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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

HOTELS.COM

(Exact name of registrant as specified in its charter)



Commission File No. 000-29575

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 75-2817683                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

10440 North Central Expressway, Suite 400, Dallas, Texas 75231
(Address of Registrants principal executive offices)

(Registrants telephone number, including area code): (214) 361-7311

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Class A Common Stock, $0.01 par value

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No o

As of March 5, 2003, the following shares of the Registrants capital
stock were outstanding:

|                     |  |  |            | 
|-------------------- |  |  | ---------- | 
|Class A Common Stock |  |  | 17,852,520 | 
|Class B Common Stock |  |  | 38,999,100 | 
|Total                |  |  | 56,851,620 | 

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant as of June 28, 2002 was $410,491,394. For
the purpose of the foregoing calculation only, USA Interactive and all
directors and executive officers of the Registrant are assumed to be affiliates
of the Registrant.

Documents Incorporated By Reference: None.



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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART II                                         
|                                                 | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|PART III                                        
|                                                 | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                 | Item 11. Executive Compensation                                                                        
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                 | Item 13. Certain Relationships and Related Party Transactions                                          
|                                                 | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                      
|CERTIFICATIONS                                  
|EXHIBIT INDEX                                   
|EX-23.1 Consent of Ernst & Young LLP            
|EX-99.1 Certification of Chief Executive Officer
|EX-99.2 Certification of Chief Financial Officer



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INDEX

|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|         |  |                                                                                                |  |     
|PART II 
|Item 8   |  | Consolidated Financial Statements and Supplementary Data                                       |  | 1   
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 20  
|Item 11. |  | Executive Compensation                                                                         |  | 23  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters |  | 29  
|Item 13. |  | Certain Relationships and Related Party Transactions                                           |  | 32  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 32  

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Explanatory Note:

This Amendment No. 1 to Form 10-K/A (this Amendment) is being filed to
correct an error in Note 9 Related Party Transactions in the Companys notes
to financial statements that appears in Item 8. Consolidated Financial
Statements and Supplementary Data of Part III of the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, originally filed on
March 27, 2003 (the Original Filing). The second paragraph of Note 9 has been
amended as follows (insertions and deletions are noted):



| |  |  | In 2002During the years ended December 31, 2002 and 2001, USA contributed $0.9 million
and $0.5 million, respectively, of advertising costs for which the Company paid no cash consideration.
This amount wasThese amounts were recorded as non-cash distribution and marketing
expense at fair value and a contribution of capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company entered into had an arrangement with Ticketmaster LLC
("Ticketmaster") and Precision Response Corporation ("PRC"), subsidiaries, a subsidiary of USA,
for outsourced call center services, which ended in 2001. In addition, the Company had an arrangement with
Ticketmaster that allowed Ticketmaster to sell hotel rooms to its customers, which ended in 2002.  Under the
arrangement, Ticketmaster marketed the Company's lodging accommodations via the Internet in return for (1) links
from the Company's websites and newsletters to the Citysearch.com and Ticketmaster.com websites and (2) a 5%
commission on the gross revenues generated from lodging accommodations booked through the Citysearch.com
site.  The Company incurred commissions and fees with Ticketmaster under these arrangements of
$0.4 million, $1.4 million $1.9 million and $0.3 million for the years ended December 31,
2002, 2001 and 2000, respectively.
|
| |  |  | During 2000 and 2002, the Company an arrangement with Precision Response Corporation ("PRC"), a subsidiary of
USA, for outsourced call center services.  The Company also incurred fees with PRC of $2.0
million and $1.5 million for the year years ended December 31, 2002 and 2000,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

As required under SEC rules, this Amendment sets forth the complete text
of Item 8. Consolidated Financial Statements and Supplementary Data as
amended.

In addition, on April 9, 2003, the Company entered into an Agreement and
Plan of Merger with USA Interactive (USA) and Hermitage Merger Corp., a
wholly-owned subsidiary of USA, pursuant to which USA would acquire all of the
issued and outstanding shares of the Companys common stock that it does not
already own. The merger agreement provides that the Company will be merged
with Hermitage Merger Corp. such that the Company will become a wholly-owned
subsidiary of USA. At the effective time of the merger, each outstanding share
of the Companys common stock (other than shares of common stock owned by USA)
will be converted into the right to receive 2.4 shares of common stock of USA.
Moreover, the merger agreement provides that at the effective time of the
merger each outstanding and unexercised option to purchase shares of the
Companys common stock, whether vested or unvested, will be converted into
options to purchase USA common stock. As a result of the execution of the
merger agreement, the Company has decided to postpone indefinitely its 2003
annual meeting of stockholders. Therefore, this Amendment is also being filed
to provide the information required by Items 10, 11, 12 and 13, which the
Company had intended to incorporate by reference from its 2003 Proxy Statement.

The remainder of the information contained in the Original Filing is not
amended hereby and shall be as set forth in the Original Filing. This Amendment
continues to speak as of the date of the Original Filing and the Company has
not updated the disclosure in this Amendment to speak to any later date.

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PART II




Item 8.Consolidated Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

|           |                                                                                                      |  |      |   | 
|---------- | ---------------------------------------------------------------------------------------------------- |  | ---- | - | 
|           |                                                                                                      |  | Page
|           |                                                                                                      |  |     
|Hotels.com |                                                                                                      |  |      |  
|           | Report of Independent Auditors                                                                       |  |      | 2 | 
|           | Consolidated Balance Sheets at December 31, 2002 and 2001                                            |  |      | 3 | 
|           | Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000               |  |      | 4 | 
|           | Consolidated Statements of Stockholders Equity for the years ended December 31, 2002,
2001 and 2000 |  |      | 5 | 
|           | Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  |      | 6 | 
|           | Notes to Financial Statements                                                                        |  |      | 7 | 

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Report of Independent Auditors

Board of Directors and Stockholders
Hotels.com

We have audited the accompanying consolidated balance sheets of Hotels.com as
of December 31, 2002 and 2001, and the related consolidated statements of
income, stockholders equity, and cash flows for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these 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 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
Hotels.com at December 31, 2002 and 2001, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 2 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill.

/s/ Ernst & Young LLP

Dallas, Texas
February 4, 2003

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Hotels.com
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |        |         |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------- | ------- | ------ | ------- | ------------ | ------- | ------ | ------- |  |  | 
|                                                                                                                                                                      |                                                |                            |         |        |         | December 31,
|                                                                                                                                                                      |                                                |                            |         |        |         |             
|                                                                                                                                                                      |                                                |                            |         |        |         | 2002         |         | 2001  
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|ASSETS                                                                                                                                                               
|CURRENT ASSETS                                                                                                                                                        |                                                |                            |         |        |         |              |         |       
|Cash and cash equivalents                                                                                                                                             |                                                | $                          | 6,058   |        |         | $            | 44,269  |       
|Restricted cash equivalents                                                                                                                                           |                                                |                            | 12,151  |        |         |              | 9,107   |       
|Marketable securities  available for sale                                                                                                                            |                                                |                            | 377,661 |        |         |              | 165,581 |       
|Accounts and notes receivable                                                                                                                                         |                                                |                            | 12,680  |        |         |              | 7,096   |       
|Prepaid hotel rooms                                                                                                                                                   |                                                |                            | 55      |        |         |              | 1,363   |       
|Current portion of non-cash deferred distribution and marketing costs                                                                                                 |                                                |                            | 8,245   |        |         |              | 10,195  |       
|Deferred income taxes                                                                                                                                                 |                                                |                            | 2,022   |        |         |              | 4,740   |       
|Other current assets                                                                                                                                                  |                                                |                            | 6,464   |        |         |              | 4,712   |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | Total current assets       |         |        | 425,336 |              |         |        | 247,063 | 
|PROPERTY AND EQUIPMENT                                                                                                                                                |                                                |                            |         |        |         |              |         |       
|Computer equipment and software                                                                                                                                       |                                                |                            | 19,525  |        |         |              | 7,862   |       
|Buildings and leasehold improvements                                                                                                                                  |                                                |                            | 1,397   |        |         |              | 995     |       
|Furniture and other equipment                                                                                                                                         |                                                |                            | 3,800   |        |         |              | 2,597   |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                |                            | 24,722  |        |         |              | 11,454  |       
|                                                                                                                                                                      | Less accumulated depreciation and amortization |                            |         | (6,084 | )       |              |         | (2,755 | )      
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                |                            | 18,638  |        |         |              | 8,699   |       
|OTHER ASSETS                                                                                                                                                          |                                                |                            |         |        |         |              |         |       
|Goodwill, net of amortization of $97,780 at December 31, 2002
and 2001                                                                                                |                                                |                            | 369,743 |        |         |              | 362,464 |       
|Non-cash deferred distribution and marketing costs                                                                                                                    |                                                |                            | 11,263  |        |         |              | 19,508  |       
|Intangible assets, net of amortization of $2,392 and $371 at
December 31, 2002 and 2001, respectively                                                                 |                                                |                            | 21,460  |        |         |              | 10,834  |       
|Other assets                                                                                                                                                          |                                                |                            | 444     |        |         |              | 8       |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | $                          | 846,884 |        |         | $            | 648,576 |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                 
|CURRENT LIABILITIES                                                                                                                                                   |                                                |                            |         |        |         |              |         |       
|Accounts payable, trade                                                                                                                                               |                                                |                            | 74,664  |        |         |              | 53,679  |       
|Deferred revenue                                                                                                                                                      |                                                |                            | 76,356  |        |         |              | 37,679  |       
|Income tax payable                                                                                                                                                    |                                                |                            | 7,445   |        |         |              | 1,736   |       
|Intercompany payable                                                                                                                                                  |                                                |                            | 1,856   |        |         |              | 1,394   |       
|Other accrued liabilities                                                                                                                                             |                                                |                            | 22,829  |        |         |              | 9,759   |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | Total current liabilities  |         |        | 183,150 |              |         |        | 104,247 | 
|Deferred income taxes                                                                                                                                                 |                                                |                            | 5,998   |        |         |              | 2,441   |       
|COMMITMENTS AND CONTINGENCIES                                                                                                                                         |                                                |                            |        |        |         |              |        |       
|STOCKHOLDERS EQUITY                                                                                                                                                  |                                                |                            |         |        |         |              |         |       
|Preferred stock, $0.01 par value; 20,000,000 shares authorized, none
outstanding                                                                                      |                                                |                            |        |        |         |              |        |       
|Class A common stock, $0.01 par value; 600,000,000 shares
authorized, 19,340,346 shares and 18,138,452 shares outstanding at
December 31, 2002 and 2001, respectively |                                                |                            | 194     |        |         |              | 182     |       
|Class B common stock, $0.01 par value; 150,000,000 shares
authorized, 38,999,100 shares outstanding at December 31, 2002 and
2001                                     |                                                |                            | 390     |        |         |              | 390     |       
|Additional paid-in capital                                                                                                                                            |                                                |                            | 556,876 |        |         |              | 513,456 |       
|Accumulated other comprehensive income (loss)                                                                                                                         |                                                |                            | 326     |        |         |              | (1      | )     
|Retained earnings                                                                                                                                                     |                                                |                            | 99,950  |        |         |              | 27,861  |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | Total Stockholders Equity |         |        | 657,736 |              |         |        | 541,888 | 
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | $                          | 846,884 |        |         | $            | 648,576 |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       

The accompanying notes are an integral part of these statements.

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Hotels.com
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)

|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |         |       |         | 
|------------------------------------------------------------ | ----------------------------------- | ---------------- | ---------------------------------- | ------- | ----------------------- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | ------- | 
|                                                             |                                     |                  |                                    |         | Year Ended December 31,
|                                                             |                                     |                  |                                    |         |                        
|                                                             |                                     |                  |                                    |         | 2002                    |         | 2001    |         | 2000 
|                                                             |                                     |                  |                                    |         |                         |         |         |         |      
|Net revenue                                                  |                                     | $                | 945,373                            |         |                         | $       | 536,497 |         |       | $       | 327,977 |        
|Operating costs and expenses:                                |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|                                                             | Cost of sales                       |                  |                                    | 657,639 |                         |         |         | 370,279 |       |         |         | 225,793 |      
|                                                             | Selling, general and administrative |                  |                                    | 157,129 |                         |         |         | 84,769  |       |         |         | 49,543  |      
|                                                             | Non-cash distribution and marketing |                  |                                    | 19,618  |                         |         |         | 16,976  |       |         |         | 4,260   |      
|                                                             | Amortization of goodwill            |                  |                                    |        |                         |         |         | 46,394  |       |         |         | 38,490  |      
|                                                             | Depreciation                        |                  |                                    | 3,284   |                         |         |         | 1,690   |       |         |         | 450     |      
|                                                             | Amortization  intangible assets    |                  |                                    | 2,202   |                         |         |         | 578     |       |         |         | 275     |      
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|                                                             |                                     |                  | Total operating costs and expenses |         |                         | 839,872 |         |         |       | 520,686 |         |         |       | 318,811 | 
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Operating profit                                             |                                     |                  | 105,501                            |         |                         |         | 15,811  |         |       |         | 9,166   |        
|Other income (expense):                                      |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|                                                             |                                     | Interest income  |                                    |         | 5,483                   |         |         |         | 8,288 |         |         |         | 8,482 |        
|                                                             |                                     | Interest expense |                                    |         |                        |         |         |         |      |         |         |         | (34   | )      
|                                                             |                                     | Other            |                                    |         | (78                     | )       |         |         | 25    |         |         |         |      |        
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Income before income tax expense                             |                                     |                  | 110,906                            |         |                         |         | 24,124  |         |       |         | 17,614  |        
|Income tax expense                                           |                                     |                  | (38,817                            | )       |                         |         | (11,217 | )       |       |         | (6,782  | )      
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Net income                                                   |                                     | $                | 72,089                             |         |                         | $       | 12,907  |         |       | $       | 10,832  |        
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Basic earnings per common share                              |                                     | $                | 1.25                               |         |                         | $       | 0.23    |         |       | $       | 0.21    |        
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Diluted earnings per common share                            |                                     | $                | 1.23                               |         |                         | $       | 0.23    |         |       | $       | 0.20    |        
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Weighted average number of basic common
shares outstanding   |                                     |                  | 57,730                             |         |                         |         | 56,260  |         |       |         | 52,774  |        
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        
|Weighted average number of diluted common
shares outstanding |                                     |                  | 58,639                             |         |                         |         | 57,343  |         |       |         | 53,580  |        
|                                                             |                                     |                  |                                    |         |                         |         |         |         |       |         |         |        

The accompanying notes are an integral part of these statements.

