<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C. 20549-1004
                             ---------------------

                                   FORM 10-K

<Table>
<C>          <S>
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934



             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001



                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934



             FOR THE TRANSITION PERIOD FROM           TO
</Table>

                             ---------------------
                         COMMISSION FILE NUMBER 0-22935

                            PEGASUS SOLUTIONS, INC.
             (Exact name of Registrant as specified in its charter)

<Table>
<S>                                              <C>
                    DELAWARE                                        75-2605174
        (State or other jurisdiction of                          (I.R.S. Employer
         incorporation or organization)                        Identification No.)

    3811 TURTLE CREEK BOULEVARD, SUITE 1100,                          75219
                 DALLAS, TEXAS                                      (Zip Code)
    (Address of principal executive offices)
</Table>

              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (214) 528-5656

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.01 PER SHARE
                  RIGHTS TO PURCHASE SERIES A PREFERRED STOCK
                                (Title of class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

     The aggregate market value on March 14, 2002 of voting stock held by
non-affiliates of the registrant was $444,933,000.

     The number of shares of the registrant's common stock, par value $0.01 per
share, outstanding as of March 14, 2002 was 24,777,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Selected portions of our definitive proxy statement for the 2002 annual
meeting of stockholders to be held on May 7, 2002 are incorporated by reference
into Part III of this Form 10-K. We disclaim incorporation by reference of
information contained on any Internet site.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

     Except where expressly indicated or the context otherwise requires, the
"Company," "Pegasus," "we," "our" or "us" when used in this annual report refers
to Pegasus Solutions, Inc., a Delaware corporation, and its predecessors and
consolidated subsidiaries. This report contains forward-looking statements
within the meaning of the federal securities laws, including statements using
terminology such as "may," "will," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "potential," or "continue," or a similar negative
phrase or other comparable terminology regarding beliefs, plans, expectations or
intentions for the future. Forward-looking statements may involve risks and
uncertainties such as adverse changes in general market conditions for business
and leisure travel as a result of additional terrorist activities, action by
U.S. military forces, changes in hotel room rates, capacity adjustments by
airlines, trends in the overall demand for travel, and the inherent difficulty
in making projections during this period of uncertainty, as well as other risks
and uncertainties described in this report. Actual results and the timing of
events could differ materially from those projected in or contemplated by the
forward-looking statements due to a number of factors, including those listed
herein under "Risk Factors."

OVERVIEW

     Pegasus is a leading provider of hotel room reservation services,
reservation technology systems and hotel representation services for the global
hotel industry. Our customers include:

     - A significant number of travel agencies around the world, including the
       10 largest U.S.-based travel agencies based on revenues;

     - More than 46,000 hotels around the world, including 48 of the 50 largest
       hotel companies based on revenues and total number of guest rooms; and

     - More than a thousand travel-related Web sites.

     On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader
in providing distribution services and solutions for the hotel industry. The
acquisition added hotel representation, central reservation system, or CRS, and
property management system, or PMS, services to our existing electronic
distribution and commission processing services. As a result of the REZ
acquisition, Pegasus is organized into two reportable segments -- technology and
hospitality.

     The technology segment provides CRS, electronic reservations distribution,
travel agent commission processing and property systems services to the global
hotel industry. The hospitality segment provides hotel representation services
offered under the Utell brand name. Pegasus sold its hotel representation
services offered under the Summit Hotels & Resorts and Sterling Hotels & Resorts
brand names in January 2001 and the representation service offered under the
Golden Tulip brand name in June 2001. For the year ended December 31, 2001,
approximately 59 percent and 41 percent of our consolidated revenues were
derived from the technology and hospitality businesses, respectively.

     In June 2001, we launched our new Web-based PMS service PegasusCentral(TM)
and announced that Six Continents Hotels had named it as one of two preferred
PMS standards for its 2,600-plus Holiday Inn and Holiday Inn Express properties.
PegasusCentral offers, on an application service provider, or ASP, basis, a
single-image inventory system, providing CRS and PMS functions from a central
database.

     Pegasus is organized primarily on the basis of services provided. Prior
period segment information has been reclassified to conform to the current
period presentation.

STRATEGY

     Our goal is to be the leading provider of transaction processing services
and technology solutions in the distribution of hotel rooms and to be the
leading provider of hotel representation and marketing services to

                                        1
<PAGE>

independent hotels and small hotel chains. We believe our central role as a
service provider to the hotel industry positions us well to achieve this goal.
Key elements of our strategy include the following:

     - Develop Leading Technologies.  We strive to develop new technologies,
       services and solutions to meet the changing needs of our current and
       prospective customers. We recently developed and launched a Web-based PMS
       with a comprehensive suite of hotel management, reservation processing
       and customer relationship management tools. This technology is currently
       operating in limited service hotels, and we continue development efforts
       to expand functionality.

     - Expand Hotel Room Distribution Channels.  We focus on expanding our hotel
       information database and increasing the number of distribution channels
       providing hotel room reservation services for individual travelers over
       the Internet, for convention and other large meeting organizers and for
       corporate travel departments. We also work to further expand the use of
       our online distribution service by third-party Web sites such as
       Expedia.com and Orbitz.com. Our goal is to create recurring transaction
       fee revenue opportunities through virtually all of the distribution
       channels through which electronic hotel room reservations occur.

     - Build Strategic Alliances and Pursue Acquisition Opportunities.  To
       enhance the functionality and market presence of our services, we seek to
       build strategic alliances with other participants in the hotel industry,
       including those providing information technology services and
       travel-related Internet-based services. We believe that these
       relationships increase brand recognition of our services and help to
       expand our customer base. We also seek to acquire assets, technology and
       businesses that provide complementary services to our existing customers
       or access to new markets and customers.

     - Expand Technology Revenue Base.  We intend to expand our revenue base
       domestically and internationally by adding customers and by cross-selling
       new and existing services to our current and future customers. New
       services such as PegasusCentral will provide us with opportunities to
       sell new services to existing customers. Additionally, we can increase
       our revenue base by bundling our services to provide comprehensive
       solutions for both new and existing customers.

     - Grow Hotel Representation Business.  We plan to increase the number of
       reservations made on behalf of existing customers by focusing on travel
       agency relationships. Through initiatives such as automating the
       commission payment process, classifying hotels to facilitate the
       selection process and offering inventory to key gateway locations, we
       hope to entice travel agents to make more reservations at Utell member
       hotels.

SERVICES

     Pegasus is organized into two business segments -- technology and
hospitality.

  TECHNOLOGY

     Our technology business provides CRS, electronic reservations distribution,
travel agent commission processing and property systems services to the global
hotel industry. Hotel companies are placing an increasing emphasis on the use of
technology as a means of both increasing revenues as well as reducing costs.
Increasingly, hotel companies are realizing that internally developing and
operating their own technology solutions may not always be the most cost
effective approach, particularly as it relates to CRS and property system
functions. These systems tend to be expensive to build, operate and update. As a
result, many hotel companies have chosen to utilize our CRS and PMS services, as
well as our other services.

     Beginning in 2002, our CRS and electronic distribution businesses will be
combined and reported as Reservations Services. By realigning our technology
segment on a functional basis, we are now able to realize synergies between our
CRS and electronic distribution businesses resulting in increased efficiency and
cost savings. Historical information included in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Item 8
"Financial Statements and Supplementary Data" does not reflect this
presentation.

                                        2
<PAGE>

     Reservation Services.  Pegasus' CRS is provided on an ASP basis to more
than 10,000 hotel properties, representing over 2.1 million hotel rooms
worldwide. During 2001, we processed approximately 44.8 million hotel bookings
through our CRS. Pegasus also provides CRS software licenses to an additional 20
hotel brands, representing 12,000 properties.

     Our CRS business provides hotel customers with a license for our
RezView(TM) CRS software as well as the hardware and facilities necessary to
process reservations. Our CRS services also include the following support and
outsourcing services:

     - System administration

     - Database administration

     - Electronic distribution channel management

     - Telecommunications management

     - Private-label voice reservation services

     Pegasus Electronic Distribution provides the technology that facilitates
electronic hotel room reservations. This technology connects travel industry
global distribution systems, or GDSs, and travel-related Internet sites to a
hotel's CRS. Pegasus Electronic Distribution supports a variety of distribution
channels including the following:

     - GDS connectivity -- Pegasus Electronic Distribution is linked to all
       major GDSs and therefore connects our hotel customers to travel agent
       terminals all over the world.

     - Third-party Web sites -- We provide travel-related Web sites access to
       our hotel information database containing more than 42,000 properties and
       on-line hotel reservation capability. We provide this service to several
       of the top travel Web sites such as Expedia.com, HotWire.com,
       Lastminute.com, Oracle e-Travel, Continental.com, Orbitz.com and our own
       TravelWeb.com and Utell.com.

     - Hotel Web sites -- Our NetBooker(TM) service provides hotel companies
       with a hotel information database and Internet-based reservation
       capabilities. Hotel Web sites that are "Powered by Pegasus(TM)" offer
       brand-loyal Internet shoppers real-time rates, availability and booking
       capabilities.

     Reservation Services revenues consist of transaction fees and commissions
as well as license, subscription, maintenance and support fees. Reservation
Services revenues represented approximately 40 percent of total revenues for
2001.

     Financial Services.  Pegasus Financial Services provides comprehensive
commission payment, processing and management solutions to hotel and travel
agency customers in more than 200 countries. Key services include Pegasus
Commission Processing, Electronic Reconciliation and Tracking and Global
Commission Solutions.

     Each month, Pegasus consolidates, distributes, reconciles, tracks and
reports millions of dollars in commission payments to a significant number of
travel agencies worldwide on behalf of more than 32,000 participating hotel
properties. This value-added commission consolidation and reporting service
facilitates more efficient and effective operation for both hotel and travel
agency participants by providing a single, monthly commission payment to member
travel agencies from participating hotels. Our commission processing service
processed approximately $500 million in hotel commissions in 2001.

     Financial Services revenues consist of both travel agency and hotel fees.
Travel agency fees are primarily based on a percentage of the value of hotel
commissions processed by Pegasus on behalf of participating travel agencies.
Revenues from travel agency fees can vary substantially from period to period
based on the types of hotels at which reservations are made and fluctuations in
overall room rates. In addition, participating hotels generally pay fees based
on the number of commissionable transactions that Pegasus processes for the
respective hotel. Financial Services revenues represented approximately 16
percent of total revenues for 2001.

                                        3
<PAGE>

     Property Systems and Services.  In June 2001, we launched our new Web-based
PMS service, PegasusCentral, and announced that Six Continents Hotels had named
it as one of two preferred PMS standards for its 2,600-plus Holiday Inn and
Holiday Inn Express properties. PegasusCentral offers, on an ASP basis, a
single-image inventory system, providing CRS and PMS functions from a central
database. PegasusCentral provides the following functions to both hotel chains
and independent properties:

     - Full property management functions

     - Multi-property central reservations

     - Customer relationship management

     - Sales and catering

     - Point-of-sale

     - Back-office modules such as receivables, payables and purchasing

     As part of the REZ acquisition, we obtained the GuestView(TM) PMS software.
Although we are still servicing existing customers, we are not selling new
licenses for the GuestView software. Revenues in 2001 consisted of maintenance
and support fees related to the GuestView software, revenues from the operations
of Global Enterprise Technology Solutions, LLC, or GETS, subsequent to September
1, 2001, the date we acquired GETS. In addition, Property System revenues
include transaction fees from our PegasusCentral product, which are recognized
monthly, based on room occupancy rates. Property Systems and Services
represented approximately 3 percent of total revenues for 2001.

  HOSPITALITY

     Our hospitality business includes hotel representation and marketing
services offered under the Utell brand name as well as Paytell, a service that
allows travelers' to prepay for reservations and manage their exposure to
foreign currency exchange rate fluctuations.

     Hotel Representation.  In order to sell their rooms in the marketplace,
many independent hotels and small chains associate themselves with our hotel
representation service and use our systems and infrastructure to market and make
reservations for their rooms. Hotels typically join our hotel representation
service for the following reasons:

     - To achieve a cost-effective presence in the primary electronic
       distribution channels -- GDS and Internet.

     - To obtain a global voice reservation capability through which travel
       agents can book their rooms over the telephone via a local call with
       local language capabilities.

     - To enhance the market image of the hotel by affiliation with a well-known
       name in hotel distribution.

     - To benefit from worldwide sales and marketing support.

     Utell is the oldest, largest and most diverse hotel representation company
in the world providing hotel marketing, voice reservation as well as GDS and
Internet representation services for approximately 5,500 hotels in 150
countries. Utell uses Pegasus' CRS, which offers advanced electronic
distribution capabilities and provides both a GDS and Internet presence for
member hotels. In addition, Utell offers front-end commission processing
services to encourage its hotel members to pay travel agency commissions.

     Representation service revenues consist of reservation processing fees,
membership fees and fees for various marketing services. Our hotel
representation services represented approximately 41 percent of total revenues
for 2001, which included Golden Tulip revenues for the six months ended June 30,
2001. Pegasus sold its Golden Tulip brand business in June 2001.

     Paytell.  Many international and domestic travelers who book rooms at
hotels to which we provide representation services utilize Paytell to prepay for
hotel stays. In some international markets, it is customary for travelers to
prepay for hotel rooms and other travel arrangements. International travelers
also benefit by
                                        4
<PAGE>

reducing their exposure to foreign currency fluctuations. Travelers using our
Paytell service prepay for hotel rooms in the traveler's local currency. When a
traveler arrives at the hotel, Pegasus remits the amount to the hotel in the
hotel's local currency. We derive revenues for this service from the difference
in the exchange rate between the date the traveler pays and the date the guest
stay occurs. See Item 7A of this annual report "Quantitative and Qualitative
Disclosures about Market Risk" for information regarding our exposure to
movements in foreign currency exchange rates.

  OTHER SERVICES

     Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional electronic hotel
reservation capabilities and information services to its existing customers and
to other participants in the hotel room distribution process. Pegasus has not
received a material amount of revenue from these services, and there can be no
assurance that any of these services will produce a material amount of revenue
in the future.

COMPETITION

     Both of our business segments face competition from within their respective
markets. To compete successfully, we must develop new technological solutions to
meet the changing needs of the hospitality industry. There can be no assurance
that any of our services will compete successfully.

  TECHNOLOGY

     Reservation Services.  Our CRS business competes with hotel companies that
develop and host their own CRSs and third parties that provide CRS and related
services under a license agreement or as an ASP. Our CRS competitors include
Computer Sciences Corporation, Trust International, SynXis Corporation and
MICROS Systems, Inc.

     Pegasus Electronic Distribution supports a variety of distribution
channels, each with its own competition. For example:

     - GDS connectivity -- Our GDS connectivity service competes with WizCom
       International, Ltd. Customers may change their electronic reservation
       interface to WizCom or to another similar service. Also, some hotels have
       established a direct connection to one or more GDSs rather than through
       an intermediary, such as Pegasus or WizCom. Other hotels may choose to
       take the same action. If hotels establish this direct connection, they
       would bypass our intermediary position and eliminate the need to pay our
       fees.

     - Third-party and hotel Web sites -- Our online distribution services face
       competition in the online hotel room reservation business from current
       competitors as well as potential new entrants, including other Web sites.
       Several competitors have Web-based reservation services offering a more
       comprehensive range of travel opportunities than we do, such as air, car
       rental and vacation packages. These competitors include Hotel
       Reservations Network, Travelocity.com, Orbitz.com and Expedia.com. Other
       potential competitors are Web site development companies that could
       develop an interface directly between a hotel's property system and a
       travel Web site, or could develop an interface between a hotel company's
       CRS and a travel Web site. The costs of entry into the Internet hotel
       room reservation business are relatively low.

     Financial Services.  Our commission processing service faces competition
principally from National Processing Company and Perot Systems, Inc. In
addition, hotels that are current or prospective customers of Pegasus Financial
Services can decide to process commission payments without, or in competition
with, our commission processing service.

     Property Systems and Services.  Our PMS business competes with hotel
companies that sell their own PMSs and third parties that provide PMSs. Our
primary PMS competitors include MICROS Systems, Inc., AremisSoft Hospitality and
Ramesys Hospitality.

                                        5
<PAGE>

  HOSPITALITY

     Our hotel representation services compete with hotel groups, franchisers,
consortia, reservation companies and other travel or hotel representation
companies. Utell's principal competitors are Lexington Services Corporation, VIP
International Corporation, SynXis Corporation, Unirez, Inc. and Sceptre
Hospitality Resources.

SEASONALITY

     Our business, particularly our hotel representation business, is sensitive
to seasonal changes in the demand for hotel rooms. The demand for business and
leisure travel is typically lower in the first and fourth quarters of the year;
therefore, these quarters have historically been our weakest quarters. Because
the majority of our operating expenses are fixed, fluctuations in revenue from
quarter to quarter may have a material effect on operating income for the
respective quarters.

INTERNATIONAL OPERATIONS

     We derive approximately 41 percent of our revenue from customers located
outside the United States, particularly in Europe. Fluctuations in the value of
foreign currencies relative to the U.S. Dollar directly impact our revenues.
More information regarding specific risks associated with our foreign operations
is available under the heading "Risk Factors."

INTELLECTUAL PROPERTY

     We are continually developing new processing technology and enhancing
existing proprietary technology. We do not currently have any registered
patents. However, we have three patent applications pending. We primarily rely
on a combination of trademark, copyright, trade secrets, confidentiality
procedures and contractual provisions to protect our technology and other
intellectual property rights. Despite these protections, it may be possible for
unauthorized parties to copy, obtain or use certain portions of our proprietary
technology. Any misappropriation of our intellectual property could have a
material adverse effect on our competitive position.

RESEARCH AND DEVELOPMENT

     Our research and development activities primarily consist of software
development, development of enhanced communication protocols and custom user
interfaces and database design and enhancement. Our total research and
development expense was $7.8 million, $16.0 million and $2.5 million for 2001,
2000 and 1999, respectively. Research and development expenses for 2000 included
an $8.0 million write-off of purchased in-process research and development
related to the acquisition of REZ, Inc.

EMPLOYEES

     At February 28, 2002, we had 1,518 employees, 999 of which are located in
the United States. We had 301 persons performing information technology
functions, 978 persons performing sales and marketing, customer relations and
business development functions and the remainder performing corporate, finance
and administrative functions. We have no unionized employees. We believe that
our employee relations are satisfactory.

RISK FACTORS

RISKS RELATED TO OUR INDUSTRY:

  TERRORIST ATTACKS AND ACTS OF WAR MAY ADVERSELY AFFECT OUR STOCK PRICE,
  OPERATIONS AND PROFITABILITY.

     During 2001 and continuing into 2002, the travel industry has been weakened
by the terrorist attacks of September 11, 2001, the following retaliation and
the continuing threat alerts. The overall long-term impact of these events on
our operations is uncertain. Both the number of reservations and the average
daily rate, or

                                        6
<PAGE>

ADR, charged for each hotel room have sharply declined following September 11,
2001 due to the decrease in demand. Continued terrorist activities or a delay in
the economic recovery from such activities could have a material adverse effect
on our business, operating results and financial condition.

  AS NEARLY ALL OF OUR REVENUES ARE DERIVED FROM THE HOTEL INDUSTRY, A DOWNTURN
  IN THE HOTEL INDUSTRY WOULD LIKELY ADVERSELY AFFECT OUR BUSINESS.

     Nearly all of our revenues are directly or indirectly dependent on the
hotel industry, which is highly sensitive to any change in the economic
conditions affecting business and leisure travel as well as other unforeseen
events. The hotel industry is susceptible to rapid and unexpected downturns, as
most recently experienced during and after the events of September 11, 2001. In
the event of any further downturn in the hotel industry, we would likely
experience significantly reduced revenues, as the use of our services and the
demand for our future services and solutions would decline. Any downturn in the
hotel industry or any reduction in the demand for hotel rooms and travel
generally, would negatively impact our business, operating results and financial
condition. Many factors affect the hotel industry, most of which are beyond our
control. The hotel industry and demand for hotel rooms or travel may be affected
by, among other things:

     - General economic conditions including recession, inflation and currency
       fluctuations

     - Political instability

     - Regional hostilities

     - Regional health issues

     - Gasoline and aviation fuel price escalation

     - Labor strikes

     We may experience substantial period-to-period fluctuations in our results
of operations as a consequence of these factors and others and the general
economic conditions affecting the demand for hotel rooms and travel.

  CONSOLIDATION IN THE HOTEL INDUSTRY COULD RESULT IN REDUCED REVENUES.

     We offer volume-based discounting for some of our fees. The recent
consolidation in the hotel industry has resulted in a higher percentage of
discounted fees, and this trend could continue. In addition, the GDS industry
has consolidated into four major GDSs. If further consolidation occurs, the
value of our services and the benefits to hotel operators of utilizing our GDS
electronic distribution service would be reduced. Any potential decrease in our
customer base or any potential increase in the percentage of discounted fees may
adversely affect the profitability of our business.

