convertible preferred stock                                                                                                                                                                                                                                               |                                            |         |           |         |  |         |           |        
|                                                         | Common stock, $.001 par value; 500,000 shares
    authorized, 126,905 and 124,319 shares issued at
    December 31, 2003 and December 31, 2002, respectively,
    and 120,871 and 117,839 shares outstanding at December 31,
    2003 and December 31, 2002, respectively |                                            |         | 122        |         |  |         | 118        |        
|                                                         | Additional paid-in capital                                                                                                                                                                                                                                                |                                            |         | 1,992,591  |         |  |         | 1,990,755  |        
|                                                         | Treasury stock, at cost; 6,034 and 6,480 shares
    at December 31, 2003 and December 31, 2002,
    respectively                                                                                                                                                          |                                            |         | (14,470    | )       |  |         | (18,567    | )      
|                                                         | Notes receivable from stockholders                                                                                                                                                                                                                                        |                                            |         |           |         |  |         | (106       | )      
|                                                         | Deferred stock-based charges                                                                                                                                                                                                                                              |                                            |         | (258       | )       |  |         | (2,246     | )      
|                                                         | Accumulated other comprehensive income (loss)                                                                                                                                                                                                                             |                                            |         | 267        |         |  |         | (424       | )      
|                                                         | Accumulated deficit                                                                                                                                                                                                                                                       |                                            |         | (1,977,924 | )       |  |         | (1,930,800 | )      
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total stockholders equity                 |         |            | 328     |  |         |            | 38,730  | 
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           
|                                                         |                                                                                                                                                                                                                                                                           | Total liabilities and stockholders equity |         | $          | 153,548 |  |         | $          | 379,208 | 
|                                                         |                                                                                                                                                                                                                                                                           |                                            |         |            |         |  |         |           

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

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HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |         |           | 
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---------------------------------------- | -------- | ------- | ------- | ---- | -------- | ------- | ------- | - | ---------- | ------- | --------- | 
|                                                                                                    |                                                                                           |                                         
|                                                                                                    |                                                                                           | Year Ended December 31,                 
|                                                                                                    |                                                                                           |                                         
|                                                                                                    |                                                                                           | 2003                                     |          | 2002    |         | 2001
|                                                                                                    |                                                                                           |                                          |          |         |         |     
|                                                                                                    |                                                                                           |                                         
|                                                                                                    |                                                                                           | (In thousands, except per share amounts)
|Revenue (including non-cash equity charges, see
    note 2)                                         |                                                                                           | $                                        | 211,015  |         |         | $    | 233,455  |         |         | $ | 265,436    |        
|Related party revenue                                                                               |                                                                                           |                                          | 7,695    |         |         |      | 31,158   |         |         |   | 38,346     |        
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|                                                                                                    | Total revenue                                                                             |                                          |          | 218,710 |         |      |          | 264,613 |         |   |            | 303,782 |          
|Cost of revenue (including non-cash equity
    charges, see note 2)                                 |                                                                                           |                                          | 60,261   |         |         |      | 78,304   |         |         |   | 113,490    |        
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|                                                                                                    | Gross profit                                                                              |                                          |          | 158,449 |         |      |          | 186,309 |         |   |            | 190,292 |          
|Operating expenses:                                                                                 |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|                                                                                                    | Sales and marketing (including non-cash equity
    charges,
    see note 2)               |                                          |          | 103,861 |         |      |          | 164,629 |         |   |            | 242,174 |          
|                                                                                                    | Product and website development (including
    non-cash equity charges, see note 2)       |                                          |          | 21,659  |         |      |          | 30,279  |         |   |            | 35,722  |          
|                                                                                                    | General and administrative (including non-cash
    equity charges, see note 2)            |                                          |          | 67,257  |         |      |          | 84,813  |         |   |            | 174,363 |          
|                                                                                                    | Amortization of goodwill and intangible assets                                            |                                          |          | 22,366  |         |      |          | 37,165  |         |   |            | 199,291 |          
|                                                                                                    | Acquisition and restructuring charges (including
    non-cash equity charges, see note 2) |                                          |          | 4,100   |         |      |          | 12,087  |         |   |            | 50,260  |          
|                                                                                                    | Impairment of long-lived assets                                                           |                                          |          | 29,580  |         |      |          | 7,335   |         |   |            | 925,094 |          
|                                                                                                    | Litigation settlement                                                                     |                                          |          | 63,600  |         |      |          | 23,000  |         |   |            |        |          
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|                                                                                                    |                                                                                           | Total operating expenses                 |          |         | 312,423 |      |          |         | 359,308 |   |            |         | 1,626,904 | 
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|Loss from operations                                                                                |                                                                                           |                                          | (153,974 | )       |         |      | (172,999 | )       |         |   | (1,436,612 | )      
|                                                                                                    | Interest income (expense), net                                                            |                                          |          | (424    | )       |      |          | 2,620   |         |   |            | 10,490  |          
|                                                                                                    | Gain on settlement of distribution agreement                                              |                                          |          | 104,071 |         |      |          |        |         |   |            |        |          
|                                                                                                    | Other income (expense), net                                                               |                                          |          | 673     |         |      |          | (5,682  | )       |   |            | (44,281 | )        
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|Loss from continuing operations                                                                     |                                                                                           |                                          | (49,654  | )       |         |      | (176,061 | )       |         |   | (1,470,403 | )      
|                                                                                                    | Gain on disposition of discontinued operations                                            |                                          |          | 2,530   |         |      |          | 11,790  |         |   |            |        |          
|                                                                                                    | Income from discontinued operations                                                       |                                          |          |        |         |      |          | 846     |         |   |            | 4,814   |          
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|Net loss                                                                                            |                                                                                           | $                                        | (47,124  | )       |         | $    | (163,425 | )       |         | $ | (1,465,589 | )      
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|Basic and diluted net loss per share applicable
    to
    Common Stockholders:                     |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|                                                                                                    | Continuing operations                                                                     |                                          | $        | (.42    | )       |      | $        | (1.49   | )       |   | $          | (13.69  | )        
|                                                                                                    | Discontinued operations                                                                   |                                          | $        | .02     |         |      | $        | .11     |         |   | $          | .04     |          
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|Net loss                                                                                            |                                                                                           | $                                        | (.40     | )       |         | $    | (1.39    | )       |         | $ | (13.64     | )      
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        
|Shares used to calculate basic and diluted net
    loss per share applicable to common stockholders |                                                                                           |                                          | 118,996  |         |         |      | 117,900  |         |         |   | 107,433    |        
|                                                                                                    |                                                                                           |                                          |          |         |         |      |          |         |         |   |            |        

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

71



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##### Table of Contents



HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                              |                                          |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |        |   |  |   |         |   |  |   |        |        |   |   |            |            |   |   |         |            |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------- | --------------- | - | ------------ |  | ---------- | - | -------- |  | ---------- | ------- | ----------- |  | ------------- | --- | ----------- |  | ------------- | --------- | ------- |  | ------ | ------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------ | ------ | - | - | ---------- | ---------- | - | - | ------- | ---------- | -
|                                                                                              |                                          |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |        
|                                                                                              |                                          | Convertible     |   |              |  |            |   |          |  | Notes      |         |             |  | Accumulated   |     |             |  |              
|                                                                                              |                                          | Preferred Stock |   | Common Stock |  | Additional |   |          |  | Receivable |         | Deferred    |  | Other         |     |             |  | Total        
|                                                                                              |                                          |                 |   |              |  | Paid-In    |   | Treasury |  | From       |         | Stock-Based |  | Comprehensive |     | Accumulated |  | Stockholders
|                                                                                              |                                          | Shares          |   | Amount       |  | Shares     |   | Amount   |  | Capital    |         | Stock       |  | Stockholders  |     | Charges     |  | Income (loss) |           | Deficit |  | Equity
|                                                                                              |                                          |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |       
|                                                                                              |                                          |                
|                                                                                              |                                          | (In thousands) 
|Balance at December 31, 2000                                                                  |                                          |                 |  |              |  |            |  |          |  |            | 82,761  |             |  | $             | 83  |             |  | $             | 1,027,423 |         |  | $      | (16,556 | ) |  | $ | (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 |                                          |                 |  |              |  |            |  |          |  |            | 4,427   |             |  |               | 4   |             |  |               | 56,250    |         |  |        |        |   |  |   |       |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | 56,254  |           
|Issuance of common stock for acquisitions                                                     |                                          |                 |  |              |  |            |  |          |  |            | 25,200  |             |  |               | 25  |             |  |               | 887,484   |         |  |        |        |   |  |   |       |   |  |   | (18,454 | ) |  |   |       |        |   |   |           |            |   |   | 869,055 |           
|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     |         |  |        |        |   |  |   |       |   |  |   | (7,434  | ) |  |   |       |        |   |   |           |            |   |   |        |           
|Repayment from stockholders                                                                   |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               |          |         |  |        |        |   |  |   | 2,863  |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | 2,863   |           
|Repurchase of common stock                                                                    |                                          |                 |  |              |  |            |  |          |  |            | (374    | )           |  |               |    |             |  |               |          |         |  |        | (1,506  | ) |  |   | 1,506  |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   |        |           
|Deferred stock- based charges                                                                 |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | 2,954     |         |  |        |        |   |  |   |       |   |  |   | (2,954  | ) |  |   |       |        |   |   |           |            |   |   |        |           
|Stock-based charges                                                                           |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | 5,600     |         |  |        |        |   |  |   |       |   |  |   | 39,216  |   |  |   |       |        |   |   |           |            |   |   | 44,816  |           
|Exercise of warrants                                                                          |                                          |                 |  |              |  |            |  |          |  |            | 90      |             |  |               |    |             |  |               | 248       |         |  |        |        |   |  |   |       |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | 248     |           
|Reclassification to prepaid distribution expense
    and other assets (see note 2)            |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | 17        |         |  |        |        |   |  |   |       |   |  |   | 75,658  |   |  |   |       |        |   |   |           |            |   |   | 75,675  |           
|                                                                                              |                                          |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |        |   |  |   |         |   |  |   |        |        |   |   |            |            |   |   |         |           
|Balance at December 31, 2001                                                                  |                                          |                 |  |              |  |            |  |          |  |            | 117,509 |             |  |               | 117 |             |  |               | 1,987,405 |         |  |        | (18,062 | ) |  |   | (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 |                                          |                 |  |              |  |            |  |          |  |            | 707     |             |  |               | 1   |             |  |               | 895       |         |  |        |        |   |  |   |       |   |  |   | (90     | ) |  |   |       |        |   |   |           |            |   |   | 806     |           
|Settlement of stock issuance obligation                                                       |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | (521      | )       |  |        |        |   |  |   |       |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | (521    | )         
|Issuance of common stock                                                                      |                                          |                 |  |              |  |            |  |          |  |            | 117     |             |  |               |    |             |  |               | 141       |         |  |        | (57     | ) |  |   |       |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | 84      |           
|Repayment from stockholders                                                                   |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               |          |         |  |        |        |   |  |   | 3,463  |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | 3,463   |           
|Repurchase of common stock                                                                    |                                          |                 |  |              |  |            |  |          |  |            | (127    | )           |  |               |    |             |  |               |          |         |  |        | (169    | ) |  |   |       |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | (169    | )         
|Reversal of stock- based charges related to
    dispositions                                  |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | (2,124    | )       |  |        |        |   |  |   |       |   |  |   | 1,502   |   |  |   |       |        |   |   |           |            |   |   | (622    | )         
|Stock-based charges                                                                           |                                          |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | 4,959     |         |  |        |        |   |  |   |       |   |  |   | 8,034   |   |  |   |       |        |   |   |           |            |   |   | 12,993  |           
|Shares returned from escrow relating to
    discontinued operations                           |                                          |                 |  |              |  |            |  |          |  |            | (367    | )           |  |               |    |             |  |               |          |         |  |        | (279    | ) |  |   |       |   |  |   |        |   |  |   |       |        |   |   |           |            |   |   | (279    | )         
|                                                                                              |                                          |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |        |   |  |   |         |   |  |   |        |        |   |   |            |            |   |   |         |           
|Balance at December 31, 2002                                                                  |                                          |                 |  |              |  |            |  |          |  |            | 117,839 |             |  |               | 118 |             |  |               | 1,990,755 |         |  |        | (18,567 | ) |  |   | (106   | ) |  |   | (2,246  | ) |  |   | (424   | )      |   |   | (1,930,800 | )          |   |   | 38,730  |           
|                                                                                              |                                          |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |        |   |  |   |         |   |  |   |        |        |   |   |            |            |   |   |         |           

72



---



##### Table of Contents



HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |      |   |  |   |        |   |  |   |      |     |  |   |            |         |   |   |        |         |  
|--------------------------------------------------------------------------------------------- | -------------------------------------- | --------------- | - | ------------ |  | ---------- | - | -------- |  | ---------- | ------- | ----------- |  | ------------- | --- | ----------- |  | ------------- | --------- | ------- |  | ------ | ------- | - |  | - | ---- | - |  | - | ------ | - |  | - | ---- | --- |  | - | ---------- | ------- | - | - | ------ | ------- | -
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |        
|                                                                                              |                                        | Convertible     |   |              |  |            |   |          |  | Notes      |         |             |  | Accumulated   |     |             |  |              
|                                                                                              |                                        | Preferred Stock |   | Common Stock |  | Additional |   |          |  | Receivable |         | Deferred    |  | Other         |     |             |  | Total        
|                                                                                              |                                        |                 |   |              |  | Paid-In    |   | Treasury |  | From       |         | Stock-Based |  | Comprehensive |     | Accumulated |  | Stockholders
|                                                                                              |                                        | Shares          |   | Amount       |  | Shares     |   | Amount   |  | Capital    |         | Stock       |  | Stockholders  |     | Charges     |  | Income (loss) |           | Deficit |  | Equity
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |       
|                                                                                              |                                        |                
|                                                                                              |                                        | (In thousands) 
|Balance at December 31, 2002                                                                  |                                        |                 |  |              |  |            |  |          |  |            | 117,839 |             |  |               | 118 |             |  |               | 1,990,755 |         |  |        | (18,567 | ) |  |   | (106 | ) |  |   | (2,246 | ) |  |   | (424 | )   |  |   | (1,930,800 | )       |   |   | 38,730 |        
|Comprehensive income (loss):                                                                  |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |      |   |  |   |        |   |  |   |      |     |  |   |            |         |   |   |        |        
|                                                                                              | Net loss                               |                 |   |             |  |            |   |         |  |            |         |            |  |               |     |            |  |               |           |        |  |        |         |  |  |   |      |  |  |   |        |  |  |   |      |    |  |   |            | (47,124 | ) |   |        | (47,124 | )
|                                                                                              | Realized loss on marketable securities |                 |   |             |  |            |   |         |  |            |         |            |  |               |     |            |  |               |           |        |  |        |         |  |  |   |      |  |  |   |        |  |  |   |      | 180 |  |   |            |        |   |   |        | 180     |  
|                                                                                              | Foreign currency translation           |                 |   |             |  |            |   |         |  |            |         |            |  |               |     |            |  |               |           |        |  |        |         |  |  |   |      |  |  |   |        |  |  |   |      | 511 |  |   |            |        |   |   |        | 511     |  
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |      |   |  |   |        |   |  |   |      |     |  |   |            |         |   |   |        |        
|                                                                                              | Comprehensive loss                     |                 |   |             |  |            |   |         |  |            |         |            |  |               |     |            |  |               |           |        |  |        |         |  |  |   |      |  |  |   |        |  |  |   |      | 691 |  |   |            | (47,124 | ) |   |        | (46,433 | )
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |      |   |  |   |        |   |  |   |      |     |  |   |            |         |   |   |        |        
|Issuance of common stock under employee stock
    purchase plan and exercise of stock options |                                        |                 |  |              |  |            |  |          |  |            | 2,838   |             |  |               | 3   |             |  |               | 3,299     |         |  |        |        |   |  |   |     |   |  |   |       |   |  |   |     |     |  |   |           |         |   |   | 3,302  |        
|Settlement of stock issuance obligation                                                       |                                        |                 |  |              |  |            |  |          |  |            | 168     |             |  |               |    |             |  |               |          |         |  |        |        |   |  |   |     |   |  |   |       |   |  |   |     |     |  |   |           |         |   |   |       |        
|Issuance of restricted stock                                                                  |                                        |                 |  |              |  |            |  |          |  |            | 436     |             |  |               | 1   |             |  |               | 343       |         |  |        |        |   |  |   |     |   |  |   | (344   | ) |  |   |     |     |  |   |           |         |   |   |       |        
|Repayment from stockholders                                                                   |                                        |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               |          |         |  |        |        |   |  |   | 68   |   |  |   |       |   |  |   |     |     |  |   |           |         |   |   | 68     |        
|Repurchase and retirement of treasury stock                                                   |                                        |                 |  |              |  |            |  |          |  |            | (12     | )           |  |               |    |             |  |               | (4,416    | )       |  |        | 4,386   |   |  |   |     |   |  |   | 30     |   |  |   |     |     |  |   |           |         |   |   |       |        
|Repurchase of common stock                                                                    |                                        |                 |  |              |  |            |  |          |  |            | (31     | )           |  |               |    |             |  |               |          |         |  |        | (38     | ) |  |   | 38   |   |  |   |       |   |  |   |     |     |  |   |           |         |   |   |       |        
|Stock-based charges                                                                           |                                        |                 |  |              |  |            |  |          |  |            |        |             |  |               |    |             |  |               | 2,610     |         |  |        |        |   |  |   |     |   |  |   | 2,302  |   |  |   |     |     |  |   |           |         |   |   | 4,912  |        
|Shares returned from escrow relating to
    discontinued operations                           |                                        |                 |  |              |  |            |  |          |  |            | (367    | )           |  |               |    |             |  |               |          |         |  |        | (251    | ) |  |   |     |   |  |   |       |   |  |   |     |     |  |   |           |         |   |   | (251   | )      
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |      |   |  |   |        |   |  |   |      |     |  |   |            |         |   |   |        |        
|Balance at December 31, 2003                                                                  |                                        |                 |  |              |  | $          |  |          |  |            | 120,871 |             |  | $             | 122 |             |  | $             | 1,992,591 |         |  | $      | (14,470 | ) |  | $ |     |   |  | $ | (258   | ) |  | $ | 267  |     |  | $ | (1,977,924 | )       |   | $ | 328    |        
|                                                                                              |                                        |                 |   |              |  |            |   |          |  |            |         |             |  |               |     |             |  |               |           |         |  |        |         |   |  |   |      |   |  |   |        |   |  |   |      |     |  |   |            |         |   |   |        |        

