PRICELINE COM INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number 0-25581

PRICELINE.COM INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Delaware 06-152849
- --------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

800 Connecticut Avenue
Norwalk, Connecticut 06854
- --------------------------------------------------------------------------------
(address of principal executive offices)

(203) 299-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed,
since last report)

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 / /.

Number of shares of Common Stock outstanding at August 2, 2002:

Common Stock, par value $0.008 per share 229,791,181
- ------------------------------------------------- ------------------
(Class) (Number of Shares)

priceline.com Incorporated
Form 10-Q

For the Quarter Ended June 30, 2002

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Consolidated Balance Sheets at June 30, 2002 and December 31, 2001.......................................3
Consolidated Statements of Operations For the Three and Six Months
Ended June 30, 2002 and 2001.........................................................................4
Consolidated Statement of Changes in Stockholders' Equity For the Six Months
Ended June 30, 2002..................................................................................5
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2002 and 2001....................6
Notes to Unaudited Condensed Consolidated Financial Statements...........................................7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........15

Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................34

Item 4. Submission of Matters to a Vote of Security Holders............................................35

PART II - OTHER INFORMATION

Item 1. Legal Proceedings...............................................................................35
Item 6. Exhibits and Reports on Form 8-K................................................................35

SIGNATURES..............................................................................................36

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PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

priceline.com INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

3

priceline.com INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See notes to consolidated financial statements.

4

priceline.com INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS)

See accompanying notes to consolidated financial statements.

5

priceline.com INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

See notes to consolidated financial statements.

6

priceline.com INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The Company is responsible for the unaudited condensed consolidated
financial statements included in this document. The financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") and include all normal and recurring adjustments that management of the
Company considers necessary for a fair presentation of its financial position
and operating results. The Company prepared the condensed financial statements
following the requirements of the Securities and Exchange Commission for interim
reporting. As permitted under those rules, the Company condensed or omitted
certain footnotes or other financial information that are normally required by
GAAP for annual financial statements. As these are condensed financials, one
should also read the financial statements in the Company's December 31, 2001,
Form 10-K.

Revenues, expenses, assets and liabilities can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year.

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

2. NET INCOME (LOSS) PER SHARE

The Company computes basic and diluted earnings per share in
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share". SFAS 128 requires the Company to report both basic
earnings per share, which is based on the weighted average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted average number of common shares outstanding and all dilutive potential
common shares outstanding. For the three and six months ended June 30, 2002, for
the purpose of calculating earnings per share - basic, the weighted average
number of common shares outstanding was 229,678,584 and 228,596,807,
respectively and for the purpose of calculating earnings per share - diluted,
the weighted average number of common shares outstanding was 239,502,372 and
239,543,363, respectively, which includes 9,823,788 and 10,946,556,
respectively, shares representing the dilutive effect of common stock
equivalents. Excluded anti-dilutive common stock equivalents for the three and
six months ended June 30, 2002 were 44,562,660 and 43,439,892, respectively.
Since the Company incurred a loss applicable to common stockholders for the six
month period ended June 30, 2001, the inclusion of options and warrants in the
calculation of weighted average common shares is anti-dilutive and therefore,
there is no difference between basic and diluted earnings per share for that
period.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," which eliminated the pooling method of accounting for all
business combinations initiated after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company adopted this accounting standard for
business combinations initiated after June 30, 2001.

In June 2001, FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which addresses
the financial accounting and reporting standards for the acquisition of
intangible assets outside of a business combination and for goodwill and other
intangible assets subsequent to their acquisition. This accounting standard
requires that goodwill be separately disclosed from other intangible assets in
the statement of financial position, and no longer be amortized but tested for
impairment at least annually. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company adopted the provisions of SFAS 142 effective January 1, 2002, and as a
result, will not record goodwill amortization. As the acquisition of the
Company's majority interest in priceline.com europe Ltd. occurred after June 30,
2001, the Company had no goodwill amortization for the year ended December 31,

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2001. The Company has completed its goodwill impairment review as of January 1,
2002, using a fair value approach in accordance with SFAS 142 and found no
impairment.