RISKS RELATED TO OUR COMPANY:

  IF WE ARE UNABLE TO DEVELOP NEW TECHNOLOGIES AND SERVICES TO MEET THE CHANGING
  NEEDS OF THE PARTICIPANTS IN THE HOTEL INDUSTRY, WE MAY BE UNABLE TO
  EFFECTIVELY COMPETE AND OUR CONTINUING OPERATIONS MAY BE JEOPARDIZED.

     Our future success depends on our ability to develop leading technologies,
enhance our existing services and develop and introduce new services. In
particular, our technologies and services must meet the needs of our current and
prospective customers. They also must continue to meet the demands of
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. Although we strive to be a technological leader,
future technology advances may not complement or be compatible with our
services. In addition, we may be unable to economically and timely incorporate
technology changes and advances into our business. We may be unsuccessful in
effectively using new technologies, adapting our services to emerging industry
standards or developing, introducing and marketing service enhancements or new
services. We may also experience difficulties that could delay or prevent the
successful development of these services. It is also possible that a new
service, while achieving a technological success, may fail to deliver

                                        7
<PAGE>

sufficient benefit to customers to warrant their use of the service. If we are
unable to develop and introduce new services or enhance existing services on a
timely and cost-effective basis or if new services do not achieve market
acceptance, it could adversely affect our ability to compete in the marketplace
and negatively affect our business, operating results and financial condition.

  IF WE ARE UNABLE TO SUCCESSFULLY COMPETE IN DELIVERING SERVICES AND SOLUTIONS
  TO THE HOTEL INDUSTRY, WE MAY LOSE MARKET SHARE AND BE FORCED TO REDUCE THE
  PRICES OF OUR SERVICES.

     We compete in markets that are rapidly evolving, intensely competitive and
involve continually changing technology and industry standards. We may
experience increased competition from current and potential competitors, many of
which have significantly greater financial, technical, marketing and other
resources than we have. Competitive pressures could reduce our market share or
require us to reduce the prices of our services. Our inability to compete
effectively with these services could adversely affect our business, operating
results and financial condition.

  OUR COMPUTER SYSTEMS AND DATABASES MAY SUFFER SYSTEM FAILURES, BUSINESS
  INTERRUPTIONS OR SECURITY BREACHES THAT COULD IMPEDE OUR ABILITY TO SERVICE
  OUR CUSTOMERS AND COULD NEGATIVELY IMPACT OUR BUSINESS.

     Our operations depend on our ability to protect our computer systems and
databases against damage or system interruptions from fire, earthquake, power
loss, telecommunications failure, unauthorized entry or other events beyond our
control. A significant amount of our computer equipment is located at a single
site in Phoenix, Arizona. Any unanticipated problems may cause a significant
system outage or data loss. Despite the implementation of security measures, our
infrastructure may also be vulnerable to break-ins, computer viruses or other
disruptions caused by our customers or others. Our infrastructure may also fail
to provide consistent dependable service as a result of circumstances both in
and out of our control. Any damage to our databases, failure of communication
links, security breach or other loss that causes interruptions in our operations
could adversely affect our business, operating results and financial condition.

  BECAUSE OUR EXPENSES ARE LARGELY FIXED IN THE SHORT-TERM AND WE CANNOT
  ACCURATELY PREDICT OUR COMPETITIVE ENVIRONMENT, UNEXPECTED REVENUE SHORTFALLS
  AND QUARTERLY VARIATIONS MAY ADVERSELY AFFECT OUR BUSINESS.

     Our expense levels are based primarily on our estimate of future revenues
and are largely fixed in the short-term. In the future, we may not accurately
predict the introduction of new or enhanced services by us or our competitors or
the degree of customer acceptance of new services. In the short-term, we may
also be unable to adjust spending rapidly enough to compensate for any
unexpected revenue shortfall. This could adversely impact our business,
operating results and financial condition. It is possible that in one or more
future quarters our results may fall below the expectations of securities
analysts or investors. In addition, our operating results may vary significantly
from quarter to quarter due to a variety of factors, many of which are outside
of our control. We believe that period-to-period comparisons of our operating
results should not be relied upon as an indication of future performance.

  OUR INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO CURRENCY FLUCTUATIONS,
  GLOBAL ECONOMIC FACTORS, FOREIGN TAX LAW ISSUES AND FOREIGN BUSINESS
  PRACTICES, WHICH COULD INCREASE OUR COST OF DOING BUSINESS AND ERODE OUR
  PROFIT MARGINS.

     We derive approximately 41 percent of our revenue from customers located
outside the United States, particularly in Europe. If the value of foreign
currencies relative to the U.S. Dollar decreases, our revenues translate to a
lower U.S. Dollar amount.

     Our international operations are also subject to other risks, including:

     - Impact of possible adverse political and economic conditions

     - Potentially adverse tax consequences

     - Impact of the policies of the United States and foreign governments on
       foreign trade

                                        8
<PAGE>

     - Reduced protection for intellectual property rights in some countries

     - Changes in regulatory requirements

     - Cost of adapting our services to foreign markets

     If we do not realize our expected results from international operations or
if the value of foreign currencies decrease relative to the U.S. Dollar, our
business, operating results and financial condition would be adversely affected.

  WE MAY NOT HAVE THE RESOURCES TO EFFECTIVELY MANAGE OUR GROWTH, AND OUR
  LIMITED EXPERIENCE IN MANAGING AND INTEGRATING ORGANIZATIONS MAY CAUSE FUTURE
  ACQUISITIONS OR JOINT VENTURES TO DISRUPT OUR OPERATIONS AND IMPEDE OUR
  OPERATING RESULTS.

     As with our recent growth, our potential future growth may place
significant demands on management as well as on our administrative, operational
and financial resources. Expanding our business to take advantage of new market
opportunities will require significant management attention and financial
resources, perhaps adversely impacting our existing operations.

     In addition, we regularly evaluate acquisition and joint venture
opportunities and in the future expect to make acquisitions of other companies
or technologies or enter into joint ventures, which will involve many risks
including:

     - Difficulty in integrating or otherwise assimilating technologies,
       products, personnel and operations

     - Diversion of management's attention from other business concerns

     - Issuance of dilutive equity securities and incurrence of debt or
       contingent liabilities

     - Large write-offs and amortization expense related to intangible assets

     - Loss of key employees of acquired organizations

     - Risks of entering markets in which we have no or limited prior experience

     - Payments of cash and assumption of liabilities of other businesses

     Our inability to manage growth or to integrate any future acquisitions or
joint ventures could adversely affect our business, operating results and
financial condition.

  REDUCTIONS IN ROOM RATES AND HOTEL COMMISSION PAYMENTS WOULD REDUCE OUR
  REVENUES AND NET INCOME.

     Pegasus Financial Services, which includes our commission processing
service, derives revenues based on the dollar value of travel agency commissions
paid by hotels. The dollar value of these commissions is based on the number of
reservations, the length of stay and the room rate. Approximately 16 percent of
our revenue in 2001 was attributable to Pegasus Financial Services. If there is
any decline in average daily room rates, change in the commission payment
process, reduction in the amount of commissions paid to travel agencies or any
increase in the direct distribution of rooms by hotels, our revenues and net
income could substantially decrease. Hotels typically are under no contractual
obligation to pay room reservation commissions to travel agencies. Hotels could
elect to reduce the current industry customary commission rate of 10 percent,
limit the maximum commission generally paid for a hotel room reservation or
eliminate commissions entirely. Hotels increasingly utilize other direct
distribution channels, like the Internet, or offering negotiated rates to major
corporate customers that are non-commissionable to travel agencies. Reductions
in room rates as well as efforts to reduce hotel reservation commissions could
adversely affect our business, operating results and financial condition.

  WE ARE EXPOSED TO CREDIT RISK FROM HOTELS AND TRAVEL-RELATED WEB SITES.

     Our hotel representation customers primarily consist of independent hotels,
and our technology customers primarily include hotel chains and travel-related
Web sites. Some of these customers may not be financially

                                        9
<PAGE>

viable. Even though we have policies in place to reduce our exposure to credit
risk and have not experienced any degradation in overall collectibility, our
inability to collect payments from these customers in the future could result in
a material adverse effect on our business, operating results and financial
condition.

  WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR PREVENT THEIR
  UNAUTHORIZED USE, WHICH COULD DIVERT OUR FINANCIAL RESOURCES AND HARM OUR
  BUSINESS.

     Our success depends upon our proprietary technology and other intellectual
property rights. We currently rely upon a combination of trademark, patents,
copyright, trade secrets, confidentiality procedures and contractual provisions
to protect our proprietary technology and other intellectual property. Despite
our current efforts to protect our proprietary rights, these protective measures
may not be enforceable or adequate to prevent misappropriation or independent
third-party development of our technology. In addition, we may need to litigate
claims against third parties to enforce our intellectual property rights,
protect our trade secrets, determine the validity and scope of the proprietary
rights of others or defend against claims of infringement or invalidity. This
litigation could result in substantial cost and diversion of management
resources. A successful claim against us could effectively block our ability to
use or license our technology and other intellectual property in the United
States or abroad. If we cannot adequately protect our proprietary rights, it
could adversely affect our competitive edge in the marketplace and consequently
our business, operating results and financial condition.

  LOSS OF OUR ARRANGEMENTS WITH KEY CUSTOMERS AND THIRD-PARTY SERVICE
  ARRANGEMENTS COULD ADVERSELY AFFECT OUR BUSINESS.

     Our business is dependent upon our customer arrangements with hotel chains,
independent hotels, hotel representation firms, travel management companies,
travel agencies, travel agency consortia, global distribution systems,
travel-related Web sites and Internet-based information and reservation systems.
In the future, we may be unable to continue or renew these arrangements on
favorable terms or initiate new arrangements. If we are unable to renew,
continue or initiate customer arrangements on a favorable basis, it could result
in a significant reduction in our customer base and revenue sources. We also
rely on third parties to provide remittance and worldwide currency exchange
services for our commission processing service and for facility maintenance, SAP
hosting and disaster recovery services for the computer and voice/data
communications systems used in all of our services. If we are unable to renew or
extend our contracts with existing third-party service providers or enter into
contracts with alternate service providers on favorable terms, it could
adversely affect our business, operating results and financial condition.

  OUR SUCCESS SIGNIFICANTLY DEPENDS ON THE EXPERIENCE OF OUR KEY PERSONNEL AND
  OUR ABILITY TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL.

     Our success depends on the continued service of our executive officers and
other key personnel including our Chief Executive Officer John F. Davis, III and
our business segment presidents Joseph W. Nicholson and Mark C. Wells. Even
though we currently have "key-man" insurance covering Messrs. Davis and
Nicholson, this insurance amount may not adequately compensate us for the loss
of their services. We cannot guarantee that we will be able to successfully
identify, attract, motivate and retain other highly-skilled personnel in a
timely and effective manner. Our failure to retain our officers and key
personnel or to recruit new personnel could adversely affect our business,
operating results and financial condition.

  GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD FORCE US TO CHANGE OUR
  OPERATIONS.

     Our primary customers are hotel chains, independent hotels, hotel
representation firms and travel agencies. We also have recently entered into a
business relationship with five large hotel industry participants. As a result
of these relationships, any federal, state or foreign governmental authorities,
competitors or consumers could raise anti-competitive concerns regarding our
relationship with our customers or otherwise. Any such action or similar
allegations by third parties could have a material adverse effect on our
business, operating results and financial condition.

                                        10
<PAGE>

  WE HAVE DETERRENTS THAT MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING CONTROL OF
  PEGASUS, AND SUCH DETERRENTS MAY PREVENT ACQUISITIONS OF OUR COMPANY THAT MAY
  BE IN YOUR BEST INTEREST.

     Provisions in our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us. These provisions include the
staggered terms of our board of directors, the exclusive right of the board of
directors to fill vacancies on the board, and restrictions on the right of
stockholders to remove members of the board of directors. We are also subject to
the provisions of Delaware law that restrict certain business combinations with
interested stockholders even if such a combination would be beneficial to
stockholders. Under Delaware law, a Delaware corporation may opt out of the
anti-takeover provisions. We do not intend to opt out of these anti-takeover
provisions. In addition, we have a stockholder rights plan. The rights are
exercisable only if a person or group of affiliated persons acquires, or has
announced the intent to acquire, 20 percent or more of our common stock.

     These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also discourage
others from making tender offers for our shares. As a result, these provisions
may prevent the market price of our common stock from reflecting the effects of
actual or rumored takeover attempts. These provisions may also prevent
significant changes in our board of directors and our management.

  OUR MINORITY INTEREST INVESTMENTS COULD ADVERSELY AFFECT OUR FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS.

     We have in the past and may in the future make strategic investments in
other companies and ventures. In doing so, we may have little or no control over
the success of the company or venture. There can be no assurance of the success
of any such investment.

  WE COULD BE SUBJECT TO NEW LAWS AND REGULATIONS RELATING TO THE INTERNET.

     We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Many of these laws and regulations are new
and have not yet been thoroughly interpreted by the courts. Accordingly, we face
numerous risks related to conducting business on the Internet that include:

     - The applicability and reach of various laws and regulations is uncertain.

     - Changes to existing laws or the passage of new laws intended to address
       privacy issues could directly affect the way we do business and could
       create uncertainty in the marketplace.

     - Since our services are accessible worldwide via the Internet, foreign
       jurisdictions may require that we comply with their laws. Our failure to
       comply with foreign laws could subject us to penalties ranging from fines
       to bans on our ability to offer our services.

     - In the United States, companies are required to qualify as foreign
       corporations in states where they are conducting business. As an Internet
       company, it is unclear in which states we are actually doing business.
       Our failure to qualify as a foreign corporation in a jurisdiction where
       we are required to do so could subject us to taxes and penalties and
       could result in our inability to enforce contracts in those
       jurisdictions.

     Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could adversely affect our business, operating results and financial
condition.

  OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE TO MANY
  FACTORS.

     Several factors have in the past caused, and may in the future cause, our
stock price to be and in the future may be extremely volatile. Our stock price
could be subject to wide fluctuations in response to a variety of factors
including the following:

     - Actual or anticipated variations in our quarterly operating results.

     - Our ability to successfully develop, introduce and market new or enhanced
       products and services to the hotel industry on a timely basis.

                                        11
<PAGE>

     - Unexpected changes in demand for our services and solutions due to the
       fixed nature of a large portion of our expenses.

     - Unpredictable volume and timing of customer revenues due to seasonality
       in the travel industry, the terms of customer contracts and other
       factors.

     - Purchasing and payment patterns, as well as pricing policies, of our
       competitors.

     - Announcements of technological innovations or new services by us or our
       competitors.

     - Changes in financial estimates by securities analysts.

     - Conditions or trends in the Internet and online commerce industries.

     - Changes in the market valuations of other similarly situated companies.

     - Announcements by us or our competitors of significant acquisitions,
       strategic partnerships, joint ventures or capital commitments.

     - Market fluctuations and performance of the hotel industry.

     - Unscheduled system downtime.

     In addition, the trading prices of Internet and technology stocks in
general have experienced extreme price and volume fluctuations in recent months.
Any negative changes in the public's perception of the prospects of Internet or
electronic commerce companies or other broad market and industry factors could
depress our stock price regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions, such as
recession or interest rate or currency rate fluctuations, also may decrease the
market price of our common stock.

ITEM 2.  PROPERTIES

     Our corporate headquarters is located in a leased facility with
approximately 59,000 square feet of space in Dallas, Texas. We also have
regional hubs in Phoenix, London and Singapore with approximately 129,000,
47,000 and 11,000 square feet of leased office space, respectively. In total, we
have 22 offices in 16 countries, all of which are leased facilities. We believe
that our existing facilities are well maintained and in good operating
condition.

     In September 2001, we signed lease agreements for new properties in Dallas
and Phoenix. We plan to move our existing offices in those respective cities
into these new facilities in 2002, which will reduce our cost on a square foot
basis. Our corporate headquarters will be located within the new Dallas
facilities measuring approximately 81,000 square feet while the Phoenix
facilities will contain approximately 110,000 square feet of office space. We
believe that our planned and existing facilities are adequate for our
anticipated levels of operations.

ITEM 3.  LEGAL PROCEEDINGS

     We are a party from time to time to certain routine legal proceedings
arising in the ordinary course of our business. Although the outcome of any
legal proceeding cannot be predicted accurately, we do not believe any liability
that might result from such proceedings could have a material adverse effect on
our business, operating results and financial condition.

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

     No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year ended December 31, 2001.

                                        12
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock has been traded on the Nasdaq National Market under the
symbol "PEGS" since August 7, 1997. At March 14, 2002, there were approximately
406 record holders of our common stock although we believe that the number of
beneficial owners of our common stock is substantially greater. The market
prices set forth below have been adjusted to reflect a three-for-two stock split
effected on January 7, 2000 in the form of a stock dividend to all stockholders
of record on December 20, 1999.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
2001
Fourth quarter..............................................  $14.20   $ 8.56
Third quarter...............................................  $13.20   $ 8.00
Second quarter..............................................  $13.02   $ 7.63
First quarter...............................................  $12.50   $ 6.06
2000
Fourth quarter..............................................  $19.31   $ 5.81
Third quarter...............................................  $21.00   $ 9.94
Second quarter..............................................  $20.75   $10.50
First quarter...............................................  $40.67   $14.25
1999
Fourth quarter..............................................  $54.42   $24.17
Third quarter...............................................  $29.75   $19.33
Second quarter..............................................  $32.92   $20.75
First quarter...............................................  $30.67   $16.67
</Table>

     We intend to retain any future earnings for use in our business and do not
intend to pay cash dividends in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of our board of directors and will
depend, among other things, upon future earnings, operations, capital
requirements, restrictions in financing agreements, our general financial
condition and general business conditions.

     On September 28, 1998, our board of directors declared a dividend
distribution of one right for each outstanding share of our common stock to
stockholders of record at the close of business on October 13, 1998. Each right
entitles the registered holder to purchase from us one one-thousand five
hundredth (1/1,500th) of a share of our Series A Preferred Stock for each share
of our common stock held at a price of $60, which reflects the adjustment for
the stock split effected in January 2000. The rights are exercisable only if a
person or group of affiliated persons acquires, or has announced the intent to
acquire, 20 percent or more of our common stock.

                                        13
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected consolidated financial data as of and for the years
ended December 31, 2001 and 2000 and for the year ended December 31, 1999 are
derived from the consolidated financial statements of Pegasus that have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are included
as Item 8 of this annual report on Form 10-K. Selected consolidated financial
data as of December 31, 1999 and as of and for the years ended December 31, 1998
and 1997 are derived from Pegasus' financial statements that have been audited
by PricewaterhouseCoopers LLP, but are not included herein. The data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with Pegasus' consolidated financial
statements and notes thereto.

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31
                                           -----------------------------------------------------
                                           2001(1),(2)   2000(1)      1999      1998      1997
                                           -----------   --------   --------   -------   -------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>           <C>        <C>        <C>       <C>
Net revenues.............................   $179,962     $162,199   $ 38,036   $29,064   $20,903
Net income (loss)........................    (29,737)     (26,582)     8,666     5,396       589
Net income (loss) per share(3)
  Basic..................................      (1.21)       (1.14)      0.47      0.34      0.05
  Diluted................................      (1.21)       (1.14)      0.44      0.32      0.05
Working capital (deficit)................     (5,541)       9,049    145,787    46,248    39,636
Total assets.............................    303,670      357,705    163,540    60,320    49,923
Long-term obligations, net of current
  portion................................         --       20,000         --        58       661
Total stockholders' equity...............    231,201      260,572    156,772    54,264    43,478
</Table>

---------------

(1) Pegasus' selected consolidated financial data includes the operations and
    purchase accounting amortization related to the acquisition of REZ in April
    2000.

(2) Pegasus' selected consolidated financial data includes the operations
    related to the acquisition of GETS in September 2001.

(3) Certain net income (loss) per share amounts were retroactively adjusted for
    a four-for-three stock split that occurred in August 1997 and a
    three-for-two stock split that occurred in January 2000.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the selected consolidated financial data included as Item 6 of this annual
report on Form 10-K and the consolidated financial statements and notes thereto
included as Item 8 of this annual report on Form 10-K. This discussion and
analysis contains forward-looking statements including statements using
terminology such as "may," "will," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "potential," or "continue," or a similar negative
phrase or other comparable terminology regarding beliefs, plans, expectations or
intentions for the future. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties, such as adverse changes in
general market conditions for business and leisure travel as a result of
additional terrorist activities, action by U.S. military forces, changes in
hotel room rates, capacity adjustments by airlines, trends in the overall demand
for travel, and the inherent difficulty in making projections during this period
of uncertainty, as well as other risks and uncertainties described in this
annual report. Pegasus' actual results and the timing of certain events could
differ materially from those discussed in the forward-looking statements as a
result of many factors including those set forth in Pegasus' filings with the
Securities and Exchange Commission, specifically including the risk factors set
forth under Item 1 of this annual report on Form 10-K.

