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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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, 2001

HOTEL RESERVATIONS NETWORK, INC.(Exact name of registrant as specified in its charter)



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Commission File No. 0-29575

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

8140 Walnut Hill Lane, Suite 800, 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, $.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
  No

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.

As of March 11, 2002, the following shares of the Registrants capital
stock were outstanding:

|                     |  |  |            | 
|-------------------- |  |  | ---------- | 
|Class A Common Stock |  |  | 18,511,800 | 
|Class B Common Stock |  |  | 38,999,100 | 
|Total                |  |  | 57,510,900 | 

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 11, 2002 was $566,750,000. For the purpose of the
foregoing calculation only, USA Networks, Inc., and all directors and executive
officers of the Registrant are assumed to be affiliates of the Registrant. The
aggregate market value of all voting stock of the Registrant as of March 11,
2001 was $3,620,040,000.

Documents Incorporated By Reference: The Registrants Proxy Statement for
its 2002 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 Discussions 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                       
|                                     | Item 13. Certain Relationships and Related Party Transactions                                 
|PART IV                             
|                                     | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      
|EX-21.1 Subsidiaries of HRN         
|EX-23.1 Consent of Ernst & Young LLP



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INDEX

|         |  |                                                                                       |  |  |    |      |  | 
|-------- |  | ------------------------------------------------------------------------------------- |  |  | -- | ---- |  | 
|         |  |                                                                                       |  |  |    | Page
|         |  |                                                                                       |  |  |    |     
|         |  | PART I                                                                                |  |  |    |     
|        
|Item 1.  |  | Business                                                                              |  |  | 2  |     
|Item 2.  |  | Properties                                                                            |  |  | 13 |     
|Item 3.  |  | Legal Proceedings                                                                     |  |  | 13 |     
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 13 |     
|        
|         |  | PART II                                                                               |  |  |    |     
|        
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  |  | 13 |     
|Item 6.  |  | Selected Financial Data                                                               |  |  | 15 |     
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |  | 16 |     
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 25 |     
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  |  | 26 |     
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  |  | 45 |     
|        
|         |  | PART III                                                                              |  |  |    |     
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |  | 45 |     
|Item 11. |  | Executive Compensation                                                                |  |  | 45 |     
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 45 |     
|Item 13. |  | Certain Relationships and Related Party Transactions                                  |  |  | 45 |     
|        
|         |  | PART IV                                                                               |  |  |    |     
|        
|Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |  | 46 |     





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PART I




Item 1.Business

GENERAL

Hotel Reservations Network, Inc. (HRN) is 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 and our toll-free call
centers. We contract with hotels in advance for volume purchases and
guaranteed availability of hotel rooms and vacation rentals at wholesale prices
and sell these rooms to consumers, often at significant discounts to published
rates. In addition, our hotel supply relationships often allow us to offer our
customers hotel accommodation alternatives for otherwise unavailable dates. At
December 31, 2001 we had room supply agreements with over 4,500 lodging
properties in 178 major markets in North America, the Caribbean, Western Europe
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, our company, HRN or
Hotel Reservations Network refer to Hotel Reservations Network, our
subsidiaries and our predecessor entities.

Our History

HRN was formed in Delaware on March 25, 1999 as a direct, wholly owned
subsidiary of USA Networks, Inc. (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.

In February 2000, we sold 6.2 million shares of our class A common stock
in an initial public offering. 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 pursuant to which
substantially all of our operating assets were transferred to a newly formed
and wholly owned indirect subsidiary of HRN, Hotel Discounts, L.P.

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, 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.

USA currently holds approximately 68% of our outstanding capital stock and
approximately 97% of the total voting power of HRN. As a result, USA is
effectively able to control the outcome of nearly all matters submitted to a
vote of our stockholders.

With the recent closing of the acquisition by USA of a controlling stake
in Expedia, HRN and Expedia are now under common control.

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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 and our toll-free call centers. We contract with
hotels in advance for volume purchases and guaranteed availability of hotel
rooms and vacation rentals at wholesale prices and sell these rooms to
consumers, often at significant discounts to published rates. In addition, our
hotel supply relationships often allow us to offer our customers hotel
accommodation alternatives for otherwise unavailable dates. At December 31,
2001, Hotel Reservations Network had room supply agreements with over 4,500
lodging properties in 178 major markets in North America, the Caribbean,
Western Europe 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,
www.travelnow.com, www.acenethotels.com, www.condosaver.com,
www.allluxuryhotels.com and www.180096hotel.com, through third-party websites,
and through our telephone call centers. Hotel Reservations Network has
negotiated affiliate marketing agreements with many of the leading
travel-related websites including Travelocity, Cheap Tickets, nwa.com (operated
by Northwest Airlines), americawest.com (operated by America West Airlines),
Places To Stay (operated by WorldRes), BestFares.com and over 23,800 other
affiliated websites. We are also prominently featured on and directly linked
to most of the leading Internet search engines and online communities,
including America Online, Lycos, Yahoo!, Excite, Infoseek and Citysearch.
Through these agreements, our accommodations are prominently featured on and
linked to these affiliated websites on a co-branded or private label basis.

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, Westin, Radisson,
Best Western, Doubletree and Hampton Inn. We believe that these suppliers view
Hotel Reservations Network as an efficient distribution channel to help
maximize their overall revenues and occupancy levels. Although Hotel
Reservations Network contracts in advance for volume room commitments, its
supply contracts typically allow it to return unsold rooms without penalty
within a specified period of time. In addition, because Hotel Reservations
Network contracts to purchase rooms in advance, it is able to manage billing
procedures for the rooms it sells and thereby maintain direct relationships
with its customers. Hotel Reservations Network has developed proprietary
revenue management and reservation systems software that is integrated with its
websites and call center operations. These systems and software enable Hotel
Reservations Network to accurately monitor its room inventory and provide
prompt, efficient customer service. We believe that our supply contracts and
revenue management capabilities differentiate Hotel Reservations Network from
retail travel agencies and other commission-based resellers of accommodations.

In addition, through our TravelNow.com subsidiary we offer 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 multiple electronic
global distribution services, 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.

Our corporate headquarters are located at 8140 Walnut Hill Lane, Suite
800, Dallas, Texas 75231, and our telephone numbers are (214) 361-7311, (800)
2-HOTELS, (800) 96-HOTEL and (800) 715-7666. Our worldwide websites include
www.hotels.com, www.hoteldiscount.com, www.travelnow.com, www.acenethotels.com,
www.condosaver.com, www.allluxuryhotels.com and www.180096hotel.com. The
information on our websites is not incorporated herein.

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Operations

We service our customer base through the Internet and our call center
operations. Although the Internet is generating an increasing proportion of our
business, both operations have experienced significant growth.

Internet Operations.We offer lodging accommodations through our own
websites, including www.hotels.com, www.hoteldiscount.com, www.travelnow.com,
www.acenethotels.com, www.condosaver.com, www.allluxuryhotels.com and
www.180096hotel.com, and over 23,800 affiliated websites. Our websites are
completely automated and allow customers to compare lodging booking options,
price, availability and amenities and to book, charge and confirm orders within
seconds. Our websites are designed to provide customers with quick, efficient
and flexible service in a manner that facilitates comparison shopping.

Call Center Operations.We currently employ approximately 400 people in
our call centers in Dallas, Ft. Worth and Pharr, Texas, and Springfield,
Missouri. Our toll-free call centers handle thousands of calls daily to our
general toll-free numbers (1-800-2-HOTELS, 1-800-96-HOTEL and 1-800-715-7666)
and also to the toll-free numbers of various travel clubs and affinity groups
for which we provide service. 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 phone conversations to ensure
superior sales technique 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.

Revenue Management Techniques.We have developed revenue management and
booking software that allows us to monitor available rooms, prices and sales
trends on a real-time basis to maximize revenues and gross profit, to process
transactions quickly and to provide prompt, effective customer service. We have
integrated this software with our websites and call center operations so that
customers always 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
purchases and guaranteed availability. We obtain room inventory from over 4,500
lodging properties through two primary methods: (a) contracting for initial
room allotments, where we have the opportunity to purchase rooms at
predetermined wholesale rates and usually may return unsold inventory to the
lodging property within a specified period of time, and (b) purchasing rooms in
advance when we feel there is a strong likelihood of selling all of the rooms.
Over 97% of our rooms sold in 2001 were sold pursuant to room allotment
contracts. Most of our 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.

In addition, we have entered into contracts with multiple electronic
global distribution services (GDS). Our contracts with these GDS systems
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

Online Marketing Sources.Our websites, including www.hotels.com,
www.hoteldiscount.com, www.travelnow.com, www.acenethotels.com,
www.condosaver.com, www.allluxuryhotels.com and www.180096hotel.com, are among
the most accessed and used lodging booking sites on the Internet. Our websites
also are integrated into many of the leading travel-related websites on the
Internet, and are prominently featured on and linked to many of the leading
Internet search engines and online communities. Under provisions of our
standard

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affiliate agreements, we pay a commission for bookings originated from the
affiliates website. In 1997, we began circulating a free weekly online
newsletter highlighting available hotels and rates in selected markets to
subscribers. Our subscribers have increased from 30,000 at December 31, 1997 to
over 2.0 million at December 31, 2001. We will seek to continue to expand this
number of subscribers as traffic on our websites increases.

Advertising. We selectively purchase advertising, both in traditional
media and online, where we can obtain preferred placement. USA also
contributed $0.5 million of advertising for which we paid no cash
consideration. This amount was recorded as non-cash distribution and marketing
expense, and a contribution of capital.

Travel Agencies, Travel Clubs and Other Membership Organizations.We
consider travel agencies to be marketing affiliates 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 Association
of Travel Agents numbers that are input directly on our websites or provided
to our call center agents at the time of booking. We also are affiliated 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.

Media Promotion.We have developed a significant media network through
our use of television, radio, newspapers and magazines. Our President, Mr.
Robert Diener, is featured regularly on over 100 radio stations across the
country. In addition, our products and services have been featured by such
media outlets as The New York Times, the Los Angeles Times, USA Today, The Wall
Street Journaland The Chicago Tribuneand have been profiled on CNN, CBS,
MSNBC and CNBC.

Technology

We have developed proprietary booking 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 IBM RS/6000 servers,
with Silicon Graphics servers used for custom interfaces to external vendors
and affiliates. We maintain our database on an IBM AS-400 model 820 with a
RAID disk storage tower and conduct daily backup functions for off-site
storage. We access the Internet backbone via T-3 data communication lines. Our
call center operations are managed by a Lucent Definity G3 Octel switch. We
also maintain backup power supplies in the event of power outages. Our systems
have not experienced significant downtime in over five years. We maintain an
Internet firewall to protect our internal systems. All credit card transactions
are processed using 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;                                  
|
| |  |  | reliability; and                                   
|
| |  |  | travel-related content.                            

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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. Hotels and travel agents
also may continue to rely upon central reservations systems. We also compete
against numerous travel-related websites. Although we currently have
agreements with some of these websites under which our booking engine is
prominently displayed on and integrated into their websites, there can be no
assurance that these affiliations will continue in the future or that they will
continue to be beneficial to our business and we may find ourselves in
competition with these affiliates. In addition, in February 2002, five major
hotel chains and Pegasus Solutions announced plans to market lodging
accommodations over the Internet through multiple 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, affiliates 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, some of our trade names are not 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 our 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

Some segments of the travel industry are heavily regulated by the federal
and state governments and foreign governments and, accordingly, some products
and services we offer are affected by these regulations. All of our products
and services are subject to federal and state consumer protection laws and
regulations prohibiting unfair and deceptive trade practices. In addition,
federal regulations concerning the display and presentation of information
currently applicable to hotel and lodging booking services could be extended to
us in the future. These consumer protection laws could result in substantial
compliance costs and could interfere with the conduct of our business.

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Regulation of the Internet

Currently, few laws and regulations apply directly to the Internet and
commercial online services and, to the extent such laws exist or apply to HRN,
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 HRNs business. This summary focuses primarily on
the enacted federal, state and international legislation specific to online
businesses such as HRN.

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 international 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 HRNs products and services or increase its cost of
doing business. HRN cannot predict whether any of the proposed privacy
legislation currently pending will be enacted and what effect, if any, it would
have on HRN.

Privacy

As an online business, customers provide HRN 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, phone number, or e-mail address. This information is used to
respond to and fulfill customer requests for HRN travel products and services.
HRN posts privacy policies for most of its Internet websites concerning HRNs
use and disclosure of user data.

Current US Federal Privacy Regulation.Increasing concern over consumer
privacy, including regulations related to the use of the Internet for
conducting transactions and electronic commerce, has led to the introduction of
proposed legislation at the federal level. A number of these 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 HRN, 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 Federal Trade Commission has a role in consumer privacy
protection and is involved with related enforcement activities.

Current State Privacy Regulation.Most states have enacted or are
considering legislation to regulate the protection of consumers 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 still pending, and is similar to what has been
enacted at the federal level.

Current International Privacy Regulation.The primary international
privacy regulations to which HRNs 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
protections in regard to transactions with businesses and organizations
in the private sector. PIPEDA recognizes the 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 extends 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
personal data from any of the EU member states. Effective July 25,
2000,  

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| |  |  | 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 Federal
Trade Commission 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.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Taxes

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 Non-Disclosure Act, as this legislation is known, 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 HRNs
products and services or increase HRNs cost of operations.

Certain Concentrations

In January 2000, we entered into a long-term affiliate agreement with
Travelocity. Under this agreement, Travelocity markets our hotels and other
lodging accommodations on its website, and in return we pay them a commission
based upon revenue generated for HRN. The agreement expires on July 31, 2005.
For 2001 and 2000, 15.6% and 9.1%, respectively, of our total revenue was
derived through our agreement with Travelocity.

We believe that in 2002 and subsequent years, the dollar amount of revenue that
we derive through the Travelocity agreement will continue to grow. We also
believe that the percentage of our total revenue in 2002 derived through our
agreement with Travelocity is likely to increase very slightly or stabilize
compared to 2001, and then decline in subsequent years as a result of our
various other revenue growth initiatives, including (a) the recent launch of our
new branded website, hotels.com, (b) the expansion of our revenue through other
existing affiliates, (c) the addition of new affiliate relationships, (d)
international expansion, (e) additional 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 IPO price, the vesting of
which was subject to achieving certain performance targets. As of December 31,
2001, 714,437 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 $500 million in
additional revenue through HRN prior to the expiration of the Travelocity
agreement on July 31, 2005. We expect the remaining shares underlying the
performance warrant to vest in full prior to the end of its term. 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, HRN is the exclusive third
party provider of negotiated rate hotel rooms (excluding negotiated rate hotel
rooms sold by Travelocity as part of a travel package) in over 60 of HRN's
largest markets, including New York, Las Vegas, Orlando, Chicago and others. Over
88% of our total revenue (from all sources, including Travelocity) was derived
from these markets in 2001.

