##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-Q

|                                             |  |                                                                                         
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                   |  |                                                                                         
|                                             |  | Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 
|                                             |  |                                                                                         
|for the Quarterly Period Ended June 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)



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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       No

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

|                     |  |  |            | 
|-------------------- |  |  | ---------- | 
|Class                |  |  |            | 
|                     |  |  |            | 
|Class A Common Stock |  |  | 18,729,664 | 
|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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|PART II  OTHER INFORMATION                       
|                                                   | ITEM 1. LEGAL PROCEEDINGS                                        
|                                                   | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS      
|                                                   | ITEM 5. OTHER INFORMATION                                        
|                                                   | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                         
|SIGNATURES                                        
|INDEX TO EXHIBITS                                 
|EX-4.1 Certificate Evidencing Class A Common Stock



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##### Table of Contents



HOTELS.COM
FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2002

TABLE OF CONTENTS

PART I  FINANCIAL INFORMATION

|                            |  |  |    |         |  |                                                                |  |  |    |          |  | 
|--------------------------- |  |  | -- | ------- |  | -------------------------------------------------------------- |  |  | -- | -------- |  | 
|                            |  |  |    |         |  |                                                                |  |  |    | Page No.
|                            |  |  |    |         |  |                                                                |  |  |    |         
|                            |  |  |    | Item 1. |  | Condensed Consolidated Financial Statements                    |  |  |    |         
|                            |  |  |    |         |  | Condensed Consolidated Balance Sheets as of June 30, 2002      |  |  |    |         
|                            |  |  |    |         |  | (unaudited) and December 31, 2001                              |  |  | 3  |         
|                            |  |  |    |         |  | Unaudited Condensed Consolidated Statements of Income for the  |  |  |    |         
|                            |  |  |    |         |  | Three and Six Months Ended June 30, 2002 and 2001              |  |  | 4  |         
|                            |  |  |    |         |  | Unaudited Condensed Consolidated Statement of Changes in       |  |  |    |         
|                            |  |  |    |         |  | Stockholders' Equity for the Six Months Ended June 30, 2002    |  |  | 5  |         
|                            |  |  |    |         |  | Unaudited Condensed Consolidated Statements of Cash Flow for   |  |  |    |         
|                            |  |  |    |         |  | the Six Months Ended June 30, 2002 and 2001                    |  |  | 6  |         
|                            |  |  |    |         |  | Notes to Unaudited Condensed Consolidated Financial Statements |  |  | 7  |         
|                            |  |  |    | Item 2. |  | Management's Discussion and Analysis of Financial Condition    |  |  |    |         
|                            |  |  |    |         |  | and Result of Operations                                       |  |  | 9  |         
|                            |  |  |    | Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk      |  |  | 15 |         
|PART II  OTHER INFORMATION |  |  |    |        
|                            |  |  |    | Item 1. |  | Legal Proceedings                                              |  |  | 16 |         
|                            |  |  |    | Item 2. |  | Changes in Securities and Uses of Proceeds                     |  |  | 16 |         
|                            |  |  |    | Item 4. |  | Submission of Matter to a Vote of Security Holders             |  |  | 16 |         
|                            |  |  |    | Item 5. |  | Other Information                                              |  |  | 17 |         
|                            |  |  |    | Item 6. |  | Exhibits and Reports on Form 8-K                               |  |  | 17 |         
|SIGNATURES                  |  |  | 18 |        
|INDEX TO EXHIBITS           |  |  | 19 |        





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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 per share data)

