##### Table of Contents



As filed with the Securities and Exchange Commission on March 27, 2003

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K

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)



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Commission File No. 000-29575

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of incorporation or organization) |  | 75-2817683
(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: The Registrants Proxy Statement for
its 2003 Annual Meeting of Stockholders is incorporated by reference herein in
Part III, Items 10, 11, 12 and 13.



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TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Business                                                                                       
|                                                  | Item 2. Properties                                                                                     
|                                                  | Item 3. Legal Proceedings                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                          
|                                                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                  | Item 6. Selected Financial Data                                                                        
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                  | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                                     
|                                                  | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures          
|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 14. Controls and Procedures                                                                       
|                                                  | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                       
|CERTIFICATIONS                                   
|EXHIBIT INDEX                                    
|EX-10.7 Employment Agreement - Mel Robinson      
|EX-10.8 Senior Management Incentive Plan         
|EX-10.9 Option Based Incentive Program           
|EX-10.10 Amendment to Directors Stock Option Plan
|EX-21.1 Subsidiaries of Hotels.com               
|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 I                                                                                |  |     
|         |  |                                                                                       |  |     
|Item 1.  |  | Business                                                                              |  | 1   
|Item 2.  |  | Properties                                                                            |  | 14  
|Item 3.  |  | Legal Proceedings                                                                     |  | 14  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 15  
|         |  |                                                                                       |  |     
|         |  | PART II                                                                               |  |     
|         |  |                                                                                       |  |     
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 16  
|Item 6.  |  | Selected Financial Data                                                               |  | 17  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19  
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 29  
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  | 30  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  | 49  
|         |  |                                                                                       |  |     
|         |  | PART III                                                                              |  |     
|         |  |                                                                                       |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 49  
|Item 11. |  | Executive Compensation                                                                |  | 49  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related            |  | 49  
|         |  | Stockholder Matters                                                                   |  |     
|Item 13. |  | Certain Relationships and Related Party Transactions                                  |  | 49  
|Item 14. |  | Controls and Procedures                                                               |  | 49  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 50  

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PART I




Item 1. Business

GENERAL

Hotels.com is a leading provider of discount hotel rooms and other lodging
accommodations. Our customers may select and book lodging accommodations in
major cities through our websites and toll-free call centers. We contract with
hotels in advance for volume commitments and guaranteed availability of hotel
rooms and vacation rentals at wholesale rates and make these lodging
accommodations available to our customers, often at significant discounts to
published rates. In addition, our hotel supply relationships often allow us to
offer our customers hotel accommodations for otherwise unavailable dates. At
December 31, 2002, we had room supply agreements with over 7,700 lodging
properties in 325 major markets in North America, Europe, the Caribbean and
Asia. Our websites feature traveler-oriented interfaces that enable travelers
to make informed decisions about their hotel accommodations by providing easy
access to the description, rates and availability 24 hours a day, 7 days a
week.

In this report, the terms we, us, our, or our company, refer to
Hotels.com, our subsidiaries and our predecessor entities.

Our History

Hotels.com was incorporated in Delaware on March 25, 1999 as a direct,
wholly-owned subsidiary of USA Interactive (USA), our parent company.

On April 13, 1999, we entered into a definitive agreement with USA, TMF,
Inc., HRN Marketing Corp. and Messrs. David Litman and Robert Diener to acquire
substantially all the assets and liabilities of TMF, Inc. and HRN Marketing
Corp. This transaction was completed on May 10, 1999. Consequently, TMF, Inc.
and HRN Marketing Corp. are, collectively, our predecessor business. Along with
their spouses and trusts for the benefit of some members of their families,
Messrs. Litman and Diener were the sole stockholders of TMF, Inc. and HRN
Marketing Corp. Since the acquisition, Messrs. Litman and Diener have
continued on as our Chief Executive Officer and President, respectively.

On March 1, 2000, we completed our initial public offering of 6.2 million
shares of our class A common stock. Our class A common stock is currently
traded on the Nasdaq National Market under the symbol ROOM.

On July 1, 2001, we completed a corporate reorganization and transferred
substantially all of our operating assets to our newly formed, wholly-owned
indirect subsidiary, Hotels.com, L.P. (formerly Hotel Discounts, L.P.).

On April 24, 2002, we changed our corporate name and identity from Hotel
Reservations Network, Inc. to Hotels.com through a short form merger with a
wholly-owned subsidiary.

Corporate Structure and Controlling Stockholder

Our capital stock currently consists of class A common stock and class B
common stock. All of the outstanding shares of our class B common stock are
held by USA. Subject to certain conditions described in our restated
certificate of incorporation, each share of class B common stock is convertible
into one share of class A common stock. Except as otherwise provided by
applicable law, each share of class B common stock has 15 votes on any matter
submitted to a vote of our stockholders and each share of class A common stock
has one vote on any matter submitted to a vote of our stockholders.

As of March 5, 2003, USA held approximately 68.6% of our outstanding
capital stock and approximately 97.0% of the total voting power of Hotels.com.
As a result, USA is effectively able to control the outcome of nearly all
matters submitted to a vote of our stockholders. USA also owns a controlling
stake in Expedia, Inc. (Expedia), and on March 19, 2003, USA and Expedia
announced an agreement under which USA would acquire all of the stock of





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Expedia that it does not already own. As Hotels.com and Expedia have a
common controlling shareholder, Hotels.com previously has said that it would
explore areas where it might work together with Expedia in a way that would
benefit all Hotels.com customers and stockholders. Although there continue to
be many areas of our business where Hotels.com has decided that it can best
achieve its goals through separate strategies and practices, there have been
instances where, fully consistent with its existing contractual agreements, it
has worked cooperatively with Expedia, and Hotels.com anticipates that it will
continue to explore such possibilities in the future.

On January 3, 2003, our board of directors authorized the repurchase of up
to $100 million of our class A common stock. We believe that utilizing excess
cash to repurchase shares of our class A common stock represents an effective
means of building shareholder value. Between January 7, 2003 and January 15,
2003, we repurchased approximately 1.55 million shares for an aggregate cost of
approximately $73.5 million. As a result of the repurchase of shares, USA
currently holds approximately 68.6% of our outstanding capital stock and 97.0%
of the total voting power of Hotels.com compared to 66.8% of our outstanding
capital stock and 96.8% of the total voting power of Hotels.com at December 31,
2002.

DESCRIPTION OF BUSINESS

Overview

We are a leading provider of discount hotel rooms and other lodging
accommodations, allowing customers to select and book hotel rooms in major
cities through our websites, our toll-free call centers and through third-party
marketing and distribution agreements. We contract with hotels in advance for
volume commitments and guaranteed availability of hotel rooms and vacation
rentals at wholesale rates and make these lodging accommodations available to
our customers, often at significant discounts to published rates. In addition,
our hotel supply relationships often allow us to offer our customers hotel
accommodations for otherwise unavailable dates. At December 31, 2002, we had
room supply agreements with over 7,700 lodging properties in 325 major markets
in North America, Europe, the Caribbean and Asia. Our websites feature easy to
use, traveler-oriented interfaces that enable travelers to make informed
decisions about their hotel accommodations by providing easy access to the
description, rates and availability 24 hours a day, 7 days a week.

We market our lodging accommodations primarily over the Internet through
our own websites, including www.hotels.com, www.hoteldiscount.com and
www.travelnow.com, and through our telephone call centers and third-party
marketing and distribution agreements. We have negotiated marketing and
distribution agreements with numerous travel-related companies, including
Travelocity, Continental Airlines, Delta Air Lines, U.S. Airways, Amtrak,
Northwest Airlines and America West Airlines.

We have room supply relationships with a wide range of independent hotel
operators and lodging properties, as well as lodging properties associated with
national chains, including Hilton, Sheraton, Wyndham, Hyatt, Loews, Radisson,
Best Western, La Quinta, Courtyard by Marriott, Doubletree and Hampton Inn. We
believe that these suppliers view Hotels.com as an efficient distribution
channel to help maximize their overall revenue and occupancy levels. Although
we contract in advance for volume room commitments, our supply contracts
typically allow us to return unsold rooms to our suppliers without penalty
within a specified period of time. In addition, because we contract to secure
rooms in advance, we are able to manage billing procedures for the rooms we
sell and thereby maintain direct relationships with our customers. We have
developed proprietary revenue management and reservation systems software that
is integrated with our websites and call center operations. Our revenue
management and reservation systems enable us to accurately monitor our room
inventory and provide prompt, efficient customer service. We believe that our
supply relationships and revenue management and reservation systems
differentiate Hotels.com from retail travel agencies and other commission-based
resellers of accommodations.

In addition, our customers may book hotel rooms at over 40,000 hotels (in
addition to the hotels with which we have wholesale supply agreements) in over
5,000 cities, air travel on 300 airlines and car rentals through over 60 car
rental companies through our subsidiary, TravelNow.com. We have developed
proprietary software to interface with multiple electronic global distribution
systems (GDS) and to provide customers with access to real-time information
regarding the availability and rates of such travel providers and the ability
to book reservations online.

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We earn a commission on the booking of such travel products either as a
percentage of the gross dollar value of the travel booking or as a fixed dollar
amount per booking.

Our corporate headquarters are located at 10440 North Central Expressway,
Suite 400, Dallas, Texas 75231, and our telephone numbers are (214) 361-7311
and (800) 2-HOTELS. Our worldwide websites include www.hotels.com,
www.hoteldiscount.com and www.travelnow.com. The information on our websites
is not incorporated in this report.

Operations

Internet Operations.We offer lodging accommodations to our customers
through our own websites, including www.hotels.com, www.hoteldiscount.com and
www.travelnow.com, and through over 33,000 third-party websites. Our websites
are completely automated and allow customers to compare lodging options, price,
availability and amenities and to book, charge and confirm orders within
seconds. Our websites are designed to provide our customers with quick,
efficient and flexible service in a manner that facilitates comparison
shopping. Our Internet-generated bookings (which includes bookings made by
customers completely over the Internet as well as bookings made in our call
centers that originated from our websites or websites of our marketing and
distribution partners) accounted for 95.2% of our total bookings 2002, of which 69.7% originated and were completed over the Internet.

Call Center Operations.Our toll-free call centers handle thousands of
calls daily through our general toll-free numbers (such as (800) 2-HOTELS,
(800) 96-HOTEL and (800) 715-7666) and through the toll-free numbers of various
convention and visitors bureaus, travel clubs and third-party websites for
which we provide service. Our toll-free call centers also handle thousands of
calls transferred to us daily from the reservation call centers of our airline
and rail marketing partners. We currently employ approximately 487 people in
our call centers in Dallas, Ft. Worth and Pharr, Texas and in Springfield,
Missouri. In addition, we outsource some call center operations to provide us
with operational flexibility, but all outsourced call center operations are
overseen by our employees. Our highly trained call center sales force is
equipped to quickly review a comprehensive list of the hotels and prices in
individual markets and to provide information on location and amenities. Our
management continuously monitors wait times and telephone conversations to
ensure superior sales technique, customer service and compliance with our
policies. We staff our call centers to service our customers on a
24-hour-a-day, seven-day-a-week basis. Our call center-generated bookings
accounted for 4.8% of our total bookings in 2002. Our call
center-completed bookings (which includes
bookings made by customer completely through our call centers as well as bookings made in our call centers that originated
from our websites or websites of our marketing and distribution partners) accounted for 30.3% of our
total bookings in 2002.

Revenue Management Techniques.We have developed revenue management and
reservation systems software that allows us to monitor room inventory, prices
and sales trends on a real-time basis. As a result, we can maximize revenue
and gross profit, process transactions quickly and provide prompt, effective
customer service. We have integrated this software with our websites and call
center operations so that customers receive current room availability and
pricing information. We are developing enhancements to our software that will
enable us to further automate and enhance our revenue management capabilities.

Supply Arrangements

We contract with hotels and other lodging properties in advance for volume
commitments and guaranteed availability of room inventory. We obtain room
inventory from over 7,700 lodging properties through two primary methods: (a)
contracting for initial room allotments, where we can obtain rooms at
predetermined wholesale rates and usually can return unsold inventory to the
lodging property within a specified period of time, and (b) prepaying for rooms
in advance if we believe that we can sell all of the rooms. Over 99.4% of our
room inventory sold in 2002 was sold pursuant to room allotment contracts.
Most of our room allotment contracts are not exclusive and must be renewed
annually.

Our proprietary software allows us to update continuously our room
availability and keeps us aware of our supply needs. As a result, we are able
to monitor our room supply and return rooms or request additional rooms as
necessary. We have developed a strong reputation with our suppliers because we
are able to fill a significant percentage of our contracted room allotments.

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In addition, we have entered into contracts with multiple electronic GDSs.
Our contracts with these GDSs permit us to use our proprietary software to
access information with respect to over 40,000 hotels (in addition to the
hotels with which we have wholesale supply agreements) in over 5,000 cities,
300 airlines and 60 car rental companies, including availability and rates for
these travel products, and the ability to book reservations online.

Marketing and Sales

Marketing Sources.Our websites, including www.hotels.com,
www.hoteldiscount.com and www.travelnow.com, are among the most accessed and
used lodging booking sites on the Internet. We have also negotiated marketing
and distribution agreements with thousands of third parties, including leading
travel companies such as Travelocity, Continental Airlines, Delta Air Lines, US
Airways, Amtrak, Northwest Airlines and America West Airlines. Under terms of
our standard marketing and distribution agreement, we pay a commission for
bookings originated from our marketing and distribution partners, which are
commonly called affiliates in our industry.

Advertising. We advertise in both online and traditional media to promote
brand awareness, product enhancements and retail offerings. Our current
brand-building campaign focuses on television advertising. In addition, we
selectively purchase online, radio and print media advertising.

Travel Agencies, Travel Clubs and Other Membership Organizations.We
consider travel agencies to be marketing and distribution partners and, as
such, work with a network of thousands of agencies to ensure awareness of our
accommodations and booking options. We pay a commission to travel agents who
book rooms on behalf of their customers. Commissions are tracked by the
International Airlines Travel Agent Network (IATAN) numbers that are input
directly on our websites or provided to our call center agents at the time of
booking. We also have marketing and distribution agreements with a variety of
travel clubs and membership organizations that promote our company as a source
of hotel accommodations. In addition, we provide accommodation booking services
for a number of membership clubs on a private label basis.