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

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HOMESTORE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |         |         |         |  
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | -------- | ------- | ------- | -------- | ------ | ------- | ------- | ---------- | ------- | ------- | ------- | -
|                                                                                                             |                                                                                                   |                                      
|                                                                                                             |                                                                                                   | Year Ended December 31,              
|                                                                                                             |                                                                                                   |                                      
|                                                                                                             |                                                                                                   | 2003                                  |                                                         | 2002     |         | 2001   
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |        
|                                                                                                             |                                                                                                   |                                      
|                                                                                                             |                                                                                                   | (In thousands)                       
|Cash flows from continuing operating
    activities:                                                         |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Loss from continuing operations                                                                              |                                                                                                   | $                                     | (49,654                                                 | )        |         | $       | (176,061 | )      |         | $       | (1,470,403 | )      
|Adjustments to reconcile net loss to net cash
    used in continuing operating activities:                   |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|                                                                                                             | Depreciation                                                                                      |                                       |                                                         | 11,906   |         |         |          | 14,397 |         |         |            | 24,900  |        
|                                                                                                             | Amortization of goodwill and intangible assets                                                    |                                       |                                                         | 22,366   |         |         |          | 37,165 |         |         |            | 199,291 |        
|                                                                                                             | Accretion of distribution obligation                                                              |                                       |                                                         |         |         |         |          | 14,812 |         |         |            | 14,812  |        
|                                                                                                             | Impairment of long-lived assets                                                                   |                                       |                                                         | 29,580   |         |         |          | 7,335  |         |         |            | 925,094 |        
|                                                                                                             | Provision for doubtful accounts                                                                   |                                       |                                                         | 2,248    |         |         |          | 5,115  |         |         |            | 29,990  |        
|                                                                                                             | Stock-based charges                                                                               |                                       |                                                         | 7,249    |         |         |          | 66,907 |         |         |            | 80,625  |        
|                                                                                                             | Gain on settlement of distribution agreement                                                      |                                       |                                                         | (104,071 | )       |         |          |       |         |         |            |        |        
|                                                                                                             | Write-down of investments                                                                         |                                       |                                                         |         |         |         |          |       |         |         |            | 30,744  |        
|                                                                                                             | Acquisition and restructuring charges                                                             |                                       |                                                         |         |         |         |          |       |         |         |            | 12,553  |        
|                                                                                                             | Realized loss on sale of marketable securities                                                    |                                       |                                                         | 180      |         |         |          | 3,168  |         |         |            |        |        
|                                                                                                             | Write-off of capitalized software                                                                 |                                       |                                                         |         |         |         |          | 2,849  |         |         |            |        |        
|                                                                                                             | Other non-cash items                                                                              |                                       |                                                         | 405      |         |         |          | 1,938  |         |         |            | 1,751   |        
|                                                                                                             | Changes in operating assets and liabilities, net
    of acquisitions and discontinued operations: |                                       |                                                         |          |         |         |          |        |         |         |            |         |        
|                                                                                                             |                                                                                                   | Accounts receivable                   |                                                         |          | 9,120   |         |          |        | (1,240  | )       |            |         | (11,502 | )      
|                                                                                                             |                                                                                                   | Prepaid distribution expense          |                                                         |          | 20,787  |         |          |        | 10,869  |         |            |         | (445    | )      
|                                                                                                             |                                                                                                   | Other assets                          |                                                         |          | (1,614  | )       |          |        | 4,782   |         |            |         | 12,498  |        
|                                                                                                             |                                                                                                   | Accounts payable and accrued expenses |                                                         |          | 33,784  |         |          |        | (54,938 | )       |            |         | 66,567  |        
|                                                                                                             |                                                                                                   | Accrued distribution agreement        |                                                         |          | (22,069 | )       |          |        |        |         |            |         |        |        
|                                                                                                             |                                                                                                   | Deferred revenue                      |                                                         |          | 3,783   |         |          |        | (10,679 | )       |            |         | (8,418  | )      
|                                                                                                             |                                                                                                   | Deferred revenue from related parties |                                                         |          | (6,657  | )       |          |        | (23,436 | )       |            |         | 34,331  |        
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|                                                                                                             |                                                                                                   |                                       | Net cash used in continuing operating activities        |          |         | (42,657 | )        |        |         | (97,017 | )          |         |         | (57,612 | )
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Cash flows from investing
    activities:                                                                    |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Purchases of property and equipment                                                                          |                                                                                                   |                                       | (9,422                                                  | )        |         |         | (3,289   | )      |         |         | (61,502    | )      
|Purchases of short-term investments                                                                          |                                                                                                   |                                       | (21,575                                                 | )        |         |         |         |        |         |         | (86,176    | )      
|Maturities of short-term investments                                                                         |                                                                                                   |                                       |                                                        |          |         |         | 14,394   |        |         |         | 147,284    |        
|Proceeds from sales of marketable securities                                                                 |                                                                                                   |                                       | 1,320                                                   |          |         |         | 2,250    |        |         |         |           |        
|Acquisitions, net of cash acquired                                                                           |                                                                                                   |                                       |                                                        |          |         |         |         |        |         |         | (57,100    | )      
|Other assets                                                                                                 |                                                                                                   |                                       |                                                        |          |         |         |         |        |         |         | (326       | )      
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|                                                                                                             |                                                                                                   |                                       | Net cash provided by (used in) investing
    activities |          |         | (29,677 | )        |        |         | 13,355  |            |         |         | (57,820 | )
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Cash flows from financing
    activities:                                                                    |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Proceeds from payment of stockholders notes                                                                 |                                                                                                   |                                       | 61                                                      |          |         |         | 3,463    |        |         |         | 2,862      |        
|Proceeds from exercise of stock options, warrants
    and share issuances under employee stock purchase plan |                                                                                                   |                                       | 3,302                                                   |          |         |         | 800      |        |         |         | 56,501     |        
|Repurchases of common stock                                                                                  |                                                                                                   |                                       |                                                        |          |         |         | (169     | )      |         |         |           |        
|Transfer from restricted cash                                                                                |                                                                                                   |                                       |                                                        |          |         |         | 243      |        |         |         | 4,890      |        
|Repayment of notes payable                                                                                   |                                                                                                   |                                       |                                                        |          |         |         |         |        |         |         | (482       | )      
|Issuance of notes receivable                                                                                 |                                                                                                   |                                       |                                                        |          |         |         |         |        |         |         | (4,777     | )      
|Settlement of stock issuance obligation                                                                      |                                                                                                   |                                       |                                                        |          |         |         | (521     | )      |         |         |           |        
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Net cash provided by financing activities                                                                    |                                                                                                   |                                       | 3,363                                                   |          |         |         | 3,816    |        |         |         | 58,994     |        
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Net cash used in continuing activities                                                                       |                                                                                                   |                                       | (68,971                                                 | )        |         |         | (79,846  | )      |         |         | (56,438    | )      
|Net cash provided by (used in) discontinued
    operations                                                   |                                                                                                   |                                       | 2,450                                                   |          |         |         | 122,037  |        |         |         | (72,866    | )      
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Change in cash and cash equivalents                                                                          |                                                                                                   |                                       | (66,521                                                 | )        |         |         | 42,191   |        |         |         | (129,304   | )      
|Cash and cash equivalents, beginning of period                                                               |                                                                                                   |                                       | 80,463                                                  |          |         |         | 38,272   |        |         |         | 167,576    |        
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        
|Cash and cash equivalents, end of period                                                                     |                                                                                                   | $                                     | 13,942                                                  |          |         | $       | 80,463   |        |         | $       | 38,272     |        
|                                                                                                             |                                                                                                   |                                       |                                                         |          |         |         |          |        |         |         |            |        

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

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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
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, 2003, the Company had an accumulated
deficit of $2.0 billion and cash and short-term investments
of $35.5 million. The Company has no material financial
commitments other than those under capital and operating lease
agreements and distribution and marketing agreements, and
consulting agreements with service providers in connection with
the first phase of implementation of the Companys new
enterprise resource planning system. The Company believes that
its existing cash and short-term investments, 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. The Companys recently announced settlement
of the Securities Class Action Lawsuit (as described in
Note 21) has reduced its cash balance by $10.0 million
during 2003 and will further deplete its cash balance by
$3.0 million in 2004 and increase the number of outstanding
shares by 20.0 million, upon final trial court approval,
which may make it more difficult to raise additional capital.
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 other litigation (See Note 22).

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.

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Cash and Cash Equivalents, Short-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. The Company also invests
in certain auction rate preferred equity and debt securities
that have been classified as short-term investments in the
accompanying balance sheet. The short-term investments are
presented in current assets in the accompanying balance sheets,
as they are intended to meet the short-term working capital
needs of the Company. The Company does not invest in any
long-term investments. It 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, 2003
and 2001, realized gains and losses were insignificant.

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, 2003,
2002 and 2001, revenue from related party arrangements with
Cendant Corporation and Real Estate Technology Trust
(RETT) accounted for approximately 4%, 12% and 13%,
respectively, of the Companys revenue (See Note 12).
No other customer accounted for more than 10% of the
Companys revenue in any year. At December 31, 2002
and 2001, a major customer, a related party, accounted for 24%
and 14% of net accounts receivable, respectively. As of
December 31, 2003 no customer represented more than 5% of
net accounts receivable.

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, 2003 and 2002, total prepaid distribution
primarily consists of prepaid distribution costs related to AOL
of $10.1 and $30.5 million, respectively. These costs are
being amortized over an 18 month period, the term of the
new agreement, ending June 30, 2004 (See Note 21).

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. Amortization of assets recorded under capital leases
is included in depreciation expense and amortized over the life
of the lease. 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,

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 $2.6 million and $2.9 million of
capitalized software costs and $1.9 million and $940,000 of
accumulated amortization included in computer software and
equipment at December 31, 2003 and 2002, respectively.
During 2002, the Company wrote off capitalized software of
approximately $2.8 million. In the fourth quarter of 2003,
the Company recorded an impairment charge of $1.8 million
as a result of a decision made by the Company to terminate the
implementation of one aspect of its enterprise resource planning
system due to revisions in its implementation plan.

Identified Intangibles, Goodwill and other
Long-Lived Assets
Definitive lived 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). 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 respective
reporting units 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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the year ended December 31, 2003,
2002 and 2001, the Company recorded an impairment charge of
$29.6 million, $7.3 million and $925.1 million,
respectively (See Note 5).

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 year ended December 31, 2001, the
Company recorded a charge of $30.7 million 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. This charge
is included in other expense, net in the consolidated statement
of operations.

Revenue
Recognition The Company
derives its revenue primarily from two sources (i) software
revenue, which includes software licenses, software development,
hardware services and support revenue which includes software
maintenance, training, consulting and website hosting revenue
and (ii) advertising revenue for running online advertising
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 recognizes revenue in accordance with
Securities and Exchange Commission Staff Accounting Bulletin
no. 104 Revenue Recognition, and Emerging
Issues Task Force Issue (EITF) 00-21 Revenue
Arrangements with Multiple Deliverables. Revenue is
recognized only when persuasive evidence

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of an arrangement exists, delivery has occurred
or services have been rendered, the price is fixed or
determinable and collectibility is reasonably assured.

The Company assesses collection 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. Cash received in advance is recorded as deferred revenue
until earned.

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.

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 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 as subscriptions, and
accordingly, revenue is deferred and recognized ratably over the
term of the contract which is typically based on a one-year
renewable term.

The Company recognizes revenue from maintenance
services 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 estimated 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 estimated 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. Percentage of completion projects ceased to become a
material amount of the Companys revenue in 2003.

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 2003 and 2002 and there was no
revenue from these types of transactions during the year ended
December 31, 2003 and 2002. During the year ended
December 31, 2001, revenue from equity-for-services and
advertising barter transactions was less than 5% of revenue.

Shipping and Handling Income and
Costs The Company accounts
for income and costs related to shipping and handling activities
in accordance with the EITF Issue No. 00-10,
Accounting for Shipping and Handling Revenues and
Costs. Income from shipping and handling is included with
revenue. Associated costs of shipping and handling are included
in cost of revenue.