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Employees

As of December 31, 2000, we had approximately 720 employees. We have never
had a work stoppage and none of our employees is represented by a labor union.
We consider our employee relationships to be positive. As of March 11, 2001,
we had approximately 800 employees.

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 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 foreign 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; and                                                             
|
| |  |  | acts of terrorism.                                                                                                             

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 affiliates. 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 our
suppliers are not exclusive and most of the contracts 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 affiliations or obtain new affiliations
with other travel service providers, we may lose access to customers and face
increased competition.We derive significant benefits, including revenues and
customer awareness, from our arrangements with leading travel websites on the
Internet. Although we currently have affiliations with these travel websites,
these websites also may compete with us for hotel bookings. If a substantial
number of these websites were to terminate their affiliation with us, we would
lose

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access to the visitors to their websites and, consequently, we would lose
access to potential customers. Alternatively, if our affiliates offer their
own lodging accommodations or if they develop relationships with our
competitors, we would face increased competition for customers. A loss of
online exposure also could be detrimental to our ability to maintain or enhance
our relationships with our suppliers. The failure or loss of these
affiliations 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 of seasonality and our reliance
upon leisure travel.Our operating results fluctuate because our business is
seasonal and because we rely significantly upon revenues from leisure
travelers. Therefore, there are numerous factors beyond our control that
affect our operating results. For any of the reasons listed below, 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.

Because of the travel patterns of our customers, we often have higher
sales and gross profits in the fourth quarter during the heavy holiday travel
season. Leisure travelers are 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; or
|
| |  |  | terrorism.                                        

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.                                     

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. In February 2002, five
major hotel chains and Pegasus Solutions announced plans to market lodging
accommodations over the Internet through multiple 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.

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 operating. 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

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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
an affiliate in connection with the execution of an affiliate marketing
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 affiliate marketing 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 affiliate marketing 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.

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 revenues 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.

Our business is 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. Consequently, USA controls approximately 97% of the total voting power
of our common stock and, therefore, will have the right to control the outcome
of any matter submitted for the vote or consent of our stockholders, except for
when a separate vote of the holders of class A common stock is required by
Delaware law. USA also may be able to cause changes in our business without
seeking the approval of any other party. These changes may not be to the
advantage of our company 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

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businesses may have interests that conflict 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. 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.

If our security system is breached, our business and reputation could
suffer.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.

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. Furthermore, our retail customers often associate our business with
our domain name rather than our corporate or trade name. 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.

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.

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 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; and         
|
| |  |  | additional regulatory requirements.                                                                 

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.

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Item 2.Properties

Hotel Reservations Networks operations are headquartered in Dallas,
Texas, where it leases an aggregate of approximately 47,700 square feet of
office space. The lease for this space expires in 2003.

TravelNow.coms offices are located in Springfield, Missouri, where it
leases approximately 12,500 square feet of office space. The lease for this
space expires in 2002. TravelNow.com has entered into a new lease of approximately
15,000 square feet of office space commencing in May 2002.

Hotel Reservations Network leases approximately 14,100 square feet of
office space in Pharr, Texas. The lease for this space expires in 2006. In
addition, we lease approximately 12,700 square feet of office space in Ft.
Worth, Texas. This lease expires in 2003.

Hotel Reservations Network also leases office space in Miami, Florida;
Atlantic City, New Jersey; Burbank, California; Grand Haven, Michigan; and
Paris, France.




Item 3.Legal Proceedings

In the ordinary course of business, HRN 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 the financial position or operations
of HRN.




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

No matter was submitted to a vote of the Companys stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of fiscal
year 2001.




PART II




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

HRNs class A common stock is quoted on The Nasdaq Stock Market (NASDAQ)
(Symbol: ROOM). There is no established public trading market for HRNs class
B common stock. HRN completed its initial public offering of its 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 HRNs class A common stock on NASDAQ:

|                                       |  |      |       |     |  |   |       | 
|-------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                       |  | High |       | Low
|                                       |  |      |       |    
|Year Ended December 31, 2000           |  |      |       |     |  |   |       | 
|First Quarter (from February 25, 2000) |  | $    | 26.50 |     |  | $ | 14.50 | 
|Second Quarter                         |  |      | 38.75 |     |  |   | 14.69 | 
|Third Quarter                          |  |      | 42.63 |     |  |   | 25.31 | 
|Fourth Quarter                         |  |      | 39.13 |     |  |   | 24.50 | 
|                                      
|Year Ended December 31, 2001           |  |      |       |     |  |   |       | 
|First Quarter                          |  | $    | 40.38 |     |  | $ | 24.33 | 
|Second Quarter                         |  |      | 50.99 |     |  |   | 24.81 | 
|Third Quarter                          |  |      | 53.70 |     |  |   | 18.25 | 
|Fourth Quarter                         |  |      | 47.83 |     |  |   | 20.27 | 

There were 52 stockholders of record as of March 11, 2002 and the closing
price of HRNs class A common stock that day was $62.98. The number of
stockholders does not include beneficial owners of the class A common stock
whose shares are held in street name.

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HRN has paid no cash dividends on its common stock to date and does not
anticipate paying cash dividends in the immediate future.

On November 29, 2001, the Company issued 40,000 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 November 30, 2001, the Company issued 10,000 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 December 4, 2001, the Company issued 27,466 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 December 19, 2001, the Company issued 5,000 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 December 27, 2001, the Company issued 6,000 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 was 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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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 business 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    |          |            |       |   |           |         |         |   |           |         |       |  
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         | January 1 to            |         | May 11 to |          | Year Ended |       |   |           |         |         |   |           |        
|                                                              |                                                 |                         |         | Year Ended December 31,                             |      | May 10, |         | December 31, |     | December 31, |         | Year Ended December 31,
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                        
|                                                              |                                                 |                         |         | 1997                                                |      | 1998    |         | 1999         |     | 1999         |         | 1999(1)                 |         | 2000      |          | 2001      
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |           
|                                                              |                                                 |                         |         | (in thousands, except for per share and other data)
|Statement of Operations Data:                                 |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|Net revenues                                                  |                                                 | $                       | 34,758  |                                                     |      | $       | 66,472  |              |     | $            | 37,701  |                         |         | $         | 124,113  |            |       | $ | 161,814   |         |         | $ | 327,977   |         |       | $ | 536,497   |        
|Operating costs and expenses:                                 |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Cost of sales                                   |                         |         | 23,284                                              |      |         |         | 45,665       |     |              |         | 26,117                  |         |           |          | 87,239     |       |   |           | 113,356 |         |   |           | 225,793 |       |   |           | 370,279 |       
|                                                              | Selling, general andadministrative(2)(3)        |                         |         | 5,782                                               |      |         |         | 9,692        |     |              |         | 5,971                   |         |           |          | 17,983     |       |   |           | 24,126  |         |   |           | 49,543  |       |   |           | 84,769  |       
|                                                              | Officers distributions (2)                     |                         |         | 6,160                                               |      |         |         | 10,126       |     |              |         |                        |         |           |          |           |       |   |           |        |         |   |           |        |       |   |           |        |       
|                                                              | Non-recurring acquisition-relatedcosts(4)       |                         |         |                                                    |      |         |         |             |     |              |         | 20,257                  |         |           |          |           |       |   |           |        |         |   |           |        |       |   |           |        |       
|                                                              | Non-cash marketing and distribution
expense     |                         |         |                                                    |      |         |         |             |     |              |         |                        |         |           |          |           |       |   |           |        |         |   |           | 4,260   |       |   |           | 16,976  |       
|                                                              | Amortization of Goodwill                        |                         |         |                                                    |      |         |         |             |     |              |         |                        |         |           |          | 12,897     |       |   |           | 38,490  |         |   |           | 38,490  |       |   |           | 46,394  |       
|                                                              | Depreciation and other amortization             |                         |         |                                                    |      |         |         | 231          |     |              |         | 119                     |         |           |          | 340        |       |   |           | 459     |         |   |           | 725     |       |   |           | 2,268   |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Total operating costs and expenses              |                         |         | 35,226                                              |      |         |         | 65,714       |     |              |         | 52,464                  |         |           |          | 118,459    |       |   |           | 176,431 |         |   |           | 318,811 |       |   |           | 520,686 |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              |                                                 | Operating profit (loss) |         |                                                     | (468 | )       |         |              | 758 |              |         |                         | (14,763 | )         |          |            | 5,654 |   |           |         | (14,617 | ) |           |         | 9,166 |   |           |         | 15,811 | 
|Other income:                                                 |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Interest and other, net                         |                         |         | 447                                                 |      |         |         | 911          |     |              |         | 429                     |         |           |          | 889        |       |   |           | 1,318   |         |   |           | 8,448   |       |   |           | 8,313   |       
|                                                              | Gain on sale of securities                      |                         |         | 13                                                  |      |         |         | 74           |     |              |         | 471                     |         |           |          |           |       |   |           | 471     |         |   |           |        |       |   |           |        |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Total other income                              |                         |         | 460                                                 |      |         |         | 985          |     |              |         | 900                     |         |           |          | 889        |       |   |           | 1,789   |         |   |           | 8,448   |       |   |           | 8,313   |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|Earnings (loss) before income taxes                           |                                                 |                         | (8      | )                                                   |      |         | 1,743   |              |     |              | (13,863 | )                       |         |           | 6,543    |            |       |   | (12,828   | )       |         |   | 17,614    |         |       |   | 24,124    |        
|Income tax expense(5)                                         |                                                 |                         | 2       |                                                     |      |         | 5       |              |     |              |        |                         |         |           | 2,421    |            |       |   |          |         |         |   | 6,782     |         |       |   | 11,217    |        
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Net earnings (loss)                             |                         | $       | (10                                                 | )    |         | $       | 1,738        |     |              | $       | (13,863                 | )       |           | $        | 4,122      |       |   | $         | (12,828 | )       |   | $         | 10,832  |       |   | $         | 12,907  |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Basic net earnings (loss) per common
share(6)   |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           | $        | 0.11       |       |   | $         | (0.24   | )       |   | $         | 0.21    |       |   | $         | 0.23    |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Diluted net earnings (loss) per common
share(6) |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           | $        | 0.11       |       |   | $         | (0.24   | )       |   | $         | 0.20    |       |   | $         | 0.23    |       
|                                                              |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|                                                              | Basic weighted average shares
outstanding(6)    |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          | 38,999     |       |   |           | 52,774  |         |   |           | 52,774  |       |   |           | 56,260  |       
|                                                              | Diluted weighted average shares
outstanding(6)  |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          | 38,999     |       |   |           | 52,774  |         |   |           | 53,580  |       |   |           | 57,343  |       
|Balance Sheet Data (end of period):                           |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|Cash and cash equivalents                                     |                                                 | $                       | 2,828   |                                                     |      | $       | 4,964   |              |     | $            | 25,193  |                         |         | $         | 2,933    |            |       | $ | 2,933     |         |         | $ | 51,037    |         |       | $ | 44,269    |        
|Marketable securities                                         |                                                 |                         | 4,083   |                                                     |      |         | 7,672   |              |     |              | 4,588   |                         |         |           | 4,906    |            |       |   | 4,906     |         |         |   | 118,413   |         |       |   | 165,581   |        
|Deferred revenue                                              |                                                 |                         | 3,278   |                                                     |      |         | 7,299   |              |     |              | 19,293  |                         |         |           | 16,447   |            |       |   | 16,447    |         |         |   | 31,221    |         |       |   | 37,679    |        
|Net working capital (deficit)(7)                              |                                                 |                         | (532    | )                                                   |      |         | (1,856  | )            |     |              | (3,311  | )                       |         |           | (44,754  | )          |       |   | (44,754   | )       |         |   | 107,106   |         |       |   | 142,816   |        
|Goodwill, net                                                 |                                                 |                         |        |                                                     |      |         |        |              |     |              |        |                         |         |           | 187,411  |            |       |   | 187,411   |         |         |   | 354,904   |         |       |   | 362,464   |        
|Total assets                                                  |                                                 |                         | 7,958   |                                                     |      |         | 14,544  |              |     |              | 32,127  |                         |         |           | 204,250  |            |       |   | 204,250   |         |         |   | 562,328   |         |       |   | 648,576   |        
|Current liability for amounts due under
purchase agreement(7) |                                                 |                         |        |                                                     |      |         |        |              |     |              |        |                         |         |           | 17,500   |            |       |   | 17,500    |         |         |   |          |         |       |   |          |        
|Net stockholders equity (deficit)(7)                         |                                                 |                         | (54     | )                                                   |      |         | (852    | )            |     |              | (2,129  | )                       |         |           | 146,347  |            |       |   | 146,347   |         |         |   | 484,195   |         |       |   | 541,888   |        
|Other Data:                                                   |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|Total room nights sold                                        |                                                 |                         | 224,000 |                                                     |      |         | 442,000 |              |     |              | 295,000 |                         |         |           | 934,000  |            |       |   | 1,229,000 |         |         |   | 2,433,000 |         |       |   | 4,190,000 |        
|Cash Flow Data:                                               |                                                 |                         |         |                                                     |      |         |         |              |     |              |         |                         |         |           |          |            |       |   |           |         |         |   |           |         |       |   |           |        
|Operating activities                                          |                                                 | $                       | 647     |                                                     |      | $       | 8,849   |              |     | $            | 17,223  |                         |         | $         | 20,439   |            |       | $ | 37,662    |         |         | $ | 82,083    |         |       | $ | 102,961   |        
|Investing activities(7)                                       |                                                 |                         | (897    | )                                                   |      |         | (4,214  | )            |     |              | 3,006   |                         |         |           | (159,819 | )(7)       |       |   | (156,813  | )(7)    |         |   | (124,440  | )       |       |   | (117,327  | )      
|Financing activities(7)                                       |                                                 |                         |        |                                                     |      |         | (2,499  | )            |     |              |        |                         |         |           | 142,313  | (7)        |       |   | 142,313   | (7)     |         |   | 90,461    |         |       |   | 7,598     |        
|Adjusted EBITDA(8)                                            |                                                 |                         | 5,776   |                                                     |      |         | 11,116  |              |     |              | (14,644 | )                       |         |           | 18,891   |            |       |   | 24,332    |         |         |   | 52,641    |         |       |   | 81,449    |        

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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 affiliate 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) |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(7) |  | 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 our
acquisition of our predecessor business. Cash flow from financing
activities includes $142.3 million of net capital contributions by USA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(8) |  | Earnings before interest, income taxes, depreciation and amortization
(Adjusted EBITDA) is defined as operating profit plus depreciation,
amortization of intangibles, and amortization of non-cash distribution and
marketing expense, and with respect to the twelve months ended December
31, 1997, and 1998, excludes officers distributions made by our
predecessor business. Adjusted EBITDA is presented because we believe it
is a widely accepted valuation indicator for companies in our industry.
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 following discussion of the financial condition and results of
operations of our company should be read in conjunction with our financial
statements and the related notes elsewhere in this report beginning on page
27. 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
purchases and guaranteed availability of rooms at wholesale prices and resell
these rooms to consumers through our websites, third-party affiliated websites
and our toll-free call centers. At December 31, 2001, we had room supply
agreements with over 4,500 lodging properties in 178 major markets in North
America, the Caribbean, Western Europe and Asia.

