##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[X]  |  | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|    
|     |  | for the Quarterly Period Ended September 30, 2001                                       
|    
|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

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

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

8140 Walnut Hill Lane
Suite 800
Dallas, Texas 75231
(Address of principal executive offices)

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

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



---

Indicate by check mark whether registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.

Yes [X] No [  ]

Indicate the number of shares outstanding of each of the issuers classes
of common stock as of September 30, 2001.

|                     |  |  |            | 
|-------------------- |  |  | ---------- | 
|Class                |  |  |            | 
|                     |  |  |            | 
|Class A Common Stock |  |  | 18,003,236 | 
|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 FLOWS         
|                               |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS                           
|PART II   OTHER INFORMATION  
|                               | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                               | ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K                                                      
|SIGNATURES                    



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##### Table of Contents



HOTEL RESERVATIONS NETWORK, INC.
FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2001

TABLE OF CONTENTS

|                                                                                               |                                                                                                                            |  |          |   | 
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- |  | -------- | - | 
|                                                                                               |                                                                                                                            |  | Page No. |  
|                                                                                               |                                                                                                                            |  |          |  
|PART I  FINANCIAL INFORMATION                                                                 |                                                                                                                            |  |          |  
|Item 1. Condensed Consolidated Financial Statements                                            |                                                                                                                            |  |          |  
|                                                                                               | Condensed Consolidated Balance Sheets as of September 30,
2001 (unaudited) and December 31, 2000                           |  |          | 3 | 
|                                                                                               | Unaudited Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2001 and 2000      |  |          | 4 | 
|                                                                                               | Unaudited Condensed Consolidated Statement of Changes in
Stockholders Equity for the Nine Months Ended September 30,
2001 |  |          | 5 | 
|                                                                                               | Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2001 and 2000            |  |          | 6 | 
|                                                                                               | Notes to Unaudited Condensed Consolidated Financial Statements                                                             |  |          | 7 | 
|Item 2. Managements Discussion and Analysis of Financial Condition
 and Results of Operations |                                                                                                                            |  | 10       |  
|Item 3. Quantitative and Qualitative Disclosure About Market Risks                             |                                                                                                                            |  | 14       |  
|PART II  OTHER INFORMATION                                                                    |                                                                                                                            |  |          |  
|Item 2. Changes in Securities and Uses of Proceeds                                             |                                                                                                                            |  | 15       |  
|Item 6. Exhibits and Reports on Form 8-K                                                       |                                                                                                                            |  | 15       |  
|SIGNATURES                                                                                     |                                                                                                                            |  | 16       |  





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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.