Advertising
Expense Advertising costs
are expensed as incurred and totaled $22.9 million,
$6.6 million and $31.5 million during the years ended
December 31, 2003, 2002 and 2001, 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 2003, 2002 and 2001, the pro forma amounts of
the Companys net loss and net loss per share for the years
ended December 31, 2003, 2002 and 2001 would have been as
follows (in thousands, except per share amounts):

|                                            |                                                                                                        |      |   |         |   |      |   |          |   |  |   |            |  
|------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---- | - | ------- | - | ---- | - | -------- | - |  | - | ---------- | -
|                                            |                                                                                                        | 2003 |   | 2002    |   | 2001
|                                            |                                                                                                        |      |   |         |   |     
|Net loss applicable to common stockholders: |                                                                                                        |      |   |         |   |      |   |          |   |  |   |           
|                                            | As reported                                                                                            |      | $ | (47,124 | ) |      | $ | (163,425 | ) |  | $ | (1,465,589 | )
|                                            | Add: Stock-based employee compensation charges
    included in reported net loss                       |      |   | 3,069   |   |      |   | 7,021    |   |  |   | 8,741      |  
|                                            | Deduct: Total stock-based compensation determined
    under the fair value-based method for all awards |      |   | (20,067 | ) |      |   | (29,798  | ) |  |   | (92,965    | )
|                                            |                                                                                                        |      |   |         |   |      |   |          |   |  |   |           
|                                            | Pro forma net loss                                                                                     |      | $ | (64,122 | ) |      | $ | (186,202 | ) |  | $ | (1,549,813 | )
|                                            |                                                                                                        |      |   |         |   |      |   |          |   |  |   |           
|Net loss per share  basic and diluted:     |                                                                                                        |      |   |         |   |      |   |          |   |  |   |           
|                                            | As reported                                                                                            |      | $ | (.40    | ) |      | $ | (1.39    | ) |  | $ | (13.64     | )
|                                            | Pro forma                                                                                              |      | $ | (.54    | ) |      | $ | (1.58    | ) |  | $ | (14.43     | )

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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
|                          |  |            
|                          |  | 2003        |     | 2002 |  | 2001
|                          |  |             |     |      |  |     
|Risk-free interest rates  |  |             | 3   | %    |  |      | 4   | % |  |  | 5   | %
|Expected lives (in years) |  |             | 4   |      |  |      | 4   |   |  |  | 4   |  
|Dividend yield            |  |             | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected volatility       |  |             | 144 | %    |  |      | 147 | % |  |  | 115 | %

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,
|                                      |  |                        
|                                      |  | 2003                    |       | 2002 |  | 2001
|                                      |  |                         |       |      |  |     
|Revenue                               |  | $                       | 1,119 |      |  | $    | 1,501  |  |  | $ | 2,456  | 
|Cost of revenue                       |  |                         | 16    |      |  |      | 134    |  |  |   | 383    | 
|Sales and marketing                   |  |                         | 3,795 |      |  |      | 63,848 |  |  |   | 71,188 | 
|Product and website development       |  |                         | 15    |      |  |      | 127    |  |  |   | 361    | 
|General and administrative            |  |                         | 164   |      |  |      | 1,297  |  |  |   | 6,237  | 
|Acquisition and restructuring charges |  |                         | 2,140 |      |  |      |       |  |  |   |       | 
|                                      |  |                         |       |      |  |      |        |  |  |   |        | 
|                                      |  | $                       | 7,249 |      |  | $    | 66,907 |  |  | $ | 80,625 | 
|                                      |  |                         |       |      |  |      |        |  |  |   |        | 

Stock-based charges for the years ended
December 31, 2003, 2002 and 2001 include $0 million,
$37.2 million and $37.2 million, respectively, of
amortization related to the AOL distribution agreement, and
$2.3 million, $17.9 million and $27.4 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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with stock options, warrants and convertible
preferred stock are not included to the extent they are
anti-dilutive.

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

Comprehensive
Income Comprehensive
income is defined as the change in equity of a business
enterprise during a period from transactions and other events
and circumstances from non-owner 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 July 2002,
the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards
(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 requires 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
adoption of SFAS No. 146 in the first quarter of 2003 did
not have a material impact on the Companys financial
position, results of operations or cash flows.

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51
(FIN 46). FIN 46 provides guidance for
determining whether and how to consolidate variable interest
entities (VIEs). Variable interests are contractual,
ownership or other interests in an entity that expose their
holders to the risks and rewards of the VIE. Variable interests
include equity investments, loans, leases, derivatives,
guarantees and other instruments whose values change with
changes in the VIEs assets. Any of these instruments may
require its holder to consolidate the VIE. FIN 46 requires
certain VIEs to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for all
new VIEs created or acquired after January 31, 2003. For
entities created before January 31, 2003, the provisions of
FIN 46 have been delayed until March 31, 2004. The
Company does not expect the adoption of this statement in the
first quarter of 2004 to have a material impact on the
Companys consolidated financial position, results of
operations or financial statement disclosures.

In January 2003, the EITF issued Issue
No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. This consensus addresses certain
aspects of accounting by a vendor of arrangements

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. The adoption of EITF
No. 00-21 in the second quarter of 2003, did not have a
material impact on the Companys consolidated financial
position, results of operations or cash flows.

3.     Discontinued
Operations

On March 19, 2002, the Company entered into
an agreement to sell its ConsumerInfo division which the Company
purchased as part of the acquisition of iPlace, Inc.
(iPlace) for $130.0 million in cash to Experian
Holdings, Inc. (Experian). The transaction closed on
April 2, 2002 resulting in a gain on disposition of
discontinued operations. The sale generated net proceeds of
approximately $117.1 million after transaction fees and
monies placed in escrow before the settlement described below.

On March 26, 2002, MemberWorks Inc.
(MemberWorks), one of the former owners of iPlace,
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 on the sale of ConsumerInfo. 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 for all periods presented
reflect the disposition of its ConsumerInfo division as
discontinued operations. Accordingly, the revenue, costs and
expenses, and cash flows of the ConsumerInfo division 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. To date $14.3 million 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. In
April 2003, $2.3 million of escrow proceeds were released
to the Company in accordance with the agreement and was
recognized as additional Gain on disposition of
discontinued operations in 2003. As of December 31,
2003, cash subject to the escrow was $7.2 million. To the
extent the escrow is released to the Company, the Company will
recognize additional gain on disposition of discontinued
operations. The escrow was scheduled to terminate in the fourth
quarter of 2003, but in the third quarter of 2003, Experian
demanded indemnification from the Company for several claims
made against Experian or its subsidiaries. The Company is
evaluating these indemnity claims and is unable to express an
opinion at this time as to their merits, however, these
potential claims against the escrow could reduce or delay the
release. 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 income from
discontinued operations was $21.3 million and
$4.8 million, respectively, for the year ended
December 31, 2001.

As a result of the Companys initial
purchase of iPlace, the Company had a claim against the original
escrow established at the time of acquisition. In the fourth
quarter of 2002, the Company reached a settlement of that claim
with the largest former shareholder and extended that settlement
offer to other former shareholders. As a result of the
acceptance of that offer by a number of shareholders, the
Company received cash and stock valued at $230,000 and
$1,029,000 in the years ended December 31, 2003 and 2002,
respectively, and recorded a gain on disposition of discontinued
operations during those same periods.

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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):

|                         |                                                               |              |       |       |   |   |         |         |  
|------------------------ | ------------------------------------------------------------- | ------------ | ----- | ----- | - | - | ------- | ------- | -
|                         |                                                               |             
|                         |                                                               | Years Ended 
|                         |                                                               | December 31,
|                         |                                                               |             
|                         |                                                               | 2003         |       | 2002 
|                         |                                                               |              |       |      
|Gross proceeds from sale |                                                               | $            | 2,300 |       |   | $ | 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 |              |       | (230  | ) |   |         | (1,029  | )
|                         |                                                               |              |       |       |   |   |         |        
|                         | Gain recognized on the sale                                   |              | $     | 2,530 |   |   | $       | 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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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. During the year ended
December 31, 2002, the Company revised its estimates
relating to a lease obligation and took an additional
$6.5 million charge. The Company also reduced its estimates
for employee termination pay by $396,000 and its contractual
obligations by $798,000 in 2002. 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 believed in 2002,
it would 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. Because the Company now believes it will take at
least one year longer than it originally estimated to sublease
the last one-third of the San Francisco property, in the fourth
quarter of 2003, the Company took an additional charge of
$1.3 million. As of December 31, 2003, two of the
planned 700 employees have not yet been paid severance.

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##### Table of Contents



HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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  |  
|Cash paid                                  |  |             | (6     | )           |  |            | (4,970 | )           |  |       |        |   |  |   | (576   | ) |  |   | (5,552  | )
|Change in estimates                        |  |             | (10    | )           |  |            | 1,290  |             |  |       |        |   |  |   | (203   | ) |  |   | 1,077   |  
|Non-cash charges                           |  |             |       |             |  |            |       |             |  |       |        |   |  |   |       |   |  |   |        |  
|Sale of a subsidiary                       |  |             |       |             |  |            |       |             |  |       |        |   |  |   |       |   |  |   |        |  
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  
|Restructuring accrual at December 31, 2003 |  | $           | 11     |             |  | $          | 10,000 |             |  | $     |        |   |  | $ | 384    |   |  | $ | 10,395  |  
|                                           |  |             |        |             |  |            |        |             |  |       |         |   |  |   |        |   |  |   |         |  

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, 2003 will be paid during 2004. 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 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, 2003, all of the planned
270 employees have 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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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  |  
|Cash paid                                  |  |             | (12    | )           |  |            | (387  | )     |  |   |     |   |  |   | (399   | )
|Change in estimates                        |  |             | (14    | )           |  |            | 46    |       |  |   |     |   |  |   | 32     |  
|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  
|Restructuring accrual at December 31, 2003 |  | $           |       |             |  | $          | 1,365 |       |  | $ |     |   |  | $ | 1,365  |  
|                                           |  |             |        |             |  |            |       |       |  |   |      |   |  |   |        |  

All of the remaining restructuring liabilities at
December 31, 2003 are related to lease obligations and will
be paid through 2006. 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, 2003, all of the planned
190 employees have been terminated and 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.

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  |  
|Cash paid                                  |  |             | (268   | )           |  |       | (1,119 | ) |  |   | (1,387 | )
|Change in estimates                        |  |             | (132   | )           |  |       | (417   | ) |  |   | (549   | )
|                                           |  |             |        |             |  |       |        |   |  |   |        |  
|Restructuring accrual at December 31, 2003 |  | $           |       |             |  | $     | 244    |   |  | $ | 244    |  
|                                           |  |             |        |             |  |       |        |   |  |   |        |  

Substantially all of the remaining restructuring
liabilities at December 31, 2003 will be paid in 2004.

In the fourth quarter of 2003, the Companys
Board of Directors approved a further restructuring and
integration plan, with the objective of eliminating duplicate
resources and redundancies.

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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 operations
and elected to change its management structure and identified
and notified approximately 95 employees whose positions
with the Company were eliminated. The work force reductions
affected approximately 7 in research and development, 17 in
production, 37 in sales and marketing and 34 in administrative
functions. As of December 31, 2003, all of the planned
95 employees have been terminated and a total of 17 have
not yet been paid severance.

In connection with this restructuring and
integration plan, the Company recorded a charge of
$3.5 million in the fourth quarter of 2003, which was
included in the acquisition and restructuring charges line in
the consolidated statement of operations. This charge consists
of employee termination benefits of $1.4 million and
stock-based charges related the acceleration of vesting of
certain options for terminated management personnel of
approximately $2.1 million.

A summary of activity related to the fourth
quarter 2003 restructuring charge is as follows (in thousands):

|                                           |  |             |       |             |  |       |        |   |  |   |        |  
|------------------------------------------ |  | ----------- | ----- | ----------- |  | ----- | ------ | - |  | - | ------ | -
|                                           |  |             |       | Stock-based |  |      
|                                           |  | Employee    |       | Charges for |  |      
|                                           |  | Termination |       | Accelerated |  |      
|                                           |  | Benefits    |       | Vesting     |  | Total
|                                           |  |             |       |             |  |      
|Initial restructuring charge               |  | $           | 1,401 |             |  | $     | 2,140  |   |  | $ | 3,541  |  
|Cash paid                                  |  |             | (511  | )           |  |       |       |   |  |   | (511   | )
|Non-cash charges                           |  |             |      |             |  |       | (2,140 | ) |  |   | (2,140 | )
|                                           |  |             |       |             |  |       |        |   |  |   |        |  
|Restructuring accrual at December 31, 2003 |  | $           | 890   |             |  | $     |       |   |  | $ | 890    |  
|                                           |  |             |       |             |  |       |        |   |  |   |        |  

Substantially all of the remaining restructuring
liabilities at December 31, 2003 will be paid in 2004.



|   |                                
|-- | -------------------------------
|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 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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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.

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.

In the third quarter of 2003, 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
included certain business units continuing to perform below
managements expectations. Pursuant to SFAS Nos. 144 and
142, the Company performed an impairment analysis. 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
$15.7 million in the third quarter of 2003 comprised of
impairments of $11.8 million of identifiable intangible
assets relating to the Companys acquisitions of
SpringStreet and Move.com, Inc., $2.6 million of
intangibles, goodwill and property and equipment relating to the
acquisition of Computer for Tracts (CFT) and
$1.3 million of prepaid distribution expense.

In the third quarter of 2003, in conjunction with
the settlement of the dispute with Cendant Corporation and
certain of its affiliates (collectively Cendant) as
described in Note 21, the Company relinquished

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

certain exclusive data rights and rights under
other agreements that were entered into at the time of the
acquisition of Move.com, Inc. and Welcome Wagon International,
Inc. (collectively the Move.com Group). As a result
of the surrender of those rights, certain intangible assets
associated with those rights no longer have value to the
Company, and, accordingly, the Company recorded an impairment
charge of $12.2 million in the year ended December 31,
2003.

In the fourth quarter of 2003 pursuant to SFAS
No. 142 the Company performed its annual review of the
valuation of its goodwill 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 from 14% to 18%. The Companys impairment
analysis did not result in a charge.

In the fourth quarter of 2003, specific events
and changes in circumstances indicated a potential impairment.
Those specific events included the Company revising its
implementation plan of its enterprise resource planning system.
As a result of the revision, the decision was made to terminate
the implementation of one aspect of the application. This
decision resulted in a charge of $1.8 million.

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, 2003 and 2002, the Company had net goodwill of
$975,000 and net intangible assets of zero.

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, 473,538 shares
exchangeable into the Companys common stock with an
estimated fair value of $12.1 million, and an amount
contingent on future performance of Top Producer. Because the
exchangeable shares vested over a three-year period and were
contingent upon the Top Producers chief executive
officers employment over a three-year period, 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, and set
at a fixed amount of $10.2 million payable in installments
of cash or stock, at the Companys option, of
$3.1 million, $2.8 million and $4.3 million in
2002, 2003 and 2004, respectively. Recognition of this fixed
obligation resulted in an increase in goodwill and accrued
expenses. The

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company paid the $3.1 million 2002
installment in cash. The Company has not yet paid the 2003
installment. 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, 2003 and 2002, the Company had net goodwill
of $11.7 million and net intangible assets of
$2.6 million and $4.6 million, respectively (See Note
22).

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, the Company had net goodwill
of $1.5 million. During the first quarter of 2003, the
Company sold the assets of Hessel (See Note 5).

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,
2003 and 2002.

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
three to five years. At December 31, 2003 there was no
value for goodwill. At December 31, 2002, the Company had
net goodwill of $1.3 million. At December 31, 2003
there was no value for net intangible assets and at
December 31, 2002 the Company had net intangible assets of
$1.2 million.

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 and 2002.

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, 2003 and 2002.

Move.com
Group

In February 2001, the Company acquired all of the
outstanding shares of the Move.com Group, from 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. See
Notes 12 and 21.

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,
2003 and 2002, the Company had net goodwill of $2.6 million
and intangible assets of $2.4 million and
$3.5 million, respectively.

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. 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 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 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  
|                                                          |                         | December 31,
|                                                          |                         | 2001        
|                                                          |                         |             
|Revenue                                                   |                         | $            | 338,052    |        
|Net loss                                                  |                         |              | (1,493,039 | )      
|Net loss per share applicable to common
    stockholders: |                         |              |            |        
|Basic and diluted                                         |                         | $            | (13.56     | )      
|                                                          |                         |              |            |        
|                                                          | Weighted average shares |              |            | 110,125 | 
|                                                          |                         |              |            |        

7.     Short-term
Investments

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, 2003 (in thousands):

|                                   |  |           |        |            |  |            |   |            |  |   |   |  |  |   |        | 
|---------------------------------- |  | --------- | ------ | ---------- |  | ---------- | - | ---------- |  | - | - |  |  | - | ------ | 
|                                   |  | Amortized |        | Unrealized |  | Unrealized |   | Estimated 
|                                   |  | Cost      |        | Gains      |  | Losses     |   | Fair Value
|                                   |  |           |        |            |  |            |   |           
|Auction rate preferred instruments |  | $         | 21,575 |            |  | $          |  |            |  | $ |  |  |  | $ | 21,575 | 

The contractual maturities of available-for-sale
debt securities at December 31, 2003 were less than
30 days. 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,
|                                         |  |             
|                                         |  | 2003         |         | 2002
|                                         |  |              |         |     
|Computer software and equipment          |  | $            | 32,275  |      |  | $ | 24,952  |  
|Furniture, fixtures and office equipment |  |              | 4,232   |      |  |   | 4,170   |  
|Leasehold improvements                   |  |              | 5,829   |      |  |   | 5,593   |  
|Machinery and equipment                  |  |              | 638     |      |  |   | 1,066   |  
|Land and building                        |  |              | 5,060   |      |  |   | 5,045   |  
|                                         |  |              |         |      |  |   |         |  
|                                         |  |              | 48,034  |      |  |   | 40,826  |  
|Less: accumulated depreciation           |  |              | (26,580 | )    |  |   | (14,893 | )
|                                         |  |              |         |      |  |   |         |  
|                                         |  | $            | 21,454  |      |  | $ | 25,933  |  
|                                         |  |              |         |      |  |   |         |  

Depreciation expense, excluding discontinued
operations, for the years ended December 31, 2003, 2002 and
2001 was $11.9 million, $14.4 million and
$24.9 million, respectively.