We began booking hotel rooms in six markets in December 1991. During 1995,
we entered into our first Internet marketing arrangement through an affiliation
with a third party. In 1997, we implemented our first proprietary website. In
early 1998, our website was fully automated, and by mid-1998, we implemented
our strategy of pursuing affiliate relationships with Internet search engines
and travel-related websites. In 2000, we began offering our customers the
ability to book vacation rentals and condominiums.

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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 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, which amount is subject to certain adjustments as defined in the
asset purchase agreement; 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.

To enhance comparability, the discussion of consolidated results of
operations is supplemented, where appropriate, with separate pro forma
financial information that gives effect to the acquisition of TMF, Inc. and HRN
Marketing Corp. as if it had occurred at the beginning of the respective
periods presented.

The pro forma information is not necessarily indicative of the revenues
and cost of sales, which actually would have been reported had the acquisition
occurred at the beginning of the respective periods, nor is it necessarily
indicative of future results.

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Results of Operations

The following table presents results of operations data for our company
and our predecessor business as well as pro forma operations data as a
percentage of total net revenue for the periods presented. Some columns may not
add due to rounding differences.

|                              |                                              |                                    |                         |      |              |       |              |      |              |     |                         |      |       |      |       |      |      |     |       |      |      |     |  
|----------------------------- | -------------------------------------------- | ---------------------------------- | ----------------------- | ---- | ------------ | ----- | ------------ | ---- | ------------ | --- | ----------------------- | ---- | ----- | ---- | ----- | ---- | ---- | --- | ----- | ---- | ---- | --- | -
|                              |                                              |                                    |                         |      | Predecessor  |       | Company     
|                              |                                              |                                    |                         |      |              |       |             
|                              |                                              |                                    |                         |      | Actual       |       | Actual       |      | Pro Forma    |     | Actual                 
|                              |                                              |                                    |                         |      |              |       |              |      |              |     |                        
|                              |                                              |                                    |                         |      | Period       |       | Period       |      |              |     |                         |      |       |      |       |      |      |     |      
|                              |                                              |                                    |                         |      | January 1 to |       | May 11 to    |      | Year Ended   |     |                         |      |       |      |       |      |     
|                              |                                              |                                    |                         |      | May 10,      |       | December 31, |      | December 31, |     | Year Ended December 31,
|                              |                                              |                                    |                         |      |              |       |              |      |              |     |                        
|                              |                                              |                                    |                         |      | 1999         |       | 1999         |      | 1999         |     | 2000                    |      | 2001 
|                              |                                              |                                    |                         |      |              |       |              |      |              |     |                         |      |      
|Net revenues                  |                                              |                                    | 100.0                   | %    |              |       | 100.0        | %    |              |     | 100.0                   | %    |       |      | 100.0 | %    |      |     | 100.0 | %   
|Operating costs and expenses: |                                              |                                    |                         |      |              |       |              |      |              |     |                         |      |       |      |       |      |      |     |       |     
|                              | Cost of sales                                |                                    |                         | 69.3 | %            |       |              | 70.3 | %            |     |                         | 70.1 | %     |      |       | 68.9 | %    |     |       | 69.0 | %   
|                              | Selling, general and administrative          |                                    |                         | 15.9 | %            |       |              | 14.5 | %            |     |                         | 14.9 | %     |      |       | 15.1 | %    |     |       | 15.8 | %   
|                              | Officers distributions                      |                                    |                         |     |              |       |              |     |              |     |                         |     |       |      |       |     |      |     |       |     |     
|                              | Non-recurring acquisition-related costs      |                                    |                         | 53.7 | %            |       |              |     |              |     |                         |     |       |      |       |     |      |     |       |     |     
|                              | Non-cash marketing and distribution expenses |                                    |                         |     |              |       |              |     |              |     |                         |     |       |      |       | 1.3  | %    |     |       | 3.2  | %   
|                              | Amortization of goodwill                     |                                    |                         |     |              |       |              | 10.4 | %            |     |                         | 23.8 | %     |      |       | 11.7 | %    |     |       | 8.7  | %   
|                              | Depreciation and other amortization          |                                    |                         | 0.3  | %            |       |              | 0.3  | %            |     |                         | 0.3  | %     |      |       | 0.2  | %    |     |       | 0.4  | %   
|                              |                                              | Total operating costs and expenses |                         |      | 139.2        | %     |              |      | 95.4         | %   |                         |      | 109.0 | %    |       |      | 97.2 | %   |       |      | 97.1 | %  
|                              |                                              |                                    | Operating profit (loss) |      |              | (39.2 | )%           |      |              | 4.6 | %                       |      |       | (9.0 | )%    |      |      | 2.8 | %     |      |      | 2.9 | %

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

Revenues

For the twelve months ended December 31, 2001, the Company generated
revenues of $536.5 million, an increase of 63.6% over the $328.0 million of
revenues 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 affiliate program.
Affiliates generate sales of rooms in exchange for commissions on those rooms.
Sales from affiliate websites accounted for approximately 65.2% of the total
revenues in 2001 compared to 54.0% in 2000. Revenues 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 84% 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 revenues. 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 revenues.

Selling General and Administrative Costs

Selling, general and administrative costs consist primarily of
compensation for personnel, affiliate 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 revenues, 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 revenues was a result of a substantial increase in affiliate fees
corresponding to the increase in the percentage of net revenues generated

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through our affiliate 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
affiliates 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
marketing costs in 2001 resulted from additional warrants issued in late 2000,
and the vesting of certain performance warrants that occurred in 2001 and free
television advertising provided to HRN 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

Goodwill is amortized over a life of ten years and relates to amounts
assigned due to the acquisition of the predecessor business, including
contingent payments. The increase in goodwill amortization reflects the
acquisition of TravelNow.com.

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.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Although the Company
has not completed its assessment, the Company does not anticipate any
impairment write-off upon adoption. 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 relates 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.

Twelve Months Ended December 31, 2000 vs. Twelve Months Ended December 31, 1999

We compare the twelve months ended December 31, 2000 to the sum of the
periods January 1 to May 10, 1999 and May 11 to December 31, 1999, as we
believe this is the most meaningful presentation.

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Revenues

For the twelve months ended December 31, 2000, the Company generated
revenues of $328.0 million, an increase of 103% over the $161.8 million of
revenues generated during the twelve months ended December 31, 1999. The
increase was primarily attributable to increased room sales through our
Internet sites and from the significant expansion in our affiliate program. As
a percentage of total revenues, Internet-generated sales increased to 93% in
2000 from 81% in 1999. Affiliates generate sales of rooms in exchange for
commissions on those rooms. Sales from affiliate websites accounted for
approximately 54% of the total revenues in 2000 compared to 41% in 1999.
Revenues 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 57 new markets during
2000, reaching a total of 97 compared to 40 at December 31, 1999, representing
a 143% 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 revenues. Gross profit
increased 111% to $102.2 million in 2000 from $48.5 million in 1999. Gross
profit margin for 2000 increased to 31.2% from 30% for the prior year period.

The increase in gross profit margin was the result of improved revenue
management and the sales mix of rooms sold in varying markets. Gross profit
also reflected higher than expected occupancy rates and room rates in certain
markets in the second half of 2000, which is not expected to be repeated in
2001.

Cost of sales and gross profit reflect a reclassification in 1999 of
affiliate commissions from cost of sales to selling, general and administrative
costs. This reclassification resulted in a reduction of cost of sales and an
increase of selling, general and administrative costs of $2.6 million in 1999.

Selling, General and Administrative Costs

Selling, general and administrative costs consist primarily of
compensation for personnel, affiliate commissions, credit card fees,
advertising and promotion, telecommunications and other overhead costs
including occupancy costs. Overall selling, general and administrative costs
increased 106.8% in 2000 over 1999. As a percentage of net revenues, selling,
general and administrative costs increased slightly to 15.1% from 14.9% in
1999.

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

Selling, general and administrative costs also reflect the
reclassification of affiliate commissions discussed above.

Non-Recurring Acquisition Related Costs

In 1999, our predecessor business paid discretionary compensation and
bonuses of $0.4 million to its employees and incurred $0.2 million of
professional and advisory fees related directly to the acquisition. In
connection with the sale of substantially all the assets of TMF, Inc. and HRN
Marketing Corp., the principal owners of such entities entered into an
agreement to pay a salesperson engaged by TMF, Inc., for past services, 5% of
all net sales proceeds, including all contingent payments, received by the
principal owners in connection with the sale. During the period January 1 to
May 10, 1999, the predecessor business recorded a charge of $19.7 million in
connection with this obligation.

Non-Cash Distribution and Marketing

Non-cash deferred distribution and marketing costs of $4.3 million in 2000
consist of amortization of the fair value of warrants issued to certain
affiliates with whom we entered into exclusive distribution and marketing
agreements. The warrants were issued on February 24, 2000 and are amortized
over the term of the affiliate

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agreements. Non-cash deferred distribution and marketing costs will
increase substantially in 2001 over 2000 levels as a result of the transactions
described in Non-Cash Distribution and Marketing Expense below.

Amortization of Goodwill

Goodwill is amortized over a life of ten years and relates to amounts
assigned due to the acquisition of the predecessor business, including
contingent payments. The increase in goodwill amortization reflects
amortization expense for the full year in 2000 versus amortization expense in
1999 from May 11, 1999, the date of acquisition of the Companys predecessor
business.

Other Income

Other income relates mainly to interest and dividends earned on marketable
securities. Other income for the twelve months ended December 31, 2000
increased to $8.4 million compared to $1.8 million for the twelve months ended
December 31, 1999 due to the increase in cash flow from operations and funds
received from our initial public offering.

Income Tax Expense

Our effective tax rate for the twelve months ended December 31, 2000 is
38.5%, and for the period May 11, 1999 to December 31, 1999 is 37%, which
reflects the federal and state income taxes. For the period from January 1 to
May 10, 1999, we were taxed as a subchapter S corporation and, accordingly, the
tax liability was incurred by our shareholders.

Pro Forma Comparisons

To enhance comparability, the discussion of consolidated results of
operations is supplemented here with separate pro forma financial information
that gives effect to the acquisition of the predecessor business as if it had
occurred at the beginning of the respective periods presented. Adjusted EBITDA
is defined as operating profit plus depreciation, amortization of intangibles,
and amortization of non-cash distribution and marketing expense. Adjusted
EBITDA is presented here because we believe it is a widely accepted valuation
indicator for companies in our industry. Adjusted EBITDA does not purport to
represent cash provided by operating activities. Adjusted EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles. Adjusted EBITDA
may not be a comparable calculation of similarly titled measures by other
companies.

The pro forma results are presented for illustrative purposes only and are
not necessarily indicative of the results of operations that would have been
reported had the predecessor business been acquired as of January 1, 1999, nor
are they necessarily indicative of future results of operations.

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Hotel Reservations Network, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
(in thousands)

|                                    |                                             |   |              |        |              |   |              |        |              |   |         |        |  |   |         |        |  |   |         |        | 
|----------------------------------- | ------------------------------------------- | - | ------------ | ------ | ------------ | - | ------------ | ------ | ------------ | - | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                    |                                             |   | Predecessor  |        | Company     
|                                    |                                             |   |              |        |             
|                                    |                                             |   | Actual       |        | Actual       |   | Pro Forma    |        | Actual      
|                                    |                                             |   |              |        |              |   |              |        |             
|                                    |                                             |   | Period       |        | Period       |   |              |        |              |   |         |        |  |   |         |        | 
|                                    |                                             |   | January 1 to |        | May 11 to    |   | Year Ended   |        | Year Ended  
|                                    |                                             |   | May 10,      |        | December 31, |   | December 31, |        | December 31,
|                                    |                                             |   |              |        |              |   |              |        |             
|                                    |                                             |   | 1999         |        | 1999         |   | 1999         |        | 2000         |   | 2001   
|                                    |                                             |   |              |        |              |   |              |        |              |   |        
|Net revenues                        |                                             | $ | 37,701       |        |              | $ | 124,113      |        |              | $ | 161,814 |        |  | $ | 327,977 |        |  | $ | 536,497 |       
|Cost of revenues                    |                                             |   | 26,117       |        |              |   | 87,239       |        |              |   | 113,356 |        |  |   | 225,793 |        |  |   | 370,279 |       
|                                    |                                             |   |              |        |              |   |              |        |              |   |         |        |  |   |         |        |  |   |         |       
|Gross profit                        |                                             |   | 11,584       |        |              |   | 36,874       |        |              |   | 48,458  |        |  |   | 102,184 |        |  |   | 166,218 |       
|Operating expenses                 
|                                    | Selling general and administrative expense  |   |              | 5,971  |              |   |              | 17,983 |              |   |         | 24,126 |  |   |         | 49,543 |  |   |         | 84,769 | 
|                                    | Non-recurring acquisition related costs     |   |              | 20,257 |              |   |              |       |              |   |         |       |  |   |         |       |  |   |         |       | 
|                                    | Non-cash distribution and marketing expense |   |              |       |              |   |              |       |              |   |         |       |  |   |         | 4,260  |  |   |         | 16,976 | 
|                                    | Amortization of goodwill                    |   |              |       |              |   |              | 12,897 |              |   |         | 38,490 |  |   |         | 38,490 |  |   |         | 46,394 | 
|                                    | Depreciation and other amortization         |   |              | 119    |              |   |              | 340    |              |   |         | 459    |  |   |         | 725    |  |   |         | 2,268  | 
|                                    |                                             |   |              |        |              |   |              |        |              |   |         |        |  |   |         |        |  |   |         |       
|Income (loss) from operations       |                                             |   | (14,763      | )      |              |   | 5,654        |        |              |   | (14,617 | )      |  |   | 9,166   |        |  |   | 15,811  |       
|                                    |                                             |   |              |        |              |   |              |        |              |   |         |        |  |   |         |        |  |   |         |       
|Adjusted EBITDA                     |                                             |   | (14,644      | )      |              |   | 18,891       |        |              |   | 24,332  |        |  |   | 52,641  |        |  |   | 81,449  |       
|                                    |                                             |   |              |        |              |   |              |        |              |   |         |        |  |   |         |        |  |   |         |       
|Cash flow from operating activities |                                             |   | 17,223       |        |              |   | 20,439       |        |              |   | 37,662  |        |  |   | 82,083  |        |  |   | 102,961 |       
|                                    |                                             |   |              |        |              |   |              |        |              |   |         |        |  |   |         |        |  |   |         |       

The pro forma information for the twelve months ended December 31, 1999,
includes adjustments to (1) record goodwill amortization expense for the full
period, (2) eliminate non-recurring, acquisition-related cost, and (3) increase
selling general and administrative expenses by $172,000, in order to present
comparable officers compensation.