DEPENDENCE ON THE HOTEL INDUSTRY AND IMPACT OF SEPTEMBER 11, 2001 EVENTS

     Our business, particularly our hotel representation business, is sensitive
to changes in the demand for hotel rooms. During 2001 and continuing into 2002,
the travel industry, which had already been adversely impacted by the onset of
the economic recession and other world events, has been further weakened by the

                                        14
<PAGE>

terrorist attacks of September 11, 2001, the following retaliation and the
continuing threat alerts. The overall long-term impact of these events on
Pegasus and the travel industry is uncertain. Both the number of reservations
and the average daily rate, or ADR, charged for each hotel room have sharply
declined following September 11, 2001 due to the decrease in demand. Although
the recovery in the number of reservations, as compared to the prior year, has
been quicker than anticipated, ADRs have not yet fully recovered and continue to
lag behind the recovery in transaction volumes. Since our Electronic
Distribution and CRS revenues are primarily transaction-based, revenues for
these businesses, which had sharp decreases immediately following September 11,
have recovered relatively quickly and, at the start of 2002, are close to the
levels seen in the prior year. However, since our hospitality and commission
processing services are based in large part on a combination of reservation
volume and ADRs, their recovery has been somewhat more sluggish. Property
Systems and Services revenues, which are primarily fixed, have not been
significantly impacted. In addition, we experienced an increase in the sales
cycle for some of our services, as new customers were hesitant to sign new
contracts given the uncertain economic environment.

     The adverse impact of both a soft economy and the September 11 events has
resulted in a decrease in the demand for hotel rooms and, therefore, has
negatively impacted our revenues in 2001. We expect this trend to continue at
least through the first six months of 2002.

     Prior to September 11, we completed a thorough review of our operations and
instituted a restructuring plan designed to reduce our costs and improve
operational efficiencies. We continue to monitor reservations and other daily
indicators and adjust our resources accordingly. We will continue to focus on
cost management and the development of new business. However, continued
terrorist activities or a delay in the economic recovery could have a material
adverse effect on our business, operating results and financial condition.

WEAKNESS OF THE EURO

     Since the REZ acquisition, Pegasus derives a substantial portion of its
revenue from customers located outside the United States, particularly in
Europe. The weakness of the Euro relative to the U.S. Dollar resulted in Pegasus
earning less revenue during the years ended December 31, 2001 and 2000 than it
otherwise might have earned if currency rates had remained comparable with
currency rates for the years ended December 31, 2000 and 1999, respectively.

RECENT DEVELOPMENTS

  HOTEL DISTRIBUTION SYSTEM, LLC

     On February 11, 2002, Pegasus and five hotel chains -- Hilton Hotels, Hyatt
Corporation, Marriott International, Six Continents Hotels and Starwood
Hotels -- announced the newly formed Hotel Distribution System, LLC, or HDS.
This new venture will market hotel rooms over the Internet through multiple
online sites using a merchant business model. In other words, HDS will have
access to net rate hotel room inventory and the opportunity to mark it up as the
marketplace allows without the associated inventory risk. HDS has announced that
it plans to utilize technology Pegasus is currently developing to provide a link
to allow Internet sites to sell hotel rooms via direct connections to hotel
reservations systems. HDS has signed an agreement with Orbitz.com to distribute
the room inventory. Pegasus' Utell subsidiary will be one of the first hotel
suppliers to distribute inventory through HDS.

  RESTRUCTURE PLAN

     On September 4, 2001, Pegasus announced the reorganization of its
operations from a business unit structure into distinct functional areas. The
restructuring plan, which includes the elimination of approximately 15 percent
of its workforce determined to be duplicative and the consolidation of certain
facilities and functions, is scheduled to be completed by early 2002 and once
fully implemented, is estimated to result in annual cost savings of
approximately $9 million to $11 million. During the year ended December 31,
2001, Pegasus incurred a total of $7.7 million in restructuring charges,
primarily consisting of severance, outplacement and redundant facilities costs.
As of December 31, 2001, total unpaid severance and outplacement costs

                                        15
<PAGE>

were $1.3 million and total unpaid redundant facilities and other costs were
$1.9 million. These unpaid costs are classified as accrued liabilities and are
expected to be paid within the next 12 months.

  ACQUISITION OF GLOBAL ENTERPRISE TECHNOLOGY SOLUTIONS, LLC

     On November 1, 2000, Pegasus entered into an agreement to acquire all or
part ownership of Global Enterprise Technology Solutions, LLC, or GETS, a Tempe,
Arizona-based provider of hotel property management systems. Under the terms of
the agreement, Pegasus initiated the acquisition by acquiring a 20 percent
interest for a combination of Pegasus common stock and cash totaling $5.0
million. This initial investment was accounted for under the equity method.

     On September 1, 2001, Pegasus acquired the remaining 80 percent of GETS for
$11.5 million in cash. The acquisition was accounted for under the purchase
method of accounting. Accordingly, GETS' results of operations subsequent to the
acquisition date are included in Pegasus' consolidated financial statements. The
total $22.6 million purchase price includes approximately $6.0 million of cash
advances to fund software development and $90,000 in acquisition costs and was
allocated to assets acquired and liabilities assumed based on estimated fair
value at the acquisition date. An independent third party provided a valuation
of intangible assets related to the GETS acquisition.

  SALE OF GOLDEN TULIP

     On June 29, 2001, Pegasus sold its Golden Tulip brand and licensing
business to Madrid-based NH Hoteles, or NH, for $2.0 million. As a result of
this transaction, Pegasus recognized a pre-tax gain of $749,000 in the second
quarter of 2001. In addition, NH signed one-year agreements with Pegasus for
reservation and hotel representation services. As part of the agreements,
Pegasus is the exclusive provider of reservations technology, voice and
electronic reservation processing and commission processing services to all
Golden Tulip Hotels and Tulip Inns.

  SALE OF SUMMIT AND STERLING

     On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and Sterling
Hotels & Resorts brand businesses to IndeCorp Corporation, or IndeCorp, for
approximately $12 million, including scheduled future payments due upon member
hotel contract renewals. IndeCorp is a Chicago-based holding company that owns
and operates the luxury hotel brand Preferred Hotels & Resorts Worldwide. In
addition, IndeCorp signed a five-year technology services agreement and a
three-year hotel representation agreement with Pegasus. Under these agreements,
Pegasus is the exclusive provider of reservation technology, electronic
reservation processing and commission processing services to the IndeCorp
brands, which includes all Preferred Hotels & Resorts, Summit Hotels & Resorts
and Sterling Hotels & Resorts member hotels.

     On November 9, 2001, Pegasus and IndeCorp amended the original sale
agreement to provide for a $6.0 million promissory note that replaces the
scheduled future payments under the original agreement. The discounted value of
this promissory note is $5.5 million. The $6.0 million promissory note requires
monthly payments for a period of eight years commencing July 1, 2002 and bears
interest at 7 percent annually.

     In conjunction with amending this original sale agreement, Pegasus also
received from IndeCorp a $2.8 million promissory note to replace existing
outstanding trade receivables and extended the term of the existing technology
services and hotel representation agreements with IndeCorp for an additional
1 1/2 years. The $2.8 million promissory note requires monthly payments for a
period of eight years commencing July 1, 2002 and bears interest at 7 percent
annually.

     During 2001, Pegasus recognized a $4.8 million pre-tax gain on the sale of
the Summit Hotels & Resorts and Sterling Hotels & Resorts brands.

CRITICAL ACCOUNTING POLICIES

     Pegasus considers certain accounting policies related to revenue
recognition, bad debt, valuation of deferred tax assets and impairment of
long-lived assets to be critical policies due to the estimation processes
                                        16
<PAGE>

involved in each. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in Item 8 of this annual report on Form 10-K.

  REVENUE RECOGNITION

     Central Reservation System.  Pegasus derives revenues from its CRS service
by charging hotel customers transaction fees as well as license, maintenance and
support fees related to our RezView software. Transaction fees are recognized
when the guest stay occurs or transaction date depending on the contract terms.
License, maintenance and support fees are recognized ratably over the term of
the customer contract.

     Electronic Distribution.  Pegasus derives revenues from its GDS
distribution service by charging hotel customers a fee based on the number of
reservations made, less the number cancelled, or net reservations. As a hotel's
cumulative volume of net reservations increases during the course of the
calendar year, its fee per transaction decreases after predetermined transaction
volume hurdles have been met. As a result, for higher volume customers, unit
transaction fees are higher at the beginning of the year, when cumulative
transactions are lower. Pegasus recognizes revenues based on the fee per
transaction that a customer is expected to pay during the entire year. Our
interim balance sheets reflect deferred revenue for the difference between the
fee per transaction that we actually bill a customer during the period and the
average fee per transaction that a customer is expected to pay for the entire
year. The deferred revenue created during the early periods of the year is
recognized by the end of the year as the fee per transaction that we actually
bill a customer falls below the average fee per transaction for the entire year.
Additionally, we generally charge new participants in the GDS distribution
service a one-time fee for work performed to establish the connection between a
hotel's central reservation system and our electronic distribution technology.
Pegasus recognizes these one-time fees over the life of the customer contract.

     Pegasus derives its online distribution revenues by charging participating
hotels transaction fees. For reservations that originate on Web sites using our
online distribution service, Pegasus charges hotels transaction fees based on
the number of net reservations made at participating properties. Online
distribution service customers also pay initial development fees and monthly
subscription or maintenance fees. Pegasus recognizes these initial development
fees over the life of the customer contract.

     Financial Services.  Pegasus derives commission processing revenues by
charging each participating travel agency a fee equal to a percentage of
commissions paid to that agency through the commission processing service.
Pegasus also generally charges participating hotels a fee based on the number of
commissionable transactions processed. Pegasus recognizes revenues from its
commission processing service in the month in which the hotel stay occurs.

     Property Systems.  Property Systems revenues consist of maintenance and
support fees, which are recognized ratably over the term of the customer
contract. In addition, Property Systems revenues include transaction fees from
our PegasusCentral product, which are recognized monthly, based on room
occupancy rates.

     Hotel Representation.  Pegasus derives revenues from its hotel
representation service by charging hotel customers reservation processing fees,
membership fees and fees for various marketing services. Reservation processing
fees are recognized when the guest stay occurs or transaction date depending on
the contract terms. Membership fees are generally billed quarterly and
recognized ratably over the billing period. Marketing service revenues are
recognized as the marketing services are provided.

  BAD DEBT

     Pegasus maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of Pegasus' customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

                                        17
<PAGE>

  INCOME TAXES

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized. Should
Pegasus determine that it will not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.

  GOODWILL AND INTANGIBLE ASSETS

     Pegasus has significant intangible assets related to goodwill and other
acquired intangibles as well as capitalized software costs. The determination of
related estimated useful lives and whether or not these assets are impaired
involves significant judgments. Changes in strategy and/or market conditions
could significantly impact these judgments and require adjustments to recorded
asset balances.

REVENUES

  TECHNOLOGY

     Central Reservation System.  CRS revenues consist of transaction fees as
well as license, maintenance and support fees related to our RezView software.
CRS revenues represented approximately 30 percent of total revenues for 2001.

     Electronic Distribution.  Electronic Distribution revenues primarily
consist of transaction fees, commissions and monthly subscription or maintenance
fees. In addition, new hotel customers pay a one-time fee for establishing the
connection between the hotel's central reservation system and the electronic
distribution technology. New third-party Web site customers typically pay a
one-time fee for establishing the connection between the third-party Web site
and our electronic distribution technology. Electronic Distribution revenues
represented approximately 10 percent of total revenues for 2001.

     Financial Services.  Financial Services revenues consist of both travel
agency and hotel fees. Travel agency fees are based on a percentage of the value
of hotel commissions processed by Pegasus on behalf of participating travel
agencies. Revenues from travel agency fees can vary substantially from period to
period based on the types of hotels at which reservations are made and
fluctuations in overall room rates. In addition, participating hotels generally
pay fees based on the number of commissionable transactions that Pegasus
processes for the hotel. Financial Services revenues represented approximately
16 percent of total revenues for 2001.

     Property Systems and Services.  Property Systems and Services revenues for
2001 primarily consisted of maintenance and support fees related to the
GuestView software as well as revenues from the operations of GETS, subsequent
to September 1, 2001, the acquisition date. In addition, Property System
revenues include transaction fees from our PegasusCentral product, which are
recognized monthly, based on room occupancy rates. Property Systems and Services
represented approximately 3 percent of total revenues for 2001.

  HOSPITALITY

     Hotel Representation.  Hotel Representation service revenues consist of
reservation processing fees, membership fees and fees for various marketing
services. Our hotel representation services represented approximately 41 percent
of total revenues for 2001, which includes Golden Tulip revenues for the six
months ended June 30, 2001. Pegasus sold its Golden Tulip brand business in June
2001. In addition, Pegasus allows international travelers, who book rooms at
hotels to which we provide representation services, to prepay for their hotel
rooms in the traveler's local currency. When a traveler arrives at the hotel,
Pegasus remits the amount to the hotel in the hotel's local currency. Revenues
for this service are derived from the difference in
                                        18
<PAGE>

the exchange rate between the date the traveler pays and the date the guest stay
occurs. See Item 7A "Quantitative and Qualitative Disclosures about Market Risk"
for information regarding our exposure to movements in foreign currency exchange
rates.

  OTHER SERVICES

     Pegasus regularly seeks to develop new services to capitalize on its
existing technology and customer base and to provide additional electronic hotel
reservation capabilities and information services to its existing customers and
to other participants in the hotel room distribution process. Pegasus has not
received a material amount of revenue from these services, and there can be no
assurance that any of these services will produce a material amount of revenue
in the future.

COSTS

     Pegasus' cost of services consists principally of personnel costs relating
to information technology, customer service and telemarketing and facilities and
equipment maintenance costs. Research and development costs consist principally
of personnel costs, related overhead costs and fees paid to outside consultants.
General and administrative expenses are primarily personnel, office, legal and
accounting related. Marketing and promotion expenses consist primarily of
personnel costs, advertising, public relations and participation in trade shows
and other industry events. Depreciation and amortization expense includes
depreciation of computer equipment, office furniture, office equipment and
leasehold improvements as well as amortization of software, goodwill and other
intangible assets. Interest expense includes interest on a note payable to Reed
Elsevier plc, which was repaid in June 2001.

YEARS ENDED DECEMBER 31, 2001 AND 2000

     Pegasus completed the acquisition of REZ on April 3, 2000 and the
acquisition of GETS on September 1, 2001. Accordingly, REZ's and GETS's results
of operations subsequent to the acquisition dates are included in the
accompanying consolidated financial statements.

     Net revenues.  Net revenues in 2001 increased to $180.0 million from $162.2
million in 2000. This increase was primarily attributable to the acquisitions of
REZ and GETS, as well as the addition of new CRS customers and growth in our
Financial Services business. The overall increase was net of lost revenues from
the sale of the Summit, Sterling and Golden Tulip brands and the discontinued
business intelligence operations. The overall increase in net revenues was also
offset by a reduction in hotel reservations and a decline in the average daily
rates subsequent to the terrorist attacks of September 11, 2001. Other changes
in the business are described in the paragraphs that follow the presentation of
revenues below (amounts in millions).

<Table>
<Caption>
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Technology:
  CRS.......................................................  $ 54.2   $ 35.7
  Electronic Distribution...................................    18.9     20.4
  Financial Services........................................    28.6     25.5
  Property Systems & Services...............................     4.5      2.2
  Business Intelligence.....................................     0.3      1.5
                                                              ------   ------
  Technology Total..........................................   106.5     85.3
  Continuing Operations.....................................   106.2     83.8
</Table>

                                        19
<PAGE>

<Table>
<Caption>
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Hospitality:
  Utell/Paytell.............................................    66.8     56.3
  Golden Tulip..............................................     6.7      8.9
  Sterling..................................................      --      5.0
  Summit....................................................      --      6.7
                                                              ------   ------
  Hospitality Total.........................................    73.5     76.9
  Continuing Operations.....................................    66.8     56.3
Total Revenue...............................................  $180.0   $162.2
                                                              ======   ======
Total Continuing Operations.................................  $173.0   $140.1
                                                              ======   ======
</Table>

     Revenues for our technology segment increased $21.2 million, or 24.9
percent, to $106.5 million in 2001 compared to $85.3 million in 2000.

     CRS revenues increased $18.5 million, or 51.8 percent, to $54.2 million in
2001 compared to $35.7 million in 2000. While a substantial portion of the
increase is attributable to a full year's revenues from REZ, the remaining
increase is primarily due to providing more services to existing customers and
adding new customers, such as Kimpton Hotels, IndeCorp and Universal Studios.

     Electronic Distribution revenues decreased $1.5 million, or 7.4 percent, to
$18.9 million in 2001 compared to $20.4 million in 2000. The decrease was the
result of a 12.5 percent decrease in transactions, due to the loss of business
previously generated from some hotel GDS connections, which terminated during
the past year. The effect of the decrease in transactions was partially offset
by a 14.3 percent increase in transaction revenue per transaction due to a 16.7
percent increase in Internet transactions, which earn higher fees.

     Financial Services revenues increased $3.1 million, or 12.2 percent, to
$28.6 million in 2001 compared to $25.5 million in 2000. The increase was
primarily due to growth in our reconciliation and tracking service revenue,
which contributes to higher average travel agency fees. Revenues were also
enhanced by a slight increase in gross commissions due to a 3.5 percent increase
in transactions.

     Property Systems and Services generated revenues of $4.5 million in 2001
compared to $2.2 million in 2000. Of the $2.3 million increase, $1.3 million is
attributable to revenues from GETS, subsequent to the September 1, 2001
acquisition. Other property system revenues consist of an agreement with
Marriott to maintain GuestView, the PMS product obtained in the REZ acquisition.

     Revenues for our hospitality segment decreased $3.4 million, or 4.4
percent, to $73.5 million in 2001 compared to $76.9 million in 2000. The sale of
our Summit, Sterling and Golden Tulip brands accounted for approximately $13.9
million of the decrease in revenues. Excluding the effect of the Summit,
Sterling and Golden Tulip sales, hotel representation revenues increased by
$10.5 million, or 18.7 percent, primarily due to the inclusion of a full year's
revenues from the REZ acquisition.

     Cost of services.  Cost of services increased $17.7 million, or 22 percent,
to $98.1 million in 2001 compared to $80.4 million in 2000. This increase is
primarily the result of the inclusion of a full twelve months of costs from the
REZ acquisition and four months of costs from the GETS acquisition. These costs
were partially offset by cost-containment efforts implemented during the year
and the absence of costs related to the Summit, Sterling and Golden Tulip
businesses. As a percent of revenue, cost of services increased to 54.5 percent
in 2001 as compared to 49.6 percent in 2000. This increase was primarily due to
realizing a lower gross margin on REZ revenues.

     Research and development.  Research and development expenses decreased
$191,000, or 2.4 percent, to $7.8 million in 2001 compared to $8.0 million for
the same period in 2000. The decrease is primarily the result of more research
and development costs meeting the criteria for capitalization in 2001. As a
percent of revenue, research and development costs decreased to 4.4 percent in
2001 as compared to 5.0 percent in 2000.

                                        20
<PAGE>

     General and administrative expenses.  General and administrative expenses
increased $4.8 million, or 23.5 percent, to $25.2 million in 2001 compared to
$20.4 million in 2000. General and administrative expenses increased primarily
due to the inclusion of a full twelve months of costs from the REZ acquisition.
In addition, an increase in the use of professional services related to our
enterprise-wide accounting and information system and our restructuring plan
also resulted in increased general and administrative expenses and were
partially offset by a decrease in travel expense and other controllable costs.
As a percent of revenue, general and administrative expenses increased to 14.0
percent in 2001 as compared to 12.6 percent in 2000.

     Marketing and promotion expenses.  Marketing and promotion expenses
decreased $3.1 million, or 12.6 percent, to $21.7 million in 2001 compared to
$24.8 million in 2000. Marketing and promotion expenses decreased primarily due
to the sales of Summit, Sterling and Golden Tulip, a reduction in headcount and
a decrease in travel and other controllable costs. In addition, Utell is now
outsourcing some of its marketing functions thereby resulting in lower costs. As
a percent of revenue, marketing and promotion expenses decreased to 12.1 percent
in 2001 as compared to 15.3 percent in 2000.

     Depreciation and amortization.  Depreciation and amortization expenses
increased $14.2 million, or 27.6 percent, to $65.7 million in 2001 compared to
$51.5 million in 2000. The increase was primarily due to the inclusion of a full
twelve months of depreciation and amortization expenses related to assets
obtained in the REZ acquisition. This increase was partially offset by a
reduction in purchased intangible assets associated with the sales of our
Summit, Sterling and Golden Tulip brand businesses.