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Hotels.com
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands, except share data)

|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |     |  
|---------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------- | ------------- | ------ | ------ | ---------- | -------------- |  | -------------- | --- | -------- |  | ------------- | ---------- | -------- |  | ------------- | --- | ----------- |  | - | ------- | ------- | - | - | ------ |  | ------ | - | --- | - | --- | -
|                             |                                                                                 |                                                                             |         |               |        |        |            | Class A Common |  | Class B Common |     |          |  |               |            |          |  |               |     | Accumulated
|                             |                                                                                 |                                                                             |         | Total         |        | Stock  |            | Stock          |  | Additional     |     |          |  |               |            | Other   
|                             |                                                                                 |                                                                             |         | Stockholders' |        |        |            |                |  | Paid-In        |     | Retained |  | Comprehensive
|                             |                                                                                 |                                                                             |         | Equity        |        | Shares |            | $              |  | Shares         |     | $        |  | Capital       |            | Earnings |  | Income (Loss)
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |              
|Balance at January 1, 2000   |                                                                                 | $                                                                           | 146,347 |               |        |        |            |                |  |                |     |          |  |               | 38,999,100 |          |  | $             | 390 |             |  | $ | 141,923 |         |   | $ | 4,122  |  |        | $ | (88 | )
|                             | Comprehensive income:                                                           |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |    
|                             |                                                                                 | Net income                                                                  |         |               | 10,832 |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  | 10,832 |   |     |   |     |  
|                             |                                                                                 | Unrealized gain on available for sale
securities, net of taxes of $77       |         |               | 165    |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   | 165 |  
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|                             | Comprehensive income                                                            |                                                                             |         | 10,997        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |    
|                             | Issuance of common stock in connection with
acquisition of predecessor          |                                                                             |         | 159,998       |        |        |            | 9,999,900      |  |                | $   | 100      |  |               |            |          |  |               |     |             |  |   |         | 159,898 |   |   |        |  |        |   |     |   |    
|                             | Proceeds from issuance of common stock, net of
issuance cost of $9,302          |                                                                             |         | 90,061        |        |        |            | 6,210,000      |  |                |     | 62       |  |               |            |          |  |               |     |             |  |   |         | 89,999  |   |   |        |  |        |   |     |   |    
|                             | Issuance of stock warrants to Internet
marketing and distribution partners      |                                                                             |         | 17,708        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 17,708  |   |   |        |  |        |   |     |   |    
|                             | Capital contribution by USA related to the
payment of contingent purchase price |                                                                             |         | 58,484        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 58,484  |   |   |        |  |        |   |     |   |    
|                             | Issuance of common stock upon exercise of
options                               |                                                                             |         | 401           |        |        |            | 25,000         |  |                |     | 1        |  |               |            |          |  |               |     |             |  |   |         | 400     |   |   |        |  |        |   |     |   |    
|                             | Income tax benefit related to stock options
exercised                           |                                                                             |         | 199           |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 199     |   |   |        |  |        |   |     |   |    
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|Balance at December 31, 2000 |                                                                                 |                                                                             | 484,195 |               |        |        | 16,234,900 |                |  |                | 163 |          |  |               | 38,999,100 |          |  |               | 390 |             |  |   | 468,611 |         |   |   | 14,954 |  |        |   | 77  |  
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|                             | Comprehensive income:                                                           |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |    
|                             |                                                                                 | Net income                                                                  |         |               | 12,907 |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  | 12,907 |   |     |   |     |  
|                             |                                                                                 | Unrealized loss on available for sale
securities, net of tax benefit of $49 |         |               | (78    | )      |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   | (78 | )
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|                             | Comprehensive income                                                            |                                                                             |         | 12,829        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |    
|                             | Issuance of common stock upon exercise of
warrants                              |                                                                             |         |               |        |        |            | 1,473,937      |  |                |     | 15       |  |               |            |          |  |               |     |             |  |   |         | (15     | ) |   |        |  |        |   |     |   |    
|                             | Issuance of stock warrants to Internet
marketing and distribution partners      |                                                                             |         | 32,684        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 32,684  |   |   |        |  |        |   |     |   |    
|                             | Capital contribution by USA                                                     |                                                                             |         | 546           |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 546     |   |   |        |  |        |   |     |   |    
|                             | Issuance of common stock upon exercise of
options                               |                                                                             |         | 7,598         |        |        |            | 429,615        |  |                |     | 4        |  |               |            |          |  |               |     |             |  |   |         | 7,594   |   |   |        |  |        |   |     |   |    
|                             | Income tax benefit related to stock options
exercised                           |                                                                             |         | 4,036         |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 4,036   |   |   |        |  |        |   |     |   |    
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|Balance at December 31, 2001 |                                                                                 |                                                                             | 541,888 |               |        |        | 18,138,452 |                |  |                | 182 |          |  |               | 38,999,100 |          |  |               | 390 |             |  |   | 513,456 |         |   |   | 27,861 |  |        |   | (1  | )
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|                             | Comprehensive income:                                                           |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |    
|                             |                                                                                 | Net income                                                                  |         |               | 72,089 |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  | 72,089 |   |     |   |     |  
|                             |                                                                                 | Unrealized gain on available for sale
securities, net of taxes of $175      |         |               | 327    |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   | 327 |  
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|                             | Comprehensive income                                                            |                                                                             |         | 72,416        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |   |    
|                             | Issuance of common stock upon exercise of
warrants                              |                                                                             |         |               |        |        |            | 272,797        |  |                |     | 3        |  |               |            |          |  |               |     |             |  |   |         | (3      | ) |   |        |  |        |   |     |   |    
|                             | Issuance of stock warrants to Internet
marketing and distribution partners      |                                                                             |         | 8,562         |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 8,562   |   |   |        |  |        |   |     |   |    
|                             | Issuance of common stock upon exercise of
options                               |                                                                             |         | 23,548        |        |        |            | 929,097        |  |                |     | 9        |  |               |            |          |  |               |     |             |  |   |         | 23,539  |   |   |        |  |        |   |     |   |    
|                             | Capital contribution by USA                                                     |                                                                             |         | 861           |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 861     |   |   |        |  |        |   |     |   |    
|                             | Income tax benefit related to stock options
exercised                           |                                                                             |         | 10,461        |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         | 10,461  |   |   |        |  |        |   |     |   |    
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  
|Balance at December 31, 2002 |                                                                                 | $                                                                           | 657,736 |               |        |        | 19,340,346 |                |  | $              | 194 |          |  | $             | 38,999,100 |          |  | $             | 390 |             |  | $ | 556,876 |         |   | $ | 99,950 |  |        | $ | 326 |  
|                             |                                                                                 |                                                                             |         |               |        |        |            |                |  |                |     |          |  |               |            |          |  |               |     |             |  |   |         |         |   |   |        |  |        |   |     |  

The accompanying notes are an integral part of these statements.

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Hotels.com
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)

|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |          |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------------------- | ----------------------------- | -------- | ----------------------- | ------ | -------- | ------- | ------ | ------ | -------- | -------- | ------ | ------ | -
|                                                                                  |                                             |                                                                 |                               |          | Year Ended December 31,
|                                                                                  |                                             |                                                                 |                               |          |                        
|                                                                                  |                                             |                                                                 |                               |          | 2002                    |        | 2001     |         | 2000  
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |       
|Cash flow from operating activities:                                              |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Net income                                                                        |                                             | $                                                               | 72,089                        |          |                         | $      | 12,907   |         |        | $      | 10,832   |         
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|                                                                                  |                                             | Depreciation                                                    |                               |          | 3,284                   |        |          |         | 1,690  |        |          |          | 450    |       
|                                                                                  |                                             | Amortization  intangible assets                                |                               |          | 2,202                   |        |          |         | 578    |        |          |          | 275    |       
|                                                                                  |                                             | Amortization of goodwill                                        |                               |          |                        |        |          |         | 46,394 |        |          |          | 38,490 |       
|                                                                                  |                                             | Non-cash deferred distribution and marketing
costs              |                               |          | 19,618                  |        |          |         | 16,976 |        |          |          | 4,260  |       
|                                                                                  |                                             | Loss on disposition of assets                                   |                               |          | 78                      |        |          |         |       |        |          |          |       |       
|                                                                                  |                                             | Deferred income taxes                                           |                               |          | 6,275                   |        |          |         | 4,416  |        |          |          | (5,077 | )     
|                                                                                  |                                             | Income tax benefit upon exercise of employee
stock options      |                               |          | 10,461                  |        |          |         | 4,036  |        |          |          | 199    |       
|                                                                                  |                                             | Changes in current assets and liabilities, net of
acquisitions: |                               |          |                         |        |          |         |        |        |          |          |        |       
|                                                                                  |                                             |                                                                 | Restricted cash equivalents   |          |                         | (3,044 | )        |         |        | (7,086 | )        |          |        | (21    | )
|                                                                                  |                                             |                                                                 | Accounts and notes receivable |          |                         | (5,290 | )        |         |        | (1,623 | )        |          |        | (3,097 | )
|                                                                                  |                                             |                                                                 | Prepaid hotel rooms           |          |                         | 1,308  |          |         |        | 263    |          |          |        | (688   | )
|                                                                                  |                                             |                                                                 | Accounts payable, trade       |          |                         | 20,616 |          |         |        | 22,047 |          |          |        | 14,082 |  
|                                                                                  |                                             |                                                                 | Deferred revenue              |          |                         | 38,419 |          |         |        | 5,972  |          |          |        | 14,774 |  
|                                                                                  |                                             |                                                                 | Income tax payable            |          |                         | 5,533  |          |         |        | (5,331 | )        |          |        | 3,108  |  
|                                                                                  |                                             |                                                                 | Intercompany payables         |          |                         | 462    |          |         |        | (698   | )        |          |        | 2,177  |  
|                                                                                  |                                             |                                                                 | Other accrued liabilities     |          |                         | 12,936 |          |         |        | 4,773  |          |          |        | 3,674  |  
|                                                                                  |                                             |                                                                 | Other current assets          |          |                         | (1,823 | )        |         |        | (2,353 | )        |          |        | (1,355 | )
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Net cash provided by operating activities                                         |                                             |                                                                 | 183,124                       |          |                         |        | 102,961  |         |        |        | 82,083   |         
|Cash flows from investing activities:                                             |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|                                                                                  | Acquisitions, net of cash acquired          |                                                                 |                               | (7,395   | )                       |        |          | (54,129 | )      |        |          | (5,000   | )     
|                                                                                  | Capital expenditures                        |                                                                 |                               | (13,275  | )                       |        |          | (4,840  | )      |        |          | (2,861   | )     
|                                                                                  | Purchase of intellectual property           |                                                                 |                               | (12,637  | )                       |        |          | (11,115 | )      |        |          |         |       
|                                                                                  | Net purchases of marketable securities      |                                                                 |                               | (211,576 | )                       |        |          | (47,295 | )      |        |          | (113,343 | )     
|                                                                                  | Investment in TravelNow.com                 |                                                                 |                               |         |                         |        |          |        |        |        |          | (3,240   | )     
|                                                                                  | Other, net                                  |                                                                 |                               |         |                         |        |          | 52      |        |        |          | 4        |       
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Net cash (used in) provided by investing activities                               |                                             |                                                                 | (244,883                      | )        |                         |        | (117,327 | )       |        |        | (124,440 | )       
|Cash flows from financing activities:                                             |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|                                                                                  | Net proceeds from issuance of stock         |                                                                 |                               |         |                         |        |          |        |        |        |          | 90,461   |       
|                                                                                  | Net proceeds from exercise of stock options |                                                                 |                               | 23,548   |                         |        |          | 7,598   |        |        |          |         |       
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Net cash provided by financing activities                                         |                                             |                                                                 | 23,548                        |          |                         |        | 7,598    |         |        |        | 90,461   |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Net increase (decrease) in cash and cash
equivalents                              |                                             |                                                                 | (38,211                       | )        |                         |        | (6,768   | )       |        |        | 48,104   |         
|Cash and cash equivalents at beginning of period                                  |                                             |                                                                 | 44,269                        |          |                         |        | 51,037   |         |        |        | 2,933    |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Cash and cash equivalents at end of period                                        |                                             | $                                                               | 6,058                         |          |                         | $      | 44,269   |         |        | $      | 51,037   |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Supplemental Cash Flow Information:                                               |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Cash paid for interest                                                            |                                             | $                                                               |                              |          |                         | $      |         |         |        | $      | 35       |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Cash paid for income taxes                                                        |                                             | $                                                               | 16,549                        |          |                         | $      | 8,095    |         |        | $      | 8,651    |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Supplemental Disclosure of Non Cash Financing
Information:                        |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Contribution by USA of television advertising                                     |                                             | $                                                               | 861                           |          |                         | $      | 546      |         |        | $      |         |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Contribution by USA to fund purchase price liability                              |                                             | $                                                               |                              |          |                         | $      |         |         |        | $      | 58,484   |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         
|Issuance of warrants                                                              |                                             | $                                                               | 8,562                         |          |                         | $      | 32,684   |         |        | $      | 17,708   |         
|                                                                                  |                                             |                                                                 |                               |          |                         |        |          |         |        |        |          |         

The accompanying notes are an integral part of these statements.

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Hotels.com

NOTES TO FINANCIAL STATEMENTS

NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION

Organization

Hotels.com (Hotels.com or the Company), a subsidiary of USA
Interactive (USA), is a leading consolidator of hotel and other lodging
accommodations for resale in the consumer market in North America, Europe, the
Caribbean and Asia. On May 10, 1999, Hotels.com acquired substantially all of
the assets and assumed substantially all of the liabilities of TMF, Inc.
(TMF) and HRN Marketing Corp. (Marketing) (the Acquisition), which
operated the Hotels.com services.

On February 25, 2000, the Company completed an initial public offering of
6,210,000 shares of class A common stock. See Note 3 for further discussion.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

Revenue Recognition

The Company classifies revenue into three categories: merchant, agency
and other. Merchant revenue is derived from bookings made of lodging
accommodations with which the Company has contracted in advance for volume
commitments and guaranteed availability. For merchant revenue, charges for
lodging accommodations are billed to customers in advance. The related payments
are included in deferred revenue and recognized as revenue at the conclusion of
the customers stay at the lodging property. Unsold contracted lodging
accommodations may be returned by the Company based on a cutoff period, which
generally expires simultaneously with the date the customer may cancel the
hotel reservation. Customers are subject to a penalty for all cancellations or
changes to the reservation. The Company bears the risk of loss for all prepaid
rooms and lodging accommodations cancelled by a customer subsequent to the
cutoff period in which the Company can return the unused lodging
accommodations. To date, the Company has not incurred significant losses under
the room contracts with lodging properties.

The Company presents merchant hotel revenue at the gross amount charged to
its customers. The determination of gross versus net presentation is based
principally on Companys consideration of Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements as later clarified by and
Emerging Issues Task Force No. 99-10, Reporting Revenue Gross as a Principal
versus Net as an Agent (EITF 99-19), including the relevant qualitative
factors regarding the Companys status as primary obligor and the extent of
their pricing latitude and inventory risk. The method of revenue presentation
by the Company does not impact gross profit, operating profit, net income,
earnings per share, or cash flows of either company, but rather revenues, cost
of sales and gross profit margin.

The principal factor in determining gross versus net presentation by the
Company is its relationship with the customer as the primary obligor. The
Company acts as the principal in the transaction and is the party that the
customer has transacted with. The Company also has broad latitude to establish
and change prices charged to customers. The Company believes that it is
principally liable to its merchant hotel customers in all situations where the
customer does not receive hotel services promised by the Company, namely in the
event that merchant hotel inventory sold by the Company is unavailable, or that
the room, or the hotel itself, does not have the amenities or is not of the
general caliber described in the Companys promotional materials.

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Agency revenue is derived from travel-related sales transactions in which
the Company receives commissions and fees from travel suppliers. For agency
revenue, Hotels.com recognizes commission revenue at the conclusion of the
customers stay at the lodging property.

Cash Equivalents

Cash and cash equivalents include cash and short-term investments.
Short-term investments consist primarily of commercial paper, U.S. Treasury
securities, U.S., state and local government agencies and certificates of
deposit with original maturities of less than three months when purchased.

Marketable Securities

All marketable debt and equity securities are classified as available for
sale and are carried at fair value. Unrealized gains and losses, net of related
income tax, are recorded as a component of accumulated other comprehensive
income (loss) in stockholders equity until realized. Realized gains and losses
on the sale of investments are based upon the specific-identification method
and are included in the statements of operations.

Financial Instruments

The carrying value of all financial instruments other than marketable
securities discussed above, approximates their fair value due to the short
maturity of the respective instruments.

Derivatives and Hedging

The Company has contracted with hotels in foreign countries to sell
lodging accommodations. Generally, the hotels invoice the Company for the
accommodations upon check-out of the customer, and the Company pays the invoice
approximately 30 days later. The amounts due from the Company are denominated
in the local currency of the hotel, and the Company is subject to changes in
exchange rates from the date of the invoice to the date of payment. In order
to mitigate the effects of the changes in exchange rates, the Company purchases
30-day foreign currency forwards at the end of each month to effectively
lock-in the exchange rate for the following month. As of December 31, 2002,
the Company had purchased forward contracts for British Pounds, Euros and
Canadian Dollars. The Company has not designated these contracts as hedges,
and, therefore, the changes in fair value are included as a component of cost
of sales in the accompanying statement of income. During 2002, the Company
recognized $0.7 million in gains from the forward contracts. As of December
31, 2002, the fair value of the foreign currency forwards was minimal, as they
had been purchased on December 31, 2002.