Adjusted EBITDA grew to $81.4 million for the twelve months ended December
31, 2001, from $52.6 million for twelve months ended December 31, 2000 and
$24.3 million on a pro forma basis for twelve months ended December 31, 1999.
Adjusted EBITDA increased 54.7% in 2001 over Adjusted EBITDA for the 2000
period, and Adjusted EBITDA increased 116% in 2000 over pro forma Adjusted
EBITDA for the 1999 period. Adjusted EBITDA as a percentage of net revenues
was 15.2% for the twelve months ended December 31, 2001, 16.1% for the twelve
months ended December 31, 2000, and 15.0% on a pro forma basis for the twelve
months ended December 31, 1999. The decrease in Adjusted EBITDA as a
percentage of net revenues for the 2001 period versus the 2000 period reflects
higher selling, general and administrative expenses as a percentage of net
revenues primarily associated with the growth in our affiliate program and
slightly lower gross profit margin. The increase in Adjusted EBITDA as a
percentage of net revenues in 2000 from pro forma Adjusted EBITDA for the 1999
period reflects higher gross profit margin percentage, partially offset by
higher selling, general and administrative expenses as a percentage of net
revenues.

Cash flow from operations grew to $103 million for the twelve months ended
December 31, 2001 from $82.1 million for the twelve months ended December 31,
2000 and from $37.7 million for the pro forma twelve months ended December 31,
1999. 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 affiliate distribution and marketing
agreements, and at the completion of our initial public offering, we issued
warrants to third-party affiliated websites 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 affiliation agreements, which range from two to five years.
During the twelve months ended December 31, 2001 and 2000, we amortized $4.3
million and $4.2 million of the warrant costs, respectively.

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In addition, upon completion of our initial public offering and in
connection with an affiliation and marketing 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 affiliation 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 $4.96 million has been amortized as of December 31, 2001. The asset is
being amortized ratably over the remaining term of the affiliation agreement.
As of December 31, 2001, 264,745 of the remaining shares underlying the
performance warrant had vested and become exercisable, and we have recorded an
aggregate of $6.40 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
affiliate 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 714,437 unvested
shares underlying performance warrant to vest fully, Travelocity, among other
things, must generate over $500 million in additional revenue through HRN prior
to the expiration of the agreement on July 31, 2005. We expect that the
remaining unvested shares underlying the performance warrant will vest in full
prior to the end of its term.

In November 2000, we entered into an additional exclusive affiliate
distribution and marketing agreement and, in connection with it, issued to the
affiliate 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 affiliation agreement. During the twelve months ended December
31, 2001 and 2000, we amortized $0.74 million and $0.07 million of the warrant
costs, respectively. In addition, we agreed under the terms of the affiliation
agreement to issue additional warrants to purchase up to 985,369 shares of
class A common stock to the affiliate if the affiliate achieves certain
performance targets. No warrants were required to be issued under this
agreement during the years ended December 31, 2001 and 2000. If the targets
remaining under the affiliation agreement as of December 31, 2001 are met in
full, we will be required to issue warrants to acquire an aggregate of 667,508
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 affiliate distribution
and marketing agreement and agreed to issue warrants to purchase up to
2,122,726 shares of class A common stock to the affiliate if the affiliate
achieves certain performance targets. No warrants were required to be issued
under this agreement during the year ended December 31, 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 affiliate marketing agreement 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

We have historically experienced seasonal fluctuations in our operating
results, with the fourth quarter contributing the highest portion of our annual
revenue due to the higher volume of leisure travelers during the fall shopping
and holiday season. 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 your stock.

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Financial position, liquidity and capital resources

Historically, we have funded our operations through cash generated from
operating activities. Our company has 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, 2001, we had $219.0 million in cash, cash equivalents and marketable
securities available for sale. Our company invests 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 $171.5 million at December 31, 2000 to $219.0 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. Our cash, cash equivalents and marketable
securities available for sale increased from $9.8 million at December 31, 1999
to $171.5 million at December 31, 2000, primarily as of result of the $90.1
million in proceeds raised in our initial public offering and cash provided by
operating activities of $82.1 million for the twelve months ended December 31,
2000.

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
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 $4.8 million for the twelve months ended
December 31, 2001, $2.9 million for the twelve months ended December 31, 2000,
and $0.2 million and $1.1 million in the periods January 1 to May 10, 1999 and
May 11 to December 31, 1999, respectively. 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.

Our company generates significant cash flow from operations, and cash flow
is expected to increase as revenues increase due to our billing and payment
policies. Our company anticipates 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 2002 or beyond.

Accounting Policies

In connection with the issuance of Securities and Exchange Commission FR-60, the
following disclosure is provided to supplement HRNs accounting policies in
regard to significant areas of judgment. Management of the 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

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to its estimated
fair value. The determination of cash flows is based upon assumptions and
forecasts that may not occur. As of December 31, 2001, HRNs balance sheet
includes $373.3 million of intangible assets, net, and $8.7 million of fixed
assets, net. Although it has not completed its assessment, the Company does not
anticipate any impairment write-off upon adoption of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets.

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 Recognition

We contract with hotels and other lodging properties in advance for volume
purchases and guaranteed availability of rooms at wholesale prices and resell
these rooms to consumers through our websites, third-party affiliated websites
and our toll-free call centers. Our revenues are generated principally through
the resale of these rooms, and we recognize as revenue the gross revenues
generated from the resale of these rooms. We have considered Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements and believe that
our income statement presentation for the resale of rooms is appropriate. In
determining the appropriate presentation, we considered among other factors our
risk of loss resulting from customer disputes and credit card fraud in
connection with rooms sold, our ability to establish and change room pricing by
renegotiating our net rates from hotels and other lodging properties and
adjusting our rates to consumers, and our risk of loss from unsold prepaid
rooms. If we had recognized revenues from the resale of these rooms on a net
basis, our revenues would have approximately equaled our reported gross profit
and there would have been no effect on our Adjusted EBITDA, income from
operations or net income.

Non-Cash Distribution and Marketing Expense

During 2001 and 2000, HRN entered into several affiliate distribution and
marketing agreements pursuant to which HRN issued warrants, some of which were
performance based. HRN calculates the fair value of warrants using certain
estimates, including the expected volatility of the stock and the expected life
of the warrants. As HRNs stock price rises, or the expected life of warrants
increases, the fair value of the warrants also will increase. HRN expects that
the amount of non-cash distribution and marketing expense that HRN 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.




Item 7A.Quantitative and Qualitative Disclosure About Market Risk

We currently have no significant floating rate indebtedness, hold no
derivative instruments and do not earn income denominated in foreign
currencies. 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. We are subject to foreign currency
fluctuations because we collect our room charges for stays in hotels foreign
markets in U.S. dollars and pay the foreign hotels in their local currency.
These fluctuations pose minimal risk to the company because of the short time
frame between collection of the room charges and payment to foreign hotels. As
less than 10% of our revenues were derived from hotel accommodations in foreign
markets in the year ended December 31, 2001, we do not believe we have
significant foreign currency exchange risk and, as a result, do not hedge
against foreign currency exchange rate changes. To the extent that changes in
interest rates and currency exchange rates affect general economic conditions,
we would be affected by such change. 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.

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Item 8.Consolidated Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

|                                 |                                                                                                                                                                                 |  |      |    | 
|-------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                 |                                                                                                                                                                                 |  | Page
|                                 |                                                                                                                                                                                 |  |     
|Hotel Reservations Network, Inc. |                                                                                                                                                                                 |  |      |   
|                                 |                                                                                                                                                                                 |  |      |   
|                                 | Reports of Independent Auditors                                                                                                                                                 |  |      | 27 | 
|                                 | Consolidated Balance Sheets at December 31, 2001 and 2000                                                                                                                       |  |      | 29 | 
|                                 | Consolidated Statements of Operations for the years ended December
31, 2001 and 2000 and for the period from May 11 to December 31,
1999                                        |  |      | 30 | 
|                                 | Combined Statement of Operations of TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp. (Predecessor) for
the period from January 1 to May 10, 1999            |  |      | 30 | 
|                                 | Consolidated Statements of Stockholders Equity for the years
ended December 31, 2001 and 2000 and for the period from May 11 to
December 31, 1999                              |  |      | 31 | 
|                                 | Combined Statement of Stockholders Deficit of TMF, Inc. (d/b/a
Hotel Reservations Network) and HRN Marketing Corp. (Predecessor)
for the period from January 1 to May 10, 1999 |  |      | 31 | 
|                                 | Consolidated Statements of Cash Flows for the years ended December
31, 2001 and 2000 and for the period from May 11 to December 31,
1999                                        |  |      | 33 | 
|                                 | Combined Statement of Cash Flows of TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp. (Predecessor) for
the period from January 1 to May 10, 1999            |  |      | 33 | 
|                                 | Notes to Financial Statements                                                                                                                                                   |  |      | 34 | 

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Report of Independent Auditors

Board of Directors and Stockholders
Hotel Reservations Network, Inc.

We have audited the accompanying consolidated balance sheets of Hotel
Reservations Network, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity, and cash flows for
the years ended December 31, 2001 and 2000 and for the period May 11, 1999
through December 31, 1999. 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 Hotel
Reservations Network, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for the years ended December 31,
2001 and 2000 and for the period May 11, 1999 through December 31, 1999 in
conformity with accounting principles generally accepted in the United States.

Ernst & Young LLP

Dallas, Texas
January 25, 2002

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Report of Independent Auditors

Board of Directors and Stockholders
TMF, Inc. and HRN Marketing Corp.

We have audited the accompanying combined statements of operations,
stockholders equity, and cash flows of TMF, Inc. (d/b/a Hotel Reservations
Network) and HRN Marketing Corp. for the period January 1, 1999 through May 10,
1999. These combined financial statements are the responsibility of the
Companies management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of operations and cash flows of
TMF, Inc. (d/b/a Hotel Reservations Network) and HRN Marketing Corp. for the
period January 1, 1999 through May 10, 1999 in conformity with accounting
principles generally accepted in the United States.

Ernst & Young LLP

Dallas, Texas
November 22, 1999

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HOTEL RESERVATIONS NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |        |         |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------- | ------- | ------ | ------- | ------------ | ------- | ------ | ------- |  |  | 
|                                                                                                                                                                      |                                                |                            |         |        |         | December 31,
|                                                                                                                                                                      |                                                |                            |         |        |         |             
|                                                                                                                                                                      |                                                |                            |         |        |         | 2001         |         | 2000  
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|ASSETS                                                                                                                                                                |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                     
|CURRENT ASSETS                                                                                                                                                        |                                                |                            |         |        |         |              |         |       
|Cash and cash equivalents                                                                                                                                             |                                                | $                          | 44,269  |        |         | $            | 51,037  |       
|Restricted cash equivalents                                                                                                                                           |                                                |                            | 9,107   |        |         |              | 2,021   |       
|Marketable securities  available for sale                                                                                                                            |                                                |                            | 165,581 |        |         |              | 118,413 |       
|Accounts and notes receivable                                                                                                                                         |                                                |                            | 7,096   |        |         |              | 4,499   |       
|Prepaid hotel rooms                                                                                                                                                   |                                                |                            | 1,363   |        |         |              | 1,626   |       
|Current portion of non-cash deferred distribution and marketing costs                                                                                                 |                                                |                            | 10,195  |        |         |              | 5,403   |       
|Deferred income taxes                                                                                                                                                 |                                                |                            | 4,740   |        |         |              |        |       
|Other current assets                                                                                                                                                  |                                                |                            | 4,712   |        |         |              | 2,240   |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | Total current assets       |         |        | 247,063 |              |         |        | 185,239 | 
|PROPERTY AND EQUIPMENT                                                                                                                                                |                                                |                            |         |        |         |              |         |       
|Computer equipment and software                                                                                                                                       |                                                |                            | 7,862   |        |         |              | 4,110   |       
|Buildings and leasehold improvements                                                                                                                                  |                                                |                            | 995     |        |         |              | 285     |       
|Furniture and other equipment                                                                                                                                         |                                                |                            | 2,597   |        |         |              | 794     |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                |                            | 11,454  |        |         |              | 5,189   |       
|                                                                                                                                                                      | Less accumulated depreciation and amortization |                            |         | (2,755 | )       |              |         | (1,065 | )      
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                |                            | 8,699   |        |         |              | 4,124   |       
|OTHER ASSETS                                                                                                                                                          |                                                |                            |         |        |         |              |         |       
|Investment in TravelNow.com                                                                                                                                           |                                                |                            |        |        |         |              | 3,240   |       
|Goodwill, net of amortization of $97,780 and $51,387 at December 31,
2001 and 2000, respectively                                                                      |                                                |                            | 362,464 |        |         |              | 354,904 |       
|Non-cash deferred distribution and marketing costs                                                                                                                    |                                                |                            | 19,508  |        |         |              | 8,046   |       
|Deferred income taxes                                                                                                                                                 |                                                |                            |        |        |         |              | 6,715   |       
|Intellectual property, net of amortization of $371 at December 31, 2001                                                                                               |                                                |                            | 10,834  |        |         |              |        |       
|Other assets, net of amortization of $207 at December 31, 2001                                                                                                        |                                                |                            | 8       |        |         |              | 60      |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | $                          | 648,576 |        |         | $            | 562,328 |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                  |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                     
|CURRENT LIABILITIES                                                                                                                                                   |                                                |                            |         |        |         |              |         |       
|Accounts payable, trade                                                                                                                                               |                                                |                            | 53,679  |        |         |              | 30,334  |       
|Deferred revenue                                                                                                                                                      |                                                |                            | 37,679  |        |         |              | 31,221  |       
|Income tax payable                                                                                                                                                    |                                                |                            | 1,736   |        |         |              | 7,116   |       
|Due to USA, net                                                                                                                                                       |                                                |                            | 1,394   |        |         |              | 2,092   |       
|Other accrued liabilities                                                                                                                                             |                                                |                            | 9,759   |        |         |              | 7,370   |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | Total current liabilities  |         |        | 104,247 |              |         |        | 78,133  | 
|Deferred income taxes                                                                                                                                                 |                                                |                            | 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,
18,138,452 shares and 16,234,900 shares outstanding at December 31,
2001 and 2000, respectively |                                                |                            | 182     |        |         |              | 163     |       
|Class B common stock, $0.01 par value; 150,000,000 shares authorized,
38,999,100 shares outstanding at December 31, 2001 and 2000                                     |                                                |                            | 390     |        |         |              | 390     |       
|Additional paid-in capital                                                                                                                                            |                                                |                            | 513,456 |        |         |              | 468,611 |       
|Accumulated other comprehensive income (loss)                                                                                                                         |                                                |                            | (1      | )      |         |              | 77      |       
|Retained earnings                                                                                                                                                     |                                                |                            | 27,861  |        |         |              | 14,954  |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | Total Stockholders Equity |         |        | 541,888 |              |         |        | 484,195 | 
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       
|                                                                                                                                                                      |                                                | $                          | 648,576 |        |         | $            | 562,328 |       
|                                                                                                                                                                      |                                                |                            |         |        |         |              |         |       