Technology

We have developed proprietary reservation systems software that
automatically updates room availability and enables us to provide efficient
customer service. The software is integrated with our websites and call center
operations and completes booking, billing and accounting functions within
seconds. In addition, the software reports daily bookings by lodging property,
city and room type so that management can monitor room availability.

Our hardware platform for the Internet consists of redundant IBM RS/6000
servers, Sun 880 Enterprise servers and Silicon Graphics servers used for
custom interfaces to external vendors and marketing and distribution partners.
We maintain our databases on Dell servers running SQL Server and IBM AS400
model 830 with RAID disk storage towers and conduct daily backup functions. We
access the Internet backbone via T3 data communication lines. Our call center
operations are managed by Avaya Definity G3 ACD switches. We also maintain
backup power supplies in the event of power outages. We maintain an Internet
firewall to protect our internal systems. All credit card transactions
processed through the Internet use encryption technology, including public key
cryptology and secured socket layer technology.

Competition

The market for travel products and services, and particularly the market
for lodging accommodations, is intensely competitive and is easy to enter. We
believe that competition in the lodging accommodations market is based
predominantly on:



| |  |  | price;                                             
| | - |  | ---------------------------------------------------
|
| |  |  | selection and availability of lodging alternatives;
|
| |  |  | selection of destination markets;                  
|
| |  |  | ease of use;                                       
|
| |  |  | customer service;                                  

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| |  |  | reliability; and       
| | - |  | -----------------------
|
| |  |  | travel-related content.

We compete against other consolidators of lodging accommodations, hotels,
travel agencies and other online and off-line travel services. Currently, most
hotels sell their services through travel agencies, travel wholesalers or
directly to customers, mainly by telephone. Increasingly, major hotels are
offering travel products and services directly to consumers through their own
websites. We believe that this trend will continue and accelerate. Hotels and
travel agents also may continue to rely upon central reservations systems. We
also compete against numerous travel-related websites. Additionally, during
2002 five major hotel chains and Pegasus Solutions began to market lodging
accommodations over the Internet through Travelweb.com and other websites using
a merchant business model similar to our business model. As demand for
online travel products and services grows, we believe that companies already
involved in the online travel products and services industry, as well as
traditional travel suppliers and travel agencies, will increase their efforts
to develop services that more closely resemble our online products and
services. We also face potential competition from Internet companies not yet in
the leisure travel market. We are unable to anticipate which other companies
are likely to offer services in the future that will compete with the products
and services we provide.

In addition, some of our current and potential competitors have greater
brand recognition, longer operating histories, larger customer bases and
greater financial, marketing and other resources than us and may enter into
strategic or commercial relationships with larger, more established and
well-financed companies. Some of our competitors may be able to secure
services and products from travel suppliers on more favorable terms, devote
greater resources to marketing and promotional campaigns and devote
substantially more resources to website and systems development than our
company. New technologies and the continued enhancement of existing
technologies also may increase competitive pressures on our company. There can
be no assurance that we will be able to compete successfully against current
and future competitors or address increased competitive pressures.

Proprietary Rights

We regard our domain names and similar intellectual property as critical
to our success. We rely on a combination of laws and contractual restrictions
with our employees, customers, suppliers, marketing and distribution partners
and others to establish and protect our proprietary rights. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our intellectual property without authorization. In addition, there can
be no assurance that others will not independently develop substantially
similar intellectual property. Although we have obtained registration of some
of our key trademarks in the United States, not all of our trade names are
eligible to receive trademark protection. In addition, effective trademark
protection may not be available or may not be sought by us in every country in
which our products and services are made available online, including the United
States. Our failure to protect our intellectual property in a meaningful manner
could materially adversely affect our business or result in erosion of our
brand name.

From time to time we may be subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by our
company. In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation,
regardless of outcome or merit, could result in substantial costs and diversion
of management and technical resources, any of which could materially harm our
business.

Travel Industry Regulation

We must comply with laws and regulations relating to the travel industry
and the sale of travel services. These include registering with various states
as a seller of travel or timeshare services, complying with certain disclosure
requirements and participating in state restitution funds. Both the Federal
Trade Commission (FTC) and the Department of Transportation (DOT) take the
position that their regulations prohibiting unfair and deceptive advertising
practices apply to us. In this regard, the FTC recently released guidance to
Internet search companies concerning the inclusion of paid advertising and paid
placement within search engine results. The guidance announced the FTC staffs
view that Internet search engines that fail to identify and disclose paid
placement and paid advertising may be misleading consumers and may thus violate
federal law. Although we do not believe that

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we constitute a search engine, the FTC has indicated that its guidance
may apply to advertising and placement on travel websites.

We also are indirectly affected by regulatory and legal changes or
uncertainties relating to travel suppliers and computer reservation systems.
For example, heightened security procedures applicable to airline travel may
affect the demand for such travel. Another example is the DOTs current review
of its rules concerning computer reservations systems. DOT could choose to
extend some or all of these rules to online services that sell airline tickets.
The current rules are effective through January 31, 2004. If the DOT elects
to regulate online travel service providers fare displays, which is possible
but does not presently appear likely, it may limit our ability to merchandise
air travel.

The underlying services and goods that we sell, such as hotel rooms,
vacation rentals and car rentals, are regulated domestically and
internationally. Because these regulations directly affect the hotels, vacation
rentals, automobile rentals, etc., that we offer, they may affect our business.
The laws and regulations applicable to hotels, vacation rentals, automobile
rentals, etc., are subject to change and we are unable to predict what changes
in law may be adopted and the potential impact on our business.

Regulation of the Internet

Currently, relatively few laws and regulations apply directly to the
Internet and commercial online services and, to the extent such laws exist or
apply to our business, we believe we are in compliance with all of them. The
following summary does not purport to be a complete discussion of all enacted
or pending regulations and policies that may affect our business. This summary
focuses primarily on the enacted federal, state and foreign legislation
specific to online businesses such as Hotels.com.

Due to the growth of the Internet and online commerce, coupled with
publicity regarding Internet fraud, new laws and regulations are continually
being considered (at the federal, state and foreign level) regarding property
ownership, sales and other taxes, pricing and content, advertising,
intellectual property rights, libel, user privacy, and information security.
New laws or different applications of existing laws would likely impose
additional burdens on companies conducting business online and may decrease the
growth of the Internet or commercial online services. In turn, this could
decrease the demand for our products and services or increase its cost of doing
business. We cannot predict whether any of the proposed privacy legislation
currently pending will be enacted and what effect, if any, it would have on our
business.

Regulation of Personally Identifiable Information

Our customers provide us with personally identifiable information (PII)
that has been specifically and voluntarily given. PII includes information
that can identify a customer as a specific individual, such as name, telephone
number, or e-mail address. This information is used to respond to and fulfill
customer requests for products and services offered by our marketing partners
and us. We post privacy policies for most of our Internet websites concerning
our use and disclosure of user data.

Privacy has received substantial attention from federal, state and foreign
governments. In many jurisdictions, laws and regulations have been approved,
and other proposals receive consideration, to safeguard consumer privacy.

A number of laws have already been enacted with respect to consumer
privacy. The most far-reaching of these current laws are focused on financial
institutions, health care providers, and companies that voluntarily solicit
information from children. For online businesses such as our business, the
Unsolicited Electronic Mail Act of 1999 has been enacted to protect
individuals, families, and Internet service providers from unsolicited and
unwanted electronic mail, commonly referred to as spamming. Additionally,
the FTC has authority to police consumer privacy claims made by companies. For
example, a claim that a company has violated privacy standards that it has told
consumers that it would follow may be actionable by the FTC.

Pending proposals vary substantially and it is uncertain which, if any,
may become law. For example, a proposal that did not become law, but was
approved in 2002 by the U.S. Senate Committee on Commerce, Science and
Transportation after being amended, originally distinguished between online and
offline transactions for

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purposes of privacy such that sellers of the same product or service
online and offline (including Hotels.com) would be required to treat customer
information from those sales differently. Some proposals allow companies to
make use of customer information for various purposes provided that consumers
are given a choice and do not opt-out of such uses, while other proposals
would prevent companies from using such information for various purposes unless
consumers are given a choice and explicitly authorize such use, e.g., opt-in.

Most states have enacted or are considering legislation to regulate the
protection of consumer information on the Internet. Much of this legislation
is focused on financial institutions and health care providers. The
legislation that has become state law is a small percentage of the number of
proposals still pending, and is similar to what has been enacted at the federal
level.

The primary foreign privacy regulations to which our international
operations are subject are Canadas Personal Information and Protection of
Electronic Documents Act and the European Union Data Protection Directive:



| |  |  | Canada: The Personal Information and Protection of Electronic
Documents Act (PIPEDA) provides Canadian residents with privacy
protection concerning transactions with businesses and organizations in
the private sector. PIPEDA recognizes an individuals right to privacy
of their personal information. Additionally, it recognizes the need of
organizations to collect, use and share personal information and
establishes rules for handling personal information. On January 1,
2004, PIPEDA will extend to the collection, use, or disclosure of
personal information in the course of any commercial activity within a
province.                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Europe: Individual countries within the European Union (EU) have
specific regulations related to the transborder dataflow of personal
information (i.e., sending personal information from one country to
another). The EU Data Protection Directive encompasses many of these
individual regulations and requires companies doing business in EU
member states to comply with its standards. It provides for specific
regulations requiring all non-EU countries doing business with EU
member states to provide adequate data privacy protection when sending
or receiving personal data from any of the EU member states. Not all
of the EU member states have implemented this Directive in a uniform
and consistent fashion.                                                                                                                                                                                                                                                                                                        
|
| |   |  | Effective July 25, 2000, the EU member states adopted a safe harbor
arrangement that provides that U.S. organizations can adopt procedures
that comply with European privacy regulations and can certify their
compliance through notice to the U.S. Department of Commerce.
Participation in the safe harbor is voluntary and indicates that the
organization provides an adequate level of privacy protection and
qualifies the company to receive data from EU member states. A company
does not have to join the safe harbor to be in compliance with the EU
Data Protection Directive. It may choose instead to seek approval for
the data transfers from the specific individual. U.S. companies that
avail themselves of the safe harbor arrangement are subject to oversight
and possible enforcement actions by the FTC or the Department of
Transportation (which has authority over ticket agents) if they violate
the provisions of their certification. Such violations may be found to
be unfair and deceptive practices.
|
| |   |  | On July 31, 2002, the EU promulgated its E-Mail Marketing Directive,
which provides that the prior explicit consent of a consumer is required
before e-mail, fax or automatic calling machines can be used to direct
market to that consumer. Because implementation is not required until
October 31, 2003, it remains to be seen how the Directive will be
translated into national law by member states. It is likely that our
subsidiaries operating in Europe will need to adapt their practices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

We cannot predict whether any of the proposed federal, state and foreign
privacy legislation currently pending will be enacted and what effect, if any,
it would have on our business.

Taxes

Current U.S. economic conditions are triggering active consideration of
stimulus measures by some governments, particularly the federal government, and
pressure to generate additional tax revenue, such as at state governments. We
cannot predict what changes in tax law or interpretations of such laws may be
adopted to assure that such changes or interpretations would not materially
impact our business.

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Federal legislation imposing limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998 and extended in 2001.
The Internet Tax Freedom Act, which was extended by the Internet
Nondiscrimination Act, exempts certain types of sales transactions conducted
over the Internet from multiple or discriminatory state and local taxation
through November 1, 2003. It is possible this legislation will not be renewed
when it terminates. Failure to renew this legislation could allow state and
local governments to impose taxes on Internetbased sales, and these taxes
could decrease the demand for our products and services or increase our cost of
operations.

Some states and localities impose a transient occupancy tax or transient
accommodations tax, or a form of sales tax, on the use and occupancy of
accommodations. Such taxes are normally collected from the consumer at the
time of use. Consistent with industry practice, we pay taxes to the lodging properties based on the rate the lodging property charges and recover the amount paid to the lodging property from the customer. Some tax authorities may assert that in some circumstances we
should collect and remit such taxes on that part of the charge to customers
that serves as compensation to us for booking services. We have not paid nor agreed to pay such taxes and intend to defend our position vigorously. We believe that we have
complied with the law in all or most jurisdictions; however, we are currently conducting an on-going review and interpretation of the tax laws in various states and jurisdictions surrounding state and local sales and occupancy taxes. Should a jurisdiction prevail on such a claim, we may consider
limiting liability for future transactions in that jurisdiction by passing on
such taxes to the consumer.

Certain Concentrations

In January 2000, we entered into a long-term affiliation and marketing
agreement with Travelocity. Under this agreement, Travelocity markets our
hotels and other lodging accommodations on its website, and in return we pay it
a commission based upon revenue generated for us. The term of the agreement
expires on July 31, 2005. For 2002, 2001 and 2000, 17.7%, 18.0% and 10.5%,
respectively, of our total revenue was derived through our agreement with
Travelocity.

We believe that in 2003 and subsequent years, the dollar amount of revenue
we derive through the Travelocity agreement will continue to grow, but the
percentage of our total revenue is likely to decline as a result of our various
other growth initiatives, including (a) the growth of our branded website,
hotels.com, (b) the expansion of revenue through other existing marketing and
distribution partners, (c) the addition of new marketing and distribution
relationships, (d) international expansion, (e) the expansion of revenue from
other lodging products such as vacation rentals, and (f) acquisitions.

In connection with the Travelocity agreement, we issued to Travelocity a
performance warrant to acquire up to 2,447,955 shares of our class A common
stock with an exercise price of $16.00 per share, our initial public offering
price, the vesting of which was to be subject to achieving certain performance
targets. As of December 31, 2002, 475,171 of the shares underlying the
performance warrant had not yet vested. In order for the remaining shares
underlying the performance warrant to vest fully, Travelocity, among other
things, must generate over $397.0 million in additional revenue through
Hotels.com prior to the expiration of the Travelocity agreement on July 31,
2005. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Non-Cash Distribution and Marketing Expense for
further discussion of the performance warrant.

Under the terms of our agreement with Travelocity, we are the exclusive
third-party provider of negotiated rate hotel rooms (excluding those hotel
rooms sold by Travelocity as part of a travel package) in 80 of our markets,
including New York, Las Vegas, Orlando, Chicago and others. Over 81.1% of our
total revenue (from all sources, including Travelocity) was derived from these
80 markets in 2002.

