##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
________________________


FORM 10-Q

(Mark One)

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[x] |  | Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2002

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

for the Transition Period from                      to

COMMISSION FILE NUMBER: 0-29575

HOTELS.COM

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|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 principal executive offices)

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

(Former name, former address and former fiscal year if changed since last report)



---



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

Indicate the number of shares outstanding of each of the issuers classes
of common stock as of September 30, 2002.

|                     |  |  |            | 
|-------------------- |  |  | ---------- | 
|Class                |  |  |            | 
|                     |  |  |            | 
|Class A Common Stock |  |  | 18,810,751 | 
|Class B Common Stock |  |  | 38,999,100 | 





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TABLE OF CONTENTS



|                               |                                                                                               |                                                                    |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.                                         
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                             
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME             
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW          
|                               |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|                               | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION   
|                               | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|CERTIFICATIONS                



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##### Table of Contents



HOTELS.COM
FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

|                               |                                                                                               |                                                                                                                       |    |          |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                               |                                                                                               |                                                                                                                       |    | Page No.
|                               |                                                                                               |                                                                                                                       |    |         
|PART I  FINANCIAL INFORMATION |                                                                                               |                                                                                                                       |    |         
|                               | Item 1. Condensed Consolidated Financial Statements                                           |                                                                                                                       |    |          |  
|                               |                                                                                               | Condensed Consolidated Balance Sheets as of September 30,
2002 (unaudited) and December 31, 2001                      |    |          | 3 | 
|                               |                                                                                               | Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and 2001 |    |          | 4 | 
|                               |                                                                                               | Unaudited
Condensed Consolidated Statement of
Stockholders Equity for the Nine Months Ended September 30,
2002       |    |          | 5 | 
|                               |                                                                                               | Unaudited Condensed Consolidated Statements of Cash Flow for
the Nine Months Ended September 30, 2002 and 2001        |    |          | 6 | 
|                               |                                                                                               | Notes to Unaudited Condensed Consolidated Financial Statements                                                        |    |          | 7 | 
|                               | Item 2.
Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                       |    | 9        |  
|                               | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             |                                                                                                                       |    | 16       |  
|                               | Item 4. Controls and Procedures                                                               |                                                                                                                       |    | 17       |  
|PART II  OTHER INFORMATION    |                                                                                               |                                                                                                                       |    |         
|                               | Item 1. Legal Proceedings                                                                     |                                                                                                                       |    | 18       |  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                       |    | 18       |  
|SIGNATURES                     |                                                                                               |                                                                                                                       | 19 |         
|CERTIFICATIONS                 |                                                                                               |                                                                                                                       | 20 |         





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##### Table of Contents












PART I  FINANCIAL INFORMATION

ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

HOTELS.COM
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |              |         |  |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------- | ------------- | ------- | ------------ | ------- |  |  | 
|                                                                                                                                                                             |                                                |                            |                                      |        |         | September 30, |         | December 31,
|                                                                                                                                                                             |                                                |                            |                                      |        |         | 2002          |         | 2001        
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         | (Unaudited)   |         |              |         | 
|                                                                                                                                                                             |                                                |                            |                                      | ASSETS |         |               |         |              |         |  |  | 
|CURRENT ASSETS                                                                                                                                                               |                                                |                            |                                      |        |         |               |         |             
|Cash and cash equivalents                                                                                                                                                    |                                                | $                          | 2,404                                |        |         | $             | 44,269  |             
|Restricted cash equivalents                                                                                                                                                  |                                                |                            | 12,117                               |        |         |               | 9,107   |             
|Marketable securities  available for sale                                                                                                                                   |                                                |                            | 382,625                              |        |         |               | 165,581 |             
|Accounts and notes receivable, net of allowance of $129 at September 30, 2002,
and $132 at December 31, 2001                                                                 |                                                |                            | 14,048                               |        |         |               | 7,096   |             
|Prepaid hotel rooms                                                                                                                                                          |                                                |                            | 623                                  |        |         |               | 1,363   |             
|Current portion of non-cash deferred distribution and marketing costs                                                                                                        |                                                |                            | 8,272                                |        |         |               | 10,195  |             
|Deferred income taxes                                                                                                                                                        |                                                |                            | 4,098                                |        |         |               | 4,740   |             
|Other                                                                                                                                                                        |                                                |                            | 8,027                                |        |         |               | 4,712   |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                | Total current assets       |                                      |        | 432,214 |               |         |              | 247,063 | 
|PROPERTY AND EQUIPMENT                                                                                                                                                       |                                                |                            |                                      |        |         |               |         |             
|Computer equipment and software                                                                                                                                              |                                                |                            | 15,873                               |        |         |               | 7,862   |             
|Buildings and leasehold improvements                                                                                                                                         |                                                |                            | 1,115                                |        |         |               | 995     |             
|Furniture and other equipment                                                                                                                                                |                                                |                            | 3,284                                |        |         |               | 2,597   |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                |                            | 20,272                               |        |         |               | 11,454  |             
|                                                                                                                                                                             | Less accumulated depreciation and amortization |                            |                                      | (4,949 | )       |               |         | (2,755       | )      
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                |                            | 15,323                               |        |         |               | 8,699   |             
|OTHER ASSETS                                                                                                                                                                 |                                                |                            |                                      |        |         |               |         |             
|Goodwill                                                                                                                                                                     |                                                |                            | 362,504                              |        |         |               | 362,464 |             
|Non-cash deferred distribution and marketing costs, less current portion                                                                                                     |                                                |                            | 13,785                               |        |         |               | 19,508  |             
|Intellectual property, net of amortization of $1,755 at September 30, 2002 and
$371 at December 31, 2001                                                                     |                                                |                            | 22,037                               |        |         |               | 10,834  |             
|Other assets                                                                                                                                                                 |                                                |                            | 31                                   |        |         |               | 8       |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                | $                          | 845,894                              |        |         | $             | 648,576 |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                |                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |         |               |         |              |         |  | 
|CURRENT LIABILITIES                                                                                                                                                          |                                                |                            |                                      |        |         |               |         |             
|Accounts payable, trade                                                                                                                                                      |                                                | $                          | 92,038                               |        |         | $             | 53,679  |             
|Deferred revenue                                                                                                                                                             |                                                |                            | 93,245                               |        |         |               | 37,679  |             
|Income tax payable                                                                                                                                                           |                                                |                            | 16,706                               |        |         |               | 1,736   |             
|Intercompany payable                                                                                                                                                         |                                                |                            | 1,345                                |        |         |               | 1,394   |             
|Other accrued liabilities                                                                                                                                                    |                                                |                            | 16,288                               |        |         |               | 9,759   |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                | Total current liabilities  |                                      |        | 219,622 |               |         |              | 104,247 | 
|DEFERRED INCOME TAXES                                                                                                                                                        |                                                |                            | 5,144                                |        |         |               | 2,441   |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                |                                                |                            |                                     |        |         |               |        |             
|STOCKHOLDERS EQUITY                                                                                                                                                         |                                                |                            |                                      |        |         |               |         |             
|Preferred stock, $.01 par value; 20,000,000 shares authorized,
none outstanding                                                                                              |                                                |                            |                                     |        |         |               |        |             
|Class A common stock, $.01 par value; 600,000,000 shares authorized,
18,810,751 and 18,138,452 shares outstanding at September 30, 2002, and
December 31, 2001, respectively |                                                |                            | 188                                  |        |         |               | 182     |             
|Class B common stock, $.01 par value; 150,000,000 shares authorized,
38,999,100 shares outstanding at September 30, 2002 and December 31, 2001                               |                                                |                            | 390                                  |        |         |               | 390     |             
|Additional paid-in capital                                                                                                                                                   |                                                |                            | 538,277                              |        |         |               | 513,456 |             
|Accumulated other comprehensive income (loss)                                                                                                                                |                                                |                            | 56                                   |        |         |               | (1      | )           
|Retained earnings                                                                                                                                                            |                                                |                            | 82,217                               |        |         |               | 27,861  |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                | Total stockholders equity |                                      |        | 621,128 |               |         |              | 541,888 | 
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             
|                                                                                                                                                                             |                                                | $                          | 845,894                              |        |         | $             | 648,576 |             
|                                                                                                                                                                             |                                                |                            |                                      |        |         |               |         |             

