LENDINGTREE INC
CONSOLIDATED FINANCIAL STATEMENTS OF HOMESPACE
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>6
<FILENAME>g64565ex10-5.txt
<DESCRIPTION>CONSOLIDATED FINANCIAL STATEMENTS OF HOMESPACE
<TEXT>

<PAGE>   1

                                                                    EXHIBIT 10.5








CONSOLIDATED FINANCIAL STATEMENTS
HomeSpace, Inc.
Years ended March 31, 2000 and 1999
with Report of Independent Auditors


<PAGE>   2


                                 HomeSpace, Inc.

                        Consolidated Financial Statements

                       Years ended March 31, 2000 and 1999




                                    CONTENTS

Report of Independent Auditors ...............................................1

Audited Consolidated Financial Statements

Consolidated Balance Sheets...................................................3
Consolidated Statements of Operations.........................................5
Consolidated Statements of Shareholders' Equity...............................6
Consolidated Statements of Cash Flows.........................................7
Notes to Consolidated Financial Statements....................................8




<PAGE>   3

                         Report of Independent Auditors

The Board of Directors and Shareholders
HomeSpace, Inc.

We have audited the accompanying consolidated balance sheets of HomeSpace, Inc.
as of March 31, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits 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 consolidated 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 audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HomeSpace, Inc. at March 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has incurred losses of $38,115,039 and
$13,465,420 for the years ended March 31, 2000 and 1999, respectively. These
losses have significantly weakened the Company's financial position and its
ability to meet current operating expenses, and, at March 31, 2000, the
Company's current liabilities exceeded its current assets by $1,369,232.

As further discussed in Note 1, the Company is currently seeking additional
financing or a potential sale of the Company in an attempt to obtain additional
sources of funds which, in management's opinion, would provide adequate cash
flows to finance the Company's operations. The satisfactory completion of these
negotiations is essential as the Company has no other immediate plans that will
provide sufficient cash flows to meet current operating requirements. Because
the negotiations are still in progress, there can be no assurance that the
Company will have sufficient funds to finance its operations, which continue to
show losses, through the period ending May 31, 2000. All of these matters



                                                                               1
<PAGE>   4

raise substantial doubt about the Company's ability to continue as a going
concern and, in the event the negotiations for continued financing or a sale are
unsuccessful, management will need to consider other alternatives including the
potential liquidation of the Company. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts or classifications of
liabilities that may result from the outcome of this uncertainty.



                                                  ERNST & YOUNG LLP

Los Angeles, California
June 5, 2000



                                                                               2
<PAGE>   5

                                 HomeSpace, Inc.

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                     MARCH 31
                                                              2000                1999
                                                          ------------         -----------
<S>                                                       <C>                  <C>
ASSETS
Current assets:
   Cash                                                   $  4,842,340         $ 3,527,421
   Prepaid expenses                                             88,056              37,500
   Accounts receivable                                         137,785             641,939
   Mortgage loans held for sale                              5,529,000                  --
                                                          ------------         -----------
Total current assets                                        10,597,181           4,206,860



Property and equipment, at cost                              7,115,004           2,731,608
Accumulated depreciation                                    (2,558,386)         (1,118,430)
                                                          ------------         -----------
                                                             4,556,618           1,613,178


Capitalized software expenditures and enhancements           1,232,874             908,155
Accumulated depreciation                                            --             (40,375)
                                                          ------------         -----------
                                                             1,232,874             867,780





Lease deposits and other assets                                993,875             633,260







                                                          ------------         -----------
Total assets                                              $ 17,380,548         $ 7,321,078
                                                          ============         ===========
</TABLE>



3
<PAGE>   6


<TABLE>
<CAPTION>
                                                                                MARCH 31
                                                                        2000                 1999
                                                                    ------------         ------------
<S>                                                                 <C>                  <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Warehouse line of credit                                         $  5,463,946         $         --
   Note payable                                                          200,000              200,000
   Accounts payable                                                    3,977,771            1,649,191
   Accrued expenses                                                      426,806              482,959
   Capital lease obligation - short-term portion                       1,897,890              474,929
                                                                    ------------         ------------
Total current liabilities                                             11,966,413            2,807,079

