1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Ancestry.com Inc. (“Ancestry” or the “company”) is an online family history resource that derives revenues primarily from providing online access to digitized historical records on a subscription basis. Ancestry is a holding company and all operations are conducted by its wholly-owned subsidiaries.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current-year presentation. These reclassifications did not have a significant impact on the condensed consolidated financial statements.

Unaudited Interim Financial Statements

The accompanying condensed consolidated balance sheet at March 31, 2012 and the condensed consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2012 and 2011 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the company’s financial position, results of operations and cash flows for the three months ended March 31, 2012 and 2011. The majority of the company’s revenues are subscription revenues, which are recognized ratably over the subscription periods; the costs to acquire subscribers are generally incurred before the company recognizes the associated subscription revenues. Results of operations may vary between periods due to the timing of when revenues and expenses are recognized. As such, the results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”) filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

The company evaluates its estimates continually to determine their appropriateness, including testing goodwill for impairment, recoverability of long-lived assets, income taxes, the estimated useful lives of the company’s intangible assets, including content databases, determination of fair value of stock options included in stock-based compensation expense and allowances for sales returns and uncollectible accounts receivable. The company bases its estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for the amounts recorded within the consolidated financial statements.

There have been no changes to the company’s significant accounting policies as described in the 2011 Annual Report for the three months ended March 31, 2012.

2. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following (in thousands):

3. FAIR VALUE MEASUREMENTS

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

Cash equivalents consist of highly liquid investments with original maturities of three months or less and are classified within Level 1 due to readily available market prices in an active market. There were no movements between fair value measurement levels of the company’s cash equivalents during the three months ended March 31, 2012. The following table summarizes the financial instruments of the company at fair value based on the valuation approach applied at March 31, 2012 (in thousands):

The following table summarizes the financial instruments of the company at fair value based on the valuation approach applied at December 31, 2011 (in thousands):

The carrying amounts reported in the financial statements for accounts receivable and accounts payable approximate their fair values because of the immediate or short-term maturities of these financial instruments. At December 31, 2011, the carrying value of debt outstanding approximated its fair value based on interest rates available to the company for debt with similar terms. At March 31, 2012, the company had no debt outstanding.

4. DEBT

In September 2010, the company entered into a three-year $100.0 million principal amount senior secured revolving credit facility with Bank of America, N.A., as administrative agent, and certain other financial institutions (the “Credit Facility”). Borrowings under the Credit Facility may be used to finance the on-going working capital needs of the company and its subsidiaries and for general corporate purposes, including permitted business acquisitions, capital expenditures and authorized share repurchases. At December 31, 2011, the company had $10.0 million of debt outstanding under the Credit Facility. In January 2012, the company paid this amount in full. At March 31, 2012, there were no borrowings outstanding. The Credit Facility contains financial and other covenants, and the company was in compliance with all of these covenants at March 31, 2012.

5. NET INCOME PER COMMON SHARE

Basic net income per common share is computed using the weighted average number of outstanding shares of common stock during the period. Diluted net income per common share is computed using the weighted average number of outstanding shares of common stock and, when dilutive, potential shares of common stock outstanding during the period. Potential shares of common stock consist primarily of incremental shares issuable upon the assumed vesting and exercise or settlement of stock-based awards using the treasury stock method.

The following table sets forth the computations of basic and diluted net income per common share (in thousands, except per share data):

For the three months ended March 31, 2012 and 2011, stock-based awards excluded from the computations of diluted net income per common share were 1.6 million shares and de minimis, respectively, as their impact was anti-dilutive.

6. STOCKHOLDERS’ EQUITY

In October 2011, the company’s board of directors authorized the repurchase of up to $50.0 million in shares of the company’s outstanding common stock. The shares were to be repurchased from time to time through September 30, 2012 in the open market or in privately negotiated transactions. During the three months ended March 31, 2012, the company repurchased approximately 0.5 million shares for $12.8 million, which completed the authorization. In total, approximately 2.1 million shares were repurchased under this authorization. The repurchased shares were recorded as treasury stock at cost.

7. STOCK-BASED AWARDS

The company grants stock options and other stock-based awards, including restricted stock units (“RSUs”), to employees, directors and consultants under the 2009 Stock Incentive Plan (the “2009 Plan”). The 2009 Plan is subject to an automatic annual increase provision on the first day of each fiscal year. On January 1, 2012, the number of shares available to be granted under the 2009 Plan increased by 1.7 million shares due to this provision. At March 31, 2012, 4.3 million shares were available to be granted under the 2009 Plan.