In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146").
SFAS 146 will be effective for the Company for disposal activities initiated
after December 31, 2002. The Company is in the process of evaluating the effect
that adopting SFAS 146 will have on its financial statements.

4. RESTRUCTURING AND SPECIAL CHARGES

During 2002, the Company decreased the liability for the 2000 special
charge by approximately $738,000. The reductions primarily resulted from the
favorable resolution of certain matters and disbursements made during the
quarter. The adjustment was reflected in the "special charge (reversal)" line of
the statement of operations.

During 2002, the Company decreased the liability for the 2000
restructuring charge by approximately $2.3 million. The reductions resulted from
disbursements made and the subleasing of office space under more favorable terms
than originally estimated. The adjustment was reflected in the "restructuring
charge (reversal)" line of the statement of operations.

In 2000, the Company recorded restructuring charges of approximately
$32.0 million and a special charge of approximately $34.8 million. The
restructuring charge resulted from the Company's review of its operations with
the intention of increasing efficiencies and refocusing its business principally
on its core travel products. As a result of this review, the Company primarily
decided to reduce its work force, consolidate its real estate and rationalize
certain international markets and potential product line offerings.

5. ACQUISITIONS

On December 21, 2001, the Company completed the acquisition of
approximately 62% of the issued and outstanding shares of priceline.com Europe
Holdings, N.V., the parent company of priceline.com europe Ltd. (together with
priceline.com Europe Holdings, N.V., "priceline.com europe") for approximately
$24 million, including transaction costs, which was accounted for as a purchase.
Priceline.com europe holds the license to the Company's business model in
Europe. Prior to the acquisition of priceline.com europe, General Atlantic
Partners, LLC and its affiliated entities ("GAP") owned approximately 86%. At
the time of the acquisition, GAP owned approximately 5.9 million shares of
priceline.com Incorporated common stock according to documents publicly filed
with the Securities and Exchange Commission. During the six months ended June
30, 2001, the Company charged

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priceline.com europe licensing fees of $450,000 and reimbursable expenses of
approximately $4.4 million. On a consolidated basis, there were no such fees in
the first or second quarter of 2002.

William Ford, a principal of GAP, is a member of the Company's Board
of Directors and chairman of the Company's audit committee. Certain investors in
priceline.com Europe Holdings, N.V., including certain affiliates of General
Atlantic Partners, LLC, have the right to put their shares of priceline.com
Europe Holdings, N.V. to priceline.com Incorporated, at fair market value, in
the event of a change in control, as defined, of priceline.com Incorporated.
These investors own 45,539,999 shares of priceline.com Europe Holdings, N.V.

The excess of the cost of the acquisition over the fair value of the
net assets acquired was recorded as goodwill. The assets and liabilities were
recorded at their estimated fair values as of the acquisition date. Amounts and
allocations of costs recorded may require adjustment based upon information
coming to the Company's attention. The Company expects in the near term that
priceline.com europe will incur operating losses and since the other
stockholders of priceline.com europe have no commitment to provide financing,
the Company recognized the entire loss for the six months ended June 30, 2002,
in its consolidated financial statements subsequent to the acquisition.

On January 31, 2002, the Company invested an additional $10 million in
priceline.com Europe Holdings, N.V., which increased the Company's equity
interest in priceline.com europe to approximately 74.6% of the issued and
outstanding shares.

6. OTHER ASSETS

Other assets at June 30, 2002 and December 31, 2001 consist of the
following (in thousands):

Convertible loans and other advances-Hutchison Priceline Limited
represents a convertible note from the Company's Asian licensee, Hutchison
Priceline Limited. Included in the prepaid expenses and other current assets
balance is a receivable from the Company's Asian license of approximately
$868,000. During the periods ended June 30, 2002 and 2001, the Company charged
Hutchison Priceline Limited $250,000 in licensing fees per period, and
approximately $216,000 and $271,000, respectively, in reimbursable expenses, in
accordance with the Company's agreements.

Convertible loans-Myprice represents the estimated net realizable
value of the amounts due to the Company from its Australian licensee.