The accompanying notes are an integral part of these statements.

29



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##### Table of Contents



HOTEL RESERVATIONS NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)

|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |        |     |        | 
|-------------------------------------------------------------------------------------------- | --------------------------------------- | -------------------------------------- | ---------------------------------- | ------- | ----------------------- | ------- | ------------ | ------- | ------- | ------- | ------- | ------ | --------- | ------- | ------------ | ------ | --- | ------ | 
|                                                                                             |                                         |                                        |                                    |         | Company                 |         | Predecessor 
|                                                                                             |                                         |                                        |                                    |         |                         |         |             
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        | Period    |         | Period      
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        | May 11 to |         | January 1 to
|                                                                                             |                                         |                                        |                                    |         | Year ended December 31, |         | December 31, |         | May 10,
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |        
|                                                                                             |                                         |                                        |                                    |         | 2001                    |         | 2000         |         | 1999    |         | 1999   
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |        
|Net revenues                                                                                 |                                         | $                                      | 536,497                            |         |                         | $       | 327,977      |         |         | $       | 124,113 |        |           | $       | 37,701       |       
|Operating
costs and expenses:                                                                |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|                                                                                             | Cost of sales                           |                                        |                                    | 370,279 |                         |         |              | 225,793 |         |         |         | 87,239 |           |         |              | 26,117 |    
|                                                                                             | Selling, general and administrative     |                                        |                                    | 84,769  |                         |         |              | 49,543  |         |         |         | 17,983 |           |         |              | 5,971  |    
|                                                                                             | Non recurring acquisition related costs |                                        |                                    |        |                         |         |              |        |         |         |         |       |           |         |              | 20,257 |    
|                                                                                             | Non-cash distribution and marketing     |                                        |                                    | 16,976  |                         |         |              | 4,260   |         |         |         |       |           |         |              |       |    
|                                                                                             | Amortization of goodwill                |                                        |                                    | 46,394  |                         |         |              | 38,490  |         |         |         | 12,897 |           |         |              |       |    
|                                                                                             | Depreciation and other amortization     |                                        |                                    | 2,268   |                         |         |              | 725     |         |         |         | 340    |           |         |              | 119    |    
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|                                                                                             |                                         |                                        | Total operating costs and expenses |         |                         | 520,686 |              |         |         | 318,811 |         |        |           | 118,459 |              |        |     | 52,464 | 
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Operating profit (loss)                                                                      |                                         |                                        | 15,811                             |         |                         |         | 9,166        |         |         |         | 5,654   |        |           |         | (14,763      | )     
|Other income (expense):                                                                      |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|                                                                                             |                                         | Interest income                        |                                    |         | 8,288                   |         |              |         | 8,482   |         |         |        | 1,054     |         |              |        | 420 |       
|                                                                                             |                                         | Interest expense                       |                                    |         |                        |         |              |         | (34     | )       |         |        | (165      | )       |              |        | (5  | )     
|                                                                                             |                                         | Gain on sales of marketable securities |                                    |         |                        |         |              |         |        |         |         |        |          |         |              |        | 471 |       
|                                                                                             |                                         | Other                                  |                                    |         | 25                      |         |              |         |        |         |         |        |          |         |              |        | 14  |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Income (loss) before income tax expense                                                      |                                         |                                        | 24,124                             |         |                         |         | 17,614       |         |         |         | 6,543   |        |           |         | (13,863      | )     
|Income tax expense                                                                           |                                         |                                        | (11,217                            | )       |                         |         | (6,782       | )       |         |         | (2,421  | )      |           |         |             |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Net income (loss)                                                                            |                                         | $                                      | 12,907                             |         |                         | $       | 10,832       |         |         | $       | 4,122   |        |           | $       | (13,863      | )     
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Basic earnings per common share                                                              |                                         | $                                      | 0.23                               |         |                         | $       | 0.21         |         |         | $       | 0.11    |        |           |         |              |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Diluted earnings per common share                                                            |                                         | $                                      | 0.23                               |         |                         | $       | 0.20         |         |         | $       | 0.11    |        |           |         |              |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Weighted average number of basic common
shares outstanding                                   |                                         |                                        | 56,260                             |         |                         |         | 52,774       |         |         |         | 38,999  |        |           |         |              |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Weighted average number of diluted common
shares outstanding                                 |                                         |                                        | 57,343                             |         |                         |         | 53,580       |         |         |         | 38,999  |        |           |         |              |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|PRO FORMA TAX INFORMATION                                                                    |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Historical loss before income tax benefit                                                    |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           | $       | (13,863      | )     
|Pro forma income tax benefit                                                                 |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         | 5,129        |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Pro forma net loss                                                                           |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           | $       | (8,734       | )     
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Pro forma basic and diluted earnings per
common share                                        |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           | $       | (0.22        | )     
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       
|Weighted average number of shares used to
compute pro forma basic and diluted loss per
share |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         | 38,999       |       
|                                                                                             |                                         |                                        |                                    |         |                         |         |              |         |         |         |         |        |           |         |              |       

The accompanying notes are an integral part of these statements.

30



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##### Table of Contents



HOTEL RESERVATIONS NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands, except share data)

|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   |      |  
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | --------------------------- | ------ | --------------------------- | ----- |  | ---------------------------------------- | - | ---------------- |  | -------------------------------------------------- | ----- | ----- |  | - | - | - |  |  | - | --------- |  |  | - | --- |  |  | ---------- | ---------- |  |  | --- | --- |  | - | - | - |  |  | ------- | ------- | - | - | ------ | ------- | ------ | - | --- | - | ---- | -
|                                       |                                                                                                                                    |                                                                                                                        |                |         | HRNMarketingCommonStock     |        |                             |       |  |                                          |   |                  |  |                                                    |       |       | 
|                                       |                                                                                                                                    |                                                                                                                        | TMFCommonStock |         |                             |        |                             |       |  | TMF andMarketingAdditionalPaid-InCapital |   |                  |  |                                                    |       |      
|                                       | TotalStockholders'Equity(Deficit)                                                                                                  |                                                                                                                        |                |         | Class ACommon
        Stock |        | Class BCommon
        Stock |       |  |                                          |   |                  |  | AccumulatedOtherComprehensiveIncome
        (Loss)
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        | AdditionalPaid-InCapital    |       |  |                                         
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   | RetainedEarnings | 
|                                       |                                                                                                                                    | Shares                                                                                                                 |                | $       |                             | Shares |                             | $     |  | Shares                                   |   | $                |  | Shares                                             |       | $     |  |   |   |  
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           | 
|Predecessor:                           |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |  
|Balance
          at January 1, 1999   |                                                                                                                                    | $                                                                                                                      | (852           | )       |                             |        | 1,000                       |       |  | $                                        | 0 |                  |  |                                                    | 1,000 |       |  | $ | 0 |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  | $ | 2 |   |  |  |         |         |   | $ | (1,168 | )       |        | $ | 314 |  
|                                       | Capital
          contribution                                                                                                     |                                                                                                                        |                | 12,900  |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         | 12,900  |   |   |        |         |        |   |     |   |     
|                                       | Comprehensive
          loss:                                                                                                      |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   |     
|                                       | Net loss
          for the period January 1, 1999 to May 10, 1999                                                                  |                                                                                                                        |                | (13,863 | )                           |        |                             |       |  |                                          |   |                  |  |                                                    |       |      |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        | (13,863 | )      |   |     |   |     
|                                       |                                                                                                                                    | Less:
          Reclassification adjustment for realized gains on marketable securities
          included in net loss |                |         | (314                        | )      |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   | (314 | )
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |  
|                                       | Comprehensive
          loss                                                                                                       |                                                                                                                        |                | (14,177 | )                           |        |                             |       |  |                                          |   |                  |  |                                                    |       |      |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   |     
|                                       | Deficit
          of Predecessor Company as of May 10, 1999 prior to the change in
          capitalization due to the acquisition |                                                                                                                        | $              | (2,129  | )                           |        |                             | 1,000 |  |                                          | $ | 0                |  |                                                    |       | 1,000 |  |   | $ | 0 |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   | $ | 2 |  |  | $       | 12,900  |   |   | $      | (15,031 | )      |   | $   | 0 |     
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |  
|Successor:                             |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |  
|                                       | Initial
          capitalization of Company in conjunction with the acquisition                                                    |                                                                                                                        | $              | 157,313 |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |          |  |  | $ | 0   |  |  |            | 38,999,100 |  |  | $   | 390 |  |   |   |   |  |  | $       | 156,923 |   |   | $      | 0       |        |   | $   | 0 |     
|                                       | Comprehensive
          income:                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   |     
|                                       |                                                                                                                                    | Net income
          for the period May 11 to December 31, 1999                                                        |                |         | 4,122                       |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         | 4,122  |   |     |   |      |  
|                                       |                                                                                                                                    | Unrealized
          losses on available for sale securities, net of taxes of $51                                      |                |         | (88                         | )      |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   | (88  | )
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |  
|                                       | Comprehensive
          income                                                                                                     |                                                                                                                        |                | 4,034   |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |   |     
|                                       | Capital
          contribution by USA related to the payment of contingent purchased price                                         |                                                                                                                        |                | 25,000  |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         | 25,000  |   |   |        |         |        |   |     |   |     
|                                       | Dividend
          to USA                                                                                                          |                                                                                                                        |                | (40,000 | )                           |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         | (40,000 | ) |   |        |         |        |   |     |   |     
|                                       |                                                                                                                                    |                                                                                                                        |                |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |   |           |  |  |   |     |  |  |            |            |  |  |     |     |  |   |   |   |  |  |         |         |   |   |        |         |        |   |     |  
|Balance
          at December 31, 1999 |                                                                                                                                    |                                                                                                                        | 146,347        |         |                             |        |                             |       |  |                                          |   |                  |  |                                                    |       |       |  |   |   |   |  |  |  |           |  |  | 0 |     |  |  | 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 affiliates                                                                        |                                                                                                                        |                | 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     |   |   |        |        |        |   |     |  |     

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|                             |                                                       |                                                                             |                |        |                             |        |                             |   |  |                                          |  |                  |  |                                                    |  |   |  |  |  |  |  |  |            |           |  |   |     |    |  |  |            |  |  |   |     |  |  |  |  |  |  |   |         |        |   |   |        |  |        |   |    |   |     |  
|---------------------------- | ----------------------------------------------------- | --------------------------------------------------------------------------- | -------------- | ------ | --------------------------- | ------ | --------------------------- | - |  | ---------------------------------------- |  | ---------------- |  | -------------------------------------------------- |  | - |  |  |  |  |  |  | ---------- | --------- |  | - | --- | -- |  |  | ---------- |  |  | - | --- |  |  |  |  |  |  | - | ------- | ------ | - | - | ------ |  | ------ | - | -- | - | --- | -
|                             |                                                       |                                                                             |                |        | HRNMarketingCommonStock     |        |                             |   |  |                                          |  |                  |  |                                                    |  |   | 
|                             |                                                       |                                                                             | TMFCommonStock |        |                             |        |                             |   |  | TMF andMarketingAdditionalPaid-InCapital |  |                  |  |                                                    |  |  
|                             | TotalStockholders'Equity(Deficit)                     |                                                                             |                |        | Class ACommon
        Stock |        | Class BCommon
        Stock |   |  |                                          |  |                  |  | AccumulatedOtherComprehensiveIncome
        (Loss)
|                             |                                                       |                                                                             |                |        |                             |        | AdditionalPaid-InCapital    |   |  |                                         
|                             |                                                       |                                                                             |                |        |                             |        |                             |   |  |                                          |  | RetainedEarnings | 
|                             |                                                       | Shares                                                                      |                | $      |                             | Shares |                             | $ |  | Shares                                   |  | $                |  | Shares                                             |  | $ |  |  |  | 
|                             |                                                       |                                                                             |                |        |                             |        |                             |   |  |                                          |  |                  |  |                                                    |  |   |  |  |  |  |  |  |            |           | 
|                             | 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
affiliates     |                                                                             |                | 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 | )
|                             |                                                       |                                                                             |                |        |                             |        |                             |   |  |                                          |  |                  |  |                                                    |  |   |  |  |  |  |  |  |            |           |  |   |     |    |  |  |            |  |  |   |     |  |  |  |  |  |  |   |         |        |   |   |        |  |        |   |    |  

The accompanying notes are an integral part of these statements.