     Restructure costs.  During 2001, Pegasus incurred $7.7 million of
restructuring charges, primarily consisting of severance, outplacement and
redundant facilities costs related to reorganizing its operations from a
business unit structure into distinct functional areas, the consolidation of
reservation centers and the winding down of Business Intelligence operations. As
of December 31, 2001, total unpaid severance and outplacement costs were $1.3
million and total unpaid redundant facilities and other costs were $1.9 million.
These unpaid costs are classified as accrued liabilities and are expected to be
paid within the next twelve months.

     Interest income.  Interest income decreased $1.8 million in 2001 compared
to 2000 as we had a smaller investment in marketable securities during 2001. The
smaller investment in marketable securities was due to the utilization of our
marketable securities to fund the REZ and GETS acquisitions and the early
payment of our $20 million note payable to Reed Elsevier.

     Interest expense.  Interest expense decreased $800,000 in 2001 compared to
2000, primarily due to early payment of our $20 million note payable to Reed
Elsevier and the reduction of capital leases.

     Equity in loss of investee.  Prior to September 1, 2001, when the Company
acquired the remaining 80 percent interest in GETS, Pegasus recognized $39,000
as its share of GETS' net losses and $595,000 as the amortization of associated
goodwill for total equity in loss of investee of $634,000.

     Gains on sales of business units.  During 2001, Pegasus sold its Summit
Hotels & Resorts and Sterling Hotels & Resorts brand businesses to IndeCorp for
approximately $12 million, which included scheduled future payments with an
estimated net realizable value of $5.5 million. During 2001, the Company
recognized a pre-tax gain on this transaction of $4.8 million. In June 2001,
Pegasus sold its Golden Tulip brand and licensing business to Madrid-based NH
Hoteles, recognizing a pre-tax gain of $749,000 related to this transaction.

     Provision for income taxes.  Pegasus recorded an income tax benefit of $8.9
million in 2001, representing an effective tax rate of 23.1 percent. Our
effective rate differed from the statutory rate primarily due to large
non-deductible expenses related to purchase accounting. Pegasus recorded an
income tax benefit of $5.9 million in 2000, representing an effective tax rate
of 18.2 percent of pretax income. The effective tax rate for 2000 differed from
the statutory rate primarily due to large non-deductible expenses related to
purchase accounting, partially offset by tax-exempt interest income.

                                        21
<PAGE>

YEARS ENDED DECEMBER 31, 2000 AND 1999

     The results of operations for the year ended December 31, 2000 include the
effect of the REZ acquisition, which was completed on April 3, 2000.
Accordingly, REZ's results of operations subsequent to the acquisition are
included in the accompanying consolidated financial statements.

     Net revenues.  Net revenues in 2000 increased to $162.2 million from $38.0
million in 1999. Revenues increased primarily due to the acquisition of REZ.
Excluding the effect of REZ, revenues increased $9.7 million, or 25.5 percent
primarily due to higher transaction levels for Electronic Distribution and
Financial Services. Excluding the effect of REZ, other changes in the business
are described in the paragraphs that follow the presentation of revenues below
(amounts in millions).

<Table>
<Caption>
                                                               2000    1999
                                                              ------   -----
<S>                                                           <C>      <C>
Technology:
  CRS.......................................................  $ 35.7   $  --
  Electronic Distribution...................................    20.4    17.9
  Financial Services........................................    25.5    18.1
  Property Systems & Services...............................     2.2      --
  Business Intelligence.....................................     1.5     2.0
                                                              ------   -----
  Technology Total..........................................    85.3    38.0
Hospitality.................................................    76.9      --
                                                              ------   -----
Total Revenue...............................................  $162.2   $38.0
                                                              ======   =====
</Table>

     Electronic Distribution revenues increased 20.0 percent in 2000 as compared
to 1999. This increase resulted primarily from a 17.2 percent increase in the
number of hotel reservations made through our GDS and online distribution
services. Transaction revenue per transaction increased 9.8 percent in 2000 as
compared to 1999 due to an increase in the number of Internet-based
transactions, which generate more revenue per transaction.

     Financial Services revenues increased 36.5 percent in 2000 compared to 1999
as a result of a 32.6 percent increase in the value of commissions paid to
member travel agencies through our commission processing service. The value of
commissions paid increased because of an increase in the number of hotel
commission transactions processed combined with an increase in the average value
of commissions processed. In addition, revenue earned on the spread between the
currency in which the hotel commission is earned and the currency paid to the
travel agency increased. Incremental reconciliation and tracking services
revenue also contributed to the increase in commission processing revenues. Net
revenues arising from the increase in commissions paid was offset by a reduction
in the average fee received from participating travel agencies for consolidating
and remitting hotel commission payments. The decrease in the average travel
agency fee is due to consolidation within the travel agency industry.

     Business Intelligence revenues decreased $506,000, or 25.8 percent, to $1.5
million in 2000 compared to $2.0 million in 1999. Pegasus Business Intelligence
revenues consisted of fees charged to hotels for the development and maintenance
of hotel databases and for consulting services. Business Intelligence had net
pretax losses of approximately $8.4 million and $4.0 million in 2000 and 1999,
respectively. Included in the 2000 pretax loss for Business Intelligence was a
$3.0 million charge related to asset impairment.

     Revenues for our hospitality segment were $76.9 million in 2000 and were
entirely related to REZ's operations subsequent to the April 3, 2000 acquisition
date.

     Cost of services.  Cost of services were $80.4 million in 2000. Included in
2000 is $64.8 million in cost of services attributable to REZ's operations.
Excluding the effect of REZ, cost of services increased $2.9 million in 2000
compared to 1999. Cost of services increased due to an increase in headcount for
Electronic Distribution and Commission Processing. As a percent of revenue, cost
of services increased to 49.6 percent in

                                        22
<PAGE>

2000 as compared to 33.4 percent in 1999. This increase was primarily due to
realizing a lower gross margin on REZ revenues.

     Research and development.  Research and development expenses were $8.0
million in 2000. Research and development expenses in 2000 include $4.9 million
related to REZ's operations. Excluding the effect of REZ, research and
development expenses increased $541,000 in 2000 compared to 1999. As a percent
of revenue, research and development costs decreased to 5.0 percent in 2000 as
compared to 6.7 percent in 1999.

     General and administrative expenses.  General and administrative expenses
were $20.4 million in 2000. General and administrative expenses in 2000 include
$11.9 million related to REZ. Excluding the effect of REZ, general and
administrative expenses increased $3.8 million in 2000 compared to 1999. General
and administrative expenses increased due to an increase in headcount as well as
other expenses that were incurred as a result of the acquisition but did not
meet the criteria for capitalization. As a percent of revenue, general and
administrative expenses increased to 12.6 percent in 2000 as compared to 12.2
percent in 1999.

     Marketing and promotion expenses.  Marketing and promotion expenses were
$24.8 million in 2000. Included in 2000 is $17.9 million in marketing and
promotion expenses attributable to REZ. Excluding the effect of REZ, marketing
and promotion expenses increased $884,000 in 2000 compared to 1999. Marketing
and promotion expenses increased due to an increase in headcount for commission
processing, business intelligence and corporate marketing. As a percent of
revenue, marketing and promotion expenses decreased to 15.3 percent in 2000 as
compared to 16.0 percent in 1999.

     Depreciation and amortization.  Depreciation and amortization expenses were
$51.5 million in 2000. In 2000, depreciation and amortization expense for
property and equipment increased to $18.6 million from $2.0 million in 1999
primarily due to $16.2 million of depreciation and amortization expense related
to REZ property and equipment. In 2000, amortization expense related to
purchased intangibles and goodwill increased to $32.9 million from $416,000 in
1999 because of the REZ acquisition.

     Restructure and asset impairment costs.  During the fourth quarter of 2000,
we incurred $3.4 million of restructuring and asset impairment charges.
Approximately $3.0 million related to a write-down of goodwill and other assets
associated with Pegasus Business Intelligence. Approximately $419,000 related to
consolidation of reservation centers in Europe and Latin America.

     Write-off of purchased in-process research and development.  During 2000,
Pegasus wrote off $8.0 million for REZ research and development projects that
had not yet reached technological feasibility at the time of acquisition. For
more information on the write-off of purchased in-process research and
development see Note 3 to the consolidated financial statements, included in
Item 8 to this annual report on Form 10-K.

     Interest income.  Interest income decreased $1.4 million in 2000 compared
to 1999 as we had less marketable securities during the second, third and fourth
quarters of 2000 due to the REZ acquisition.

     Interest expense.  Interest expense increased $1.7 million in 2000 compared
to 1999 primarily due to $1.2 million accrued interest on a note payable to Reed
Elsevier plc, the majority REZ shareholder, as well as interest expense for
outstanding balances on our Chase line of credit and capital leases.

     Provision for income taxes.  Pegasus recorded an income tax benefit of $5.9
million in 2000. Our effective rate differed from the statutory rate primarily
due to large non-deductible expenses related to purchase accounting. Pegasus
recorded an income tax provision of $4.7 million in 1999, an effective tax rate
of 35.1 percent of pretax income. The effective tax rate for 1999 differed from
the statutory rate primarily due to state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

     Pegasus' principal sources of liquidity at December 31, 2001 included cash
and cash equivalents of $13.4 million, short-term investments of $9.2 million
and an unused revolving credit facility of $30.0 million. In September 2001,
Pegasus signed lease agreements for its new Dallas and Phoenix offices. In
conjunction with the lease agreements, Pegasus entered into two irrevocable
standby letter of credit agreements with

                                        23
<PAGE>

Chase Manhattan Bank totaling $2.6 million. The amount available to Pegasus
under the $30 million credit facility is reduced by these letters of credit.

     Pegasus had a working capital deficit of $5.5 million at December 31, 2001
compared to positive working capital of $9.0 million at December 31, 2000.
Working capital decreased primarily as a result of early payment of our $20
million note payable to Reed Elsevier as well as an $11.5 million payment for
the GETS acquisition. Net cash provided by operating activities increased to
$25.4 million in 2001 from $24.4 million in 2000, primarily due to an increased
focus on cost containment.

     Capital expenditures consisted of purchases of software, furniture and
computer equipment as well as internally developed software costs and amounted
to $14.4 million in 2001, compared to $16.7 million in 2000. Additional uses of
cash for investing activities in 2001 included the purchase of marketable
securities and the acquisition of GETS. Pegasus has satisfied its cash
requirements for investments primarily through cash generated from operations,
the sale of capital stock, and the sale of the Summit, Sterling and Golden Tulip
brand businesses. Pegasus estimates that capital expenditures during 2002 will
increase over 2001 primarily due to furniture, equipment and leasehold
improvements for our new Dallas and Phoenix offices as well as costs associated
with our new data center in Phoenix. Capital expenditures for 2002 will also
include adding capacity to existing systems and software development. Operating
leases are the only off-balance sheet financing arrangements the Company engages
in. Approximate future minimum lease payments are included in note 13 to the
consolidated financial statements included in item 8 of this annual report on
Form 10-K.

     In conjunction with the REZ acquisition, Pegasus entered into a credit
agreement on April 17, 2000. Under the terms of the credit agreement, Pegasus
has an aggregate $30 million revolving credit facility with Chase Bank of Texas,
Compass Bank and Wells Fargo Bank (Texas). The credit agreement has a two-year
term, and a current interest rate of LIBOR plus 2 percent. There was no amount
outstanding under the credit facility at March 14, 2002. However, the two
irrevocable standby letter of credit agreements entered into by Pegasus for the
new Dallas and Phoenix offices reduce the available borrowing capacity under
this revolving credit facility by $2.6 million. Management is currently in
discussions with lending institutions regarding the renewal or replacement of
this credit agreement and believes it will be renewed or replaced before its
April 2002 expiration.

     On August 9, 2000, the Board of Directors authorized the repurchase of up
to two million shares of the Company's common stock. The repurchase is at the
discretion of the Board of Directors' Stock Repurchase Committee and may be made
on the open market, in privately negotiated transactions or otherwise, depending
on market conditions, price, share availability and other factors. Shares
repurchased may be reserved for later reissue in connection with employee
benefit plans and other general corporate purposes. As of March 14, 2002,
Pegasus had repurchased 196,000 shares at a cost of $2.1 million.

     Our future liquidity and capital requirements will depend on numerous
factors, including:

     - Our profitability

     - Operational cash requirements, including payments for severance and
       redundant facilities related to our restructuring

     - Competitive pressures

     - Development of new services and applications

     - Acquisition of and investment in complementary businesses or technologies

     - Response to unanticipated cash requirements

     Pegasus believes its cash flows from operations, together with funds
available from debt financing, will be sufficient to meet its foreseeable
operating and capital requirements through at least the next twelve months.
Pegasus may consider other financing alternatives to fund its requirements,
including possible public or private debt or equity offerings. However, there
can be no assurance that any financing alternatives sought by Pegasus will be
available or will be on terms that are attractive to Pegasus. Further, any debt
financing may involve restrictive covenants, and any equity financing may be
dilutive to stockholders.
                                        24
<PAGE>

INFLATION

     Pegasus does not believe that inflation has materially impacted results of
operations during the past three years. Substantial increases in costs and
expenses could have a significant impact on its results of operations to the
extent such increases are not passed along to customers.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," or FAS 141, and No. 142, "Goodwill and Other
Intangibles," or FAS 142. FAS 141 prohibits the pooling-of-interests method and
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. The provisions of FAS
141 generally apply to all business combinations initiated after June 30, 2001.

     FAS 142 addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets (but not those acquired in
a business combination) at acquisition and for goodwill and other intangible
assets subsequent to their acquisition. Pegasus applied the provisions of FAS
141 and FAS 142 to the GETS acquisition and will apply the provisions to
existing goodwill and intangible assets beginning in 2002. The amount of
goodwill included in the Company's consolidated balance sheet at December 31,
2001 relates to the REZ and GETS acquisitions, and management believes there are
no other identifiable intangible assets included in the goodwill amount. As
such, the Company will discontinue the amortization of goodwill acquired in the
REZ acquisition beginning in January 2002.

     Beginning in 2002, workforce-in-place from the REZ acquisition will be
reclassified as goodwill. Also beginning in 2002, goodwill will be subject to an
annual impairment test. Based on preliminary valuations performed to date,
management does not believe that goodwill will be impaired. As a result, other
than discontinuing the amortization of goodwill, which amounted to $16.2 million
in 2001, adoption of the Statements is not expected to have a material impact on
the consolidated financial statements.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," or FAS 144. FAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," or
FAS 121, and related literature and establishes a single accounting model, based
on the framework established in FAS 121, for long-lived assets to be disposed of
by sale. The Company is required to adopt FAS 144 beginning in January 2002. The
Company does not believe that the adoption of FAS 144 will have a material
impact on its consolidated financial statements.

     In November 2001, the FASB Emerging Issues Task Force, or EITF, reached a
consensus on EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products)." This EITF consensus
concludes that consideration from a vendor to a customer is a reduction of the
selling price of the vendor's products or services and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's income
statement. Companies are required to adopt EITF 01-9 for fiscal years beginning
after December 15, 2001, and are required to reclassify all prior period amounts
to conform to the current period presentation. Pegasus is currently evaluating
the effects of this pronouncement on our consolidated financial statements.

                                        25
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Pegasus is exposed to certain market risks, including the effects of
movements in foreign currency exchange rates, and uses derivative financial
instrument contracts to manage foreign exchange risks. Pegasus has established a
control environment that includes policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument
activities. Company policy prohibits holding or issuing derivative financial
instruments for trading purposes.

     To reduce the impact of changes in foreign exchange rates on consolidated
results of operations and future foreign currency denominated cash flows, the
Company was a party to various forward exchange contracts at December 31, 2001.
These contracts reduce exposure to currency movements affecting existing foreign
currency denominated assets and liabilities primarily trade receivables and
payables.

     A summary of forward exchange contracts in place at December 31, 2001
follows (in thousands):

<Table>
<Caption>
                                                               SELL    PURCHASE
                                                              ------   --------
<S>                                                           <C>      <C>
Australian Dollar...........................................  $   --     $178
Canadian Dollar.............................................     847       --
Swiss Franc.................................................      --      403
Danish Krone................................................      --      125
Euro........................................................   4,724       --
British Pound...............................................      92       --
Hong Kong Dollar............................................     300       --
Japanese Yen................................................     794       --
Norwegian Krona.............................................      --       67
New Zealand Dollar..........................................      20       --
Swedish Krona...............................................     529       --
Singapore Dollar............................................      --        6
Thai Baht...................................................     156       --
                                                              ------     ----
  Total.....................................................  $7,462     $779
                                                              ======     ====
</Table>

     A $295,000 contract to sell Japanese Yen has a contract maturity of March
2002. All other contracts mature in January 2002. Because of the short-term
nature of these contracts, the fair value approximates the contract value. The
difference between the fair value and contract value is included in the
consolidated balance sheet as accounts receivable and was not material at
December 31, 2001. During the fiscal year ended December 31, 2000, Pegasus used
similar forward exchange contracts and had either sell or purchase forward
exchange contracts of a similarly short-term nature in place on December 31,
2000. As of December 31, 2000, Pegasus had approximately $13.6 million in sell
forward exchange contracts and $2.8 million in purchase forward exchange
contracts. Pegasus' positions with respect to these forward exchange contracts
differed as of December 31, 2000 compared to December 31, 2001 because of
changes in Pegasus' non-U.S. denominated trade payables and receivables. For
more information on derivative financial instruments see Notes 1 and 6 to the
consolidated financial statements included in Item 8 to this annual report on
Form 10-K.

                                        26
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
  of Pegasus Solutions, Inc.:

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss),
changes in stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Pegasus Solutions, Inc. and its subsidiaries
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
February 4, 2002, except as to Note 17
  which is as of February 11, 2002

                                        27
<PAGE>

                            PEGASUS SOLUTIONS, INC.

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS

Cash and cash equivalents...................................  $ 13,438   $ 37,150
Short-term investments......................................     9,167         63
Accounts receivable, net of allowance for doubtful accounts
  of $5,790 and $7,159, respectively........................    29,228     29,889
Income tax receivable.......................................       375         --
Other current assets........................................     4,934      5,689
                                                              --------   --------
          Total current assets..............................    57,142     72,791
Goodwill, net of accumulated amortization of $28,544 and
  $11,944, respectively.....................................   136,921    149,764
Intangible assets, net of accumulated amortization of
  $43,939 and $20,638, respectively.........................    32,505     62,909
Property and equipment, net.................................    67,365     64,434
Other noncurrent assets.....................................     9,737      7,807
                                                              --------   --------
          Total assets......................................  $303,670   $357,705
                                                              ========   ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable............................................  $ 19,018   $ 14,883
Accrued liabilities.........................................    13,280     11,651
Deferred tax liability......................................    12,301     12,078
Unearned income.............................................     8,585      9,428
Accrued payroll and benefits................................     6,905      6,719
Customer deposits...........................................     2,170      2,691
Other current liabilities...................................       424         80
Income tax payable..........................................        --      6,212
                                                              --------   --------
     Total current liabilities..............................    62,683     63,742
Note payable................................................        --     20,000
Deferred tax liability......................................       544      8,961
Noncurrent uncleared commission checks......................     4,004      2,844
Other noncurrent liabilities................................     5,238      1,586
Commitments and contingencies...............................        --         --
Stockholders' equity:
  Preferred stock, $0.01 par value; 2,000 shares authorized;
     zero shares issued and outstanding.....................        --         --
  Common stock, $0.01 par value; 50,000 shares authorized;
     25,136 and 24,873 shares issued, respectively..........       251        249
  Additional paid-in capital................................   290,444    288,422
  Unearned compensation.....................................       (34)      (157)
  Accumulated comprehensive gain (loss).....................        21       (265)
  Accumulated deficit.......................................   (56,238)   (26,501)
  Treasury stock at cost; 441 and 245 shares,
     respectively...........................................    (3,243)    (1,176)
                                                              --------   --------
          Total stockholders' equity........................   231,201    260,572
                                                              --------   --------
          Total liabilities and stockholders' equity........  $303,670   $357,705
                                                              ========   ========
</Table>

          See accompanying notes to consolidated financial statements.
                                        28
<PAGE>

                            PEGASUS SOLUTIONS, INC.