Computer software and equipment above includes
$2.1 million of assets purchased under capital leases at
December 31, 2003.

9.     Goodwill and
Other 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, 2003,
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,
|                                             |                                     |                         
|                                             |                                     | 2003                     |         | 2002    |   | 2001
|                                             |                                     |                          |         |         |   |     
|Reported net loss                            |                                     | $                        | (47,124 | )       |   | $    | (163,425 | )       |   | $ | (1,465,589 | )      
|Add back: goodwill amortization (net of tax) |                                     |                          |        |         |   |      |         |         |   |   | 136,048    |        
|                                             |                                     |                          |         |         |   |      |          |         |   |   |            |        
|Adjusted net loss                            |                                     |                          | (47,124 | )       |   |      | (163,425 | )       |   |   | (1,329,541 | )      
|                                             |                                     |                          |         |         |   |      |          |         |   |   |            |        
|Basic and diluted loss per share:            |                                     |                          |         |         |   |      |          |         |   |   |            |        
|                                             | As reported                         |                          | $       | (.40    | ) |      | $        | (1.39   | ) |   | $          | (13.64  | )
|Add back: goodwill amortization              |                                     |                          |        |         |   |      |         |         |   |   | 1.26       |        
|                                             |                                     |                          |         |         |   |      |          |         |   |   |            |        
|                                             | Adjusted net loss                   |                          | $       | (.40    | ) |      | $        | (1.39   | ) |   | $          | (12.38  | )
|                                             |                                     |                          |         |         |   |      |          |         |   |   |            |        
|                                             | Weighted average shares outstanding |                          |         | 118,996 |   |      |          | 117,900 |   |   |            | 107,433 |  
|                                             |                                     |                          |         |         |   |      |          |         |   |   |            |        

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 adoption of SFAS
No. 142 of $2.7 million. The change in the net
carrying amount of goodwill in the Software segment for the year
ended December 31, 2003 was due to an impairment change
related to CFT and the sale

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of Hessel in 2003. Goodwill by segment, excluding
discontinued operations, as of December 31, 2003 and 2002
is as follows (in thousands):

|               |       |                    |        |        |  |   |        |        | 
|-------------- | ----- | ------------------ | ------ | ------ |  | - | ------ | ------ | 
|               |       |                   
|               |       | As of December 31,
|               |       |                   
|               |       | 2003               |        | 2002  
|               |       |                    |        |       
|Media services |       | $                  | 1,307  |        |  | $ | 1,307  |       
|Software       |       |                    | 12,656 |        |  |   | 15,437 |       
|Print          |       |                    | 6,514  |        |  |   | 6,514  |       
|               |       |                    |        |        |  |   |        |       
|               | Total |                    | $      | 20,477 |  |   | $      | 23,258 | 
|               |       |                    |        |        |  |   |        |       

Definite-lived 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,
|                                                  |       |                   
|                                                  |       |                    |        |             
|                                                  |       | 2003               |        | 2002        
|                                                  |       |                    |        |             
|                                                  |       | Gross              |        | Accumulated  |  | Gross  |        | Accumulated 
|                                                  |       | Amount             |        | Amortization |  | Amount |        | Amortization
|                                                  |       |                    |        |              |  |        |        |             
|Customer lists and relationships                  |       | $                  | 18,786 |              |  | $      | 18,081 |              |  | $ | 27,661 |         |  | $ | 19,231 |       
|Trade name, trademarks, websites and brand names  |       |                    | 19,746 |              |  |        | 4,032  |              |  |   | 23,201 |         |  |   | 3,525  |       
|Online traffic                                    |       |                    | 533    |              |  |        | 320    |              |  |   | 18,636 |         |  |   | 8,601  |       
|Purchased technology                              |       |                    | 9,325  |              |  |        | 6,822  |              |  |   | 11,690 |         |  |   | 6,139  |       
|Purchased content                                 |       |                    | 7,631  |              |  |        | 5,248  |              |  |   | 15,604 |         |  |   | 5,900  |       
|Exclusive electronic listing and rights Agreement |       |                    |       |              |  |        |       |              |  |   | 13,220 |         |  |   | 1,442  |       
|Porting relationships                             |       |                    | 1,728  |              |  |        | 1,220  |              |  |   | 1,728  |         |  |   | 610    |       
|NAR® operating agreement                          |       |                    | 1,578  |              |  |        | 301    |              |  |   | 1,578  |         |  |   | 150    |       
|Other                                             |       |                    | 5,844  |              |  |        | 3,389  |              |  |   | 7,811  |         |  |   | 2,760  |       
|                                                  |       |                    |        |              |  |        |        |              |  |   |        |         |  |   |        |       
|                                                  | Total |                    | $      | 65,171       |  |        | $      | 39,413       |  |   | $      | 121,129 |  |   | $      | 48,358 | 
|                                                  |       |                    |        |              |  |        |        |              |  |   |        |         |  |   |        |       

Amortization expense, excluding discontinued
operations, for intangible assets for the years ended
December 31, 2003, 2002 and 2001 was $22.4 million,
$37.2 million and $63.2 million, respectively.
Amortization expense for the next five years is estimated to be
as follows (in thousands):

|                        |  |        |       | 
|----------------------- |  | ------ | ----- | 
|Year Ended December 31, |  | Amount
|                        |  |       
|2004                    |  |        | 7,894 | 
|2005                    |  |        | 3,587 | 
|2006                    |  |        | 1,834 | 
|2007                    |  |        | 1,423 | 
|2008                    |  |        | 1,423 | 

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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,
|                    |  |             
|                    |  | 2003         |        | 2002
|                    |  |              |        |     
|Prepaid commissions |  | $            | 4,804  |      |  | $ | 5,226  | 
|Other               |  |              | 5,781  |      |  |   | 7,513  | 
|                    |  |              |        |      |  |   |        | 
|                    |  | $            | 10,585 |      |  | $ | 12,739 | 
|                    |  |              |        |      |  |   |        | 

11.     Accrued
Expenses

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

|                                     |  |              |        |      |  |   |        | 
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2003         |        | 2002
|                                     |  |              |        |     
|Accrued payroll and related benefits |  | $            | 14,184 |      |  |   | 14,723 | 
|Accrued royalties                    |  |              | 1,914  |      |  |   | 2,472  | 
|Accrued restructuring charges        |  |              | 6,000  |      |  |   | 8,455  | 
|Accrued professional fees            |  |              | 3,451  |      |  |   | 7,023  | 
|Other                                |  |              | 17,027 |      |  |   | 27,059 | 
|                                     |  |              |        |      |  |   |        | 
|                                     |  | $            | 42,576 |      |  | $ | 59,732 | 
|                                     |  |              |        |      |  |   |        | 

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 (See Note 5). In connection with the
Companys acquisition of the Move.com Group, Cendant
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 for discussion of the
resolution of the dispute.

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 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 $7.7 million, $31.2 million and
$38.3 million related to these transactions was recognized
in 2003, 2002 and 2001, respectively. This revenue was reported
separately as revenue from related parties in these financial
statements. It is not practical to separately determine the
costs of such revenues. During the years ended December 31,
2003, 2002 and 2001, the Company had received approximately
$1.2 million, $12.0 million and $83.3 million of
cash, respectively, and had recorded at December 31, 2003,
2002 and 2001, deferred revenue of approximately
$6.9 million, $13.5 million and $37.0 million,
respectively, related to these agreements. This deferred revenue
will be recognized over the next two to five 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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003, net of its expected
selling costs, at $1.4 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
and 2001, the Company received payments, including accrued
interest, of approximately $3.5 million and
$2.9 million, respectively, in connection with these notes.
Additionally, the Company reacquired 373,959 shares of unvested
common stock at their original issuance price during 2001 in
exchange for the cancellation of the related promissory notes in
the amount of approximately $1.5 million. The outstanding
balance of employee notes, including accrued interest, amounted
to $106,000 at December 31, 2002 and were fully repaid by
December 31, 2003.

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, 2003 balance sheet. The Company has not paid
the 2003 portion of this earnout. See Note 21 for discussion of
litigation with the former owners.

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 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
2003 and 2002 was $1.3 million in each year.

13.     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
the Companys internal organization and disclosure of
revenue and operating expenses based upon internal accounting
methods. As of the beginning of 2003, the Company combined the
previously reported Online Advertising segment with the Media
Services segment as management changed

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the way that the Company manages and evaluates
its businesses. In addition, the Company changed the names of
the Software and Services segment to Software and
the Offline Advertising segment to Print. As a
result of these changes, management now evaluates performance
and allocates resources based on three segments, consisting of
Media Services, Software, and Print. The Company 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; impairment 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.

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

|                                             |                      |                         |         |          |   |      |         |          |   |  |           |            |  
|-------------------------------------------- | -------------------- | ----------------------- | ------- | -------- | - | ---- | ------- | -------- | - |  | --------- | ---------- | -
|                                             |                      |                        
|                                             |                      | Year Ended December 31,
|                                             |                      |                        
|                                             |                      | 2003                    |         | 2002     |   | 2001
|                                             |                      |                         |         |          |   |     
|Revenue:                                     |                      |                         |         |          |   |      |         |          |   |  |           |           
|                                             | Media Services       |                         | $       | 143,510  |   |      | $       | 160,506  |   |  | $         | 193,154    |  
|                                             | Software             |                         |         | 27,806   |   |      |         | 46,804   |   |  |           | 52,560     |  
|                                             | Print                |                         |         | 47,394   |   |      |         | 57,303   |   |  |           | 58,068     |  
|                                             |                      |                         |         |          |   |      |         |          |   |  |           |           
|Total revenue                                |                      |                         | 218,710 |          |   |      | 264,613 |          |   |  | 303,782   |           
|                                             |                      |                         |         |          |   |      |         |          |   |  |           |           
|Cost of revenue and operating expenses:      |                      |                         |         |          |   |      |         |          |   |  |           |           
|                                             | Media Services       |                         |         | 132,961  |   |      |         | 137,642  |   |  |           | 262,504    |  
|                                             | Software             |                         |         | 32,963   |   |      |         | 53,506   |   |  |           | 54,667     |  
|                                             | Print                |                         |         | 49,000   |   |      |         | 57,110   |   |  |           | 50,887     |  
|                                             | Unallocated          |                         |         | 157,660  |   |      |         | 189,354  |   |  |           | 1,372,337  |  
|                                             |                      |                         |         |          |   |      |         |          |   |  |           |           
|Total cost of revenue and operating expenses |                      |                         | 372,684 |          |   |      | 437,612 |          |   |  | 1,740,394 |           
|                                             |                      |                         |         |          |   |      |         |          |   |  |           |           
|                                             | Loss from operations |                         | $       | (153,974 | ) |      | $       | (172,999 | ) |  | $         | (1,436,612 | )
|                                             |                      |                         |         |          |   |      |         |          |   |  |           |           

Revenue for the years ended December 31,
2003, 2002 and 2001 included $7.7 million,
$31.2 million and $38.3 million, respectively, of
revenue from a related party, Cendant and RETT (Cendant). The
related party revenue for 2003, 2002 and 2001 consisted of
$5.8 million, $21.0 million and $24.3 million in
Media Services and $1.9 million, $10.2 million and
$14.0 million in Software, respectively.

The Company has one customer, a related party
Cendant, within its Media Services and Software segments
representing approximately 13% and 22%, respectively, of those
segments revenue for the year ended December 31, 2002
and 13% and 27%, respectively, of those segments revenue
for the year ended December 31, 2001. Our revenue from
Cendant was less than 10% in each segment for the year ended
December 31, 2003.

The Company has another customer AOL within its
Media Services segment for the year ended December 31, 2001
representing approximately 5% of that segments revenue.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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 the
aggregate number of shares that qualify as Incentive Stock
Options (as defined in the plan) must not exceed
20.0 million shares. In accordance with the provisions of
the SIP, the number of options available for grant was increased
by 5,439,240 shares, 5,330,104 shares and
5,287,807 shares in January 2004, 2003 and 2002,
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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the activities
under the option plans (including the Move.com Group, HomeWrite
and iPlace options) for the years ended December 31, 2003,
2002 and 2001 (shares in thousands):

|                                 |                                |           |        |                 |   |                |                |                |  |   |       |       | 
|-------------------------------- | ------------------------------ | --------- | ------ | --------------- | - | -------------- | -------------- | -------------- |  | - | ----- | ----- | 
|                                 |                                |           |        |                 |   | Weighted      
|                                 |                                | Number    |        |                 |   | Average       
|                                 |                                | of Shares |        | Price Per Share |   | Exercise Price
|                                 |                                |           |        |                 |   |               
|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  |      
|                                 | Granted                        |           |        | 2,564           |   |                |                | 0.56 to 3.68   |  |   |       | 1.84  | 
|                                 | Exercised                      |           |        | (1,595          | ) |                |                | 0.30 to 3.57   |  |   |       | 1.59  | 
|                                 | Cancelled                      |           |        | (2,735          | ) |                |                | 0.30 to 89.25  |  |   |       | 6.25  | 
|                                 |                                |           |        |                 |   |                |                |                |  |   |       |      
|Outstanding at December 31, 2003 |                                |           | 22,549 |                 |   | $              | 0.30 to $89.25 |                |  | $ | 2.87  |      
|                                 |                                |           |        |                 |   |                |                |                |  |   |       |      

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 of the options.
Common stock available for future grants as of December 31,
2003 was 16.4 million shares.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Additional information with respect to the
outstanding options at December 31, 2003 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           |  |           | 460    |                  |  |                | 8.75 |                     |  | $              | 0.30  |  |  |  | 161    |  |  | $ | 0.30  | 
|0.39            |  |           | 2,400  |                  |  |                | 8.77 |                     |  |                | 0.39  |  |  |  | 1,040  |  |  |   | 0.39  | 
|0.56 to 1.44    |  |           | 2,481  |                  |  |                | 8.72 |                     |  |                | 1.05  |  |  |  | 609    |  |  |   | 1.17  | 
|1.72 to 1.76    |  |           | 12,216 |                  |  |                | 8.07 |                     |  |                | 1.76  |  |  |  | 7,423  |  |  |   | 1.76  | 
|2.07 to 2.25    |  |           | 2,602  |                  |  |                | 8.05 |                     |  |                | 2.25  |  |  |  | 1,366  |  |  |   | 2.24  | 
|2.54 to 33.68   |  |           | 2,263  |                  |  |                | 8.06 |                     |  |                | 11.96 |  |  |  | 920    |  |  |   | 19.41 | 
|34.50 to 68.38  |  |           | 82     |                  |  |                | 6.31 |                     |  |                | 40.68 |  |  |  | 66     |  |  |   | 39.82 | 
|69.63 to 69.63  |  |           | 6      |                  |  |                | 5.91 |                     |  |                | 69.63 |  |  |  | 4      |  |  |   | 69.63 | 
|72.13 to 72.13  |  |           | 33     |                  |  |                | 6.16 |                     |  |                | 72.13 |  |  |  | 25     |  |  |   | 72.13 | 
|89.25 to 89.25  |  |           | 6      |                  |  |                | 6.09 |                     |  |                | 89.25 |  |  |  | 5      |  |  |   | 89.25 | 
|                |  |           |        |                  |  |                |      |                     |  |                |       |  |  |  |        |  |  |   |       | 
|$0.30 to $89.25 |  |           | 22,549 |                  |  |                | 8.22 |                     |  | $              | 2.87  |  |  |  | 11,619 |  |  | $ | 3.47  | 
|                |  |           |        |                  |  |                |      |                     |  |                |       |  |  |  |        |  |  |   |       | 

The weighted-average fair value of options
granted during the years ended December 31, 2003, 2002 and
2001 was $1.58, $1.46 and $18.87, respectively. The total number
of shares exercisable was 11.6 million, 8.0 million
and 5.8 million at December 31, 2003, 2002 and 2001,
respectively. The weighted average exercise price at those dates
was $3.47, $4.82 and $21.46, respectively.