HOTEL RESERVATIONS NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

|                                                                                                                                                                             |                                      |        |         |               |  |   |              |   |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------ | ------- | ------------- |  | - | ------------ | - |  | 
|                                                                                                                                                                             |                                      |        |         | September 30, |  |   | December 31, |  
|                                                                                                                                                                             |                                      |        |         | 2001          |  |   | 2000         |  
|                                                                                                                                                                             |                                      |        |         |               |  |   |              |  
|                                                                                                                                                                             |                                      |        |         | (Unaudited)   |  |   |              |   | 
|                                                                                                                                                                             |                                      | ASSETS |         |               |  |   |              |   |  | 
|CURRENT ASSETS                                                                                                                                                               |                                      |        |         |               |  |   |              |  
|Cash and cash equivalents                                                                                                                                                    |                                      | $      | 69,589  |               |  | $ | 51,037       |  
|Restricted cash equivalents                                                                                                                                                  |                                      |        | 3,485   |               |  |   | 2,021        |  
|Marketable securities  available for sale                                                                                                                                   |                                      |        | 139,579 |               |  |   | 118,413      |  
|Accounts receivable, net of allowance of $226 at September 30, 2001,
and $0 at December 31, 2000                                                                             |                                      |        | 5,564   |               |  |   | 4,499        |  
|Prepaid hotel rooms                                                                                                                                                          |                                      |        | 1,242   |               |  |   | 1,626        |  
|Current portion of non-cash deferred distribution and marketing costs                                                                                                        |                                      |        | 10,195  |               |  |   | 5,403        |  
|Income tax receivable                                                                                                                                                        |                                      |        | 1,350   |               |  |   |             |  
|Other                                                                                                                                                                        |                                      |        | 1,951   |               |  |   | 2,240        |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|Total current assets                                                                                                                                                         |                                      |        | 232,955 |               |  |   | 185,239      |  
|PROPERTY AND EQUIPMENT                                                                                                                                                       |                                      |        |         |               |  |   |              |  
|Computer equipment and software                                                                                                                                              |                                      |        | 6,774   |               |  |   | 4,110        |  
|Buildings and leasehold improvements                                                                                                                                         |                                      |        | 965     |               |  |   | 285          |  
|Furniture and other equipment                                                                                                                                                |                                      |        | 2,473   |               |  |   | 794          |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|                                                                                                                                                                             |                                      |        | 10,212  |               |  |   | 5,189        |  
|Less accumulated depreciation and amortization                                                                                                                               |                                      |        | (2,169  | )             |  |   | (1,065       | )
|                                                                                                                                                                             |                                      |        |         |               |  |  
|                                                                                                                                                                             |                                      |        | 8,043   |               |  |   | 4,124        |  
|OTHER ASSETS                                                                                                                                                                 |                                      |        |         |               |  |   |              |  
|Investment in TravelNow.com                                                                                                                                                  |                                      |        |        |               |  |   | 3,240        |  
|Goodwill, net of amortization of $85,997 and $51,387 at September 30, 2001
and December 31, 2000, respectively                                                               |                                      |        | 369,692 |               |  |   | 354,904      |  
|Non-cash deferred distribution and marketing costs, less current portion                                                                                                     |                                      |        | 22,057  |               |  |   | 8,046        |  
|Deferred tax asset                                                                                                                                                           |                                      |        | 8,319   |               |  |   | 6,715        |  
|Intellectual Property                                                                                                                                                        |                                      |        | 11,032  |               |  |   |             |  
|Other assets                                                                                                                                                                 |                                      |        | 82      |               |  |   | 60           |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|                                                                                                                                                                             |                                      | $      | 652,180 |               |  | $ | 562,328      |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|                                                                                                                                                                             | LIABILITIES AND STOCKHOLDERS EQUITY |        |         |               |  |   |              |   | 
|CURRENT LIABILITIES                                                                                                                                                          |                                      |        |         |               |  |   |              |  
|Accounts payable, trade                                                                                                                                                      |                                      | $      | 50,662  |               |  | $ | 30,334       |  
|Deferred revenue                                                                                                                                                             |                                      |        | 48,000  |               |  |   | 31,221       |  
|Income tax payable                                                                                                                                                           |                                      |        |        |               |  |   | 7,116        |  
|Deferred income tax payable                                                                                                                                                  |                                      |        | 9,096   |               |  |   |             |  
|Due to USAi                                                                                                                                                                  |                                      |        | 1,055   |               |  |   | 2,092        |  
|Other accrued liabilities                                                                                                                                                    |                                      |        | 9,480   |               |  |   | 7,370        |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|Total current liabilities                                                                                                                                                    |                                      |        | 118,293 |               |  |   | 78,133       |  
|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, 18,003,236
and 16,234,900 shares outstanding at September 30, 2001, and December 31, 2000,
respectively |                                      |        | 181     |               |  |   | 163          |  
|Class B common stock, $.01 par value; 150,000,000 shares authorized, 38,999,100
shares outstanding at September 30, 2001 and December 31, 2000                               |                                      |        | 390     |               |  |   | 390          |  
|Additional paid-in capital                                                                                                                                                   |                                      |        | 510,001 |               |  |   | 468,611      |  
|Retained earnings                                                                                                                                                            |                                      |        | 23,056  |               |  |   | 14,954       |  
|Accumulated other comprehensive income                                                                                                                                       |                                      |        | 259     |               |  |   | 77           |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|Total stockholders equity                                                                                                                                                   |                                      |        | 533,887 |               |  |   | 484,195      |  
|                                                                                                                                                                             |                                      |        |         |               |  |  
|                                                                                                                                                                             |                                      | $      | 652,180 |               |  | $ | 562,328      |  
|                                                                                                                                                                             |                                      |        |         |               |  |  

The accompanying notes are an integral part of these statements.