The accompanying notes are an integral part of these statements.

3



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HOTELS.COM
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|----------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | 
|                                                                                    |  | Three Months        |         | Nine Months        
|                                                                                    |  | Ended September 30, |         | Ended September 30,
|                                                                                    |  |                     |         |                    
|                                                                                    |  | 2002                |         | 2001                |  | 2002 |         | 2001
|                                                                                    |  |                     |         |                     |  |      |         |     
|Revenues                                                                            |  | $                   | 277,386 |                     |  | $    | 151,241 |      |  | $ | 672,814 |   |  | $ | 394,829 | 
|Cost of revenues                                                                    |  |                     | 192,233 |                     |  |      | 105,692 |      |  |   | 466,754 |   |  |   | 274,755 | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Gross profit                                                                        |  |                     | 85,153  |                     |  |      | 45,549  |      |  |   | 206,060 |   |  |   | 120,074 | 
|Operating expenses                                                                  |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Selling, general and administrative                                                 |  |                     | 45,661  |                     |  |      | 23,774  |      |  |   | 107,920 |   |  |   | 61,483  | 
|Non-cash distribution and marketing                                                 |  |                     | 4,748   |                     |  |      | 3,547   |      |  |   | 14,856  |   |  |   | 12,211  | 
|Amortization of goodwill                                                            |  |                     |        |                     |  |      | 11,827  |      |  |   |        |   |  |   | 34,610  | 
|Depreciation                                                                        |  |                     | 612     |                     |  |      | 265     |      |  |   | 1,562   |   |  |   | 701     | 
|Amortizationother                                                                  |  |                     | 843     |                     |  |      | 241     |      |  |   | 2,142   |   |  |   | 496     | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Total operating expenses                                                            |  |                     | 51,864  |                     |  |      | 39,654  |      |  |   | 126,480 |   |  |   | 109,501 | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Income from operations                                                              |  |                     | 33,289  |                     |  |      | 5,895   |      |  |   | 79,580  |   |  |   | 10,573  | 
|Interest and other income, net                                                      |  |                     | 1,462   |                     |  |      | 1,979   |      |  |   | 4,113   |   |  |   | 6,927   | 
|Loss from disposition of assets                                                     |  |                     |        |                     |  |      |        |      |  |   | (68     | ) |  |   |        | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Income before income tax expense                                                    |  |                     | 34,751  |                     |  |      | 7,874   |      |  |   | 83,625  |   |  |   | 17,500  | 
|Income tax expense                                                                  |  |                     | 12,162  |                     |  |      | 6,268   |      |  |   | 29,269  |   |  |   | 9,398   | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Net income                                                                          |  | $                   | 22,589  |                     |  | $    | 1,606   |      |  | $ | 54,356  |   |  | $ | 8,102   | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Basic earnings per common share                                                     |  | $                   | 0.39    |                     |  | $    | 0.03    |      |  | $ | 0.94    |   |  | $ | 0.14    | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Diluted earnings per common share                                                   |  | $                   | 0.39    |                     |  | $    | 0.03    |      |  | $ | 0.93    |   |  | $ | 0.14    | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Weighted average number of shares
used to compute basic earnings per
common share   |  |                     | 57,809  |                     |  |      | 56,989  |      |  |   | 57,687  |   |  |   | 56,260  | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 
|Weighted average number of shares
used to compute diluted earnings
per common share |  |                     | 58,408  |                     |  |      | 57,469  |      |  |   | 58,463  |   |  |   | 57,160  | 
|                                                                                    |  |                     |         |                     |  |      |         |      |  |   |         |   |  |   |         | 

The accompanying notes are an integral part of these statements.