During 2000, the Company accelerated the vesting
for five employees and re-measured 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. In 2003, as a
result of previously established employment agreements, the
Company accelerated the vesting of 1,162,945 options and
extended the exercise period related to the departure of former
officers and recorded a non-cash charge amounting to $2.6
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 2004, 2003
and 2002, the amount available under the plan was increased by
604,360, 592,234 and 587,534 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 2003, 2002 and 2001, the Company issued 1,243,105,
282,691 and 296,173 shares, respectively, of common stock under
the ESPP at a weighted issuance price of $0.67, $0.77 and $16.18
per share, respectively.

During the year ended December 31, 2003 and
2002, the Company issued 436,588 and 36,000 shares of restricted
stock, respectively, to certain members of the Companys
Board of Directors. The 2002 shares vest over one year and the
2003 shares vest over three years. The charge associated with
the issuance of these shares was $90,000 for the 2002 shares and
$344,000 for the 2003 shares and are being recognized over their
respective 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. These
warrants expired in August 2003.

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. None have been exercised since 2001. These warrants
expired in February 2003.

Throughout 1998 and 1999, the Company issued
warrants to purchase 910,836 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 was recognized as expense over the
term of the applicable MLS agreements, ranging from one to two
years. Through the year ended December 31, 2001, 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. None have been exercised since 2001.

In February 2000, the Company issued warrants to
purchase 460,089 shares of the Companys common stock at an
exercise price of $27.953 per share to the Broker Gold program
members who elected to renew their existing listing agreements
with the Company for an additional two years at the end of their
existing two-year term. All warrants issued were fully vested,
non-forfeitable and were immediately exercisable. The non-cash
charge for the warrants totaled approximately
$21.9 million, which was 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 have
been exercised since 2001. These warrants expired in February
2003.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 31,680 shares of the Companys common stock
at a weighted average exercise 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 was 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 was 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
recognized upon the issuance of the warrant and was not material
to the Companys financial results.

The Company recognized $1.2 million,
$9.4 million and $18.9 million in stock-based charges
for the years ending December 31, 2003, 2002 and 2001,
respectively, in connection with the issuance of all warrants.
At December 31, 2003, warrants to purchase 298,587 shares
of common stock were outstanding with a weighted-average
exercise price of $15.03 per share.

16.     Capitalization

At December 31, 2003, the Company had
authorized the issuance of one share of Series A preferred
stock. At December 31, 2003, 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.

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, the Company repurchased
373,959 shares of common stock for approximately
$1.5 million, 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.

During 2003, the Company repurchased
31,765 shares of common stock for approximately $38,000, in
exchange for the cancellation of notes payable to the Company of
equal value.



| |                         
| | ------------------------
| | Issuance of Common Stock

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, the Company entered into a
five-year distribution agreement with AOL. In exchange for
entering into this agreement, the Company paid AOL
$20.0 million in cash and issued to AOL approximately
3.9 million shares of its common stock. In the agreement,
the Company also guaranteed that the value of 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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 now
offers increased promotion and more prominent integration of the
Companys content in a redesigned real estate area on the
AOL service. The parties continue to share advertising revenue
in certain home-related categories. The Company paid AOL
$7.5 million in cash to terminate the previous agreement
and allowed AOL to fully draw down on the $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 eliminated the
Companys responsibility to provide AOL with an additional
make-whole payment in July 2003. 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 has made or will make quarterly cash
payments of $3.75 million, in six equal installments beginning
January 2003 and ending April 2004.

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

net unamortized deferred balance for this equity
consideration 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 $(487,000),
$(124,000) and $1.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

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 $1.1 million,
$45.7 million and $48.5 million in stock-based charges
in connection with the issuance of common stock for the years
ended December 31, 2003, 2002 and 2001, 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,                       
|             |                                              |                                               
|             |                                              | 2003                                           |   | 2002    |         | 2001
|             |                                              |                                                |   |         |         |     
|Numerator:   |                                              |                                                |   |         |         |      |   |          |          |   |   |           
|             |                                              | Loss from continuing operations                |   | $       | (49,654 | )    |   | $        | (176,061 | ) |   | $          | (1,470,403 | )
|             |                                              | Gain on disposition of discontinued operations |   |         | 2,530   |      |   |          | 11,790   |   |   |            |           |  
|             |                                              | Income from discontinued operations            |   |         |        |      |   |          | 846      |   |   |            | 4,814      |  
|             |                                              |                                                |   |         |         |      |   |          |          |   |   |           
|             | Net loss                                     |                                                | $ | (47,124 | )       |      | $ | (163,425 | )        |   | $ | (1,465,589 | )         
|             |                                              |                                                |   |         |         |      |   |          |          |   |   |           
|Denominator: |                                              |                                                |   |         |         |      |   |          |          |   |   |           
|             | Weighted average shares outstanding          |                                                |   | 118,996 |         |      |   | 117,900  |          |   |   | 107,433    |           
|             |                                              |                                                |   |         |         |      |   |          |          |   |   |           
|             | Basic and diluted earnings (loss) per share: |                                                |   |         |         |      |   |          |          |   |   |            |           
|             | Loss from continuing operations              |                                                | $ | (.42    | )       |      | $ | (1.49    | )        |   | $ | (13.69     | )         
|             | Income from discontinued operations          |                                                | $ | .02     |         |      | $ | .11      |          |   | $ | .04        |           
|             |                                              |                                                |   |         |         |      |   |          |          |   |   |           
|             | Net loss                                     |                                                | $ | (.40    | )       |      | $ | (1.39    | )        |   | $ | (13.64     | )         
|             |                                              |                                                |   |         |         |      |   |          |          |   |   |           

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 22,847,784, 25,056,743 and 15,908,308 for
the years ended December 31, 2003, 2002 and 2001,
respectively.

18.     Supplemental
Cash Flow Information

During the year ended December 31, 2003:



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company paid $103,000 in interest.                                                                                                                                                                                                                                                            
|
| |  | The Company was required to accelerate 1,162,945
    options for terminated former executives and incurred a
    $2,609,000 expense in 2003.                                                                                                                                                      
|
| |  | The Company issued 436,000 shares of restricted
    stock to certain members of the Companys Board of
    Directors. These shares vest over three years. The charge
    associated with the issuance of these shares was $344,000 and is
    being recognized over the three-year vesting period.
|
| |  | The Company funded $2.1 million of capital
    expenditures through an equipment lease financing arrangement.                                                                                                                                                                                     

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.                                                                                                                        

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.                                                                                                                                          

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 and 2002 are as follows (in thousands):

|                                     |                                            |              |         |              |   |   |         |          |  
|------------------------------------ | ------------------------------------------ | ------------ | ------- | ------------ | - | - | ------- | -------- | -
|                                     |                                            | December 31, |         | December 31,
|                                     |                                            | 2003         |         | 2002        
|                                     |                                            |              |         |             
|Deferred tax assets:                 |                                            |              |         |              |   |   |         |         
|                                     | Net operating loss carryforwards           |              | $       | 325,470      |   |   | $       | 209,652  |  
|                                     | Deferred expenses                          |              |         | 60,551       |   |   |         | 96,827   |  
|                                     | Impairment charges                         |              |         | 18,012       |   |   |         | 3,697    |  
|                                     | Other                                      |              |         | 31,187       |   |   |         | 53,491   |  
|                                     |                                            |              |         |              |   |   |         |         
|                                     |                                            |              | 435,220 |              |   |   | 363,667 |         
|                                     | Less: valuation allowance                  |              |         | (422,303     | ) |   |         | (348,793 | )
|                                     |                                            |              |         |              |   |   |         |         
|Net deferred tax assets              |                                            |              | 12,917  |              |   |   | 14,874  |         
|                                     |                                            |              |         |              |   |   |         |         
|Deferred tax liabilities:            |                                            |              |         |              |   |   |         |         
|                                     | Amortization of acquired intangible assets |              |         | (12,917      | ) |   |         | (14,874  | )
|                                     |                                            |              |         |              |   |   |         |         
|Total gross deferred tax liabilities |                                            |              | (12,917 | )            |   |   | (14,874 | )       
|                                     |                                            |              |         |              |   |   |         |         
|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 $73.5 million primarily as a result of a
change in net operating losses offset by the expiration of
deferred tax assets related to certain warrants.

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.

The difference between the statutory tax rate and
the effective tax rate is due to permanent differences and a
valuation allowance placed against the Companys deferred
tax assets.

At December 31, 2003 and 2002, the Company
had net operating losses for federal income tax purposes of
approximately $872.6 million and $569.4 million,
respectively, which begin to expire in 2008. At
December 31, 2003 and 2002, the Company had net operating
losses for state income tax purposes of approximately
$340.6 million and $313.9 million, respectively, which
begin to expire in 2004. 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, 2003 and 2002, the net operating loss
carryforwards includes approximately $62.5 million and
$69.7 million, respectively, related to the exercise of
employee stock options

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and warrants, respectively. Any benefit resulting
from the utilization of this portion of the net operating loss
carryforwards will be credited directly to equity.

21. Settlement of Disputes and
Litigation



| |                          
| | -------------------------
| | Settlement of AOL Dispute

In January 2003, the Company entered into a new
marketing agreement with America Online, Inc. (AOL)
that resolved its dispute with AOL 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 paid AOL $7.5 million in cash to
terminate the previous agreement and allowed AOL to fully draw
down on an existing $90.0 million letter of credit secured
by restricted cash on the Companys Consolidated Balance
Sheet at December 31, 2002. Termination of the previous
agreement also eliminated 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 in
January 2003 and ending in April 2004.

In connection with the settlement with AOL, the
Company reduced its accrued distribution obligation and accrued
expenses by $189.9 million and $4.2 million,
respectively, and allowed AOL to draw down on the
$90.0 million letter of credit. Accordingly, the Company
recorded a gain on settlement of the distribution agreement of
$104.1 million, which is included in other income in the
Consolidated Statement of Operations for the year ended
December 31, 2003.



| |                                                  
| | -------------------------------------------------
| | Settlement of Securities Class Action
    Lawsuit

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 the Companys filings with the SEC, analysts
reports, press releases and media reports. The complaints sought
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 (Securities Class Action Lawsuit)
naming the Company, certain of the Companys current
officers and employees, certain of the Companys former
officers, directors and employees, and various other parties,
including among others MaxWorldwide, Inc.,
PricewaterhouseCoopers LLP, AOL Time Warner, Inc. 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
Time Warner, Inc. and Cendant, among others. The court also
dismissed

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 advised that it does not
intend to amend the complaint. 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 the Company, but answered the complaint. Accordingly,
the March 7, 2003 decision did not make any ruling with
respect to the claims asserted against the Company.

On August 12, 2003, the Company entered into
a settlement agreement with the Plaintiff to resolve all
outstanding claims related to the Securities Class Action
Lawsuit. On October 8, 2003, the District Court
preliminarily approved the settlement. A final hearing on the
settlement was held on January 16, 2004, after delivery of
notice to class members. On February 5, 2004, the court
issued an interim order generally approving the terms of the
settlement as fair, adequate and reasonable, but directing
additional briefing from the parties on two issues:
(1) whether certain objectors proposal to carve
out certain claims from the settlement is feasible;
(2) whether notice to class members was potentially
inadequate because of the short time period given to file their
claims. The court has suggested that the parties consider
allowing additional time for class members to file claims, which
would not affect the total settlement fund. The briefs were
filed February 20, 2004, and the Company expects the court
to determine whether to grant final approval of the settlement
in the near future.

As a part of the settlement, the Company agreed
to pay $13.0 million in cash and issue 20.0 million
new shares of its common stock valued at $50.6 million as of
August 12, 2003. In October 2003, the Company placed $10.0
million in escrow upon preliminary approval by the U.S. District
Court, with an additional $3.0 million due upon final
judicial approval of the settlement. Following this approval,
the $13.0 million and the 20 million shares of newly
issued common stock will be distributed to the class. The
issuance of the shares will be exempt from registration under
Section 3(a)(10) of the Securities Act of 1933. As a result
of the settlement, the Company has recorded a litigation
settlement charge of $63.6 million in its operating results
for the year ended December 31, 2003. In addition, the
Company has agreed to adopt, within thirty days of final
approval of the settlement, certain corporate governance
principles that have been approved by the Board of Directors,
including requirements for independent directors and special
committees, a non-classified Board of Directors with two-year
terms, appointment of a new shareholder-nominated director,
prohibition on the future use of stock options for director
compensation and minimum stock retention by officers after
exercise of future stock option grants. The Company will also
divide evenly with the class any future net proceeds from
insurance with respect to the litigation after provision for
legal expenses incurred against the Company. The Plaintiff has
agreed that any members of the class who participate in the
settlement will release and discharge all claims against the
Company and will request that the court issue a bar order
providing for the maximum protection to which the Company is
entitled under the law with respect to discharge and bar of all
future claims for contribution or indemnity by other persons,
arising out of or in any way related to the action, whether
under federal, state or common law, or any other principle of
law or equity. Several persons who purportedly acquired the
Companys shares during the class period January 1,
2000 through December 21, 2002, representing less than 1%
of our outstanding shares, have notified the Plaintiff that they
wish to be excluded from the settlement.

There are still additional risks to the Company
related to the Securities Class Action Lawsuit. These risks
include failure by the court to finally approve the settlement
and suits by persons who have elected to be excluded from the
settlement or whose claims against us may not be discharged or
barred by the settlement.



| |                              
| | -----------------------------
| | Settlement of Cendant Dispute

In connection with the Companys acquisition
of the Move.com Group, the Company entered into a series of
agreements with Cendant that, among other things, provided the
Company with certain promotion and exclusive data rights and
placed certain restrictions on Cendants ability to dispose
of the Companys

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares. In connection with the Companys
acquisition of the Move.com Group, Cendant previously alleged
that the Company breached certain representations and warranties
made in the acquisition agreement as a result of the restatement
of the Companys consolidated financial statements for the
year ended December 31, 2000 and the first three quarters
of 2001. On August 5, 2003, the Company and Cendant settled
potential claims relating to the Companys acquisition of
the Move.com Group and entered into certain new agreements with
Cendant. The settlement terminated certain existing arrangements
between the Company and Cendant and resulted in several new
arrangements between the parties. The following summarizes the
material terms of the settlement.

Settlement Agreement.Under the terms of the Settlement
Agreement, Cendant agreed not to sue the Company or its
officers, directors and other related parties with respect to
the acquisition of the Move.com Group and the prior restatement
of the Companys consolidated financial statements.
However, in the circumstances described below, Cendant retains
the right to sue the Company for contribution, indemnification,
or similar relief if Cendant is held liable for or settles
claims against it in the Securities Class Action Lawsuit up to
the amount for which it is held liable or for which it settles.

As discussed below under Settlement of
Securities Class Action Lawsuit, on March 7, 2003,
the court in the Securities Class Action Lawsuit dismissed with
prejudice Cendant as a defendant. However, that dismissal is
subject to appeal to the United States Court of Appeals for the
Ninth Circuit. If Cendants dismissal as a defendant in the
Securities Class Action Lawsuit is reversed on appeal and
Cendant is subsequently found liable or settles the claims
against it in the Securities Class Action Lawsuit, Cendant will
likely seek indemnification, contribution or similar relief from
the Company. However, as part of the Companys settlement
of the Securities Class Action Lawsuit, the parties have
requested that the court enter an order barring claims by third
parties against the Company for indemnification, contribution
and similar relief with respect to liability such third parties
may have in the Securities Class Action Lawsuit. In the event
that the settlement is ultimately approved, the Company
anticipates that the court will enter the requested bar order.

Such an order may preclude Cendant from seeking
indemnification, contribution or similar relief from the Company
in the event Cendant is found liable or settles claims against
it in the Securities Class Action Lawsuit. However, the Company
has been advised by counsel that the law is unclear on whether
Cendant would be so precluded. Therefore, the Company would
likely incur significant expenses in defending such an action by
Cendant and could ultimately be found liable to Cendant or
settle with Cendant, notwithstanding the bar order. Such
expenses, liability or settlement could have a material adverse
effect on the Companys financial position and results of
operations.

In addition, if Cendant is not permitted to share
in the settlement of the Securities Class Action Lawsuit
(which would be the case if its dismissal as a defendant is
reversed on appeal), the Company has agreed to pay or otherwise
provide to Cendant the amount of money and/or other
consideration that Cendant would have been otherwise entitled to
receive from that portion of the class action settlement fund
provided by the Company had Cendant been a class member and
Cendants proof of claim in respect of its shares had been
accepted in full. At this time, Cendant is still a member of the
class and has not been excluded. Because the proofs of claim
have not yet been accepted in the settlement of the Securities
Class Action Lawsuit, the Company is unable to estimate the
amount of cash and number of shares that Cendant could be
entitled to receive from the Company should Cendant be prevented
from participating in the settlement.