3



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HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         |  |  |   |         | 
|----------------------------------------------------------------------------------- |  | ------------------- | ------- |  | ------------------- | - | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|                                                                                    |  | Three Months        |         |  | Nine Months         |  
|                                                                                    |  | Ended September 30, |         |  | Ended September 30, |  
|                                                                                    |  |                     |         |  |                     |  
|                                                                                    |  | 2001                |         |  | 2000                |   |        | 2001 |  |   | 2000    | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Net revenues                                                                        |  | $                   | 151,241 |  |                     | $ | 94,618 |      |  | $ | 394,829 |  |  | $ | 227,963 | 
|Cost of revenues                                                                    |  |                     | 105,692 |  |                     |   | 65,723 |      |  |   | 274,755 |  |  |   | 158,276 | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Gross profit                                                                        |  |                     | 45,549  |  |                     |   | 28,895 |      |  |   | 120,074 |  |  |   | 69,687  | 
|Operating costs and expenses:                                                       |  |                     |         |  |                     |   |        |      |  |   |         |  |  |   |         | 
|Selling, general and administrative                                                 |  |                     | 23,774  |  |                     |   | 14,987 |      |  |   | 61,483  |  |  |   | 34,683  | 
|Non-cash distribution and marketing                                                 |  |                     | 3,547   |  |                     |   | 1,235  |      |  |   | 12,211  |  |  |   | 2,956   | 
|Amortization of goodwill                                                            |  |                     | 11,827  |  |                     |   | 10,591 |      |  |   | 34,610  |  |  |   | 27,871  | 
|Depreciation and other amortization                                                 |  |                     | 506     |  |                     |   | 182    |      |  |   | 1,197   |  |  |   | 527     | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Total operating costs and expenses                                                  |  |                     | 39,654  |  |                     |   | 26,995 |      |  |   | 109,501 |  |  |   | 66,037  | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Income from operations                                                              |  |                     | 5,895   |  |                     |   | 1,900  |      |  |   | 10,573  |  |  |   | 3,650   | 
|Interest and other income, net                                                      |  |                     | 1,979   |  |                     |   | 2,594  |      |  |   | 6,927   |  |  |   | 5,584   | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Income before income tax expense                                                    |  |                     | 7,874   |  |                     |   | 4,494  |      |  |   | 17,500  |  |  |   | 9,234   | 
|Income tax expense                                                                  |  |                     | 6,268   |  |                     |   | 1,730  |      |  |   | 9,398   |  |  |   | 3,555   | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Net income                                                                          |  | $                   | 1,606   |  |                     | $ | 2,764  |      |  | $ | 8,102   |  |  | $ | 5,679   | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Basic and diluted earnings per
common share                                         |  | $                   | 0.03    |  |                     | $ | 0.05   |      |  | $ | 0.14    |  |  | $ | 0.11    | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Weighted average number of shares
used to compute basic earnings per
common share   |  |                     | 56,989  |  |                     |   | 55,214 |      |  |   | 56,260  |  |  |   | 51,957  | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 
|Weighted average number of shares
used to compute diluted earnings
per common share |  |                     | 57,469  |  |                     |   | 56,487 |      |  |   | 57,160  |  |  |   | 52,660  | 
|                                                                                    |  |                     |         |  |                     |   |        |      |  |   |         | 

The accompanying notes are an integral part of these statements.

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HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)

|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |        |       | 
|----------------------------------------------------- | -------------------------------------------------------- | - | ------- | ----- | - | ------------ | ------- | - | ------------ | ------- | --- | ------- | ------- | - | ------------- | ------------- |  | ----------------- | -------- | --- | - | - | ------ | ----- | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   | Additional    |               |  | Accumulated Other |          |     |   |   |       
|                                                      |                                                          |   |         |       |   |              | Class A |   |              | Class B |     |         | Paid-In |   |               | Comprehensive |  |                   | Retained |    
|                                                      |                                                          |   | Total   |       |   | Common Stock |         |   | Common Stock |         |     | Capital |         |   | Income (Loss) |               |  | Earnings          |         
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |         
|Balance at January 1, 2001                            |                                                          | $ | 484,195 |       |   | $            | 163     |   |              | $       | 390 |         |         | $ | 468,611       |               |  | $                 | 77       |     |   | $ | 14,954 |      
|Comprehensive income:                                 |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |        |      
|                                                      | Net income for the three
months ended March 31,
2001     |   |         | 1,846 |   |              |         |  |              |         |     |        |         |   |               |              |  |                   |          |    |   |   |        | 1,846 | 
|                                                      | Other comprehensive loss                                 |   |         | (36   | ) |              |         |  |              |         |     |        |         |   |               |              |  |                   |          | (36 | ) |   |        |      | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |       
|                                                      | Comprehensive income                                     |   |         | 1,810 |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |        |       | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |       
|                                                      | Net income for the three
months ended June
30, 2001      |   |         | 4,650 |   |              |         |  |              |         |     |        |         |   |               |              |  |                   |          |    |   |   |        | 4,650 | 
|                                                      | Other comprehensive loss                                 |   |         | (64   | ) |              |         |  |              |         |     |        |         |   |               |              |  |                   |          | (64 | ) |   |        |      | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |       
|                                                      | Comprehensive income                                     |   |         | 4,586 |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |        |       | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |       
|                                                      | Net income for the three
months ended September
30, 2001 |   |         | 1,606 |   |              |         |  |              |         |     |        |         |   |               |              |  |                   |          |    |   |   |        | 1,606 | 
|                                                      | Other comprehensive income                               |   |         | 282   |   |              |         |  |              |         |     |        |         |   |               |              |  |                   |          | 282 |   |   |        |      | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |       
|                                                      | Comprehensive income                                     |   |         | 1,888 |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |        |       | 
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                   |          |     |   |   |       
|Issuance of stock warrants to
internet affiliates     |                                                          |   | 31,013  |       |   |              |        |   |              |         |    |         |         |   | 31,013        |               |  |                   |         |     |   |   |       |      
|Issuance of common stock upon
exercise of options     |                                                          |   | 6,668   |       |   |              | 4       |   |              |         |    |         |         |   | 6,664         |               |  |                   |         |     |   |   |       |      
|Issuance of common stock upon
exercise of warrants    |                                                          |   |        |       |   |              | 14      |   |              |         |    |         |         |   | (14           | )             |  |                   |         |     |   |   |       |      
|Income tax benefit related to
stock options exercised |                                                          |   | 3,727   |       |   |              |        |   |              |         |    |         |         |   | 3,727         |               |  |                   |         |     |   |   |       |      
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                  
|Balance at September 30, 2001                         |                                                          | $ | 533,887 |       |   | $            | 181     |   |              | $       | 390 |         |         | $ | 510,001       |               |  | $                 | 259      |     |   | $ | 23,056 |      
|                                                      |                                                          |   |         |       |   |              |         |   |              |         |     |         |         |   |               |               |  |                  

The accompanying notes are an integral part of these statements.