4



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HOTELS.COM
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)

|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |        | 
|------------------------------------------------------------------------- | -------------------------------------------------------- | - | ------- | ------ | ----- | - | ------------ | - | ------- | - | ------------- | - | ------------- | - | ----------------- | - |  | - | -- | ---- | - | - | ------ | ------ | 
|                                                                          |                                                          |   |         |        |       |   | Class A      |   |         |   |               |   | Additional    |   | Accumulated Other |   |  |   |   
|                                                                          |                                                          |   |         |        |       |   | Common       |   | Class B |   | Paid-In       |   | Comprehensive |   | Retained         
|                                                                          |                                                          |   | Total   |        | Stock |   | Common Stock |   | Capital |   | Income (Loss) |   | Earnings     
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |              
|Balance at January 1, 2002                                                |                                                          | $ | 541,888 |        |       | $ | 182          |   |         | $ | 390           |   |               | $ | 513,456           |   |  | $ | (1 | )    |   | $ | 27,861 |       
|Comprehensive income:                                                     |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|                                                                          | Net income for the three
months ended March 31,
2002     |   |         | 12,934 |       |   |              |  |         |   |               |  |               |   |                   |  |  |   |    |      |   |   |        | 12,934 | 
|                                                                          | Other comprehensive loss                                 |   |         | (263   | )     |   |              |   |         |   |               |   |               |   |                   |   |  |   |    | (263 | ) |   |        |        | 
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|                                                                          | Comprehensive income                                     |   |         | 12,671 |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |        | 
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|                                                                          | Net income for the three
months ended June 30,
2002      |   |         | 18,833 |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        | 18,833 | 
|                                                                          | Other comprehensive income                               |   |         | 225    |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    | 225  |   |   |        |        | 
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|                                                                          | Comprehensive income                                     |   |         | 19,058 |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |        | 
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|                                                                          | Net income for the three
months ended September
30, 2002 |   |         | 22,589 |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        | 22,589 | 
|                                                                          | Other comprehensive income                               |   |         | 95     |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    | 95   |   |   |        |        | 
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|                                                                          | Comprehensive income                                     |   |         | 22,684 |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |        | 
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|Issuance of common stock upon
exercise of warrants by
Internet affiliates |                                                          |   | 6,347   |        |       |   | 1            |   |         |   |               |   |               |   | 6,346             |   |  |   |    |      |   |   |        |       
|Issuance of common stock upon
exercise of options                         |                                                          |   | 12,212  |        |       |   | 5            |   |         |   |               |   |               |   | 12,207            |   |  |   |    |      |   |   |        |       
|Income tax benefit related to
stock options exercised                     |                                                          |   | 5,407   |        |       |   |              |   |         |   |               |   |               |   | 5,407             |   |  |   |    |      |   |   |        |       
|Contribution from USA                                                     |                                                          |   | 861     |        |       |   |              |   |         |   |               |   |               |   | 861               |   |  |   |    |      |   |   |        |       
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       
|Balance at September 30, 2002                                             |                                                          | $ | 621,128 |        |       | $ | 188          |   |         | $ | 390           |   |               | $ | 538,277           |   |  | $ | 56 |      |   | $ | 82,217 |       
|                                                                          |                                                          |   |         |        |       |   |              |   |         |   |               |   |               |   |                   |   |  |   |    |      |   |   |        |       

The accompanying notes are an integral part of these statements.

5



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HOTELS.COM
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)