Stock Options

Stock options granted during the three months ended March 31, 2012 vest over four to five years. Stock option activity for the three months ended March 31, 2012 was as follows:

The company estimates the fair value of each stock option on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the calculations for the three months ended March 31, 2012 and 2011:

Additional information regarding stock options was as follows (in thousands, except per share data):

Restricted Stock Units

RSUs granted during the three months ended March 31, 2012 vest over three to five years. RSU activity for the three months ended March 31, 2012 was as follows (units in thousands):

The total fair value of RSUs that vested in the three months ended March 31, 2012 was $1.0 million. No RSUs vested in the three months ended March 31, 2011.

Summary of Stock-Based Compensation Expense

Stock-based compensation expense was included in the following captions in the condensed consolidated statements of comprehensive income (in thousands):

Unrecognized stock-based compensation, net of estimated forfeitures, for stock options and RSUs at March 31, 2012 was as follows (in thousands, except years):

8. INCOME TAXES

The company recorded income tax expense of $6.6 million for the three months ended March 31, 2012, which resulted in an effective income tax rate of 32.7%, a decrease of 3.7 percentage points compared to the three months ended March 31, 2011. This decrease was primarily due to increased earnings in jurisdictions with lower effective tax rates in the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

The company is subject to income taxes in U.S. and foreign jurisdictions and to examination by tax authorities. Significant judgment is required in evaluating the company’s uncertain tax positions and determining its provision for income taxes. The company’s total gross unrecognized tax benefits at March 31, 2012 and December 31, 2011 were $4.3 million and $4.2 million, respectively. The gross uncertain tax positions, if recognized, would result in a reduction of tax expense.

9. BUSINESS ACQUISITIONS

In March 2012, the company completed two acquisitions for a total of approximately $11.7 million in cash consideration. The company acquired the DNA assets of Sorenson Molecular Genealogy Foundation, a non-profit organization with a diverse collection of DNA samples and corresponding genealogical information. The company also acquired We’re Related, LLC, which operates the We’re Related Facebook application. The assets acquired and liabilities assumed from the two transactions were recorded based on their estimated fair values at the date of acquisition. Cash consideration of $3.0 million is being held as restricted cash for potential indemnification obligations and certain other requirements related to the transactions. The final purchase price allocation for each acquisition is subject to change based on the final payments of restricted cash. These acquisitions were not material, either individually or in the aggregate, to the company’s financial position or results of operations.

10. COMMITMENTS AND CONTINGENCIES

From time to time, the company is a party to or otherwise involved in legal proceedings and other claims that arise in the ordinary course of business or otherwise. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The company records a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. While the company cannot assure the ultimate outcome of any legal proceeding or contingency in which the company is or may become involved, the company does not believe any material loss is reasonably possible in connection with any pending matter.

11. SUBSEQUENT EVENTS

In April 2012, the company entered into a definitive agreement to acquire Archives.com, a family history Web site, for $100.0 million in cash consideration plus assumed liabilities. The closing of the transaction is subject to various conditions, including expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. In certain circumstances specifically related to antitrust matters and subject to certain conditions, the company would be required to pay a fee of $10.0 million if the agreement were terminated. Archives.com has approximately 0.4 million paying subscribers and offers subscriptions priced at $39.95 per year. This transaction will enable the company to add a differentiated service targeted to a complementary segment of the growing family history market.

In April 2012, the company’s board of directors authorized the repurchase of up to $100.0 million of its outstanding common stock. Shares of the company’s common stock may be repurchased from time to time through March 31, 2013 in the open market or in privately negotiated transactions. The company expects to fund any repurchases using cash on hand or borrowings under a credit facility. The amount and timing of specific repurchases, if any, will depend on market conditions, stock price, available sources of liquidity and other factors.

Basis of Presentation

The condensed consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current-year presentation. These reclassifications did not have a significant impact on the condensed consolidated financial statements.

The accompanying condensed consolidated balance sheet at March 31, 2012 and the condensed consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2012 and 2011 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of normal recurring nature) considered necessary to present fairly the company’s financial position, results of operations and cash flows for the three months ended March 31, 2012 and 2011. The majority of the company’s revenues are subscription revenues, which are recognized ratably over the subscription periods; the costs to acquire subscribers are generally incurred before the company recognizes the associated subscription revenues. Results of operations may vary between periods due to the timing of when revenues and expenses are recognized. As such, the results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”) filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

The company evaluates its estimates continually to determine their appropriateness, including testing goodwill for impairment, recoverability of long-lived assets, income taxes, the estimated useful lives of the company’s intangible assets, including content databases, determination of fair value of stock options included in stock-based compensation expense and allowances for sales returns and uncollectible accounts receivable. The company bases its estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for the amounts recorded within the consolidated financial statements.

There have been no changes to the company’s significant accounting policies as described in the 2011 Annual Report for the three months ended March 31, 2012.