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HOTEL RESERVATIONS NETWORK, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

|                                                                                 |                                                                        |                               |                                           |         |                     |         |         |         |        |         |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------- | ----------------------------------------- | ------- | ------------------- | ------- | ------- | ------- | ------ | ------- | -
|                                                                                 |                                                                        |                               |                                           |         | Nine Months         |        
|                                                                                 |                                                                        |                               |                                           |         | Ended September 30, |        
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|                                                                                 |                                                                        |                               |                                           |         | 2001                |         |         | 2000    |       
|                                                                                 |                                                                        |                               |                                           |         |                     |         |         |         |       
|Cash flows from operating activities:                                            |                                                                        |                               |                                           |         |                     |         |         |        
|Net income                                                                       |                                                                        | $                             | 8,102                                     |         |                     | $       | 5,679   |        
|Adjustment to reconcile net income to net cash provided by operating
activities: |                                                                        |                               |                                           |         |                     |         |         |        
|                                                                                 | Depreciation and other amortization                                    |                               |                                           | 1,197   |                     |         |         | 527     |       
|                                                                                 | Amortization of goodwill                                               |                               |                                           | 34,610  |                     |         |         | 27,871  |       
|                                                                                 | Amortization of deferred distribution and marketing costs              |                               |                                           | 12,211  |                     |         |         | 2,956   |       
|                                                                                 | Deferred income taxes                                                  |                               |                                           | 7,492   |                     |         |         | (4,300  | )     
|                                                                                 | Changes in operating assets and liabilities, net of acquisitions       |                               |                                           |         |                     |         |         |         |       
|                                                                                 |                                                                        | Restricted cash               |                                           |         | (1,464              | )       |         |         |       |        
|                                                                                 |                                                                        | Accounts and notes receivable |                                           |         | (162                | )       |         |         | (22    | )      
|                                                                                 |                                                                        | Prepaid hotel rooms           |                                           |         | 384                 |         |         |         | (224   | )      
|                                                                                 |                                                                        | Accounts payable, trade       |                                           |         | 19,231              |         |         |         | 13,356 |        
|                                                                                 |                                                                        | Deferred revenue              |                                           |         | 16,293              |         |         |         | 27,049 |        
|                                                                                 |                                                                        | Due to USAi, net              |                                           |         | (1,037              | )       |         |         | 1,955  |        
|                                                                                 |                                                                        | Income tax payable/receivable |                                           |         | (4,830              | )       |         |         | 1,903  |        
|                                                                                 |                                                                        | Other accrued liabilities     |                                           |         | 4,529               |         |         |         | 890    |        
|                                                                                 |                                                                        | Other, net                    |                                           |         | 409                 |         |         |         | (2,107 | )      
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|                                                                                 |                                                                        |                               | Net cash provided by operating activities |         |                     | 96,965  |         |         |        | 75,533  |  
|Cash flows from investing activities:                                            |                                                                        |                               |                                           |         |                     |         |         |        
|                                                                                 | Payment of purchase price for acquisition of predecessor               |                               |                                           |        |                     |         |         | (5,000  | )     
|                                                                                 | Capital expenditures                                                   |                               |                                           | (3,615  | )                   |         |         | (1,370  | )     
|                                                                                 | Purchase of marketable securities                                      |                               |                                           | (20,894 | )                   |         |         | (50,216 | )     
|                                                                                 | Acquisitions, net of cash acquired                                     |                               |                                           | (49,450 | )                   |         |         |        |       
|                                                                                 | Purchase of intellectual properties                                    |                               |                                           | (11,100 | )                   |         |         |        |       
|                                                                                 | Other, net                                                             |                               |                                           | (22     | )                   |         |         | 4       |       
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|                                                                                 |                                                                        |                               | Net cash used in investing activities     |         |                     | (85,081 | )       |         |        | (56,582 | )
|Cash flows from financing activities:                                            |                                                                        |                               |                                           |         |                     |         |         |        
|                                                                                 | Net proceeds from issuance of stock                                    |                               |                                           |        |                     |         |         | 90,461  |       
|                                                                                 | Net proceeds from exercise of stock options                            |                               |                                           | 6,668   |                     |         |         |        |       
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|                                                                                 |                                                                        |                               | Net cash provided by financing activities |         |                     | 6,668   |         |         |        | 90,461  |  
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|Net increase in cash and cash equivalents                                        |                                                                        |                               | 18,552                                    |         |                     |         | 109,412 |        
|Cash and cash equivalents at beginning of period                                 |                                                                        |                               | 51,037                                    |         |                     |         | 6,257   |        
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|Cash and cash equivalents at end of period                                       |                                                                        | $                             | 69,589                                    |         |                     | $       | 115,669 |        
|                                                                                 |                                                                        |                               |                                           |         |                     |        
|Supplemental cash flow information:                                              |                                                                        |                               |                                           |         |                     |         |         |        
|                                                                                 | Cash paid for interest                                                 |                               | $                                         |        |                     |         | $       | 34      |       
|                                                                                 | Cash paid for taxes                                                    |                               | $                                         | 6,734   |                     |         | $       | 5,984   |       
|Non-cash financing activities:                                                   |                                                                        |                               |                                           |         |                     |         |         |        
|                                                                                 | Capital contribution by USAi to fund purchase price liability          |                               | $                                         |        |                     |         | $       | 58,328  |       
|                                                                                 | Issuance of Warrants                                                   |                               | $                                         |        |                     |         | $       | 14,755  |       
|                                                                                 | Issuance of common stock in connection with acquisition of
predecessor |                               | $                                         |        |                     |         | $       | 159,998 |       