For its part, the Company released all claims
against Cendant (including a release of any derivative claims,
to the extent permitted by law) relating to the acquisition of
the Move.com Group (other than with respect to the existing
Falcon license agreement described below) and the Companys
prior restatement of its consolidated financial statements.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Settlement Agreement also provides for the
termination of a stockholders agreement that contained a
standstill provision under which Cendant had agreed not to
acquire additional Homestore stock, a requirement that Cendant
vote its Homestore stock in proportion to the vote of all other
stockholders and restrictions on Cendants ability to sell
its Homestore stock.

The Settlement Agreement contains other
provisions, including the requirement that the Company prepay
approximately $1.5 million under an existing insurance
contract that would otherwise be payable over three years.

In addition to the Settlement Agreement, Cendant
and the Company executed a new Registration Rights Agreement, an
Option Agreement, a new Listings License Agreement and a Source
Code License and Maintenance Services Agreement, each of which
is described below.

New Registration Rights Agreement.The new Registration Rights Agreement
required the Company to file a shelf registration statement
relating to the approximately 18.3 million shares held by
Cendant as a result of the acquisition of the Move.com Group,
with expenses to be paid by the Company. The registration
statement was declared effective on September 5, 2003. If
the Companys stock had been delisted from NASDAQ prior to
March 5, 2004 or if the registration statement had failed
to remain effective through that date, and in certain other
circumstances, the Company would have been required to pay
Cendant liquidated damages of approximately $18,000 per business
day, up to a maximum of $7.5 million. The Companys
obligation to pay liquidated damages terminated on March 5,
2004.

Option Agreement.The Option Agreement granted to the
Company an option to purchase 7,264,812 shares of the
Companys common stock held by Cendant. The option became
exercisable on August 15, 2003 and expired on
October 4, 2003 without being exercised.

New Listings License Agreement.Under the new Listings License
Agreement, Cendant granted to the Company a non-exclusive
license to use Listing Data (generally defined as data and
information related to the sale, purchase, lease, or rental of
residential property) and Broker Agent Data (generally defined
as data and information related to residential real property
brokers or sales agents) on any of the Companys websites
where REALTOR.com® listings are displayed. Cendant is not
obligated to provide any data to the extent that the Company can
obtain the same data under one of its MLS agreements. Cendant
can terminate the license for any reason upon 90 days
written notice. The new Listings License Agreement also
prohibits the Company from charging referral fees during the
term of the agreement and for a period of three years following
termination. Also for a period of three years following a
termination of the new Listings License Agreement, Cendant
cannot directly or indirectly take action to reduce the quality,
quantity, substance, accuracy or timeliness of listings
available to the Company from any MLS, or from Cendant or its
affiliates or franchisees.

The new Listings License Agreement replaces the
prior Master Operating Agreement under which Cendant granted to
the Company an exclusive license to use the Listing Data and a
non-exclusive license to use the Broker Agent Data. The prior
Master Operating Agreement had an initial term of 40 years,
contained specific termination rights, provided the Company with
additional non-exclusive licenses to New Resident Data
(generally defined as data and information regarding the
purchasers, renters, or lessors of residential real property)
and other data related to residential property, granted the
Company wider usage rights with regard to the licensed data, and
provided for marketing and promotional efforts between the
parties.

Prior to the settlement, the Company was not
receiving any Listings Data or Broker Agent Data from Cendant
under the Master Operating Agreement because it receives such
data from its arrangements with approximately 900 MLSs
across the United States. The new Listings License Agreement
does not affect the Companys arrangements with these MLSs.
Thus, the new Listings License Agreement, like the now
terminated Master Operating Agreement, serves as a backup source
for such data.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In conjunction with the termination of the
exclusive license under the Master Operating Agreement, the
Company relinquished certain exclusive data rights and rights
under other agreements. As a result of the surrender of those
rights, certain intangible assets associated with those rights
no longer have value to the Company, and, accordingly, the
Company has recorded an impairment charge of $12.2 million
for the year ended December 31, 2003.

Source Code License and Maintenance Services
Agreement.Pursuant to an agreement
dated October 26, 2000 (the First Falcon
Agreement), the Company agreed to provide RETT a modified
version of the Companys Top Producer Online contact
management software for real estate agents known as
Falcon. The First Falcon Agreement contemplated that
the parties would enter into a maintenance services agreement
with respect to Falcon. In connection with the settlement, a
Source Code License and Maintenance Services Agreement (the
Second Falcon Agreement) was executed with Cendant
under which the Company agreed to provide Cendant with the
source code for the Falcon software and for certain other Top
Producer Online software. Cendant may use this source code to
maintain, modify, and upgrade the Falcon software. The Company
also agreed to provide Cendant with a dedicated support staff
who will use commercially reasonable efforts to maintain,
modify, and upgrade Falcon as instructed by Cendant. The initial
term for such support is three years, and Cendant will have the
option to renew for one additional year. The Company is entitled
to receive approximately $2.3 million in maintenance fees, which
will be recognized on a straight-line basis over the three-year
term of the maintenance agreement. Cendant agreed not to develop
or promote a competitive online real estate customer
relationship management system for two years.

Following the settlement, the Company and RETT
also entered into an Amendment to Software License Agreement
(the Amendment), thereby amending the First Falcon
Agreement. The Amendment modifies certain of the Falcon software
functionality that the Company must deliver to RETT and
establishes deadlines by which the various Falcon software
components must be delivered. The Amendment also requires the
Company to develop new features and functionality for certain
other Top Producer Online software. Further, the Amendment
grants to RETT, Cendant, and certain of Cendants
affiliates (including affiliates outside of the real estate
industry) a license to use the Falcon software as newly
described in the Amendment, and a license to use certain other
Top Producer Online software.

22.     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.
Certain equipment leases constitute capital leases. The
accompanying consolidated financial statements include the
assets and liabilities arising from these capital lease
obligations. Future minimum lease payments under these capital
and

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

operating leases as of December 31, 2003 are
net of actual sublease arrangements and exclusive of estimated
sublease income used in the restructuring provision (See
Note 4) are as follows (in thousands):

|                                   |       |                |       |                  |  |   |       |        | 
|---------------------------------- | ----- | -------------- | ----- | ---------------- |  | - | ----- | ------ | 
|Year Ended December 31,            |       | Capital leases |       | Operating leases
|                                   |       |                |       |                 
|2004                               |       | $              | 1,575 |                  |  | $ | 9,752 |       
|2005                               |       |                | 376   |                  |  |   | 9,322 |       
|2006                               |       |                |      |                  |  |   | 8,784 |       
|2007                               |       |                |      |                  |  |   | 4,748 |       
|2008 and thereafter                |       |                |      |                  |  |   | 751   |       
|                                   |       |                |       |                  |  |   |       |       
|                                   | Total |                | $     | 1,951            |  |   | $     | 33,357 | 
|                                   |       |                |       |                  |  |   |       |       
|Less: Amount representing interest |       |                | (47   | )                |  |   |       |       
|                                   |       |                |       |                  |  |   |       |       
|                                   |       |                | 1,904 |                  |  |   |       |       
|Less: Current portion              |       |                | (369  | )                |  |   |       |       
|                                   |       |                |       |                  |  |   |       |       
|                                   |       | $              | 1,535 |                  |  |   |       |       
|                                   |       |                |       |                  |  |   |       |       

Of the amounts above, $12.0 million has
already been accrued in restructuring accruals and is reflected
in accrued expenses and other non-current liabilities at
December 31, 2003. Rental expense for the Company for
operating leases was $6.8 million, $10.6 million and
$18.9 million for the years ended December 31, 2003,
2002 and 2001, respectively.

Commitments for the years ending in 2008 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 and 2003 this amount is included as
other long-term assets on the balance sheet.

Distribution
Agreements

The Company has entered into various web portal
distribution and preferred alliance agreements which require the
Company to make certain scheduled payments over the term of the
agreements. These amounts disclosed below include amounts of
$7.5 million due in 2004 under the Companys new
agreement with AOL (see Note 21). The following presents
the Companys future minimum commitments under those
agreements (in thousands):

|                         |       |   |        |        | 
|------------------------ | ----- | - | ------ | ------ | 
|Year Ending December 31, |       |  
|                         |       |  
|2004                     |       | $ | 17,710 |       
|2005                     |       |   | 7,200  |       
|2006                     |       |   | 2,850  |       
|2007                     |       |   |       |       
|2008                     |       |   |       |       
|                         |       |   |        |       
|                         | Total |   | $      | 27,760 | 
|                         |       |   |        |       

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

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, |       |  
|                         |       |  
|2004                     |       | $ | 2,200 |      
|2005                     |       |   | 2,400 |      
|2006                     |       |   | 1,500 |      
|2007                     |       |   | 1,500 |      
|2008                     |       |   | 1,500 |      
|                         |       |   |       |      
|                         | Total |   | $     | 9,100 | 
|                         |       |   |       |      

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 remaining contractual
commitment as of December 31, 2003 associated with the
project was $1.3 million.

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 sought 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 its 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
(Securities Class Action Lawsuit) naming the
Company, certain of its current officers and employees, certain
of its former officers, directors and employees, and various
other parties, including among others MaxWorldwide, Inc.,
PricewaterhouseCoopers LLP, AOL Time Warner, Inc. 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
Time Warner, Inc. 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 advised that it does not intend to
amend the complaint. At the same time, the court denied the
motions to dismiss of PricewaterhouseCoopers LLP and our 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.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On August 12, 2003, the Company entered into
a settlement agreement with the Plaintiff to resolve all
outstanding claims related to the Securities Class Action
Lawsuit. On October 8, 2003, the District Court
preliminarily approved the settlement. A final hearing on the
settlement was held on January 16, 2004, after delivery of
notice to class members. On February 5, 2004, the court
issued an interim order generally approving the terms of the
settlement as fair, adequate and reasonable, but directing
additional briefing from the parties on two issues:
(1) whether certain objectors proposal to carve
out certain claims from the settlement is feasible;
(2) whether notice to class members was potentially
inadequate because of the short time period given to file their
claims. The court has suggested that the parties consider
allowing additional time for class members to file claims, which
would not affect the total settlement fund. The briefs were
filed February 20, 2004, and the Company expects the court
to determine whether to grant final approval of the settlement
in the near future.

As a part of the settlement, the Company agreed
to pay $13.0 million in cash and issue 20.0 million
new shares of its common stock valued at $50.6 million as
of August 12, 2003. In October 2003, the Company placed
$10.0 million in escrow upon preliminary approval by the
U.S. District Court, with an additional $3.0 million due
upon final judicial approval of the settlement. Following this
approval, the $13.0 million and the 20 million shares
of newly issued common stock will be distributed to the class.
The issuance of the shares will be exempt from registration
under Section 3(a)(10) of the Securities Act of 1933. As a
result of the settlement, the Company has recorded a litigation
settlement charge of $63.6 million in its operating results
for the year ended December 31, 2003. In addition, the
Company has agreed to adopt, within thirty days of final
approval of the settlement, certain corporate governance
principles that have been approved by the Board of Directors,
including requirements for independent directors and special
committees, a non-classified Board of Directors with two-year
terms, appointment of a new shareholder-nominated director,
prohibition on the future use of stock options for director
compensation and minimum stock retention by its officers after
exercise of future stock option grants. The Company will also
divide evenly with the class any future net proceeds from
insurance with respect to the litigation after provision for
legal expenses incurred by the Company. The Plaintiff has agreed
that any members of the class who participate in the settlement
will release and discharge all claims against the Company and
will request that the court issue a bar order providing for the
maximum protection to which the Company is entitled under the
law with respect to discharge and bar of all future claims for
contribution or indemnity by other persons, arising out of or in
any way related to the action, whether under federal, state or
common law, or any other principle of law or equity. Several
persons who purportedly acquired the Companys shares
during the class period January 1, 2000 through
December 21, 2002, representing less than 1% of our
outstanding shares, have notified the Plaintiff that they wish
to be excluded from the settlement.

There are still additional risks to the Company
related to the Securities Class Action Lawsuit. These risks
include failure by the court to finally approve the settlement
and suits by persons who have elected to be excluded from the
settlement or whose claims against the Company may not be
discharged or barred by the settlement.

In September 2002, Matt L. Brody filed a
purported class action complaint (Brody) 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.
The complaint seeks rescission or an unspecified amount of
damages. In October 2002, defendants removed the action to the
United States District Court, Central District of California. In
June 2003, plaintiff filed with the United States Court of
Appeals for the Ninth Circuit a Petition for Writ of Mandamus,
asking the Ninth Circuit to direct the District Court to vacate
its order denying plaintiffs motion to remand the action
to state court. On August 15, 2003, the Ninth Circuit
issued an order directing the real parties in interest to file a
response. Defendants filed their response on August 29,
2003.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On August 11, 2003, the District Court
issued an order dismissing without prejudice plaintiffs
claims against the defendants and striking his class action
allegations. Plaintiff filed an amended complaint on
September 12, 2003. The Company filed a motion to dismiss
on October 29, 2003. The motion was heard by the Court on
March 8, 2004. Brody has admitted that his claim will be
barred if the Court approves the settlement in the Securities
Class Action Lawsuit. His counsel filed a motion to amend the
complaint to add Ronald Drucker as a lead plaintiff. Drucker,
separately, filed a motion in the Securities Class Action
requesting that the class purportedly represented by Brody and
Drucker be carved out of the settlement. The Court in the
Securities Class Action Lawsuit requested additional briefing
(See Note 21). Although the Company believes that existing
law should result in denial of Druckers carve
out motion and dismissal of the Brody action, the Company
is unable to express an opinion as to the outcome of this case
at this time.

In November 2002, 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. The Complaint has
been amended several times. The Company has recently answered
the Third Amended Complaint, which seeks an unspecified amount
of general, exemplary and punitive damages. Pyfrom is a class
member in the Securities Class Action Lawsuit, and the
Company believes that, under the law, his claim should be
resolved if the settlement of the Securities Class Action
receives final judicial approval. Nonetheless, the Company is
unable to express an opinion as to the probable outcome of this
case at this time.

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 the Company of its
financial condition prior to its 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. The
complaint seeks an unspecified amount of damages in excess of
$150,000. 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. In May 2003, the
Company answered the complaint and filed a counterclaim for
various causes of action against Stuart Siegel, Jerome Meyer,
David Meyer, the Jill Siegel and Irving Siegel Trust, and
eNeighborhoods Acquisition Company. The plaintiffs agreed to
participate in the Securities Class Action Lawsuit settlement
with regard to their securities fraud claims. Plaintiffs filed a
motion for partial summary judgment in District Court for breach
of two registration rights agreements as a result of the
Companys failure to register certain shares of its stock
acquired by the plaintiffs in the iPlace acquisition. The
parties have agreed to postpone the hearing on summary judgment
to pursue settlement. Trial has tentatively been scheduled for
July 6, 2004. Although the Company intends to vigorously
defend plaintiffs claims, the Company is unable to express
an opinion at this time as to the probable outcome of the
litigation.

On September 11, 2003, the Company received
correspondence from an attorney representing certain former
shareholders of Top Producer Systems, Inc. alleging fraud,
breach of fiduciary duty and violations of securities laws by
the Company and certain of its officers in connection with the
Companys acquisition of Top Producer in May 2000. On
September 29, 2003, the Company was scheduled to pay an
installment of approximately $6.8 million in either cash or
Homestore common stock, at the Companys option, in partial
consideration for the acquisition (See Note 6). In
investigating these allegations the Company discovered facts
indicating that the Company might have rights of offset with
respect to portions of the September 29, 2003 installment
and with respect to non-competition payments due to the former
president of Top Producer. Accordingly, the Company elected to
postpone making the installment and any further non-competition
payments until the Company could more thoroughly investigate
these matters. On February 18, 2004, two

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

former shareholders of Top Producer filed a
Statement of Claim against Top Producer Systems Company, HSTPUS,
Inc., and Homestore, Inc., in the Supreme Court of British
Columbia, Canada, alleging that the Company breached its
contract with the plaintiffs by failing to pay them their
portion of the scheduled September 29, 2003 installment,
which portion was approximately $5.4 million of the total
$6.8 million installment. Also on February 18, 2004,
the former president of Top Producer filed a Statement of Claim
in the Supreme Court of British Columbia alleging that the
Company breached its contract to pay him two installments
aggregating approximately $500,000 under a non-competition
agreement. Both claims seek damages for breach of contract,
interest, costs and such other relief as the court may grant.
The Company has previously accrued its obligation to make these
payments. The Company has not yet filed its response to these
claims, but anticipate that it will assert the right to offset
approximately $1.7 million against the remaining amounts
owed to Top Producer shareholders with respect to that
acquisition. The Company is unable to express an opinion on the
ultimate outcome of this case at this time.