Capital lease obligation - long-term portion                           1,867,573              464,801
                                                                    ------------         ------------
                                                                      13,833,986            3,271,880
Commitments and contingencies (Note 10)

Shareholders' equity:
   Series B preferred stock, $.001 par value
     23,695,877 shares authorized,
     23,180,413 and 2,561,855 shares issued and outstanding,
     respectively                                                         23,181                2,562
   Series C preferred stock, $.001 par value
     10,745,327 shares authorized,
     9,870,739 shares issued and outstanding                               9,871                   --
   Common stock, $.001 par value
     25,000,000 shares authorized,
     5,847,043 and 5,222,457 shares issued and outstanding,
     respectively                                                          5,847                5,222
   Paid-in capital in excess of par                                   75,319,014           24,449,003
   Preferred stock to be issued                                               --           12,666,653
   Treasury stock                                                       (539,796)                  --
   Note receivable for common stock                                   (1,822,673)          (1,740,399)
   Accumulated deficit                                               (69,448,882)         (31,333,843)
                                                                    ------------         ------------
Total shareholders' equity                                             3,546,562            4,049,198
                                                                    ------------         ------------
Total liabilities and shareholders' equity                          $ 17,380,548         $  7,321,078
                                                                    ============         ============
</TABLE>

See accompanying notes.


                                                                               4
<PAGE>   7

                                 HomeSpace, Inc.

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                             YEAR ENDED MARCH 31
                                                          2000                 1999
                                                      ------------         ------------
<S>                                                   <C>                  <C>

REVENUES
Mortgage services                                     $  2,783,023         $  3,732,601
Real estate services                                     3,402,696            1,916,863
Home services                                               22,687                3,710
                                                      ------------         ------------
Total revenues                                           6,208,406            5,653,174

OPERATING EXPENSES
Mortgage origination                                       429,099              668,369
Real estate referral costs                               2,698,739            1,510,670
Depreciation and amortization                            2,054,681              662,420
Equipment leasing and rentals                              715,668              564,375
Compensation and related benefits                       15,986,711            9,587,124
Occupancy and related costs                              2,015,069            1,286,469
Technical expenses                                       7,291,760              328,437
General and administrative                              10,654,197            4,187,887
Write-off of capitalized software expenditures           2,032,734                   --
                                                      ------------         ------------
Total operating expenses                                43,878,658           18,795,751
                                                      ------------         ------------

Operating loss                                         (37,670,252)         (13,142,578)
Interest expense                                          (362,502)            (492,468)
Other (expense) income                                     (82,285)             169,625
                                                      ------------         ------------
Net loss                                              $(38,115,039)        $(13,465,420)
                                                      ============         ============
</TABLE>

See accompanying notes.


                                                                               5
<PAGE>   8

                                 HomeSpace, Inc.

                 Consolidated Statements of Shareholders' Equity


<TABLE>
<CAPTION>
                                                                                              NOTES                        TOTAL
                          SERIES B   SERIES C                      ADDITIONAL  PREFERRED  RECEIVABLE FOR               SHAREHOLDERS'
                          PREFERRED PREFERRED  COMMON   TREASURY    PAID-IN   STOCK TO BE     COMMON     ACCUMULATED      EQUITY
                            STOCK     STOCK    STOCK     STOCK      CAPITAL     ISSUED        STOCK        DEFICIT       (DEFICIT)
                          ----------------------------------------------------------------------------------------------------------
<S>                        <C>      <C>      <C>      <C>        <C>         <C>           <C>           <C>           <C>