|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |              |         |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------- | ----------- | ------- | ------------ | ------- |  |  | 
|                                                                                                                                                                        |                                                |                            |                                      |        |         | June 30,    |         | December 31,
|                                                                                                                                                                        |                                                |                            |                                      |        |         | 2002        |         | 2001        
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         | (Unaudited) |         |              |         | 
|                                                                                                                                                                        |                                                |                            |                                      | ASSETS |         |             |         |              |         |  |  | 
|CURRENT ASSETS                                                                                                                                                          |                                                |                            |                                      |        |         |             |         |             
|Cash and cash equivalents                                                                                                                                               |                                                | $                          | 34,739                               |        |         | $           | 44,269  |             
|Restricted cash equivalents                                                                                                                                             |                                                |                            | 12,086                               |        |         |             | 9,107   |             
|Marketable securities  available for sale                                                                                                                              |                                                |                            | 305,289                              |        |         |             | 165,581 |             
|Accounts and notes receivable, net of allowance of $128 at June 30, 2002,
and $132 at December 31, 2001                                                                 |                                                |                            | 14,627                               |        |         |             | 7,096   |             
|Prepaid hotel rooms                                                                                                                                                     |                                                |                            | 319                                  |        |         |             | 1,363   |             
|Current portion of non-cash deferred distribution and marketing costs                                                                                                   |                                                |                            | 9,395                                |        |         |             | 10,195  |             
|Deferred income taxes                                                                                                                                                   |                                                |                            | 6,174                                |        |         |             | 4,740   |             
|Other                                                                                                                                                                   |                                                |                            | 6,869                                |        |         |             | 4,712   |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                | Total current assets       |                                      |        | 389,498 |             |         |              | 247,063 | 
|PROPERTY AND EQUIPMENT                                                                                                                                                  |                                                |                            |                                      |        |         |             |         |             
|Computer equipment and software                                                                                                                                         |                                                |                            | 11,111                               |        |         |             | 7,862   |             
|Buildings and leasehold improvements                                                                                                                                    |                                                |                            | 1,075                                |        |         |             | 995     |             
|Furniture and other equipment                                                                                                                                           |                                                |                            | 3,126                                |        |         |             | 2,597   |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                |                            | 15,312                               |        |         |             | 11,454  |             
|                                                                                                                                                                        | Less accumulated depreciation and amortization |                            |                                      | (4,191 | )       |             |         | (2,755       | )      
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                |                            | 11,121                               |        |         |             | 8,699   |             
|OTHER ASSETS                                                                                                                                                            |                                                |                            |                                      |        |         |             |         |             
|Goodwill                                                                                                                                                                |                                                |                            | 362,494                              |        |         |             | 362,464 |             
|Non-cash deferred distribution and marketing costs, less current portion                                                                                                |                                                |                            | 15,210                               |        |         |             | 19,508  |             
|Intellectual property, net of amortization of $1,160 at June 30, 2002 and
$371 at December 31, 2001                                                                     |                                                |                            | 22,165                               |        |         |             | 10,834  |             
|Other assets                                                                                                                                                            |                                                |                            | 31                                   |        |         |             | 8       |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                | $                          | 800,519                              |        |         | $           | 648,576 |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                |                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |         |             |         |              |         |  | 
|CURRENT LIABILITIES                                                                                                                                                     |                                                |                            |                                      |        |         |             |         |             
|Accounts payable, trade                                                                                                                                                 |                                                | $                          | 79,485                               |        |         | $           | 53,679  |             
|Deferred revenue                                                                                                                                                        |                                                |                            | 93,378                               |        |         |             | 37,679  |             
|Income tax payable                                                                                                                                                      |                                                |                            | 11,021                               |        |         |             | 1,736   |             
|Intercompany payable                                                                                                                                                    |                                                |                            | 2,654                                |        |         |             | 1,394   |             
|Other accrued liabilities                                                                                                                                               |                                                |                            | 13,757                               |        |         |             | 9,759   |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                | Total current liabilities  |                                      |        | 200,295 |             |         |              | 104,247 | 
|Deferred income taxes                                                                                                                                                   |                                                |                            | 6,806                                |        |         |             | 2,441   |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                           |                                                |                            |                                     |        |         |             |        |             
|STOCKHOLDERS EQUITY                                                                                                                                                    |                                                |                            |                                      |        |         |             |         |             
|Preferred stock, $0.01 par value; 20,000,000 shares authorized,
none outstanding                                                                                        |                                                |                            |                                     |        |         |             |        |             
|Class A common stock, $.01 par value; 600,000,000 shares authorized,
18,729,664 and 18,138,452 shares outstanding at June 30, 2002, and
December 31, 2001, respectively |                                                |                            | 187                                  |        |         |             | 182     |             
|Class B common stock, $.01 par value; 150,000,000 shares authorized,
38,999,100 shares outstanding at June 30, 2002 and December 31, 2001                               |                                                |                            | 390                                  |        |         |             | 390     |             
|Additional paid-in capital                                                                                                                                              |                                                |                            | 533,252                              |        |         |             | 513,456 |             
|Accumulated other comprehensive loss                                                                                                                                    |                                                |                            | (39                                  | )      |         |             | (1      | )           
|Retained earnings                                                                                                                                                       |                                                |                            | 59,628                               |        |         |             | 27,861  |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                | Total stockholders equity |                                      |        | 593,418 |             |         |              | 541,888 | 
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             
|                                                                                                                                                                        |                                                | $                          | 800,519                              |        |         | $           | 648,576 |             
|                                                                                                                                                                        |                                                |                            |                                      |        |         |             |         |             

The accompanying notes are an integral part of these statements.