Concentrations

The Companys cash and short-term investment portfolio is diversified and
consists primarily of investment grade securities. Investments are held with
high-quality financial institutions, government and government agencies and
corporations, thereby reducing credit risk concentrations. Interest rate
fluctuations impact the carrying value of the portfolio.

In January 2000, the Company entered into a long-term marketing and
distribution agreement with Travelocity, pursuant to which Travelocity markets
the Companys hotels and other lodging accommodations on its website and in
return is paid a commission based upon the revenue generated for the Company.
The term of the agreement expires on July 31, 2005. During the years 2002,
2001 and 2000, 17.7%, 18.0% and 10.5%, respectively, of the Companys total
revenue was derived through the agreement. The Company expects the dollar
amount of revenue to grow in 2003 under the agreement; however, the percentage
of the Companys total revenue derived through the Travelocity agreement is
expected to decline in 2003 and in subsequent years.

Prepaid Lodging Accommodations

Prepaid lodging accommodations are carried at cost and are charged to
expense at the conclusion of the customers stay at the lodging property.
Management reviews the carrying value of prepaid lodging

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accommodations and provides adjustment for impairment, if necessary. As of
December 31, 2002 and 2001, no adjustment was necessary.

Property and Equipment

Property and equipment, including significant improvements, are recorded
at cost. Repairs and maintenance and any gains or losses on dispositions are
included in operations.

Depreciation and amortization is recorded on a straight-line basis over
the assets estimated service lives, as follows:

|                                |  |                                 
|------------------------------- |  | --------------------------------
|Asset Category                  |  | Depreciation/Amortization Period
|                                |  |                                 
|Computer equipment and software |  | 3 to 5 years                    
|Leasehold improvements          |  | 4 to 7 years                    
|Furniture and other equipment   |  | 3 to 10 years                   
|Intangible assets               |  | 1 to 10 years                   

Long-Lived Assets Including Intangibles

Prior to January 1, 2002, goodwill was amortized over a period of 10
years. Effective January 1, 2002, the Company adopted the Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets,
whereby the Company no longer amortizes goodwill, but is required to perform an
impairment test at least annually in accordance with the Statement. The
Company has completed its impairment test as of October 1, 2002 and has
concluded that no goodwill impairment write-off is necessary.

Had the Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets been effective January 1, 2000, the Companys pre-tax
income, net income, basic earnings per share and diluted earnings per share for
the twelve months ending December 31, 2001 and 2000 would have been as follows:

|                                  |  |          |        |           |  |          |  |           |  |   |        |    |  |   |        |  |  |  |  |  |  |   |        | 
|--------------------------------- |  | -------- | ------ | --------- |  | -------- |  | --------- |  | - | ------ | -- |  | - | ------ |  |  |  |  |  |  | - | ------ | 
|                                  |  | 2001     |        | 2000     
|                                  |  |          |        |          
|                                  |  | As       |        |           |  |          |  |           |  |   |        | As |  |   |        |  |  |  |  | 
|                                  |  | Reported |        | Pro Forma |  | Reported |  | Pro Forma
|                                  |  |          |        |           |  |          |  |          
|Income before income tax          |  | $        | 24,124 |           |  |          |  |           |  | $ | 70,518 |    |  | $ | 17,614 |  |  |  |  |  |  | $ | 56,104 | 
|Net income                        |  | $        | 12,907 |           |  |          |  |           |  | $ | 52,889 |    |  | $ | 10,832 |  |  |  |  |  |  | $ | 34,503 | 
|Basic earnings per common share   |  | $        | 0.23   |           |  |          |  |           |  | $ | 0.94   |    |  | $ | 0.21   |  |  |  |  |  |  | $ | 0.65   | 
|Diluted earnings per common share |  | $        | 0.23   |           |  |          |  |           |  | $ | 0.92   |    |  | $ | 0.20   |  |  |  |  |  |  | $ | 0.64   | 

Intangible assets are amortized using the straight-line method over their
estimated period of benefit ranging from one to 10 years. The Company reviews
the carrying value of intangible assets at least annually. If this review
indicates that the carrying value will not be recoverable, as determined based
on the projected undiscounted future cash flows of the assets, the carrying
value is reduced to its estimated fair value. No indicators of impairment were
noted in 2002, 2001 or 2000.

Advertising

Advertising expense, excluding non-cash distribution and marketing costs,
for the years ended December 31, 2002, 2001 and 2000 was $41.3 million, $10.6
million and $8.4 million, respectively.

The Company capitalizes costs paid for advertising to specific target
audiences on third-party Internet websites that have resulted in lodging
bookings for which the revenue has not been recognized as of the balance sheet
date. The capitalized costs are amortized over a period of no more than three
months, which approximates the period over which the revenue is earned. As of
December 31, 2002 and 2001, capitalized advertising was $1.2 million and
$198,000, respectively. Other advertising costs are expensed in the period
incurred.

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Income Taxes

Subsequent to its initial public offering in February 2000, the Company
filed its federal and state income tax returns on a stand-alone basis. The
Companys income for the period January and February 2000 is included in USAs
consolidated income tax returns.

The Company accounts for income taxes under the liability method, and
deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled on a stand-alone basis. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
No valuation allowance has been established at December 31, 2002 or 2001.

Earnings Per Share

The Company computes basic earnings per share based on the weighted
average number of common shares outstanding, and diluted earnings per share
based on the weighted average number of common shares and all dilutive
potential common shares outstanding.

Use of 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 amounts reported in the financial
statements and footnotes thereto. Actual results could differ from those
estimates.

Stock Warrants

The Company has issued stock warrants in conjunction with certain
marketing and distribution agreements. These warrants are either fully vested
and non-forfeitable at issuance or they have certain performance features that
allow the marketing and distribution partner to earn the warrants based on
certain criteria.

The fair value of the warrants that are fully vested and non-forfeitable
is measured at issuance and amortized over the term of the related marketing
and distribution agreements as non-cash distribution and marketing expense.

The fair value of the warrants with performance features is measured
quarterly, once the minimum performance has been met and the warrants begin to
be earned. The fair value of the earned warrants at the measurement date is
charged to expense as non-cash distribution and marketing expense. At
subsequent measurement dates continuing until the performance period has ended,
the aggregate number of warrants earned under the performance period is
measured, and the increase or decrease in the aggregate fair value from the
previous measurement date is charged to expense as non-cash distribution and
marketing expense.

Segment Information

Currently the Companys revenues are primarily derived from its domestic
customers making hotel reservations through its domestic websites and call
centers. The Company does not have separate reportable operating segments
under the provisions of Statement of Accounting Standard No. 131, Disclosures
about Segment of an Enterprise and Related Information.

Stock Based Compensation

The Company accounts for its stock based awards for employees and
directors under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations (APB Opinion No. 25). Under APB Opinion No. 25
compensation cost

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for stock-based awards for employees and directors is measured as the
excess, if any, of the quoted market price of the Companys stock at the date
of the grant over the amount to be paid to acquire the stock.

Had the Company accounted for the stock based awards using the fair value
method as fully discussed in Note 10, the Companys earnings and income per
share would have been different. The Companys pro forma information follows
(in thousands except for income per share information):

|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                            |  | 2002 |        | 2001 |  | 2000
|                                                                                                                                            |  |      |        |      |  |     
|Net income, as reported                                                                                                                     |  | $    | 72,089 |      |  | $    | 12,907 |   |  | $ | 10,832 |  
|Add: Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects                                  |  |      |       |      |  |      |       |   |  |   |       |  
|Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects |  |      | (3,831 | )    |  |      | (3,405 | ) |  |   | (2,323 | )
|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Pro forma net income                                                                                                                        |  | $    | 68,258 |      |  | $    | 9,502  |   |  | $ | 8,509  |  
|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Earnings per share:                                                                                                                         |  |      |        |      |  |      |        |   |  |   |        |  
|Basic  as reported                                                                                                                         |  | $    | 1.25   |      |  | $    | 0.23   |   |  | $ | 0.21   |  
|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Basic  pro forma                                                                                                                           |  | $    | 1.18   |      |  | $    | 0.17   |   |  | $ | 0.16   |  
|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Diluted  as reported                                                                                                                       |  | $    | 1.23   |      |  | $    | 0.23   |   |  | $ | 0.20   |  
|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  
|Diluted  pro forma                                                                                                                         |  | $    | 1.16   |      |  | $    | 0.17   |   |  | $ | 0.16   |  
|                                                                                                                                            |  |      |        |      |  |      |        |   |  |   |        |  

The pro forma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period and additional options may be granted in future years.

In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure (FASB Statement No. 148), which
amends Statement of Financial Accounting Standard No. 123 (FASB Statement No.
123). This Statement provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of FASB Statement
No. 123. The transition guidance and annual disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company will adopt the
accounting provisions of FASB Statement No. 123 as of January 1, 2003 and will
include the required interim disclosure provisions in its financial statements
for the quarter ending March 31, 2003. The Company will expense stock-based
compensation on a prospective basis and will continue to provide pro forma
information in the Notes to Financial Statements to provide the results as if
the accounting provisions of FASB Statement No. 123 had been adopted in
previous years. Going forward, in addition to stock options, the Company
intends to issue restricted stock that will vest in future periods. For stock
options and restricted stock issued, the accounting charge will be measured at
the grant date and amortized ratably as non-cash compensation over the vesting
term.

Reclassifications

Certain amounts in prior years financial statements have been
reclassified to conform to the current year presentation.

NOTE 3  BUSINESS ACQUISITION

During 2002, Hotels.com acquired Room Finders, Inc., a company in the
travel business. The total purchase price for the acquisition, net of cash
acquired, was $7.4 million.

In December 2000, the Company agreed to acquire 1,080,000 shares for $3.2
million ($3 per share), representing a 9.86% interest in TravelNow.com, Inc.
(TravelNow), a leading Internet travel site with one of the largest travel
affiliate programs on the Internet. On January 3, 2001, the Company entered
into a definitive merger agreement pursuant to which the Company agreed to
acquire all of the remaining outstanding shares of TravelNow for $4.16 per
share in cash, as well as certain other contractual payments in the
transaction. The acquisition was

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consummated on February 16, 2001, and TravelNow became a wholly-owned
subsidiary of the Company. The total purchase price, net of cash acquired,
including acquisition expense, was approximately $47.8 million and was
accounted for as a purchase. Goodwill in the amount of $47.5 million was
recorded for the acquisition. (See Note 2.)

Also during 2001, the Company acquired two other companies in the travel
business. The total purchase price for these two acquisitions, net of cash
acquired was $7.8 million, of which $1.5 million is payable at a future date.

On May 10, 1999, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of TMF, Inc. and HRN Marketing
Corp., which operated Hotels.coms service. The total purchase price paid
through December 31, 2000 was $406 million, which was comprised primarily of:
$145 million paid on May 11, 1999; $5 million related to a promissory note
which was paid on January 31, 2000; $50 million related to contingent payments
based on the operating performance for the year ended December 31, 1999; $78.4
million related to 4,899,900 shares of class A common stock issued to the
sellers of the predecessor business which represented 10% of the aggregate
value of the Company immediately prior to the initial public offering in
accordance with the asset purchase agreement; $46 million based on operating
performance for the twelve-month period ended March 31, 2000, and $81.6 million
related to 5,100,000 shares of class A common stock issued to the sellers of
the predecessor business in exchange for their release of the Companys
obligation for contingent payments based on operating performance for the
twelve month periods ended March 31, 2001 and 2002. The class A shares were
issued to the sellers at the time of the public offering. The acquisition was
accounted for under the purchase method of accounting. The total amount of
goodwill of $406.3 million was recorded for the acquisition. (See Note 2.)

NOTE 4  MARKETABLE SECURITIES  AVAILABLE FOR SALE

Investments in marketable securities  available for sale at December 31,
2002 consist of the following (in thousands):

|                                                                |  |                |         |      |  |            |     |            |  |   |      |   |  |   |         | 
|--------------------------------------------------------------- |  | -------------- | ------- | ---- |  | ---------- | --- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                                                |  |                |         |      |  | Pre-tax    |     | Pre-tax    |  |   |      |  
|                                                                |  |                |         |      |  | Unrealized |     | Unrealized |  |   |      |  
|                                                                |  | Amortized Cost |         | Gain |  | Loss       |     | Fair Value
|                                                                |  |                |         |      |  |            |     |           
|U.S., state and local
government securities                     |  | $              | 372,160 |      |  | $          | 722 |            |  | $ | (221 | ) |  | $ | 372,661 | 
|Non U.S. government
securities and other fixed
term obligations |  |                | 5,000   |      |  |            |    |            |  |   |     |   |  |   | 5,000   | 
|                                                                |  |                |         |      |  |            |     |            |  |   |      |   |  |   |         | 
|Total marketable securities                                     |  | $              | 377,160 |      |  | $          | 722 |            |  | $ | (221 | ) |  | $ | 377,661 | 
|                                                                |  |                |         |      |  |            |     |            |  |   |      |   |  |   |         | 

The contractual maturities of marketable securities classified as
available-for-sale were as follows (in thousands):

|                                    |  |           |         |            |  |   |         | 
|----------------------------------- |  | --------- | ------- | ---------- |  | - | ------- | 
|                                    |  | Amortized |         | Estimated 
|                                    |  | Cost      |         | Fair Value
|                                    |  |           |         |           
|Due in 1 year or less               |  | $         | 297,440 |            |  | $ | 297,569 | 
|Due in 1 to 2 years                 |  |           | 54,785  |            |  |   | 54,887  | 
|Due in 2 to 5 years                 |  |           | 10,281  |            |  |   | 10,302  | 
|Due in over 5 years                 |  |           | 14,654  |            |  |   | 14,903  | 
|                                    |  |           |         |            |  |   |         | 
|Total investment in debt securities |  | $         | 377,160 |            |  | $ | 377,661 | 
|                                    |  |           |         |            |  |   |         | 

During 2002, the Company did not have any realized gains or losses on its
investments.

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Investments in marketable securities  available for sale at December 31,
2001 consist of the following (in thousands):

|                                                                |  |                |         |      |  |            |     |            |  |   |      |   |  |   |         | 
|--------------------------------------------------------------- |  | -------------- | ------- | ---- |  | ---------- | --- | ---------- |  | - | ---- | - |  | - | ------- | 
|                                                                |  |                |         |      |  | Pre-tax    |     | Pre-tax    |  |   |      |  
|                                                                |  |                |         |      |  | Unrealized |     | Unrealized |  |   |      |  
|                                                                |  | Amortized Cost |         | Gain |  | Loss       |     | Fair Value
|                                                                |  |                |         |      |  |            |     |           
|U.S., state and local
government securities                     |  | $              | 142,250 |      |  | $          | 203 |            |  | $ | (217 | ) |  | $ | 142,236 | 
|Commercial paper                                                |  |                | 983     |      |  |            | 12  |            |  |   |     |   |  |   | 995     | 
|Non U.S. government
securities and other fixed
term obligations |  |                | 22,350  |      |  |            |    |            |  |   |     |   |  |   | 22,350  | 
|                                                                |  |                |         |      |  |            |     |            |  |   |      |   |  |   |         | 
|Total marketable securities                                     |  | $              | 165,583 |      |  | $          | 215 |            |  | $ | (217 | ) |  | $ | 165,581 | 
|                                                                |  |                |         |      |  |            |     |            |  |   |      |   |  |   |         | 

The contractual maturities of marketable securities classified as
available-for-sale were as follows (in thousands):

|                                    |  |           |         |            |  |   |         | 
|----------------------------------- |  | --------- | ------- | ---------- |  | - | ------- | 
|                                    |  | Amortized |         | Estimated 
|                                    |  | Cost      |         | Fair Value
|                                    |  |           |         |           
|Due in 1 year or less               |  | $         | 123,898 |            |  | $ | 123,989 | 
|Due in 1 to 2 years                 |  |           | 6,776   |            |  |   | 6,705   | 
|Due in 2 to 5 years                 |  |           | 22,768  |            |  |   | 22,747  | 
|Due in over 5 years                 |  |           | 12,141  |            |  |   | 12,140  | 
|                                    |  |           |         |            |  |   |         | 
|Total investment in debt securities |  | $         | 165,583 |            |  | $ | 165,581 | 
|                                    |  |           |         |            |  |   |         | 

During 2001, the Company did not have any realized gains or losses on its
investments.