Balance at March 31, 1998  $     -  $     -  $ 3,881  $       -  $14,541,217 $          -  $(2,523,376)  $(17,868,423) $ (5,846,701)
Issuance of common stock
   in exchange for
   services at $1.94
   per share                     -        -        2          -        4,668            -            -              -         4,670
Issuance of common stock
   in exchange for note
   payable at $5.90 per
   share                         -        -    1,339          -    7,905,681            -      782,977              -     8,689,997
Issuance of Series B
   preferred stock for
   cash at $.78 per
   share                     2,562        -        -          -    1,997,437            -            -              -     1,999,999
Series B preferred
   stock to be issued            -        -        -          -            -   12,666,653            -              -    12,666,653
Net loss                         -        -        -          -            -            -            -    (13,465,420)  (13,465,420)
                          ---------------------------------------------------------------------------------------------------------
Balance at March 31, 1999    2,562        -    5,222          -   24,449,003   12,666,653   (1,740,399)   (31,333,843)    4,049,198
Accrued interest                 -        -        -          -            -            -      (82,274)             -       (82,274)
Repurchase of common
   stock at $1.94
   per share                     -        -        -   (539,796)           -            -            -              -      (539,796)
Issuance of Series B
   preferred stock for
   cash at $.97 per
   share                    20,619        -        -          -   19,979,381  (12,666,653)           -              -     7,333,347
Issuance of Series C
   preferred stock for
   cash at $3.02 per
   share                         -    9,871        -          -   29,898,467            -            -              -    29,908,338
Issuance of common stock
   issued for cash at
   $1.94 per share               -        -      425          -      604,363            -            -              -       604,788
Issuance of common stock
   issued to settle
   liability at $1.94
   per share                     -        -      200          -      387,800            -            -              -       388,000
Net loss                         -        -        -          -            -            -            -    (38,115,039)  (38,115,039)
                          ---------------------------------------------------------------------------------------------------------
Balance at March 31, 2000  $23,181  $ 9,871  $ 5,847  $(539,796) $75,319,014 $          -  $(1,822,673)  $(69,448,882) $  3,546,562
                          =========================================================================================================
</TABLE>

See accompanying notes.


6
<PAGE>   9

                                 HomeSpace, Inc.

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                          YEAR ENDED MARCH 31
                                                                       2000                  1999
                                                                   ------------         ------------
<S>                                                                <C>                  <C>
OPERATING ACTIVITIES
Net loss                                                           $(38,115,039)        $(13,465,420)
Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation and amortization expense                            2,196,366              662,419
     Write-off of capitalized software                                2,032,734                   --
     Write-off of uncollectible notes                                        --               20,000
     (Increase) decrease in prepaid expenses                            (50,556)                (946)
     Decrease (increase) in accounts receivable                         504,154             (446,899)
     Increase in mortgage loans held for sale                        (5,529,000)            (142,393)
     Decrease (increase) in lease deposits and other assets             360,615             (599,460)
     Increase in accounts payable and accrued expenses                2,272,427            1,086,556
     Increase in warehouse line of credit                             5,463,946                   --
     Other operating increases                                          598,603              209,296
                                                                   ------------         ------------
Net cash used in operating activities                               (30,265,750)         (12,886,143)
                                                                   ------------         ------------

INVESTING ACTIVITIES
Purchase of property and equipment                                   (4,383,395)          (1,298,389)
Capitalized software expenditures                                    (2,782,553)            (908,155)
                                                                   ------------         ------------
Net cash used in investing activities                                (7,165,948)          (2,206,544)
                                                                   ------------         ------------

FINANCING ACTIVITIES
Payments of capital lease obligation                                 (1,773,793)            (905,000)
Increases of capital lease obligations                                2,825,733              279,649
Repurchase of common stock                                             (539,796)                  --
Issuance of common stock                                                992,788                   --
Issuance of Series C preferred stock                                 29,908,338            3,202,020
Repayment of notes receivable                                                --              858,000
Issuance of Series B preferred stock                                  7,333,347           14,666,652
                                                                   ------------         ------------
Net cash provided by financing activities                            38,746,617           18,101,321
                                                                   ------------         ------------

Net increase in cash                                                  1,314,919            3,008,634
Cash at beginning of year                                             3,527,421              518,787
                                                                   ------------         ------------
Cash at end of year                                                $  4,842,340         $  3,527,421
                                                                   ============         ============

SUPPLEMENTAL DISCLOSURES
Non-cash transaction - issuance of common stock                    $    388,000         $      4,670
Interest paid                                                           288,288              410,254
</TABLE>

See accompanying notes.



                                                                               7
<PAGE>   10

                                 HomeSpace, Inc.

                   Notes to Consolidated Financial Statements

                                 March 31, 2000


1. DESCRIPTION OF BUSINESS

ORGANIZATION

HomeSpace, Inc. (the Company) was incorporated in the state of Florida and began
operations on April 1, 1997. Prior to that date the Company was a development
stage enterprise.

