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 and six months ended June 30, 2011 were $1.3 million and $1.4 million, respectively. The amount of unrealized gains, net of tax, reclassified out of accumulated other comprehensive income

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—CONSOLIDATED FINANCIAL STATEMENT DETAILS (Continued)

into earnings related to the sales and maturities of available-for-sale securities for the three and six months ended June 30, 2010 were less than $0.1 million and $2.7 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. Included in the income tax provision for the three months ended June 30, 2011 is a benefit of $0.7 million due to a lower estimated annual effective tax rate from that applied to the first quarter's ordinary income from continuing operations.

        For the three and six months ended June 30, 2011, the Company recorded an income tax provision for continuing operations of $9.5 million and $25.6 million, respectively, which represent effective tax rates of 17% and 28%, respectively. The tax rates for the three and six months ended June 30, 2011 are lower than the federal statutory rate of 35% due principally to the reduction in state tax accruals resulting from income tax provision to tax return reconciliations and the expiration of statutes of limitations and foreign income taxed at lower rates, partially offset by interest on tax contingencies and state taxes.

        For the three and six months ended June 30, 2010, the Company recorded an income tax provision for continuing operations of $5.3 million and $11.5 million, respectively, which represent effective tax rates of 26% and 93%, respectively. The tax rate for the three months ended June 30, 2010 is lower than the federal statutory rate of 35% due principally to foreign tax credits, partially offset by interest on tax contingencies and state taxes. The tax rate for the six months ended June 30, 2010 is higher than the federal statutory rate of 35% 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 tax contingencies and state taxes, partially offset by foreign tax credits.

        At June 30, 2011 and December 31, 2010, unrecognized tax benefits, including interest, are $473.3 million and $487.6 million, respectively. Of the total unrecognized tax benefits at June 30, 2011, $460.1 million is included in "non-current income taxes payable," $12.3 million relates to deferred tax assets included in "other non-current assets" and $0.8 million is included in "accrued expenses and other current liabilities." Included in unrecognized tax benefits at June 30, 2011 is $94.9 million relating

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—INCOME TAXES (Continued)

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 June 30, 2011 are subsequently recognized, $95.1 million and $210.7 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 June 30, 2011 is a $1.5 million benefit and a $1.9 million expense, respectively, net of related deferred taxes of $1.0 million and $1.2 million, respectively, for interest on unrecognized tax benefits. Included in income tax provision for continuing operations and discontinued operations for the six months ended June 30, 2011 is a $0.6 million expense and a $3.3 million expense, respectively, net of related deferred taxes of $0.4 million and $2.1 million, respectively, for interest on unrecognized tax benefits. At June 30, 2011 and December 31, 2010, the Company has accrued $104.2 million and $97.7 million, respectively, for the payment of interest. At June 30, 2011 and December 31, 2010, the Company has accrued $4.5 million and $5.0 million, respectively, 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 2006. The settlement has not yet been submitted to the Joint Committee of Taxation for approval. The IRS began its review of the Company's tax returns for the years ended December 31, 2007 through 2009 in July 2011. The statute of limitations for the years 2001 through 2007 has currently been extended to December 31, 2012. Various state and local jurisdictions are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with 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 $57.0 million within twelve months of the current reporting date, of which approximately $10.9 million could decrease income tax provision, primarily due to settlements, expirations of statutes of limitations, 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 of up to $40.0 million that was contingent upon OkCupid's 2011 earnings performance. During the second quarter of 2011, the provisions of this contingent consideration arrangement were

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4—BUSINESS COMBINATION (Continued)

amended. Pursuant to the amendment, $30.0 million was paid to the former owners, and a potential additional payment of up to $10.0 million is contingent upon revised performance goals. The fair value of the contingent consideration at June 30, 2011 is $10.0 million and is included in "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheet. The Company estimated the fair value of the contingent consideration using its judgment of the likelihood of achieving the revised performance goals, which incorporates significant unobservable inputs.

NOTE 5—MARKETABLE SECURITIES

        At June 30, 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 June 30, 2011 are as follows (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5—MARKETABLE SECURITIES (Continued)

        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 June 30, 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 June 30, 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):

        Gross realized gains and losses from the sales of marketable securities and from the sales of investments are included in "Other income, net" in the accompanying consolidated statement of operations.

NOTE 6—FUNDS HELD IN ESCROW FOR MEETIC TENDER OFFER

        On July 8, 2011, IAC launched its previously announced tender offer for the 73% of Meetic that it does not own at a price per share of €15.00. The initial phase of the tender offer will close on August 29, 2011 and the second phase of the tender offer will close on September 19, 2011. In connection with the tender offer, IAC was obligated to place sufficient funds in escrow to purchase 100% of the shares that it does not own or $360.6 million. These funds are classified as a non-current asset as their expected use is to acquire a non-current asset. At the conclusion of the tender process, any unused funds will be returned to IAC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—FAIR VALUE MEASUREMENTS

        The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are:

•

Level 1: Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.