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

|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|----------------------------------------------------------------------------------- |  | -------------- | ------- | -------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | 
|                                                                                    |  | Three Months   |         | Six Months    
|                                                                                    |  | Ended June 30, |         | Ended June 30,
|                                                                                    |  |                |         |               
|                                                                                    |  | 2002           |         | 2001           |  | 2002 |         | 2001
|                                                                                    |  |                |         |                |  |      |         |     
|Net revenues                                                                        |  | $              | 229,715 |                |  | $    | 138,302 |      |  | $ | 395,428 |   |  | $ | 243,588 | 
|Cost of revenues                                                                    |  |                | 161,124 |                |  |      | 95,349  |      |  |   | 274,521 |   |  |   | 169,063 | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Gross profit                                                                        |  |                | 68,591  |                |  |      | 42,953  |      |  |   | 120,907 |   |  |   | 74,525  | 
|Operating costs and expenses                                                        |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Selling, general and administrative                                                 |  |                | 35,737  |                |  |      | 21,959  |      |  |   | 62,258  |   |  |   | 37,709  | 
|Non-cash distribution and marketing                                                 |  |                | 4,036   |                |  |      | 4,733   |      |  |   | 10,108  |   |  |   | 8,664   | 
|Amortization of goodwill                                                            |  |                |        |                |  |      | 11,783  |      |  |   |        |   |  |   | 22,783  | 
|Depreciation                                                                        |  |                | 518     |                |  |      | 254     |      |  |   | 950     |   |  |   | 436     | 
|Amortization  other                                                                |  |                | 778     |                |  |      | 141     |      |  |   | 1,300   |   |  |   | 255     | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Total operating costs and expenses                                                  |  |                | 41,069  |                |  |      | 38,870  |      |  |   | 74,616  |   |  |   | 69,847  | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Income from operations                                                              |  |                | 27,522  |                |  |      | 4,083   |      |  |   | 46,291  |   |  |   | 4,678   | 
|Interest and other income, net                                                      |  |                | 1,520   |                |  |      | 2,291   |      |  |   | 2,651   |   |  |   | 4,948   | 
|Loss on disposition of assets                                                       |  |                | (68     | )              |  |      |        |      |  |   | (68     | ) |  |   |        | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Income before income tax expense                                                    |  |                | 28,974  |                |  |      | 6,374   |      |  |   | 48,874  |   |  |   | 9,626   | 
|Income tax expense                                                                  |  |                | 10,141  |                |  |      | 1,724   |      |  |   | 17,107  |   |  |   | 3,130   | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Net income                                                                          |  | $              | 18,833  |                |  | $    | 4,650   |      |  | $ | 31,767  |   |  | $ | 6,496   | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Basic earnings per common share                                                     |  | $              | 0.33    |                |  | $    | 0.08    |      |  | $ | 0.55    |   |  | $ | 0.12    | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Diluted earnings per common share                                                   |  | $              | 0.32    |                |  | $    | 0.08    |      |  | $ | 0.54    |   |  | $ | 0.11    | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Weighted average number of shares
used to compute basic earnings per
common share   |  |                | 57,721  |                |  |      | 56,385  |      |  |   | 57,626  |   |  |   | 55,895  | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 
|Weighted average number of shares
used to compute diluted earnings
per common share |  |                | 58,537  |                |  |      | 57,418  |      |  |   | 58,491  |   |  |   | 57,006  | 
|                                                                                    |  |                |         |                |  |      |         |      |  |   |         |   |  |   |         | 

The accompanying notes are an integral part of these statements.