The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly owned subsidiaries (HomeSpace Services,
Inc. and HomeSpace Delaware Inc.). All significant intercompany transactions and
balances have been eliminated in consolidation.

BUSINESS AND OPERATIONS

The Company provides mortgage brokerage services and real estate services to
consumers located throughout the United States. The Company markets its services
through affinity relationships with retailers, corporations and member
associations. Real estate services are provided through a network of real estate
brokers, and the Company arranges mortgage financing through a number of
financial institutions.

In August 1997, Costco Wholesale Corporation (Costco) contracted with the
Company to provide mortgage and real estate services to its 28 million members.
The significance of this contract caused senior management to redirect its real
estate broker strategy and to devote its primary attention to implementing the
Costco program. Processes and procedures were modified in order to present
mortgage loan options directly to Costco members and to take mortgage
applications through the Company's National Transactions Center in Englewood,
Colorado.

Management has decided that it will use the Costco program to attract other
affinity groups and corporate sponsors, which in turn, will increase the
Company's real estate and mortgage loan market share. The Company developed and
launched a web site in November 1999. Management has placed emphasis on growing
the business to gain market share.


                                                                               8
<PAGE>   11

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)




1. DESCRIPTION OF BUSINESS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES

From inception, the Company has incurred net losses and negative cash flows. The
Company's continued existence is dependent upon its ability to generate
sufficient revenues to produce profitable operations and/or obtaining additional
debt and equity capital. Subsequent to year end (May 2000), the Company raised
$3.8 million through a debt offering with existing shareholders. The Company
anticipates a further round of financing in the third quarter of fiscal 2000 or
a sale of the Company. However, there can be no assurance that additional
financing will be available. If adequate funds are not available, or are not
available on terms acceptable to the Company, the Company may be required to
curtail its operations significantly, forego market opportunities, or obtain
funds through strategic partners or others that may require the Company to
relinquish material rights to certain of its technologies or potential markets.

The Company is currently seeking additional financing or a potential sale of the
Company in an attempt to obtain additional sources of funds which, in
management's opinion, would provide adequate cash flows to finance the Company's
operations. The satisfactory completion of these negotiations is essential as
the Company has no other immediate plans that will provide sufficient cash flows
to meet current operating requirements. Because the negotiations are still in
progress, there can be no assurance that the Company will have sufficient funds
to finance its operations, which continue to show losses, through the period
ending May 31, 2000. All of these matters raise substantial doubt about the
Company's ability to continue as a going concern and, in the event the
negotiations for continued financing or a sale are unsuccessful, management will
need to consider other alternatives including the potential liquidation of the
Company. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts or classifications of liabilities that may result from the
outcome of this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUES

Revenues and related direct costs are recognized at the time all significant
services have been completed. For mortgage services, this is at the time loans
are closed. For real estate services, revenue is recognized when cash payments
are received from realtors.


                                                                               9
<PAGE>   12

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is provided on a straight-line basis over
estimated useful lives of three to five years.

CAPITALIZED SOFTWARE EXPENDITURES

The Company capitalizes software expenditures for development of, and
enhancements to, its real estate services and mortgage brokerage software and
amortizes such costs over an estimated useful life of three years. The
capitalized software expenditures as of March 31, 2000, are primarily for the
development of, and enhancements to, the Company's Customer Relationship
Management (CRM) System that will be used to offer mortgage brokerage, real
estate and other homeowner services. Management determined that some of the
previously capitalized expenditures associated with the development of software
to be used internally was no longer useful and/or salable as of March 31, 2000.
The costs for such software totaled $2,687,834 with prior period amortization of
$655,100 for a net cost of $2,032,734, which was written off as of March 31,
2000.

MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are reported net of discounts and are valued at the
lower of cost or market, determined on an aggregate basis. Any gain or loss on
the sale of the loans is recognized at the time of sale.

INCOME TAXES

The Company utilizes the liability method of accounting for income taxes as set
forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in the years in which the differences are expected to reverse. Recognition
of deferred tax assets is limited to amounts considered by management to be
realizable in future periods.


                                                                              10
<PAGE>   13

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

Advertising costs, which consist of developing and printing costs of brochures
and other marketing materials, are charged to expense when incurred. For the
years ended March 31, 2000 and 1999, advertising costs totaled $2,098,961 and
$41,618, respectively.