|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |         |        |         |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | -------- | ------------------- | -------- | ------ | ------- | ------ | ------- | -
|                                                                                 |                                                                  |                                                            |                                           |          | Nine Months        
|                                                                                 |                                                                  |                                                            |                                           |          | Ended September 30,
|                                                                                 |                                                                  |                                                            |                                           |          |                    
|                                                                                 |                                                                  |                                                            |                                           |          | 2002                |          | 2001  
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |       
|Cash flow from operating activities:                                             |                                                                  |                                                            |                                           |          |                     |          |        |        
|Net income                                                                       |                                                                  | $                                                          | 54,356                                    |          |                     | $        | 8,102  |        
|Adjustment to reconcile net income to net cash provided by operating
activities: |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 | Depreciation                                                     |                                                            |                                           | 1,562    |                     |          |        | 701     |       
|                                                                                 | Amortization  other                                             |                                                            |                                           | 2,142    |                     |          |        | 496     |       
|                                                                                 | Amortization of goodwill                                         |                                                            |                                           |         |                     |          |        | 34,610  |       
|                                                                                 | Non-cash distribution and marketing                              |                                                            |                                           | 14,856   |                     |          |        | 12,211  |       
|                                                                                 | Loss from disposition of assets                                  |                                                            |                                           | 68       |                     |          |        |        |       
|                                                                                 | Deferred income taxes                                            |                                                            |                                           | 3,344    |                     |          |        | 7,492   |       
|                                                                                 | Changes in operating assets and liabilities, net of acquisitions |                                                            |                                           |          |                     |          |        |         |       
|                                                                                 |                                                                  | Restricted cash equivalent                                 |                                           |          | (3,010              | )        |        |         | (1,464 | )      
|                                                                                 |                                                                  | Accounts and notes receivable                              |                                           |          | (6,952              | )        |        |         | (162   | )      
|                                                                                 |                                                                  | Prepaid hotel rooms                                        |                                           |          | 740                 |          |        |         | 384    |        
|                                                                                 |                                                                  | Accounts payable, trade                                    |                                           |          | 38,359              |          |        |         | 19,231 |        
|                                                                                 |                                                                  | Deferred revenue                                           |                                           |          | 55,566              |          |        |         | 16,293 |        
|                                                                                 |                                                                  | Intercompany payable                                       |                                           |          | (49                 | )        |        |         | (1,037 | )      
|                                                                                 |                                                                  | Income tax payable/receivable                              |                                           |          | 14,940              |          |        |         | (8,557 | )      
|                                                                                 |                                                                  | Income tax benefit upon exercise of employee stock
options |                                           |          | 5,407               |          |        |         | 3,727  |        
|                                                                                 |                                                                  | Other accrued liabilities                                  |                                           |          | 6,529               |          |        |         | 4,529  |        
|                                                                                 |                                                                  | Other, net                                                 |                                           |          | (3,338              | )        |        |         | 409    |        
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 |                                                                  |                                                            | Net cash provided by operating activities |          |                     | 184,520  |        |         |        | 96,965  |  
|Cash flow from investing activities:                                             |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 | Acquisitions, net of cash acquired                               |                                                            |                                           | (40      | )                   |          |        | (49,450 | )     
|                                                                                 | Capital expenditures                                             |                                                            |                                           | (9,013   | )                   |          |        | (3,615  | )     
|                                                                                 | Purchase of marketable securities, net                           |                                                            |                                           | (216,957 | )                   |          |        | (20,894 | )     
|                                                                                 | Purchase of intellectual property                                |                                                            |                                           | (12,587  | )                   |          |        | (11,100 | )     
|                                                                                 | Other, net                                                       |                                                            |                                           |         |                     |          |        | (22     | )     
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 |                                                                  |                                                            | Net cash used in investing activities     |          |                     | (238,597 | )      |         |        | (85,081 | )
|Cash flow from financing activities:                                             |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 | Net proceeds from exercise of stock options                      |                                                            |                                           | 12,212   |                     |          |        | 6,668   |       
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 |                                                                  |                                                            | Net cash provided by financing activities |          |                     | 12,212   |        |         |        | 6,668   |  
|Net increase (decrease) in cash and cash equivalents                             |                                                                  |                                                            | (41,865                                   | )        |                     |          | 18,552 |        
|Cash and cash equivalents at beginning of period                                 |                                                                  |                                                            | 44,269                                    |          |                     |          | 51,037 |        
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|Cash and cash equivalents at end of period                                       |                                                                  | $                                                          | 2,404                                     |          |                     | $        | 69,589 |        
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|Supplemental cash flow information:                                              |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 | Cash paid for taxes                                              |                                                            | $                                         | 5,578    |                     |          | $      | 6,734   |       
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|Non-cash financing activities:                                                   |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 | Contribution by USA for television advertising                   |                                                            | $                                         | 861      |                     |          | $      |        |       
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        
|                                                                                 | Issuance of common stock upon exercise of warrants               |                                                            | $                                         | 6,347    |                     |          | $      |        |       
|                                                                                 |                                                                  |                                                            |                                           |          |                     |          |        |        

The accompanying notes are an integral part of these statements.

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HOTELS.COM
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Hotels.com (the Company), formerly known as Hotel Reservations Network,
Inc., is a leading consolidator of discount hotel and other lodging
accommodations for resale in the consumer market in North America, the
Caribbean, Europe and Asia. Effective April 24, 2002, the Company changed its
name from Hotel Reservations Network, Inc. to Hotels.com. The Company is a
subsidiary of USA Interactive, formerly known as USA Networks, Inc. (USA).

Basis of Presentation

In the opinion of the Company, all adjustments including normal recurring
adjustments necessary for a fair presentation of unaudited condensed
consolidated financial statements have been made. Interim results are not
necessarily indicative of results to be expected for a full year. The interim
unaudited condensed consolidated financial statements and notes thereto are
presented as permitted by the Securities and Exchange Commission and do not
contain certain information included in the Companys audited consolidated
financial statements and notes thereto. Accordingly, the accompanying
unaudited condensed consolidated financial statements and notes should be read
in conjunction with the Companys 2001 consolidated financial statements
included in the Companys Annual Report on Form 10-K.

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, the Company 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 simultaneously with the date the customer may cancel
the hotel reservation. Customers are subject to a penalty for all cancellations
or changes to the reservation. The Company bears the risk of loss for all
prepaid rooms and 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.

Advertising

Advertising expense for the three-month periods ending September 30, 2002
and 2001 was $12.6 million and $2.9 million, respectively. Advertising expense
for the nine-month periods ending September 30, 2002 and 2001 was $26.1 million
and $7.8 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 longer than three months, which approximates the period
over which the revenue is earned. As of September 30, 2002, capitalized
advertising was $1.4 million. Other advertising costs are expensed in the
period incurred.

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Goodwill

Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, pursuant
to which goodwill and intangible assets with indefinite lives are no longer
amortized. However, the Company is required to perform an impairment test at
least annually in accordance with the statement. The Company completed its
initial impairment test as of January 1, 2002 and has concluded that no
goodwill impairment write-off was necessary.

Had this statement been effective January 1, 2001, the Companys pre-tax
income, net income and diluted earnings per share for the three months ending
September 30, 2001 would have been $19.7 million, $14.8 million and $0.26,
respectively and, for the nine months ending September 30, 2001, $52.1 million,
$39.1 million and $0.68, respectively.

Intellectual Property

Intellectual property primarily consists of purchased websites and web
domain names, which includes hotels.com. Management has developed and
implemented a branding strategy for these domain names that is expected to
benefit the Company over a long period of time. Accordingly, the Company
amortizes the costs of the intellectual property over a period of up to 10
years.