     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                    (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                2001       2000      1999
                                                              --------   --------   -------
<S>                                                           <C>        <C>        <C>
Net revenues................................................  $179,962   $162,199   $38,036
Cost of services............................................    98,132     80,377    12,691
Research and development....................................     7,842      8,033     2,546
General and administrative expenses.........................    25,201     20,404     4,630
Marketing and promotion expenses............................    21,709     24,843     6,079
Depreciation and amortization...............................    65,651     51,549     2,438
Restructure and asset impairment costs......................     7,696      3,421        --
Write-off of purchased in-process research and
  development...............................................        --      8,000        --
                                                              --------   --------   -------
Operating income (loss).....................................   (46,269)   (34,428)    9,652
Other income (expense):
     Interest income........................................     1,655      3,464     4,828
     Interest expense.......................................      (887)    (1,687)      (27)
     Equity in loss of investee, including amortization of
       excess purchase price of $595........................      (634)        --        --
     Gain on sale of business units.........................     5,538         --        --
     Other..................................................     1,914        151    (1,100)
                                                              --------   --------   -------
Income (loss) before income taxes...........................   (38,683)   (32,500)   13,353
Income tax benefit (expense)................................     8,946      5,918    (4,687)
                                                              --------   --------   -------
Net income (loss)...........................................  $(29,737)  $(26,582)  $ 8,666
                                                              ========   ========   =======
Other comprehensive income (loss) -- change in unrealized
  gain (loss), net of tax of $185, $171 and $13,
  respectively..............................................       286       (240)      (25)
                                                              --------   --------   -------
Comprehensive income (loss).................................  $(29,451)  $(26,822)  $ 8,641
                                                              ========   ========   =======
Net income (loss) per share:
     Basic..................................................  $  (1.21)  $  (1.14)  $  0.47
                                                              ========   ========   =======
     Diluted................................................  $  (1.21)  $  (1.14)  $  0.44
                                                              ========   ========   =======
Weighted average shares outstanding:
     Basic..................................................    24,570     23,380    18,576
                                                              ========   ========   =======
     Diluted................................................    24,570     23,380    19,689
                                                              ========   ========   =======
</Table>

          See accompanying notes to consolidated financial statements.
                                        29
<PAGE>

                            PEGASUS SOLUTIONS, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (IN THOUSANDS)
<Table>
<Caption>
                                COMMON STOCK                                    TREASURY STOCK        UNREALIZED
                             ------------------   ADDITIONAL                  -------------------   GAIN (LOSS) ON   RETAINED
                             NUMBER OF             PAID-IN       UNEARNED     NUMBER OF               MARKETABLE     EARNINGS
                              SHARES     AMOUNT    CAPITAL     COMPENSATION    SHARES     AMOUNT      SECURITIES     (DEFICIT)
                             ---------   ------   ----------   ------------   ---------   -------   --------------   ---------
<S>                          <C>         <C>      <C>          <C>            <C>         <C>       <C>              <C>
Balance at December 31,
  1998.....................   15,980      $160     $ 63,330       $(616)        (175)     $   (26)      $  --        $ (8,584)
Secondary offering.........    3,450        35       84,408          --           --           --          --              --
Windfall tax benefit of
  stock options............       --        --        4,196          --           --           --          --              --
Net change in unearned
  compensation.............       --        --          150         174           --           --          --              --
Exercise of stock
  options..................      542         5        2,191          --           --           --          --              --
Issuance of stock
  warrant..................      519         5        2,484          --           --           --          --              --
Issuance for stock purchase
  plan.....................       24        --          219          --           --           --          --              --
Change in unrealized gain
  (loss) on marketable
  securities...............       --        --           --          --           --           --         (25)             --
Net income.................       --        --           --          --           --           --          --           8,666
                              ------      ----     --------       -----         ----      -------       -----        --------
Balance at December 31,
  1999.....................   20,515       205      156,978        (442)        (175)         (26)        (25)             82
Windfall tax benefit of
  stock options............       --        --          397          --           --           --          --              --
Net change in unearned
  compensation.............       --        --           (6)        285           --           --          --              --
Exercise of stock
  options..................      116         1          504          --           --           --          --              --
Issuance for stock purchase
  plan.....................       72         1          809          --           --           --          --              --
Issuance for REZ
  acquisition..............    3,990        40      126,742          --           --           --          --              --
Issuance for GETS
  acquisition..............      180         2        2,998          --           --           --          --              --
Shares received from REZ
  escrow settlement........       --        --           --          --          (70)      (1,150)         --              --
Change in unrealized gain
  (loss) on marketable
  securities...............       --        --           --          --           --           --        (240)             --
Dividend payable resulting
  from stock split.........       --        --           --          --           --           --          --              (1)
Net loss...................       --        --           --          --           --           --          --         (26,582)
                              ------      ----     --------       -----         ----      -------       -----        --------
Balance at December 31,
  2000.....................   24,873       249      288,422        (157)        (245)      (1,176)       (265)        (26,501)
Windfall tax benefit of
  stock options............       --        --          542          --           --           --          --              --
Net change in unearned
  compensation.............       --        --           --         123           --           --          --              --
Exercise of stock
  options..................      215         1          989          --           --           --          --              --
Issuance for stock purchase
  plan.....................       48         1          453          --           --           --          --              --
Purchase of treasury
  shares...................       --        --           --          --         (196)      (2,067)         --              --
Acquisition of GETS........       --        --           38          --           --           --          --              --
Change in unrealized gain
  (loss) on marketable
  securities...............       --        --           --          --           --           --         286              --
Net loss...................       --        --           --          --           --           --          --         (29,737)
                              ------      ----     --------       -----         ----      -------       -----        --------
Balance at December 31,
  2001.....................   25,136      $251     $290,444       $ (34)        (441)     $(3,243)      $  21        $(56,238)
                              ======      ====     ========       =====         ====      =======       =====        ========

<Caption>

                              TOTAL
                             --------
<S>                          <C>
Balance at December 31,
  1998.....................  $ 54,264
Secondary offering.........    84,443
Windfall tax benefit of
  stock options............     4,196
Net change in unearned
  compensation.............       324
Exercise of stock
  options..................     2,196
Issuance of stock
  warrant..................     2,489
Issuance for stock purchase
  plan.....................       219
Change in unrealized gain
  (loss) on marketable
  securities...............       (25)
Net income.................     8,666
                             --------
Balance at December 31,
  1999.....................   156,772
Windfall tax benefit of
  stock options............       397
Net change in unearned
  compensation.............       279
Exercise of stock
  options..................       505
Issuance for stock purchase
  plan.....................       810
Issuance for REZ
  acquisition..............   126,782
Issuance for GETS
  acquisition..............     3,000
Shares received from REZ
  escrow settlement........    (1,150)
Change in unrealized gain
  (loss) on marketable
  securities...............      (240)
Dividend payable resulting
  from stock split.........        (1)
Net loss...................   (26,582)
                             --------
Balance at December 31,
  2000.....................   260,572
Windfall tax benefit of
  stock options............       542
Net change in unearned
  compensation.............       123
Exercise of stock
  options..................       990
Issuance for stock purchase
  plan.....................       454
Purchase of treasury
  shares...................    (2,067)
Acquisition of GETS........        38
Change in unrealized gain
  (loss) on marketable
  securities...............       286
Net loss...................   (29,737)
                             --------
Balance at December 31,
  2001.....................  $231,201
                             ========
</Table>

          See accompanying notes to consolidated financial statements.
                                        30
<PAGE>

                            PEGASUS SOLUTIONS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                                2001       2000       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $(29,737)  $(26,582)  $  8,666
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Write-off of purchased in-process research and
     development............................................        --      8,000         --
    Depreciation and amortization...........................    65,651     51,549      2,438
    Equity in loss of investee..............................       634         --         --
    Gain on sale of business units..........................    (5,538)        --         --
    Asset impairment........................................        --      3,003         --
    Bad debt expense........................................     3,408      2,874         --
    Write-off of minority interest investment...............        --         --      1,100
    Deferred income taxes...................................    (9,934)    (9,865)      (661)
    Other...................................................    (1,140)     1,153      4,621
    Changes in assets and liabilities, net of effects of
     acquisitions:
      Accounts receivable...................................    (3,963)     6,664     (1,167)
      Other current and noncurrent assets...................       574      2,438     (1,494)
      Accounts payable and accrued liabilities..............     4,144    (12,403)     1,153
      Unearned income.......................................      (843)    (2,046)      (196)
      Income tax receivable/payable.........................    (6,587)     1,827         --
      Other noncurrent liabilities..........................     8,730     (2,235)       295
                                                              --------   --------   --------
         Net cash provided by operating activities..........    25,399     24,377     14,755
Cash flows from investing activities:
  Purchase of REZ, net of cash acquired.....................       852    (93,115)        --
  Purchase of GETS..........................................   (11,512)    (2,000)        --
  Proceeds from sale of business units......................     4,033         --         --
  Purchase of marketable securities.........................   (16,375)        --    (54,536)
  Proceeds from maturity of marketable securities...........     7,225     35,294     34,893
  Purchase of property and equipment........................   (14,407)   (16,678)    (3,383)
  Proceeds from sale of property and equipment..............       310         --         --
  Other.....................................................     1,500     (1,500)      (100)
                                                              --------   --------   --------
         Net cash used in investing activities..............   (28,374)   (77,999)   (23,126)
Cash flows from financing activities:
  Proceeds from issuance of common stock....................     1,444      1,301     89,347
  Proceeds from line of credit..............................        --     10,000         --
  Repayment of line of credit...............................        --    (10,000)        --
  Repayment of notes payable................................   (20,000)   (18,021)        --
  Purchase of treasury stock................................    (2,067)        --         --
  Other.....................................................      (114)       (53)      (540)
                                                              --------   --------   --------
         Net cash provided by (used in) financing
           activities.......................................   (20,737)   (16,773)    88,807
Net increase (decrease) in cash and cash equivalents........   (23,712)   (70,395)    80,436
Cash and cash equivalents, beginning of period..............    37,150    107,545     27,109
                                                              --------   --------   --------
Cash and cash equivalents, end of period....................  $ 13,438   $ 37,150   $107,545
                                                              ========   ========   ========
Supplemental disclosure of cash flow information:
  Interest paid.............................................  $  2,073   $    449   $     28
                                                              ========   ========   ========
  Income taxes paid.........................................  $  2,385   $  1,167   $  1,117
                                                              ========   ========   ========
Supplemental schedule of noncash investing and financing
  activities:
  Common stock issued for purchase of REZ...................  $     --   $125,632   $     --
                                                              ========   ========   ========
  Note payable issued for purchase of REZ...................  $     --   $ 20,000   $     --
                                                              ========   ========   ========
  Common stock issued for investment in GETS................  $     --   $  3,000   $     --
                                                              ========   ========   ========
  Notes received from sale of Summit and Sterling Hotels &
    Resorts.................................................  $  7,000   $     --   $     --
                                                              ========   ========   ========
</Table>

          See accompanying notes to consolidated financial statements
                                        31
<PAGE>

                            PEGASUS SOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  BASIS OF PRESENTATION

     Pegasus is a leading provider of end-to-end reservation distribution
systems, reservation technology systems and hotel representation services for
the global hotel industry. On April 3, 2000, Pegasus completed the acquisition
of REZ, Inc. ("REZ"), a leader in providing distribution services and solutions
for the hotel industry. The acquisition added hotel representation, central
reservation system, or CRS, and property management system, or PMS, services to
our existing electronic distribution and commission processing services. Pegasus
is organized primarily on the basis of services provided, and as a result of the
REZ acquisition, the Company is now organized into two reportable
segments -- technology and hospitality.

     The technology segment provides CRS, electronic distribution, commission
processing and property systems services to the global hotel industry. The
hospitality segment provides hotel representation services offered under the
Utell brand name. Hotel representation services offered under the Summit Hotels
& Resorts and Sterling Hotels & Resorts brand names were sold in January 2001,
and the Golden Tulip representation service was sold in June 2001.

     In June 2001, we launched our new Web-based PMS service,
PegasusCentral(TM), and announced that Six Continents Hotels had named it as one
of two preferred PMS standards for its 2,600-plus Holiday Inn and Holiday Inn
Express properties. PegasusCentral offers, on an ASP basis, a single-image
inventory system, providing CRS and PMS functions from a central database.

     The consolidated financial statements include the accounts of Pegasus
Solutions, Inc. and its wholly owned subsidiaries ("Pegasus" or "the Company").
All significant intercompany balances have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to current year
presentation. Pegasus' common stock is traded on the Nasdaq National Market
under the symbol PEGS.

  MANAGEMENT ESTIMATES

     The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosures of contingent assets and liabilities.
Actual results may differ from those estimates.

  CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with maturities of
three months or less from the date of purchase to be cash equivalents.

  INVESTMENTS IN DEBT AND EQUITY SECURITIES

     Marketable securities consist of corporate debt and equity securities and
obligations issued by governments and agencies. By policy, the Company invests
primarily in high-grade marketable securities. All marketable securities are
defined as available-for-sale under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."

     Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and re-evaluates such
determination at each balance sheet date. Debt securities that are bought with
the intent and ability to hold until maturity are classified as held-to-maturity
securities and are recorded at amortized cost. Debt securities that the Company
does not have the intent or ability to hold until

                                        32
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maturity are classified as available-for-sale. Available-for-sale securities are
carried at fair value, with changes in the unrealized gain or loss reported as a
separate component of stockholders' equity, net of tax.

  CAPITALIZED SOFTWARE

     Software development costs are accounted for in accordance with either
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," or with Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Capitalized software development costs are
amortized on a product-by-product basis using the greater of the amount computed
by the ratio of current year net revenue to estimated future net revenue, or the
amount computed by the straight-line method over a period which approximates the
estimated economic life of the product. In the event unamortized software costs
exceed the net realizable value of the software, the excess is written-off in
the period the excess is determined. Additionally, capitalized software includes
software purchased from third parties used in the operations of the Company. In
addition to software acquired in purchase transactions, the Company capitalized
software of $3,676,000, $3,035,000 and $917,000 during 2001, 2000 and 1999.
Amortization of capitalized software for those same years was $15,780,000,
$11,315,000 and $499,000, respectively. At December 31, 2001 and 2000,
unamortized capitalized software was $51.0 million and $45.0 million,
respectively.

  PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, ranging from three to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the life of the lease. Expenditures for maintenance
and repairs, as well as minor renewals, are charged to operations as incurred,
while betterments and major renewals are capitalized. Any gain or loss resulting
from the retirement or sale of an asset is credited or charged to operations.

     The Company evaluates long-lived assets to be held and used in the
business, or to be disposed of, for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. Impairment is determined by comparing expected future cash flows
(undiscounted and before interest) to the net book value of the assets. If
impairment exists, the amount of impairment is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets. The Company believes that no impairment of property and
equipment existed at December 31, 2001 or 2000.

  GOODWILL

     Goodwill represents the excess of the purchase price of acquisitions over
the fair value of the net assets acquired. Through December 31, 2001, goodwill
was amortized on a straight-line basis over ten to fifteen years. Unamortized
goodwill at December 31, 2001 and 2000 was $136.9 million and $149.8 million,
respectively. The carrying value of goodwill is evaluated periodically in
relation to the operating performance and anticipated future undiscounted net
cash flows of the related business. The Company believes that no impairment of
goodwill existed at December 31, 2001 or 2000.

     Amortization of goodwill was $16,203,000, $12,280,000 and $416,000 for the
years ended December 31, 2001, 2000 and 1999, respectively (see "Recently issued
accounting standards").

                                        33
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  OTHER INVESTMENTS

     In September 1998, the Company purchased 225,225 shares of Series B
Convertible Preferred Stock of Intermezzo Systems, Inc. for $1.0 million
representing approximately a 10.6 percent interest. Intermezzo was a developer
of enterprise software solutions for the hospitality industry. The Intermezzo
board of directors elected to cease operations in July 1999 and entered into an
orderly plan of liquidation. As a result, Pegasus wrote-off $1.1 million in 1999
representing the Company's entire investment in Intermezzo.

     As a result of the REZ acquisition, the Company has a $1.1 million
non-controlling equity investment in the SITA Foundation that is accounted for
under the cost method. The investment, which is included in other current
assets, is ultimately convertible into 32,853 shares of France Telecom upon the
approval of the SITA board of trustees. The Company intends to divest its
ownership upon such approval.

  REVENUES

     Pegasus' revenues are predominantly transaction-based. The Company's
technology segment derives its revenues from transaction fees, commissions fees,
license fees and maintenance fees charged to participating hotels and travel
agencies. The Company's hospitality segment derives its revenues from
reservation processing fees, membership fees and fees for various marketing
services.

     Central Reservation Systems.  Central Reservation Systems revenues consist
of transaction fees as well as license, maintenance and support fees related to
the Company's RezView(TM) software. Transaction fees are recognized when the
guest stay occurs or transaction date depending on the contract terms. License,
maintenance and support fees are recognized ratably over the term of the
customer contract.

     Pegasus Electronic Distribution.  Pegasus derives revenues from its GDS
distribution service by charging hotel customers a fee based on the number of
reservations made, less the number cancelled ("net reservations"). As a hotel's
cumulative volume of net reservations increases during the course of the
calendar year, its fee per transaction decreases after predetermined transaction
volume hurdles have been met. As a result, for higher volume customers, unit
transaction fees are higher at the beginning of the year, when cumulative
transactions are lower. The Company recognizes revenues based on the fee per
transaction that a customer is expected to pay during the entire year. The
Company's interim balance sheets reflect deferred revenue for the difference
between the fee per transaction that Pegasus actually bills a customer during
the period and the average fee per transaction that a customer is expected to
pay for the entire year. The deferred revenue created during the early periods
of the year is recognized by the end of the year as the fee per transaction that
Pegasus actually bills a customer falls below the average fee per transaction
for the entire year. Additionally, Pegasus generally charges new participants in
the GDS distribution service a one-time fee for work performed to establish the
connection between a hotel's central reservation system and the Pegasus
electronic distribution technology. The Company recognizes these one-time fees
over the life of the customer contract. The Company also charges certain GDS's a
fee based on either the number of net reservations or the number of hotel chains
connected to the GDS through the Pegasus electronic distribution technology to
compensate for the management and consolidation of multiple interfaces.

     Pegasus derives its Internet distribution revenues by charging
participating hotels transaction fees. For reservations that originate on Web
sites using our online distribution service, Pegasus charges hotels transaction
fees based on the number of net reservations made at participating properties.
Online distribution service customers also pay initial development fees and
monthly subscription or maintenance fees.

     Financial Services.  Pegasus derives commission processing revenues by
charging each participating travel agency a fee equal to a percentage of
commissions paid to that agency through the commission processing service. The
Company also generally charges participating hotels a fee based on the number of

                                        34
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

commissionable transactions processed. Revenues from travel agency fees can vary
substantially from period to period based on the types of hotels at which
reservations are made and fluctuations in overall room rates. Pegasus recognizes
revenues from its commission processing service in the month in which the hotel
stay occurs.

     Property Systems.  Property Systems revenues consist of maintenance and
support fees from the Company's GuestView(TM) software and the operations of
Global Enterprise Technology Solutions, LLC ("GETS") subsequent to its September
2001 acquisition. In addition, Property System revenues include transaction fees
from our PegasusCentral product, which are recognized monthly, based on room
occupancy rates. While no new licenses are being sold for GuestView, existing
customers continue to be serviced, with maintenance and support fees recognized
ratably over the term of the customer contract. The operations of GETS
subsequent to its September 2001 acquisition consists primarily of maintenance
and support fees, which are recognized ratably over the term of the customer
contract.

     Hotel Representation.  Hotel representation revenues consist of reservation
processing fees, membership fees and fees for various marketing services.
Reservation processing fees are recognized when the guest stay occurs or on the
transaction date depending on the contract terms. Membership fees are generally
billed quarterly and recognized ratably over the billing period. Marketing
service revenues are recognized as the marketing services are provided.

  INCOME TAXES

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts more likely than not to be realized.

  ADVERTISING COSTS

     Advertising and promotion-related expenses are charged to operations when
incurred. Advertising expense for 2001, 2000 and 1999 was approximately $3.8
million, $5.1 million and $1.0 million, respectively.

  RESEARCH AND DEVELOPMENT

     Research and development expenses are charged to operations when incurred.

  FOREIGN CURRENCY

     The Company has various foreign operations, primarily in Canada, Europe,
Latin America and Asia. The U.S. dollar is the functional currency for the
Company's foreign operations. Gains and losses from foreign currency
transactions are recognized in the period in which they occur and are included
in other income (expense).

  FINANCIAL INSTRUMENTS

     The Company uses derivative financial instrument contracts to manage
foreign exchange risks. Amounts receivable or payable under derivative financial
instrument contracts are reported on the consolidated balance

                                        35
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sheet. As exchange rates fluctuate, gains and losses on contracts designated as
hedges of existing assets and liabilities are recognized in the statement of
operations as other income (expense).

     The carrying amounts of the Company's financial instruments reflected in
the consolidated balance sheets at December 31, 2001 and 2000 approximate their
respective fair values.

  CONCENTRATIONS OF CREDIT AND MARKET RISK

     The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash, receivables and forward contracts to purchase or
sell foreign currencies.

     Cash.  Cash balances exceeding the federally insured limits are maintained
in financial institutions. However, management believes the institutions are of
high credit quality.

     Accounts receivable.  The Company's technology customers primarily include
well-established hotel chains and travel-related web sites. The Company's
representation customers primarily consist of independent hotels, some of which
are located outside the United States. Some of these customers may not be
financially viable. Even though the Company has policies in place to limit
exposure from concentrations of credit risks, management believes the Company
has moderate exposure to credit risk related to accounts receivable from its
customers.