NOTE 5  NON-CASH DEFERRED DISTRIBUTION AND MARKETING COSTS

In connection with several exclusive marketing and distribution
agreements, and at the completion of its initial public offering, the Company
issued warrants to marketing and distribution partners to purchase 1,428,365
shares of its class A common stock. These warrants are non-forfeitable, fully
vested and exercisable and are not subject to any performance targets. At that
time, the Company recorded an asset of approximately $14.8 million based on the
fair market value of the warrants to purchase class A common stock at the
initial public offering price of $16.00 per share. The asset is being amortized
ratably over the terms of the exclusive marketing and distribution agreements,
which range from two to five years. During the twelve months ended December
31, 2002, 2001 and 2000, the Company amortized $3.5 million, $4.3 million and
$4.2 million of the warrant costs, respectively.

In addition, upon completion of the Companys initial public offering and
in connection with a marketing and distribution agreement, the Company issued a
performance warrant to acquire up to 2,447,955 shares of the Companys class A
common stock to Travelocity, the vesting of which was to be subject to
achieving certain performance targets. In March 2001, the Company entered into
an amendment to the marketing and distribution agreement with Travelocity to
extend the term of the agreement through July 31, 2005 and to broaden and
expand the marketing and distribution relationship. In connection with this
amendment, the Company also revised the terms of the performance warrant and
waived the vesting requirements as to a portion of the warrant, which resulted
in 1,468,773 shares underlying the performance warrant becoming immediately
exercisable and the remaining 979,182 shares continuing to be subject to
achieving certain performance targets. At the time of this amendment, the
Company recorded an asset of approximately $26.3 million based on the fair
market value of the warrants that became exercisable at such time, of which
$6.0 million and $5.0 million was amortized during the twelve-month period
ending December 31, 2002 and 2001, respectively. The asset is being amortized
ratably over the remaining term of the marketing and distribution agreement.
Through December 31, 2002, 504,011 of the remaining shares underlying the
performance warrant had vested and become exercisable, and the Company has
recorded an aggregate of $14.9 million of additional noncash deferred
distribution and marketing expense based upon the fair market value of such
shares. The Company will record during each quarterly period through the end
of the term of the marketing and distribution agreement in July 2005 an
additional non-cash deferred distribution and marketing expense related to the
portion of the performance warrant that vests during each such quarter.

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In November 2000, the Company entered into an additional exclusive
marketing and distribution agreement and, in connection with it, issued to the
marketing and distribution partner warrants to purchase 95,358 shares of our
class A common stock at $31.46 per share,the market price of the class A
common stock on the date such warrant was issued. These warrants are
non-forfeitable, fully vested and exercisable and are not subject to any
performance targets. At that time, the Company recorded an asset of
approximately $2.9 million based on the fair market value of the warrants,
which is being amortized ratably over the four-year term of the exclusive
marketing and distribution agreement. During the twelve months ended December
31, 2002, 2001 and 2000, the Company amortized $0.7 million, $0.7 million and
$0.1 million of the warrant costs, respectively. In addition, the Company
agreed under the terms of the marketing and distribution agreement to issue
additional warrants to purchase up to 985,369 shares of class A common stock to
the marketing and distribution partner if the marketing and distribution
partner achieves certain performance targets. No warrants were required to be
issued under this agreement during the years ended December 31, 2002, 2001 and
2000.

In March 2001, the Company entered into another exclusive marketing and
distribution agreement and agreed to issue warrants to purchase up to 2,122,726
shares of class A common stock to the marketing and distribution partner if the
marketing and distribution partner achieves certain performance targets. No
warrants were required to be issued under this agreement during the years ended
December 31, 2002 and 2001.

During 2002 and 2001, 170,459 and 1,257,906, respectively, of the
non-performance warrants to purchase class A common shares issued to the
marketing and distribution partners were exercised. As of December 31, 2001,
170,459 of the non-performance warrants to purchase class A common shares
issued to the marketing and distribution partners remained unexercised. As of
December 31, 2002, all of the non-performance warrants to purchase class A
common shares issued to the marketing and distribution partners had been
exercised.

NOTE 6  INCOME TAXES

A reconciliation of total income tax expense to the amounts computed by
applying the statutory federal income tax rate to earnings before income taxes
for the years ended December 31 is shown as follows (in thousands):

|                                                         |  |      |        |      |  |      |        |   |  |   |       | 
|-------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | 
|                                                         |  | 2002 |        | 2001 |  | 2000
|                                                         |  |      |        |      |  |     
|Income tax expense at the federal statutory rate of 35%  |  | $    | 38,817 |      |  | $    | 8,443  |   |  | $ | 6,165 | 
|State income taxes, net of effect of federal tax benefit |  |      | 450    |      |  |      | 522    |   |  |   | 617   | 
|Non-deductible goodwill                                  |  |      |       |      |  |      | 5,242  |   |  |   |      | 
|Investment income from tax-exempt securities             |  |      | (1,727 | )    |  |      | (1,149 | ) |  |   |      | 
|Warrant exercises                                        |  |      | (1,248 | )    |  |      | (1,695 | ) |  |   |      | 
|Other                                                    |  |      | 2,525  |      |  |      | (146   | ) |  |   |      | 
|                                                         |  |      |        |      |  |      |        |   |  |   |       | 
|Income tax expense                                       |  | $    | 38,817 |      |  | $    | 11,217 |   |  | $ | 6,782 | 
|                                                         |  |      |        |      |  |      |        |   |  |   |       | 

The components of income tax expense are as follows:

|                                       |         |                                       |        |        |        |      |        |       |       |   |       |        |        |  
|-------------------------------------- | ------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ----- | ----- | - | ----- | ------ | ------ | -
|                                       |         |                                       |        | 2002   |        | 2001 |        | 2000 
|                                       |         |                                       |        |        |        |      |        |      
|Current income tax expense (benefit):  |         |                                       |        |        |        |      |        |       |       |   |       |       
|                                       | Federal |                                       | $      | 32,092 |        |      | $      | 6,182 |       |   | $     | 10,781 |       
|                                       | State   |                                       |        | 450    |        |      |        | 619   |       |   |       | 1,078  |       
|                                       |         |                                       |        |        |        |      |        |       |       |   |       |       
|                                       |         | Current income tax expense            |        |        | 32,542 |      |        |       | 6,801 |   |       |        | 11,859 |  
|Deferred income tax expense (benefit): |         |                                       |        |        |        |      |        |       |       |   |       |       
|                                       | Federal |                                       |        | 6,275  |        |      |        | 4,015 |       |   |       | (4,616 | )     
|                                       | State   |                                       |        |       |        |      |        | 401   |       |   |       | (461   | )     
|                                       |         |                                       |        |        |        |      |        |       |       |   |       |       
|                                       |         | Deferred income tax expense (benefit) |        |        | 6,275  |      |        |       | 4,416 |   |       |        | (5,077 | )
|                                       |         |                                       |        |        |        |      |        |       |       |   |       |       
|Total net income tax expense           |         | $                                     | 38,817 |        |        | $    | 11,217 |       |       | $ | 6,782 |       
|                                       |         |                                       |        |        |        |      |        |       |       |   |       |       

The net deferred tax liability of $4.0 million as of December 31, 2002 was
related to (a) the tax effects of cumulative temporary differences arising from
the amortization of goodwill, which is not amortized for book purposes, but is
amortized over 15 years for tax purposes, (b) the tax effects of cumulative
temporary differences

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arising from the treatment of non-performance warrants issued to marketing
and distribution partners and (c) the tax effects arising from unrealized gain
or loss on marketable securities included in comprehensive income. For tax
purposes, warrant expenses are recognized at the time of exercise of warrants,
while for book purposes, they are expensed over the life of the marketing and
distribution agreement. The effective tax rate is 35%, which reflects the
federal statutory rate and applicable state income tax rates.

NOTE 7  COMMITMENTS AND CONTINGENCIES

The Company leases office space and equipment used in connection with its
operations under various operating leases. Future minimum payments under these
non-cancelable agreements totaled $12.0 million and are $2.6 million, $1.8
million, $1.7 million, $1.6 million, $1.4 million and $2.9 million for the
years 2003, 2004, 2005, 2006, 2007 and thereafter, respectively. Expenses
charged to operations under these leases were $2.9 million, $1.7 million and
$0.9 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

At December 31, 2002, the Company has $9.9 million of outstanding letters
of credit that expire between January 2003 and April 2004. The outstanding
letters of credit are collateralized by $10.7 million of restricted cash
equivalents.

As of December 31, 2002, the Company has non-cancelable commitments for
lodging accommodations totaling $5.2 million, which relate to the period
January 2003 to January 2004. As of December 31, 2002, the Company has
commitments under advertising contracts with third-party Internet websites
totaling $9.7 million, of which $0.6 million is non-cancelable.

NOTE 8  LITIGATION

In re Hotels.com, Inc. Shareholders Litigation,No. 19662-NC (Delaware
Court of Chancery).On June 2, 2002, the Companys Board of Directors received
a letter from its majority shareholder, USA, announcing USAs intention to make
an exchange offer in the near future for the shares of Hotels.com that it does
not currently own. The Board of Directors formed a Special Committee on June
3, 2002, composed entirely of independent directors to review and evaluate the
possible offer by USA if and when the offer is made. On June 3, 2002, the
following complaints were filed against the company, the Board of Directors of
Hotels.com and USA in Chancery Court in New Castle County, Delaware: David
Goldstein, et al. v. Barry Diller, et al.; Wilhelm Unger, et al. v. Hotels.com,
et al.; Howard Keebler, et al. v. Hotels.com, et al.; Chavy Weisz, et al. v.
Elan J. Blutinger, et al.; and Robert Kemp, et al. v. David Litman, et al. The
complaints generally allege that the transaction would be a breach of fiduciary
duty and that the indicated exchange ratio is unfair. Each of the complaints
seeks, among other things, injunctive relief against consummation of the
transaction and damages in an unspecified amount. The actions were
subsequently consolidated under the caption In re Hotels.com, Inc. Shareholders
Litigation, No. 19662-NC (Delaware Court of Chancery). On December 16, 2002,
the plaintiffs in the consolidated actions agreed that all of the defendants
have an indefinite extension of time in which to respond to the complaints in
those lawsuits, pending a determination by the plaintiffs whether they will
proceed with the lawsuits. The Company believes that this lawsuit is without
merit, and the defendants intend to defend vigorously against it.

In re Hotels.com Securities Litigation,No. 3-03CV00069 (U.S. District
Court, N.D. Tex).Between January 10, 2003 and February 13, 2003, several
purported shareholder class action complaints were filed in the United States
District Court for the Northern District of Texas against us and three of our
executives. These actions purport to be brought on behalf of purchasers of our
common stock in the period from October 23, 2002 to January 6, 2003 (the Class
Period), and make certain claims under the federal securities laws.
Specifically, the complaints allege that during the Class Period, the
defendants knowingly (i) made certain materially false and misleading public
statements, in a press release and two press interviews, with respect to the
anticipated performance of our company during the fourth quarter of 2002 and
(ii) concealed from the investing public certain material events and
developments that were likely to render that anticipated performance
unattainable. The complaints assert that the individual defendants profited
from the rise in our share price caused by their public statements through
sales of our stock during the Class Period. The complaints further allege that
as a result of our announcement, on January 6, 2003, of a downward revision of
its guidance for the fourth quarter of 2002, the Companys share price declined
precipitously. The plaintiffs seek certification of a class of all
non-defendant purchasers of our stock during the Class Period and seek damages
in an unspecified amount suffered by the putative

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class. The plaintiffs and the defendants have agreed to consolidate these
actions into a single action bearing the title In re Hotels.com Securities
Litigation, No. 3-03CV00069 and an order to that effect has been submitted to
the court for its approval. The Company believes that this lawsuit is without
merit, and the defendants intend to defend vigorously against it.

Pomilio-Wilson v. Blutinger, et al.,No. 03-00349J (191st Dist. Ct.,
Dallas County, Tex.). In a related development, on January 14, 2003, a
shareholder derivative action was filed against Hotels.com (as a nominal
defendant only), and a number of current and former officers and directors of
Hotels.com. The Pomilio-Wilsonlawsuit, Anita Pomilio-Wilson, Derivatively on
Behalf of Nominal Defendant Hotels.com v. Elan J. Blutinger, et al., No.
03-00349, arises out of substantially the same events and circumstances as the
putative class action described above. The gravamen of the complaint is that
the nine individual defendants who sold shares in Hotels.com during the period
from October 25 to December 3, 2002, breached their fiduciary duty to
Hotels.com by misappropriating, and trading and profiting on the basis of,
proprietary, material non-public information concerning the financial condition
and growth prospects of Hotels.com. The complaint also alleges that all of the
individual defendants aided and abetted the selling defendants breaches of
fiduciary duty by concealing from the market the information on the basis of
which the selling defendants allegedly traded and profited. The complaint
seeks imposition of a constructive trust in favor of Hotels.com on the profits
obtained by the selling defendants on their sales of Hotels.com stock during
the period referred to above, as well as unspecified damages resulting from the
individual defendants alleged breaches of fiduciary duty. The Company
believes that this lawsuit is without merit, and the defendants intend to
defend vigorously against it.

MetroGuide.com, Inc. v. Hotel Reservations Network, Inc. et al., No.
03-20170 (U.S. District Court, S.D. Fl). On January 27, 2003, MetroGuide.com,
one of our marketing and distribution partners, sued us in federal court in
Miami, Florida. The lawsuit alleges that we encouraged our other marketing and
distribution partners to infringe on MetroGuide.coms copyrighted content from
its websites and competed unfairly with MetroGuide.com through the use of
predatory advertising and link farms. MetroGuide.com seeks injunctive relief
and damages in an unspecified amount. MetroGuide has agreed to an extension of
time until April 30, 2003 to file an answer to the complaint. The Company
believes that the allegations are without merit and intends to defend
vigorously against it.

In the ordinary course of business, Hotels.com is party to litigation
involving property, contract and other claims.

NOTE 9  RELATED PARTY TRANSACTIONS

During the years ended December 31, 2002 and 2001, USA contributed $0.9
million and $0.5 million, respectively, of advertising costs for which the
Company paid no cash consideration. These amounts were recorded as non-cash
distribution and marketing expense at fair value and a contribution of capital.

The Company had an arrangement with Ticketmaster, a subsidiary of USA, for
outsourced call center services, which ended in 2001. In addition, the Company
had an arrangement with Ticketmaster that allowed Ticketmaster to sell hotel
rooms to its customers, which ended in 2002. Under the arrangement,
Ticketmaster marketed the Companys lodging accommodations via the Internet in
return for (1) links from the Companys websites and newsletters to the
Citysearch.com and Ticketmaster.com websites and (2) a 5% commission on the
gross revenues generated from lodging accommodations booked through the
Citysearch.com site. The Company incurred commissions and fees with
Ticketmaster under these arrangements of $0.4 million, $1.9 million and $0.3
million for the years ended December 31, 2002, 2001 and 2000, respectively.

During 2000 and 2002, the Company an arrangement with Precision Response
Corporation (PRC), a subsidiary of USA, for outsourced call center services.
The Company incurred fees with PRC of $2.0 million and $1.5 million for the
years ended December 31, 2002 and 2000, respectively.