Employees

As of December 31, 2002, we had approximately 1,150 employees. We have
never experienced a work stoppage and none of our employees are represented by
a labor union. We consider our employee relationships to be positive.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of
the securities laws. We have based these forward-looking statements on our
current expectations and projections about future events, based on

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the information currently available to us. Such forward-looking
statements are principally contained in the sections Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Item 1. Business. The forward-looking statements include, among other
things, statements relating to our anticipated financial performance, business
prospects, new developments, and similar matters.

These forward-looking statements are subject to risks, uncertainties and
assumptions that may affect the operations, performance, development and
results of our business and include, but are not limited to, the risk factors
described under the section Risk Factors in this report, and the following:



| |  |  | material adverse changes in economic conditions generally or in our markets;                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | future regulatory or legislative actions and conditions in our operating areas;                                                
|
| |  |  | competition from others;                                                                                                       
|
| |  |  | the ability to expand into and successfully operate in international markets;                                                  
|
| |  |  | product demand and market acceptance;                                                                                          
|
| |  |  | the ability to protect proprietary information and technology or to
obtain necessary licenses on commercially reasonable terms;
|
| |  |  | the ability to obtain and retain key executives and employees;                                                                 
|
| |  |  | acts of terrorism; and                                                                                                         
|
| |  |  | war or political instability.                                                                                                  

We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this report may not occur.

Risk Factors

In the future, if we are unable to obtain arrangements with lodging
suppliers similar to those we currently have, our business may suffer.If we
are unable to maintain satisfactory relationships with our existing lodging
suppliers or if our lodging suppliers establish similar or more favorable
relationships with our competitors, our operating results and our business
would be harmed because we would not have the necessary supply of rooms to
satisfy the needs of our customers or our marketing and distribution partners.
Consequently, we would not be able to successfully compete for customers. Our
business depends significantly upon our ability to contract with lodging
properties in advance for volume purchases and guaranteed availability. We rely
on our suppliers to provide us with rooms at wholesale prices. However, our
contracts with suppliers are not exclusive and most must be renewed annually.
At times in the past, lodging properties have reduced our allotment of rooms or
renewed our contracts on less favorable terms and they may do so again in the
future. Furthermore, in order to maintain and grow our business, we will need
to establish new arrangements with lodging properties in our existing markets
and in new markets. There can be no assurance that we will be able to identify
appropriate hotels or enter into agreements with those hotels on favorable
terms, if at all. This failure could harm the growth of our business and,
consequently, our stock price.

If we are unable to maintain our marketing and distribution partnerships
or obtain new marketing and distribution partnerships with other travel service
providers, we may lose access to customers and face increased competition.We
derive significant benefits, including revenue and customer awareness, from our
arrangements with leading travel websites on the Internet. Although we
currently have marketing and distribution agreements with these travel
companies, they also may compete with us for hotel bookings. If a substantial
number of these companies were to terminate their marketing and distribution
partnerships with us, we would lose access to their customers. Alternatively,
if our marketing and distribution partners offer their own lodging
accommodations or if they develop relationships with our competitors, we would
face increased competition for customers. A loss of distribution could be
detrimental to our ability to maintain or enhance our relationships with our
suppliers. The failure or loss of these distributions would impair our growth
strategy because we would lose access to customers and face increased
competition and, consequently, the profitability of our business could suffer.

Our operating results fluctuate because our reliance upon leisure travel.
Our operating results fluctuate because our business is seasonal and because we
rely significantly upon revenue from leisure travelers. Therefore, there are
numerous factors beyond our control that affect our operating results. For any
of the reasons listed below,

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or for other reasons we do not presently anticipate, it is possible that
our operating results will be below market expectations, including the
expectations of financial analysts and investors.

Leisure travelers are typically sensitive to discretionary spending
levels, tend to curtail travel during general economic downturns and are
affected by other trends or events that may include:



| |  |  | bad weather or natural disasters;              
| | - |  | -----------------------------------------------
|
| |  |  | fuel price increases;                          
|
| |  |  | travel-related accidents;                      
|
| |  |  | hotel, airline or other travel-related strikes;
|
| |  |  | financial instability of the airline industry; 
|
| |  |  | terrorism; or                                  
|
| |  |  | war or political instability.                  

Other factors that may adversely affect our quarterly operating results include, but are not limited to:



| |  |  | the number of rooms we are able to sell;                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to expand into new markets;                                                                                                      
|
| |  |  | our ability to develop strong brand recognition and customer loyalty;                                                                        
|
| |  |  | our ability to increase the level of traffic on our websites;                                                                                
|
| |  |  | our ability to retain or expand our wholesale supply arrangements,
obtain satisfactory discounts or obtain sufficient inventory of rooms;
and
|
| |  |  | the announcement or introduction of lower prices or new travel
services and products by our competitors.                                     

We are controlled by USA and, as a result, our other stockholders will
have little or no influence over stockholders decisions.USA currently owns
38,999,100 shares of our class B common stock, which has 15 votes per share
compared to one vote per share of our class A common stock. Consequently, USA
controls approximately 97.0% of the total voting power of our common stock and,
therefore, effectively has the right to control the outcome of any matter
submitted to a vote or for the consent of our stockholders, except for matters
as to which a separate class vote of the holders of class A common stock is
required by Delaware law. In addition, officers and directors of USA comprise
a majority of our board of directors. As a result, USA may be able to cause
changes to our company or to our business without the approval of the other
members of the board and without seeking the approval of any other person.
These changes may not be to our advantage or in the best interest of our other
stockholders.

We may face potential conflicts of interest with USA, which may harm our
business.Conflicts of interest may arise between us, on the one hand, and USA
and its affiliates, on the other hand, in areas relating to past, ongoing and
future relationships, corporate opportunities, indemnity agreements, tax and
intellectual property matters, potential acquisitions or financing
transactions, sales or other dispositions by USA of shares of our common stock
held by it and the exercise by USA of its ability to control our management and
affairs. For example, USA is engaged in a diverse range of businesses, such as
Expedia, Home Shopping Network and Ticketmaster, and these businesses may have
interests that conflict with or overlap in some manner with our business. In
particular, USAs Expedia subsidiary, which is much more widely known than we
are, offers products and services similar to those we offer. In addition, on
March 19, 2003, USA and Expedia announced an agreement under which USA would
acquire all of the stock of Expedia that it does not already own. USA is under
no obligation to share any future business opportunities available to it with
us, unless Delaware law requires it to do so, and our restated certificate of
incorporation specifically includes provisions that release USA from this
obligation and any liability that would result from a breach of these
obligations. There can be no assurance our business will not be harmed by, or
our financial condition or results of operations will not be negatively
impacted by, any conflicts that may arise between us and USA or any of its
affiliates, including Expedia, any loss of a corporate opportunity to USA or
any of its affiliates, including Expedia, that may otherwise be available to
us, or any engagement by USA in any activity that is similar to our business
because these conflicts of interest or loss of a corporate opportunity could
result in a loss of customers and, therefore, business.

Our business may suffer if tourism or business travel to New York
declines.We derived approximately 16.9% of our total revenues in 2002 from
the New York market. If tourism or business travel to New York were to

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decline significantly for any reason, including further acts of terrorism
or war or political instability, our business may suffer.

Our business may suffer if Travelocity terminates its marketing and
distribution agreement with us.We derived approximately 17.7% of our total
revenues in 2002 through our marketing and distribution agreement with
Travelocity. The term of the marketing and distribution agreement expires on
July 31, 2005. If Travelocity fails to renew the marketing and distribution
agreement or if terminates the marketing and distribution agreement early for
any reason, our business may suffer.

The travel industry, particularly the market for lodging accommodations,
is highly competitive.If we do not compete successfully, we will not be able
to attract customers and maintain our arrangements with our hotel suppliers.
We primarily compete with other consolidators of hotel accommodations, online
travel reservation services and entities that maintain travel-related websites,
traditional travel agencies and hotels. We may face more competition, directly
or indirectly, from lodging properties as they enter the discount rate market
or book discount accommodations through travel agents. During 2002, five major
hotel chains and Pegasus Solutions began to market lodging accommodations over
the Internet through Travelweb.com and other websites using a merchant
business model similar to our business model. In addition, the proliferation
of special rate offers by lodging properties may affect the rates that we can
charge our customers, which would affect our profit margins and, in turn, our
business results. Increased competition could reduce our operating margins and
profitability, result in loss of market share and diminish our brand
recognition.

Some of our actual and potential competitors may have competitive
advantages, such as longer operating histories, larger customer bases,
potential to offer greater selection at better prices, greater brand
recognition, more website traffic, or significantly greater financial,
marketing or other resources. We cannot assure you that we will be able to
compete successfully against current and future competitors.

Because our business has grown so rapidly, our business could suffer if we
do not successfully manage this growth and potential future growth.Our
business has grown very quickly in its few years of operation. We have rapidly
expanded our operations and anticipate further expansion. We began operations
in 1991, and since then, we have launched our online operations, expanded the
number of destinations we offer and increased the number of lodging properties
with which we have supply arrangements. In addition, we entered into our first
Internet marketing arrangement in 1995 and implemented our first proprietary
website in 1997. These changes have increased our volume of sales and have
placed, and we expect they will continue to place, a strain on our management
and operational resources. There can be no assurance that we will be able to
efficiently or effectively manage the growth of our operations and any failure
to do so may limit our future growth and hamper our business strategy.

The amortization of deferred distribution and marketing expenses resulting
from the issuance of performance warrants and potential future warrant
issuances will have an adverse impact on our future operating results, the
magnitude of which is difficult to predict.We issued a performance warrant to
Travelocity in connection with the execution of a marketing and distribution
agreement in January 2000 and amended the terms of the performance warrant in
March 2001. To the extent earned, the value of the performance warrant will be
recorded as a non-cash deferred distribution and marketing expense. In
addition, pursuant to other marketing and distribution agreements, we may be
required to issue additional warrants in the future if certain performance
goals are met, the value of which would also be recorded as additional non-cash
deferred distribution and marketing expense when such warrant is issued.

At this time, we cannot determine the amount of this expense because we do
not know to what degree we will achieve the performance targets, or the value
of the warrants when vested or issued. If our stock price rises significantly
during the term of these marketing and distribution relationships, the value of
the warrants when vested or issued will increase. If the amount of that
expense increases, it will have an adverse effect on our income and operating
results. If we are forced to expense the entire performance warrant in one
year, the effect on our net income and operating results for that year will be
even more adverse. For a more detailed description of the potential financial
impact of the warrants, see Managements Discussion and Analysis of Financial
Condition and Results of Operations  Non-Cash Distributing and Marketing
Expense.

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Our business depends substantially on the continuing efforts of our key
employees and our future success depends on our ability to retain our key
employees.We depend substantially on the continued services and performance
of our senior management, particularly David Litman, our Chief Executive
Officer, Robert Diener, our President, and some other key personnel. The loss
of services of either of these executive officers or other key employees could
harm the management of our business and our operating results because of the
significant role these employees play in the operation of our business.

Acquisitions, which may expose us to risks that could significantly harm
our business, are a part of our growth strategy.One part of our growth
strategy is to broaden the scope and content of our existing business through
acquisitions. Although we are not currently committed to any particular
acquisitions, our management regularly evaluates acquisition opportunities as a
way for us to grow our business. Our failure to successfully complete
acquisitions could adversely affect our ability to compete. Even if we are
successful in acquiring and integrating businesses, the acquisitions may be
time-consuming, costly or unwise, which may cause our acquisitions not to have
the desired or predicted effects on our operating results and may adversely
affect our growth strategies. Acquisitions that are completed in the future
would expose us to potential risks, including risks associated with the
assimilation of new operations, sites and personnel, unforeseen liabilities,
the diversion of resources from our existing businesses, sites and
technologies, the inability to generate sufficient revenue or content to offset
the costs and expenses of acquisitions, and potential loss of, or harm to,
relationships with employees, customers and suppliers as a result of
integration of new businesses.

We could be liable for breaches of security on our websites and fraudulent
transactions by users of our websites.In our business, secured transmission
of confidential information (such as customers itineraries, hotel and other
reservation information, credit card numbers and expiration dates, personal
information and billing addresses) over public networks is essential to
maintaining consumer and supplier confidence. Although we employ measures such
as encryption technology, our current security measures may not be adequate.
Security breaches also could expose us to a risk of loss or litigation and
possible liability for failing to secure confidential customer or supplier
information and could have a detrimental effect on our reputation and could
adversely affect our ability to attract customers. Although we have developed
systems and processes that are designed to protect consumer information and
prevent fraudulent credit card transactions, failure to mitigate such fraud may
adversely affect our operating results.

We may not be able to prevent others from using our domain names, trade
names or other intellectual property, which may harm our business and expose us
to litigation.Because our hotel and lodging accommodations reservations
business is to a great extent leisure and retail-oriented, customer name
recognition and the look and feel (as well as the underlying functionality)
of our websites are very important to our ability to maintain our competitive
position. Therefore, we regard our domain names and similar intellectual
property as critical to our success. Failure to effectively protect our
intellectual property could harm us through erosion of our brand name or the
misappropriation of our proprietary technologies by our competitors, thereby
hindering our ability to compete effectively. Some of our trade names are not
eligible to receive trademark protection in every country where our products
and services are available.

We currently hold the Internet domain name hotels.com, as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies in the United States and foreign countries, and the
regulations are subject to change. Regulatory bodies could modify the
requirements for holding domain names. As a result, we may not be able to
acquire or maintain the domain names in all of the countries in which we
conduct business utilizing the terms hotels or hotels.com. We are aware
that other entities or persons have already registered domain names utilizing
the term hotels or hotels.com. For example, others have registered the
domain names wwwhotels.com, hotels.net, and hoteles.com in the United States
and hotels.fr and hotels.de in France and Germany, respectively. If we are
unable to purchase these names on commercially reasonable terms or in the event
we were otherwise to lose the ability to use a domain name in a particular
country, we would be forced to incur significant additional expenses to market
our products within that country, including the development of a new brand and
the creation of new promotional materials and packaging.

In addition, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear and
subject to change. Consequently, we may not be able to maintain domain names
in all of the locations where we conduct business or prevent others from
acquiring domain names that decrease the value of our domain names.