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

|                                                                          |                                                      |   |         |        |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     |      |   |   |        |        | 
|------------------------------------------------------------------------- | ---------------------------------------------------- | - | ------- | ------ | ----- | - | ------------ | - | ------- | - | ------------- | - | ------------- | - | ----------- | - |  | - | --- | ---- | - | - | ------ | ------ | 
|                                                                          |                                                      |   |         |        |       |   |              |   |         |   |               |   |               |   | Accumulated |   |  |   |    
|                                                                          |                                                      |   |         |        |       |   | Class A      |   |         |   |               |   | Additional    |   | 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 loss                             |   |         | 225    |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     | 225  |   |   |        |        | 
|                                                                          |                                                      |   |         |        |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     |      |   |   |        |       
|                                                                          | Comprehensive income                                 |   |         | 19,058 |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     |      |   |   |        |        | 
|                                                                          |                                                      |   |         |        |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     |      |   |   |        |       
|Issuance of common stock
upon exercise of warrants
by Internet affiliates |                                                      |   | 4,149   |        |       |   | 1            |   |         |   |               |   |               |   | 4,148       |   |  |   |     |      |   |   |        |       
|Issuance of common stock
upon exercise of options                         |                                                      |   | 9,960   |        |       |   | 4            |   |         |   |               |   |               |   | 9,956       |   |  |   |     |      |   |   |        |       
|Income tax benefit related
to stock options exercised                     |                                                      |   | 4,831   |        |       |   |              |   |         |   |               |   |               |   | 4,831       |   |  |   |     |      |   |   |        |       
|Contribution from USA                                                     |                                                      |   | 861     |        |       |   |              |   |         |   |               |   |               |   | 861         |   |  |   |     |      |   |   |        |       
|                                                                          |                                                      |   |         |        |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     |      |   |   |        |       
|Balance at June 30, 2002                                                  |                                                      | $ | 593,418 |        |       | $ | 187          |   |         | $ | 390           |   |               | $ | 533,252     |   |  | $ | (39 | )    |   | $ | 59,628 |       
|                                                                          |                                                      |   |         |        |       |   |              |   |         |   |               |   |               |   |             |   |  |   |     |      |   |   |        |       

The accompanying notes are an integral part of these statements.

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

|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |         |         |         |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | -------- | -------------- | -------- | ------- | ------- | ------- | ------- | -
|                                                                                 |                                                                  |                                                            |                                           |          | Six Months    
|                                                                                 |                                                                  |                                                            |                                           |          | Ended June 30,
|                                                                                 |                                                                  |                                                            |                                           |          |               
|                                                                                 |                                                                  |                                                            |                                           |          | 2002           |          | 2001   
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |        
|Cash flow from operating activities:                                             |                                                                  |                                                            |                                           |          |                |          |         |        
|Net income                                                                       |                                                                  | $                                                          | 31,767                                    |          |                | $        | 6,496   |        
|Adjustment to reconcile net income to net cash provided by operating
activities: |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 | Depreciation                                                     |                                                            |                                           | 950      |                |          |         | 436     |        
|                                                                                 | Amortization  other                                             |                                                            |                                           | 1,300    |                |          |         | 255     |        
|                                                                                 | Amortization of goodwill                                         |                                                            |                                           |         |                |          |         | 22,783  |        
|                                                                                 | Non-cash distribution and marketing                              |                                                            |                                           | 10,108   |                |          |         | 8,664   |        
|                                                                                 | Loss from disposition of assets                                  |                                                            |                                           | 68       |                |          |         |        |        
|                                                                                 | Deferred income taxes                                            |                                                            |                                           | 2,931    |                |          |         | 7,793   |        
|                                                                                 | Changes in operating assets and liabilities, net of acquisitions |                                                            |                                           |          |                |          |         |         |        
|                                                                                 |                                                                  | Restricted
cash equivalents                                |                                           |          | (2,979         | )        |         |         | (1,152  | )      
|                                                                                 |                                                                  | Accounts and notes receivable                              |                                           |          | (7,531         | )        |         |         | (2,801  | )      
|                                                                                 |                                                                  | Prepaid hotel rooms                                        |                                           |          | 1,044          |          |         |         | 791     |        
|                                                                                 |                                                                  | Accounts payable, trade                                    |                                           |          | 25,806         |          |         |         | 29,023  |        
|                                                                                 |                                                                  | Deferred revenue                                           |                                           |          | 55,699         |          |         |         | 29,243  |        
|                                                                                 |                                                                  | Intercompany payable                                       |                                           |          | 1,260          |          |         |         | 996     |        
|                                                                                 |                                                                  | Income tax payable/receivable                              |                                           |          | 9,306          |          |         |         | (11,195 | )      
|                                                                                 |                                                                  | Income
tax benefit upon exercise of employee stock options |                                           |          | 4,831          |          |         |         | 883     |        
|                                                                                 |                                                                  | Other accrued liabilities                                  |                                           |          | 3,998          |          |         |         | 733     |        
|                                                                                 |                                                                  | Other, net                                                 |                                           |          | (2,180         | )        |         |         | 533     |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 |                                                                  |                                                            | Net cash provided by operating activities |          |                | 136,378  |         |         |         | 93,481  |  
|Cash flow from investing activities:                                             |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 | Acquisitions, net of cash acquired                               |                                                            |                                           | (30      | )              |          |         | (47,934 | )      
|                                                                                 | Capital expenditures                                             |                                                            |                                           | (3,951   | )              |          |         | (2,703  | )      
|                                                                                 | Purchase of marketable securities                                |                                                            |                                           | (139,767 | )              |          |         |        |        
|                                                                                 | Proceeds from sale of marketable securities                      |                                                            |                                           |         |                |          |         | 22,672  |        
|                                                                                 | Purchase of intellectual properties                              |                                                            |                                           | (12,120  | )              |          |         |        |        
|                                                                                 | Other, net                                                       |                                                            |                                           |         |                |          |         | 37      |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 |                                                                  |                                                            | Net cash used in investing activities     |          |                | (155,868 | )       |         |         | (27,928 | )
|Cash flow from financing activities:                                             |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 | Net proceeds from exercise of stock options                      |                                                            |                                           | 9,960    |                |          |         | 2,078   |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 |                                                                  |                                                            | Net cash provided by financing activities |          |                | 9,960    |         |         |         | 2,078   |  
|Net increase (decrease) in cash and cash equivalents                             |                                                                  |                                                            | (9,530                                    | )        |                |          | 67,631  |        
|Cash and cash equivalents at beginning of period                                 |                                                                  |                                                            | 44,269                                    |          |                |          | 51,037  |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|Cash and cash equivalents at end of period                                       |                                                                  | $                                                          | 34,739                                    |          |                | $        | 118,668 |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|Supplemental cash flow information:                                              |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 | Cash paid for taxes                                              |                                                            | $                                         | 39       |                |          | $       | 5,585   |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|Non-cash financing activities:                                                   |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 | Contribution by USAi for television advertising                  |                                                            | $                                         | 861      |                |          | $       |        |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        
|                                                                                 | Issuance of common stock upon exercise of warrants               |                                                            | $                                         | 4,149    |                |          | $       | 30,208  |        
|                                                                                 |                                                                  |                                                            |                                           |          |                |          |         |        