Pricelinemortgage represents the Company's 49% equity investment in
pricelinemortgage. In September 2001, the Company converted a debt instrument
into a 49% equity interest in pricelinemortgage and, accordingly, has recognized
its pro rata share of pricelinemortgage's net income. At June 30, 2002, the
investment in pricelinemortgage consists of the Company's original investment of
$4.6 million and the Company's cumulative share of pricelinemortgage's earnings
of approximately $1.3 million. Robert J. Mylod Jr., the Company's Chief
Financial Officer, is a director of, and an investor in, Alliance Capital
Partners Inc., the parent company of Alliance Partners. In 1997, Mr. Mylod
invested $50,000 in Alliance Capital Partners Inc. and his investment represents
less than 1/10 of one percent of Alliance's outstanding common stock.

9

In June 2002, the Company purchased the trademarks and registered
Internet domain names of Lowestfare.com.

7. DELTA AIR LINES

During the first quarter 2001, Delta and the Company agreed to
restructure Delta's investment in the Company. Delta exchanged 6,000,000 shares
of Series A Convertible Redeemable PIK Preferred Stock for 80,000 shares of a
newly created Series B Redeemable Preferred Stock ("Series B Preferred Stock")
and warrants (the "Warrants") to purchase approximately 27 million shares of the
Company's common stock at an exercise price of $2.97 per share.

Pursuant to the terms of the certificate of designations relating to
the Series B Preferred Stock, the Series B Preferred Stock bears a dividend that
is payable through the issuance of approximately 3.0 million shares of the
Company's common stock each year, subject to adjustment as provided for in the
certificate of designations. The Series B Preferred Stock has a liquidation
preference of $1,000 per share and is subject to mandatory redemption on
February 6, 2007 or is subject to redemption at the option of Delta or the
Company prior to February 6, 2007. In the event the Company consummates any of
certain business combination transactions, the Series B Preferred Stock may be
redeemed at the option of the Company or Delta at the liquidation preference per
outstanding share plus all dividends accrued but not paid on the shares. In such
an event, Delta would also be entitled to receive an amount equal to the sum of
the dividend payments that would have accrued or cumulated on the shares to be
redeemed through the remaining scheduled dividend payment dates and, in the
event that any of the business combination transactions occurs before November
16, 2002, a premium payment of $625 per share.

The Warrants provide that at any time the closing sales price of the
Company's Common Stock has exceeded $8.90625 (subject to adjustment) for 20
consecutive trading days, the Warrants will automatically be exercised. The
exercise price of the Warrant is paid by surrendering .00296875 shares of Series
B Preferred Stock for each share of Common Stock purchased. As of June 30, 2002,
there were 4,537,199 Warrants outstanding.

During 2001, Delta exercised Warrants to purchase approximately 18.4
million shares of the Company's common stock and on January 29, 2002, Delta
exercised Warrants to purchase 4 million shares of the Company's common stock.
As a result, there are 13,469 shares of Series B Preferred Stock outstanding
with an aggregate liquidation preference of approximately $13.5 million and the
Company's future semi-annual dividend has been reduced to approximately 242,000
shares of Common Stock. In accordance with the terms of the Series B Preferred
Stock, the Company delivered 986,491 shares of the Company's common stock to
Delta on August 6, 2001 and 454,308 shares of Common Stock on February 6, 2002,
as dividend payments and, as a result, the Company recorded a non-cash dividend
of $8.6 million in the third quarter of 2001 and a non-cash dividend of $1.85
million in the first quarter of 2002.

8. COMMITMENTS AND CONTINGENCIES

On January 6, 1999, the Company received notice that a third party
patent applicant and patent attorney, Thomas G. Woolston, purportedly had filed
in December 1998 with the United States Patent and Trademark Office a request to
declare an interference between a patent application filed by Woolston and the
Company's U.S. Patent 5,794,207. The Company is currently awaiting information
from the Patent Office regarding whether it will initiate an interference
proceeding.

On January 19, 1999, Marketel International Inc. ("Marketel"), a
California corporation, filed a lawsuit against priceline.com, among others,
alleging causes of action for misappropriation of trade secrets, conversion,
false advertising and for correction of inventorship of U.S. Patent 5,794,207.