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We also may be required to incur significant expenses to protect our
rights or to defend claims by others of alleged infringement of trademarks and
other intellectual property rights of third parties by us. If we do not
prevail, we could be required to stop using our trade names or domain names or
to pay damages.

Our expansion into international markets may make us susceptible to global
economic factors, foreign tax law issues, foreign business practices, currency
fluctuations and fluctuations in international travel.Our international
operations are an increasing portion of our business. Our addition of
international destinations may require us to make significant investments to
develop relationships in these locations for an extended period of time before
we realize returns on these investments, if any. Providing our customers with
international destinations to choose from may subject us to particular risks,
including:



| |  |  | a decrease in tourism due to adverse political and economic conditions;                             
| | - |  | ----------------------------------------------------------------------------------------------------
|
| |  |  | a decrease in tourism due to concerns about the risks of international flights related to terrorism;
|
| |  |  | fluctuations in the value of the U.S. dollar relative to other currencies;                          
|
| |  |  | potentially adverse tax consequences;                                                               
|
| |  |  | reduced protection for intellectual property rights and domain names in some countries;             
|
| |  |  | additional regulatory requirements; and                                                             
|
| |  |  | increased seasonality.                                                                              

If we do not realize increased sales from our international operations,
our profitability could suffer because of the investment we expect to make in
this effort.

We may be subject to occupancy or similar taxes for past sales and our
future sales may decrease if we are required to collect such taxes. Most
states and local taxing jurisdictions impose sales, occupancy or other similar
taxes on the sale of hotel rooms. In accordance with longstanding industry
practice, we pay occupancy taxes to the hotels based upon the amount that they
charge us, and we recover that amount from our customers. One or more states
or local taxing jurisdictions may seek to impose sales, occupancy or other tax
collection obligations on us and other Internet travel companies. A successful
assertion by one or more states or local taxing jurisdictions that we should
collect sales or occupancy taxes on the sale of hotel rooms could result in
substantial tax liabilities for past sales, decrease our ability to compete
with other Internet travel companies not subjected to collecting sales and
occupancy taxes and otherwise harm our business.

System interruption and the lack of integration and redundancy in our
information systems may affect our business.Customer access to our websites
directly affects the volume of lodging accommodations and other travel products
that we book and the services we offer and thus affects our net revenue and net
bookings. We experience occasional system interruptions that make our websites
unavailable or prevent us from efficiently fulfilling orders or providing
services to third parties, which may reduce our net bookings and net revenue
and the attractiveness of our products and services. To prevent system
interruptions, we continually need to add additional software and hardware and
upgrade our systems and network infrastructure to accommodate both increased
traffic on our websites and increased sales volume. Our computer and
communications systems and operations could be damaged or interrupted by fire,
flood, power loss, telecommunications failure, break-ins, earthquakes, acts of
war or terrorism, acts of God, computer viruses, physical or electronic
break-ins and similar events or disruptions. Any of these events could cause
system interruptions, delays and loss of critical data, and could prevent us
from accepting and fulfilling customer bookings. Should this occur, it would
make our product offerings less attractive to our customers and our service
offerings less attractive to third parties. While we do have backup systems
for certain aspects of our operations, our systems are not fully redundant and
our disaster recovery planning may not be sufficient for all eventualities. In
addition, we may have inadequate insurance coverage or insurance limits to
compensate us for losses from a major interruption. If any of this were to
occur, it could damage our reputation and be expensive to remedy.

Our business may suffer if we are unable to execute our new vacation
packages product line successfully.We launched a new product line, vacation
packages, in March 2003. Vacation packages are more complex products than our
other lodging offerings and require us to be able to combine customer-selected
air, lodging and car components into a single vacation package. We cannot
assure you that we will be successful in our vacation package product line or
that we will be able to compete successfully with our competitors who offer
vacation packages.

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Our operating results fluctuate because of seasonality.Historically, we
have often experienced higher sales and gross profits in the fourth quarter
during the heavy domestic holiday travel season because of the travel patterns
of our customers; however, during the fourth quarter of 2002 our sales and
gross profits were flat compared to the third quarter of 2002, reflecting the
increase in the portion of our business from sales of our international
properties and a sudden and unexpected decline in average daily rates.
Generally, our international sales rise during the second quarter, peak during
the third quarter and decline during the first and fourth quarters. We expect
additional seasonality in the future as our international sales increase.

Available Information

Our principal website is www.hotels.com. Hotels.com makes available free
of charge, on or through its website, its annual, quarterly and current
reports, and any amendments to those reports, as soon as reasonably practicable
after electronically filing such reports with the Securities and Exchange
Commission (SEC). Information contained on our website is not part of this
report.




Item 2. Properties

Our operations are headquartered in Dallas, Texas, where we lease an
aggregate of approximately 73,340 square feet of office space. The lease for
this space expires in 2010. In addition, we lease approximately 47,700 square
feet of office space for our former headquarters. The lease for this space
expires in 2003.

TravelNow.coms offices are located in Springfield, Missouri, where it
leases approximately 15,000 square feet of office space. The lease for this
space expires in 2009.

We lease approximately 14,100 square feet of office space in Pharr, Texas.
The lease for this space expires in 2006. We also lease approximately 7,600
square feet of office space in Pharr, Texas. This lease expires in 2004. In
addition, we lease approximately 12,700 square feet of office space in Ft.
Worth, Texas. This lease expires in 2003. We lease approximately 6,800 square
feet of office space in Miami, Florida. The lease for this space expires in
2006. We lease approximately 6,000 square feet of office space in Paris,
France. This lease expires in 2009.

We also lease office space in Atlantic City, New Jersey; Burbank,
California; Grand Haven, Michigan; New Orleans, Louisiana; and Hong Kong SAR,
China.




Item 3. Legal Proceedings

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. We believe that the allegations in these actions
are without merit and will defend vigorously against them should a defense be
necessary.

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 during the period from October 23, 2002 to

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##### Table of Contents



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
our guidance for the fourth quarter of 2002, our 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 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. We
believe that these lawsuits are without merit, and the defendants intend to
defend vigorously against them.

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. We believe 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. We believe that
the allegations are without merit and intend to defend vigorously against it.

In the ordinary course of business, we and our subsidiaries are parties to
litigation involving property, contract and other claims. Although there can be
no assurance in this regard, the amounts that may be recovered in these matters
are not expected to be material to our financial position or operations.




Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2002.

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##### Table of Contents






PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters

Class A Common Stock

Our class A common stock is quoted on The Nasdaq Stock Market (NASDAQ)
(Symbol: ROOM). We completed our initial public offering of our class A common
stock on February 25, 2000.

The following table sets forth, for the calendar periods indicated, the
high and low sales prices per share for our class A common stock on NASDAQ:

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                             |  | High |       | Low
|                             |  |      |       |    
|Year Ended December 31, 2001 |  |      |       |     |  |   |       | 
|First Quarter                |  | $    | 39.94 |     |  | $ | 25.00 | 
|Second Quarter               |  |      | 48.50 |     |  |   | 25.00 | 
|Third Quarter                |  |      | 53.16 |     |  |   | 20.06 | 
|Fourth Quarter               |  |      | 47.20 |     |  |   | 22.92 | 
|Year Ended December 31, 2002 |  |      |       |     |  |   |       | 
|First Quarter                |  | $    | 69.01 |     |  | $ | 42.95 | 
|Second Quarter               |  |      | 64.80 |     |  |   | 40.47 | 
|Third Quarter                |  |      | 51.70 |     |  |   | 35.00 | 
|Fourth Quarter               |  |      | 74.96 |     |  |   | 42.66 | 

There were 44 stockholders of record as of March 5, 2003 and the closing
price of our class A common stock that day was $46.19. The number of
stockholders does not include beneficial owners of our class A common stock
whose shares are held in street name.

Class B Common Stock

USA is the only
holder of record of our class B common stock and owned 38,999,100 shares as
of March 5, 2003. As a result, there is no established
public trading market for our class B common stock.

Dividends

We have not paid cash dividends on our common stock to date and do not
anticipate paying cash dividends in the immediate future.

Recent Sales of Unregistered Securities

On October 15, 2002, we issued 79,627 shares of our class A common stock
upon the exercise of warrants previously issued to a strategic partner of the
company. The exercise price of the warrant was $16.00.

On October 24, 2002, we issued 23,344 shares of our class A common stock
upon the exercise of warrants previously issued to a strategic partner of the
company. The exercise price of the warrant was $16.00.

The transactions described above were deemed to be exempt from
registration under the Securities Act of 1933 in reliance on Section 3(a)(9)
and Section 4(2) of the Securities Act as a transaction by an issuer not
involved in any public offering.

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##### Table of Contents






Item 6. Selected Financial Data

The following table presents selected summary financial data of our
company and our predecessor business. The data was derived from our audited
financial statements and our predecessors audited combined financial
statements and reflects the operations and financial position of our company or
our predecessor business at the dates and for the periods indicated. The table
also presents summary unaudited pro forma combined condensed financial data as
of and for the year ended December 31, 1999. The pro forma combined condensed
statements of operations data gives effect to the acquisition of substantially
all the assets of our predecessor business and to the capital transactions that
occurred in connection therewith as if they had occurred on January 1, 1999.
The information in this table should be read in conjunction with the financial
statements and accompanying notes and other financial data pertaining to our
company and our predecessor business as well as Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
in this report.