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.

Advertising

Advertising expense for the three-month periods ending June 30, 2002 and
2001 was $8.9 million and $2.4 million, respectively. Advertising expense for
the six-month periods ending June 30, 2002 and 2001 was $13.4 million and $4.9
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 June 30, 2002, capitalized advertising is $1.5 million. Other
advertising costs are expensed in the period incurred.

Goodwill

Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, whereby
the Company does not amortize goodwill, but 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.

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
June 30, 2001 would have been $18.2 million, $12.3 million and $0.21,
respectively and, for the six months ending June 30, 2001, $32.4 million, $21.9
million and $0.38, respectively.

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Intellectual Properties

Intellectual
properties primarily consist of purchased web domain names, which
include hotels.com among others. 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
properties 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 $305.35
million and aggregate market value of $305.29 million resulting in a pre-tax
unrealized loss of $0.06 million. The cumulative unrealized loss of $0.06
million is shown as a component of comprehensive income net of income tax
benefits of $0.02 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 June 30, 2002 and 2001, the Company amortized $0.9
million and $1.2 million of the warrant costs, respectively. During the six
months ended June 30, 2002 and 2001, the Company amortized $1.8 million and
$2.4 million of the warrant costs, respectively.

In addition, upon completion of the Companys initial public offering and
in connection with an affiliation and marketing agreement, the Company issued a
performance warrant to acquire up to 2,447,955 shares of the Companys class A
common stock to Travelocity, the vesting of which was to be subject to
achieving certain performance targets. In March 2001, the Company entered into
an amendment to the affiliation agreement with Travelocity to extend the term
of the agreement through July 31, 2005, and to broaden and expand the
affiliation relationship. In connection with this amendment, the Company also
revised the terms of the performance warrant and waived the vesting
requirements as to a portion of the warrant, which resulted in 1,468,773 shares
underlying the performance warrant becoming immediately exercisable and the
remaining 979,182 shares continuing to be subject to achieving certain
performance targets. At the time of this amendment, the Company recorded an
asset of approximately $26.3 million based on the fair market value of the
warrants that became exercisable at such time, of which $1.49 million and $2.98
million was amortized during the three-month and six-month periods ending June
30, 2002, respectively. The asset is being amortized ratably over the remaining
term of the affiliation agreement. Through June 30, 2002, 383,369 of the
remaining shares underlying the performance warrant had vested and become
exercisable, and the Company has recorded an aggregate of $10.5 million of
additional non-cash deferred distribution and marketing expense based upon the
fair market value of such shares, of which $1.5 million and $4.2 million was
recorded as expense in the three-month and six-month periods ended June 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

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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 June 30, 2002 and 2001, the Company amortized $0.2 million of the warrant
costs, respectively, and during the six months ended June 30, 2002 and 2001,
the Company amortized $0.4 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 six months ended June 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 six months ended
June 30, 2002.