ESCROW BALANCES

The Company held escrow balances in trust of $149,409 and $156,474 as of March
31, 2000 and 1999, respectively.

CASH FLOWS

For purposes of the consolidated statement of cash flows, cash includes demand
deposits with maturities of less than three months. None of the Company's cash
is restricted.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

The majority of the Company's revenue is generated from services provided to
executive members of Costco. The Company and Costco have a contractual agreement
under which these services are provided, but the contract can be terminated by
either party with 10-days written notice.

All cash deposits are held by one financial institution and exceed the existing
federal deposit insurance coverage limit.


                                                                              11
<PAGE>   14

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

4. PROPERTY AND EQUIPMENT

Property and equipment at March 31, 2000 and 1999, are recorded at cost and
consisted of the following:

                                                    2000               1999
                                                 -----------        -----------

Computer equipment                               $ 2,209,502        $   914,040
Furniture and fixtures                                90,587            281,149
Equipment under capital leases                     4,506,089          1,481,280
Leasehold improvements                               308,826             55,139
                                                 -----------        -----------
Gross book value                                   7,115,004          2,731,608
Accumulated depreciation and amortization         (2,558,386)        (1,118,430)
                                                 -----------        -----------
Net book value                                   $ 4,556,618        $ 1,613,178
                                                 ===========        ===========

5. WAREHOUSE LINE OF CREDIT

In October 1999, the Company entered into a revolving Warehouse Line of Credit
Agreement with a financial institution in the amount of $15,000,000 bearing
interest at prime plus .25% to 1% depending upon the length of time of
repayment. The line of credit is secured by mortgage loans and as of March 31,
2000, the outstanding balance was $5,463,946.

6. NOTE PAYABLE

The Company secured a $200,000 demand loan from Costco on October 24, 1998. The
note bears interest from the date of advance at a variable per annum rate (8.8%
as of March 31, 2000).

7. SHAREHOLDERS' EQUITY

The Company is authorized to issue 40,000,000 shares of convertible preferred
stock of which 4,000,000, 23,695,877 and 10,745,327 shares have been designated
as "Series A," Series B" and "Series C," respectively, having $3.03, $0.97 and
$3.03 per share liquidation preferences, respectively. As of March 31, 2000 and
1999, there were no preferred Series A shares issued or outstanding.


                                                                              12
<PAGE>   15

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)


7. SHAREHOLDERS' EQUITY (CONTINUED)

The preferred Series B shares are convertible into common shares at a rate of
two shares of preferred Series B to one share of common as of March 31, 2000.
The holders of the preferred Series B shares are entitled to receive, when and
if declared by the board of directors, noncumulative cash dividends at a rate of
$0.097 per share, in preference to any declaration or payment on the common
shares. The holders of the preferred Series B shares are entitled to vote
together with the shares of common stock as one class, at the equivalent amount
of common shares as if converted.

During November 1999, the Company received $29,908,338 in connection with an
equity capital contribution transaction. Under the terms of this transaction,
the Company issued 9,870,739 shares of Series C preferred stock.

8. EMPLOYEE BENEFIT PLAN

On January 1, 1998, the Company established a defined contribution profit
sharing and salary reduction plan covering all employees meeting general
eligibility requirements. Pursuant to the provisions of Internal Revenue Code
Section 401(k), the plan has received a favorable determination letter from the
Internal Revenue Service. Employees are 100% vested in all personal salary
reduction contributions and related earnings. Employer matching contributions
equal 50% of the first 5% of employee contributions and vest over four years.
For the years ended March 31, 2000 and 1999, employer contributions totaled
$131,719 and $99,131, respectively.

9. INCOME TAXES

At March 31, 2000 and 1999, the Company had net operating loss carryforwards of
approximately $69,200,000 and $31,000,000, respectively. These carryforwards
expire between the years 2007 and 2020 and may be subject to limitation of use
under the provisions of Internal Revenue Code Section 382 and corresponding
state sections.