NOTE 2  MARKETABLE SECURITIES AVAILABLE FOR SALE

Investments in marketable securities available for sale consist of
government bonds and medium term notes with an aggregate cost of $382.54
million and aggregate market value of $382.63 million resulting in a pre-tax
unrealized gain of $0.09 million. The cumulative unrealized gain of $0.09
million is shown as a component of comprehensive income net of income tax costs
of $0.03 million. These investments have maturity dates generally less than
one year.

NOTE 3  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 in February
2000, the Company issued warrants to third parties with 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 three months ended September 30, 2002 and 2001, the Company amortized $0.9
million and $1.1 million of the warrant costs, respectively. During the nine
months ended September 30, 2002 and 2001, the Company amortized $2.7 million
and $3.5 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

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such time, of which $1.49 million and $4.5 million was amortized during
the three-month and nine-month periods ending September 30, 2002, respectively.
The asset is being amortized ratably over the remaining term of the affiliation
agreement. Through September 30, 2002, 446,726 of the remaining shares
underlying the performance warrant had vested and become exercisable, and the
Company has recorded an aggregate of $12.7 million of additional noncash
deferred distribution and marketing expense based upon the fair market value of
such shares, of which $2.2 million and $6.4 million was amortized in the
three-month and nine-month periods ended September 30, 2002, respectively, and
the balance of which was recorded in prior periods. 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 three months
ended September 30, 2002 and 2001, the Company amortized $0.2 million of the
warrant costs, respectively, and during the nine months ended September 30,
2002 and 2001, the Company amortized $0.6 million of warrant costs,
respectively. In addition, the Company may be required to issue additional
warrants to purchase up to 635,722 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 nine months ended
September 30, 2002.

In March 2001, the Company entered into another exclusive affiliate
distribution and marketing agreement. The Company may be required to issue
warrants to purchase up to 1,698,180 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 nine months ended
September 30, 2002.

As of September 30, 2002, 128,395 of the fully vested non-performance
warrants to purchase class A common shares issued to all of the affiliates
described above remained unexercised.

NOTE 4  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is net income (loss) plus other comprehensive
income (loss), which consists of changes in unrealized gains (losses) on
marketable securities available for sale, net of the related tax impact.
Comprehensive income for the quarter ended September 30, 2002 was $22.7 million
compared to $1.9 million for the same period in 2001. Comprehensive income for
the nine months ended September 30, 2002 was $54.4 million compared to $8.3
million for the same period in 2001. The increase in comprehensive income in
2002 was primarily due to the growth in net income.




|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Our company is a leading provider of discount hotel accommodations 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

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September 30, 2002, we had room supply agreements with over 6,500 lodging
properties in 285 major markets in North America, the Caribbean, 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.

Results of Operations for the Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001

Revenues

For the three months ended September 30, 2002, the Company generated
revenues of $277.4 million, an increase of 83.4% over the $151.2 million of
revenues generated in the same period in 2001. The increase for the quarter
was primarily attributable to the growth of our new website and brand,
hotels.com, and the growth in travel and lodging bookings through the Internet.
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 42 new markets during
the quarter, reaching a total of 285 markets compared to 171 markets at
September 30, 2001, representing a 66.7% increase.

The increase in revenue was also attributable to the growth in our
revenues from international and vacation rental properties. Revenue from
properties in Europe, Canada, Mexico, the Caribbean, and Asia increased 178.2%
to $43.5 million in the third quarter of 2002 from $15.6 million in the third
quarter of 2001. Revenues from the Companys vacation rentals, which include
condominiums, timeshares, and vacation homes, increased 123.8% to $7.6 million
in the third quarter of 2002 from $3.4 million in the third quarter of 2001.

In addition, revenues increased as a result of the expansion of our
affiliate program. Affiliates generate sales of rooms in exchange for
commissions based on the amount of revenues generated by the Company on the
sale of such rooms. Revenues derived through our agreement with Travelocity,
our largest affiliate, accounted for approximately 17.6% of our total revenues
for the quarter.

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 86.9% to $85.2 million in the third quarter of 2002 from $45.5
million in the third quarter of 2001. Gross profit margin for the three months
ended September 30, 2002 increased to 30.7% from 30.1% for the prior year
period. The increase in gross profit margin was primarily due to the decrease
in no-show costs during the third quarter of 2002 compared to no-show costs
incurred in the third quarter of 2001 related to exceptionally high
cancellations after the September 11, 2001 terrorist attacks.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of (i)
compensation for personnel, (ii) affiliate commissions, (iii) credit card fees,
(iv) advertising and promotion, (v) telecommunications, and (vi) other overhead
costs including occupancy costs. Overall selling, general and administrative
expense increased 92.1% for the quarter ended September 30, 2002 over the same
period in 2001. As a percentage of net revenues, selling, general and
administrative expense for the three months ended September 30, 2002 increased
to 16.5% from 15.7% for the same period in 2001.

The increase in selling, general and administrative expense for the
three-month period ended September 30, 2002 over the same period for 2001 was
due to an increase in advertising costs, including costs associated with the
launch and branding of the new hotels.com website, and an increase in personnel

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costs, credit card fees and affiliate commissions resulting from the
growth in net revenues. The increase in selling, general and administrative
expense as a percentage of net revenues for the three months ended September
30, 2002 over the same period in 2001 was due to higher advertising and
promotion expense as a percentage of net revenues related to the launch and
branding of hotels.com.

Non-Cash Distribution and Marketing

Non-cash distribution and marketing expense increased to $4.7 million for
the three months ended September 30, 2002 compared to $3.5 million in the prior
year period.

Non-cash distribution and marketing expense consists primarily of
amortization of the fair value of non-performance warrants and performance
warrants issued to certain affiliates with whom we entered into exclusive
distribution and marketing agreements. The non-performance warrants were
issued in 2000 and the related expense is amortized over the term of the
warrant agreements. The expense related to the performance warrants is fully
expensed upon vesting. The increase in non-cash distribution and marketing
expense for the three months ended September 30, 2002 over the same period in
2001 resulted from the vesting of certain performance warrants. (See Note 3 
Notes to Unaudited Condensed Consolidated Financial Statements for further
details.) The Company will amortize $2.6 million of expense related to
non-performance warrants during the fourth quarter of 2002 and also will
recognize additional expense based upon any additional performance warrants
that vest in the fourth quarter of 2002, the amount of which is not known as it
is based upon stock price.