As of June 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 June 30, 2002 was $19.1 million
compared to $4.6 million for the same period in 2001. Comprehensive income for
the six months ended June 30, 2002 was $31.7 million compared to $6.4 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
June 30, 2002, we had room supply agreements with over 6,400 lodging properties
in 243 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 and Six Months Ended June 30, 2002 Compared to the Three Months and Six Months Ended June 30, 2001

Revenues

For the three months ended June 30, 2002, the Company generated revenues
of $229.7 million, an increase of 66.1% over the $138.3 million of revenues
generated in the same period in 2001. For the six months ended June 30, 2002,
the Company generated revenues of $395.4 million, an increase of 62.3% over the
$243.6 million of revenues generated in the same period in 2001. The increase
for the quarter and six-month period was primarily attributable to the launch
of our new website and brand, hotels.com,

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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 25 new markets during the quarter and 65 new markets during the
first six months of 2002, reaching a total of 243 markets compared to 146
markets at June 30, 2001, representing a 66.4% 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 133% to
$27.9 million in the second quarter of 2002 from $12.0 million in the second
quarter of 2001 and 138.1% to $43.1 million for the six months ended June 30,
2002 from $18.1 million for the same period in 2001. Revenues from the
Companys vacation rentals, which include condominiums, timeshares, and
vacation homes, increased 124% to $6.5 million in the second quarter of 2002
from $2.9 million in the second quarter of 2001 and 173.8% to $11.5 million in
for the six months ended June 30, 2002 from $4.2 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 19.0% and 18.8% of our total
revenues for the quarter and six months ended June 30, 2002, respectively. Due
to a mathematical error, the revenues derived through our agreement with
Travelocity were previously incorrectly reported as 16.1% of our total revenues
for the three-month period ended March 31, 2002 and 15.6% and 9.1% of our total
revenues for 2001 and 2000, respectively. The corrected percentages of our
total revenues derived through our agreement with Travelocity are approximately
18.6% for the three-month period ended March 31, 2002 and approximately 18.0%
and 10.5% for 2001 and 2000, respectively.

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 59.7% to $68.6 million in the second quarter of 2002 from $43.0
million in the second quarter of 2001. Gross profit margin for the three
months ended June 30, 2002 decreased to 29.9% from 31.1% for the prior year
period. The decrease in gross profit margin was primarily due to the increase
in costs associated with our international hotels as a result of significant
fluctuation in exchange rates in the second quarter of 2002.

Gross profit increased 62.2% to $120.9 million in the first six months of
2002 from $74.5 million in the first six months of 2001. Gross profit margin
for the six months ended June 30, 2002 and 2001 was 30.6%.

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 62.7% for the quarter ended June 30, 2002 over the same
period in 2001. As a percentage of net revenues, selling, general and
administrative expense for the three months ended June 30, 2002 decreased to
15.6% from 15.9% for the same period in 2001. Selling, general and
administrative expense increased 65.1% for the six months ended June 30, 2002
compared to the same period in 2001. As a percentage of revenues, selling,
general and administrative expense for the six months ended June 30, 2002
increased to 15.7% from 15.5% over the same period in 2001.

The increase in selling, general and administrative expense for the
three-month and six-month periods ended June 30, 2002 over the same periods for
2001 was due to an increase in advertising costs,

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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. Selling, general and administrative expense as a
percentage of net revenues, however, declined during the second quarter of 2002
due to the lower personnel costs and affiliate commission expense as a
percentage of net revenues, partially offset by higher advertising and
promotion expense as a percentage of net revenues related to the launch and
branding of hotels.com. The increase in selling, general and
administrative expense as a percentage of net revenues for the six months
ended June 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 decreased to $4.0 million for
the three months ended June 30, 2002 compared to $4.7 million in the prior year
period. For the six months ended June 30, 2002, non-cash distribution and
marketing expense increased to $10.1 million from $8.7 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 six months ended June 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 each of the third and fourth quarters 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 third and fourth quarters of 2002 and in
2003, but the amount is not known as it is based upon stock price.

For the six months ended June 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 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, whereby
the Company does not amortize goodwill, but 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 and six months ending June 30, 2001, goodwill
amortization expense amounted to $11.8 million and $22.8 million, respectively.

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.