On December 5, 2000, the United States District Court for the Northern
District of California granted priceline.com's motion for summary judgment with
respect to Marketel's theft of trade secret and patent inventorship claims, and
ruled that there were triable issues of fact as to Marketel's false advertising
claims, although Judge Legge volunteered that it was unlikely that Marketel
could establish damages and suggested that these claims should be voluntarily
dismissed. The false advertising claims were subsequently dismissed by
stipulation, and on February 1,

10

2001, Judge Legge clarified his inventorship ruling in favor of priceline.com
and entered final judgment in favor of priceline.com. On April 25, 2002, the
Federal Circuit affirmed the judgment in favor of priceline.com in all respects.
On May 9, 2002, Marketel filed a petition for panel rehearing with the Federal
Circuit, claiming error in the decision affirming the District Court's judgment.
The petition for rehearing was denied on May 21, 2002. Marketel has until August
19, 2002 to file a writ of certiorari asking the U.S. Supreme Court to review
the Federal Circuit decision. If no such writ is filed, the judgment in
priceline.com's favor will become final.

Subsequent to the Company's announcement on September 27, 2000 that
revenues for the third quarter 2000 would not meet expectations, it was served
with the following putative class action complaints:

- Weingarten v. priceline.com Incorporated
and Jay S. Walker
3:00 CV 1901 (District of Connecticut).
- Twardy v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1884 (District of Connecticut).
- Berdakina v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1902 (District of Connecticut).
- Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1924 (District of Connecticut).
- Fialkov v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1954 (District of Connecticut).
- Licht v. priceline.com Incorporated and
Jay S. Walker 3:00 CV 2049 (District of Connecticut).
- Ayach v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2062 (District of Connecticut).
- Zia v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1968 (District of Connecticut).
- Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1980 (District of Connecticut).
- Bazag v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2122 (District of Connecticut).
- Breier v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2146 (District of Connecticut).
- Farzam et al. v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2176 (District of Connecticut).
- Caswell v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2169 (District of Connecticut).
- Howard Gunty Profit Sharing Plan v. priceline.com Inc.
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1917 (District of Connecticut).
- Cerelli v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1918 (District of Connecticut)

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- Mayer v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1923 (District of Connecticut)
- Anish v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1948 (District of Connecticut)
- Atkin v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1994 (District of Connecticut).
- Lyon v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2066 (District of Connecticut).
- Kwan v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2069 (District of Connecticut).
- Krim v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2083 (District of Connecticut).
- Karas v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2232 (District of Connecticut).
- Michols v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2280 (District of Connecticut).

All of these cases have been transferred to Judge Dominick J.
Squatrito. On September 12, 2001, Judge Squatrito Ordered that these cases be
consolidated under the Master File No. 3:00cv1884 (DJS), and he designated lead
plaintiffs and lead plaintiffs' counsel. On October 29, 2001, plaintiffs served
a Consolidated Amended Complaint. On February 5, 2002, Amerindo Investment
Advisors, Inc., who is one of the lead plaintiffs in the consolidated action,
made a motion for leave to withdraw as lead plaintiff in this action. The court
has yet to rule on that motion. On February 28, 2002, the Company filed a motion
to dismiss the Consolidated Amended Complaint. That motion has been fully
briefed. The Court has yet to rule on that motion. On July 26 and August 1,
2002, the Court issued scheduling orders concerning pretrial proceedings. The
Company intends to defend vigorously against this action.

In addition, the Company has been served with a complaint that
purports to be a shareholder derivative action against its Board of Directors
and certain of its current executive officers, as well as priceline.com (as a
nominal defendant). The complaint alleges breach of fiduciary duty and waste of
corporate assets. The action is captioned Mark Zimmerman v. Richard Braddock, J.
Walker, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N.
Nicholas, N. Peretsman, and priceline.com Incorporated 18473-NC (Court of
Chancery of Delaware, County of New Castle, State of Delaware). On February 6,
2001, all defendants moved to dismiss the complaint for failure to make a demand
upon the Board of Directors and failure to state a cause of action upon which
relief can be granted. Pursuant to a stipulation by the parties, an amended
complaint was filed on June 21, 2001. Defendants renewed their motion to dismiss
on August 20, 2001, and plaintiff served his opposition to that motion on
October 26, 2001. Defendants filed their reply brief on January 7, 2002. Oral
argument on that motion was conducted on April 23, 2002, and decision was
reserved. The Company intends to defend vigorously against this action.