                                                                              13
<PAGE>   16

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

9. INCOME TAXES (CONTINUED)

Pursuant to Statement of Financial Accounting Standards No. 109, the Company has
recorded a deferred tax asset for the net operating loss carryforwards at March
31, 2000 and 1999, in the amounts below, which have been offset by a valuation
allowance in the same amount, as follows:

                                                       MARCH 31
                                               2000                 1999
                                           ------------         ------------
Deferred tax asset:
   Net operating loss carryforwards        $ 24,900,000         $ 10,540,000
   Valuation allowance                      (24,900,000)         (10,540,000)
                                           ------------         ------------
Net                                        $         --         $         --
                                           ============         ============

10. COMMITMENTS AND CONTINGENCIES

LEASES

Beginning May 1, 1996, the Company leased facilities located in Ontario,
California, from a corporation owned by two stockholders, one of whom is also a
director, under a noncancelable operating lease expiring March 1999. In July
1997, the lease was renegotiated to a month-to-month basis and this lease was
terminated in January 2000. For the years ended March 31, 2000 and 1999, rent
expense under this lease totaled $95,119 and $126,825, respectively.

Beginning September 1, 1996, the Company also leased office facilities in
Englewood, Colorado, under a noncancelable operating lease expiring in May 2002.
Additional Englewood facilities were leased on September 30, 1998, with a lease
expiration on May 31, 2001. For the years ended March 31, 2000 and 1999, rent
expense under these leases totaled $1,393,572 and $739,082, respectively. In
March 2000, facilities originally leased in Englewood, Colorado, were subleased
for the balance of the lease term.

In November 1999, the Company leased office facilities in Pasadena, California,
under a 60-month noncancelable operating lease. The Company occupied these
facilities in June 2000. Rent expense under this lease will average $586,000 per
year.


                                       14
<PAGE>   17

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)


10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LEASES (CONTINUED)

Future minimum lease payments required under the above operating and capital
leases are as follows:

                                        OPERATING          CAPITAL
YEAR ENDING MARCH 31                      LEASES           LEASES
                                    ------------------------------------

   2001                               $    1,145,470    $    1,897,890
   2002                                      663,602         1,605,622
   2003                                      669,344           750,441
   2004                                      669,344           170,093
   2005 and thereafter                       957,533                 -
                                    ------------------------------------
                                           4,105,293         4,424,046
Less current portion                               -        (1,897,890)
Amount representing interest                       -          (658,583)
                                    ------------------------------------
                                      $    4,105,293    $    1,867,573
                                    ====================================

SEVERANCE PLAN

The Company adopted a Severance Plan on March 16, 2000 (the Plan), providing
members of executive management with severance payments in the event of an
involuntary termination of employment other than for cause or a voluntary
termination of employment for good reason within 12 months following a change of
control transaction via a triggering event as defined in the Plan. Senior vice
presidents and higher level officers are entitled to one year's compensation and
employee benefits and vice presidents are entitled to six months' compensation
and employee benefits. Severance payments are conditioned upon release from
liability, non-disclosure of confidential information, non-solicitation of
employees and others, non-competition, and transitional assistance. As of March
31, 2000, the Company estimates that approximately $3,050,000 would be payable
to all executive management upon the occurrence of a triggering event.


                                                                              15
<PAGE>   18

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LITIGATION

As of April 1, 1999, the Company was in dispute with a corporation over 1.4
million shares of Series A convertible preferred stock (convertible into 560,000
shares of common stock) that were to be issued pursuant to a proposed merger
transaction. On December 15, 1999, the Company entered into a confidential
settlement agreement with the other corporation releasing all claims. The
Company transferred shares of its common stock and cash to the other
corporation. Certain shareholders of the Company agreed to indemnify the Company
in connection with the dispute and pledged shares of common stock to secure
their indemnity obligations. Effective March 1, 2000, the Company repurchased
certain pledged shares from two shareholders and accepted the equivalent cash
value in satisfaction of such indemnification.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, mortgage loans held for
sale, accounts receivable, and a note payable.

CASH

The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and management believes there are no significant credit risks
affecting cash.

MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are sold to a third party upon origination by the
Company on a flow basis and no significant credit or interest rate risk exists.
Accordingly, management believes the carrying amounts of the loans represent
fair value.

ACCOUNTS RECEIVABLE

Accounts receivable are short term in nature (less than 30 days). Management
monitors amounts owed to the Company and no significant credit risks exist with
respect to collectibility. Accordingly, management believes the carrying amounts
of these receivables represent fair value.


