NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

        IAC is a leading internet company with more than 50 brands serving consumer audiences across more than 30 countries…our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. IAC includes the businesses comprising its Search segment; its Match and ServiceMagic segments; the businesses comprising its Media & Other segment; as well as investments in unconsolidated affiliates.

        All references to "IAC," the "Company," "we," "our" or "us" in this report are to IAC/InterActiveCorp.

Basis of Presentation

        The consolidated financial statements include the accounts of the Company, all entities that are wholly-owned by the Company and all entities in which the Company has a controlling financial interest, whether through voting interests or variable interests. The Company's consolidated financial statements include one variable interest entity, in which the Company has a controlling financial interest through voting rights and is also the primary beneficiary. Intercompany transactions and accounts have been eliminated. Investments in entities in which the Company has the ability to exercise significant influence over the operating and financial matters of the investee, but does not have a controlling financial interest, are accounted for using the equity method and are included in "Long-term investments" in the accompanying consolidated balance sheet.

        The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2010.

        The accompanying unaudited consolidated statements of operations and cash flows for the three months ended March 31, 2010 have been reclassified to present Evite, Gifts.com, IAC Advertising Solutions and InstantAction, all of which were previously reported in IAC's Media & Other segment, as discontinued operations. In addition, certain other prior year amounts have been reclassified to conform to the current year presentation.

Accounting Estimates

        The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosure of contingent assets and liabilities. Actual amounts could differ materially from these estimates. On an ongoing basis, the Company evaluates its estimates and judgments including those related to the fair values of marketable securities and other investments, goodwill and indefinite-lived intangible assets, the useful lives of definite-lived intangible assets and property and equipment, the carrying value of accounts receivable, including the determination of the allowances for doubtful accounts and other revenue related allowances, the reserves for income tax contingencies and the valuation allowances for deferred income tax assets and the fair value of stock-based awards, among others. The Company bases its estimates and judgments on historical experience, its forecasts and budgets and other factors that the Company considers relevant.

Restatement of Previously Issued Consolidated Financial Statements

        We have restated our consolidated financial statements as described in Note 13—RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS.

Certain Risks and Concentrations

        A substantial portion of the Company's revenue is attributable to online advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying behavior or advertiser spending behavior could adversely affect our operating results. A significant majority of the Company's online advertising revenue is attributable to a paid listing supply agreement with Google Inc. ("Google"). On April 8, 2011, this agreement was amended and extended through March 31, 2016. For the three months ended March 31, 2011 and 2010, revenue earned from Google is $214.9 million and $171.5 million, respectively. The majority of this revenue is earned by the businesses comprising the Search segment. Accounts receivable related to revenue earned from Google totaled $77.3 million at March 31, 2011 and $70.5 million at December 31, 2010.

NOTE 2—CONSOLIDATED FINANCIAL STATEMENT DETAILS

Property and equipment, net

Redeemable noncontrolling interests

Accumulated other comprehensive income

Other income (expense), net

Comprehensive income (loss)

        The specific-identification method is used to determine the cost of securities sold and the amount of unrealized gains and losses reclassified out of accumulated other comprehensive income into earnings. The amount of unrealized gains, net of tax, reclassified out of accumulated other comprehensive income into earnings related to the sales and maturities of available-for-sale securities for the three months ended March 31, 2011 and 2010 were $0.1 million and $2.5 million, respectively.

NOTE 3—INCOME TAXES

        At the end of each interim period, the Company makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax provision or benefit related to significant, unusual, or extraordinary items, if applicable, that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of a beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.

        The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (and/or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of the realizability of deferred tax assets generated in the current year. The accounting estimates used to compute the provision or benefit for income taxes may change as new events occur, more experience is acquired, additional information is obtained or our tax environment changes. To the extent that the expected annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in income tax provision for the quarter in which the change occurs.

        For the three months ended March 31, 2011, the Company recorded an income tax provision for continuing operations of $16.0 million, which represents an effective tax rate of 44%. The tax rate for the three months ended March 31, 2011 is higher than the federal statutory rate of 35% due principally to interest for income tax contingencies and state taxes, partially offset by foreign income taxed at lower rates. For the three months ended March 31, 2010, the Company recorded an income tax provision for continuing operations of $6.1 million on a pre-tax loss of $8.5 million. The continuing operations income tax provision, despite a pre-tax loss, is due principally to a valuation allowance on the deferred tax asset created by the impairment charge for our investment in The HealthCentral Network, Inc. ("HealthCentral"), interest on income tax contingencies and state taxes.