Amortization of Goodwill

Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, pursuant
to which goodwill and intangible assets with indefinite lives are no longer
amortized. However, the Company is required to perform an impairment test at
least annually in accordance with the statement. The Company has completed its
initial impairment test as of January 1, 2002 and has concluded that no
goodwill impairment write-off is necessary.

For the three months ending September 30, 2001, goodwill amortization
expense amounted to $11.8 million.

Results of Operations for the Nine months Ended September 30, 2002 Compared to the Nine Months Ended September 30, 2001

Revenues

For the nine months ended September 30, 2002, the Company generated
revenues of $672.8 million, an increase of 70.4% over the $394.8 million of
revenues generated in the same period in 2001. The increase for the nine-month
period was primarily attributable to the launch of our new website and brand,
hotels.com, and the growth in travel and lodging bookings through the Internet.
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 114 new markets during
the nine months ended September 30, 2002, reaching a total of 285 markets
compared to 171 markets at September 30, 2001, representing a 66.7% increase.

The increase in revenue was also attributable to the growth in our
revenues from international and vacation rental properties. Revenue from
properties in Europe, Canada, Mexico, the Caribbean, and Asia increased 152.7%
to $85.2 million for the nine months ended September 30, 2002 from $33.7
million for the same period in 2001. Revenues from the Companys vacation
rentals, which include condominiums,

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timeshares, and vacation homes, increased 150.5% to $19.2 million for the
nine months ended September 30, 2002 from $7.6 million for the same period in
2001.

In addition, revenues increased as a result of the expansion of our
affiliate program. Affiliates generate sales of rooms in exchange for
commissions based on the amount of revenues generated by the Company on the
sale of such rooms. Revenues derived through our agreement with Travelocity,
our largest affiliate, accounted for approximately 18.3% of our total revenues
for the nine months ended September 30, 2002.

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 71.6% to $206.1 million in the first nine months of 2002 from $120.1
million in the first nine months of 2001. Gross profit margin for the nine
months ended September 30, 2002 and 2001 was 30.6% and 30.4%, respectively.

Selling, General and Administrative

Selling, general and administrative expense consists primarily of (i)
compensation for personnel, (ii) affiliate commissions, (iii) credit card fees,
(iv) advertising and promotion, (v) telecommunications, and (vi) other overhead
costs including occupancy costs. Selling, general and administrative expense
increased 75.5% for the nine months ended September 30, 2002 compared to the
same period in 2001. As a percentage of revenues, selling, general and
administrative expense for the nine months ended September 30, 2002 increased
to 16.0% from 15.6% over the same period in 2001.

The increase in selling, general and administrative expense for the
nine-month period ended September 30, 2002 over the same period for 2001 was
due to an increase in advertising costs, including costs associated with the
launch and branding of the new hotels.com website, and an increase in personnel
costs, credit card fees and affiliate commissions resulting from the growth in
net revenues. The increase in selling, general and administrative expense as a
percentage of net revenues for the nine months ended September 30, 2002 was due
to higher advertising and promotion expense as a percentage of net revenues
related to the launch and branding of hotels.com.

Non-Cash Distribution and Marketing

Non-cash distribution and marketing expense increased to $14.9 million for
the nine months ended September 30, 2002 compared to $12.2 million during the
same period in 2001.

Non-cash distribution and marketing expense consists primarily of
amortization of the fair value of non-performance warrants and performance
warrants issued to certain affiliates with whom we entered into exclusive
distribution and marketing agreements. The non-performance warrants were
issued in 2000 and the related expense is amortized over the term of the
warrant agreements. The expense related to the performance warrants is fully
expensed upon vesting. The increase in non-cash distribution and marketing
expense for the nine months ended September 30, 2002 over the same period in
2001 resulted from the vesting of certain performance warrants that occurred in
2002 (see Note 3  Notes to Unaudited Condensed Consolidated Financial
Statements for further details). The Company will amortize $2.6 million of
expense related to non-performance warrants during the fourth quarter of 2002
and $8.3 million of expense related to non-performance warrants during 2003.
The Company will recognize additional expense based upon any additional
performance warrants that vest in the fourth quarter of 2002 and in 2003, but
the amount is not known as it is based upon stock price.

For the nine months ended September 30, 2002, non-cash distribution and
marketing expense included $0.9 million of advertising costs for which we paid
no cash consideration. This amount was

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contributed by USA and was recorded as non-cash distribution and marketing
expense at fair value and a contribution of capital.

Amortization of Goodwill

Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, pursuant
to which goodwill and intangible assets with indefinite lives are no longer
amortized. However, the Company is required to perform an impairment test at
least annually in accordance with the statement. The Company has completed its
initial impairment test as of January 1, 2002 and has concluded that no
goodwill impairment write-off is necessary.

For the nine months ending September 30, 2001, goodwill amortization
expense amounted to $34.6 million.

Adjusted EBITDA

Adjusted EBITDA is defined as operating profit plus depreciation, other
amortization, amortization of intangibles, and non-cash distribution and
marketing expense. Adjusted EBITDA is presented here as a tool and as a
valuation methodology used by management in evaluating the business. 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 accounting principles
generally accepted in the United States. Adjusted EBITDA may not be a
comparable calculation of similarly titled measures by other companies.