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HOTEL RESERVATIONS NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share data)

|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |        |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------------------- | ---------------------------------------------------------- | ------- | ----------------------- | ------ | ------------ | -------- | ------- | ------ | -------- | -------- | --------- | ------ | ------------ | ------ | ------ | ------ | -
|                                                                                  |                                             |                                                                 |                                                            |         | Company                 |        | Predecessor 
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |             
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          | Period    |        | Period      
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          | May 11 to |        | January 1 to
|                                                                                  |                                             |                                                                 |                                                            |         | Year Ended December 31, |        | December 31, |          | May 10,
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |        
|                                                                                  |                                             |                                                                 |                                                            |         | 2001                    |        | 2000         |          | 1999    |        | 1999    
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |         
|Cash flows from operating activities:                                             |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Net income (loss)                                                                 |                                             | $                                                               | 12,907                                                     |         |                         | $      | 10,832       |          |         | $      | 4,122    |          |           | $      | (13,863      | )     
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|                                                                                  |                                             | Depreciation and amortization                                   |                                                            |         | 2,268                   |        |              |          | 725     |        |          |          | 340       |        |              |        | 119    |       
|                                                                                  |                                             | Amortization of goodwill                                        |                                                            |         | 46,394                  |        |              |          | 38,490  |        |          |          | 12,897    |        |              |        |       |       
|                                                                                  |                                             | Non-cash deferred distribution and marketing
costs              |                                                            |         | 16,976                  |        |              |          | 4,260   |        |          |          |          |        |              |        |       |       
|                                                                                  |                                             | Gain on marketable securities                                   |                                                            |         |                        |        |              |          |        |        |          |          |          |        |              |        | (471   | )     
|                                                                                  |                                             | Non-cash compensation charge                                    |                                                            |         |                        |        |              |          |        |        |          |          |          |        |              |        | 12,900 |       
|                                                                                  |                                             | Deferred income taxes                                           |                                                            |         | 4,416                   |        |              |          | (5,077  | )      |          |          | (1,587    | )      |              |        |       |       
|                                                                                  |                                             | Changes in current assets and liabilities, net of
acquisitions: |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |        |        |       
|                                                                                  |                                             |                                                                 | Restricted cash equivalents                                |         |                         | (7,086 | )            |          |         | (21    | )        |          |           | (2,000 | )            |        |        |       |  
|                                                                                  |                                             |                                                                 | Accounts and notes receivable                              |         |                         | (1,623 | )            |          |         | (3,097 | )        |          |           | (1,340 | )            |        |        | 20     |  
|                                                                                  |                                             |                                                                 | Prepaid hotel rooms                                        |         |                         | 263    |              |          |         | (688   | )        |          |           | (418   | )            |        |        | (179   | )
|                                                                                  |                                             |                                                                 | Accounts payable, trade                                    |         |                         | 22,047 |              |          |         | 14,082 |          |          |           | 4,759  |              |        |        | 7,123  |  
|                                                                                  |                                             |                                                                 | Deferred revenue                                           |         |                         | 5,972  |              |          |         | 14,774 |          |          |           | (2,846 | )            |        |        | 11,994 |  
|                                                                                  |                                             |                                                                 | Income tax payable                                         |         |                         | (5,331 | )            |          |         | 3,108  |          |          |           |       |              |        |        |       |  
|                                                                                  |                                             |                                                                 | Income tax benefit upon exercise of employee
stock options |         |                         | 4,036  |              |          |         | 199    |          |          |           |       |              |        |        |       |  
|                                                                                  |                                             |                                                                 | Due to USA, net                                            |         |                         | (698   | )            |          |         | 2,177  |          |          |           |       |              |        |        |       |  
|                                                                                  |                                             |                                                                 | Other accrued liabilities                                  |         |                         | 4,773  |              |          |         | 3,674  |          |          |           | 6,990  |              |        |        | (371   | )
|                                                                                  |                                             |                                                                 | Other current assets                                       |         |                         | (2,353 | )            |          |         | (1,355 | )        |          |           | (478   | )            |        |        | (49    | )
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Net cash provided by operating activities                                         |                                             |                                                                 | 102,961                                                    |         |                         |        | 82,083       |          |         |        | 20,439   |          |           |        | 17,223       |       
|Cash flows from investing activities:                                             |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|                                                                                  | Acquisitions, net of cash acquired          |                                                                 |                                                            | (54,129 | )                       |        |              | (5,000   | )       |        |          | (157,985 | )         |        |              |       |       
|                                                                                  | Capital expenditures                        |                                                                 |                                                            | (4,840  | )                       |        |              | (2,861   | )       |        |          | (1,092   | )         |        |              | (222   | )     
|                                                                                  | Purchase of intellectual property           |                                                                 |                                                            | (11,115 | )                       |        |              |         |         |        |          |         |           |        |              |       |       
|                                                                                  | Net purchases of marketable securities      |                                                                 |                                                            | (47,295 | )                       |        |              | (113,343 | )       |        |          | (1,500   | )         |        |              | (8,434 | )     
|                                                                                  | Investment in TravelNow.com                 |                                                                 |                                                            |        |                         |        |              | (3,240   | )       |        |          |         |           |        |              |       |       
|                                                                                  | Proceeds from sale of marketable securities |                                                                 |                                                            |        |                         |        |              |         |         |        |          | 996      |           |        |              | 11,631 |       
|                                                                                  | Other, net                                  |                                                                 |                                                            | 52      |                         |        |              | 4        |         |        |          | (238     | )         |        |              | 31     |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Net cash (used in) provided by investing activities                               |                                             |                                                                 | (117,327                                                   | )       |                         |        | (124,440     | )        |         |        | (159,819 | )        |           |        | 3,006        |       
|Cash flows from financing activities:                                             |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|                                                                                  | Net proceeds from issuance of stock         |                                                                 |                                                            |        |                         |        |              | 90,461   |         |        |          |         |           |        |              |       |       
|                                                                                  | Net proceeds from exercise of stock options |                                                                 |                                                            | 7,598   |                         |        |              |         |         |        |          |         |           |        |              |       |       
|                                                                                  | Capital contribution by USA                 |                                                                 |                                                            |        |                         |        |              |         |         |        |          | 182,313  |           |        |              |       |       
|                                                                                  | Dividend distribution to USA                |                                                                 |                                                            |        |                         |        |              |         |         |        |          | (40,000  | )         |        |              |       |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Net cash provided by financing activities                                         |                                             |                                                                 | 7,598                                                      |         |                         |        | 90,461       |          |         |        | 142,313  |          |           |        |             |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Net increase (decrease) in cash and cash
equivalents                              |                                             |                                                                 | (6,768                                                     | )       |                         |        | 48,104       |          |         |        | 2,933    |          |           |        | 20,229       |       
|Cash and cash equivalents at beginning of period                                  |                                             |                                                                 | 51,037                                                     |         |                         |        | 2,933        |          |         |        |         |          |           |        | 4,964        |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Cash and cash equivalents at end of period                                        |                                             | $                                                               | 44,269                                                     |         |                         | $      | 51,037       |          |         | $      | 2,933    |          |           | $      | 25,193       |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Supplemental Cash Flow Information:                                               |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Cash paid for interest                                                            |                                             | $                                                               |                                                           |         |                         | $      | 35           |          |         | $      |         |          |           | $      |             |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Cash paid for income taxes                                                        |                                             | $                                                               | 8,095                                                      |         |                         | $      | 8,651        |          |         | $      |         |          |           | $      |             |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Supplemental Disclosure of Non Cash Financing
Information:                        |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Contribution by USA of television advertising                                     |                                             | $                                                               | 546                                                        |         |                         | $      |             |          |         | $      |         |          |           | $      |             |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Contribution by USA to fund purchase price liability                              |                                             | $                                                               |                                                           |         |                         | $      | 58,484       |          |         | $      |         |          |           | $      |             |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       
|Issuance of warrants                                                              |                                             | $                                                               | 32,684                                                     |         |                         | $      | 17,708       |          |         | $      |         |          |           | $      |             |       
|                                                                                  |                                             |                                                                 |                                                            |         |                         |        |              |          |         |        |          |          |           |        |              |       

The accompanying notes are an integral part of these statements.

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HOTEL RESERVATIONS NETWORK, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION

Organization

Hotel Reservations Network, Inc. (Hotel Reservations Network or the
Company), a subsidiary of USA Networks, Inc. (USA), is a leading
consolidator of hotel and other lodging accommodations for resale in the
consumer market in North America, the Caribbean, Western Europe and Asia. On
May 10, 1999, Hotel Reservations Network, Inc. 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 Hotel Reservations Network services. TMF and Marketing are the
Companys predecessors (Predecessors). Until its acquisition by Hotel
Reservations Network Inc., TMF operated the Hotel Reservations Network.
Marketing, which was formed on August 17, 1998 and commenced operations in
October 1998, specialized in Internet marketing and provided, on a contract
basis, marketing, advertising, promotional activities and public relations to
TMF.

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.

Recapitalization

In conjunction with the Companys initial public offering, the Company
authorized capital of 600,000,000 shares of class A common stock, 150,000,000
shares of class B common stock and 20,000,000 shares of preferred stock.
Holders of class A common stock are entitled to one vote per share and holders
of class B common stock are entitled to 15 votes per share. USA was issued
38,999,100 shares of class B common stock in exchange for its equity interests.

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

For merchant revenues, charges for hotel 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 hotel.
For agent revenues, HRN recognizes commission revenues at the conclusion of the
customers stay at the hotel.

The Company offers rooms that are contracted for in advance or are
prepaid. Unsold contracted rooms may be returned by the Company based on a
cutoff period, which generally expires before 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 rooms cancelled by a customer subsequent to the cutoff period
in which the Company can return the unused rooms. To date, the Company has not
incurred significant losses under the room contracts with hotels.

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. Government agencies and certificates of deposit with original
maturities of less than three months when purchased.

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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, approximates their fair value due to the short maturity of the
respective instruments.

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 distribution and
marketing agreement with Travelocity, pursuant to which Travelocity markets
our 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 in July 31, 2005. During the years 2001 and
2000, 15.6% and 9.1%, respectively, of the Companys total
revenue was derived through the agreement. The Company expects the
proportion of its total revenue
derived through the Travelocity agreement to increase very slightly
or stabilize 2002 compared to 2001, and then to decline in subsequent
years.

Prepaid Hotel Rooms

Prepaid hotel rooms are carried at cost and are charged to expense at the
conclusion of the customers stay at the hotel. Management reviews the carrying
value of prepaid hotel rooms and provides adjustment for impairment, if
necessary. As of December 31, 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                   
|Intellectual property           |  | 5 to 15 years                   

Long-Lived Assets Including Intangibles

Goodwill and other intangible assets are amortized using the straight-line
method over their estimated period of benefit. Goodwill is amortized
over a period of 10 years while intangible assets are amortized over
a period ranging from one to 10 years.
The Company reviews the carrying value of long-lived assets if the facts and
circumstances suggest that they may be impaired. 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 2001, 2000 and 1999. See below under New Accounting Pronouncements for
further information related to goodwill and other intangible assets.

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Advertising

Advertising expense, excluding non-cash distribution and marketing costs,
for the years ended December 31, 2001 and 2000 was $10.6 million and $8.4
million, respectively. Advertising expense for the period January 1 to May 10,
1999 and the period May 11 to December 31, 1999 was $1.4 million and $5.2
million, respectively.

The Company capitalizes costs paid for advertising to specific target
audiences on third party Internet websites that have resulted in hotel room
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, 2001 and 2000, capitalized advertising was $198,000 and $193,000,
respectively. Other advertising costs are expensed in the period incurred.

Income Taxes

Subsequent to its Initial Public Offering in February 2000, the Company
files its federal and state income tax returns on a stand-alone basis. The
Companys income for the period May 11, 1999 through February 2000 is included
in USAs consolidated income tax returns. The Predecessor to the Company
elected to be taxed as an S corporation for Federal income tax purposes and
thus generally did not pay federal income taxes.

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, 2001 or 2000.

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
affiliation agreements. These warrants are either fully vested and
non-forfeitable at issuance, or they have certain performance features that
allow the affiliate 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 affiliate
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.

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New Accounting Pronouncement

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations effective for
business combinations after June 30, 2001, and 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 test in accordance with the statements. Other intangible assets
will continue to be amortized over their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Although it has not
completed its assessment, the Company does not anticipate any impairment
write-off upon adoption. Application of the non-amortization provisions of the
statement is expected to result in a reduction of annual amortization expense
by approximately $47.2 million per year. The new rules on business
combinations do not have any impact on the Company.

Reclassifications

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

NOTE 3  BUSINESS ACQUISITION

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 Web. 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 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. The resulting $47.8 million of goodwill is
being amortized over a life of 10 years. (See Note 2.)