The accompanying notes are an integral part of these statements.

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HOTEL RESERVATIONS NETWORK, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Organization

Hotel Reservations Network, Inc. (Hotel Reservations Network or the
Company) is a leading provider of discount hotel rooms in North America, the Caribbean, Western Europe and Asia for resale in the
consumer markets. The
Company is a majority-owned subsidiary of USA Networks, Inc. (USAi).

On February 25, 2000, the Company completed an initial public offering of
6,210,000 shares of class A common stock. See Note 2 for further discussion.

Basis of Presentation

In the opinion of the Company, all adjustments including normal recurring
adjustments necessary for a fair presentation of such 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 2000 consolidated financial statements
included in the Companys Annual Report on Form 10-K.

Advertising

Advertising expense for the three-month and nine-month periods ended
September 30, 2001 was $2.9 million and $7.8 million, respectively. Advertising
expense for the three-month and nine-month periods ended September 30, 2000 was
$2.5 million and $5.9 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 September 30, 2001, capitalized
advertising was $0.24 million. Other advertising costs are expensed in the
period incurred.

New Accounting Pronouncement

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the statement is expected to result in an
increase in income before taxes of approximately $47.3 million per year. The

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Company will perform the first of the required impairment tests of
goodwill as of January 1, 2002 and has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.

NOTE 2  INITIAL PUBLIC OFFERING OF COMMON STOCK

On February 25, 2000, the Company completed an initial public offering in
which it sold 6,210,000 shares of class A common stock at $16.00 per share,
raising $90.0 million in proceeds, net of offering expenses. Immediately prior
to the offering the Company had 9,999,900 shares of class A common stock issued
to the sellers of the predecessor business and 38,999,100 shares of class B
common stock outstanding.

NOTE 3  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 $139.2 million
and aggregate market value of $139.6 million resulting in a pre-tax unrealized
gain of $0.4 million. The cumulative unrealized gain of $0.4 million is shown
as a component of comprehensive income net of income tax cost of $0.14 million.
These investments have maturity dates generally less than one year.

NOTE 4  NON-CASH DEFERRED DISTRIBUTION AND MARKETING COSTS

In January 2000, HRN entered into an exclusive affiliate distribution and
marketing agreement and issued a performance warrant upon the completion of the
public offering, which, if fully vested, would have permitted the affiliate to
acquire 2,447,955 shares of class A common stock at the initial public offering
price of $16.00. On March 3, 2001, the Company restructured the affiliate
distribution and marketing agreement whereby the term of the agreement was
extended through July, 2005 in exchange for waiver of all performance vesting
requirements and all exercise restrictions on 60% of the performance warrants
(1,468,773 shares) originally issued to such affiliate. The remaining 40% of
the performance warrant (979,182 shares) will become vested based upon
achieving certain performance targets during the term of the agreement. As a
result of the restructured agreement, the Company deferred additional warrant
costs of $26.3 million. The Company amortized $1.5 million and $3.5 million of
such costs during the quarter and nine months ended September 30, 2001,
respectively. The remainder will be amortized over the amended term of the
agreement.

The fair value of the warrants with performance features will be measured
quarterly and will be charged to expense as non-cash distribution and marketing
expense as they are earned. For the quarter and nine months ended September
30, 2001, the Company recorded an expense of approximately $0.8 million and
$4.7 million, respectively, related to the performance warrants earned.

Additionally, in November 2000 and March 2001, the Company entered into
additional affiliate distribution and marketing agreements and agreed to issue
warrants based upon the affiliates achieving certain performance targets. If
the targets are met in full, the Company will be required to issue warrants to
acquire an aggregate of 3.1 million shares of class A common stock at an
average price calculated at the end of each performance measurement period. No
warrants were required to be issued under these agreements during the quarter
ended September 30, 2001.

