TREE

Business Context and Reporting Period

Company: Tree.com, Inc. (Parent of LendingTree, LLC)

Reporting Period: Fiscal Year Ended December 31, 2008

Corporate Status: Spun off from IAC/InterActiveCorp on August 20, 2008. Shares began trading on NASDAQ on August 21, 2008.

Business Segments:

• Lending Business: Online networks (LendingTree.com, GetSmart.com) matching consumers with lenders; direct origination and funding of residential loans (LendingTree Loans, HomeLoanCenter.com).
• Real Estate Business: Internet-enabled brokerage (RealEstate.com, REALTORS) operating in 20 markets; new home builder matching service (iNest).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 34% year-over-year. Lending revenue fell 35% due to reduced consumer demand, fewer loan closings, and a shift to lower-margin conforming loans. Real Estate revenue declined 31% due to fewer closings and the cessation of the agent network business.
• Impairment Charges: The 2008 net loss included significant non-cash impairment charges totaling $164.4 million ($103.6 million for Lending goodwill/intangibles and $60.8 million for Real Estate goodwill). This compares to $475.7 million in impairment charges in 2007.
• Operating Loss Improvement: Operating loss improved by $325.4 million compared to 2007, primarily driven by the reduction in impairment charges and cost-cutting measures (restructuring and marketing reductions).
• Loan Volume: The dollar value of loans closed by network lenders and LendingTree Loans decreased 40% to $15.0 billion in 2008 from $24.9 billion in 2007.

Guidance, Outlook, Risks, and Contingencies

Management Commentary & Outlook: Management anticipates continued adverse market conditions in the mortgage and real estate sectors. The company expects to adjust selling and marketing expenditures in relation to revenue opportunities. While the company believes current cash and borrowing capacity are sufficient for the foreseeable future, it faces increased costs operating as an independent public entity.

Key Risks:

• Credit Market Disruption: Severe constraints in the secondary mortgage market and credit availability threaten the ability to fund and sell loans. LendingTree Loans relies on warehouse lines of credit to fund operations.
• Financing Dependence: The company is highly dependent on renewing warehouse lines of credit. As of December 31, 2008, $100 million in committed lines and $150 million in uncommitted lines were available, with some expiring in early 2009.
• Legal Proceedings: Significant litigation includes:
  • Patent Litigation: Ongoing disputes with Source Search Technologies and Block Financial Corp. regarding loan-matching patents.
  • Employment Litigation: Multiple class actions regarding wage and hour violations (e.g., Gonzalez, Richardson, D'Asero). Settlements totaling approximately $5.9 million were reached or pending in 2008.
  • Privacy/Security: Multiple class actions arising from an April 2008 data breach where unauthorized parties accessed customer information. Most cases have been stayed pending arbitration.
  • Regulatory: South Carolina state lawsuits alleging failure to provide required mortgage broker disclosures.
• Loan Loss Obligations: The company maintains a reserve of $10.5 million for losses on previously sold loans due to representations and warranties obligations.

Investor Verification Checklist

• Verify the renewal status and terms of the $100 million committed warehouse lines of credit expiring in late 2009 and early 2010.
• Monitor the resolution of the April 2008 data breach class action lawsuits currently in arbitration.
• Assess the impact of the $164.4 million impairment charges on future asset valuations and potential for additional write-downs.
• Review the status of the South Carolina mortgage broker litigation and potential regulatory penalties.
• Track the company's ability to maintain liquidity given the 34% revenue decline and continued operating losses.