NOTE 10  EMPLOYEE BENEFITS

401(k) Savings Plan

The Company offers a plan pursuant to Section 401(k) of the Internal
Revenue Code (the Plan) covering substantially all full-time employees. The
Companys share of the matching employer contributions is set at the

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discretion of management. The expense for the Plan was $73,000, $51,000
and $24,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

Stock Option Plan

In February 2000, the Board of Directors of the Company adopted the
following stock option plans:

A total of 5,400,000 shares of class A common stock was reserved for
issuance under the 2000 Stock Plan (the Stock Option Plan) for the grants of
incentive stock options to employees, including officers and employee
directors, and for grants of non-statutory stock options and stock purchase
rights, or SPRs, to employees, directors and consultants, and employees of
marketing and distribution partners. Unless terminated sooner, the Stock
Option Plan will terminate automatically on February 21, 2010.

A total of 100,000 shares of class A common stock was reserved for
issuance under the Directors Stock Option Plan. The Directors Stock Option
Plan provides for the grant of non-statutory stock options to members of the
Board of Directors who were not, at the time of grant, employees of the Company
and/or any of our affiliates. Unless terminated sooner, the plan will
terminate automatically on February 21, 2010. Under the plan, as amended,
options to purchase 15,000 shares of class A common stock will be automatically
granted upon a directors election to office, and thereafter an additional
10,000 shares will be granted annually on the date of the annual meeting of
stockholders of the Company.

For both Plans, the option exercise price is the fair market value at the
date of grant. Options granted generally vest over four years and expire ten
years from the date of grant. A summary of changes in outstanding options
under the stock option plans is as follows:

|                                   |  |              |           |          |  |          |       |          |  |                       |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|---------------------------------- |  | ------------ | --------- | -------- |  | -------- | ----- | -------- |  | --------------------- | --------- | -------- |  | - | ----- |  |  | -------- | --------- | - |  | - | ----- | 
|                                   |  | December 31,
|                                   |  |             
|                                   |  | 2002         |           | 2001     |  | 2000    
|                                   |  |              |           |          |  |         
|                                   |  |              |           |          |  | Weighted |       |          |  |                       |           | Weighted |  |   |       |  |  | Weighted
|                                   |  |              |           |          |  | Average  |       |          |  |                       |           | Average  |  |   |       |  |  | Average 
|                                   |  | Shares       |           | Price($) |  | Shares   |       | Price($) |  | Shares                |           | Price($)
|                                   |  |              |           |          |  |          |       |          |  |                       |           |         
|                                   |  |              |           |          |  |          |       |          |  | (Shares in Thousands) |           |          |  |   |       |  |  |         
|Outstanding at beginning of period |  |              | 2,697,823 |          |  | $        | 26.59 |          |  |                       | 1,818,899 |          |  | $ | 20.21 |  |  |          |          |   |  | $ |      | 
|Granted                            |  |              | 2,025,786 |          |  |          | 49.36 |          |  |                       | 1,794,154 |          |  |   | 31.63 |  |  |          | 2,150,117 |   |  |   | 19.87 | 
|Exercised                          |  |              | (929,096  | )        |  |          | 25.34 |          |  |                       | (429,615  | )        |  |   | 17.69 |  |  |          | (25,000   | ) |  |   | 16.00 | 
|Forfeited                          |  |              | (510,201  | )        |  |          | 39.05 |          |  |                       | (485,615  | )        |  |   | 29.20 |  |  |          | (306,218  | ) |  |   | 18.15 | 
|                                   |  |              |           |          |  |          |       |          |  |                       |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Outstanding at end of period       |  |              | 3,284,312 |          |  |          | 39.05 |          |  |                       | 2,697,823 |          |  |   | 26.59 |  |  |          | 1,818,899 |   |  |   | 20.21 | 
|                                   |  |              |           |          |  |          |       |          |  |                       |           |          |  |   |       |  |  |          |           |   |  |   |       | 

The weighted average fair value of options granted during the years ended
December 2002, 2001 and 2000 was $28.81, $25.00 and $14.83, respectively.

|               |  |                     |         |                     |  |                  |     |                   |  |             |       |         |  |  |        |  |  |          |       | 
|-------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | --- | ----------------- |  | ----------- | ----- | ------- |  |  | ------ |  |  | -------- | ----- | 
|               |  | December 31, 2002  
|               |  |                    
|               |  | Options Outstanding |         | Options Exercisable
|               |  |                     |         |                    
|               |  |                     |         |                     |  |                  |     |                   |  |             |       |         |  |  |        |  |  | Weighted
|               |  | Outstanding         |         | Weighted Average    |  |                  |     |                   |  | Exercisable |       | Average
|Range of       |  | at                  |         | Remaining           |  | Weighted Average |     | at                |  | Exercise   
|Exercise Price |  | December 31, 2002   |         | Contractual Life    |  | Exercise Price   |     | December 31, 2002 |  | Price      
|               |  |                     |         |                     |  |                  |     |                   |  |            
|$15.50$17.68  |  |                     | 450,915 |                     |  |                  | 7.2 |                   |  | $           | 15.94 |         |  |  | 62,212 |  |  | $        | 16.00 | 
|$17.68$23.57  |  |                     | 221,361 |                     |  |                  | 8.5 |                   |  | $           | 21.85 |         |  |  | 27,352 |  |  | $        | 21.88 | 
|$23.57$29.46  |  |                     | 241,002 |                     |  |                  | 8.1 |                   |  | $           | 25.79 |         |  |  | 50,474 |  |  | $        | 25.79 | 
|$29.47$35.36  |  |                     | 212,495 |                     |  |                  | 7.8 |                   |  | $           | 31.76 |         |  |  | 48,116 |  |  | $        | 31.53 | 
|$35.36$41.25  |  |                     | 495,428 |                     |  |                  | 8.9 |                   |  | $           | 39.43 |         |  |  | 17,290 |  |  | $        | 38.18 | 
|$41.26$47.14  |  |                     | 803,148 |                     |  |                  | 8.9 |                   |  | $           | 43.71 |         |  |  | 35,232 |  |  | $        | 43.96 | 
|$47.14$53.04  |  |                     | 187,300 |                     |  |                  | 8.9 |                   |  | $           | 52.96 |         |  |  |       |  |  | $        |      | 
|$53.04$58.93  |  |                     | 672,663 |                     |  |                  | 9.3 |                   |  | $           | 57.55 |         |  |  |       |  |  | $        |      | 

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As permitted under FASB Statement No. 123, the Company has elected to
follow APB Opinion No. 25 in accounting for stock-based awards to employees.
Under APB Option No. 25, the Company generally recognizes no compensation
expense with respect to such awards, since the exercise price of the stock
options granted is equal to the fair market value of the underlying security on
the grant date.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123 for awards granted during the years ended
December 31, 2002, 2001 and 2000 as if the Company had accounted for its
stock-based awards to employees under the fair value method of FASB Statement
No. 123. The fair value of the Companys stock-based awards to employees was
estimated as of the date of the grant using a Black-Scholes option pricing
model. Limitations on the effectiveness of the Black-Scholes option valuation
model are that it was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable and that
the model requires the use of highly subjective assumptions including expected
stock price volatility. Because the Companys stock-based awards to employees
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of these options was
estimated at the date of grant with the following weighted-average assumptions
for 2002, 2001 and 2000: risk-free interest rates of 3.53% for 2002, 4.13% for
2001 and 5.77% to 6.54% for 2000; a dividend yield of zero; volatility factor
of 64% in 2002 and 100% in 2001 and 2000; and expected average option life of
five years.

For pro forma purposes, the estimated fair value of the Companys options
is amortized over the vesting period for options. The Companys pro forma
information follows (in thousands expect for income per share information):

|                                               |  |      |        |      |  |      |       |  |  |   |       | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                               |  | 2002 |        | 2001 |  | 2000
|                                               |  |      |        |      |  |     
|Pro forma net income                           |  | $    | 68,258 |      |  | $    | 9,502 |  |  | $ | 8,509 | 
|Pro forma basic and diluted earnings per share |  | $    | 1.18   |      |  | $    | 0.17  |  |  | $ | 0.16  | 
|Pro forma diluted earnings per share           |  | $    | 1.16   |      |  | $    | 0.17  |  |  | $ | 0.16  | 

The pro forma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period and additional options may be granted in future years.

NOTE 11  EARNINGS PER SHARE DATA

Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the sum of
weighted average number of common shares outstanding and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares issuable upon the exercise of stock options and warrants
using the treasury stock method. Common equivalent shares of 0, 697,128 and
416,758 were excluded from the computation for the years ended December 31,
2002, 2001 and 2000, respectively, as their effect is antidilutive. The
following table sets forth the computation of basic and diluted income per
share (in thousands, except per share amounts):

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##### Table of Contents



|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |        | 
|------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | ---- | ------ |  | - | ---- | ------ | 
|                         |                                                                                                                                        |   | Year Ended December 31,
|                         |                                                                                                                                        |   |                        
|                         |                                                                                                                                        |   | 2002                    |        | 2001 |   | 2000
|                         |                                                                                                                                        |   |                         |        |      |   |     
|Numerator:               |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       
|                         | Net income                                                                                                                             |   | $                       | 72,089 |      |   | $    | 12,907 |  |   | $    | 10,832 | 
|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       
|Denominator:             |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       
|                         | Denominator for basic income per share
 weighted average shares outstanding                                                           |   |                         | 57,730 |      |   |      | 56,260 |  |   |      | 52,774 | 
|                         | Employee stock options and stock warrants                                                                                              |   |                         | 909    |      |   |      | 1,083  |  |   |      | 806    | 
|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       
|                         | Denominator for diluted income per share
 adjusted weighted average shares
outstanding, assuming exercise of common
equivalent shares |   |                         | 58,639 |      |   |      | 57,343 |  |   |      | 53,580 | 
|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       
|Basic income per share   |                                                                                                                                        | $ | 1.25                    |        |      | $ | 0.23 |        |  | $ | 0.21 |       
|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       
|Diluted income per share |                                                                                                                                        | $ | 1.23                    |        |      | $ | 0.23 |        |  | $ | 0.20 |       
|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       

NOTE 12  SELECTED QUARTERLY RESULTS (UNAUDITED)

|                                      |  |                                       |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|------------------------------------- |  | ------------------------------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | ------- |  |  | - | ------- | 
|                                      |  | Year Ended December 31, 2002         
|                                      |  |                                      
|                                      |  | Quarter Ended                         |         | Quarter Ended |  | Quarter Ended |         | Quarter Ended
|                                      |  | December 31,                          |         | September 30, |  | June 30,      |         | March 31,    
|                                      |  |                                       |         |               |  |               |         |              
|                                      |  | (In thousands, except per share data)
|Net revenue                           |  | $                                     | 272,560 |               |  | $             | 277,386 |               |  | $ | 229,715 |  |  | $ | 165,712 | 
|Operating profit                      |  |                                       | 25,922  |               |  |               | 33,289  |               |  |   | 27,522  |  |  |   | 18,768  | 
|Net Income                            |  |                                       | 17,733  |               |  |               | 22,589  |               |  |   | 18,833  |  |  |   | 12,934  | 
|Basic earnings per common share (a)   |  | $                                     | 0.30    |               |  | $             | 0.39    |               |  | $ | 0.33    |  |  | $ | 0.22    | 
|Diluted earnings per common share
(a) |  | $                                     | 0.30    |               |  | $             | 0.39    |               |  | $ | 0.32    |  |  | $ | 0.22    | 

|                                      |  |                                       |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|------------------------------------- |  | ------------------------------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | ------- |  |  | - | ------- | 
|                                      |  | Year Ended December 31, 2001         
|                                      |  |                                      
|                                      |  | Quarter Ended                         |         | Quarter Ended |  | Quarter Ended |         | Quarter Ended
|                                      |  | December 31,                          |         | September 30, |  | June 30,      |         | March 31,    
|                                      |  |                                       |         |               |  |               |         |              
|                                      |  | (In thousands, except per share data)
|Net revenue                           |  | $                                     | 141,668 |               |  | $             | 151,241 |               |  | $ | 138,302 |  |  | $ | 105,286 | 
|Operating profit                      |  |                                       | 5,238   |               |  |               | 5,895   |               |  |   | 4,083   |  |  |   | 595     | 
|Net Income (loss)                     |  |                                       | 4,805   |               |  |               | 1,606   |               |  |   | 4,650   |  |  |   | 1,846   | 
|Basic earnings per common share (a)   |  | $                                     | 0.08    |               |  | $             | 0.03    |               |  | $ | 0.08    |  |  | $ | 0.03    | 
|Diluted earnings per common share
(a) |  | $                                     | 0.08    |               |  | $             | 0.03    |               |  | $ | 0.08    |  |  | $ | 0.03    | 



---

|(a) |  | Per common share amounts for the quarters may not add to the annual
amount because of differences in the average common shares outstanding
during each period.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 13  SUBSEQUENT EVENT

On January 3, 2003, the Companys board of directors authorized the
repurchase of up to $100 million of the Companys class A common stock.
Between January 7, 2003 and January 15, 2003, we repurchased approximately 1.55
million shares for an aggregate cost of approximately $73.5 million.

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PART III




Item 10.Directors and Executive Officers of the Registrant

Directors of Hotels.com

The following list sets forth the name, and present principal occupation
or employment, and material occupations, positions, offices or employment for
the past five years of each director of our company. Our directors are elected
to serve for terms of one year.

Anne Busquet. Ms. Busquet, 53, has been a director of the company since
January 2003. Ms. Busquet has been a Director of USA since March 1999 and
President of USAs Travel Services group since January 2003. From September
2001 to December 2002, she was President of AMB Advisors, LLC, an independent
consulting firm. Previously, she was at American Express for 23 years in a
variety of executive positions. She was President, Interactive Services and
New Businesses Division of American Express from July 2000 to April 2001,
President of American Express Relationship Services Division from October 1995
to July 2000, and Executive Vice President of American Express Consumer Card
Group since November 1993. Ms. Busquet currently serves as a director of USA
and Expedia, Inc.

Elan Blutinger.Mr. Blutinger, 46, has been a director of the company
since April 2001. Mr. Blutinger serves as a member of the Audit and
Compensation Committees of our Board of Directors. He is the founding partner
and Managing Director of Alpine Consolidated LLC, a strategic merchant bank,
and has served in that capacity since 1997. In 1997, Mr. Blutinger founded
Travel Services International, Inc., a leisure travel distribution firm, and
served on its board of directors until its acquisition in 2000. From 1987 to
1996, Mr. Blutinger was the Chairman and Chief Executive Officer of Shoppers
Express, Inc., the industrys first electronic supermarket home shopping
company. Mr. Blutinger also serves on the board of directors of a UK based
Online Travel Corporation plc, a London Stock Exchange traded Internet-based
travel technology and distribution company, and ResortQuest International, a
New York Stock Exchange traded vacation rental property management company.

Robert Diener.Mr. Diener, 44, has served as the companys President and
as one of its directors since May 1999. He founded our predecessor business
with Mr. Litman in 1991 and previously served as that entitys President and
Treasurer from 1991 to its acquisition in 1999.

Barry Diller.Mr. Diller, 61, has been a director of the company since
August 2002. Mr. Diller has been a director and the Chairman and Chief
Executive Officer of USA (or its predecessors) since August 1995. He was
Chairman of the Board and Chief Executive Officer of QVC, Inc. from December
1992 through December 1994. From 1984 to 1992, Mr. Diller served as the
Chairman of the Board and Chief Executive Officer of Fox, Inc. Prior to joining
Fox, Inc., a media company, Mr. Diller served for 10 years as Chairman of the
Board and Chief Executive Officer of Paramount Pictures Corporation. Mr. Diller
currently serves as a director of Expedia, Inc., The Washington Post Company,
and The Coca-Cola Company. He also serves on the Board of the Museum of
Television and Radio, Conservation International and 13/WNET. In addition, Mr.
Diller is a member of the Board of Councilors for the University of Southern
Californias School of Cinema-Television, the New York University Board of
Trustees, the Tisch School of the Arts Deans Council and the Executive Board
for the Medical Sciences of University of California, Los Angeles.