In February 2000, the Company entered into other exclusive affiliate
distribution and marketing agreements and issued 1,428,365 warrants to purchase
class A common stock at the initial public offering price of $16.00.
Additionally, in November 2000, the Company entered into another affiliate
distribution and marketing agreement and issued 95,358 warrants to purchase
class A common stock at an exercise price of $31.46. These 1,523,723 warrants
are non-forfeitable, fully vested and exercisable and are not

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subject to any performance targets. The Company has deferred the cost of
$17.7 million for these warrants, and is amortizing the cost over the term of
the affiliate agreements, which range from two to five years. During the
quarter and nine months ended September 30, 2001, the Company amortized $1.25
million and $4.0 million of the warrant costs, respectively. During the
quarter and nine months ended September 30, 2000, the Company amortized $1.2
million and $3.0 million, respectively.

NOTE 5  ACQUISITION

In December 2000, the Company agreed to acquire 1,080,000 shares for $3.2
million ($3 per share), representing a 9.86% interest in TravelNow.com Inc.
(TravelNow), a leading Internet travel site with one of the largest travel
affiliate programs on the Web. On January 3, 2001, the Company entered into a
definitive merger agreement pursuant to which the Company agreed to acquire all
of the remaining outstanding shares of TravelNow for $4.16 per share in cash,
as well as certain other contractual payments in the transaction. The
acquisition was consummated on February 16, 2001, and TravelNow became a
wholly-owned subsidiary of the Company. The total purchase price, net of cash
acquired, including acquisition expense, was approximately $47.8 million and
was accounted for as a purchase, resulting in $47.8 million of goodwill.

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

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

NOTE 6  INCOME TAX

The Companys effective tax rate has increased to 53.7% for the nine
months ended September 30, 2001 as a result of a decrease in estimated value of
goodwill for income tax purposes determined in the third quarter associated
with restricted shares of class A common stock issued to the sellers of our
predecessor business immediately prior to our initial public offering.

NOTE 7  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is net income (loss) plus other comprehensive
income (loss), which consists of changes in unrealized gain (losses) on
marketable securities available for sale.

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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,
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 September 30, 2001 we had
room supply agreements with over 3,800 lodging properties in 171 major markets
in North America, the Caribbean, Western Europe and Asia. Our websites feature
traveler oriented interfaces which 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.

Overview

We contract with hotels and other lodging properties in advance for volume
purchases and guaranteed availability of rooms at wholesale prices and resell
these rooms to consumers through our websites, third-party affiliated websites
and our toll-free call centers. Our revenues are generated principally through
the resale of the rooms. Our cost of goods sold includes the cost of rooms
sold.

Following our acquisition of TravelNow.com Inc. in February 2001, we began
offering customers the ability to book hotel rooms at over 40,000 hotels (in
addition to the hotels with which we have wholesale supply agreements) in over
5,000 cities, air travel on 300 airlines, and car rentals through over 60 car
rental companies. We earn a commission on the booking of such travel products
either as a percentage of the gross dollar value of the travel booking or as a
fixed dollar amount per booking.

RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000.

Recent Events

On September 11, 2001 terrorists attacked the United States. Following
the terrorist attacks, the United States launched a military offensive in
Afghanistan against the suspected terrorists and their supporters. The
combination of the September 11th terrorist attacks and the military response
has had a significant negative effect on the travel industry as a whole as
leisure and business travelers have been reluctant to travel. Airlines and
hotel and other lodging properties responded to the decreased demand by
reducing schedules and room rates significantly.

This reduction in travel affected our company significantly during the
last three weeks of September 2001 as new bookings were substantially below,
and cancellations of existing bookings were substantially above, pre-September
11th levels, which in turn negatively impacted our revenues and EBITDA.
Although as of early November 2001 our transaction volumes (reservations and
room nights sold) have since returned to near pre-September 11th levels, our
revenues continue to be affected by reduced room rates in the hotel industry
generally. As a result, we expect our revenues, EBITDA and EBITDA as a
percentage of net revenues to be negatively impacted in the fourth quarter of
2001. We expect that hotel room rates will remain at unusually low levels
throughout the fourth quarter of 2001, and will gradually increase in 2002.

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Revenues

For the quarter ended September 30, 2001, the company generated revenues
of $151.2 million, an increase of 59.8% over the $94.6 million of revenues
generated in the same period in 2000. For the nine months ended September 30,
2001, the Company generated revenues of $394.8 million, an increase of 73.2%
over the $228.0 million of revenues generated in the same period in 2000. The
increase for the quarter and nine-month period was primarily attributable to
increased room sales through our Internet sites, from the significant expansion
in our affiliate program and from the acquisition of TravelNow in February
2001. 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.
Sales from affiliates (both web affiliates and call center affiliates)
accounted for approximately 66.0% and 65.1% of the total revenues for the quarter
and nine months ended September 30, 2001 compared to 53.1% and 49.7% for the quarter and nine months ended September 30, 2000.