In connection with the acquisition, the following assets were acquired and
liabilities were assumed (in thousands):

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Accounts receivable, net |  | $ | 903   | 
|Other current assets     |  |   | 119   | 
|Fixed assets             |  |   | 1,408 | 
|Accounts payable         |  |   | 1,097 | 
|Accrued expenses         |  |   | 909   | 
|Deferred revenue         |  |   | 486   | 

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 the Hotel Reservations Network service. The total
purchase price paid through December 31, 2000 is $406 million, which is
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 is being amortized over a life of ten years. (See
Note 2)

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NOTE 4  MARKETABLE SECURITIES  AVAILABLE FOR SALE

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. 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 | 
|                                                                |  |           |         |            |  |            |     |            |  |   |      |   |  |   |         | 

Total marketable securities have an aggregate face value of $164,280. The
contractual maturities of marketable securities were as follows (in thousands):

|                                    |  |            |         | 
|----------------------------------- |  | ---------- | ------- | 
|                                    |  | Face Value
|                                    |  |           
|Due in 1 year or less               |  | $          | 60,465  | 
|Due in 1 to 2 years                 |  |            | 6,680   | 
|Due in 2 to 5 years                 |  |            | 22,840  | 
|Due in over 5 years                 |  |            | 74,295  | 
|                                    |  |            |         | 
|Total investment in debt securities |  | $          | 164,280 | 
|                                    |  |            |         | 

Available-for-sale investments at December 31, 2000 were as follows (in
thousands):

|                            |  |           |         |            |  |            |     |         |  |   |     |   |  |   |         | 
|--------------------------- |  | --------- | ------- | ---------- |  | ---------- | --- | ------- |  | - | --- | - |  | - | ------- | 
|                            |  |           |         |            |  | Pre-tax    |     | Pre-tax |  |   |     |  
|                            |  | Amortized |         | Unrealized |  | Unrealized |     | Fair   
|                            |  | Cost      |         | Gain       |  | Loss       |     | Value  
|                            |  |           |         |            |  |            |     |        
|U.S. government securities  |  | $         | 31,051  |            |  | $          | 117 |         |  | $ | (11 | ) |  | $ | 31,157  | 
|Commercial paper            |  |           | 77,061  |            |  |            |    |         |  |   |    |   |  |   | 77,061  | 
|Certificates of deposit     |  |           | 10,175  |            |  |            | 20  |         |  |   |    |   |  |   | 10,195  | 
|                            |  |           |         |            |  |            |     |         |  |   |     |   |  |   |         | 
|Total marketable securities |  | $         | 118,287 |            |  | $          | 137 |         |  | $ | (11 | ) |  | $ | 118,413 | 
|                            |  |           |         |            |  |            |     |         |  |   |     |   |  |   |         | 

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 affiliate distribution and marketing
agreements, and at the completion of our initial public offering, the Company
issued warrants to third-party affiliated websites 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,
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 affiliation agreements, which range from two to
five years. During the twelve months ended December 31, 2001 and 2000, the
Company amortized $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 an affiliation and marketing 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 affiliation agreement with Travelocity to extend the
term of the agreement through July 31, 2005, and to broaden and expand the
affiliation 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

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which $4.96 million was amortized during the twelve-month period ending
December 31, 2001. The asset is being amortized ratably over the remaining term
of the affiliation agreement. Through December 31, 2001, 264,745 of the
remaining shares underlying the performance warrant had vested and become
exercisable, and the Company has recorded an aggregate of $6.40 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 affiliate 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 November 2000, the Company entered into an additional exclusive
affiliate distribution and marketing agreement and, in connection with it,
issued to the affiliate 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 affiliation agreement. During the twelve
months ended December 31, 2001 and 2000, the Company amortized $0.74 million
and $0.07 million of the warrant costs, respectively. In addition, the Company
agreed under the terms of the affiliation agreement to issue additional
warrants to purchase up to 985,369 shares of class A common stock to the
affiliate if the affiliate achieves certain performance targets. No warrants
were required to be issued under this agreement during the years ended December
31, 2001 and 2000.

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

As
of December 31, 2001, 263,817 of the non-performance warrants to purchase
class A common shares issued to the affiliates remained unexercised.

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):

|                                                                                         |  |      |        |      |  |      |       |  |  |   |       | 
|---------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                         |  | 2001 |        | 2000 |  | 1999
|                                                                                         |  |      |        |      |  |     
|Income tax expense at the federal statutory rate of 35%
in 2001 and 2000 and 34% in 1999 |  | $    | 8,443  |      |  | $    | 6,165 |  |  | $ | 2,225 | 
|State income taxes, net of effect of federal tax benefit                                 |  |      | 522    |      |  |      | 617   |  |  |   | 196   | 
|                                                                                         |  |      |        |      |  |      |       |  |  |   |       | 
|Non-deductible goodwill                                                                  |  |      | 5,242  |      |  |      |      |  |  |   |      | 
|Investment income from tax-exempt securities                                             |  |      | (1,149 | )    |  |      |      |  |  |   |      | 
|Warrant exercises                                                                        |  |      | (1,695 | )    |  |      |      |  |  |   |      | 
|Other                                                                                    |  |      | (146   | )    |  |      |      |  |  |   |      | 
|Income tax expense                                                                       |  | $    | 11,217 |      |  | $    | 6,782 |  |  | $ | 2,421 | 
|                                                                                         |  |      |        |      |  |      |       |  |  |   |       | 

The components of income tax expense are as follows:

|                                       |         |                                       |        |       |       |      |       |        |        |   |       |        |        |  
|-------------------------------------- | ------- | ------------------------------------- | ------ | ----- | ----- | ---- | ----- | ------ | ------ | - | ----- | ------ | ------ | -
|                                       |         |                                       |        | 2001  |       | 2000 |       | 1999  
|                                       |         |                                       |        |       |       |      |       |       
|Current income tax expense (benefit):  |         |                                       |        |       |       |      |       |        |        |   |       |       
|                                       | Federal |                                       | $      | 6,182 |       |      | $     | 10,781 |        |   | $     | 3,520  |       
|                                       | State   |                                       |        | 619   |       |      |       | 1,078  |        |   |       | 488    |       
|                                       |         |                                       |        |       |       |      |       |        |        |   |       |       
|                                       |         | Current income tax expense            |        |       | 6,801 |      |       |        | 11,859 |   |       |        | 4,008  |  
|Deferred income tax expense (benefit): |         |                                       |        |       |       |      |       |        |        |   |       |       
|                                       | Federal |                                       |        | 4,015 |       |      |       | (4,616 | )      |   |       | (1,393 | )     
|                                       | State   |                                       |        | 401   |       |      |       | (461   | )      |   |       | (194   | )     
|                                       |         |                                       |        |       |       |      |       |        |        |   |       |       
|                                       |         | Deferred income tax expense (benefit) |        |       | 4,416 |      |       |        | (5,077 | ) |       |        | (1,587 | )
|                                       |         |                                       |        |       |       |      |       |        |        |   |       |       
|Total net income tax expense           |         | $                                     | 11,217 |       |       | $    | 6,782 |        |        | $ | 2,421 |       
|                                       |         |                                       |        |       |       |      |       |        |        |   |       |       

The net deferred tax asset of $2.3 million as of December 31, 2001 is
related to (a) the tax effects of cumulative temporary differences arising from
the amortization of goodwill, which is amortized over 10 years for

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book purposes and 15 years for tax purposes and (b) the tax effects of
cumulative temporary differences arising from the treatment of non-performance
warrants issued to affiliates. 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 affiliate agreement. The effective tax rate
is 46.5%, which reflects the federal statutory rate and applicable state income
tax rates.

The Companys effective tax rate has increased to 46.5% for the twelve
months ended December 31, 2001 as a result of (a) a decrease in estimated value
of goodwill for income tax purposes determined in the third quarter associated
with restricted shares of class A common stock issued to the sellers of our
predecessor business immediately prior to our initial public offering, (b)
non-deductibility of goodwill from the TravelNow acquisition, (c) the exemption
of municipal security income from federal income taxes, and (d) the difference
between the gain earned by warrant holders upon exercise and the fair value of
the warrants upon issuance.

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 total $3.7 million and are $1.6 million, $0.8
million, $0.3 million, $0.3 million, $0.2 million and $0.5 million in the years
2002, 2003, 2004, 2005, 2006 and thereafter, respectively. Expenses charged to
operations under these leases were $1.7 million and $0.9 million for the years
ended December 31, 2001 and 2000, respectively and $0.1 million and $0.4
million for the period from January 1 to May 10, 1999 and the period May 11 to
December 31, 1999, respectively.

At December 31, 2001, the Company has $6.7 million of outstanding letters
of credit that expire between March 2002 and March 2003. The outstanding
letters of credit are collateralized by $7.6 million of restricted cash
equivalents.

As of December 31, 2001, the Company has non-cancelable commitments for
hotel rooms totaling $3.2 million, which relate to the period January 1, 2002
to December 31, 2002. Furthermore, the Company has non-cancelable commitments
under advertising contracts with third party Internet websites totaling $3.3
million as of December 31, 2001.

NOTE 8  LITIGATION

In the ordinary course of business, the Company is engaged in various
lawsuits; however, the Company is not currently involved in any material legal
proceedings. In the opinion of management, the ultimate outcome of the various
lawsuits should not have a material impact on the liquidity, results of
operations or financial condition of the Company.

NOTE 9  RELATED PARTY TRANSACTIONS

During the year, USA contributed $0.5 million of television advertising
for which the Company paid no consideration. This amount is recorded as a
non-cash distribution and marketing expense.

The Company has arrangements with Ticketmaster LLC (Ticketmaster), a
subsidiary of USA, that allows Ticketmaster to sell hotel rooms to their
customers. Furthermore, the Company entered into an arrangement with
Ticketmaster and Precision Response Corporation (PRC) for outsourced call
center services. For the year ended December 31, 2001, the Company incurred
fees of $1.9 million under the arrangements with Ticketmaster. For the year
ended December 31, 2000, the Company incurred fees of $0.3 million and $1.5
million under the arrangements with Ticketmaster and PRC, respectively. For
the period May 11 to December 31, 1999, the Company incurred fees of $0.09
million under its arrangements with Ticketmaster.

The Company entered into an arrangement with Ticketmaster which operates
the CitySearch.com website. Under the arrangement, Ticketmaster will market the
Companys hotel products via the Internet in return for (1) links from the
Companys websites and newsletters to the CitySearch.com and Ticketmaster.com
websites and (2) a 5% commission on the gross revenues generated from rooms
booked through the CitySearch.com site. The commission paid to Ticketmaster for
the years ended December 31, 2001 and 2000 was $0.02 million, respectively.

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NOTE 10  NON-RECURRING ACQUISITION RELATED COSTS

During the period January 1 to May 10, 1999, the Predecessor paid
discretionary compensation and bonuses of $398,000 to its employees (other than
Messrs. Diener and Litman, the principal owners of the predecessor) and
incurred professional and advisory fees of $159,000 related directly to the
acquisition.

In connection with the sale of substantially all the assets of TMF and
Marketing, the principal owners entered into an agreement to pay an executive
of TMF for past services 5% of all net sales proceeds, including all contingent
payments, received by the principal owners in connection with the sale. During
the period January 1 to May 10, 1999, the Predecessor recorded a charge of
$19.7 million in connection with this obligation, of which $6.8 million was
paid in cash at the time of closing and $12.9 million represents an estimate of
the amount to be satisfied directly by the sellers of the predecessor company.
Accordingly the Company has treated the $12.9 million as a non-cash
compensation charge in the statement of cash flows.

NOTE 11  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 $41,000 and $24,000 for the years
ended December 31, 2001 and 2000, respectively. For the period January 1 to
May 10, 1999 and for the period May 11 to December 31, 1999 the expense was
$6,000 and $11,000, respectively.

Stock Option Plan

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

A total of 5,400,000 shares of class A common stock was reserved for
issuance under the 2000 Stock Plan (the Stock Option Plan) for the grants of
incentive stock options to employees, including officers and employee
directors, and for grants of non-statutory stock options and stock purchase
rights, or SPRs, to employees, directors and consultants, and employees of
affiliates. 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.

41



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##### Table of Contents



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:

|                                 |  |        |           |             |  |                |              |  |  |                  |       | 
|-------------------------------- |  | ------ | --------- | ----------- |  | -------------- | ------------ |  |  | ---------------- | ----- | 
|                                 |  |        |           |             |  |                |              |  |  | Weighted Average
|                                 |  | Shares |           | Price Range |  | Exercise Price
|                                 |  |        |           |             |  |               
|Outstanding at January 1, 2000   |  |        |           |             |  |                |              |  |  |                  |       | 
|Granted                          |  |        | 2,150,117 |             |  | $              | 15.50-$39.00 |  |  | $                | 19.87 | 
|Exercised                        |  |        | (25,000   | )           |  |                | $16.00       |  |  | $                | 16.00 | 
|Cancelled                        |  |        | (306,218  | )           |  | $              | 16.00-$31.88 |  |  | $                | 18.15 | 
|                                 |  |        |           |             |  |                |              |  |  |                  |       | 
|Outstanding at December 31, 2000 |  |        | 1,818,899 |             |  | $              | 16.00-$39.00 |  |  | $                | 20.21 | 
|Granted                          |  |        | 1,794,154 |             |  | $              | 20.06-$44.03 |  |  | $                | 31.63 | 
|Exercised                        |  |        | (429,615  | )           |  | $              | 15.50-$34.88 |  |  | $                | 17.69 | 
|Cancelled                        |  |        | (485,615  | )           |  | $              | 16.00-$44.03 |  |  | $                | 29.20 | 
|                                 |  |        |           |             |  |                |              |  |  |                  |       | 
|Outstanding at December 31, 2001 |  |        | 2,697,823 |             |  | $              | 15.50-$44.03 |  |  | $                | 26.59 | 
|                                 |  |        |           |             |  |                |              |  |  |                  |       | 

The weighted average fair value of options granted during the year was
$25.79.

|               |  |                     |         |                     |  |          |     |                   |  |          |       |  |  |          |         |  |  |   |       | 
|-------------- |  | ------------------- | ------- | ------------------- |  | -------- | --- | ----------------- |  | -------- | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|               |  | December 31, 2001  
|               |  |                    
|               |  | Options Outstanding |         | Options Exercisable
|               |  |                     |         |                    
|               |  |                     |         |                     |  | Weighted |     | Weighted          |  |          |       |  |  | Weighted
|               |  | Outstanding         |         | Average             |  | Average  |     | Exercisable       |  | Average 
|Range of       |  | at                  |         | Remaining           |  | Exercise |     | at                |  | Exercise
|Exercise Price |  | December 31, 2001   |         | Contractual Life    |  | Price    |     | December 31, 2001 |  | Price   
|               |  |                     |         |                     |  |          |     |                   |  |         
|$13.21-$17.61  |  |                     | 891,946 |                     |  |          | 7.8 |                   |  | $        | 15.96 |  |  |          | 180,026 |  |  | $ | 16.00 | 
|$17.61-$22.02  |  |                     | 137,857 |                     |  |          | 9.1 |                   |  | $        | 20.13 |  |  |          | 7,375   |  |  | $ | 20.38 | 
|$22.02-$26.42  |  |                     | 634,978 |                     |  |          | 9.0 |                   |  | $        | 24.73 |  |  |          |        |  |  |   |      | 
|$26.42-$30.82  |  |                     | 77,376  |                     |  |          | 8.5 |                   |  | $        | 29.74 |  |  |          | 19,691  |  |  | $ | 29.74 | 
|$30.82-$35.22  |  |                     | 338,538 |                     |  |          | 8.7 |                   |  | $        | 33.00 |  |  |          | 40,904  |  |  | $ | 33.01 | 
|$35.22-$39.63  |  |                     | 280,000 |                     |  |          | 9.2 |                   |  | $        | 38.20 |  |  |          | 56,248  |  |  | $ | 38.39 | 
|$39.63-$44.03  |  |                     | 337,128 |                     |  |          | 8.6 |                   |  | $        | 44.03 |  |  |          |        |  |  |   |      | 

|               |  |                   |           |                  |  |                  |     |  |  |   |       | 
|-------------- |  | ----------------- | --------- | ---------------- |  | ---------------- | --- |  |  | - | ----- | 
|               |  | December 31, 2000
|               |  |                  
|               |  | Outstanding       |           | Weighted Average |  |                  |     | 
|Range of       |  | at                |           | Remaining        |  | Weighted Average
|Exercise Price |  | December 31, 2000 |           | Contractual Life |  | Exercise Price  
|               |  |                   |           |                  |  |                 
|$15.50-$19.50  |  |                   | 1,344,353 |                  |  |                  | 8.9 |  |  | $ | 15.96 | 
|$19.51-$27.30  |  |                   | 54,408    |                  |  |                  | 9.2 |  |  | $ | 20.38 | 
|$27.31-$31.20  |  |                   | 99,938    |                  |  |                  | 9.0 |  |  | $ | 29.75 | 
|$31.21-$35.10  |  |                   | 220,200   |                  |  |                  | 9.4 |  |  | $ | 33.24 | 
|$35.11-$39.00  |  |                   | 100,000   |                  |  |                  | 9.7 |  |  | $ | 39.00 | 
|               |  |                   |           |                  |  |                  |     |  |  |   |       | 
|               |  |                   | 1,818,899 |                  |  |                  | 9.1 |  |  | $ | 20.21 | 
|               |  |                   |           |                  |  |                  |     |  |  |   |       | 

No options were exercisable at December 31, 2000.