•

Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data. The fair value of the Company's level 2 financial assets is primarily obtained from observable market prices for identical underlying securities that may not be actively traded. Certain of these securities may have different market prices from multiple market data sources, in which case a weighted average market price is used.



•

Level 3: Unobservable inputs for which there is little or no market data and require the Company to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability. See below for a discussion of assets measured at fair value using level 3 inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—FAIR VALUE MEASUREMENTS (Continued)

        The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—FAIR VALUE MEASUREMENTS (Continued)

        The following tables present the changes in the Company's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

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IAC/INTERACTIVECORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—FAIR VALUE MEASUREMENTS (Continued)

        There are no gains or losses included in earnings for the three and six months ended June 30, 2011 and 2010, relating to the Company's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs.

Auction rate securities

        The Company's auction rate securities ("ARS") are valued by discounting the estimated future cash flow streams of the securities over the lives of the securities. Credit spreads and other risk factors are also considered in establishing fair value. During the first quarter of 2011, one of the ARS was redeemed at its par value of $5.0 million. The cost basis of ARS is $10.0 million and $15.0 million at June 30, 2011 and December 31, 2010, respectively, with gross unrealized losses of $1.3 million and $1.9 million at June 30, 2011 and December 31, 2010, respectively. The unrealized losses are included in "Accumulated other comprehensive income" in the accompanying consolidated balance sheet. At June 30, 2011, the remaining auction rate security is rated A/WR and matures in 2035. Due to its high credit rating and because the Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell this security before recovery of its amortized cost basis, which may be maturity, the Company does not consider the auction rate security to be other-than-temporarily impaired at June 30, 2011.

Contingent consideration arrangement

        See Note 4 for information regarding the contingent consideration arrangement.

Assets measured at fair value on a nonrecurring basis

        The Company's non-financial assets, such as goodwill, intangible assets and property and equipment, as well as equity and cost method investments, are measured at fair value only when an impairment charge is recognized. Such fair value measurements are based predominantly on Level 3 inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—FAIR VALUE MEASUREMENTS (Continued)

        During the first quarter of 2010, the Company recorded an $18.3 million impairment charge to write-down its investment in HealthCentral to fair value. The decline in value was determined to be other-than-temporary due to HealthCentral's continued losses and negative operating cash flows. The Company estimated the fair value of its investment in HealthCentral using a multiple of revenue approach. The impairment charge is included within "Equity in losses of unconsolidated affiliates" in the accompanying consolidated statement of operations.

NOTE 8—FINANCIAL INSTRUMENTS

        The fair values of the financial instruments listed below have been determined by the Company using available market information and appropriate valuation methodologies.

        The carrying value of cash equivalents approximates fair value due to their short-term maturity. The funds held in escrow for the Meetic tender offer consist of cash and cash equivalents. The carrying value of these cash equivalents approximates fair value due to their short-term maturity. The fair value of notes receivable is based on discounting the expected future cash flow streams using yields of the underlying credit. The fair value of long-term debt is estimated using quoted market prices or indices for similar liabilities and taking into consideration other factors such as credit quality and maturity. The fair value of the letters of credit and surety bond are based on the present value of the costs associated with maintaining these instruments over their expected term. See Note 5 for discussion of the fair value of marketable securities, Note 7 for discussion of the fair value of the auction rate securities and Note 4 for discussion of the fair value of the contingent consideration arrangement.

        The Company has guaranteed $5.0 million of The Newsweek/Daily Beast Company's $10.0 million line of credit. At June 30, 2011, $10.0 million had been drawn on this line of credit. The carrying value and fair value of this guarantee represents the amount the Company expects to pay to settle this obligation.

        At June 30, 2011 and December 31, 2010, the carrying values of the Company's investments accounted for under the cost method totaled $6.9 million and $39.0 million, respectively, and are included in "Long-term investments" in the accompanying consolidated balance sheet. IAC's investment in The Active Network, Inc., which was previously accounted for under the cost method, became an investment measured at fair value during the second quarter of 2011. The cost basis of this long-term

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IAC/INTERACTIVECORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—FINANCIAL INSTRUMENTS (Continued)

marketable equity security was $33.4 million at June 30, 2011, with a gross unrealized gain of $47.5 million included in "Accumulated other comprehensive income" in the accompanying consolidated balance sheet. The Company evaluates each cost method investment for impairment on a quarterly basis and recognizes an impairment loss if a decline in value is determined to be other-than-temporary. If the Company has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of a cost method investment, then the fair value of such cost method investment is not estimated, as it is impracticable to do so.

NOTE 9—EARNINGS (LOSS) PER SHARE

        The following tables set forth the computation of basic and diluted earnings (loss) per share attributable to IAC shareholders.