Reconciliation of income from operations and Adjusted EBITDA:

|                       |                                     |   |                    |       |                   |   |        |        |      |   |        |        |  |   |        |        | 
|---------------------- | ----------------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                       |                                     |   | Three Months Ended |       | Nine Months Ended
|                       |                                     |   | September 30,      |       | September 30,    
|                       |                                     |   |                    |       |                  
|                       |                                     |   | 2002               |       | 2001              |   | 2002   |        | 2001
|                       |                                     |   |                    |       |                   |   |        |        |     
|Income from operations |                                     | $ | 33,289             |       |                   | $ | 5,895  |        |      | $ | 79,580 |        |  | $ | 10,573 |       
|Add:                   |                                     |   |                    |       |                   |   |        |        |      |   |        |        |  |   |        |       
|                       | Non-cash distribution
and marketing |   |                    | 4,748 |                   |   |        | 3,547  |      |   |        | 14,856 |  |   |        | 12,211 | 
|                       | Amortization of goodwill            |   |                    |      |                   |   |        | 11,827 |      |   |        |       |  |   |        | 34,610 | 
|                       | Depreciation                        |   |                    | 612   |                   |   |        | 265    |      |   |        | 1,562  |  |   |        | 701    | 
|                       | Other amortization                  |   |                    | 843   |                   |   |        | 241    |      |   |        | 2,142  |  |   |        | 496    | 
|                       |                                     |   |                    |       |                   |   |        |        |      |   |        |        |  |   |        |       
|Adjusted EBITDA        |                                     | $ | 39,492             |       |                   | $ | 21,775 |        |      | $ | 98,140 |        |  | $ | 58,591 |       
|                       |                                     |   |                    |       |                   |   |        |        |      |   |        |        |  |   |        |       

Adjusted EBITDA increased to $39.5 million for the quarter ended September
30, 2002, an 81.4% increase from $21.8 million for the prior year period.
Adjusted EBITDA as a percentage of revenues was 14.2% for the quarter ended
September 30, 2002, compared to 14.4% for the prior year period. The decrease
in Adjusted EBITDA as a percentage of revenues during the third quarter of
2002 was primarily due to a higher selling, general and administrative expense
as a percentage of revenues due to an increase in advertising costs
associated with the branding of the new hotels.com website.

Adjusted EBITDA increased to $98.1 million for the nine months ended
September 30, 2002, a 67.5% increase from $58.6 million for the prior year
period. Adjusted EBITDA as a percentage of revenues was 14.6% for the nine
months ended September 30, 2002, compared to 14.8% for the prior year period.
The decrease in Adjusted EBITDA as a percentage of revenues during the
nine-month period ended September 30, 2002 was primarily due to a higher
selling, general and administrative expense as a
percentage of revenues due to an increase in advertising costs
associated with the launch and branding of hotels.com.

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Liquidity and Capital Resources

Historically, we have funded our operations through cash generated from
operating activities. Our company historically has 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 $90.0 million in proceeds net of offering expenses. As of
September 30, 2002, we had $397.1 million in cash, cash equivalents and
marketable securities held for sale. Our company invests excess cash
predominantly in debt instruments that are highly liquid, of high-quality
investment grade, and that 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.

Net cash provided from operating activities was $184.5 million for the
nine months ending September 30, 2002, compared to $97.0 million for the same
period in 2001. Capital expenditures and the purchase of intellectual property
were $21.6 million for the nine months ended September 30, 2002. As a result
of our rapid growth, we expect to increase capital expenditures for purchased
software, internally developed software, computer equipment, telecommunications
equipment and software, furniture and fixtures, leasehold improvements and
intellectual property.

Our company generates significant cash flow from operations, and cash flow
is expected to increase as revenues increase due in part to our billing and
payment policies. Management anticipates that cash on hand and cash provided
by operating activities will be sufficient to fund our working capital
requirements for the next twelve months and for a foreseeable period after
twelve months. Additional funds could be necessary, however, to complete
sizable strategic acquisitions (if any) or other business combinations (if any)
in 2002 or beyond.

Seasonality

Our revenues are somewhat influenced by the seasonal nature of holiday
travel in the markets we serve, and have historically peaked in the fall. As
our business expands into new markets, the impact of seasonality is expected to
lessen.

USA Interactive

On June 3, 2002, USA announced its intention to commence an exchange
offer whereby USA would acquire all of the publicly held shares of the Company.
The Company's board of directors formed a special committee to review and
negotiate with USA in connection with this potential offer and to determine
whether any potential offer was fair to, and in the best interests of, the
Company and its stockholders other than USA. On October 10, 2002, USA announced
that it was ending the proposed exchange offer process, although USA could
re-commence such a process in the future at any time. On October 21, 2002, the
Company's board of directors dissolved the special committee.

The Company continues to believe that its prospects within the USA
Interactive family are excellent. USA Interactive will continue to own a
controlling stake in the Company and will also continue to own a controlling
stake in Expedia, Inc. As the Company and Expedia have a common controlling
shareholder, the Company has said previously that the Company would explore
areas where it might work together with Expedia in ways that would benefit the
Companys customers and stockholders. Although there continue to be many areas
of the Companys business where the Company has decided that it can best
achieve its goals through separate strategies and practices, there have been
instances where, fully consistent with the Companys existing contractual
agreements, the Company has worked cooperatively with Expedia, and the Company
anticipates that it will continue to explore such possibilities in the future.

Accounting Policies

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

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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 relate 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
periodically. 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 flow, the carrying
value is reduced to its estimated fair value. The determination of cash flow
is based upon assumptions and forecasts that may not occur. As of September
30, 2002, the Companys balance sheet includes $384.5 million of intangible
assets, net, and $15.3 million of fixed assets, net. The Company has completed
its initial impairment test as of January 1, 2002 and has concluded that no
goodwill impairment write-off is necessary.