     Foreign currency contracts.  The counterparties to the Company's foreign
exchange contracts are substantial and creditworthy multinational commercial
banks or other financial institutions that are recognized market makers. Neither
the risks of counterparty nonperformance nor the economic consequences of
counterparty nonperformance associated with these contracts are considered by
the Company to be material.

     The Company is exposed to certain market risks, including the effects of
movements in foreign currency exchange rates. 41 percent of revenue is derived
from customers located outside the United States, particularly in Europe.
Fluctuations in the value of foreign currencies relative to the U.S. Dollar
directly impact our revenues. The Company uses derivative financial instrument
contracts to manage foreign exchange risks. The Company has established a
control environment that includes policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument
activities. Company policy prohibits holding or issuing derivative financial
instruments for trading purposes.

  NET INCOME (LOSS) PER SHARE

     Basic earnings per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the reporting period, after giving retroactive effect to stock
splits. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. For the calculation of diluted net income per
share, the basic weighted average number of shares is increased by the dilutive
effect of stock options determined using the treasury stock method. The effect
of stock options is not included in the calculation of diluted net loss per
share for the years ended December 31, 2001 and 2000 as the effect would be
anti-dilutive. Shares issuable upon the exercise of stock options that were
excluded from the calculation were 3.3 million and 3.1 million in 2001 and 2000,
respectively. The Company has no other potentially dilutive securities.

     For the year ended December 31, 1999, outstanding options totaling 1.1
million had strike prices below the average fair market value of the Company's
common stock and were included in the diluted earnings per share calculations
for that year. The effect of this inclusion increased the weighted average
number of shares outstanding to be used in the diluted earnings per share
calculation to 19.7 million.

                                        36
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and Other
Intangibles" ("FAS 142"). FAS 141 prohibits the pooling-of-interests method and
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. The provisions of FAS
141 generally apply to all business combinations initiated after June 30, 2001.

     FAS 142 addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets (but not those acquired in
a business combination) at acquisition and for goodwill and other intangible
assets subsequent to their acquisition. Pegasus applied the provisions of FAS
141 and FAS 142 to the GETS acquisition and will apply the provisions to
existing goodwill and intangible assets beginning in 2002. The amount of
goodwill included in the Company's consolidated balance sheet at December 31,
2001 relates to the REZ and GETS acquisitions, and management believes there are
no other identifiable intangible assets included in the goodwill amount. As
such, the Company will discontinue the amortization of goodwill acquired in the
REZ acquisition beginning in January 2002.

     Beginning in 2002, workforce-in-place from the REZ acquisition will be
reclassified as goodwill. Also beginning in 2002, goodwill will be subject to an
annual impairment test. Based on preliminary valuations performed to date,
management does not believe that goodwill will be impaired. As a result, other
than discontinuing the amortization of goodwill, which amounted to $16.2 million
in 2001, adoption of the Statements is not expected to have a material impact on
the consolidated financial statements.

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") and related literature and establishes a single accounting model,
based on the framework established in FAS 121, for long-lived assets to be
disposed of by sale. The Company is required to adopt FAS 144 beginning in
January 2002. The Company does not believe that the adoption of FAS 144 will
have a material impact on its consolidated financial statements.

     In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products)." This EITF consensus
concludes that consideration from a vendor to a customer is a reduction of the
selling price of the vendor's products or services and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's income
statement. Companies are required to adopt EITF 01-9 for fiscal years beginning
after December 15, 2001, and are required to reclassify all prior period amounts
to conform to the current period presentation. The Company is currently
evaluating the effects of this pronouncement on its consolidated financial
statements.

                                        37
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  RESTRUCTURE COSTS

     During the years ended December 31, 2001 and 2000, Pegasus recognized $7.7
million and $3.4 million of restructuring charges, respectively. The composition
of those charges follows (amounts in thousands):

<Table>
<Caption>
                                                               2001     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Reorganization by business function:
  Severance and outplacement costs..........................  $3,910   $   --
  Redundant facilities and other costs......................   2,392       --
                                                              ------   ------
                                                               6,302       --
Consolidation of reservation centers:
  Severance costs...........................................     821       --
  Redundant facilities and other costs......................     352      419
                                                              ------   ------
                                                               1,173      419
Winding-down of business intelligence services:
  Write-down of goodwill and other assets...................      --    3,002
  Severance costs...........................................     221       --
                                                              ------   ------
                                                                 221    3,002
                                                              ------   ------
Total restructuring charges.................................  $7,696   $3,421
                                                              ======   ======
</Table>

     Pegasus conducted a reorganization of its reportable segments by business
function in the third quarter of 2001, incurring $6.3 million of restructuring
charges. These charges included $3.9 million of severance and outplacement costs
and $2.4 million of redundant facilities and other costs. As a result of the
reorganization plan, Pegasus eliminated approximately 15 percent of its
workforce determined to be duplicative and consolidated certain facilities and
functions. The positions eliminated were primarily related to call center and
administrative functions and included both domestic and international locations.

     The Company consolidated reservation centers outside the United States
during the fourth quarter of 2000 and the first and fourth quarters of 2001,
incurring $1.6 million of restructuring charges. These charges included $821,000
of severance costs and $771,000 of redundant facilities and other costs. As a
result of the reservation center consolidation, Pegasus eliminated approximately
five percent of its workforce determined to be duplicative and consolidated
certain facilities and functions.

     Pegasus' business intelligence division ceased operations during the fourth
quarter of 2000, incurring $3.2 million of restructuring charges. These charges
included $221,000 of severance costs and $3.0 million to write-down goodwill and
other assets associated with business intelligence services. Approximately one
percent of the Company's workforce was eliminated by the winding-down of these
services.

     As of December 31, 2001, total unpaid severance and outplacement costs were
$1.3 million and total unpaid redundant facilities and other costs were $1.9
million. These unpaid costs are classified as accrued liabilities and will be
paid within the next 12 months.

                                        38
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  ACQUISITIONS

  REZ, INC.

     On April 3, 2000, Pegasus completed the acquisition of REZ, Inc. ("REZ"),
which was accounted for under the purchase method of accounting. Accordingly,
REZ's results of operations subsequent to the acquisition date are included in
the Company's consolidated financial statements.

     The $245.3 million purchase price includes approximately $11.0 million in
acquisition costs and was allocated to assets acquired and liabilities assumed
based on estimated fair value at the acquisition date. The approximate fair
value of assets acquired and liabilities assumed at the acquisition date,
excluding a write-off of purchased in-process research and development
("IPR&D"), is summarized below (in thousands):

<Table>
<S>                                                           <C>
Estimated fair value of net tangible assets purchased.......  $    996
Deferred tax liability associated with the intangibles
  acquired..................................................   (42,179)
Customer relationships......................................    59,600
Software....................................................    33,300
Workforce in-place..........................................    20,200
Non-compete agreement.......................................     3,700
Goodwill....................................................   161,708
</Table>

     The allocation of the purchase price to intangibles was based upon an
independent, third-party appraisal and management's estimates. When initially
allocated, intangible assets and goodwill had estimated useful lives and
estimated annual amortization as follows (in thousands):

<Table>
<Caption>
                                                                             CALCULATED ANNUAL
                                                     ESTIMATED USEFUL LIFE     AMORTIZATION
                                                     ---------------------   -----------------
<S>                                                  <C>                     <C>
Customer relationships.............................         3 years               $19,733
Software...........................................         3 years                11,048
Workforce in-place.................................         3 years                 6,815
Non-compete agreement..............................         5 years                   737
Goodwill...........................................        10 years                16,191
</Table>

     The carrying value of customer relationships was reduced by $7.2 million
during 2001, due to the sale of Summit, Sterling and Golden Tulip representation
services -- see Note 4. Therefore, the rate of annual amortization was adjusted
accordingly over the remaining useful life of customer relationships.

     A charge of $8.0 million was taken in 2000 to write off purchased IPR&D
projects. The value assigned to purchased IPR&D was determined by identifying
research projects in areas for which technological feasibility had not yet been
established. These projects included a customer reporting system and Corporate
Direct, a program for discounted corporate room rates on the Internet. The value
was determined by estimating the expected cash flows from the projects once
commercially viable, discounting the net cash flows back to their present value
and then applying a percentage of completion to the calculated value.

  GLOBAL ENTERPRISE TECHNOLOGY SOLUTIONS, LLC

     On September 1, 2001, Pegasus acquired the remaining 80 percent of the
outstanding common stock of Global Enterprise Technology Solutions, LLC
("GETS"), a Tempe, Arizona-based provider of hotel property management systems,
for $11.5 million in cash. Pegasus acquired the initial 20 percent interest on

                                        39
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

November 1, 2000 for $5.0 million in cash and stock, which was accounted for
under the equity method. The final purchase price totaled $22.6 million and was
comprised of:

     - $16.5 million in total cash and common stock exchanged in November 2000
       and September 2001,

     - $6.0 million of software development costs funded by Pegasus prior to
       acquisition, and

     - $90,000 of acquisition costs.

     The acquisition was accounted for under the purchase method of accounting.
Accordingly, GETS' results of operations subsequent to the acquisition date are
included in the Company's consolidated financial statements. Allocation of the
purchase price to assets acquired and liabilities assumed was based upon an
independent, third-party appraisal and management's estimates. The approximate
fair value of assets acquired and liabilities assumed at the acquisition date is
summarized below (in thousands):

<Table>
<S>                                                           <C>
Estimated fair value of net tangible liabilities assumed....  $(1,380)
Software....................................................   18,120
Other intangible assets.....................................      120
Goodwill....................................................    5,730
</Table>

     Acquired software and intangible assets that are depreciable total $18.2
million and have a weighted average useful life of 4.9 years. Software was not
amortized during 2001 as it was not available for general release to customers.
Goodwill related to the 20 percent share of GETS acquired in November 2000 was
amortized through the September 2001 acquisition of the remaining 80 percent of
GETS and was included in equity in loss of investee. At August 31, 2001,
amortization included in equity in loss of investee totaled $595,000. Pursuant
to the issuance of FAS 141 and FAS 142, goodwill obtained with the September
2001 GETS acquisition is not subject to amortization. The $5.7 million of
goodwill was assigned to the technology segment of the Company and is expected
to be completely deductible for tax purposes.

4.  SALE OF BUSINESS UNITS

  SUMMIT AND STERLING HOTELS & RESORTS

     On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and Sterling
Hotels & Resorts brand businesses to IndeCorp Corporation ("IndeCorp") for
approximately $12 million, including scheduled future payments due upon member
hotel contract renewals. IndeCorp is a Chicago-based holding company that owns
and operates the luxury hotel brand Preferred Hotels & Resorts Worldwide. In
addition, IndeCorp signed a five-year technology services agreement and a
three-year hotel representation agreement with Pegasus. As part of the
agreements, Pegasus is the exclusive provider of reservation technology,
electronic reservation processing and commission processing services to the
IndeCorp brands, which includes all Preferred Hotels & Resorts, Summit Hotels &
Resorts and Sterling Hotels & Resorts member hotels.

     On November 9, 2001, Pegasus and IndeCorp amended the original sale
agreement to provide for a $6.0 million promissory note that replaces the
scheduled future payments under the original agreement. The discounted value of
this promissory note is $5.5 million. The $6.0 million promissory note requires
monthly payments for a period of eight years commencing July 1, 2002 and bears
interest at seven percent.

     In conjunction with amending the original sale agreement, Pegasus also
received from IndeCorp a $2.8 million promissory note to replace existing
outstanding trade receivables, and extended the term of the existing technology
services and hotel representation agreements with IndeCorp for an additional
1 1/2 years.

                                        40
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The $2.8 million promissory note requires monthly payments for a period of eight
years commencing July 1, 2002 and bears interest at seven percent.

     During 2001, Pegasus recognized a $4.8 million pre-tax gain on the sale of
the Summit Hotels & Resorts and Sterling Hotels & Resorts brands.

  GOLDEN TULIP

     On June 29, 2001, Pegasus sold its Golden Tulip brand and licensing
business to Madrid-based NH Hoteles ("NH") for $2.0 million. As a result of this
transaction, Pegasus recognized a pre-tax gain of $749,000. In addition, NH
signed one-year agreements with Pegasus for reservation and Utell services. As
part of the agreements, Pegasus is the exclusive provider of reservations
technology, voice and electronic reservation processing and commission
processing services to all Golden Tulip Hotels and Tulip Inns.

5.  MARKETABLE SECURITIES

     Marketable securities held by the Company at December 31, 2001 and 2000 are
classified as available-for-sale and consist of corporate debt and equity
securities and obligations issued by governments and agencies. Realized gains
and losses are determined on a specific identification basis. In 2001, the
Company recognized a $484,000 write-down of the carrying value of equity
securities. There were no realized gains or losses from investment transactions
in 2000 or 1999. Corporate debt securities and government and agency obligations
all have contractual maturities less than one year at December 31, 2001. The
amortized cost and fair value of marketable securities at December 31, 2001 and
2000 are as follows (in thousands):

<Table>
<Caption>
                                                            GROSS        GROSS      ESTIMATED
                                              AMORTIZED   UNREALIZED   UNREALIZED     FAIR
                                                COST        GAINS        LOSSES       VALUE
                                              ---------   ----------   ----------   ---------
<S>                                           <C>         <C>          <C>          <C>
December 31, 2001
  Corporate debt............................   $5,976        $32         $  (4)      $6,004
  Government and agency obligations.........    3,141          6            --        3,147
  Equity securities.........................       16         --            --           16
                                               ------        ---         -----       ------
  Total marketable securities...............   $9,133        $38         $  (4)      $9,167
                                               ======        ===         =====       ======
December 31, 2000
  Equity securities.........................   $  500        $--         $(437)      $   63
                                               ======        ===         =====       ======
</Table>

6.  DERIVATIVE FINANCIAL INSTRUMENTS

     To reduce the impact of changes in foreign exchange rates on consolidated
results of operations and future foreign currency denominated cash flows, the
Company was a party to various forward exchange contracts at December 31, 2001.
These contracts reduce exposure to currency movements affecting existing foreign
currency denominated assets and liabilities -- primarily trade receivables and
payables.

                                        41
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of forward exchange contracts in place at December 31, 2001
follows (in thousands):

<Table>
<Caption>
                                                               SELL    PURCHASE
                                                              ------   --------
<S>                                                           <C>      <C>
Australian Dollar...........................................  $   --     $178
Canadian Dollar.............................................     847       --
Swiss Franc.................................................      --      403
Danish Krone................................................      --      125
Euro........................................................   4,724       --
British Pound...............................................      92       --
Hong Kong Dollar............................................     300       --
Japanese Yen................................................     794       --
Norwegian Krona.............................................      --       67
New Zealand Dollar..........................................      20       --
Swedish Krona...............................................     529       --
Singapore Dollar............................................      --        6
Thai Baht...................................................     156       --
                                                              ------     ----
  Total.....................................................  $7,462     $779
                                                              ======     ====
</Table>

     A $295,000 contract to sell Japanese Yen has a contract maturity of March
2002. All other contracts mature in January 2002. Because of the short-term
nature of these contracts, the fair value approximates the contract value. The
difference between the fair value and contract value is included in the
consolidated balance sheet as accounts receivable and was not material at
December 31, 2001.

7.  PROPERTY AND EQUIPMENT

     Property and equipment at December 31 consisted of the following (in
thousands):

<Table>
<Caption>
                                                                            ESTIMATED
                                                       2001       2000     USEFUL LIFE
                                                     --------   --------   ------------
<S>                                                  <C>        <C>        <C>
Software...........................................  $ 87,738   $ 65,941   3 to 5 years
Computer equipment.................................    22,905     20,974   3 to 4 years
Furniture and equipment............................     4,377      2,868        7 years
Office equipment...................................     3,929      4,925        4 years
Leasehold improvements.............................     2,766      2,331     lease term
                                                     --------   --------
                                                      121,715     97,039
Less: accumulated depreciation.....................   (54,350)   (32,605)
                                                     --------   --------
Property and equipment, net........................  $ 67,365   $ 64,434
                                                     ========   ========
</Table>

     Depreciation expense for property and equipment was $23.3 million, $18.6
million and $2.0 million for 2001, 2000 and 1999, respectively.

                                        42
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  DEBT

     As part of the consideration paid for REZ, the Company entered into a $20
million, eight percent note payable to Reed Elsevier plc, the majority REZ
shareholder, which was due on April 3, 2002. On June 15, 2001, the Company
repaid the entire principal balance of $20 million, plus accrued interest of
$2.0 million.

     In April 2000, the Company entered into a $30 million revolving credit
facility with Chase Bank of Texas, Compass Bank and Wells Fargo Bank (Texas).
The credit agreement has a two-year term and a current interest rate of LIBOR
plus two percent. There was no amount outstanding under the credit facility at
December 31, 2001 and 2000.

     In September 2001, Pegasus signed lease agreements for its new Dallas and
Phoenix offices. In conjunction with the lease agreements, Pegasus entered into
two irrevocable standby letter of credit agreements with Chase Manhattan Bank
totaling $2.6 million. The amount available to Pegasus under the $30 million
credit facility is reduced by these letters of credit.

9.  STOCKHOLDERS' EQUITY

     Pegasus completed a secondary public offering of 3,450,000 shares of common
stock at a price of $25.92 per share in May 1999. After deducting the
underwriters' discounts and offering expenses, net proceeds to Pegasus were
approximately $84.4 million.

     On December 8, 1999, the board of directors approved a three-for-two stock
split to be effected in the form of a stock dividend on January 7, 2000 to
stockholders of record on December 20, 1999. All references in the consolidated
financial statements to shares, share prices, per share amounts and stock plans
have been retroactively adjusted for the three-for-two stock split. In
connection with the stock split, $68,383 was reclassified to common stock from
additional paid-in capital in the December 31, 1999 balance sheet.

     On August 9, 2000, the board of directors authorized the repurchase of up
to two million shares of the Company's common stock. The repurchase is at the
discretion of the board of directors' Stock Repurchase Committee and may be made
on the open market, in privately negotiated transactions or otherwise, depending
on market conditions, price, share availability and other factors. Shares
repurchased may be reserved for later reissue in connection with employee
benefit plans and other general corporate purposes. As of December 31, 2001, the
Company had purchased 196,000 shares for an aggregate $2.1 million.

10.  STOCK-BASED COMPENSATION

     In accordance with the Company's 1996 stock option plan ("1996 Plan"),
amended and approved in March 1997, options to purchase 1,300,000 shares of the
Company's common stock may be granted to Company employees. In accordance with
the Company's 1997 stock option plan ("1997 Plan"), approved in March 1997,
options to purchase shares of the Company's common stock may be granted to
Company employees, non-employee directors and contractors. The 1997 Plan was
amended in May 2001 to provide that the number of shares reserved for issuance
would equal 15 percent of the number of shares outstanding as of the last
business day in April each year, less the number of shares reserved under all
Company stock option plans as of that date. The number of shares reserved for
issuance under both the 1996 and 1997 Plans (collectively, "the Plans") as of
December 31, 2001 was approximately 4.0 million.

     Options granted under the Plans may be in the form of incentive stock
options or nonqualified stock options. The compensation committee of the board
of directors ("Committee") administers the Plans and determines grant prices.
Options granted to Company employees generally vest over a four-year period.
Options granted to non-employee directors and contractors vest and expire as
determined by the Committee.

                                        43
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options granted under the 1996 Plan before September 15, 1999 expire in December
2005. Options granted to Company employees under the 1997 Plan before September
15, 1999 expire in December 2006. Options granted to Company employees on or
after September 15, 1999 under the Plans expire ten years from the date of
grant. The Company's authorized but unissued or reacquired common stock is used
for issuance of shares as stock options are exercised.

     In accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations, the
Company recorded net unearned compensation of approximately $150,000 in 1999
related to stock option grants. No unearned compensation was recorded in 2001
and 2000. Unearned compensation is being recognized ratably over the vesting
period for the stock option grants. Compensation expense of approximately
$123,000, $279,000 and $324,000 was charged to operations in 2001, 2000 and
1999, respectively.

     The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). Had compensation cost for the plans of the Company
been determined based on the fair value provisions of FAS 123, the Company's net
income (loss) and net income (loss) per share would have been decreased to the
pro forma amounts indicated below (in thousands, except per share amounts):

<Table>
<Caption>
                                                           2001       2000      1999
                                                         --------   --------   ------
<S>                                                      <C>        <C>        <C>
Net income (loss) -- as reported.......................  $(29,737)  $(26,582)  $8,666
Net income (loss) -- pro forma.........................  $(33,648)  $(30,267)  $7,572
Net income (loss) per share -- as reported:
  Basic................................................  $  (1.21)  $  (1.14)  $ 0.47
  Diluted..............................................  $  (1.21)  $  (1.14)  $ 0.44
Net income (loss) per share -- pro forma:
  Basic................................................  $  (1.37)  $  (1.29)  $ 0.41
  Diluted..............................................  $  (1.37)  $  (1.29)  $ 0.38
</Table>

     The pro forma disclosures provided are not likely to be representative of
the effects on reported net income (loss) for future years due to future grants
and the vesting requirements of the Company's stock option plans.