|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |         |         | 
|------------------------------------------------------------- | ----------------------------------------------- | ---------------------- | ------- | ------------ | --- | ---------- | ------- | ------------ | ------- | ------------ | -------- | --------------------------------------------------- | ----- | ---- | --------- | ------------ | ------- | - | --------- | ------- | ----- | - | --------- | ------- | ------ | - | --------- | ------- | ------- | 
|                                                              |                                                 |                        |         | Predecessor  |     | Company   
|                                                              |                                                 |                        |         |              |     |           
|                                                              |                                                 |                        |         | Actual       |     | Actual     |         | Pro Forma    |         |              |          | Actual                                              |       |      |           |             
|                                                              |                                                 |                        |         |              |     |            |         |              |         |             
|                                                              |                                                 |                        |         |              |     |            |         | Period       |         | Period       |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |  
|                                                              |                                                 |                        |         | Year Ended   |     | January 1  |         | May 11 to    |         | Year Ended   |          |                                                     |       |      |           | Year Ended   |         |   |           |        
|                                                              |                                                 |                        |         | December 31, |     | to May 10, |         | December 31, |         | December 31, |          |                                                     |       |      |           | December 31, |         |   |           |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                    
|                                                              |                                                 |                        |         | 1998         |     | 1999       |         | 1999         |         | 1999 (1)     |          | 2000                                                |       | 2001 |           | 2002        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |             
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          | (in thousands, except for per share and other data) |       |      |           |             
|Statement of Operations Data:                                 |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|Net revenue                                                   |                                                 | $                      | 66,472  |              |     | $          | 37,701  |              |         | $            | 124,113  |                                                     |       | $    | 161,814   |              |         | $ | 327,977   |         |       | $ | 536,497   |         |        | $ | 945,373   |        
|Operating costs and expenses:                                 |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Cost of sales                                   |                        |         | 45,665       |     |            |         | 26,117       |         |              |          | 87,239                                              |       |      |           | 113,356      |         |   |           | 225,793 |       |   |           | 370,279 |        |   |           | 657,639 |        
|                                                              | Selling, general and
administrative(2)(3)       |                        |         | 9,692        |     |            |         | 5,971        |         |              |          | 17,983                                              |       |      |           | 24,126       |         |   |           | 49,543  |       |   |           | 84,769  |        |   |           | 157,129 |        
|                                                              | Officers distributions(2)                      |                        |         | 10,126       |     |            |         |             |         |              |          |                                                    |       |      |           |             |         |   |           |        |       |   |           |        |        |   |           |        |        
|                                                              | Non-recurring acquisition-related
costs(4)      |                        |         |             |     |            |         | 20,257       |         |              |          |                                                    |       |      |           |             |         |   |           |        |       |   |           |        |        |   |           |        |        
|                                                              | Non-cash marketing and
distribution expense     |                        |         |             |     |            |         |             |         |              |          |                                                    |       |      |           |             |         |   |           | 4,260   |       |   |           | 16,976  |        |   |           | 19,618  |        
|                                                              | Amortization of Goodwill                        |                        |         |             |     |            |         |             |         |              |          | 12,897                                              |       |      |           | 38,490       |         |   |           | 38,490  |       |   |           | 46,394  |        |   |           |        |        
|                                                              | Depreciation and other amortization             |                        |         | 231          |     |            |         | 119          |         |              |          | 340                                                 |       |      |           | 459          |         |   |           | 725     |       |   |           | 2,268   |        |   |           | 5,486   |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Total operating costs and expenses              |                        |         | 65,714       |     |            |         | 52,464       |         |              |          | 118,459                                             |       |      |           | 176,431      |         |   |           | 318,811 |       |   |           | 520,686 |        |   |           | 839,872 |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              |                                                 | Operating profit(loss) |         |              | 758 |            |         |              | (14,763 | )            |          |                                                     | 5,654 |      |           |              | (14,617 | ) |           |         | 9,166 |   |           |         | 15,811 |   |           |         | 105,501 | 
|Other income:                                                 |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Interest and other, net                         |                        |         | 911          |     |            |         | 429          |         |              |          | 889                                                 |       |      |           | 1,318        |         |   |           | 8,448   |       |   |           | 8,313   |        |   |           | 5,483   |        
|                                                              | Gain on sale of securities                      |                        |         | 74           |     |            |         | 471          |         |              |          |                                                    |       |      |           | 471          |         |   |           |        |       |   |           |        |        |   |           |        |        
|                                                              | Loss on disposition of assets                   |                        |         |             |     |            |         |             |         |              |          |                                                    |       |      |           |             |         |   |           |        |       |   |           |        |        |   |           | (78     | )      
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Total other income                              |                        |         | 985          |     |            |         | 900          |         |              |          | 889                                                 |       |      |           | 1,789        |         |   |           | 8,448   |       |   |           | 8,313   |        |   |           | 5,405   |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|Earnings(loss) before income taxes                            |                                                 |                        | 1,743   |              |     |            | (13,863 | )            |         |              | 6,543    |                                                     |       |      | (12,828   | )            |         |   | 17,614    |         |       |   | 24,124    |         |        |   | 110,906   |        
|Income tax expense(5)                                         |                                                 |                        | (5      | )            |     |            |        |              |         |              | (2,421   | )                                                   |       |      |          |              |         |   | (6,782    | )       |       |   | (11,217   | )       |        |   | (38,817   | )      
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Net income(loss)(6)                             |                        | $       | 1,738        |     |            | $       | (13,863      | )       |              | $        | 4,122                                               |       |      | $         | (12,828      | )       |   | $         | 10,832  |       |   | $         | 12,907  |        |   | $         | 72,089  |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Basic net income(loss) per common
share(6)(7)   |                        |         |              |     |            |         |              |         |              | $        | 0.11                                                |       |      | $         | (0.24        | )       |   | $         | 0.21    |       |   | $         | 0.23    |        |   | $         | 1.25    |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Diluted net income(loss) per
common share(6)(7) |                        |         |              |     |            |         |              |         |              | $        | 0.11                                                |       |      | $         | (0.24        | )       |   | $         | 0.20    |       |   | $         | 0.23    |        |   | $         | 1.23    |        
|                                                              |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|                                                              | Basic weighted average shares
outstanding (7)   |                        |         |              |     |            |         |              |         |              |          | 38,999                                              |       |      |           | 52,774       |         |   |           | 52,774  |       |   |           | 56,260  |        |   |           | 57,730  |        
|                                                              | Diluted weighted average shares
outstanding(7)  |                        |         |              |     |            |         |              |         |              |          | 38,999                                              |       |      |           | 52,774       |         |   |           | 53,580  |       |   |           | 57,343  |        |   |           | 58,639  |        
|Balance Sheet Data (end of period):                           |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|Cash and cash equivalents                                     |                                                 | $                      | 4,964   |              |     | $          | 25,193  |              |         | $            | 2,933    |                                                     |       | $    | 2,933     |              |         | $ | 51,037    |         |       | $ | 44,269    |         |        | $ | 6,058     |        
|Marketable securities                                         |                                                 |                        | 7,672   |              |     |            | 4,588   |              |         |              | 4,906    |                                                     |       |      | 4,906     |              |         |   | 118,413   |         |       |   | 165,581   |         |        | $ | 377,661   |        
|Deferred revenue                                              |                                                 |                        | 7,299   |              |     |            | 19,293  |              |         |              | 16,447   |                                                     |       |      | 16,447    |              |         |   | 31,221    |         |       |   | 37,679    |         |        | $ | 76,356    |        
|Net working capital (deficit)(8)                              |                                                 |                        | (1,856  | )            |     |            | (3,311  | )            |         |              | (44,754  | )                                                   |       |      | (44,754   | )            |         |   | 107,106   |         |       |   | 142,816   |         |        | $ | 242,186   |        
|Goodwill, net                                                 |                                                 |                        |        |              |     |            |        |              |         |              | 187,411  |                                                     |       |      | 187,411   |              |         |   | 354,904   |         |       |   | 362,464   |         |        | $ | 369,743   |        
|Total assets                                                  |                                                 |                        | 14,544  |              |     |            | 32,127  |              |         |              | 204,250  |                                                     |       |      | 204,250   |              |         |   | 562,328   |         |       |   | 648,576   |         |        | $ | 846,884   |        
|Current liability for amounts due
under purchase agreement(8) |                                                 |                        |        |              |     |            |        |              |         |              | 17,500   |                                                     |       |      | 17,500    |              |         |   |          |         |       |   |          |         |        |   |          |        
|Net stockholders equity (deficit)(8)                         |                                                 |                        | (852    | )            |     |            | (2,129  | )            |         |              | 146,347  |                                                     |       |      | 146,347   |              |         |   | 484,195   |         |       |   | 541,888   |         |        |   | 657,736   |        
|Other Data:                                                   |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|Total room nights sold                                        |                                                 |                        | 442,000 |              |     |            | 295,000 |              |         |              | 934,000  |                                                     |       |      | 1,229,000 |              |         |   | 2,433,000 |         |       |   | 4,190,000 |         |        |   | 7,838,000 |        
|Cash Flow Data:                                               |                                                 |                        |         |              |     |            |         |              |         |              |          |                                                     |       |      |           |              |         |   |           |         |       |   |           |         |        |   |           |        
|Operating activities                                          |                                                 | $                      | 8,849   |              |     | $          | 17,223  |              |         | $            | 20,439   |                                                     |       | $    | 37,662    |              |         | $ | 82,083    |         |       | $ | 102,961   |         |        | $ | 183,124   |        
|Investing activities(8)                                       |                                                 |                        | (4,214  | )            |     |            | 3,006   |              |         |              | (159,819 | )(7)                                                |       |      | (156,813  | )(7)         |         |   | (124,440  | )       |       |   | (117,327  | )       |        |   | (244,883  | )      
|Financing activities(8)                                       |                                                 |                        | (2,499  | )            |     |            |        |              |         |              | 142,313  | (7)                                                 |       |      | 142,313   | (7)          |         |   | 90,461    |         |       |   | 7,598     |         |        |   | 23,548    |        
|Adjusted EBITDA (9)                                           |                                                 |                        | 11,116  |              |     |            | (14,644 | )            |         |              | 18,891   |                                                     |       |      | 24,332    |              |         |   | 52,641    |         |       |   | 81,449    |         |        |   | 130,605   |        

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---

|(1) |  | Pro forma statements of operations data gives effect to the elimination
of officers distributions and non-recurring, acquisition-related costs,
amortization of goodwill, interest expense and pro forma income taxes.                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Our predecessor business distributed substantially all of its earnings
before taxes to its officers and recorded the distributions as expense.
Pro forma statement of operating data for 1999 does not include officers
distributions and assumes that officers salaries under the new
compensation arrangements were effective January 1, 1999. Officers
salaries are included in selling, general and administrative expenses.                                               
|   
|(3) |  | Reflects reclassification of performance-based marketing and distribution
partner fees from cost of sales to selling, general and administrative
expenses, resulting in an increase to gross profit of $2.6 million and
$0.2 million for the twelve months ended December 31, 1999 and 1998,
respectively.                                                                                                                                                                        
|   
|(4) |  | Our predecessor business paid discretionary bonuses of $0.4 million to
its employees (other than the officers) and incurred $0.2 million of
professional and advisory fees related directly to the acquisition. Our
predecessor business recorded a compensation charge of $19.7 million
related to an agreement that the principal owners of our predecessor
business had with an employee.                                                                                      
|   
|(5) |  | As of January 1, 1997, our predecessor business elected to be taxed as a
subchapter S corporation and, as a result, did not pay federal income
taxes. As of May 11, 1999, in connection with our acquisition of our
predecessor business, we elected to be taxed as a subchapter C corporation
as part of USAs consolidated group until the completion of our initial
public offering. Since the initial public offering, we pay taxes
separately from USA on our taxable income.
|   
|(6) |  | The following table adjusts our reported net earnings and basic and
diluted earnings per share to exclude amortization expense related to
goodwill and other intangible assets with indefinite lives as if Statement
of Financial Accounting Standards No. 142, Goodwill and Other
Intangibles was effective January 1, 2000:                                                                                                                                                   

|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |        |      | 
|---------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------ | ------ | ----------------------- | ---- | ---- | ------ | ------ | ---- | - | ------ | ------ | ---- | 
|                                                     |                                                           |                                            |        | Year Ended December 31,
|                                                     |                                                           |                                            |        |                        
|                                                     |                                                           |                                            |        | 2000                    |      | 2001 |        | 2002  
|                                                     |                                                           |                                            |        |                         |      |     
|Net Earnings Available To Common Shareholders        |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|Reported net income available to common shareholders |                                                           | $                                          | 10,832 |                         |      | $    | 12,907 |        |      | $ | 72,089 |       
|                                                     | Add: goodwill amortization, net of taxes                  |                                            |        | 23,671                  |      |      |        | 39,982 |      |   |        |       |     
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|                                                     | Net income available to common shareholders  as adjusted |                                            | $      | 34,503                  |      |      | $      | 52,889 |      |   | $      | 72,089 |     
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|Basic earnings per common share                      |                                                           | $                                          | 0.21   |                         |      | $    | 0.23   |        |      | $ | 1.25   |       
|                                                     | Add: goodwill amortization, net of taxes                  |                                            |        | 0.44                    |      |      |        | 0.71   |      |   |        |       |     
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|                                                     | Adjusted basic earnings per common share                  |                                            | $      | 0.65                    |      |      | $      | 0.94   |      |   | $      | 1.25   |     
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|Diluted earnings per common share                    |                                                           | $                                          | 0.20   |                         |      | $    | 0.23   |        |      | $ | 1.23   |       
|                                                     |                                                           | Add: goodwill amortization, net of taxes   |        |                         | 0.44 |      |        |        | 0.69 |   |        |        |     | 
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       
|                                                     |                                                           | Adjusted diluted earnings per common share |        | $                       | 0.64 |      |        | $      | 0.92 |   |        | $      | 1.23 | 
|                                                     |                                                           |                                            |        |                         |      |      |        |        |      |   |        |       



|(7) |  | Pro forma statement of operations for the twelve months ended December
31, 1999 assumes the same number of shares outstanding as 2000 for
comparison purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(8) |  | For the period May 11 to December 31, 1999, cash flow used in investing
activities includes $158.0 million of cash used in connection with the
acquisition of our predecessor business. Cash flow from financing
activities includes $142.3 million of net capital contributions by USA.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(9) |  | Adjusted EBITDA is defined as income from operations, plus depreciation,
amortization of non-cash distribution and marketing expense, non-cash
compensation, amortization of other intangibles (including goodwill) and,
with respect to the twelve months ended December 31, 1998, excludes
officers distributions made by our predecessor business. We believe that
Adjusted EBITDA and Adjusted EBITDA as a percentage of revenue (Adjusted
EBITDA Margin) provides investors and analysts with useful information
concerning our cash operating profits and cash operating margins, and
assists investors and analysts in comparing us with other industry peers.
Furthermore, we have historically used Adjusted EBITDA and

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| |  | Adjusted EBITDA Margin as an internal measure of our performance. We
believe that Adjusted Net Income and Adjusted EPS are logically derived
from Adjusted EBITDA and are similarly useful to investors and analysts.
Adjusted EBITDA should not be considered in isolation or as a substitute
for measures of financial performance or liquidity prepared in accordance
with generally accepted accounting principles. Adjusted EBITDA may not be
comparable to calculations of similarly titled measures presented by
other companies.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this section has been derived from our
consolidated financial statements and should be read together with our
consolidated financial statements and related notes included elsewhere in this
report. The following discussion and the information included under Risk
Factors contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those expressed
or implied in these forward-looking statements as a result of various factors,
including those set forth in the section entitled Risk Factors.

The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes elsewhere in this report beginning on page 31.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results and the timing of certain events may differ
materially from those described in these forward-looking statements due to a
number of factors. You should read the information in the sections entitled
Risk Factors and Forward-Looking Statements contained in Item 1. Business
for information about our presentation of forward-looking information.

Overview

We contract with hotels and other lodging properties in advance for volume
commitments and guaranteed availability of rooms at wholesale rates and make
these lodging accommodations available to our customers through our websites
and toll-free call centers and through third-party marketing and distribution
agreements. At December 31, 2002, we had room supply agreements with over 7,700
lodging properties in 325 major markets in North America, Europe, the Caribbean
and Asia.

In general, we bill a customers credit card in full when a reservation is
booked and pay the lodging property after a guest has departed. We record
prepaid bookings as deferred revenue until check-out, at which time revenue is
recognized. Accordingly, prepaid bookings represent payments received for
revenue to be recognized in the future. We also impose a change/cancellation
fee that is recorded as revenue upon change/cancellation of a reservation.
Because our customers pay us when a reservation is booked, charged or cancelled
and we do not pay a lodging property until after a guest has departed, we are
able to operate with limited or even negative working capital.

In 2001, following our acquisition of TravelNow.com Inc., we began
offering customers the ability to book hotel rooms at over 40,000 hotels (in
addition to the hotels with which we have wholesale supply agreements) in over
5,000 cities, air travel on 300 airlines and car rentals through over 60 car
rental companies. We have developed proprietary software to interface with GDS
systems and to provide customers with access to real-time information regarding
the availability and rates of such travel providers and the ability to book
reservations online. We earn a commission on the booking of such travel
products, either as a percentage of the gross dollar value of the travel
booking or as a fixed dollar amount per booking.

On May 10, 1999, we completed our acquisition of our predecessor business.
The total purchase price paid through September 30, 2000 was $406 million,
which is comprised primarily of: $145 million paid on May 11, 1999; $5 million
related to a promissory note that 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 our 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 5.1 million 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

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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.

Results of Operations

The following table presents results of operations data for our company,
as well as pro forma operations data as a percentage of total net revenue for
the periods presented.

|                              |                                              |                                    |                  |      |                         |     |       |      |      |     |       |      |      |      |  
|----------------------------- | -------------------------------------------- | ---------------------------------- | ---------------- | ---- | ----------------------- | --- | ----- | ---- | ---- | --- | ----- | ---- | ---- | ---- | -
|                              |                                              |                                    |                  |      | Year Ended December 31,
|                              |                                              |                                    |                  |      |                        
|                              |                                              |                                    |                  |      | 2000                    |     | 2001  |      | 2002
|                              |                                              |                                    |                  |      |                         |     |       |      |     
|Net revenue                   |                                              |                                    | 100.0            | %    |                         |     | 100.0 | %    |      |     | 100.0 | %   
|Operating costs and expenses: |                                              |                                    |                  |      |                         |     |       |      |      |     |       |     
|                              | Cost of sales                                |                                    |                  | 68.9 | %                       |     |       | 69.0 | %    |     |       | 69.6 | %   
|                              | Selling, general and administrative          |                                    |                  | 15.1 | %                       |     |       | 15.8 | %    |     |       | 16.6 | %   
|                              | Non-cash marketing and distribution expenses |                                    |                  | 1.3  | %                       |     |       | 3.2  | %    |     |       | 2.1  | %   
|                              | Amortization of goodwill                     |                                    |                  | 11.7 | %                       |     |       | 8.7  | %    |     |       |     |     
|                              | Depreciation and other amortization          |                                    |                  | 0.2  | %                       |     |       | 0.4  | %    |     |       | 0.6  | %   
|                              |                                              |                                    |                  |      |                         |     |       |      |      |     |       |     
|                              |                                              | Total operating costs and expenses |                  |      | 97.2                    | %   |       |      | 97.1 | %   |       |      | 88.9 | %   
|                              |                                              |                                    |                  |      |                         |     |       |      |      |     |       |     
|                              |                                              |                                    | Operating profit |      |                         | 2.8 | %     |      |      | 2.9 | %     |      |      | 11.1 | %

Twelve Months Ended December 31, 2002 vs. Twelve Months Ended December 31, 2001

Revenue

For the twelve months ended December 31, 2002, we generated revenue of
$945.4 million, an increase of 76.2% over the $536.5 million of revenue
generated during the twelve months ended December 31, 2001. The increase was
primarily attributable to the growth of our new website and brand, hotels.com,
and the growth in travel and lodging bookings through the Internet. Revenue
also increased due to the addition of new cities in which we offer hotel rooms,
an increase in hotels offered in existing cities and an increase in room
allotments available for sale. We expanded into 147 new markets during 2002,
reaching a total of 325 compared to 178 at December 31, 2001, representing an
82.6% increase.