                                                                              16
<PAGE>   19

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

NOTE PAYABLE

Management believes the carrying value of the note payable represents the fair
value of this financial instrument because its terms are similar to those in the
lending market for comparable loans with comparable risks.

12. STOCK OPTIONS

The Company has granted common stock options to executive management and other
employees and uses the intrinsic-value method of accounting for these stock
options. Accordingly, no compensation cost for options granted has been
recognized in the accompanying financial statements. All outstanding options are
currently exercisable and they expire generally at employment termination.
Exercise prices range from $1.94 to $6.25 per share.

The following table summarizes information about the Company's stock options
outstanding at March 31, 2000:

                                   WEIGHTED-AVERAGE
   RANGE OF          NUMBER           REMAINING           WEIGHTED-AVERAGE
EXERCISE PRICES   OUTSTANDING      CONTRACTUAL LIFE        EXERCISE PRICE
--------------------------------------------------------------------------------

     $1.94            5,609,000        4.8 YEARS                 $1.94
  $5.25-$6.25           265,000        4.8 YEARS                 $5.99


                                                                              17
<PAGE>   20

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

12. STOCK OPTIONS (CONTINUED)

The following is a schedule of the activity relating to the Company's stock
options for the year ended March 31, 2000:

                                                                     WEIGHTED-
                                                                     AVERAGE
                                                     SHARES          EXERCISE
                                                    (000'S)            PRICE
                                                    ----------------------------

Options outstanding at beginning of year                 4,982          $1.39
Granted                                                  4,542           1.94
Exercised                                                    -              -
Expired/rescinded                                       (3,650)          1.94
Options outstanding at end of year                       5,874           2.12
Options exercisable at end of year                         483           3.12
Weighted average fair value of options granted
  during the year                                            -           1.94

13. SUBSEQUENT EVENTS

CONVERTIBLE NOTE FINANCING

In June 2000, the Company authorized the sale of up to $4,000,000 of 6%
convertible Series D notes due October 20, 2000, to existing investors. The
Company's Chief Executive Officer also agreed to purchase $60,000 of Series D
notes in bi-monthly installments running through September 2000. The Series D
notes will be convertible into Series E convertible preferred stock at the same
price per share as offered in a financing in which the Company issues at least
$10 million in a Series E equity financing. If the Series E financing does not
occur before the due date of the notes or a change of control transaction, as
defined, then the Series D notes will be convertible into Series D-2 preferred
stock (described below) at $3.03 per share.

As part of the convertible note financing, the Company also agreed to authorize
the issuance of shares of Series D-1 and D-2 convertible preferred stock to the
investors who will purchase Series D notes. The Series D-1 stock will have the
same rights, preferences and privileges as the Series B convertible preferred
stock and the Series D-2 stock will


                                                                              18
<PAGE>   21

                                 HomeSpace, Inc.

             Notes to Consolidated Financial Statements (continued)

13. SUBSEQUENT EVENTS (CONTINUED)

CONVERTIBLE NOTE FINANCING (CONTINUED)

have the same rights, preferences and privileges as the Series C convertible
preferred stock. The Series D-1 and Series D-2 stock will receive pari passu
with each other and rank senior to all other equity of the Company.

MORTGAGE PROCESSING OUTSOURCED

In June 2000, the Company entered into an agreement with a third party to assume
certain mortgage processing capabilities. As a result, the Company reduced its
workforce in June 2000.

14. SALE OF COMPANY AND OTHER MATTERS (UNAUDITED)

On June 26, 2000, the Company received a notice of default from Imperial Bank
under its capital lease agreements described in Note 10. Additionally, as of
June 30, 2000, the Company was delinquent in paying its trade payables,
operating leases and substantially all other obligations.

On July 19, 2000, the Company signed a letter of intent with LendingTree, Inc.
to sell certain assets of HomeSpace Services, Inc. for $12 million in cash and
stock. Subject to the signing of a definitive purchase agreement, the
transaction is expected to close on or about August 4, 2000. Upon closing, the
assets of the Company not sold will be liquidated. The cash proceeds to be
received from the sale and subsequent liquidation may not be sufficient for the
Company to satisfy all outstanding obligations and recover the full carrying
value of its assets.

Costco terminated its affinity marketing relationship with the Company on July
31, 2000.


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