     The weighted average fair value for options with exercise prices equal to
the market price of stock at the grant date was $6.23, $10.88 and $14.55 in
2001, 2000 and 1999, respectively. The weighted average fair value for options
with exercise prices below the market price of stock at the grant date was
$13.72 in 1999. There were no options granted in 2001 and 2000 with exercise
prices below the market price of stock at the grant date. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions:

<Table>
<Caption>
                                                         2001        2000        1999
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
Dividend yield.......................................         --          --          --
Expected volatility Post-IPO grants..................       78.8%       83.0%       72.0%
Risk-free rate of return.............................        4.3%        6.4%        5.7%
Expected life........................................  4.0 years   4.0 years   4.0 years
</Table>

                                        44
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes activity under the Company's stock option
plans during the years ended December 31 (in thousands, except per share
amounts):

<Table>
<Caption>
                                             NUMBER OF          WEIGHTED AVERAGE EXERCISE
                                          COMPANY OPTIONS            PRICE PER SHARE
                                       ---------------------   ---------------------------
                                       2001    2000    1999     2001      2000      1999
                                       -----   -----   -----   -------   -------   -------
<S>                                    <C>     <C>     <C>     <C>       <C>       <C>
Options outstanding at beginning of
  year...............................  3,069   1,859   2,001   $13.53    $10.71    $ 4.91
Granted..............................  1,791   1,586     525    10.30     16.89     24.93
Exercised............................    216     110     544     4.59      4.26      4.02
Canceled.............................    520     266     123    16.05     17.69      6.64
                                       -----   -----   -----
Options outstanding at end of year...  4,124   3,069   1,859   $12.30    $13.53    $10.71
                                       =====   =====   =====   ======    ======    ======
Options exercisable at end of year...  1,376   1,073     707   $10.70    $ 6.99    $ 3.63
                                       =====   =====   =====   ======    ======    ======
</Table>

     The following table summarizes information for stock options outstanding at
December 31, 2001 (in thousands, except per share amounts):

<Table>
<Caption>
                                       OPTIONS OUTSTANDING
                         -----------------------------------------------       OPTIONS EXERCISABLE
                                     WEIGHTED AVERAGE                      ----------------------------
                         NUMBER OF      REMAINING       WEIGHTED AVERAGE   NUMBER OF   WEIGHTED AVERAGE
EXERCISE PRICES           OPTIONS    CONTRACTUAL LIFE    EXERCISE PRICE     OPTIONS     EXERCISE PRICE
---------------          ---------   ----------------   ----------------   ---------   ----------------
<S>                      <C>         <C>                <C>                <C>         <C>
$ 1.34.................      367        4.0 years            $ 1.34            367          $ 1.34
$ 2.07.................       97        4.0 years              2.07             97            2.07
$ 6.33 - $ 8.93........    1,183        8.1 years              7.77            264            6.95
$ 9.69 - $14.17........    1,134        8.6 years             11.90            153           10.39
$14.66 - $19.83........      859        8.2 years             17.82            242           17.85
$22.45 - $29.02........      484        5.8 years             24.79            253           24.84
                           -----                                             -----
$ 1.34 - $29.02........    4,124        7.5 years            $12.30          1,376          $10.70
                           =====                                             =====
</Table>

     The pro forma disclosures for 2001, 2000 and 1999 include approximately
$223,000, $366,000 and $108,000, respectively, of compensation expense related
to the Company's Employee Stock Purchase Plan. The fair value of shares issued
under this plan was estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions:

<Table>
<Caption>
                                                            2001       2000       1999
                                                          --------   --------   --------
<S>                                                       <C>        <C>        <C>
Dividend yield..........................................        --         --         --
Expected volatility.....................................      70.5%      83.0%      72.0%
Risk-free rate of return................................       6.1%       6.3%       4.5%
Expected life...........................................  1.0 year   1.0 year   1.0 year
</Table>

     In May 1998, the Company's stockholders approved the Pegasus Solutions,
Inc. 1997 Employee Stock Purchase Plan ("Stock Plan"). The Company has reserved
750,000 shares of its common stock for purchase by employees pursuant to the
terms of the Stock Plan. Eligible participating employees of the Company may
elect to have an amount up to, but not in excess of, 10 percent of their regular
salary or wages withheld for the purpose of purchasing the Company's common
stock. Under the Stock Plan, an eligible participating employee will be granted
an option at the beginning of each plan year (the "Offering Commencement Date")
to purchase at the end of the plan year (the "Offering Termination Date") shares
of common stock using the amounts that have accumulated from the employee's
payroll deductions made during the plan year at a price

                                        45
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that is 85 percent of the closing price of the common stock on the Nasdaq
National Market or any other national securities exchange on the Offering
Commencement Date or the Offering Termination Date, whichever is lower.

11.  EMPLOYEE BENEFIT PLANS

  DEFINED CONTRIBUTION PLANS

     In the United States, the Company sponsors a 401(k) defined contribution
retirement plan ("401(k) Plan") covering full-time employees who have attained
the age of twenty-one. The 401(k) Plan allows eligible employees to defer
receipt of up to 17 percent of their compensation and contribute such amounts to
various investment funds. Eligible employees may elect to participate at the
beginning of any quarter after their hire date. Employee contributions vest
immediately. The Company makes discretionary matching contributions for
employees' annual contributions of up to five percent of employees'
compensation. The Company's matching contributions vest one-third a year for
three years. After three years of employment, an employee is fully vested in all
matching contributions.

     In the United Kingdom, the Company sponsors a defined contribution
retirement plan known as the Utell Limited Group Personal Pension Plan ("Utell
Defined Contribution Plan"). The Utell Defined Contribution Plan covers all
full-time employees not covered within the defined benefit plan described below,
regardless of length of service, as well as temporary employees after more than
3 months service. Eligible employees can contribute up to 17.5 percent of their
basic salary to various investment funds. Eligible employees may elect to
participate at any time during their employment. The Company makes discretionary
matching contributions for employees' annual contributions of six percent of the
employee's basic salary when the employee contribution levels are three percent
or above, and four percent when employee contributions are two percent. The
Company's matching contributions vest immediately for employees.

     During 2001, 2000 and 1999, the Company contributed $1,778,000, $1,050,000
and $363,000, respectively, to the 401(k) Plan. During 2001 the Company
contributed approximately $182,000 to the Utell Defined Contribution Plan.
During the year-ended December 31, 2000, REZ and the Company contributed a total
of $152,000 to the Utell Defined Contribution Plan.

  DEFINED BENEFIT PLANS

     Pursuant to their employment agreements, certain Company officers are
eligible for additional retirement benefits to be paid by the Company under the
Supplemental Employee Retirement Plan ("SERP"). The SERP was effective January
1, 2000 and provides supplemental retirement benefits to certain officers of the
Company based on final average compensation.

     In the United Kingdom, the Company operates a defined benefit plan which is
only open to employees who were part of the Reed Elsevier Pension Scheme in
December 1997 -- hereto known as the "Utell Defined Benefit Plan." The Utell
Defined Benefit Plan provides supplemental retirement benefits to its members,
based on final average compensation.

                                        46
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     For each defined benefit plan, the following tables provide a statement of
funded status as of December 31, 2001 and 2000, and summaries of the changes in
the benefit obligation and fair value of assets for the years then ended (in
thousands):

<Table>
<Caption>
                                                                       UTELL DEFINED
                                                        SERP            BENEFIT PLAN
                                                  -----------------   ----------------
                                                   2001      2000      2001      2000
                                                  -------   -------   -------   ------
<S>                                               <C>       <C>       <C>       <C>
Benefit obligation at beginning of year.........  $ 2,514   $    --   $ 7,889   $   --
Service cost....................................      365       244       777      576
Interest cost...................................      198       150       473       29
Plan participants' contributions................       --        --       155      190
Amendments......................................       --     1,880        --       --
Actuarial loss..................................    1,237       240      (457)    (610)
Obligations assumed.............................       --        --        --    7,704
Benefits paid...................................       --        --        --       --
                                                  -------   -------   -------   ------
Benefit obligation at end of year...............  $ 4,314   $ 2,514   $ 8,837   $7,889
                                                  =======   =======   =======   ======
Fair value of plan assets at beginning of
  year..........................................  $    --   $    --   $ 8,063   $   --
Actual return on plan assets....................       --        --      (942)    (194)
Employer contribution...........................       --        --       386      363
Plan participants' contributions................       --        --       155      190
Assets transferred..............................       --        --        --    7,704
Benefits paid...................................       --        --        --       --
                                                  -------   -------   -------   ------
Fair value of plan assets at end of year........  $    --   $    --   $ 7,662   $8,063
                                                  =======   =======   =======   ======
Funded status...................................  $(4,314)  $(2,514)  $(1,175)  $  174
Unrecognized actuarial loss.....................    1,446       240       710     (380)
Unrecognized prior service cost.................    1,619     1,738        --       --
                                                  -------   -------   -------   ------
Net amount recognized...........................  $(1,249)  $  (536)  $  (465)  $ (206)
                                                  =======   =======   =======   ======
</Table>

     The weighted average assumptions used in the measurement of the Company's
benefit obligations as of December 31, 2001 and 2000 are as follows:

<Table>
<Caption>
                                                                      UTELL DEFINED
                                                           SERP       BENEFIT PLAN
                                                        -----------   -------------
                                                        2001   2000   2001    2000
                                                        ----   ----   -----   -----
<S>                                                     <C>    <C>    <C>     <C>
Discount rate.........................................  7.25%  7.5%    6.0%    6.0%
Expected return on plan assets........................  N/A    N/A     7.5%    7.5%
Rate of compensation increase.........................  5.0%   5.0%    4.0%    4.0%
</Table>

                                        47
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table provides the components of net periodic benefit costs
for the years ended December 31, 2001 and 2000 (in thousands):

<Table>
<Caption>
                                                                       UTELL DEFINED
                                                           SERP        BENEFIT PLAN
                                                        -----------   ---------------
                                                        2001   2000    2001     2000
                                                        ----   ----   ------   ------
<S>                                                     <C>    <C>    <C>      <C>
Service cost..........................................  $365   $244   $  777   $  576
Interest cost.........................................   198    150      473       29
Expected return on plan assets........................    --     --     (605)     (36)
Amortization of prior service cost....................   136    141       --       --
Recognized net actuarial loss.........................    15     --       --       --
                                                        ----   ----   ------   ------
Net periodic benefit loss.............................  $714   $535   $  645   $  569
                                                        ====   ====   ======   ======
</Table>

12.  INCOME TAXES

     Pretax income (loss) from continuing operations for the years ended
December 31 was taxed under the following jurisdictions (in thousands):

<Table>
<Caption>
                                                          2001       2000      1999
                                                        --------   --------   -------
<S>                                                     <C>        <C>        <C>
Domestic..............................................  $(39,332)  $(34,325)  $13,260
Foreign...............................................       649      1,825        93
                                                        --------   --------   -------
                                                        $(38,683)  $(32,500)  $13,353
                                                        ========   ========   =======
</Table>

     Deferred taxes consisted of the following at December 31 (in thousands):

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforward...........................  $ 14,357   $  7,506
  Bad debt reserves.........................................     1,514      3,006
  Income tax credits........................................       828        800
  Various expense accruals..................................       412      1,045
  Capital loss carryforward.................................        --        385
  Stock option compensation expense.........................       252        213
  Other.....................................................       100      1,298
                                                              --------   --------
     Gross deferred tax assets..............................    17,463     14,253
     Valuation allowance....................................       (50)       (50)
                                                              --------   --------
     Gross deferred tax assets, net of valuation
       allowance............................................    17,413     14,203
Deferred tax liabilities:
  Acquired intangible assets................................   (25,367)   (34,309)
  Depreciation and amortization.............................    (4,891)      (933)
                                                              --------   --------
     Gross deferred tax liabilities.........................   (30,258)   (35,242)
                                                              --------   --------
Net deferred tax liabilities................................  $(12,845)  $(21,039)
                                                              ========   ========
</Table>

                                        48
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. As of December 31,
management believes it is more likely than not that the deferred tax assets will
be realized; therefore, except as noted below, no valuation allowance is
necessary. The valuation allowance at December 31, 2001 and 2000 is related to
various deferred tax assets established with the March 31, 2000 acquisition of
REZ.

     At December 31, 2001 and 2000, the Company had federal net operating loss
carryforwards of approximately $35.0 million and $18.3 million, respectively.
United Kingdom net operating loss carryforwards for the respective periods were
$2.0 million and zero. The net operating loss carryforwards that existed at
December 31, 2001 will begin to expire in 2007. Utilization of the net operating
loss carryforwards may be limited by the separate return loss year rules and
could be affected by ownership changes which have occurred or could occur in the
future.

     The Company has not provided for foreign withholding taxes or United States
deferred income taxes on accumulated undistributed earnings of foreign
subsidiaries, as management does not intend to repatriate such earnings. If such
earnings were to be repatriated, such earnings could be subject to foreign
withholding tax and United States residual tax.

     The components of the income tax provision for the years ended December 31
were as follows (in thousands):

<Table>
<Caption>
                                                            2001      2000      1999
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Current provision:
  Federal................................................  $    --   $ 3,185   $4,792
  State..................................................       --        90      519
  Foreign................................................      988       672       37
                                                           -------   -------   ------
                                                               988     3,947    5,348
Deferred benefit:
  Federal................................................   (7,840)   (8,249)    (579)
  State..................................................   (1,481)   (1,616)     (82)
  Foreign................................................     (613)       --       --
                                                           -------   -------   ------
                                                            (9,934)   (9,865)    (661)
                                                           -------   -------   ------
Provision (benefit) for income taxes.....................  $(8,946)  $(5,918)  $4,687
                                                           =======   =======   ======
</Table>

                                        49
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A reconciliation of taxes based on the federal statutory rate and the
provision (benefit) for income taxes is summarized as follows for the years
ended December 31:

<Table>
<Caption>
                                                              2001     2000     1999
                                                              -----    -----    ----
<S>                                                           <C>      <C>      <C>
Expected income tax provision (benefit).....................  (35.0)%  (35.0)%  34.0%
Non-deductible amortization of goodwill.....................   14.7%    12.9%     --
Write-off of purchased in-process research and
  development...............................................     --      8.6%     --
Other permanent differences.................................    0.2%    (1.6)%  (2.0)%
State income taxes..........................................   (2.5)%   (3.1)%   2.2%
Other, net..................................................   (0.5)%     --     0.9%
                                                              -----    -----    ----
Provision (benefit) for income taxes........................  (23.1)%  (18.2)%  35.1%
                                                              =====    =====    ====
</Table>

13.  COMMITMENTS AND CONTINGENCIES

     The Company leases its corporate office space and certain office equipment
under non-cancelable operating leases. In September 2001, lease agreements were
signed for new Dallas and Phoenix offices. The Company incurred rent expense of
approximately $7.8 million, $6.7 million and $1.0 million in 2001, 2000 and
1999, respectively.

     Approximate future minimum lease payments at December 31, 2001, under
non-cancelable operating leases with original terms exceeding one year, were as
follows (in thousands):

<Table>
<Caption>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                           <C>
2002........................................................  $ 9,875
2003........................................................    7,180
2004........................................................    6,385
2005........................................................    5,367
2006........................................................    5,177
Thereafter..................................................   27,112
                                                              -------
                                                              $61,042
                                                              =======
</Table>

     Future minimum lease payments due in foreign currencies were translated at
the rate in effect at December 31, 2001.

     Funds for travel agency commission checks that have not cleared the
Company's processing bank after certain time periods are returned to the
Company. Any amounts that are not remitted to travel agents will be escheated to
the appropriate states, as required by the respective unclaimed property laws.
Liabilities are recorded upon the Company's receipt of the funds from the bank,
and total $6.2 million and $4.6 million at December 31, 2001 and 2000,
respectively.

     Pegasus is subject to certain legal proceedings, claims and disputes that
arise in the ordinary course of our business. Although management cannot predict
the outcomes of these legal proceedings, we do not believe these actions will
have a material adverse effect on our financial position, results of operations
or liquidity.

                                        50
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  RELATED PARTIES

     One Director of the Company serves as a senior vice president within
Marriott International, Inc. In 2001, 2000 and 1999, the Company received $3.7
million, $3.1 million and $2.1 million, respectively, from Marriott and its
affiliates for CRS, electronic distribution and Utell services. During the same
years, the Company paid Marriott $1.8 million, $1.8 million and $1.5 million,
respectively, for consolidating commission data and funds from its properties.
At December 31, 2001, receivables from Marriott were $549,000 and payables to
Marriott were $106,000.

     Another Director of the Company serves as a senior vice president within
Hyatt Hotels Corporation. In 2001, 2000 and 1999, the Company received $970,000,
$1,218,000 and $882,000, respectively, from Hyatt for electronic distribution
and commission processing services. At December 31, 2001, receivables from Hyatt
were $38,000.

15.  SEGMENT INFORMATION

     As set forth in the criteria of Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
the Company is organized into two reportable segments -- technology and
hospitality.

     The technology segment provides CRS, electronic distribution, commission
processing and property systems services to the global hotel industry. The
hospitality segment provides hotel representation services offered under the
Utell brand name. Hotel representation services offered under the Summit Hotels
& Resorts and Sterling Hotels & Resorts brand names were sold in January 2001,
while the Golden Tulip representation service was sold in June 2001.

     The Company is organized primarily on the basis of services provided. Prior
period segment information has been reclassified to conform to the current
period presentation. Segment data includes an allocation of all corporate costs
to the operating segments. Management evaluates the performance of its segments
based on earnings before interest, income tax, depreciation and amortization
("EBITDA"). The Company believes that EBITDA, which is widely used by analysts
and investors, is an appropriate measure of operating performance. Nevertheless,
this measure should not be considered in isolation of, or as a substitute for,
operating income, cash flows from operating activities or any other measure for
determining the Company's operating performance or liquidity that is calculated
in accordance with generally accepted accounting principles. In addition, the
Company's calculation of EBITDA is not necessarily comparable to similarly
titled measures reported by other companies.

                                        51
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table presents information about reported segments at and for
the years ending December 31 (in thousands):

<Table>
<Caption>
                                                                       RECONCILING
                                            TECHNOLOGY   HOSPITALITY      ITEMS       TOTAL
                                            ----------   -----------   -----------   --------
<S>                                         <C>          <C>           <C>           <C>
2001
Net revenues..............................   $106,451      $73,511        $  --      $179,962
EBITDA....................................     18,233        1,149           --        19,382
2000
Net revenues..............................     85,335       76,864           --       162,199
EBITDA....................................     14,338       10,884         (101)       25,121
1999
Net revenues..............................     38,036           --           --        38,036
EBITDA....................................     12,090           --           --        12,090
</Table>

     Reconciling items for 2000 include acquisition costs that did not meet the
criteria for capitalization and certain bank charges. A reconciliation of total
segment EBITDA to total consolidated income (loss) before income taxes for the
years ended December 31 is as follows:

<Table>
<Caption>
                                                          2001       2000      1999
                                                        --------   --------   -------
<S>                                                     <C>        <C>        <C>
Total EBITDA for reportable segments..................  $ 19,382   $ 25,121   $12,090
Write-off of purchased in-process research and
  development.........................................        --     (8,000)       --
Equity in loss of investee............................      (634)        --        --
Gain on sales of business units.......................     5,538         --        --
Depreciation and amortization.........................   (65,651)   (51,549)   (2,438)
Interest income.......................................     1,655      3,464     4,828
Interest expense......................................      (887)    (1,687)      (27)
Other.................................................     1,914        151    (1,100)
                                                        --------   --------   -------
Consolidated income (loss) before income taxes........  $(38,683)  $(32,500)  $13,353
                                                        ========   ========   =======
</Table>

     The following table presents revenue by geographic location for the years
ended December 31, 2001, 2000 and 1999 (amounts in thousands):

<Table>
<Caption>
                                                          2001       2000      1999
                                                        --------   --------   -------
<S>                                                     <C>        <C>        <C>
Domestic..............................................  $106,008   $101,903   $32,091
International.........................................    73,954     60,296     5,945
                                                        --------   --------   -------
Total revenue.........................................  $179,962   $162,199   $38,036
                                                        ========   ========   =======
</Table>

                                        52
<PAGE>
                            PEGASUS SOLUTIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table summarizes the unaudited consolidated quarterly results
of operations for 2001 and 2000 after giving retroactive effect to a
three-for-two stock split (in thousands, except per share amounts):

<Table>
<Caption>
                                                               QUARTERS ENDED
                                         -----------------------------------------------------------
                                          MARCH 31      JUNE 30      SEPTEMBER 30      DECEMBER 31
                                         -----------   ----------   ---------------   --------------
<S>                                      <C>           <C>          <C>               <C>
2001
Revenues...............................   $ 46,108      $ 49,768       $ 45,226          $ 38,860
Loss before provision for income
  taxes................................   $(13,244)     $ (5,837)      $(14,687)         $ (4,915)
Net loss...............................   $(11,083)     $ (4,467)      $(10,851)         $ (3,336)
Basic and diluted net loss per share...   $  (0.45)     $  (0.18)      $  (0.44)         $  (0.14)
Basic and diluted weighted average
  shares outstanding...................     24,596        24,490         24,567            24,632
2000
Revenues...............................   $ 10,661      $ 52,582       $ 52,630          $ 46,326
Income (loss) before provision for
  income taxes.........................   $  4,111      $(14,964)      $ (5,914)         $(15,733)
Net income (loss)......................   $  3,021      $(13,150)      $ (5,052)         $(11,401)
Basic net income (loss) per share......   $   0.15      $  (0.54)      $  (0.21)         $  (0.46)
Diluted net income (loss) per share....   $   0.14      $  (0.54)      $  (0.21)         $  (0.46)
Basic weighted average shares
  outstanding..........................     20,356        24,157         24,395            24,588
Diluted weighted average shares
  outstanding..........................     21,048        24,157         24,395            24,588
</Table>

     In accordance with FAS 128, earnings per share are computed independently
for each of the quarters presented; therefore, the sum of the quarterly earnings
per share may not equal the annual earnings per share.