The increase in revenue was also attributable to the growth of our revenue
from international and vacation rental properties. Revenue related to
properties located in Europe, Canada, Mexico, the Caribbean and Asia increased
176.5% to $125.7 million in 2002 from $45.5 million in 2001. Revenue from our
vacation rentals, which include condominiums, timeshares and vacation homes,
increased 147.1% to $25.5 million in 2002 from $10.3 million in 2001.

In addition, revenue increased as a result of the expansion of our
marketing and distribution partner program. Our marketing and distribution
partners generate sales of rooms in exchange for commissions based on the
amount of revenue generated by us on the sale of such rooms. Revenue derived
through our agreement with Travelocity, our largest marketing and distribution
partner, accounted for approximately 17.7% of our total revenue for 2002 and
18.0% for 2001.

Cost of Sales and Gross Profit

Cost of sales includes the cost of rooms sold. The increase in cost of
sales and gross profit corresponds to the growth in net revenue. Gross profit
increased 73.1% to $287.7 million in 2002 from $166.2 million in 2001. Gross
profit margin for 2002 decreased slightly to 30.4% from 31.0% for the prior
year period.

The decrease in gross profit margin was primarily due to an increase in
occupancy tax expense as a result of the additional reserve established in 2002
for the contingent occupancy tax liability. The decrease in gross profit

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margin was also due to the increase in costs associated with our
international accommodations as a result of significant fluctuation in exchange
rates during 2002.

Selling, General and Administrative Costs

Selling, general and administrative costs consist primarily of
compensation for personnel, marketing and distribution partner commissions,
credit card fees, advertising and promotion, telecommunications and other
overhead costs including occupancy costs. Overall selling, general and
administrative costs increased 85.4% in 2002 over 2001. As a percentage of net
revenue, selling, general and administrative costs increased to 16.6% from
15.8% in 2001.

The increase in selling, general and administrative expense for the twelve
months ended December 31, 2002 over the same period for 2001 was due to an
increase in advertising costs, including costs associated with the launch and
branding of the new hotels.com website and an increase in personnel costs,
credit card fees and marketing and distribution partner commissions resulting
from the growth in net revenue. The increase in selling, general and
administrative expense as a percentage of net revenue for the twelve months
ended December 31, 2002 was due to higher advertising and promotion expense as
a percentage of net revenue related to the launch and branding of hotels.com,
partially offset by a lower expense to sales ratio for personnel cost and
marketing and distribution partner commissions.

Non-Cash Distribution and Marketing

Non-cash deferred distribution and marketing costs of $19.6 million in
2002 consisted of amortization of the fair value of warrants issued to certain
marketing and distribution partners with whom we entered into exclusive
distribution and marketing agreements and advertising contributed by USA for
which we paid no cash consideration. The warrants were issued in 2000 and are
amortized over the term of the warrant agreements. The increase in non-cash
deferred distribution and marketing costs in 2002 resulted from the vesting of
certain performance warrants that occurred in 2002 and free television
advertising provided to us by USA in 2002.

Amortization of Goodwill

Effective January 1, 2002, we adopted the Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, pursuant
to which goodwill and intangible assets with indefinite lives are no longer
amortized. However, the company is required to perform an impairment test at
least annually in accordance with the Statement. There were no impairment
losses in 2002 or 2001.

For the year ended December 31, 2001, goodwill amortization expense
amounted to $46.4 million.

Other Income

Other income relates mainly to interest and dividends earned on marketable
securities. Other income for the twelve months ended December 31, 2002
decreased to $5.5 million compared to $8.3 million for the twelve months ended
December 31, 2001 due to the lower interest rates and a shift to a higher
portion of tax-free investments in 2002 partially offset by a higher invested
balance.

Income Tax Expense

Our effective tax rate for the twelve months ended December 31, 2002 and
2001 was 35.0% and 46.5%, respectively, which reflects the federal and state
income taxes. The decrease in the effective tax rate was primarily due to
elimination of permanent difference upon the discontinuation of amortization of
goodwill for book purposes from January 2002.

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Twelve Months Ended December 31, 2001 vs. Twelve Months Ended December 31, 2000

Revenue

For the twelve months ended December 31, 2001, we generated revenue of
$536.5 million, an increase of 63.6% over the $328.0 million of revenue
generated during the twelve months ended December 31, 2000. The increase was
primarily attributable to increased room sales through our Internet sites and
from the significant expansion in our marketing and distribution partner
program. Our marketing and distribution partners generate sales of rooms in
exchange for commissions on those rooms. Sales from marketing and distribution
partners accounted for approximately 65.2% of the total revenue in 2001
compared to 54.0% in 2000. Revenue also increased due to the addition of new
cities in which we offer hotel rooms, an increase in hotels offered in existing
cities and an increase in room allotments available for sale. We expanded into
81 new markets during 2001, reaching a total of 178 compared to 97 at December
31, 2000, representing an 83.5% increase.

Cost of Sales and Gross Profit

Cost of sales includes the cost of rooms sold. The increase in cost of
sales and gross profit corresponds to the growth in net revenue. Gross profit
increased 62.7% to $166.2 million in 2001 from $102.2 million in 2000. Gross
profit margin for 2001 decreased slightly to 31.0% from 31.2% for the prior
year period.

Gross profit margin declined slightly as a result of our decision to focus
somewhat more on acquiring new customers and increasing market share, and on
the absolute amount of gross profit dollars, instead of solely on gross profit
margin. The decrease in gross profit margin was partially offset by the
inclusion of TravelNow.coms higher margin commission revenue.

Selling General and Administrative Costs

Selling, general and administrative costs consist primarily of
compensation for personnel, marketing and distribution partner commissions,
credit card fees, advertising and promotion, telecommunications and other
overhead costs including occupancy costs. Overall selling, general and
administrative costs increased 71.1% in 2001 over 2000. As a percentage of net
revenue, selling, general and administrative costs increased to 15.8% from
15.1% in 2000.

The increase in selling, general and administrative costs as a percentage
of net revenue was a result of a substantial increase in marketing and
distribution partner commissions corresponding to the increase in the
percentage of net revenue generated through our marketing and distribution
partner network and an increase in average commission rates, partially offset
by economies of scale recognized in our personnel and telecommunications costs.

Non-Cash Distribution and Marketing

Non-cash deferred distribution and marketing costs of $17.0 million in
2001 consists of amortization of the fair value of warrants issued to certain
marketing and distribution partners with whom we entered into exclusive
marketing and distribution agreements, and advertising contributed by USA for
which we paid no cash consideration. The warrants were issued in 2000 and are
amortized over the term of the warrant agreements. The increase in non-cash
deferred distribution and marketing costs in 2001 resulted from additional
warrants issued in late 2000, the vesting of certain performance warrants that
occurred in 2001 and free television advertising provided to us by USA in late
2001. Non-cash deferred distribution and marketing costs increased
substantially in 2001 over 2000 levels as a result of the transactions
described in Non-Cash Distribution and Marketing Expense below.

Amortization of Goodwill

Prior to 2002, goodwill was amortized over a life of ten years and related
to amounts assigned due to the acquisition of the predecessor business,
including contingent payments. The increase in goodwill amortization reflected
the acquisition of TravelNow.com.

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In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will continue to be
amortized over their useful lives.

We applied the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. We completed our initial
impairment test as of January 1, 2002 and concluded that no goodwill impairment
writeoff is necessary. Application of the non-amortization provisions of the
statement is expected to result in an increase in income before taxes of
approximately $47.2 million per year.

Other Income

Other income related mainly to interest and dividends earned on marketable
securities. Other income for the twelve months ended December 31, 2001
decreased to $8.3 million compared to $8.4 million for the twelve months ended
December 31, 2000 due to the lower interest rates and a shift to a higher
portion of tax-free investments in 2001 partially offset by a higher invested
balance.

Income Tax Expense

Our effective tax rate for the twelve months ended December 31, 2001 and
2000 was 46.5% and 38.5%, respectively, which reflects the federal and state
income taxes. The increase in the effective tax rate primarily resulted from a
decrease in estimated value of deductible goodwill for income tax purposes
associated with restricted class A common stock issued to the sellers of our
predecessor business immediately prior to our initial public offering, as well
as non-deductibility of the goodwill associated with the TravelNow.com
acquisition. These have been partially offset by the exemption of municipal
securities income from federal income taxes and the difference between the gain
earned by warrant holders upon exercise and the fair value of the warrants upon
issuance.

Adjusted EBITDA

Adjusted EBITDA is defined as income from operations, plus depreciation,
amortization of non-cash distribution and marketing expense, non-cash
compensation, and amortization of other intangibles (including goodwill).
Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue are
presented for informational purposes only and should not be considered as a
substitute for the historical financial information presented in accordance
with generally accepted accounting principles. We believe that Adjusted EBITDA
and Adjusted EBITDA as a percentage of net revenue provides investors and
analysts with useful information concerning our cash operating profits and cash
operating margins and assists investors and analysts in comparing us with other
industry peers. Furthermore, we have historically used Adjusted EBITDA and
Adjusted EBITDA as a percentage of net revenue as an internal measure of our
performance.

Hotels.com
Unaudited Combined Condensed Statements of Operations
(in thousands)

|                                                             |                                             |   |                         |        |      |   |        |        |  |   |         |        | 
|------------------------------------------------------------ | ------------------------------------------- | - | ----------------------- | ------ | ---- | - | ------ | ------ |  | - | ------- | ------ | 
|                                                             |                                             |   | Year Ended December 31,
|                                                             |                                             |   |                        
|                                                             |                                             |   | 2000                    |        | 2001 |   | 2002  
|                                                             |                                             |   |                         |        |      |   |       
|Reconciliation of Income From Operations to Adjusted EBITDA: |                                             |   |                         |        |      |   |        |        |  |   |         |       
|Income from operations                                       |                                             |   | 9,166                   |        |      |   | 15,811 |        |  |   | 105,501 |       
|Adjustments for non-cash expense:                            |                                             |   |                         |        |      |   |        |        |  |   |         |       
|                                                             | Depreciation                                |   |                         | 450    |      |   |        | 1,690  |  |   |         | 3,284  | 
|                                                             | Amortization  other                        |   |                         | 275    |      |   |        | 578    |  |   |         | 2,202  | 
|                                                             | Amortization of goodwill                    |   |                         | 38,490 |      |   |        | 46,394 |  |   |         |       | 
|                                                             | Non-cash marketing and distribution expense |   |                         | 4,260  |      |   |        | 16,976 |  |   |         | 19,618 | 
|                                                             |                                             |   |                         |        |      |   |        |        |  |   |         |       
|Adjusted EBITDA                                              |                                             | $ | 52,641                  |        |      | $ | 81,449 |        |  | $ | 130,605 |       
|                                                             |                                             |   |                         |        |      |   |        |        |  |   |         |       

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Adjusted EBITDA grew to $130.6 million for the twelve months ended
December 31, 2002, from $81.4 million for the twelve months ended December 31,
2001 and $52.6 million for twelve months ended December 31, 2000. Adjusted
EBITDA increased 60.4% in 2002 over Adjusted EBITDA for the 2001 period, and
Adjusted EBITDA increased 54.7% in 2001 over Adjusted EBITDA for the 2000
period. Adjusted EBITDA as a percentage of net revenue was 13.8% for the
twelve months ended December 31, 2002, 15.2% for the twelve months ended
December 31, 2001 and 16.1% for the twelve months ended December 31, 2000. The
decrease in Adjusted EBITDA as a percentage of net revenue for the 2002 period
versus the 2001 period reflects higher selling, general and administrative
expenses as a percentage of net revenue primarily attributable to an increase
in advertising costs associated with the launch and branding of the new
hotels.com website and a slightly lower gross profit margin. The decrease in
Adjusted EBITDA as a percentage of net revenue for the 2001 period versus the
2000 period reflects higher selling, general and administrative expenses as a
percentage of net revenue primarily associated with the growth in our marketing
and distribution partner program and slightly lower gross profit margin.

Cash flow from operations grew to $183.1 million from $103.0 million for
the twelve months ended December 31, 2001 and from $82.1 million for the twelve
months ended December 31, 2000. The increase in the operating cash flow can
primarily be attributed to the increase in Adjusted EBITDA and the changes in
working capital year over year.

Non-Cash Distribution and Marketing Expense

In connection with several exclusive marketing and distribution
agreements, and at the completion of our initial public offering, we issued
warrants to certain marketing and distribution partners to purchase 1,428,365
shares of our class A common stock. These warrants are non-forfeitable, fully
vested and exercisable and are not subject to any performance targets. At that
time, we 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
and 2001, we amortized $3.5 million and $4.3 million of the warrant costs,
respectively.

In addition, upon completion of our initial public offering and in
connection with a marketing and distribution agreement, we issued a performance
warrant to Travelocity to acquire up to 2,447,955 shares of our class A common
stock with an exercise price of $16.00 per share, the vesting of which was to
be subject to achieving certain performance targets. In March 2001, we 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 our relationship. In connection with this amendment, we 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, we 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 $10.9 million has been amortized as of December 31, 2002. The
asset is being amortized ratably over the remaining term of the marketing and
distribution agreement. As of December 31, 2002, 504,011 of the remaining
shares underlying the performance warrant had vested and become exercisable,
and we have 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. We 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. In order for the
remaining 475,171 unvested shares underlying performance warrant to vest fully,
Travelocity, among other things, must generate over $397.0 million in
additional revenue through us prior to the expiration of the agreement on July
31, 2005.