In December 2002, Jeff Paradise and certain other
former employee optionholders of iPlace filed a complaint in the
United States 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. In
October 2003, the parties reached a settlement and the case was
dismissed.



| |                      
| | ---------------------
| | 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 defendant. 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 complaint seeks an unspecified amount
of damages.

In January 2002, Jeff Joerg filed a complaint in
Delaware Chancery Court, derivatively on the Companys
behalf 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. The
complaint seeks an unspecified amount of damages. On
January 28, 2004, the Company entered into a settlement to
resolve the California Superior Court and Delaware Chancery
Court derivative actions. In consideration for plaintiffs
release of all claims, the Company agreed: to adopt the
corporate governance reforms set forth in the Securities Class
Action Lawsuit settlement (See Note 21); that it was in the
best interests of the Company to terminate its relationship with
PricewaterhouseCoopers LLP as the Companys auditors (which
the Audit Committee did in September 2003); and to pay
plaintiffs attorneys fees in the sum of $150,000 in
cash and 200,000 shares of the Companys stock. The
issuance of the shares will be exempt from registration under
Section 3(a)(10) of the Securities Act of 1933. The
conditions of the settlement include approval by the United
States District Court of the Securities Class Action Lawsuit
settlement, approval by the California Superior Court of the
consolidated shareholder derivative action settlement and the
dismissal with prejudice of the California and Delaware actions.
While the United States District Court determined the terms of
the settlement to be fair, adequate and reasonable, there is no
assurance that the Company will receive court approval of the
Securities Class Action Lawsuit settlement and that the
California Superior Court will approve this settlement.

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | SEC Investigation

In January 2002, the Company was notified that
the SEC had issued a formal order of private investigation in
connection with accounting matters that resulted in the
restatement of the Companys financial statements in March
2002. The SEC requested that the Company provide it with certain
documents concerning the restatement. 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, March 2003, and September
2003, certain of the Companys 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
the Company that, in light of the actions taken by the
Companys Board of Directors and the Companys Audit
Committee and its cooperation in the SECs investigation,
those agencies would not bring any enforcement action against
the Company. Because the investigation is ongoing and the
Company is committed to cooperating with the SEC, the Company
will likely continue to incur additional costs related to the
investigation, and management time and attention may be diverted
until the investigation concludes.



| |                              
| | -----------------------------
| | Insurance Coverage Litigation

Between September 2002 and November 2002, Genesis
Insurance Company (Genesis), Federal Insurance
Company (Federal), Clarendon National Insurance
Company (Clarendon), Royal Indemnity Company
(Royal) and TIG Insurance Company of Michigan
(TIG) sent the Company notices of rescission of the
officers and directors liability policies issued to the Company
for the period of August 4, 2001 through August 4,
2002. 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 the
Company and certain of its 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 had requested that the court stay the Federal and
Genesis actions, but those requests were denied in March 2003.

In October 2002, Lumbermens Mutual Casualty
Company rescinded and filed a similar complaint against the
Company and certain of its current and former officers,
directors and employees to confirm the rescission in the
Superior Court of California, County of Los Angeles.

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

The TIG and Lumbermens cases recently were
reassigned to a single judge and, as a consequence, the trial
previously scheduled in the TIG case for January 2004 has been
postponed. TIG and Lumbermens each filed a motion for summary
judgment requesting the court to declare its directors and
officers liability policy rescinded as to all insureds. On
February 27, 2004, the court granted the TIG and Lumbermens
motions for summary judgment. The Company intends to appeal the
rulings.

In May 2003, XL Insurance Limited
(Bermuda) sent the Company a notice of rescission of
the officers and directors liability policy issued to the
Company for the period August 4, 2001 to August 4,
2002. The Company is in discussions with Bermuda about possibly
deferring any arbitration over the insurers purported
rescission pending the resolution of the underlying liability
lawsuits.

In May 2003, the United States District Court for
the Central District of California denied the Companys
request that the hearing on Federals motion for summary
judgment be continued to allow the Company to conduct discovery
on the issues presented by Federals motion, and granted
Federals motion for

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

summary judgment declaring that the directors and
officers liability policy issued by Federal is rescinded as to
all insureds. In July 2003, the same court granted motions for
summary judgment declaring that the directors and officers
liability policies issued by Genesis, Royal and Clarendon are
rescinded as to all insureds. On January 21, 2004, we filed
the Companys appellate briefs from each of the District
Courts judgments to the Ninth Circuit Court of Appeals. A
date for oral argument has not been scheduled.

The Company is unable to express an opinion at
this time as to the probable outcome of these lawsuits.



| |                 
| | ----------------
| | Other Litigation

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 substantial
damages and a declaratory judgment in connection with his claim
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. The Company is unable to express an
opinion at this time as to the probable outcome of this lawsuit.

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 was 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 was completed in March
2003. The arbitrator ruled that Amica was entitled to
compensatory damages and interest in the amount of $303,000. The
Company appealed the arbitrators ruling. The appeal was
denied on October 10, 2003 and the Company paid the
assessed damages without further appeal.

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 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.

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 alleged a claim for patent
infringement based on activities related to the websites
REALTOR.com® and HomeBuilder.com. Specifically, Tren
alleged 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 sought
unspecified damages and a permanent injunction against the
Company using the technology. In January 2003, counsel for Tren
withdrew their representation. On October 22, 2003, new
counsel appeared on behalf of Tren and discovery has resumed.
The Company believes Trens claims are without merit and
intend to vigorously defend the case.

On October 1, 2003, Plaintiff Kevin Keithley
(Keithley) filed, in pro se, a complaint against
defendants the Company, the NAR and the NAHB in the United
States District Court for the Northern District of California
alleging infringement of U. S. Patent
No. 5,584,025 pursuant to 35 U.S.C. Section 271.
The complaint sought unspecified damages and a permanent
injunction against the Company using the technology. In the
complaint, Plaintiff asserts exclusive license of the patent.
Plaintiff has not served the complaint upon any of the
defendants. On February 2, 2004, the court issued an order
providing an additional 90 days to serve the complaint. If
Plaintiff serves the complaint on the Defendants, the Company
intends to

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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

move the court to transfer the case to the
Eastern District of Pennsylvania so that it can be consolidated
with the action previously commenced by Tren Technologies
Holdings LLC. The Company is unable to express an opinion at
this time as to the probable outcome of this case.

On October 29, 2003, Peter Tafeen, a former
officer of Homestore, filed suit in the Delaware Chancery Court
in New Castle County. Under Section 145 of the Delaware
General Corporation Law and the Companys Bylaws, the
complaint asserts a claim for advancement of expenses incurred
in the amount of $2.0 million and for future expenses in
connection with the SEC and Department of Justice investigations
and the civil actions filed against Tafeen for his purported
role in a scheme to inflate the Companys revenues. Tafeen
and the Company filed cross-motions for summary judgment. The
motions were fully briefed, and the court held oral argument on
the motions on February 8, 2004. The court has not ruled on
the motions. While the Company intends to vigorously defend the
case, the Company is unable to express an opinion as to the
outcome of this case at this time.



| |              
| | -------------
| | 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-Q and except as
set forth herein, the Company is not a party to any other
litigation or administrative proceedings that management
believes will have a material adverse effect on the
Companys business, results of operations, financial
condition or cash flows.

23.     Subsequent
Events



| |            
| | -----------
| | Stock Plans

In January 2004, in accordance with plan
provisions, the number of shares reserved for issuance under the
SIP and the ESPP were increased by an additional 5,439,240 and
604,360 shares, respectively.

121



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HOMESTORE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

24.     Quarterly
Financial Data (unaudited)

Provided below is the selected unaudited
quarterly financial data for 2003 and 2002:

|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |       |  
|------------------------------------ | ----------------------- | ---------------------------------------- | ------ | -------- |  | --------- | ------- | -------- | - | -------- | ------- | -------- | - | --------- | ------- | -------- | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                     |                         |                                         
|                                     |                         | Three Months Ended                      
|                                     |                         |                                         
|                                     |                         | Mar. 31,                                 |        | June 30, |  | Sept. 30, |         | Dec. 31, |   | Mar. 31, |         | June 30, |   | Sept. 30, |         | Dec. 31,
|                                     |                         | 2003(1)                                  |        | 2003(2)  |  | 2003      |         | 2003     |   | 2002(3)  |         | 2002     |   | 2002      |         | 2002    
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |         
|                                     |                         |                                         
|                                     |                         | (In thousands, except per share amounts)
|Revenue                              |                         | $                                        | 54,857 |          |  | $         | 53,887  |          |   | $        | 55,087  |          |   | $         | 54,879  |          |   | $ | 74,116  |       |   | $ | 65,894  |       |   | $ | 63,779  |       |   | $ | 60,824  |      
|Gross profit                         |                         |                                          | 39,533 |          |  |           | 38,552  |          |   |          | 39,673  |          |   |           | 40,691  |          |   |   | 51,916  |       |   |   | 44,548  |       |   |   | 45,956  |       |   |   | 43,889  |      
|Income from continuing operations    |                         |                                          | 86,975 |          |  |           | (93,990 | )        |   |          | (30,582 | )        |   |           | (12,057 | )        |   |   | (35,655 | )     |   |   | (62,436 | )     |   |   | (40,351 | )     |   |   | (37,619 | )    
|Income from discontinued operations  |                         |                                          | 229    |          |  |           | 2,301   |          |   |          |        |          |   |           |        |          |   |   | 846     |       |   |   | 10,179  |       |   |   | 582     |       |   |   | 1,029   |      
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Net Income/(loss)                    |                         | $                                        | 87,204 |          |  | $         | (91,689 | )        |   | $        | (30,582 | )        |   | $         | (12,057 | )        |   | $ | (34,809 | )     |   | $ | (52,257 | )     |   | $ | (39,769 | )     |   | $ | (36,590 | )    
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Basic net income (loss) per share:   |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|                                     | Continuing operations   |                                          | $      | 0.74     |  |           | $       | (0.80    | ) |          | $       | (0.26    | ) |           | $       | (.10     | ) |   | $       | (0.30 | ) |   | $       | (0.53 | ) |   | $       | (0.34 | ) |   | $       | (0.32 | )
|                                     | Discontinued operations |                                          | $      |         |  |           | $       | 0.02     |   |          | $       |         |   |           | $       |         |   |   | $       | 0.01  |   |   | $       | 0.09  |   |   | $       |      |   |   | $       | 0.01  |  
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|                                     | Net income (loss)       |                                          | $      | 0.74     |  |           | $       | (0.78    | ) |          | $       | (0.26    | ) |           | $       | (.10     | ) |   | $       | (0.29 | ) |   | $       | (0.44 | ) |   | $       | (0.34 | ) |   | $       | (0.31 | )
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Diluted net income (loss) per share: |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|                                     | Continuing operations   |                                          | $      | 0.72     |  |           | $       | (0.80    | ) |          | $       | (0.26    | ) |           | $       | (.10     | ) |   | $       | (0.30 | ) |   | $       | (0.53 | ) |   | $       | (0.34 | ) |   | $       | (0.32 | )
|                                     | Discontinued operations |                                          | $      |         |  |           | $       | 0.02     |   |          | $       |         |   |           | $       |         |   |   | $       | 0.01  |   |   | $       | 0.09  |   |   | $       |      |   |   | $       | 0.01  |  
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|                                     | Net income (loss)       |                                          | $      | 0.72     |  |           | $       | (0.78    | ) |          | $       | (0.26    | ) |           | $       | (.10     | ) |   | $       | (0.29 | ) |   | $       | (0.44 | ) |   | $       | (0.34 | ) |   | $       | (0.31 | )
|                                     |                         |                                          |        |          |  |           |         |          |   |          |         |          |   |           |         |          |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      



---



|    |                                                                                                   
|--- | --------------------------------------------------------------------------------------------------
|(1) | Includes a one-time non-cash gain of $104,071
    from the settlement of a distribution agreement.
|   
|(2) | Includes a litigation settlement charge of
    $63,600.                                           
|   
|(3) | Includes a litigation settlement charge of
    $23,000.                                           

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

As previously reported in our Current Report on
Form 8-K filed on October 6, 2003, effective
September 29, 2003, our Audit Committee dismissed
PricewaterhouseCoopers LLP (PwC) as our accountants
and engaged Ernst & Young LLP (E&Y) to
serve as our accountants for the year ending December 31,
2003.




Item 9A.     Controls
and Procedures

As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and
with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934 (the Exchange Act).
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 the SECs rules and
forms.

There were no changes in our internal control
over financial reporting during the period covered by this
report that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




PART III

Information required by Items 10, 11, 12, 13
and 14 of Part III is omitted from this Annual Report
and will be filed in a definitive proxy statement or by an
amendment to this Annual Report not later than 120 days
after the end of the fiscal year covered by this Annual Report.




Item 10.     Directors
and Executive Officers of the Registrant

We will provide information that is responsive to
this item in our definitive proxy statement or in an amendment
to this Annual Report not later than 120 days after the end
of the fiscal year covered by this Annual Report, in either case
under the captions Management,
Section 16(a) Beneficial Ownership Reporting
Compliance, Code of Conduct and Business
Ethics and possibly elsewhere therein. That information is
incorporated in this item by reference.




Item 11.     Executive
Compensation

We will provide information that is responsive to
this item in our definitive proxy statement or in an amendment
to this Annual Report not later than 120 days after the end
of the fiscal year covered by this Annual Report, in either case
under the caption Executive Compensation, and
possibly elsewhere therein. That information is incorporated in
this item by reference.






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

We will provide information that is responsive to
this item in our definitive proxy statement or in an amendment
to this Annual Report not later than 120 days after the end
of the fiscal year covered by this Annual Report, in either case
under the caption Security Ownership of Certain Beneficial
Owners and Management, and possibly elsewhere therein.
That information is incorporated in this item by reference.




Item 13.     Certain
Relationships and Related Transactions

We will provide information that is responsive to
this item in our definitive proxy statement or in an amendment
to this Annual Report not later than 120 days after the end
of the fiscal year covered by this Annual Report, in either case
under the caption Certain Relationships and Related
Transactions, and possibly elsewhere therein. That
information is incorporated in this item by reference.

123



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##### Table of Contents






Item 14.     Principal
Accountant Fees and Services

We will provide information that is responsive to
this item in our definitive proxy statement or in an amendment
to this Annual Report not later than 120 days after the end
of the fiscal year covered by this Annual Report, in either case
under the caption Principal Accountant Fees and
Services, and possibly elsewhere therein. That information
is incorporated in this item by reference.




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 67 of this report.

(2) Financial Statement Schedule,
Exhibit Number 99.01.