17.  SUBSEQUENT EVENT

     On February 11, 2002, Pegasus and five hotel chains -- Hilton Hotels, Hyatt
Corporation, Marriott International, Six Continents Hotels and Starwood
Hotels -- announced the newly formed Hotel Distribution System, LLC, or HDS.
This new venture will market hotel rooms over the Internet through multiple
online sites using a merchant business model. Utilizing the technology
leadership of Pegasus, HDS plans to provide a link to allow Internet sites to
sell hotel rooms via direct connections to hotel reservations systems. HDS has
signed an agreement with Orbitz.com to distribute room inventory. Pegasus' Utell
subsidiary will be one of the first hotel suppliers to be distributed through
HDS.

                                        53
<PAGE>

ITEM 9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item appears in our definitive proxy
statement for our 2002 annual meeting of Stockholders under the captions
"Nominees for Directors," "Directors Continuing in Office" and "Executive
Officers," which information is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item appears in our definitive proxy
statement for its 2002 annual meeting of stockholders under the caption
"Executive Compensation," which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item appears in our definitive proxy
statement for its 2002 annual meeting of stockholders under the caption
"Directors' and Officers' Ownership of Our Common Stock," which information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item appears in our definitive proxy
statement for its 2002 annual meeting of stockholders under the caption "Certain
Transactions," which information is incorporated herein by reference.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)1. The following Financial Statement Schedule is filed as part of this annual
report:

<Table>
<S>                                                           <C>
Report of Independent Accountants on Financial Statement
  Schedule..................................................  Page S-1
Consolidated Valuation and Qualifying Accounts..............  Page S-2
</Table>

        All other schedules for which provision is made in the applicable
        accounting regulations of the Securities and Exchanges Commission are
        not required under the related instructions or are inapplicable and
        therefore have been omitted.

   2. The following documents are filed or incorporated by reference as exhibits
to this annual report:

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    2.1       Agreement and Plan of Merger dated November 16, 1999, as
              amended and restated, among the Company, Pegasus Worldwide,
              Inc., Rez, Inc., Reed Elsevier, Inc. and Utell International
              Group, LTD. (incorporated by reference from Appendix A of
              the Company's Registration Statement (File No. 333-92683) on
              Form S-4 filed on December 14, 1999)
    3.1       Fourth Amended and Restated Certificate of Incorporation
              (incorporated by reference from Exhibit 3.1 of the Company's
              Form 10-Q filed with the Commission on May 15, 2000)
    3.2       Second Amended and Restated Bylaws
    3.3       Form of Certification of Designation, Preferences and Rights
              of Series A Preferred Stock of Pegasus Systems, Inc.
              (incorporated by reference from Exhibit 2 of the Company's
              Form 8-A filed with the Commission on October 9, 1998)
</Table>

                                        54
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    4.1       Specimen of Common Stock certificate
    4.2       Fourth Amended and Restated Certificate of Incorporation
              (See Exhibit 3.1)
              Second Amended Restated Bylaws (see Exhibit 3.2)
    4.3       Rights Agreement dated June 25, 1996 by and among the
              Company and certain holders of capital stock of the Company
              named therein
    4.4       Rights Agreement dated as of September 28, 1998 by and
              between the Company and American Securities Transfer &
              Trust, Inc. (incorporated by reference from Exhibit 4 of the
              Company's Current Report on Form 8-K filed with the
              Commission on October 9, 1998)
    4.5       Form of Rights Certificate (incorporated by reference from
              Exhibit 3 of the Company's Form 8-A filed with Commission on
              October 9, 1998)
  *10.1       Employment Agreement dated January 1, 2000 between the
              Company and John F. Davis, III
  *10.2       Employment Agreement dated January 1, 2000 between the
              Company and Joseph W. Nicholson
  *10.3       Employment Agreement dated January 1, 2000 between the
              Company and Jerome L. Galant
 +*10.4       Employment Agreement dated May 7, 2001 between the Company
              and Susan K. Cole
  *10.5       1996 Stock Option Plan, as amended
  *10.6       1997 Amended Stock Option Plan, (incorporated by reference
              from the Company's definitive proxy statement filed with the
              Commission on March 22, 2001)
   10.7       Service Agreement dated December 13, 1996 between the
              Company and Comdisco, Inc.
   10.8       Service Agreement dated January 17, 1997 between the Company
              and Genuity, Inc.
  *10.9       1997 Employee Stock Purchase Plan, as amended
   10.10      Office Lease dated October 1, 1995, First Amendment to
              Office Lease dated February 25, 1998, Second Amendment to
              Office Lease dated November 2, 1998 and Third Amendment to
              Office Lease dated November 8, 1999 between the Company and
              the Utah State Retirement Investment Fund relating to
              property located at 3811 Turtle Creek Blvd., Suite 1100,
              Dallas, Texas 75219 (incorporated by reference to the
              Company's Form S-4 filed with the Commission on December 14,
              1999)
   10.11      Office Lease dated July 26, 1996, First Amendment to Office
              Lease dated August 22, 1997 and Second Amendment to Office
              Lease dated October 24, 2000 between the Company and Pivotal
              Simon Office XVI, L.L.C. relating to property located at
              7500 N. Dreamy Draw, Suite 120, Phoenix, Arizona 85020
   10.12      Credit Agreement dated April 17, 2000, among the Company,
              Chase Bank of Texas, N.A., Compass Bank and Wells Fargo
              (incorporated by reference from Exhibit 10.14 of the
              Company's Form 10-Q filed with the Commission on May 15,
              2000)
   10.13      Form of Security Agreement dated April 17, 2000, among the
              Company, Chase Bank of Texas, N.A. and certain guarantors
              (incorporated by reference from Exhibit 10.15 of the
              Company's Form 10-Q filed with the Commission on May 15,
              2000)
   10.14      Purchase Agreement dated October 31, 2000, among the
              Company, Global Enterprise Technology Solutions, LLC,
              Enterprise Hospitality Solutions, Inc., The Rivadalla Family
              Trust and Christian Rivadalla (incorporated by reference
              from Exhibit 10.16 of the Company's Form 10-Q filed with
              Commission on November 14, 2000)
   10.15      Office Lease dated January 31, 1997, First Amendment to
              Office Lease dated August 7, 1997, Second Amendment to
              Office Lease dated November 1, 1999 and Third Amendment to
              Office Lease dated November 2, 1999 between the Company and
              EastGroup Properties relating to property located at 11048
              N. 23rd Avenue, Phoenix, Arizona 85029
   10.16      Office Lease dated September 1, 1987 and First Amendment to
              Office Lease dated October 26, 1989 between the Company and
              Bridger Properties relating to property located at 2 Kew
              Bridge Road, Brentford Middlesex
  *10.17      Employment agreement dated January 1, 2001 between the
              Company and Ric L. Floyd
  *10.18      Employment agreement dated January 17, 2001 between the
              Company and Mark C. Wells
  *10.19      Supplemental Employee Retirement Plan
</Table>

                                        55
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
   10.20      Office lease dated September 17, 2001 between the Company
              and Dallas RPFIV Campbell Centre Associates Limited
              Partnership relating to property located at 8350 North
              Central Expressway, Dallas, Texas 75206 (incorporated by
              reference from 10.23 of the Company's Form 10-Q filed with
              the Commission on November 15, 2001)
   10.21      Office lease dated September 14, 2001 between the Company
              and Ryan Companies US, Inc. relating to property located at
              1400 North Pima Road, Scottsdale, Arizona 85260
              (incorporated by reference from 10.23 of the Company's Form
              10-Q filed with the Commission on November 15, 2001)
   10.22      Form of Promissory Note agreement dated November 9, 2001
              between the Company and IndeCorp Corporation (incorporated
              by reference from 10.23 of the Company's Form 10-Q filed
              with the Commission on November 15, 2001)
   10.23      Form of Promissory Note agreement dated November 9, 2001
              between the Company and IndeCorp Corporation (incorporated
              by reference from 10.23 of the Company's Form 10-Q filed
              with the Commission on November 15, 2001)
  +21.1       Subsidiaries of the Company
  +23.1       Consent of PricewaterhouseCoopers LLP
  +24.1       Power of Attorney (included on signature page)
</Table>

     Unless otherwise indicated, exhibits are incorporated by reference to the
Company's Registration Statement (File No. 333-28595) on Form S-1 declared
effective by the Commission on August 6, 1997.
---------------

+ Filed herewith.

* Management contract or compensatory plan or arrangement -- The Company will
  furnish a copy of any exhibit listed above to any stockholder without charge
  upon written request to Mr. Ric Floyd, Executive Vice President and General
  Counsel, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219.

(b) Reports on Form 8-K

                                        56
<PAGE>

     There were no reports on Form 8-K that were filed during the quarter ended
December 31, 2001. Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on this 19th day of
March, 2002.

                                          PEGASUS SOLUTIONS, INC.

                                          By:    /s/ JOHN F. DAVIS, III
                                            ------------------------------------
                                                     John F. Davis, III
                                                  Chief Executive Officer
                                                        and Chairman

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

                               POWER OF ATTORNEY

     KNOW ALL MEN AND WOMEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints John F. Davis, III, Susan K. Cole and Ric
L. Floyd, and each of them, such individual's true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for such
individual and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this annual report on Form 10-K, with all
exhibits thereto, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully and to intents and
purposes as he might or could do in person hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

<Table>
<Caption>
                    SIGNATURES                                     TITLE                       DATE
                    ----------                                     -----                       ----
<S>     <C>                                          <C>                                  <C>

              /s/ JOHN F. DAVIS, III                    Chief Executive Officer and       March 19, 2002
 ------------------------------------------------      Chairman (Principal Executive
                John F. Davis, III                                Officer)

                /s/ SUSAN K. COLE                    Executive Vice President and Chief   March 19, 2002
 ------------------------------------------------       Financial Officer (Principal
                  Susan K. Cole                      Financial and Accounting Officer)

           /s/ WILLIAM C. HAMMETT, JR.                   Vice Chairman and Director       March 19, 2002
 ------------------------------------------------
             William C. Hammett, Jr.

              /s/ MICHAEL A. BARNETT                              Director                March 19, 2002
 ------------------------------------------------
                Michael A. Barnett

              /s/ ROBERT B. COLLIER                               Director                March 19, 2002
 ------------------------------------------------
                Robert B. Collier

              /s/ THOMAS F. O'TOOLE                               Director                March 19, 2002
 ------------------------------------------------
                Thomas F. O'Toole

               /s/ JEFFREY A. RICH                                Director                March 19, 2002
 ------------------------------------------------
                 Jeffrey A. Rich

                /s/ BRUCE W. WOLFF                                Director                March 19, 2002
 ------------------------------------------------
                  Bruce W. Wolff
</Table>

                                        57
<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
of Pegasus Solutions, Inc.

     Our audits of the consolidated financial statements referred to in our
report dated February 4, 2002, except as to Note 17, which is as of February 11,
2002, appearing in this Annual Report on Form 10-K, also included an audit of
the financial statement schedule listed in Item 14(a)(1) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

PricewaterhouseCoopers LLP

Dallas, Texas
February 4, 2002

                                       S-1
<PAGE>

                                                                     SCHEDULE II

                            PEGASUS SOLUTIONS, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
      FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (IN THOUSANDS)

<Table>
<Caption>
                                                       ADDITIONS    ADDITIONS
                                          BALANCE AT   CHARGED TO     FROM                   BALANCE AT
                                          BEGINNING    COSTS AND    ACQUIRED                   END OF
CLASSIFICATION                            OF PERIOD     EXPENSES    COMPANIES   DEDUCTIONS     PERIOD
--------------                            ----------   ----------   ---------   ----------   ----------
<S>                                       <C>          <C>          <C>         <C>          <C>
December 31, 1999
  Allowance for doubtful accounts.......    $   99       $   --      $    --     $   (17)      $   82
  Income tax valuation allowance........       270           --           --        (270)          --
                                            ------       ------      -------     -------       ------
  Total reserves and allowances.........       369           --           --        (287)          82
December 31, 2000
  Allowance for doubtful accounts.......        82        2,874       11,924      (7,721)       7,159
  Income tax valuation allowance........        --           --           50          --           50
                                            ------       ------      -------     -------       ------
  Total reserves and allowances.........        82        2,874       11,974      (7,721)       7,209
December 31, 2001
  Allowance for doubtful accounts.......     7,159        3,408          214      (4,991)       5,790
  Income tax valuation allowance........        50           --           --          --           50
                                            ------       ------      -------     -------       ------
  Total reserves and allowances.........    $7,209       $3,408      $   214     $(4,991)      $5,840
                                            ======       ======      =======     =======       ======
</Table>

---------------

(a) This schedule should be read in conjunction with the Company's audited
    consolidated financial statements and related notes thereto that appear in
    Item 8 of this annual report on Form 10-K.

                                       S-2
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    2.1       Agreement and Plan of Merger dated November 16, 1999, as
              amended and restated, among the Company, Pegasus Worldwide,
              Inc., Rez, Inc., Reed Elsevier, Inc. and Utell International
              Group, LTD. (incorporated by reference from Appendix A of
              the Company's Registration Statement (File No. 333-92683) on
              Form S-4 filed on December 14, 1999)
    3.1       Fourth Amended and Restated Certificate of Incorporation
              (incorporated by reference from Exhibit 3.1 of the Company's
              Form 10-Q filed with the Commission on May 15, 2000)
    3.2       Second Amended and Restated Bylaws
    3.3       Form of Certification of Designation, Preferences and Rights
              of Series A Preferred Stock of Pegasus Systems, Inc.
              (incorporated by reference from Exhibit 2 of the Company's
              Form 8-A filed with the Commission on October 9, 1998)
    4.1       Specimen of Common Stock certificate
    4.2       Fourth Amended and Restated Certificate of Incorporation
              (See Exhibit 3.1)
              Second Amended Restated Bylaws (see Exhibit 3.2)
    4.3       Rights Agreement dated June 25, 1996 by and among the
              Company and certain holders of capital stock of the Company
              named therein
    4.4       Rights Agreement dated as of September 28, 1998 by and
              between the Company and American Securities Transfer &
              Trust, Inc. (incorporated by reference from Exhibit 4 of the
              Company's Current Report on Form 8-K filed with the
              Commission on October 9, 1998)
    4.5       Form of Rights Certificate (incorporated by reference from
              Exhibit 3 of the Company's Form 8-A filed with Commission on
              October 9, 1998)
  *10.1       Employment Agreement dated January 1, 2000 between the
              Company and John F. Davis, III
  *10.2       Employment Agreement dated January 1, 2000 between the
              Company and Joseph W. Nicholson
  *10.3       Employment Agreement dated January 1, 2000 between the
              Company and Jerome L. Galant
 +*10.4       Employment Agreement dated May 7, 2001 between the Company
              and Susan K. Cole
  *10.5       1996 Stock Option Plan, as amended
  *10.6       1997 Amended Stock Option Plan, (incorporated by reference
              from the Company's definitive proxy statement filed with the
              Commission on March 22, 2001)
   10.7       Service Agreement dated December 13, 1996 between the
              Company and Comdisco, Inc.
   10.8       Service Agreement dated January 17, 1997 between the Company
              and Genuity, Inc.
  *10.9       1997 Employee Stock Purchase Plan, as amended
   10.10      Office Lease dated October 1, 1995, First Amendment to
              Office Lease dated February 25, 1998, Second Amendment to
              Office Lease dated November 2, 1998 and Third Amendment to
              Office Lease dated November 8, 1999 between the Company and
              the Utah State Retirement Investment Fund relating to
              property located at 3811 Turtle Creek Blvd., Suite 1100,
              Dallas, Texas 75219 (incorporated by reference to the
              Company's Form S-4 filed with the Commission on December 14,
              1999)
   10.11      Office Lease dated July 26, 1996, First Amendment to Office
              Lease dated August 22, 1997 and Second Amendment to Office
              Lease dated October 24, 2000 between the Company and Pivotal
              Simon Office XVI, L.L.C. relating to property located at
              7500 N. Dreamy Draw, Suite 120, Phoenix, Arizona 85020
   10.12      Credit Agreement dated April 17, 2000, among the Company,
              Chase Bank of Texas, N.A., Compass Bank and Wells Fargo
              (incorporated by reference from Exhibit 10.14 of the
              Company's Form 10-Q filed with the Commission on May 15,
              2000)
   10.13      Form of Security Agreement dated April 17, 2000, among the
              Company, Chase Bank of Texas, N.A. and certain guarantors
              (incorporated by reference from Exhibit 10.15 of the
              Company's Form 10-Q filed with the Commission on May 15,
              2000)
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
   10.14      Purchase Agreement dated October 31, 2000, among the
              Company, Global Enterprise Technology Solutions, LLC,
              Enterprise Hospitality Solutions, Inc., The Rivadalla Family
              Trust and Christian Rivadalla (incorporated by reference
              from Exhibit 10.16 of the Company's Form 10-Q filed with
              Commission on November 14, 2000)
   10.15      Office Lease dated January 31, 1997, First Amendment to
              Office Lease dated August 7, 1997, Second Amendment to
              Office Lease dated November 1, 1999 and Third Amendment to
              Office Lease dated November 2, 1999 between the Company and
              EastGroup Properties relating to property located at 11048
              N. 23rd Avenue, Phoenix, Arizona 85029
   10.16      Office Lease dated September 1, 1987 and First Amendment to
              Office Lease dated October 26, 1989 between the Company and
              Bridger Properties relating to property located at 2 Kew
              Bridge Road, Brentford Middlesex
  *10.17      Employment agreement dated January 1, 2001 between the
              Company and Ric L. Floyd
  *10.18      Employment agreement dated January 17, 2001 between the
              Company and Mark C. Wells
  *10.19      Supplemental Employee Retirement Plan
   10.20      Office lease dated September 17, 2001 between the Company
              and Dallas RPFIV Campbell Centre Associates Limited
              Partnership relating to property located at 8350 North
              Central Expressway, Dallas, Texas 75206 (incorporated by
              reference from 10.23 of the Company's Form 10-Q filed with
              the Commission on November 15, 2001)
   10.21      Office lease dated September 14, 2001 between the Company
              and Ryan Companies US, Inc. relating to property located at
              1400 North Pima Road, Scottsdale, Arizona 85260
              (incorporated by reference from 10.23 of the Company's Form
              10-Q filed with the Commission on November 15, 2001)
   10.22      Form of Promissory Note agreement dated November 9, 2001
              between the Company and IndeCorp Corporation (incorporated
              by reference from 10.23 of the Company's Form 10-Q filed
              with the Commission on November 15, 2001)
   10.23      Form of Promissory Note agreement dated November 9, 2001
              between the Company and IndeCorp Corporation (incorporated
              by reference from 10.23 of the Company's Form 10-Q filed
              with the Commission on November 15, 2001)
  +21.1       Subsidiaries of the Company
  +23.1       Consent of PricewaterhouseCoopers LLP
  +24.1       Power of Attorney (included on signature page)
</Table>

     Unless otherwise indicated, exhibits are incorporated by reference to the
Company's Registration Statement (File No. 333-28595) on Form S-1 declared
effective by the Commission on August 6, 1997.
---------------

+ Filed herewith.

* Management contract or compensatory plan or arrangement -- The Company will
  furnish a copy of any exhibit listed above to any stockholder without charge
  upon written request to Mr. Ric Floyd, Executive Vice President and General
  Counsel, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219.