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Reconciliation of income from operations and Adjusted EBITDA:

|                       |                                     |   |                             |       |                           |   |        |        |      |   |        |        |  |   |        |        | 
|---------------------- | ----------------------------------- | - | --------------------------- | ----- | ------------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                       |                                     |   | Three Months Ended June 30, |       | Six Months Ended June 30,
|                       |                                     |   |                             |       |                          
|                       |                                     |   | 2002                        |       | 2001                      |   | 2002   |        | 2001
|                       |                                     |   |                             |       |                           |   |        |        |     
|Income from operations |                                     | $ | 27,522                      |       |                           | $ | 4,083  |        |      | $ | 46,291 |        |  | $ | 4,678  |       
|Add:                   |                                     |   |                             |       |                           |   |        |        |      |   |        |        |  |   |        |       
|                       | Non-cash distribution and marketing |   |                             | 4,036 |                           |   |        | 4,733  |      |   |        | 10,108 |  |   |        | 8,664  | 
|                       | Amortization of goodwill            |   |                             |      |                           |   |        | 11,783 |      |   |        |       |  |   |        | 22,783 | 
|                       | Depreciation                        |   |                             | 518   |                           |   |        | 254    |      |   |        | 950    |  |   |        | 436    | 
|                       | Other amortization                  |   |                             | 778   |                           |   |        | 141    |      |   |        | 1,300  |  |   |        | 255    | 
|                       |                                     |   |                             |       |                           |   |        |        |      |   |        |        |  |   |        |       
|Adjusted EBITDA        |                                     | $ | 32,854                      |       |                           | $ | 20,994 |        |      | $ | 58,649 |        |  | $ | 36,816 |       
|                       |                                     |   |                             |       |                           |   |        |        |      |   |        |        |  |   |        |       

Adjusted EBITDA increased to $32.9 million for the quarter ended June 30,
2002, a 56.5% increase from $21.0 million for the prior year period. Adjusted
EBITDA as a percentage of net revenues was 14.3% for the quarter ended June 30,
2002, compared to 15.2% for the prior year period. The decrease in Adjusted
EBITDA as a percentage of net revenues during the second quarter of 2002 was
primarily due to a lower gross profit margin, partially offset by lower
selling, general and administrative expense as a percentage of net revenues.

Adjusted EBITDA increased to $58.6 million for the six months ended June
30, 2002, a 59.3% increase from $36.8 million for the prior year period.
Adjusted EBITDA as a percentage of net revenues was 14.8% for the six months
ended June 30, 2002, compared to 15.1% for the prior year period. The decrease
in Adjusted EBITDA as a percentage of net revenues during the six-month period
ended June 30, 2002 was primarily due to a higher selling, general and
administrative expense as a percentage of net revenues resulting from higher
advertising and promotion expense as a percentage of net revenues related to
the launch and branding of hotels.com.

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 June
30, 2002, we had $352.1 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 $136.4 million for the six
months ending June 30, 2002, compared to $93.5 million for the same period in
2001. Capital expenditures and the purchase of intellectual property were
$16.1 million for the six months ended June 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.

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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.

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 judgment. Management of
the Company is required to make certain estimates and assumptions during the
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States. These estimates and
assumptions impact the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. These estimates also impact the reported
amount of net earnings during any period. Actual results could differ from
those estimates. Because of the size of the financial statement elements they
related to, some of our accounting policies and estimates have a more
significant impact on our financial statements than others.

Long-Lived Assets

We assess the recoverability of the carrying value of long-lived assets
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 June 30,
2002, the Companys balance sheet includes $384.7 million of intangible assets,
net, and $11.1 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 resell
these rooms to consumers through our websites, third-party affiliated websites
and our toll-free call centers. Our revenues are generated principally through
the resale of these rooms, and we recognize as revenue the gross revenues
generated from the resale of these rooms. USA Interactive, our parent
company, intends to discuss the revenue presentation of our company
and Expedia, Inc., another subsidiary of USA Interactive, with the
Securities and Exchange Commission. Although our business models are
similar, 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 resale 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

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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 three and six months
ended June 30, 2002 would have been approximately $68.6 million and $120.9
million, respectively, and our revenues for the three and six months ended June 30, 2001 would have been approximately $43.0
million and $74.5 million, respectively, but there would have been no effect on our Adjusted
EBITDA, income from operations, net income or earnings per share.

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.

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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 three months ended
June 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 dollar.
The effect of foreign exchange rate fluctuations on Hotels.com for the three
months ended June 30, 2002, was an increase in the cost of rooms sold of
approximately $1.1 million.