David Ellen.Mr. Ellen, 38, has been a director of the company since
August 2002. Mr. Ellen has served as Deputy General Counsel for USA since July
2001. Mr. Ellen currently serves as a director of Styleclick, Inc. and
Expedia, Inc. Prior to joining USA, Mr. Ellen served as General Counsel at
Eureka Broadband Corporation. He has also previously served as senior counsel
at Cablevision Systems Corporation, as well as special counsel at the Federal
Communications Commission. Mr. Ellen was a law clerk for Judge (now Justice)
Ruth Bader Ginsburg on the U.S. Court of Appeals for the D.C. Circuit, for
Judge (now Justice) Stephen Breyer on the U.S. Court of Appeals for the First
Circuit, and for Justice Sandra Day O Connor on the U.S. Supreme Court.

Beverly Harms.Ms. Harms, 67, has been a director of the company since
February 2000. Ms. Harms also serves as Chairman of the Compensation Committee
of our Board of Directors and a member of the Audit Committee of our Board of
Directors. Ms. Harms is a private investor. From 1990 to March 2001, she was
Senior

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Vice President of Managed Investments for Communications Equity Associates
(CEA). Prior to joining CEA as President of their Florida owned and operated
cable systems, she owned and operated broadcasting properties in New York and
New Hampshire and was an original franchisee, owner and operator of cable
television properties in upstate New York.

Victor Kaufman.Mr. Kaufman, 59, has been a director of the company since
May 1999. Since October 1999, Mr. Kaufman has served as Vice Chairman of USA.
Previously, Mr. Kaufman served in the Office of the Chairman for USA since
January 1997 and as Chief Financial Officer of USA since November 1, 1997.
Prior to that time, he served as Chairman and Chief Executive Officer of Savoy
since March 1992 and as a director of Savoy since February 1992. Mr. Kaufman
was the founding Chairman and Chief Executive Officer of Tri-Star Pictures,
Inc. from 1983 until December 1987, at which time he became President and Chief
Executive Officer of Tri-Stars successor company, Columbia Pictures
Entertainment, Inc. He resigned from these positions at the end of 1989
following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined
Columbia in 1974 and served in a variety of senior positions at Columbia and
its affiliates prior to the founding of Tri-Star. Mr. Kaufman also serves as a
director of USA and Expedia, Inc.

Dara Khosrowshahi.Mr. Khosrowshahi, 33, has been a director of the
company since May 1999. Since January 2002, Mr. Khosrowshahi has served as
Executive Vice President and Chief Financial Officer of USA. Mr. Khosrowshahi
has served as Executive Vice President, Operations and Strategic Planning of
USA since July 2000. From August 1999 to July 2000, Mr. Khosrowshahi served as
President of USA Networks Interactive, a division of USA. Mr. Khosrowshahi
joined USA in 1998 as Vice President of Strategic Planning for USA and was
later promoted to Senior Vice President in May 1999. Prior to joining USA, Mr.
Khosrowshahi worked at Allen & Company Incorporated from 1991 to 1998 where he
served as Vice President from 1995 to 1998. He is a director of Expedia, Inc.
and BET.com.

David Litman.Mr. Litman, 45, has served as our Chief Executive Officer
and as one of our directors since May 1999. He co-founded our predecessor
business with Mr. Diener in 1991 and previously served as that entitys Chief
Executive Officer from 1991 to its acquisition in 1999.

Dan Marriott.Mr. Marriott, 34, has been a director of Hotels.com since
March 2002. Since March 2002, Mr. Marriott has served as Senior Vice
President, Strategic Planning of USA. Previously, Mr. Marriott served as
Executive Vice President of Corporate Strategy and Development of Ticketmaster
from January 2000 to February 2002. Prior to such position, Mr. Marriott
served as Executive Vice President, Business Development from February 1999 to
December 1999 and Executive Vice President, Product Development and Marketing
from August 1997 to January 1999. Prior to joining the Company, Mr. Marriott
was employed by PepsiCo for approximately seven years, most recently in the
position of Senior Product Manager for PepsiCos Frito-Lay division. He is a
director of Expedia, Inc.

Eli Segal.Mr. Segal, 60, has been a director of the company since May
1999. Mr. Segal also serves as Chairman of the Audit Committee of our Board of
Directors and is a member of the Compensation Committee of our Board of
Directors. Since December 1996, Mr. Segal has served as Chairman of the Board
of SchoolSports, a magazine and online content provider covering the world of
high school sports. Mr. Segal previously served as Assistant to the President
of the United States from January 1993 to February 1996 and as President and
Chief Executive Officer of The Welfare to Work Partnership, a nonpartisan,
nonprofit business organization, from 1997 to 2000. Mr. Segal also serves as a
director of Hasbro, Inc. and A.C. Moore Arts & Crafts, Inc.

Executive Officers of the Registrant

The following list sets forth the name, and present principal occupation
or employment, and material occupations, positions, offices or employment for
the past five years of each executive officer of the company other than Mr.
Litman and Mr. Diener, whose biographies are set forth above.

Sandra DArcy. Ms. DArcy, 55, has served as Hotels.coms Executive Vice
President since 1998. From 1994 to 1998, she served as a Vice President of
Hotels.coms predecessor business.

21



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##### Table of Contents



Mel Robinson.Mr. Robinson, 48, has served as Hotels.coms Chief
Financial and Strategic Officer since September 2000. Previously, from 1997,
Mr. Robinson was Senior Vice President of Travel Services International, a
leisure travel distribution firm. From 1994 to 1997, Mr. Robinson was Chief
Financial Officer of Cruises Only.

Gregory S. Porter.Mr. Porter, 37, joined Hotels.com as its General
Counsel and Secretary in June 2000. From August 1999 until he became an
employee of the company, Mr. Porter was an attorney with the law firm of Baker
& McKenzie. From 1995 to 1999, Mr. Porter was Vice PresidentLegal of Harken
Energy Corporation, an oil and gas exploration company.

Section 16(a) Beneficial Ownership Reporting Compliance.

To the companys knowledge, based solely on a review of the copies of
reports furnished to the Company and, in certain instances, written
representations that no additional reports were required, during the fiscal
year ended December 31, 2002, all of the companys executive officers,
directors and holders of more than 10% of its common stock timely filed all
reports required by Section 16(a) of the Exchange Act of 1934, as amended,
except with respect to the late filings of Form 5 by each of Mr. Litman and Mr.
Diener to report an option grant in January 2002.

22



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##### Table of Contents






Item 11.Executive Compensation

The following table presents information concerning total compensation
earned by the Named Executive Officers  the Chief Executive Officer and the
four other most highly compensated executive officers of Hotels.com who served
in such capacities as of December 31, 2002  for services rendered to
Hotels.com during each of the last three fiscal years. The information
presented below represents compensation earned by the Named Executive Officers
for all services performed for Hotels.com or any of its subsidiaries.

Summary Compensation Table

|                   |                          |        |      |        |  |            |                     |           |        |                 |         |        |  |  |              |         |     |   |        |        | 
|------------------ | ------------------------ | ------ | ---- | ------ |  | ---------- | ------------------- | --------- | ------ | --------------- | ------- | ------ |  |  | ------------ | ------- | --- | - | ------ | ------ | 
|                   |                          |        |      |        |  |            |                     |           |        |                 |         |        |  |  | Long-Term    |         |     |   |       
|                   |                          |        |      |        |  |            |                     |           |        |                 |         |        |  |  | Compensation |         |     |   |       
|                   |                          |        |      |        |  |            |                     |           |        |                 |         |        |  |  | Awards       |         |     |   |       
|                   |                          |        |      |        |  |            |                     |           |        |                 |         |        |  |  |              |         |     |   |       
|                   |                          |        |      |        |  |            | Annual Compensation |           | Shares |                 |         |        | 
|Name and Principal |                          | Fiscal |      |        |  | Underlying |                     | All Other
|Positions          |                          | Year   |      | Salary |  | Bonus      |                     | Options   |        | Compensation(1)
|                   |                          |        |      |        |  |            |                     |           |        |                
|                   |                          |        | 2002 |        |  | $          | 250,000             |           |        | $               | 200,000 |        |  |  | 50,000       |         |     | $ | 17,067 |       
|David Litman       |                          |        | 2001 |        |  |            | 250,000             |           |        |                 | 505,625 |        |  |  |             |         |     |   | 30,531 |       
|                   | Chief Executive Officer  |        |      | 2000   |  |            |                     | 115,000   | (2)    |                 |         |       |  |  |              | 200,000 | (2) |   |        |       | 
|                   |                          |        | 2002 |        |  | $          | 250,000             |           |        | $               | 200,000 |        |  |  | 50,000       |         |     | $ | 16,779 |       
|Robert Diener      |                          |        | 2001 |        |  |            | 250,000             |           |        |                 | 505,625 |        |  |  |             |         |     |   | 30,339 |       
|                   | President                |        |      | 2000   |  |            |                     | 115,000   | (3)    |                 |         |       |  |  |              | 200,000 | (3) |   |        |       | 
|Mel Robinson       |                          |        | 2002 |        |  | $          | 200,000             |           |        | $               |        |        |  |  | 11,700       |         |     | $ | 16,213 |       
|                   | Chief Financial and      |        |      | 2001   |  |            |                     | 200,000   |        |                 |         |       |  |  |              | 126,100 | (4) |   |        | 11,876 | 
|                   | Strategic Officer        |        |      | 2000   |  |            |                     | 52,615    | (5)    |                 |         |       |  |  |              | 100,000 |     |   |        |       | 
|                   |                          |        | 2002 |        |  | $          | 172,800             |           |        | $               |        |        |  |  | 14,447       |         |     | $ | 11,957 |       
|Sandra DArcy      |                          |        | 2001 |        |  |            | 172,800             |           |        |                 |        |        |  |  | 9,560        | (6)     |     |   | 20,416 |       
|                   | Executive Vice President |        |      | 2000   |  |            |                     | 152,453   |        |                 |         | 61,481 |  |  |              | 59,375  |     |   |        |       | 
|Gregory S. Porter  |                          |        | 2002 |        |  | $          | 132,904             |           |        | $               |        |        |  |  | 14,840       |         |     | $ | 15,696 |       
|                   | General Counsel and      |        |      | 2001   |  |            |                     | 125,001   |        |                 |         |       |  |  |              | 18,220  | (7) |   |        | 16,876 | 
|                   | Secretary                |        |      | 2000   |  |            |                     | 60,000    | (8)    |                 |         |       |  |  |              | 15,000  |     |   |        |       | 



---

|(1) |  | Includes the value of the Companys contributions to the
Company-sponsored 401(k) plan and the amount paid by the Company for
medical, dental, vision and term life insurance coverage under health
and welfare plans.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Mr. Litman on May 10, 2000.                                                                                                                 
|   
|(3) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Mr. Diener on May 10, 2000.                                                                                                                 
|   
|(4) |  | Excludes options to purchase 20,000 shares of USA common stock
granted to Mr. Robinson on December 16, 2001.                                                                                                          
|   
|(5) |  | Reflects compensation for the period September 1, the date Mr.
Robinson joined Hotels.com, to December 31, 2000.                                                                                                      
|   
|(6) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Ms. DArcy on December 16, 2001.                                                                                                            
|   
|(7) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Mr. Porter on December 16, 2001.                                                                                                            
|   
|(8) |  | Reflects compensation for the period June 19, the date Mr. Porter
joined Hotels.com, to December 31, 2000.                                                                                                            

23



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##### Table of Contents



Stock Options

The following table sets forth certain information about the stock option
awards that were made to the Named Executive Officers during fiscal 2002. All
of these options are transferable to family members under specified conditions.

Option Grants in Last Fiscal Year

|                  |  |            |        |              |  |           |      |            |  |        |       |                          |  |                            |         |  |  |   |           |  |  |   |           | 
|----------------- |  | ---------- | ------ | ------------ |  | --------- | ---- | ---------- |  | ------ | ----- | ------------------------ |  | -------------------------- | ------- |  |  | - | --------- |  |  | - | --------- | 
|                  |  | Number of  |        | Percentage   |  |           |      |            |  |        |       |                          |  | Potential Realizable Value
|                  |  | Shares     |        | of Total     |  |           |      |            |  |        |       |                          |  | at Assumed Annual Rates of
|                  |  | Underlying |        | Options      |  | Exercise  |      |            |  |        |       | Stock Price Appreciation
|                  |  | Options    |        | Granted to   |  | Price     |      |            |  |        |       | for Option Term(1)      
|                  |  | Granted    |        | Employees in |  | Per Share |      | Expiration |  |       
|Name              |  | (#)(2)     |        | Fiscal Year  |  | ($/sh)    |      | Date       |  | 5% ($) |       | 10% ($)                 
|                  |  |            |        |              |  |           |      |            |  |        |       |                         
|David Litman      |  |            | 50,000 |              |  |           | 2.47 | %          |  | $      | 44.83 |                          |  |                            | 1/24/12 |  |  | $ | 1,409,667 |  |  | $ | 3,572,374 | 
|Robert Diener     |  |            | 50,000 |              |  |           | 2.47 | %          |  | $      | 44.83 |                          |  |                            | 1/24/12 |  |  | $ | 1,409,667 |  |  | $ | 3,572,374 | 
|Mel Robinson      |  |            | 6,000  | (3)          |  |           | 0.30 | %          |  | $      | 43.31 |                          |  |                            | 1/11/12 |  |  | $ | 163,425   |  |  | $ | 414,150   | 
|                  |  |            | 5,100  | (3)          |  |           | 0.28 | %          |  |        | 58.93 |                          |  |                            | 4/01/12 |  |  |   | 211,246   |  |  |   | 535,340   | 
|Sandra DArcy     |  |            | 3,563  | (3)          |  |           | 0.18 | %          |  | $      | 43.31 |                          |  |                            | 1/11/12 |  |  | $ | 97,047    |  |  | $ | 245,936   | 
|                  |  |            | 7,500  |              |  |           | 0.37 | %          |  |        | 43.31 |                          |  |                            | 1/11/12 |  |  |   | 204,281   |  |  |   | 517,687   | 
|                  |  |            | 3,384  | (3)          |  |           | 0.17 | %          |  |        | 58.93 |                          |  |                            | 4/01/12 |  |  |   | 125,414   |  |  |   | 317,823   | 
|Gregory S. Porter |  |            | 1,200  | (3)          |  |           | 0.06 | %          |  | $      | 43.31 |                          |  |                            | 1/11/12 |  |  | $ | 32,685    |  |  | $ | 82,830    | 
|                  |  |            | 1,140  | (3)          |  |           | 0.06 | %          |  |        | 58.93 |                          |  |                            | 4/01/12 |  |  |   | 42,249    |  |  |   | 107,068   | 
|                  |  |            | 12,500 |              |  |           | 0.62 | %          |  |        | 38.06 |                          |  |                            | 7/29/12 |  |  |   | 313,661   |  |  |   | 794,879   | 



---

|(1) |  | Potential gains are calculated based on the closing price per share
of the class A common stock on the date of grant, net of the respective
exercise price but before taxes associated with the exercise. The 5%
and 10% assumed annual rates of compounded stock appreciation are
mandated by the rules of the Securities and Exchange Commission and do
not represent Hotels.coms estimate or projection of future Hotels.com
stock price. Actual gains, if any, on stock option exercises are
dependent on the future market price of shares of class A common stock,
Hotels.coms future financial performance and overall market
conditions, as well as on the option holders continued employment
through the vesting period. The amounts reflected in this table may
not necessarily be achieved.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | All of the options granted were granted under the companys 2000
Stock Plan, expire 10 years from the date of grant and were granted at
the fair market value at the time of grant. The stock options will
become exercisable with respect to 1/4 of the shares on the first
anniversary of the date of grant and with respect to 1/48 of the
original amount of shares on each monthly anniversary thereafter until
fully vested.                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | Represents options granted pursuant to the Companys Option-Based
Incentive Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents



Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Option Values

|                     |  |             |         |          |  |                                |           |                        |  |                         |       |                      |  |  |         |  |  |   |         |  |  |   |           | 
|-------------------- |  | ----------- | ------- | -------- |  | ------------------------------ | --------- | ---------------------- |  | ----------------------- | ----- | -------------------- |  |  | ------- |  |  | - | ------- |  |  | - | --------- | 
|                     |  |             |         |          |  |                                |           |                        |  | Number of Shares        |       | Value of Unexercised
|                     |  | Shares      |         |          |  |                                |           | Underlying Unexercised |  | In-the Money Options(1)
|                     |  | Acquired on |         | Value    |  | Options at Fiscal Year-End (#) |           | At Fiscal Year-End ($)
|                     |  | Exercise    |         | Realized |  |                                |           |                       
|Name                 |  | (#)         |         | ($)      |  | Exercisable                    |           | Unexercisable          |  | Exercisable             |       | Unexercisable       
|                     |  |             |         |          |  |                                |           |                        |  |                         |       |                     
|David Litman(2)      |  |             | 62,499  |          |  | $                              | 2,824,852 |                        |  |                         | 8,335 |                      |  |  | 108,333 |  |  | $ | 321,981 |  |  | $ | 2,743,404 | 
|Robert Diener(3)     |  |             | 62,499  |          |  | $                              | 2,824,852 |                        |  |                         | 8,335 |                      |  |  | 108,333 |  |  | $ | 321,981 |  |  | $ | 2,743,404 | 
|Mel Robinson(4)      |  |             | 107,194 |          |  | $                              | 2,124,899 |                        |  |                         | 9,425 |                      |  |  | 121,181 |  |  | $ | 181,787 |  |  | $ | 2,310,977 | 
|Sandra DArcy(5)     |  |             | 20,769  |          |  | $                              | 879,030   |                        |  |                         | 3,819 |                      |  |  | 37,766  |  |  | $ | 115,524 |  |  | $ | 943,394   | 
|Gregory S. Porter(6) |  |             | 7,000   |          |  | $                              | 205,855   |                        |  |                         | 8,990 |                      |  |  | 32,070  |  |  | $ | 187,878 |  |  | $ | 562,168   | 



---

|(1) |  | Amounts were calculated using the closing price of Hotels.coms
Class A common stock on the last trading day of the fiscal year
($54.63). Value is calculated on the basis of the difference between
the option exercise price and $54.63 multiplied by the number of shares
of common stock underlying the option.                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Mr. Litman on May 10, 2000, of which options to purchase
7,500 shares of USA common stock were vested at December 31, 2002 and
options to purchase 7,500 shares of USA common stock were unexercisable
as of December 31, 2002. None of such options were exercised in 2002.
The values of the exercisable and unexercisable in-the-money USA
options at December 31, 2002 were $9,225 and $9,225, respectively.
|   
|(3) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Mr. Diener on May 10, 2000, of which options to purchase
7,500 shares of USA common stock were vested at December 31, 2002 and
options to purchase 7,500 shares of USA common stock were unexercisable
as of December 31, 2002. None of such options were exercised in 2002.
The values of the exercisable and unexercisable in-the-money USA
options at December 31, 2002 were $9,225 and $9,225, respectively.
|   
|(4) |  | Excludes options to purchase 20,000 shares of USA common stock
granted to Mr. Robinson on December 16, 2001, of which options to
purchase 5,000 shares of USA common stock were vested at December 31,
2002 and options to purchase 15,000 shares of USA common stock were
unexercisable at December 31, 2002. None of such options were
exercised in 2002.                                                                                                                               
|   
|(5) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Ms. DArcy on December 16, 2001, of which options to
purchase 3,750 shares of USA common stock were vested at December 31,
2002 and options to purchase 11,250 shares of USA common stock were
unexercisable at December 31, 2002. None of such options were
exercised in 2002.                                                                                                                                 
|   
|(6) |  | Excludes options to purchase 15,000 shares of USA common stock
granted to Mr. Porter on December 16, 2001, of which options to
purchase 3,750 shares of USA common stock were vested at December 31,
2002 and options to purchase 11,250 shares of USA common stock were
unexercisable at December 31, 2002. None of such options were
exercised in 2002.                                                                                                                                 

Employment Agreements

On July 28, 2000, we entered into an employment agreement with Mr.
Robinson, for an initial term extending through August 31, 2001, and providing
for automatic renewals of consecutive one-year terms unless either party gives
at least 60 days prior written notice of its intention not to renew. The
employment agreement provided for an initial base salary of $180,000, which was
increased to $200,000 in 2001. Mr. Robinson is also eligible to receive an
annual discretionary bonus.

Mr. Robinsons employment agreement provided for a grant of stock options
to purchase 100,000 shares of our class A common stock. Mr. Robinsons options
are exercisable over a four-year period, with 25% of the number of shares
covered by such options vesting after one year and 1/36 of the remainder
vesting each month over the following three years. Upon a change of control of
Hotels.com, in addition to any options vested at the time of the change of
control, 50% of the unvested options shall also become vested.

25



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##### Table of Contents



Other Benefits

401(k) Retirement Plan. We maintain a 401(k) retirement savings plan that
is available to substantially all of our employees. Under the terms of the
plan, we match 25% of each participants voluntary contributions up to 4% of
the participants compensation. A participant vests in the matching
contributions after three years of employment.

Director Compensation

Messrs. Diener and Litman, who are directors that are also Hotels.com
employees, Ms. Busquet and Messrs. Diller, Ellen, Kaufman, Khosrowshahi and
Marriott, who are directors that are employees of Hotels.coms parent company
USA, do not receive any additional compensation for serving on the Board of
Directors.

Annual Retainer Fee. Each director of Hotels.com who is not an employee
of Hotels.com, USA or an Hotels.com subsidiary, receives an annual retainer of
$10,000 per year plus $1,000 for each Board or Committee meeting attended and
$2,500 for each Committee chaired. Under our Directors Stock Option Plan, as
amended, directors who are not employees of Hotels.com, USA or any Hotels.com
subsidiary received a grant of options to purchase 15,000 shares of our class A
common stock upon their initial election to office. In addition, the
Directors Stock Option Plan provides that each such director will receive an
additional grant of options to purchase 10,000 shares of our class A common
stock annually on the date of our annual meeting of stockholders at which the
director is re-elected. The exercise price per share of our class A common
stock subject to the options is the fair market value of our class A common
stock on the date of grant, which is defined as the mean of the high and low
sale price on any stock exchange on which the class A common stock is listed or
as reported by Nasdaq or, in the event that the class A common stock is not so
listed or reported, as determined by an investment banking firm selected by the
Compensation Committee. The options vest in equal increments on each of the
first three anniversaries of the date of grant. The options expire ten years
from the date of grant.

Other Benefits. We reimburse our directors who are not employees of
either Hotels.com or USA for the reasonable expenses associated with attending
Board meetings and provide them with liability insurance coverage for their
activities as our directors.

Compensation Committee Interlocks and Insider Participation

Neither Ms. Harms nor Messrs. Segal or Blutinger is an officer or
employee, or former officer or employee, of Hotels.com or any of its
subsidiaries. No interlocking relationship exists between the members of
Hotels.coms Management, Board or Compensation Committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.

Compensation Committee Report on Executive Compensation

The Compensation Committee is responsible for establishing and
administering the companys executive compensation programs.

The Compensation Committees compensation philosophy is designed to
support the companys primary objective of creating value for shareholders.
The Compensation Committee believes that the following compensation strategies
for the Companys executive officers, including the Chief Executive Officer
(the CEO) and the President, achieve this objective:



| |  |  | Attract and retain talented executives  Hotels.com provides core
compensation in the form of base salary and benefit programs that are
comparable to those of similarly sized companies in the
e-commerce/leisure/hospitality industry. The base salary target is
generally based on industry survey results. For higher levels of
responsibility, the base salary component is intended to be a
diminishing portion of the executives potential total compensation.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26



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##### Table of Contents





| |  |  | Emphasize pay for performance  Hotels.coms incentive plan
establishes a significant relationship between current Hotels.com
performance and incentive compensation, on a sliding scale basis, with
substantial rewards possible for exceptional results and no reward for
results below plan.                                                                                                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Encourage management stock ownership  The Compensation Committee
firmly believes that long-term shareholder value will be significantly
enhanced by management stock ownership. As a result, the Companys
stock option program strongly encourages stock ownership by executive
officers. The Company generally establishes base salary ranges by
considering compensation levels in similarly sized companies in the
e-commerce/leisure/ hospitality industry.

The Compensation Committee reviews and approves all executive officer
salary adjustments as recommended by the CEO. The Committee reviews the
performance of the CEO and establishes his base salary. In addition to
compensation through base salaries, the Compensation Committee has the
authority to issue performance-based bonuses. Incentive bonuses will be paid
only to the extent that the Company meets performance objectives. Bonus awards
are based on the Compensation Committees determination of the individuals
position and level of responsibility and the individuals impact on the
Companys financial success

Base Salary

All salaries for executive and senior management are approved by the
Compensation Committee. For the CEO and the President, the Compensation
Committee takes into account a variety of factors in determining base salary,
including:



| |  |  | the individuals experience and prior performance;                                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the companys operating performance;                                                                                                    
|
| |  |  | the companys attainment of planned financial and strategic initiatives;                                                                
|
| |  |  | competitive salaries for comparable officers at comparable companies; and                                                               
|
| |  |  | the fairness of individual executive officers salaries relative to
their responsibilities and the salaries of other executive officers.

Stock Options

The companys stock option program is designed to link executive
compensation with stockholder value. The company grants options to all
employees upon initial employment and the company makes periodic option grants
to eligible employees based on performance. Certain employees may receive
option grants upon promotion and in connection with entering into certain new
employment arrangements.

In addition, the company has adopted an Option-Based Incentive Program
pursuant to which all employees, including the companys senior executives
other than the CEO and the President, receive quarterly grants of stock option
contingent upon the companys attainment of certain financial goals.

Chief Executive Officer and President Compensation

In January 2001, the Company adopted a Senior Management Incentive Plan
pursuant to which the annual salary of Mr. Litman, the companys Chief
Executive Officer, and Mr. Robert Diener, the companys President, was
increased to $250,000. In addition, under the plan Mr. Litman and Mr. Diener
each would receive annual incentive bonuses and option grants based upon the
attainment of certain performance goals.

Messrs. Litman and Diener each received a salary of $250,000 and a bonus
of $200,000 during 2002. Mr. Litman and Mr. Diener received a stock option
grant of 50,000 shares in 2002. In January 2002, Messrs. Litman and Diener
each received a stock option grant of 75,000 shares of class A common stock
under the Senior Management Incentive Plan based upon their performance in
2002.

27



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##### Table of Contents



Summary

The Compensation Committee believes that the Companys executive
compensation program must continually provide executives with a strong
incentive to focus on and achieve the Companys business objectives and link a
significant portion of long-term remuneration directly to stock price
appreciation realized by all of the Companys stockholders. By assuring that
executives are appropriately compensated and therefore motivated, the long-term
interests of stockholders will be best served.

Submitted by the Compensation Committee of the Companys Board of
Directors

Elan Blutinger        Beverly
Harms (Chairperson)        Eli
Segal

Performance Graph

The following Performance Graph compares, for the period that our Class A
common stock has been publicly traded (since February 25, 2000), the cumulative
total stockholder return for Hotels.com with The Nasdaq Stock Market (U.S.
Composite) Index (the Nasdaq Composite), and The ISDEX Internet Stock Index
(the ISDEX Internet Index). The Performance Graph assumes that $100 was
invested beginning on the date of our initial public offering in each of
Hotels.com and each of the indexes. Total return performance for the Nasdaq
Composite and the ISDEX Internet Index is weighted based on the market
capitalization of the companies included in each index and assumes that
dividends are reinvested. We did not declare or pay any dividends on our Class
A common stock fiscal 2002, 2001 or 2000. Immediately following the
Performance Graph is a chart of the numerical plot-points that support the
graph. We caution that the stock price performance shown in the graph below
should not be considered indicative of potential future stock price
performance.

(PERFORMANCE GRAPH)

|                     |  |              |        |              |  |      |        |      |  |   |        |  |  |   |        | 
|-------------------- |  | ------------ | ------ | ------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                     |  |              |        | December 31,
|                     |  | February 25, |        |             
|                     |  | 2000         |        | 2000         |  | 2001 |        | 2002
|                     |  |              |        |              |  |      |        |     
|Hotels.com           |  | $            | 100.00 |              |  | $    | 109.14 |      |  | $ | 176.93 |  |  | $ | 210.12 | 
|ISDEX Internet Index |  | $            | 100.00 |              |  | $    | 37.02  |      |  | $ | 18.53  |  |  | $ | 11.05  | 
|Nasdaq Composite     |  | $            | 100.00 |              |  | $    | 53.82  |      |  | $ | 42.49  |  |  | $ | 29.09  | 

28



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##### Table of Contents






Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

Our class A Common Stock

The following table sets forth, as of April 11, 2003, certain information
regarding the beneficial ownership of our class A common stock by each person
or entity who is known by us to own beneficially 5% or more of our outstanding
class A common stock, each director of the Company, each of our Named Executive
Officers, and all of our directors and executive officers as a group. The
table also presents as of April 11, 2003, information relating to the
beneficial ownership of shares of common stock of USA, our parent company, by
each director of the Company, each of our Named Executive Officers, and all of
our directors and executive officers as a group.

|                                            |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|------------------------------------------- |  | ------------------ |  | --- | ----------- | ------------------ |  | ------------------- | ---- | ------------------- |  |  | ---- | - |  | 
|                                            |  |                    |  |     |             | Number of Shares   |  | Percentage of       |      | Percentage of Total
|Name and Address of                         |  |                    |  |     |             | Beneficially Owned |  | Shares Beneficially |      | Voting Power (of   
|Beneficial Owner                            |  | Title of Class     |  | (1) |             | Owned (1)          |  | All Classes) (2)   
|                                            |  |                    |  |     |             |                    |  |                    
|USA Interactive                             |  | Hotels.com class A |  |     | 38,999,100  | (3)                |  |                     | 67.8 | %                   |  |  | 96.9 | %
|152 West 57th Street, 42nd Floor            |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|New York, NY 10019                          |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|                                            |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|Viking Global Performance LLC               |  | Hotels.com class A |  |     | 991,100     | (4)                |  |                     | 5.5  | %                   |  |  | *    |  
|280 Park Avenue, 35th Floor                 |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|New York, New York 10017                    |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|                                            |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|Viking Global Investors, L.P.               |  | Hotels.com class A |  |     | 991,100     | (4)                |  |                     | 5.5  | %                   |  |  | *    |  
|280 Park Avenue, 35th Floor                 |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|New York, New York 10017                    |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|                                            |  |                    |  |     |             |                    |  |                     |      |                     |  |  |      |   |  | 
|O. Andreas Halvorsen(5)                     |  | Hotels.com class A |  |     | 991,100     | (4)                |  |                     | 5.5  | %                   |  |  | *    |  
|Brian T. Olson (5)                          |  | Hotels.com class A |  |     | 991,100     | (4)                |  |                     | 5.5  | %                   |  |  | *    |  
|David C. Ott (5)                            |  | Hotels.com class A |  |     | 991,100     | (4)                |  |                     | 5.5  | %                   |  |  | *    |  
|Elan Blutinger                              |  | Hotels.com class A |  |     | 6,668       | (6)                |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     |            |                    |  |                     |     |                     |  |  |     |  
|Anne Busquet                                |  | Hotels.com class A |  |     |            |                    |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 50,701      | (7)                |  |                     | *    |                     |  |  | *    |  
|Sandra DArcy                               |  | Hotels.com class A |  |     | 15,738      | (6)                |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 3,750       | (8)                |  |                     | *    |                     |  |  | *    |  
|Robert Diener (9)                           |  | Hotels.com class A |  |     | 4,188,860   | (10)               |  |                     | 23.2 | %                   |  |  | *    |  
|                                            |  | USA common         |  |     | 11,250      | (8)                |  |                     | *    |                     |  |  | *    |  
|Barry Diller (11)                           |  | Hotels.com class A |  |     |            |                    |  |                     |     |                     |  |  |     |  
|                                            |  | USA common         |  |     | 235,213,844 | (12)               |  |                     | 39.9 | %                   |  |  | 68.2 | %
|David Ellen                                 |  | Hotels.com class A |  |     |            |                    |  |                     |     |                     |  |  |     |  
|                                            |  | USA common         |  |     | 19,750      | (13)               |  |                     | *    |                     |  |  | *    |  
|Beverly Harms                               |  | Hotels.com class A |  |     | 10,000      | (6)                |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 4,000       |                    |  |                     | *    |                     |  |  | *    |  
|Victor Kaufman                              |  | Hotels.com class A |  |     |            |                    |  |                     |     |                     |  |  |     |  
|                                            |  | USA common         |  |     | 1,621,760   | (14)               |  |                     | *    |                     |  |  | *    |  
|Dara Khosrowshahi                           |  | Hotels.com class A |  |     | 68,550      | (6)                |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 597,536     | (15)               |  |                     | *    |                     |  |  | *    |  
|David Litman (9)                            |  | Hotels.com class A |  |     | 4,290,235   | (16)               |  |                     | 23.8 | %                   |  |  | *    |  
|                                            |  | USA common         |  |     | 11,250      | (8)                |  |                     | *    |                     |  |  | *    |  
|Dan Marriott                                |  | Hotels.com class A |  |     |            |                    |  |                     |     |                     |  |  |     |  
|                                            |  | USA common         |  |     | 791,756     | (17)               |  |                     | *    |                     |  |  | *    |  
|Gregory S. Porter                           |  | Hotels.com class A |  |     | 14,267      | (18)               |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 3,750       | (8)                |  |                     | *    |                     |  |  | *    |  
|Mel Robinson                                |  | Hotels.com class A |  |     | 36,871      | (6)                |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 5,000       | (8)                |  |                     | *    |                     |  |  | *    |  
|Eli Segal                                   |  | Hotels.com class A |  |     | 10,000      | (6)                |  |                     | *    |                     |  |  | *    |  
|                                            |  | USA common         |  |     | 1,000       |                    |  |                     | *    |                     |  |  | *    |  
|Directors and executive officers as a group |  | Hotels.com class A |  |     | 8,641,188   | (19)               |  |                     | 47.9 | %                   |  |  | 1.4  | %
|(14 persons)                                |  | USA common         |  |     | 238,345,347 | (20)               |  |                     | 40.2 | %                   |  |  | 68.3 | %