        At March 31, 2011 and December 31, 2010, unrecognized tax benefits, including interest, are $490.2 million and $487.6 million, respectively. Of the total unrecognized tax benefits at March 31, 2011, $478.2 million is included in "non-current income taxes payable," $11.9 million relates to deferred tax assets included in "other non-current assets" and $0.1 million is included in "accrued expenses and other current liabilities." Included in unrecognized tax benefits at March 31, 2011 is $98.4 million relating to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. If unrecognized tax benefits at March 31, 2011 are subsequently recognized, $106.1 million and $208.7 million, net of related deferred tax assets and interest, would reduce income tax provision for continuing operations and discontinued operations, respectively. In addition, a continuing operations income tax provision of $4.3 million would be required upon the subsequent recognition of unrecognized tax benefits for an increase in the Company's valuation allowance against certain deferred tax assets.

        The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax provision. Included in income tax provision for continuing operations and discontinued operations for the three months ended March 31, 2011 is a $2.1 million expense and a $1.5 million expense, respectively, net of related deferred taxes of $1.3 million and $0.9 million, respectively, for interest on unrecognized tax benefits. At March 31, 2011 and December 31, 2010, the Company has accrued $103.6 million and $97.7 million, respectively, for the payment of interest. At March 31, 2011 and December 31, 2010, the Company has accrued $5.0 million for penalties.

        The Company is routinely under audit by federal, state, local and foreign authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. The Internal Revenue Service ("IRS") has completed its review of the Company's tax returns for the years ended December 31, 2001 through 2003 and the proposed settlement has been submitted to the Joint Committee of Taxation for approval. The IRS is currently examining the Company's tax returns for the years ended December 31, 2004 through 2006. The statute of limitations for the years 2001 through 2006 has currently been extended to December 31, 2012. Various state, local and foreign jurisdictions are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with December 31, 2003. Income taxes payable include reserves considered sufficient to pay assessments that may result from examination of prior year tax returns. Changes to reserves from period to period and differences between amounts paid, if any, upon resolution of issues raised in audits and amounts previously provided may be material. Differences between the reserves for income tax contingencies and the amounts owed by the Company are recorded in the period they become known. The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by $64.3 million within twelve months of the current reporting date, of which approximately $15.7 million could decrease income tax provision, primarily due to settlements, expirations of statutes of limitation, and the reversal of deductible temporary differences that will primarily result in a corresponding decrease in net deferred tax assets. An estimate of other changes in unrecognized tax benefits, while potentially significant, cannot be made.

NOTE 4—BUSINESS COMBINATION

        On January 20, 2011, Match acquired OkCupid for $50.0 million in cash, plus potential additional consideration that is contingent upon OkCupid's 2011 earnings performance. The amount of the additional contingent consideration ranges from $0 to $40.0 million. The fair value of the contingent consideration arrangement at the acquisition date was $40.0 million and is included in "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheet at March 31, 2011. The Company estimated the fair value of the contingent consideration using a probability weighted earnings model, which incorporates significant unobservable inputs.

NOTE 5—MARKETABLE SECURITIES

        At March 31, 2011, available-for-sale marketable securities are as follows (in thousands):

        At December 31, 2010, available-for-sale marketable securities are as follows (in thousands):

        The net unrealized gains in the tables above are included in accumulated other comprehensive income for their respective periods.

        The contractual maturities of debt securities classified as available-for-sale at March 31, 2011 are as follows (in thousands):

        The following table summarizes investments in marketable securities that have been in a continuous unrealized loss position for less than twelve months (in thousands):

        At March 31, 2011 and December 31, 2010, there are no investments in marketable securities that have been in a continuous unrealized loss position for twelve months or longer.

        Substantially all of the Company's debt securities are rated investment grade. Because the Company does not intend to sell any marketable securities and it is not more likely than not that the Company will be required to sell any marketable securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider any of its marketable securities to be other-than-temporarily impaired at March 31, 2011.

        The following table presents the proceeds from sales and maturities of available-for-sale marketable securities and the related gross realized gains and losses (in thousands):