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PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On June 2, 2002, the Companys Board of Directors received a letter from
its majority shareholder, USA, announcing USAs intention to make an exchange
offer in the near future for the shares of Hotels.com that it does not
currently own. The Board of Directors formed a Special Committee on June 3,
2002, composed entirely of independent directors to review and evaluate the
possible offer by USA if and when the offer is made. On June 3, 2002, the
following complaints were filed against the Company, the Board of Directors of
Hotels.com and USA in Chancery Court in New Castle County, Delaware:
David
Goldstein et al. v. Barry Diller, et al.; Wilhelm Unger et al.
v. Hotels.com, et
al.; Howard Keebler, et al. v. Hotels.com, et al.;
Chavy Weisz, et al. v. Elan J.
Blutinger, et al.; and Robert Kemp, et al. v. David Litman, et
al. The complaints
generally allege that the transaction would be a breach of duty and that the
indicated exchange ratio is unfair. Each of the complaints seeks, among other
things, injunctive relief against consummation of the transaction and damages
in an unspecified amount. The time for defendants to respond to the complaints
has not yet elapsed.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2002, the Company sold unregistered
securities as follows:

On April 17, 2002, the Company issued 45,036 shares of our Class A common
stock upon the exercise of warrants previously issued to a strategic partner of
the Company. The exercise price of the warrants was $16.00.

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




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the annual meeting of shareholders on May 21, 2002, the following
proposals were voted upon. Percentages are based on the total of the shares
voted for and against.

Concerning Election of Directors

|                      |  |                |             |                |  |  |           | 
|--------------------- |  | -------------- | ----------- | -------------- |  |  | --------- | 
|Nominees for Director |  | Votes Cast For |             | Votes Withheld
|                      |  |                |             |               
|Elan J. Blutinger     |  |                | 601,581,861 |                |  |  | 168,125   | 
|Robert Diener         |  |                | 600,118,657 |                |  |  | 1,631,329 | 
|Julius Genachowski    |  |                | 600,118,657 |                |  |  | 1,631,329 | 
|Beverly Harms         |  |                | 601,581,561 |                |  |  | 168,425   | 
|Victor A. Kaufman     |  |                | 601,580,441 |                |  |  | 169,545   | 
|Dara Khosrowshahi     |  |                | 600,119,746 |                |  |  | 1,630,240 | 
|David Litman          |  |                | 600,150,807 |                |  |  | 1,599,179 | 
|Daniel Marriott       |  |                | 600,118,536 |                |  |  | 1,631,450 | 
|Jon Miller            |  |                | 600,119,851 |                |  |  | 1,630,135 | 
|Eli Segal             |  |                | 601,581,761 |                |  |  | 168,225   | 

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Concerning Ratification of Independent Accountants

|                    |  |  |             |  |  |  |       |  
|------------------- |  |  | ----------- |  |  |  | ----- | -
|Votes Cast For:     |  |  | 601,704,309 |  |  |  | 99.99 | %
|Votes Cast Against: |  |  | 43,833      |  |  |  | 0.01  | %
|Abstentions:        |  |  | 1,844       |  |  |  |       |  
|Broker Non-Votes    |  |  |            |  |  |  |       |  

See also pages 1 though 4 and pages 12 through 14 of the registrants
definitive proxy statement dated April 29, 2002.




ITEM 5. OTHER INFORMATION

On June 2, 2002, the Companys Board of Directors received a letter from
its majority shareholder, USA, announcing USAs intention to make an
exchange offer in the near future for the shares of Hotels.com that it
does not currently own.  USA subsequently stated on June 5, 2002 that
it did not intend to commence an exchange offer in the near future but has
publicly stated on several occasions that it remains committed to pursuing
a transaction to acquire the balance of Hotels.com.  The Companys Board of
Directors formed a Special Committee on June 3, 2002 composed entirely of
independent directors to review and evaluate USAs proposal if and when one
is made.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits:
|--- |  | ---------



| | 4.1 |  | Specimen Certificate evidencing Class A common stock
| | --- |  | ----------------------------------------------------



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

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

        On April 25, 2002, the Company filed a report on
Form 8-K reporting under Item 5, attaching a press release announcing that the Company had changed its corporate name and identity
from Hotels Reservations Network, Inc. to Hotels.com through a short form merger with a wholly-owned subsidiary.

On June 25, 2002, the Company furnished information under Item 9 of Form
8-K regarding its presentation at the CIBC Heads in Beds Tour.

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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: August 14, 2002 |  | By:        |  | /s/ Mel Robinson                                  
|                      |  |            |  |                                                   
|                      |  |            |  | Mel Robinson
Chief Financial and Strategic Officer

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INDEX TO EXHIBITS

|        |  |                                                              | 
|------- |  | ------------------------------------------------------------ | 
|Exhibit |  | Description                                                  | 
|        |  |                                                             
|4.1     |  | Certificate evidencing Class A common stock (filed herewith)

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