29



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---

|*    |  | Represents less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(1)  |  | Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with
respect to securities. Except as otherwise indicated by footnote, and
subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect
to all shares of class A common stock shown as beneficially owned by
them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(2)  |  | Percentage of total voting power is based on one vote for each
share of our class A common stock and 15 votes for each share of our
Class B common stock, calculated assuming no conversion of our Class B
common stock by any holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(3)  |  | Represents the number of shares of class A common stock that may be
issued upon conversion of the shares of Class B common stock held by
USA. Under our restated certificate of incorporation, shares of our
Class B common stock are convertible at any time into an equal number
of shares of our class A common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|(4)  |  | Consist of (a) 511,100 shares held by Viking Global Equities LP,
(b) 35,800 shares held Viking Global Consumer Fund LP and (c) 444,200
shares of class A common stock held by held by VGE III Portfolio Ltd.
and Viking Global Consumer Portfolio Ltd. Viking Global Investors
L.P., Viking Global Performance LLC, and Messrs. Halvorsen, Olson and
Ott do not own any shares of class A common stock directly. Viking
Global Investors L.P. is the general partner of Viking Global Equities
LP and Viking Global Consumer Fund LP. Viking Global Performance LLC,
an affiliate of Viking Global Investors LP, provides managerial
services to Viking Global Equities LP and Viking Global Consumer Fund
LP. Messrs. Halvorsen, Olson and Ott are Managing Directors of Viking
Global Investors LP and members of Viking Global Performance LLC.                                                                                                                                                                                                  
|    
|(5)  |  | The address of Messrs. Halvorsen, Olson and Ott is c/o Viking
Global Performance LLC, 280 Park Avenue, 35th Floor, New York, New York
10017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(6)  |  | Represents shares of class A common stock issuable upon the
exercise of vested stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(7)  |  | Consists of 19,035 shares of USA common stock and 31,666 shares of
USA common stock issuable upon the exercise of vested stock options
granted under USAs stock option plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(8)  |  | Represents shares of USA common stock issuable upon the exercise of
vested stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|(9)  |  | The address of Messrs. Litman and Diener is c/o Hotels.com, 10440
North Central Expressway, Suite 400, Dallas, TX 75231.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(10) |  | Consists of (a) 596,558 shares of class A common stock held by Mr.
Diener directly, (b) 50,002 shares of class A common stock issuable
upon the exercise of vested stock options, (c) 3,529,980 shares of
class A common stock held of record by TMF Liquidating Trust, and (d)
12,320 shares of class A common stock held for the benefit of Mr.
Dieners children. Mr. Diener is a co-trustee of TMF Liquidating Trust
and, along with his spouse and trusts for the benefit of his minor
children, are beneficiaries of 50% of TMF Liquidating Trusts assets.
Mr. Diener disclaims beneficial ownership of all other assets held by
TMF Liquidating Trust and the class A common stock attributable to the
trusts for the benefit of his children, and this report shall not be
deemed an admission that Mr. Diener is the beneficial owner of those
shares of class A common stock for any purpose.                                                                                                                                            
|    
|(11) |  | The address of Mr. Diller is c/o USA Interactive, 152 West 57th
Street, 42nd Floor, New York, NY 10019.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(12) |  | Consists of 2,043,705 shares of USA common stock owned by Mr.
Diller, options to purchase 47,120,888 shares of USA common stock
granted under USAs stock option plans, 200,801 shares of USA common
stock held by a private foundation as to which Mr. Diller disclaims
beneficial ownership, 44 shares of USA common stock and 48,846,808
shares of USA Class B common stock held by BDTV Inc, BDTV II Inc., BDTV
III Inc. and BDTV IV Inc., 49,756,461 shares of USA common stock and
2,353,188 shares of USA Class B common stock which are held by Liberty
Media Corporation, and 43,181,308 shares of USA common stock,
13,430,000 shares of USA Class B common stock and warrants to acquire
28,280,641 shares of USA common stock, which are held by Vivendi
Universal, S.A., as to which Mr. Diller has general voting authority
under the Stockholders Agreement. Excludes options to purchase 26,665
shares of USA common stock held by Mr. Dillers spouse, as to which Mr.
Diller disclaims beneficial ownership.                      
|    
|(13) |  | Consists of 1,000 shares of USA restricted stock and 18,750 shares
of USA common stock issuable upon the exercise of vested stock options
granted under USAs stock option plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(14) |  | Consists of 19,260 shares of USA common stock, 15,000 shares of USA
restricted stock and 1,587,500 shares of USA common stock issuable upon
the exercise of vested stock options granted under USAs stock option
plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(15) |  | Consists of 42,120 shares of USA common stock, 15,000 shares of USA
restricted stock and 540,416 shares of USA common stock issuable upon
the exercise of vested stock options granted under USAs stock option
plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(16) |  | Consists of (a) 495,700 shares of class A common stock held by Mr.
Litman directly, (b) 50,002 shares of class A common stock issuable
upon the exercise of vested stock options, (c) 3,529,980 shares of
class A common stock held of record by TMF Liquidating Trust, (d)
104,892 shares of class A common stock held for the benefit of Mr.
Litmans children, and (e) 109,661 shares of class A common stock held
by a foundation for which Mr. Litman serves as an officer and director.
Mr. Litman is a co-trustee of TMF Liquidating Trust and, along with
his spouse and trusts for the benefit of his minor children, are
beneficiaries of 50% of TMF Liquidating Trusts assets. Mr. Litman
disclaims beneficial ownership of all other assets held by TMF
Liquidating Trust and the class A common stock attributable to the
trusts for the benefit of his children and the foundation, and this
report shall not be deemed an admission that Mr. Litman is the
beneficial owner of those shares of class A common stock for any
purpose.
|    
|(17) |  | Consists of 16 shares of USA common stock held indirectly by Mr.
Marriotts spouse, 3,000 shares of USA restricted stock and
788,740
shares of USA common stock issuable upon the exercise of vested stock
options granted under USAs stock option plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(18) |  | Consists of 750 shares of class A common stock and 13,517 shares of
class A common stock issuable upon the exercise of vested stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(19) |  | Includes 261,347 of class A common stock issuable upon the exercise
of vested stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(20) |  | Includes 50,122,960 shares of USA common stock issuable upon the
exercise of vested stock options granted under USAs stock option plans
and 34,000 shares of USA restricted stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

30



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##### Table of Contents



Our Class B Common Stock

The following table sets forth, as of April 11, 2003, certain information
regarding the beneficial ownership of our Class B common stock by each person
or entity who is known by us to own beneficially 5% or more or of our
outstanding Class B common stock, each director of the Company, each of our
Named Executive Officers, and all of our directors and executive officers as a
group.

|                                                                    |  |                    |            |               |  |  |     |  
|------------------------------------------------------------------- |  | ------------------ | ---------- | ------------- |  |  | --- | -
|Name and Address of                                                 |  | Number of Shares   |            | Percentage of
|Beneficial Owner                                                    |  | Beneficially Owned |            | Class (1)    
|USA Interactive
152 West 57th Street, 42nd Floor
New York, NY 10019 |  |                    | 38,999,100 |               |  |  | 100 | %
|Elan Blutinger                                                      |  |                    |           |               |  |  |    |  
|Anne Busquet                                                        |  |                    |           |               |  |  |    |  
|Sandra DArcy                                                       |  |                    |           |               |  |  |    |  
|Robert Diener                                                       |  |                    |           |               |  |  |    |  
|Barry Diller                                                        |  |                    |           |               |  |  |    |  
|David Ellen                                                         |  |                    |           |               |  |  |    |  
|Beverly Harms                                                       |  |                    |           |               |  |  |    |  
|Victor Kaufman                                                      |  |                    |           |               |  |  |    |  
|Dara Khosrowshahi                                                   |  |                    |           |               |  |  |    |  
|David Litman                                                        |  |                    |           |               |  |  |    |  
|Dan Marriott                                                        |  |                    |           |               |  |  |    |  
|Gregory S. Porter                                                   |  |                    |           |               |  |  |    |  
|Mel Robinson                                                        |  |                    |           |               |  |  |    |  
|Eli Segal                                                           |  |                    |           |               |  |  |    |  
|All executive officers and directors as a group (14 persons)        |  |                    |           |               |  |  |    |  



---

|(1) |  | Beneficial ownership is determined in accordance with the rules of
the Commission and generally includes voting or investment power with
respect to securities. Except as otherwise indicated by footnote, and
subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect
to all shares of Class B common stock shown as beneficially owned by
them. Shares of our Class B common stock may be converted at any time
into an equal number of shares of our Class A common stock.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Equity Compensation Plan Information

The following table sets forth certain information, as of December 31,
2002, regarding the Companys equity compensation plans.

|                                                              |  |                            |           |                      |  |                        |       |  |  |                      |           | 
|------------------------------------------------------------- |  | -------------------------- | --------- | -------------------- |  | ---------------------- | ----- |  |  | -------------------- | --------- | 
|                                                              |  |                            |           |                      |  |                        |       |  |  | Number of securities
|                                                              |  | Number of securities to be |           | Weighted average     |  | remaining available   
|                                                              |  | issued upon exercise of    |           | exercise price of    |  | for future grant under
|                                                              |  | outstanding options,       |           | outstanding options, |  | equity compensation   
|                                                              |  | warrants and rights        |           | warrants and rights  |  | plans                 
|                                                              |  |                            |           |                      |  |                       
|Equity compensation
plans approved by
security holders(1)     |  |                            | 3,284,312 |                      |  | $                      | 39.05 |  |  |                      | 831,997   | 
|Equity compensation
plans not approved
by security holders(2) |  |                            | 627,824   |                      |  | $                      | 18.35 |  |  |                      | 2,047,827 | 
|                                                              |  |                            |           |                      |  |                        |       |  |  |                      |           | 
|Total                                                         |  |                            | 3,912,136 |                      |  | $                      | 35.73 |  |  |                      | 2,879,824 | 
|                                                              |  |                            |           |                      |  |                        |       |  |  |                      |           | 



---

|(1) |  | The material features of our 2000 Stock Plan and our Directors
Stock Option Plan are described in Note 10 to the Companys financial
statements for the year ended December 31, 2002.                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consists of warrants issued or issuable to third-party marketing
and distributing partners in connection with several exclusive
marketing and distribution agreements are more fully described in Note
5 to the Companys financial statements for the year ended December 31,
2002.

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Item 13.Certain Relationships and Related Party Transactions

We had an arrangement with Ticketmaster, a division of USA, that allowed
Ticketmaster to sell hotel rooms to their customers. Under the arrangement,
Ticketmaster marketed our lodging accommodations via the Internet in return for
(1) links from our websites and newsletters to the Citysearch.com and
Ticketmaster.com websites and (2) a 5% commission on the gross revenues
generated from lodging accommodations booked through the Citysearch.com site.
This arrangement terminated in 2002. The commission paid to Ticketmaster for
the year ended December 31, 2002 was $0.4 million.

In March 2002, we entered into an arrangement with an arrangement with
Precision Response Corporation, a subsidiary of USA, for outsourced call center
services. For the year ended December 31, 2002, we incurred fees of $2.0
million under the arrangements with Precision Response Corporation.

During 2002, USA contributed $0.9 million of television advertising on its
cable channels for which the Company paid no consideration.




Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as a part of this report

(1)  Financial Statements included in Part II of this report.

|           |                                                                                                      |  |      |   | 
|---------- | ---------------------------------------------------------------------------------------------------- |  | ---- | - | 
|           |                                                                                                      |  | Page
|           |                                                                                                      |  |     
|Hotels.com |                                                                                                      |  |      |  
|           | Report of Independent Auditors                                                                       |  |      | 2 | 
|           | Consolidated Balance Sheets at December 31, 2002 and 2001                                            |  |      | 3 | 
|           | Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000               |  |      | 4 | 
|           | Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001 and 2000 |  |      | 5 | 
|           | Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  |      | 6 | 
|           | Notes to Financial Statements                                                                        |  |      | 7 | 

(3)  Exhibits

|        |  |                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                         
|Number  |  | Description                                                                                                                                             
|        |  |                                                                                                                                                         
|23.1    |  | Consent of Ernst & Young LLP (filed herewith).
Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002, 18 U.S.C.
|99.1    |  | Section 1350 (filed herewith).
Certification of Chief Financial and Strategic Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002, 18         
|99.2    |  | U.S.C. Section 1350 (filed herewith).                                                                                                                   

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized

|               |  |                                                                    
|-------------- |  | -------------------------------------------------------------------
|               |  | Hotels.com                                                         
|              
|               |  |                                                                    
|              
|               |  |                                                                    
|              
|April 30, 2003 |  | /s/ Mel RobinsonMel Robinson, Chief Financial and Strategic Officer

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CERTIFICATIONS

I, David S. Litman, certify that:

1.     I have reviewed this annual report on Form 10-K/A of Hotels.com;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flow of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                        
|-------------------- |  | -------------------------------------------------------
|Date: April 30, 2003 |  | /s/ David LitmanDavid S. Litman
Chief Executive Officer

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I, Mel Robinson, certify that:

1.     I have reviewed this annual report on Form 10-K/A of Hotels.com;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flow of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                   
|-------------------- |  | ------------------------------------------------------------------
|Date: April 30, 2003 |  | /s/ Mel RobinsonMel Robinson
Chief Financial and Strategic Officer

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##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                         
|Number  |  | Description                                                                                                                                             
|        |  |                                                                                                                                                         
|23.1    |  | Consent of Ernst & Young LLP (filed herewith).
Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002, 18 U.S.C.
|99.1    |  | Section 1350 (filed herewith).
Certification of Chief Financial and Strategic Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002, 18         
|99.2    |  | U.S.C. Section 1350 (filed herewith).                                                                                                                   

36