Revenues also increased due to the addition of new cities in which we
offer hotel rooms, an increase in hotels offered in existing cities, and an
increase in room allotments available for sale. We expanded into 25 new markets
during the quarter and 74 new markets during the nine-month period, reaching a
total of 171 compared to 83 at September 30, 2000, representing a 106.0%
increase.

Cost of Sales and Gross Profit

Cost
of sales includes the cost of rooms sold. The increase in cost of
revenues and gross profit corresponds to the growth in net revenues. Gross
profit increased 57.4% to $45.5 million in the third quarter of 2001 from $28.9
million in the third quarter of 2000. Gross profit margin for the three months
ended September 30, 2001 and September 30, 2000 was 30.1% and 30.5%,
respectively. Gross profit margin declined slightly as a result of our
decision to focus somewhat more on acquiring new customers and increasing
market share, and on the absolute amount of gross profit dollars, instead of
solely on gross profit margin. The decrease in gross profit margin was
partially offset by the inclusion of TravelNow.coms higher margin commission
revenues. Additionally, we have established a reserve for expected costs associated with reservation cancellations resulting from
the September 11th terrorist attacks, which has contributed to the slight
decline in gross profit margin.

Gross profit increased 72.3% to $120.1 million in the first nine months of
2001 from $69.7 million in the first nine months of 2000. Gross profit margin
for the nine months ended September 30, 2001 and September 30, 2000 was 30.4%
and 30.6%, respectively. The gross profit margin for the nine-month period
ended September 30, 2001 was impacted by the same factors discussed above.

Selling, General and Administrative Costs

Selling, general and administrative costs consist primarily of (1)
compensation for personnel (2) affiliate commissions (3) credit card fees (4)
advertising and promotion (5) telecommunications and (6) other overhead costs
including occupancy costs. Overall selling, general and administrative costs
increased 58.6% for the quarter ended September 30, 2001 over the same period
in 2000. As a percentage of net revenues, selling, general and administrative
costs for the three months ended September 30, 2001 decreased slightly to 15.7%
from 15.8% for the same period in 2000.

Overall selling, general and administrative costs increased 77.3% for the
nine months ended September 30, 2001 over the same period in 2000. As a
percentage of net revenues, selling, general and administrative costs for the
nine months ended September 30, 2001 increased to 15.6% from 15.2% for the same
period in 2000.

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The increase in selling, general and administrative costs as a percentage
of net revenues for the nine-month period was a result of an increase in
affiliate commissions corresponding to the increase in the amount of net
revenues generated through our affiliate network, and an increase in personnel
costs as a percentage of revenues due to additional staffing levels related to
current and anticipated future growth.

Non-Cash Distribution and Marketing

Non-cash deferred distribution and marketing costs increased to $12.2
million for the nine months ended September 30, 2001 compared to $3.0 million
in the prior year period. Non-cash deferred distribution and marketing costs
consist of amortization of the fair value of warrants issued to certain
affiliates with whom we entered into exclusive distribution and marketing
agreements. The warrants were issued in 2000 and are amortized over the term
of the warrant agreements. The increase in non-cash deferred distribution and
marketing costs in 2001 resulted from additional warrants issued in late 2000,
and the vesting of certain performance warrants which occurred in 2001 (see
Note 4  Notes to Unaudited Condensed Consolidated Financial Statements for
further details). Additionally, non-cash deferred distribution and marketing
costs for the nine months ended September 30, 2000 included only seven months
of amortization.

Amortization of Goodwill

Goodwill is amortized over a life of ten years and relates to amounts
assigned due to the acquisition of the predecessor business, including
contingent payments, and the acquisition of TravelNow.com. The increase in
goodwill amortization expense reflects amortization of goodwill related to the
acquisition of TravelNow.com in February 2001.

Other Assets

During the third quarter of 2001, the company acquired certain
intellectual property, which is amortized over its estimated useful life of ten
years.

Income Tax Expense

Income tax expense increased to $6.3 million for the three months ended
September 30, 2001 as compared to $1.7 million in the prior year period, and our
effective tax rate increased to 79.6% for the three months ended September 30,
2001 from 38.5% for the prior year period. The increase in income tax expense
and effective tax rate resulted from a decrease in estimated value of goodwill
for income tax purposes associated with restricted shares of Class A common
stock issued to the sellers of our predecessor business immediately prior to
our initial public offering. Such decrease necessitated a one-time catch-up
adjustment to income tax expense for the third quarter of 2001 and will result
in a slight increase in our effective tax rate in future periods.

EBITDA

Earnings before interest, income taxes, depreciation and amortization
(EBITDA) is defined as operating profit plus depreciation, amortization of
intangibles, and amortization of non-cash distribution and marketing expense.
EBITDA is presented here as a management tool and as a valuation methodology
for companies in our industry. EBITDA does not purport to represent cash
provided by operating activities. 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. EBITDA may not
be a comparable calculation of similarly titled measures by other companies.