In November 2000, we 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, we 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

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the twelve months ended December 31, 2002, 2001 and 2000, we amortized
$0.7 million, $0.7 million and $0.1 million of the warrant costs, respectively.
In addition, we 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 it achieves
certain performance targets. No warrants were required to be issued under this
agreement during the years ended December 31, 2002, 2001 and 2000. If the
targets remaining under the marketing and distribution agreement as of December
31, 2002 are met in full, we will be required to issue warrants to acquire an
aggregate of 317,861 shares of class A common stock at an exercise price
calculated at the end of each performance measurement period.

In March 2001, we 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.

We will record an additional non-cash deferred distribution and marketing
expense upon the issuance of any such warrants. The amount of the additional
non-cash deferred distribution and marketing expense related to these
performance warrants and the additional warrants that may be issued in
connection with the exclusive marketing and distribution agreements in November
2000 and March 2001, cannot be determined at this time because it is dependent
on the amount of the performance warrants that vest and the amount of the
contingent warrants to be issued, and the value of such warrants on the date of
vesting or issuance. Such amount could be significant if our stock price
increases significantly from current levels.

Seasonality

Historically, we have often experienced higher sales and gross profits in
the fourth quarter during the heavy domestic holiday travel season because of
the travel patterns of our customers; however, during the fourth quarter of
2002 our sales and gross profits were flat compared to the third quarter of
2002, reflecting the increase in the portion of our business from sales of our
international properties and a sudden and unexpected decline in average daily
rates. Generally, our international sales rise during the second quarter, peak
during the third quarter and decline during the first and fourth quarters.
Furthermore, the travel industry is subject to seasonal fluctuations dependent
upon business and leisure travel patterns. If seasonality in the travel
industry causes quarterly fluctuations, there could be a material adverse
effect on our business and the value of our stock. We expect additional
seasonality in the future as our international sales increase.

Financial position, liquidity and capital resources

Historically, we have funded our operations through cash generated from
operating activities. We have historically been debt free. In addition, on
February 25, 2000, we completed an initial public offering in which we sold
6,210,000 shares of class A common stock at a price of $16.00 per share,
raising $90.1 million in proceeds net of offering expenses. At December 31,
2002, we had $383.7 million in cash, cash equivalents and marketable securities
available for sale. At January 31, 2003, following implementation of a class A
common stock repurchase program, we had $332.1 million in cash, cash
equivalents and marketable securities available for sale. We invest excess
cash predominantly in debt instruments that are highly liquid, of high-quality
investment grade, and predominantly have maturities of less than one year with
the intent to make such funds readily available for operating purposes and to
support its continued growth, both internally and through strategic
acquisitions.

Our cash, cash equivalents and marketable securities available for sale
increased from $209.9 million at December 31, 2001 to $383.7 million at
December 31, 2002 primarily as a result of cash provided by operating
activities of $183.1 million, which was partially offset by approximately $7.4
million of cash used in acquisitions. Our cash, cash equivalents and
marketable securities available for sale increased from $169.5 million at
December 31, 2000 to $209.9 million at December 31, 2001 primarily as a result
of cash provided by operating activities of $103.0 million, which was offset by
approximately $54.1 million of cash used in acquisitions.

Operating cash flow is generated based on our practice of billing a
customers credit card in full when a reservation is booked and paying the
lodging property after a guest has departed. We record prepaid bookings as

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deferred revenue until check-out. Accordingly, to the extent customers do
not cancel their reservations, prepaid bookings represent payments received for
revenue to be recognized in the future.

Capital expenditures were $13.3 million for the twelve months ended
December 31, 2002, $4.8 million for the twelve months ended December 31, 2001
and $2.9 million for the twelve months ended December 31, 2000. Capital
expenditures were primarily used for computers, furniture, equipment and
software. As a result of our rapid growth, we expect to increase capital
expenditures for purchased software, internally developed software, computer
equipment and leasehold improvements.

We anticipate that we will need to invest working capital towards the
development and expansion of our overall operations, including expansion into
new cities and increasing our penetration in existing markets.

We generate significant cash flow from operations, and cash flow is
expected to increase as revenue increase due to our billing and payment
policies. We anticipate that cash on hand and cash provided by operating
activities will be sufficient to fund our operations for the next twelve months
and for a foreseeable period after twelve months. Additional funds could be
necessary, however, to complete strategic acquisitions or other business
combinations in 2003 or beyond.

Accounting Policies

In connection with the issuance of Securities and Exchange Commission
FR-60, the following disclosure is provided to supplement our accounting
policies in regard to significant areas of judgment. Management of our company
is required to make certain estimates and assumptions during the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States. These estimates and assumptions
impact the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the consolidated financial
statements. These estimates also impact the reported amount of net earnings
during any period. Actual results could differ from those estimates. Because
of the size of the financial statement elements they related to, some of our
accounting policies and estimates have a more significant impact on our
financial statements than others.

Long-Lived Assets

We assess the recoverability of the carrying value of long-lived assets as
disclosed in Note 2 under Long-Lived Assets Including Intangibles in the
notes to the financial statements included elsewhere in this report. If
circumstances suggest that long-lived assets may be impaired, and a review
indicates that the carrying value will not be recoverable, as determined based
on the projected undiscounted future cash flows, the carrying value is reduced
to its estimated fair value. The determination of cash flows is based upon
assumptions and forecasts that may not occur. As of December 31, 2002, our
balance sheet included $391.6 million of intangible assets, net, and $18.6
million of fixed assets, net. We have completed our impairment test as of
December 31, 2002 and have concluded that no goodwill impairment write-off is
necessary.

Deferred Taxes

Estimates of deferred income taxes and the significant items giving rise
to the deferred assets and liabilities are shown in Note 6 of the notes to the
financial statements, and reflect managements assessment of actual future
taxes to be paid on items reflected in the financial statements, giving
consideration to both timing and the probability of realization. Actual income
taxes could vary from these estimates due to future changes in income tax law
or based upon review of our tax returns by the IRS or foreign taxing
authorities, as well as operating results of the company that vary
significantly from budgets.

Revenue Presentation

We contract with hotels and other lodging properties in advance for volume
commitments and guaranteed availability of rooms at wholesale rates and make
these lodging accommodations available to our customers through our websites
and toll-free call centers and through third-party marketing and distribution
agreements. Our revenue is generated principally through the bookings of these
lodging accommodations, and we recognize as revenue the gross

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revenue generated from the bookings of these lodging accommodations. As
previously announced, USA, our parent company, had voluntarily requested the
SEC to review the presentation of revenue by Hotels.com and Expedia for
merchant hotel revenue, as Hotels.com presents such revenue on a gross basis
and Expedia on a net basis. The SEC has concluded its review, and will not
object to the revenue presentation that each company has historically used.

Non-Cash Distribution and Marketing Expense

During 2001 and 2000, we entered into several marketing and distribution
agreements pursuant to which we issued warrants, some of which were performance
based. We calculate the fair value of warrants using certain estimates,
including the expected volatility of the stock and the expected life of the
warrants. If our stock price rises, or the expected life of warrants
increases, the fair value of the warrants also will increase. We expect that
the amount of non-cash distribution and marketing expense that we will
recognize in future periods will grow since the fair value of the performance
based warrants will be determined at the time the performance criteria are met.

Stock Based Compensation

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. We will adopt the accounting
provisions of FASB Statement No. 123 as of January 1, 2003 and will include the
required interim disclosure provisions in our financial statements for the
quarter ending March 31, 2003. We 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, we intend 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.

Non-GAAP Financial Measures

The SEC recently issued guidance regarding the use of non-GAAP financial
measures, which are defined as a numerical measures of a registrants
historical or future financial performance, financial position or cash flows
that:



| |  |  | exclude amounts, or are subject to adjustments that have the effect
of excluding amounts, that are included in the most directly comparable
measure calculated and presented in accordance with GAAP; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | include amounts, or are subject to adjustments that have the effect
of including amounts, that are excluded in the most directly comparable
measure calculated and presented in accordance with GAAP.   

Our executive management believes that certain non-GAAP measures,
including EBITDA, Adjusted Net Income, Adjusted EPS and Free Cash Flow, are
helpful, when presented in conjunction with the comparable GAAP measures. The
non-GAAP measures are not meant to replace or supersede the GAAP measures, but
rather to supplement the information to present the readers of the financial
statements with the same information as management considers in assessing the
results of operations and performance of business units.

When presenting non-GAAP financial measures we will present a
reconciliation of the most directly comparable GAAP measures. These non-GAAP
measures are consistent with how management views the results of operations in
assessing performance. The final rules on these measures were just released in
January, so we, like the rest of the world, are in the process of interpreting
the rules. While we believe that the measures we present comply with the
rules, we will continue to monitor any developments in their interpretation.
Accordingly, we can give no assurance that we will be able to provide these or
comparable measures in future filings.

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Non-GAAP financial measures fall into two categories(a) measures of
performance that are different from that presented in the GAAP financial
statement (for example, net income versus Adjusted Net Income), or (b) measures
of liquidity different from cash flow or cash flow from operations computed in
accordance with GAAP.

Performance-Based Measurements

Definitions of Measurements that We Will Use



| |  |  | Adjusted EBITA (earnings before interest, taxes, amortization of
intangibles, non-cash compensation expense and non-cash distribution
and marketing expense, other income and expenses, and non-recurring
items).                                                                                                                                                                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Adjusted Net Income (amounts that have been, or ultimately will be,
settled in cash and the measure will be computed as net income plus (1)
amortization of intangibles, non-cash distribution and marketing
expense and non-cash compensation expense and (3) non-recurring or
unusual items, including the cumulative effect of accounting changes,
that have not or are not reasonably likely to recur within two years,
all on an after-tax basis).
|
| |  |  | Adjusted EPS (Adjusted Net Income divided by fully diluted shares
outstanding, including restricted stock issued without using the
treasury method convention, as the denominator).                                                                                                                                                                                                                                                                    

Going forward, Adjusted EBITA, Adjusted Net Income and Adjusted EPS will
be the primary measures that we will use to review the operating performance of
our business. In the past, we also used Adjusted EBITDA to measure
performance. As support, these measures are prominently displayed in
our investor presentations by our executive management, and we expect
that these measures will be prominently displayed in future budget
presentations and investor presentations.
Furthermore, incentive compensation is directly linked to achieving Adjusted
EBITA and Adjusted Net Income targets. Previously, Adjusted EBITDA, as we
defined it, was the primary measure of performance reviewed by management. We
believe that depreciation of capital expenditures, especially capitalized
technology, is an important measure of performance. It is important to note
that we do not adjust for non-cash items because they are non-recurring, but
rather because our management excludes these items in reviewing the operating
performance of our business and our overall results.

Discussion of Non-Cash Items

To date, non-cash compensation has been a relatively small amount, but we
intend to account for stock-based compensation in accordance with FASB
Statement No. 123, and expense the fair value of the equity instruments over
their vesting terms. Going forward, we intend to issue restricted stock and
the accounting charge will be measured at the grant date and amortized ratably
as non-cash compensation over the vesting term. We anticipate that the expense
related to restricted stock will increase over time. We view the true cost of
restricted stock as the resulting dilution to common shareholders rather than
the estimated fair value of the instrument that is used to record the expense.
We may issue some options in the near term as we complete our shift to
restricted stock. Stock option compensation will be included in the
amortization of non-cash compensation. Consistent with our view that the true
cost is the dilution, for purposes of calculating Adjusted Net Income Per
Share, all restricted shares are treated as outstanding for calculating the
weighted average shares outstanding, and the treasury method convention is not
used to reduce the shares outstanding.

Non-Recurring Items

The new rules offer guidelines for the treatment of non-recurring items,
prohibiting adjustments identified as non-recurring, infrequent or unusual when
(1) the nature of the charge or gain is such that it is reasonably likely to
recur within two years, or (2) there was a similar charge or gain within the
prior two years. We will review items identified as non-recurring in future
periods to ensure they comply with this guidance.

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Reconciliation of Non-GAAP Measures to GAAP Measures and Presentation

When presenting non-GAAP financial measures, the most directly comparable
GAAP measure will be presented in equal or greater prominence. In addition, we
will provide a reconciliation of each of the non-GAAP measures to the GAAP
measures.

We believe that the most comparable GAAP measures are as follows:

|                       |  |                                            
|---------------------- |  | -------------------------------------------
|Non-Recurring Measures |  | GAAP Measures                              
|                       |  |                                            
|Adjusted EBITDA        |  | Operating Income                           
|Adjusted EBITA         |  | Operating Income                           
|Adjusted Net Income    |  | Net Income available to common shareholders
|Adjusted EPS           |  | Diluted EPS                                

Liquidity Measurements

Definition of Measurement that We Will Use



| |  |  | Free Cash Flow (GAAP cash flow from operations less capital
expenditures)
| | - |  | -------------------------------------------------------------------------

Free Cash Flow (FCF) is the primary measure our executive management
uses to review our ability to convert operating performance into cash, which
can then be used to support reinvestments in current operations, acquisitions,
or other strategic purposes. We expect that this measure will be
prominently displayed in our future budget presentations and investor presentations by our executive management.

Discussion of Elements of Computation

Capital expenditures, taken directly from the cash flow statement, are
utilized in the computation since they represent a significant portion of our
cash expenditures, and are a direct reinvestment in our business to increase
future performance.

Reconciliation of Non-GAAP Measures to GAAP Measures

We believe that the
most comparable GAAP measure is cash flow from
operations, which is the starting point of FCF.




Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We currently have no floating rate indebtedness. All of our revenue is
recognized in U.S. dollars. Accordingly, changes in interest rates do not
generally have a material direct or indirect effect on our financial position.
Since cash and marketable securities represent a significant portion of our
total current assets, we are at risk of reduced income from our investments in
the event of a decrease in interest rates.