(3) Exhibits

|       |   |               |  |                                                                                                                                                                                                                                                                                                                                                                                       
|------ | - | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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) filed May 28, 1999.)                                                                                                                                
|       | 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) filed May 28, 1999.)                                                      
|       | 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) filed May 28, 1999.)                                                                                                                   
|       | 2 | .04           |  | Agreement and Plan of Reorganization dated
    May 19, 1999 between NetSelect, Inc., Avenue Acquisition
    Corporation and SpringStreet, Inc. (Incorporated by reference to
    Exhibit 2.04 to our registration statement on
    Form S-1/ A (File No. 333-79689) filed June 17,
    1999.)                                                                                         
|       | 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 filed November 15, 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 filed
    November 15, 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 to Annex A to the definitive proxy statement
    filed November 29, 2000.)
|       | 3 | .01.1         |  | Amended and Restated Certificate of Incorporation
    dated August 10, 1999. (Incorporated by reference to
    Exhibit 3.01.1 to our quarterly report on Form 10-Q
    for the quarter ended March 31, 2003 filed May 14,
    2003.)                                                                                                                                                  
|       | 3 | .01.2         |  | Certificate of Amendment of Certificate of
    Incorporation dated May 22, 2002. (Incorporated by
    reference to Exhibit 3.01.2 to our quarterly report on
    Form 10-Q for the quarter ended March 31, 2003 filed
    May 14, 2003.)                                                                                                                                              
|       | 3 | .02           |  | Bylaws dated August 10, 1999. (Incorporated
    by reference to Exhibit 3.1 to our quarterly report on
    Form 10-Q for the quarter ended June 30, 2003 filed
    August 14, 2003.)                                                                                                                                                                                                  

124



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|       |    |               |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|------ | -- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Exhibit Title
|       |    |              
|       | 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) filed May 28,
    1999.)                                                                                                                                                                             
|       | 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/ A (File
    No. 333-79689) filed June 17, 1999.)                                                                                                                                            
|       | 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
    filed March 10, 2000.)                                                                                                                                                                                                          
|       | 4  | .01           |  | Form of Specimen Certificate for common stock.
    (Incorporated by reference to Exhibit 4.01 to our
    registration statement on Form S-1/ A (File
    No. 333-79689) filed July 8, 1999.)                                                                                                                                                                                                         
|       | 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) filed May 28, 1999.)                                                                                                                                                          
|       | 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) filed May 28, 1999.)                                                                                                                                          
|       | 10 | .01.1         |  | Operating Agreement dated November 26, 1996,
    between REALTORS® Information Network, Inc. and RealSelect,
    Inc. (Incorporated by reference to Exhibit 10.02 to our
    registration statement on Form S-1 (File
    No. 333-79689) filed May 28, 1999.)                                                                                                                                        
|       | 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/ A (File No. 333-79689) filed
    June 17, 1999.)                                                                                                            
|       | 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/A (File No. 333-79689) filed June 17,
    1999.)                                                                                                                  
|       | 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/A (File No. 333-79689) filed June 17,
    1999.)
|       | 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) filed May 28, 1999.)                                                                                                                   
|       | 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) filed May 28, 1999.)                                                                                                                                            
|       | 10 | .05           |  | Agreement dated August 21, 1998 among
    RealSelect, Inc., REALTORS® Information Network, Inc.,
    National Association of REALTORS®, NetSelect, Inc., and
    NetSelect L.L.C. (Incorporated by reference to
    Exhibit 10.29 to our registration statement on
    Form S-1 (File No. 333-79689) filed May 28, 1999.)                                                                            
|       | 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/A (File
    No. 333-79689) filed June 17, 1999.)                                                                                              
|       | 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/A (File No. 333-79689) filed June 17,
    1999.)(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) filed May 28, 1999.)                                                                          

125



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|       |    |               |  |                                                                                                                                                                                                                                                                                                                                                 
|------ | -- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Exhibit Title
|       |    |              
|       | 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. (Incorporated
    by reference to Exhibit 10.10 to our annual report on
    Form 10-K filed March 26, 2003.)(1)                                                                                                                               
|       | 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) filed May 28, 1999.)                    
|       | 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) filed May 28,
    1999.) 
|       | 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, 2000 filed April 2, 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) filed May 28, 1999.)(3)                                                                                                                                                       
|       | 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) filed May 28, 1999.)(3)                                                                                                                                                      
|       | 10 | .15           |  | Homestore.com, Inc. 1999 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 10.18 to our
    registration statement on Form S-1/A (File
    No. 333-79689) filed July 27, 1999.)(3)                                                                                                                                                
|       | 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/A (File
    No. 333-79689) filed July 27, 1999.)(3)                                                                                                                                        
|       | 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) filed May 24, 2002.)(3)                                                                                                                                            
|       | 10 | .18           |  | InfoTouch Corporation 1994 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 10.20 to our
    registration statement on Form S-1/A (File
    No. 333-79689) filed June 17, 1999.)(3)                                                                                                                                              
|       | 10 | .19           |  | Move.com, Inc. 2000 Stock Incentive Plan.
    (Incorporated by reference to Exhibit 4.04 to our
    registration statement on Form S-8 (File
    No. 333-55828) filed February 16, 2001.)(3)                                                                                                                                                    
|       | 10 | .20           |  | Cendant Corporation Move.com Group 1999 Stock
    Option Plan as assumed by Cendant Corporation from Move.com,
    Inc. and amended and restated effective as of March 21,
    2000. (Incorporated by reference to Exhibit 4.05 to our
    registration statement on Form S-8 (File
    No. 333-55828) filed February 16, 2001.)(3)             
|       | 10 | .21           |  | 1997 Stock Initiative Plan of Cendant Corporation
    as amended and restated through October 14, 1998.
    (Incorporated by reference to Exhibit 4.06 to our
    registration statement on Form S-8 (File
    No. 333-55828) filed February 16, 2001.)(3)                                                                                      
|       | 10 | .22           |  | Amendment to Amended and Restated 1997 Stock
    Incentive Plan of Cendant Corporation dated March 27, 2000.
    (Incorporated by reference to Exhibit 4.07 to our
    registration statement on Form S-8 (File
    No. 333-55828) filed February 16, 2001.)(3)                                                                                 
|       | 10 | .23           |  | Amendment to Amended and Restated 1997 Stock
    Incentive Plan of Cendant Corporation dated March 28, 2000.
    (Incorporated by reference to Exhibit 4.08 to our
    registration statement on Form S-8 (File
    No. 333-55828) filed February 16, 2001.)(3)                                                                                 
|       | 10 | .24           |  | Homestore 401(k) Plan. (Incorporated by reference
    to Exhibit 10.25 to our registration statement on
    Form S-1/ A (File No. 333-79689) filed June 17,
    1999.)(3)                                                                                                                                                                       
|       | 10 | .25           |  | Form of Indemnity Agreement between Homestore.
    Inc. and each of its directors and executive officers.(2)(3)                                                                                                                                                                                                                                 

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|       |    |               |  |                                                                                                                                                                                                                                                                                                
|------ | -- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Exhibit Title
|       |    |              
|       | 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
    quarterly report on Form 10-Q for the quarter ended
    March 31, 2002 filed May 14, 2002.)(3)                                      
|       | 10 | .27           |  | 2003 Executive Bonus Plan of W. Michael
    Long. (Incorporated by reference to Exhibit 10.1 to our
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2003 filed November 13, 2003.)(3)                                                                                
|       | 10 | .28           |  | Employment Agreement dated March 6, 2002
    between Homestore.com, Inc. and Jack D. Dennison.
    (Incorporated by reference to Exhibit 6.03(A) to our
    quarterly report on Form 10-Q for the quarter ended
    March 31, 2002 filed May 14, 2002.)(3)                                     
|       | 10 | .29           |  | 2003 Executive Bonus Plan of Jack D.
    Dennison. (Incorporated by reference to Exhibit 10.2 to our
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2003 filed November 13, 2003.)(3)                                                                               
|       | 10 | .30           |  | 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
    quarterly report on Form 10-Q for the quarter ended
    March 31, 2002 filed May 14, 2002.)(3)                                  
|       | 10 | .31           |  | 2003 Executive Bonus Plan of Lewis R.
    Belote III. (Incorporated by reference to Exhibit 10.3
    to our quarterly report on Form 10-Q for the quarter ended
    September 30, 2003 filed November 13, 2003.)(3)                                                                            
|       | 10 | .32           |  | Executive Retention and Severance Agreement dated
    April 24, 2002 between Homestore.com, Inc. and
    Allan P. Merrill. (Incorporated by reference to
    Exhibit 6.06(A) to our Form 10-Q for the quarter ended
    March 31, 2002 filed May 14, 2002.)(3)                                 
|       | 10 | .33           |  | Memorandum dated March 29, 2002 to
    Allan P. Merrill. (Incorporated by reference to
    Exhibit 6.07(A) to our Form 10-Q for the quarter ended
    March 31, 2002 filed May 14, 2002.)(3)                                                                                                   
|       | 10 | .34           |  | 2003 Executive Bonus Plan of Allan P.
    Merrill. (Incorporated by reference to Exhibit 10.5 to our
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2003 filed November 13, 2003.)(3)                                                                               
|       | 10 | .35           |  | 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 filed May 14, 2002.)(3)                                
|       | 10 | .36           |  | 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
    filed May 14, 2002.)(3)                                                                                                  
|       | 10 | .37           |  | Separation Agreement dated August 1, 2003
    between Homestore, Inc. and Patrick R. Whelan.(2)(3)                                                                                                                                                                                             
|       | 10 | .38           |  | Executive Retention and Severance Agreement dated
    September 30, 2002 between Homestore.com, Inc. and
    Allan D. Dalton. (Incorporated by reference to
    Exhibit 10.1 to our quarterly report on Form 10-Q for
    the quarter ended September 30, 2002 filed
    November 14, 2002.)(3)
|       | 10 | .39           |  | Offer Letter dated October 7, 2002 between
    Homestore.com, Inc. and Allan D. Dalton. (Incorporated by
    reference to Exhibit 10.2 to our quarterly report on
    Form 10-Q for the quarter ended September 30, 2002
    filed November 14, 2002.)(3)                                      
|       | 10 | .40           |  | Annual Bonus Plan, 2002 of Allan Dalton.
    (Incorporated by reference to Exhibit 10.3 to our quarterly
    report on Form 10-Q for the quarter ended
    September 30, 2002 filed November 14, 2002.)(3)                                                                                     
|       | 10 | .41           |  | 2003 Executive Bonus Plan of Allan D. Dalton.
    (Incorporated by reference to Exhibit 10.4 to our quarterly
    report on Form 10-Q for the quarter ended
    September 30, 2003 filed November 13, 2003.)(3)                                                                                
|       | 10 | .42           |  | 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
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2002 filed November 14, 2002.)(3)    
|       | 10 | .43           |  | Offer Letter dated September 30, 2002
    between Homestore.com, Inc. and Michael R. Douglas.
    (Incorporated by reference to Exhibit 10.5 to our quarterly
    report on Form 10-Q for the quarter ended
    September 30, 2002 filed November 14, 2002.)(3)                                

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|       |    |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------ | -- | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Exhibit Title
|       |    |              
|       | 10 | .44           |  | Annual Bonus Plan, 2002 of Michael R.
    Douglas. (Incorporated by reference to Exhibit 10.6 to our
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2002 filed November 14, 2002.)(3)                                                                                                                                                                                                                                                                                                         
|       | 10 | .45           |  | 2003 Executive Bonus Plan of Michael R.
    Douglas. (Incorporated by reference to Exhibit 10.6 to our
    quarterly report on Form 10-Q for the quarter ended
    September 30, 2003 filed November 13, 2003.)(3)                                                                                                                                                                                                                                                                                                       
|       | 10 | .46           |  | Stipulation and Agreement of Settlement between
    California State Teachers Retirement System and Homestore,
    Inc. dated as of August 12, 2003. (Incorporated by
    reference to Exhibit 10.7 to our quarterly report on
    Form 10-Q for the quarter ended September 30, 2003
    filed November 13, 2003.)                                                                                                                                                                                                     
|       | 10 | .47           |  | Settlement Agreement and Release dated
    August 5, 2003 among Homestore, Inc., Welcome Wagon
    International, Inc., Cendant Corporation, Cendant Membership
    Services Holdings, Inc, Century 21 Real Estate Corporation,
    Coldwell Banker Real Estate Corporation, ERA Franchise Systems,
    Inc., NRT Incorporated, and Cendant Mortgage Corporation.
    (Incorporated by reference to Exhibit 10.1 to our quarterly
    report on Form 10-Q for the quarter ended June 30,
    2003 filed August 14, 2003.)
|       | 10 | .48           |  | Registration Rights Agreement dated
    August 5, 2003 among Homestore, Inc., Cendant Corporation
    and Cendant Membership Services Holdings, Inc. (Incorporated by
    reference to Exhibit 10.2 to our quarterly report on
    Form 10-Q for the quarter ended June 30, 2003 filed
    August 14, 2003.)                                                                                                                                                                                                             
|       | 10 | .49           |  | Listings License Agreement dated August 5,
    2003 between Cendant Corporation and Homestore, Inc.
    (Incorporated by reference to Exhibit 10.3 to our quarterly
    report on Form 10-Q for the quarter ended June 30,
    2003 filed August 14, 2003.)                                                                                                                                                                                                                                                              
|       | 10 | .50           |  | Source Code License and Maintenance Services
    Agreement dated August 5, 2003 between Homestore, Inc. and
    Cendant Corporation. (Incorporated by reference to
    Exhibit 10.4 to our quarterly report on Form 10-Q for
    the quarter ended June 30, 2003 filed August 14, 2003.)                                                                                                                                                                                                                                 
|       | 10 | .51           |  | Option Agreement dated August 5, 2003
    between Cendant Membership Services Holdings, Inc. and
    Homestore, Inc. (Incorporated by reference to Exhibit 10.5
    to our quarterly report on Form 10-Q for the quarter ended
    June 30, 2003 filed August 14, 2003.)                                                                                                                                                                                                                                                 
|       | 21 | .01           |  | Subsidiaries of Homestore, Inc.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 23 | .01           |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 23 | .02           |  | Report of PricewaterhouseCoopers LLP on Financial
    Statement Schedule.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 23 | .03           |  | Consent of Ernst & Young LLP, Independent
    Auditors.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 23 | .04           |  | Report of Ernst & Young LLP on Financial
    Statement Schedule.(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       | 24 | .01           |  | Power of Attorney (included on signature pages to
    this report).(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 31 | .01           |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.(2)                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 31 | .02           |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.(2)                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 32 | .01           |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.(2)                                                                                                                                                                                                                                                                                                                                                             
|       | 32 | .02           |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350 as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.(2)                                                                                                                                                                                                                                                                                                                                                             
|       | 99 | .01           |  | Schedule II  Valuation and
    Qualifying Accounts.(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) | Denotes management contracts and compensatory
    plans and arrangements.                                                                          

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##### Table of Contents



(b) Reports on Form 8-K

During the last quarter of the fiscal year ended
December 31, 2003, the registrant filed or furnished the
following Current Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Current Report on Form 8-K (filed
    pursuant to Item 4  Changes in Registrants
    Certifying Accountant) filed October 6, 2002 reporting the
    dismissal, effective September 29, 2003, by our Audit
    Committee of PwC as our accountants and the engagement of
    E&Y to serve as our accountants for the year ending
    December 31, 2003.
|
| | (2) Current Report on Form 8-K
    (furnished pursuant to Item 12  Results of
    Operations and Financial Condition) filed on November 13,
    2003, reporting the release of our financial results for the
    third quarter ended September 30, 2003.                                                                                                   

(c) Exhibits

See Item 15(a)(3) above.

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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, the registrant
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 15, 2004

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
jointly and severally, Lewis R. Belote, III and Michael R.
Douglas, and each one of them, his attorneys-in-fact, each with
the power of substitution, for him in any all capacities, to
sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.

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 15, 2004
|Principal Financial Officer and Principal
    Accounting Officer: |  |                                      |  |               
|                                                                 
|/s/ LEWIS R. BELOTE, IIILewis R. Belote, III                      |  | Chief Financial Officer              |  | March 15, 2004
|Additional Directors:                                             |  |                                      |  |               
|                                                                 
|/s/ JOE F. HANAUERJoe F. Hanauer                                  |  | Chairman of the Board and Director   |  | March 15, 2004
|/s/ TERRENCE M. MCDERMOTTTerrence M. McDermott                    |  | Director                             |  | March 15, 2004

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|                                       |  |          |  |               
|-------------------------------------- |  | -------- |  | --------------
|Signature                              |  | Title    |  | Date          
|                                       |  |          |  |               
|/s/ L. JOHN DOERRL. John Doerr         |  | Director |  | March 15, 2004
|/s/ WILLIAM E. KELVIEWilliam E. Kelvie |  | Director |  | March 15, 2004
|/s/ KENNETH K. KLEINKenneth K. Klein   |  | Director |  | March 15, 2004
|/s/ V. PAUL UNRUHV. Paul Unruh         |  | Director |  | March 15, 2004
|/s/ BRUCE G. WILLISONBruce G. Willison |  | Director |  | March 15, 2004

131