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EBITDA increased to $21.8 million for the quarter ended September 30,
2001, a 56.8% increase from $13.9 million for the prior year period. EBITDA as
a percentage of net revenues was 14.4% for the quarter ended September 30,
2001, compared to 14.7% for the prior year period.

EBITDA increased to $58.6 million for the nine months ended September 30,
2001, a 67.4% increase from $35.0 million for the prior year period. EBITDA as
a percentage of net revenues, or EBITDA margin, was 14.8% for the nine months
ended September 30, 2001, compared to 15.4% for the prior year period.

The decrease in EBITDA margin for the three months ended September 30,
2001 reflects the lower gross profit. The decrease in EBITDA margin for the
nine months ended September 30, 2001 reflects the increase in selling, general
and administrative expense as a percentage of revenues and the lower gross
profit.

Future Trends

As a result of the downturn in the travel industry as a whole following
the September 11th terrorist attacks and the military response to the attacks
and the continuing reluctance of business and leisure travelers to travel, we
expect historically low room rates and historically high cancellation rates in
the fourth quarter of 2001, which will negatively impact revenues in the fourth
quarter. We also expect that EBITDA margin will be significantly lower in the
fourth quarter of 2001 than for the prior year period as a result of lower room
rates and abnormally high costs associated with programming upgrades and
preparatory work for our branding campaign, which we expect to launch in early
2002.

We expect EBITDA margin in fiscal year 2002 to decrease to approximately
12.5% from our historical level of approximately 15% due to costs associated
with our branding campaign (expected to range from $10 million to $15 million)
and expected lower room rates.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have funded our operations through cash generated from
operating activities. Our company historically has been debt free. In
addition, on February 25, 2000, we completed an initial public offering in
which we sold 6,210,000 shares of Class A common stock at a price of $16.00 per
share, raising $90.0 million in proceeds net of offering expenses. As of
September 30, 2001, we had $212.7 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 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 by operating activities was $97.0 million for the nine
months ended September 30, 2001, compared to $75.5 million for the same period
in 2000. Capital expenditures were $3.6 million for the nine months ended
September 30, 2001 compared to $1.4 million for the prior year period. As a
result of our rapid growth, we expect to increase capital expenditures for
purchased software, internally developed software, computer equipment and
leasehold improvements.

Our company generates significant cash flows from operations, and cash
flows are expected to increase as revenues increase due to our billing and
payment policies. Management anticipates that cash on hand and cash provided
by operating activities will be sufficient to fund our working capital
requirements for the next twelve months and for a foreseeable period after
twelve months. Additional funds could be necessary, however, to complete
sizable strategic acquisitions or other business combinations in 2001 or
beyond.

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SEASONALITY

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

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; 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 fresh simply because we have not made additional comments on those
forward-looking statements.

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

We currently have no significant floating rate indebtedness, hold no
derivative instruments and do not earn income denominated in foreign
currencies. All of our revenue is recognized in U.S. dollars. Accordingly,
changes in interest rates do not generally have a material direct or indirect
effect on our financial position. We are subject to foreign currency fluctuations because we collect our room charges in U.S. Dollars and pay the hotels in their local currency. These fluctuations pose minimal risk to the company because of the short time frame between collection of the room charges and payment to hotels. As less than 10% of our revenues currently are derived from hotel
accommodations in foreign markets, we do not believe we have any significant
foreign currency exchange risk and, as a result, do not hedge against foreign
currency exchange rate changes. To the extent that changes in interest rates
and currency exchange rates affect general economic conditions, we would be
affected by such change. Since cash and marketable securities represent a
significant portion of our total current assets, we are at risk of reduced
income from our investments in the event of a decrease in interest rates.

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PART II   OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the three months ended September 30, 2001, the Company sold
unregistered securities as follows:

On August 6, 2001, the Company issued 34,261 shares of our Class A common
stock upon the exercise of warrants previously issued to a strategic partner of
the Company. The exercise price of the warrant was $16.00.

The 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 a transaction by an issuer not involved in any
public offering.




ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K

(a)  Exhibits.

|        |  |                                                     
|------- |  | ----------------------------------------------------
|Exhibit |  |                                                     
|Numbers |  | Exhibits                                            
|        |  |                                                     
|3.1**   |  | Restated Certificate of Incorporation of the Company
|3.2**   |  | Restated Bylaws of the Company                      
|4.1**   |  | Specimen Certificate evidencing Common Stock        



---

|*  |  | Filed herewith.                                                                                                                                         
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Previously filed as an exhibit to the Companys Registration Statement
on Form S-1, Registration Number 333-90601, and incorporated herein by
reference.

(b)  Reports on Form 8-K.

On October 22, 2001, the Company furnished information under Item 9 of
Form 8-K regarding its earnings for the second quarter of 2001.

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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.

|                        |  |                                                                                                         
|----------------------- |  | --------------------------------------------------------------------------------------------------------
|                       
|Date: November 14, 2001 |  | HOTEL RESERVATIONS NETWORK, INC.
By: /s/ Mel Robinson
Mel Robinson
Chief Financial and Strategic Officer

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