Currently, all of our foreign hotel revenue is denominated in U.S. dollars
and is received at the time that a reservation is made. We are subject to risk
from foreign exchange rate fluctuations because the hotel rooms in foreign
markets that we contract to purchase are paid for in the local currency of the
hotel after the customer has completed his stay. During the year ended
December 31, 2002, our gross profit margin, earnings and cash flow were
adversely impacted by the significant weakening of the U.S. dollar against
major foreign currencies, in particular the Euro, the British pound and the
Canadian dollar. The foreign exchange rate fluctuations during the year ended
December 31, 2002 increased our cost of rooms sold by approximately $1.2
million. During the third quarter of 2002, we implemented a hedging program to
lessen our exposure to fluctuations in foreign exchange rates.

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Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

|           |                                                                                            |  |      |    | 
|---------- | ------------------------------------------------------------------------------------------ |  | ---- | -- | 
|           |                                                                                            |  | Page
|           |                                                                                            |  |     
|Hotels.com |                                                                                            |  |      |   
|           |                                                                                            |  |      |   
|           | Report of Independent Auditors                                                             |  |      | 31 | 
|           | Consolidated Balance Sheets at December 31, 2002 and 2001                                  |  |      | 32 | 
|           | Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000     |  |      | 33 | 
|           | Consolidated Statements of Stockholders Equity for the years ended December 31, 2002,     |  |      |    | 
|           | 2001 and 2000                                                                              |  |      | 34 | 
|           | Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 |  |      | 35 | 
|           | Notes to Financial Statements                                                              |  |      | 36 | 

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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.

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.

33



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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    |  |   |      |  
|                                                                |  | Amortized |         | Unrealized |  | Unrealized |     |            |  |  
|                                                                |  | 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):

|                                    |  |               |         |                     |  |   |         | 
|----------------------------------- |  | ------------- | ------- | ------------------- |  | - | ------- | 
|                                    |  | AmortizedCost |         | EstimatedFair 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    |  |   |      |  
|                                                                |  | Amortized |         | Unrealized |  | Unrealized |     |            |  |  
|                                                                |  | 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):

|                                    |  |               |         |                     |  |   |         | 
|----------------------------------- |  | ------------- | ------- | ------------------- |  | - | ------- | 
|                                    |  | AmortizedCost |         | EstimatedFair 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

In 2002, USA contributed $0.9 million of advertising costs for which the
Company paid no cash consideration. This amount was recorded as non-cash
distribution and marketing expense at fair value and a contribution of capital.

The Company entered into an arrangement with Ticketmaster LLC
(Ticketmaster) and Precision Response Corporation (PRC), subsidiaries of
USA, for outsourced call center services. The Company incurred fees with
Ticketmaster of $0.4 million, $1.4 million and $0.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company also incurred fees
with PRC of $2.0 million for the year ended December 31, 2002.

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 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.

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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 |         |  |  |       |  |  | $        |      | 

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.

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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):

|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |        | 
|------------------------ | -------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | ---- | ------ |  | - | ---- | ------ | 
|                         |                                                                                                                                        |   | 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 |       
|                         |                                                                                                                                        |   |                         |        |      |   |      |        |  |   |      |       

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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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##### Table of Contents






Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None




PART III

The information required by Part III (Items 10, 11, 12 and 13) has been
incorporated herein by reference to Hotels.coms definitive Proxy Statement to
be used in connection with the 2003 Annual Meeting of Stockholders (the 2003
Proxy Statement) as set forth below, in accordance with General Instruction
G(3) of Form 10-K.




Item 10. Directors and Executive Officers of the Registrant

Information relating to our directors and executive officers is set forth
in the section entitled Item 1Election of Directors and Management
Information in the 2003 Proxy Statement and is incorporated herein by
reference.




Item 11. Executive Compensation

Information regarding compensation of our officers and directors is set
forth in the section entitled Executive Compensation in the 2003 Proxy
Statement and is incorporated herein by reference.




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

Information regarding ownership of our class A common stock and class B
common stock is set forth in the section entitled Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters in
the 2003 Proxy Statement and is incorporated herein by reference.




Item 13. Certain Relationships and Related Party Transactions

Information regarding certain relationships and related transactions with
Hotels.com is set forth in the section entitled Certain Relationships and
Related Party Transactions in the 2003 Proxy Statement and is incorporated
herein by reference.




Item 14. Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Within the 90-day period prior to the
filing of this report, an evaluation was carried out under the supervision and
with the participation of our management, including the Chief Executive Officer
(CEO) and Chief Financial and Strategic Officer (CFO), of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, the CEO and
CFO have concluded that our disclosure controls and procedures are effective.

Subsequent to the date of their evaluation, there have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls.

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##### Table of Contents






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 |                                                                                                      |  | 31   |   
|                               | Consolidated Balance Sheets at December 31, 2002 and 2001                                            |  |      | 32 | 
|                               | Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000               |  |      | 33 | 
|                               | Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001 and 2000 |  |      | 34 | 
|                               | Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  |      | 35 | 
|                               | Notes to Financial Statements                                                                        |  |      | 36 | 

(3) Exhibits

|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|-------------- |  | ----------- | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description
|               |  |             | 3.1   |  |  | Restated Certificate of Incorporation (previously filed on May 15, 2002 as an
exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 and incorporated herein by reference, SEC File No. 000-29575).                                                                                                                                       
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 3.2   |  |  | Restated Bylaws (previously filed on February 7, 2000 as an exhibit to the
Companys Registration Statement on Form S-1, Amendment No. 3, and incorporated
herein by reference, Registration No. 333-90601).                                                                                                                                                                   
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 4.1   |  |  | Specimen class A common stock certificate (previously filed on August 14, 2002
as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter
ended July 31, 2002 and incorporated herein by reference, SEC File No.
000-29575).                                                                                                                                 
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.1  |  |  | Assumption Agreement between the Company and USA Networks, Inc., dated February
2, 2000 (previously filed on February 7, 2000 as an exhibit to the Companys
Registration Statement on Form S-1, Amendment No. 3, and incorporated herein by
reference, Registration No. 333-90601).                                                                                           
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.2  |  |  | Tax Sharing Agreement between the Company and USA Networks, Inc., dated May 10,
1999 (previously filed on February 7, 2000 as an exhibit to the Companys
Registration Statement on Form S-1, Amendment No. 3, and incorporated herein by
reference, Registration No. 333-90601).                                                                                              
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.3  |  |  | 2000 Stock Option Plan (previously filed on February 7, 2000 as an exhibit to
the Companys Registration Statement on Form S-1, Amendment No. 3, and
incorporated herein by reference, Registration No. 333-90601).                                                                                                                                                            
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.4  |  |  | Directors Stock Option Plan (previously filed on February 7, 2000 as an exhibit
to the Companys Registration Statement on Form S-1, Amendment No. 3, and
incorporated herein by reference, Registration No. 333-90601).*                                                                                                                                                     
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.5  |  |  | Amended and Restated Asset Purchase Agreement by and among the Company, USA
Networks, Inc., TMF, Inc., HRN Marketing Corp., David Litman and Robert Diener,
dated February 2, 2000 (previously filed on February 7, 2000 as an exhibit to
the Companys Registration Statement on Form S-1, Amendment No. 3, and
incorporated herein by reference, Registration No. 333-90601).
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.6  |  |  | Form of Employment Agreement between the Company and Sandra DArcy (previously
filed on February 7, 2000 as exhibit 10.9 to the Companys Registration
Statement on Form S-1, Amendment No. 3, and incorporated herein by reference,
Registration No. 333-90601).*                                                                                                             
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.7  |  |  | Employment Agreement between the Company and Mel Robinson (filed herewith). *                                                                                                                                                                                                                                                                                                  
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.8  |  |  | Senior Management Incentive Plan (filed herewith). *                                                                                                                                                                                                                                                                                                                           
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.9  |  |  | Option Based Incentive Program (filed herewith). *                                                                                                                                                                                                                                                                                                                             
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.10 |  |  | Amendment to Directors Stock Option Plan adopted May 31, 2001 (filed herewith). *                                                                                                                                                                                                                                                                                              
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 21.1  |  |  | Subsidiaries of Hotels.com (filed herewith).                                                                                                                                                                                                                                                                                                                                   
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 23.1  |  |  | Consent of Ernst & Young LLP (filed herewith).                                                                                                                                                                                                                                                                                                                                 
|              
|               |  |             | 99.1  |  |  | Certification of Chief Executive Officer pursuant to Section 906 of                                                                                                                                                                                                                                                                                                            
|               |  |             |       |  |  | Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith).                                                                                                                                                                                                                                                                                                           
|              
|               |  |             | 99.2  |  |  | Certification of Chief Financial and Strategic Officer pursuant to Section 906                                                                                                                                                                                                                                                                                                 
|               |  |             |       |  |  | of Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith).                                                                                                                                                                                                                                                                                                        
|               |  |             |      
|               |  |             | *     |  |  | Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this form pursuant to Item 15(c) of Form 10-K.                                                                                                                                                                                                                                   

50



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(b)  Reports
on Form 8-K



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Hotels.com furnished a Current Report on Form 8-K dated
October 23, 2002, which reported announcement of Hotels.coms
financial results for the third quarter of 2002 under Item 9 of Form
8-K.

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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                                           
|              
|March 27, 2003 |  | /s/ David LitmanDavid Litman, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated below.

|                                       |  |                                                                                    |  |               
|-------------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|Signatures                             |  | Title                                                                              |  | Date          
|                                      
|/s/ David LitmanDavid Litman           |  | Chief Executive Officer and Director
(Principal Executive Officer)                 |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Robert DienerRobert Diener         |  | President and Director                                                             |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Mel RobinsonMel Robinson           |  | Chief Financial and Strategic Officer
(Principal Financial and Accounting
Officer) |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Elan J. BlutingerElan J. Blutinger |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Anne BusquetAnne Busquet           |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Barry DillerBarry Diller           |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ David EllenDavid Ellen             |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Beverly HarmsBeverly Harms         |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Victor A. KaufmanVictor A. Kaufman |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Dara KhosrowshahiDara Khosrowshahi |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Dan MarriottDan Marriott           |  | Director                                                                           |  | March 27, 2003
|                                      
|                                       |  |                                                                                    |  |               
|                                      
|/s/ Eli SegalEli Segal                 |  | Director                                                                           |  | March 27, 2003

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CERTIFICATIONS

I, David S. Litman, certify that:

1.     I have reviewed this annual report on Form 10-K 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: March 27, 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 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: March 27, 2003 |  |  |  | /s/ Mel RobinsonMel Robinson
Chief Financial and Strategic Officer

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EXHIBIT INDEX

|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|-------------- |  | ----------- | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description
|               |  |             | 3.1   |  |  | Restated Certificate of Incorporation (previously filed on May 15, 2002 as an
exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 and incorporated herein by reference, SEC File No. 000-29575).                                                                                                                                       
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 3.2   |  |  | Restated Bylaws (previously filed on February 7, 2000 as an exhibit to the
Companys Registration Statement on Form S-1, Amendment No. 3, and incorporated
herein by reference, Registration No. 333-90601).                                                                                                                                                                   
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 4.1   |  |  | Specimen class A common stock certificate (previously filed on August 14, 2002
as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter
ended July 31, 2002 and incorporated herein by reference, SEC File No.
000-29575).                                                                                                                                 
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.1  |  |  | Assumption Agreement between the Company and USA Networks, Inc., dated February
2, 2000 (previously filed on February 7, 2000 as an exhibit to the Companys
Registration Statement on Form S-1, Amendment No. 3, and incorporated herein by
reference, Registration No. 333-90601).                                                                                           
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.2  |  |  | Tax Sharing Agreement between the Company and USA Networks, Inc., dated May 10,
1999 (previously filed on February 7, 2000 as an exhibit to the Companys
Registration Statement on Form S-1, Amendment No. 3, and incorporated herein by
reference, Registration No. 333-90601).                                                                                              
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.3  |  |  | 2000 Stock Option Plan (previously filed on February 7, 2000 as an exhibit to
the Companys Registration Statement on Form S-1, Amendment No. 3, and
incorporated herein by reference, Registration No. 333-90601).                                                                                                                                                            
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.4  |  |  | Directors Stock Option Plan (previously filed on February 7, 2000 as an exhibit
to the Companys Registration Statement on Form S-1, Amendment No. 3, and
incorporated herein by reference, Registration No. 333-90601).*                                                                                                                                                     
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.5  |  |  | Amended and Restated Asset Purchase Agreement by and among the Company, USA
Networks, Inc., TMF, Inc., HRN Marketing Corp., David Litman and Robert Diener,
dated February 2, 2000 (previously filed on February 7, 2000 as an exhibit to
the Companys Registration Statement on Form S-1, Amendment No. 3, and
incorporated herein by reference, Registration No. 333-90601).
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.6  |  |  | Form of Employment Agreement between the Company and Sandra DArcy (previously
filed on February 7, 2000 as exhibit 10.9 to the Companys Registration
Statement on Form S-1, Amendment No. 3, and incorporated herein by reference,
Registration No. 333-90601).*                                                                                                             
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.7  |  |  | Employment Agreement between the Company and Mel Robinson (filed herewith). *                                                                                                                                                                                                                                                                                                  
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.8  |  |  | Senior Management Incentive Plan (filed herewith). *                                                                                                                                                                                                                                                                                                                           
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.9  |  |  | Option Based Incentive Program (filed herewith). *                                                                                                                                                                                                                                                                                                                             
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 10.10 |  |  | Amendment to Directors Stock Option Plan adopted May 31, 2001 (filed herewith). *                                                                                                                                                                                                                                                                                              
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 21.1  |  |  | Subsidiaries of Hotels.com (filed herewith).                                                                                                                                                                                                                                                                                                                                   
|               |  |             |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|               |  |             | 23.1  |  |  | Consent of Ernst & Young LLP (filed herewith).                                                                                                                                                                                                                                                                                                                                 
|              
|               |  |             | 99.1  |  |  | Certification of Chief Executive Officer pursuant to Section 906 of                                                                                                                                                                                                                                                                                                            
|               |  |             |       |  |  | Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith).                                                                                                                                                                                                                                                                                                           
|              
|               |  |             | 99.2  |  |  | Certification of Chief Financial and Strategic Officer pursuant to Section 906                                                                                                                                                                                                                                                                                                 
|               |  |             |       |  |  | of Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (filed herewith).                                                                                                                                                                                                                                                                                                        



---

|* |  | Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this form pursuant to Item 15(c) of Form 10-K.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------