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

Pro forma information regarding net income and earnings per share is
required by SFAS 123 for awards granted during the years ended December 31,
2001 and 2000 as if the Company had accounted for its stock-based awards to
employees under the fair value method of SFAS 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

42



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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. For
2001, the fair value of the Companys stock-based awards to employees was
estimated assuming expected average option life of 5 years, expected volatility
of 100%, an average risk-free interest rate of 4.1308% and no payment of
dividends. For 2000, the fair value of the Companys stock-based awards to
employees was estimated assuming expected average option life of 5 years,
expected volatility of 100%, a risk-free interest rate ranging from 5.77% to
6.65% and no payment of dividends.

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):

|                                               |  |      |       |      |  |   |       | 
|---------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                               |  | 2001 |       | 2000
|                                               |  |      |       |     
|Pro forma net income                           |  | $    | 9,502 |      |  | $ | 8,509 | 
|Pro forma basic and diluted earnings per share |  | $    | 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 12  EARNINGS PER SHARE DATA

Basic earnings (loss) per share is computed by dividing net income (loss)
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 697,128 and
416,758 were excluded from the computation for the years ended December 31,
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):

|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |        |  
|------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------- | ------ | ------------ | - | ------- | ------ | ---- | - | ---------- | ------ | ------------ | - | ----------- | ------ | -
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   | Period     |        | Period      
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   | May 11, to |        | January 1 to
|                                |                                                                                                                                               |   | Year Ended December 31, |        | December 31, |   | May 10,
|                                |                                                                                                                                               |   |                         |        |              |   |        
|                                |                                                                                                                                               |   | 2001                    |        | 2000         |   | 1999    |        | 1999
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |     
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   | (Pro Forma)
|Numerator:                      |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       
|                                | Net income (loss)                                                                                                                             |   | $                       | 12,907 |              |   | $       | 10,832 |      |   | $          | 4,122  |              |   | $           | (8,734 | )
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       
|Denominator:                    |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       
|                                | Denominator for basic income per share
 weighted average shares outstanding                                                                  |   |                         | 56,260 |              |   |         | 52,774 |      |   |            | 38,999 |              |   |             | 38,999 |  
|                                | Employee stock options and stock warrants                                                                                                     |   |                         | 1,083  |              |   |         | 806    |      |   |            |       |              |   |             |       |  
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       
|                                | Denominator for diluted income (loss)
per share  adjusted weighted average
shares outstanding, assuming exercise of
common equivalent shares |   |                         | 57,343 |              |   |         | 53,580 |      |   |            | 38,999 |              |   |             | 38,999 |  
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       
|Basic income (loss) per share   |                                                                                                                                               | $ | 0.23                    |        |              | $ | 0.21    |        |      | $ | 0.11       |        |              | $ | (0.22       | )     
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       
|Diluted income (loss) per share |                                                                                                                                               | $ | 0.23                    |        |              | $ | 0.20    |        |      | $ | 0.11       |        |              | $ | (0.22       | )     
|                                |                                                                                                                                               |   |                         |        |              |   |         |        |      |   |            |        |              |   |             |       

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NOTE 13  SELECTED QUARTERLY RESULTS (UNAUDITED)

|                                     |  |                                       |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|------------------------------------ |  | ------------------------------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | ------- |  |  | - | ------- | 
|                                     |  | 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 revenues                         |  | $                                     | 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    | 

|                                   |  |                                       |         |               |  |               |        |               |  |   |        |  |  |   |        | 
|---------------------------------- |  | ------------------------------------- | ------- | ------------- |  | ------------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                   |  | Year Ended December 31, 2000         
|                                   |  |                                      
|                                   |  | Quarter Ended                         |         | Quarter Ended |  | Quarter Ended |        | Quarter Ended
|                                   |  | December 31,                          |         | September 30, |  | June 30,      |        | March 31,    
|                                   |  |                                       |         |               |  |               |        |              
|                                   |  | (In thousands, except per share data)
|Net revenues                       |  | $                                     | 100,014 |               |  | $             | 94,618 |               |  | $ | 78,082 |  |  | $ | 55,263 | 
|Operating profit                   |  |                                       | 5,515   |               |  |               | 1,900  |               |  |   | 885    |  |  |   | 866    | 
|Net Income (loss)                  |  |                                       | 5,153   |               |  |               | 2,764  |               |  |   | 1,750  |  |  |   | 1,165  | 
|Basic earnings per common share(a) |  | $                                     | 0.09    |               |  | $             | 0.05   |               |  | $ | 0.03   |  |  | $ | 0.03   | 
|Diluted earnings per common share  |  | $                                     | 0.09    |               |  | $             | 0.05   |               |  | $ | 0.03   |  |  | $ | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

44



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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 HRNs definitive Proxy Statement to be used
in connection with the 2002 Annual Meeting of Stockholders (the 2002 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 directors and executive officers of HRN is set
forth in the section entitled Item 1Election of Directors and Management
Information in the 2002 Proxy Statement and is incorporated herein by
reference.




Item 11.Executive Compensation

Information regarding compensation of officers and directors of HRN is set
forth in the section entitled Executive Compensation in the 2002 Proxy
Statement and is incorporated herein by reference.




Item 12.Security Ownership of Certain Beneficial Owners and Management

Information regarding ownership of HRNs class A common stock and class B
common stock is set forth in the section entitled Security Ownership of
Certain Beneficial Owners and Management in the 2002 Proxy Statement and is
incorporated herein by reference.




Item 13.Certain Relationships and Related Party Transactions

Information regarding certain relationships and related transactions with
HRN is set forth in the section entitled Certain Relationships and Related
Party Transactions in the 2002 Proxy Statement and is incorporated herein by
reference.

45



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##### Table of Contents






PART IV




Item 14.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
|                                 |                                                                                                                                                                                 |  |     
|Hotel Reservations Network, Inc. |                                                                                                                                                                                 |  |      |   
|                                 |                                                                                                                                                                                 |  |      |   
|                                 | Reports of Independent Auditors                                                                                                                                                 |  |      | 27 | 
|                                 | Consolidated Balance Sheets at December 31, 2001 and 2000                                                                                                                       |  |      | 29 | 
|                                 | Consolidated Statements of Operations for the years ended December
31, 2001 and 2000 and for the period from May 11 to December 31,
1999                                        |  |      | 30 | 
|                                 | Combined Statement of Operations of TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp. (Predecessor) for
the period from January 1 to May 10, 1999            |  |      | 30 | 
|                                 | Consolidated Statements of Stockholders Equity for the years
ended December 31, 2001 and 2000 and for the period from May 11 to
December 31, 1999                              |  |      | 31 | 
|                                 | Combined Statement of Stockholders Deficit of TMF, Inc. (d/b/a
Hotel Reservations Network) and HRN Marketing Corp. (Predecessor)
for the period from January 1 to May 10, 1999 |  |      | 31 | 
|                                 | Consolidated Statements of Cash Flows for the years ended December
31, 2001 and 2000 and for the period from May 11 to December 31,
1999                                        |  |      | 33 | 
|                                 | Combined Statement of Cash Flows of TMF, Inc. (d/b/a Hotel
Reservations Network) and HRN Marketing Corp. (Predecessor) for
the period from January 1 to May 10, 1999            |  |      | 33 | 
|                                 | Notes to Financial Statements                                                                                                                                                   |  |      | 34 | 



| | (3) |  | Exhibits
| | --- |  | --------

|               |  |                                                                                                                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                        
|3.1            |  | Restated Certificate of Incorporation (filed as Exhibit 3.2
to HRNs Registration Statement on Form S-1 (Registration
No. 333-90601), and incorporated herein by reference).                                                                                                                                           
|              
|3.2            |  | Form of Restated Bylaws (filed as Exhibit 3.3 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                                                                                         
|              
|4.1            |  | Specimen class A common stock certificate (filed as Exhibit
4.1 to HRNs Registration Statement on Form S-1
(Registration No. 333-90601), and incorporated herein by
reference).                                                                                                                                       
|              
|10.1           |  | Assumption Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc. (filed as Exhibit 10.1 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                           
|              
|10.2           |  | Tax Sharing Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc. (filed as Exhibit 10.2 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                          
|              
|10.3           |  | 2000 Stock Option Plan (filed as Exhibit 10.3 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                                                                                         
|              
|10.4           |  | Directors Stock Option Plan (filed as Exhibit 10.4 to
HRNs Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                                                                                   
|              
|10.5           |  | Amended and Restated Asset Purchase Agreement by and among
Hotel Reservations Network, Inc., USA Networks, Inc., TMF,
Inc., HRN Marketing Corp., David Litman and Robert Diener
(filed as Exhibit 10.5 to HRNs Registration Statement on
Form S-1 (Registration No. 333-90601), and incorporated
herein by reference).
|              
|10.6           |  | Employment Agreement with Sandra DArcy (filed as Exhibit
10.9 to HRNs Registration Statement on Form S-1
(Registration No. 333-90601), and incorporated herein by
reference).                                                                                                                                        
|              
|10.7           |  | Employment Agreement with Mel Robinson (filed as Exhibit
10.1 to HRNs Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, and incorporated
herein by reference).                                                                                                                         
|              
|21.1           |  | Subsidiaries of HRN                                                                                                                                                                                                                                                                                                    
|              
|23.1           |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                           



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

(1)  HRN furnished a Current Report on Form 8-K dated October 22, 2001
(Item 9) which reported HRNs financial results for the third quarter of 2001.

46



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##### Table of Contents



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

| |  |                                                       
| |  | ------------------------------------------------------
| |  | Hotel Reservations Network, Inc.                      
|
| |  | /s/ David Litman
David 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 Litman
David Litman              |  | Chief Executive Officer and Director
(Principal Executive Officer)                 |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Robert Diener

Robert Diener           |  | President and Director                                                             |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Mel Robinson

Mel Robinson             |  | Chief Financial and Strategic Officer
(Principal Financial and Accounting
Officer) |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Beverly Harms

Beverly Harms           |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Victor A. Kaufman

Victor A. Kaufman   |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Dara Khosrowshahi

Dara Khosrowshahi   |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Jon Miller

Jon Miller                 |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Eli Segal

Eli Segal                   |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Julius Genachowski

Julius Genachowski |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Dan Marriott

Dan Marriott             |  | Director                                                                           |  | March 28, 2002
|                                           |  |                                                                                    |  |               
|/s/ Elan J. Blutinger

Elan J. Blutinger   |  | Director                                                                           |  | March 28, 2002

47



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##### Table of Contents



EXHIBIT INDEX

|               |  |                                                                                                                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                        
|3.1            |  | Restated Certificate of Incorporation (filed as Exhibit 3.2
to HRNs Registration Statement on Form S-1 (Registration
No. 333-90601), and incorporated herein by reference).                                                                                                                                           
|              
|3.2            |  | Form of Restated Bylaws (filed as Exhibit 3.3 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                                                                                         
|              
|4.1            |  | Specimen class A common stock certificate (filed as Exhibit
4.1 to HRNs Registration Statement on Form S-1
(Registration No. 333-90601), and incorporated herein by
reference).                                                                                                                                       
|              
|10.1           |  | Assumption Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc. (filed as Exhibit 10.1 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                           
|              
|10.2           |  | Tax Sharing Agreement between Hotel Reservations Network,
Inc. and USA Networks, Inc. (filed as Exhibit 10.2 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                          
|              
|10.3           |  | 2000 Stock Option Plan (filed as Exhibit 10.3 to HRNs
Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                                                                                         
|              
|10.4           |  | Directors Stock Option Plan (filed as Exhibit 10.4 to
HRNs Registration Statement on Form S-1 (Registration No.
333-90601), and incorporated herein by reference).                                                                                                                                                   
|              
|10.5           |  | Amended and Restated Asset Purchase Agreement by and among
Hotel Reservations Network, Inc., USA Networks, Inc., TMF,
Inc., HRN Marketing Corp., David Litman and Robert Diener
(filed as Exhibit 10.5 to HRNs Registration Statement on
Form S-1 (Registration No. 333-90601), and incorporated
herein by reference).
|              
|10.6           |  | Employment Agreement with Sandra DArcy (filed as Exhibit
10.9 to HRNs Registration Statement on Form S-1
(Registration No. 333-90601), and incorporated herein by
reference).                                                                                                                                        
|              
|10.7           |  | Employment Agreement with Mel Robinson (filed as Exhibit
10.1 to HRNs Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, and incorporated
herein by reference).                                                                                                                         
|              
|21.1           |  | Subsidiaries of HRN                                                                                                                                                                                                                                                                                                    
|              
|23.1           |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                           

48