Deferred Taxes

Estimates of deferred income taxes and the significant items giving rise
to the deferred assets and liabilities 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 Reporting

We contract with hotels and other lodging properties in advance for volume
purchases and guaranteed availability of rooms at wholesale prices and sell
these rooms to consumers through our websites, third-party affiliated websites
and our toll-free call centers. Our revenues are generated principally through
the sale of these rooms, and we recognize as revenue the gross revenues
generated from the sale of these rooms. USA Interactive, our parent company, is
discussing the revenue presentation of our Company and Expedia, Inc., another
subsidiary of USA Interactive, with the Securities and Exchange Commission with
the goal of reaching a conclusion during the fourth quarter. Although our
business models have similarities, Expedia presents its merchant hotel revenue
on a net basis instead of a gross basis as we present for our merchant hotel
revenue. We have considered Staff Accounting Bulletin No. 101 Revenue
Recognition in Financial Statements and believe that our income statement
presentation for the sale of rooms is appropriate. In determining the
appropriate presentation, we considered, among other factors, our belief that
we, and not the hotel, are the party primarily obligated to satisfy our
customers, our ability to establish and change the prices we charge to
consumers, our risk of loss resulting from customer disputes and credit card
fraud in connection with rooms sold, 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 for the nine months ended September 30, 2002 would have
been approximately $206.1 million, and our revenues for the nine months ended
September 30, 2001 would have been approximately $120.1 million, but there
would have been no effect on our Adjusted EBITDA, income from operations, net
income or earnings per share.

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Non-Cash Distribution and Marketing Expense

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

Caution Regarding Forward-Looking Statements

The foregoing discussion contains forward-looking statements within the
meaning of the securities laws concerning our plans, goals, product and service
offerings, and anticipated financial performance. These forward-looking
statements may generally be identified by introductions such as outlook for
an upcoming period of time, or words and phrases such as should, expect,
hope, plans, projected, believes, forward-looking (or variants of
those words and phrases) or similar language indicating the expression of our
opinion or view concerning the future.

These forward-looking statements are subject to risks and uncertainties
based on a number of factors and our actual results or events may differ
materially from those anticipated by such forward-looking statements. These
factors include, but are not limited to: the growth rate of our revenue and
market share; our ability to add desirable cities and hotels to our hotel
product offerings; our ability to grow and service our affiliate network;
decrease in demand for lodging as a result of additional acts of terrorism or
fear of additional acts of terrorism; our ability to effectively manage our
business functions while growing at a rapid rate; the quality of our plans and
strategies, and our ability to execute such plans and strategies. In addition,
forward-looking statements concerning our expected revenue or earnings levels
are subject to many additional uncertainties applicable to competitors
generally and to general economic conditions over which we have no control.

The time at which a forward-looking statement is made should also be
included in an appropriate understanding of such statement. In that regard, we
do not plan to generally publicly update all prior forward-looking statements
and, accordingly, prior forward-looking statements should not be considered to
be still applicable simply because we have not made additional comments on
those forward-looking statements.

Other risks, which should be considered in connection with forward-looking
statements, are described under the heading Risk Factors in our Annual Report
on Form 10-K.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Currently, all of our foreign hotel revenue is denominated in U.S. dollars
and is received at the time that a reservation is made. We are subject to risk
from foreign exchange rate fluctuations because the hotel rooms in foreign
markets that we contract to purchase are paid for in the local currency of the
hotel after the customer has completed his stay. During the nine months ended
September 30, 2002, our gross profit margin, earnings and cash flow were
adversely impacted by the significant weakening of the U.S. dollar against
major foreign currencies, in particular the Euro, the British pound and the
Canadian

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dollar. The effect of foreign exchange rate fluctuations on Hotels.com
for the nine months ended September 30, 2002, was an increase in the cost of
rooms sold of approximately $1.2 million. During the third quarter of 2002, the Company implemented a hedging program to lessen the Company's
exposure to fluctuations in foreign exchange rates.




ITEM 4. CONTROLS AND PROCEDURES

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

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

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PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the litigation previously reported in the Companys Form 10-Q for the
quarter ended June 30, 2002, the actions filed in Delaware have been
consolidated under the caption In re Hotels.com Inc. Shareholders Litigation
(Delaware Court of Chancery, Consolidated C.A. No. 19662-NC). The time for
defendants to respond to the complaints has not yet elapsed. On October 10,
2002, USA Interactive announced that it was ending the ongoing process to
acquire all of the shares of the Company that it does not now own.
The Company expects that the complaints will be dismissed as moot.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(b)  Reports on Form 8-K:

On July 23, 2002, the Company furnished information under Item 9 of Form
8-K regarding its earnings for the second quarter of 2002.

On August 14, 2002, the Company furnished information under Item 9 of Form
8-K regarding certification by the Companys Chief Executive Officer and Chief
Financial & Strategic Officer of the Companys Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2002 pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |  |                   |  |            |  |                                                                   
|----- |  | ----------------- |  | ---------- |  | ------------------------------------------------------------------
|      |  |                   |  | HOTELS.COM
|     
|Date: |  | November 14, 2002 |  | By:        |  | /s/ David S. LitmanDavid S. Litman
Chief Executive Officer        
|     
|Date: |  | November 14, 2002 |  | By:        |  | /s/ Mel RobinsonMel Robinson
Chief Financial and Strategic Officer

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CERTIFICATIONS

I, David S. Litman, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hotels.com;

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

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

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

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

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

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

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

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

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

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                   |  |                                                           
|----- |  | ----------------- |  | ----------------------------------------------------------
|Date: |  | November 14, 2002 |  | /s/ David S. LitmanDavid S. Litman
Chief Executive Officer

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I, Mel Robinson, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hotels.com;

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

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

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

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

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

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

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

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

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

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                   |  |                                                                   
|----- |  | ----------------- |  | ------------------------------------------------------------------
|Date: |  | November 14, 2002 |  | /s/ Mel RobinsonMel Robinson
Chief Financial and Strategic Officer

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