On March 16, March 26, April 27, and June 5, 2001, respectively, four
putative class action complaints were filed in the U.S. District Court for the
Southern District of New York naming priceline.com, Inc., Richard S. Braddock,
Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch,
Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon
Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and
01 Civ. 4956). Shives et al. v. Bank of America Securities LLC et al., 01 Civ.
4956, also names other defendants and states claims unrelated to the Company.
The complaints allege, among other things, that priceline.com and the individual
defendants named in the complaints violated the federal securities laws by
issuing and selling priceline.com common stock in priceline.com's March 1999
initial public offering without disclosing to investors that some of the
underwriters in the offering, including the lead underwriters, had allegedly
solicited and

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received excessive and undisclosed commissions from certain investors. By Orders
of Judge Mukasey and Judge Scheindlin dated August 8, 2001, these cases were
consolidated for pre-trial purposes with hundreds of other cases, which contain
allegations concerning the allocation of shares in the initial public offerings
of companies other than priceline.com, Inc. By Order of Judge Scheindlin dated
August 14, 2001, the following cases were consolidated for all purposes: 01 Civ.
2261; 01 Civ. 2576; and 01 Civ. 3590. On April 19, 2002, plaintiffs filed a
Consolidated Amended Class Action Complaint in these cases. This Consolidated
Amended Class Action Complaint makes similar allegations described to those
above but with respect to both our March 1999 initial public offering and our
August 1999 second public offering of common stock. The named defendants are
priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E. Francis, Nancy
B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co., Goldman Sachs
& Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson Stephens, Inc. (as
successor-in-interest to BancBoston), Credit Suisse First Boston Corp. (as
successor-in-interest to Donaldson Lufkin & Jenrette Securities Corp.), Allen &
Co., Inc. and Salomon Smith Barney, Inc. Priceline, Richard Braddock, Jay
Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together with other
issuer defendants in the consolidated litigation, filed a joint motion to
dismiss on July 15, 2002. Plaintiffs have yet to file papers in opposition to
that motion. Priceline has not responded to the Consolidated Amended Complaint
and the time within which to do so has not yet expired. The Company intends to
defend vigorously against these actions.

The Company has been informed that a sub-committee of the board of
directors of Myprice pty. Ltd. has been formed to evaluate whether a lawsuit
should be instituted against us in connection with its investment in Myprice. If
necessary, the Company will defend against any such suit vigorously.

In January 2002, the Company received a letter from the Teradata
Division of NCR Corporation alleging that the Company infringed U.S. Patents
5,699,526, 5,721,906, 5,832,496, 5,951,643, 5,954,798, 5,991,791, 6,026,403,
6,085,223, 6,151,601, 6,169,997, and 6,253,203. Based on advice from its patent
counsel, the Company does not believe that it infringes any of the patents at
issue. If necessary, the Company will defend vigorously against any suit arising
from NCR's claims.

From time to time, the Company has been and expects to continue to be
subject to legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of third party intellectual property
rights by it. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and could
adversely affect the Company's results of operations and business.

The Company holds a convertible note with a face amount of
approximately $11.1 million that is owed to it by Hutchison-Priceline and is
convertible into approximately 35% (on a fully diluted basis) of the equity of
Hutchison-Priceline. The Company made this investment at the formation of
Hutchison-Priceline in 2000. Hutchison-Priceline officially launched its
business operations in the second quarter of 2002 and, as is typical of a newly
launched business, it is incurring substantial operating losses consistent with
its business plan. The Company expects to make an additional investment in
convertible notes of Hutchison-Priceline during the third quarter of 2002.
Should Hutchison-Priceline fail to meet its future business objectives, the
value of the Company's note is likely to become impaired and could result in a
charge to the Company's income statement for the write-down of the note. The
Company's investment in Hutchison-Priceline is in the form of a convertible note
and the Company does not control Hutchison-Priceline operations. If the Company
elects to convert the convertible note to equity it would result in the
Company's recognizing approximately 35% of the operating results of
Hutchison-Priceline through the "other income (loss)" line item of the Company's
income statement which possibly could have a material and adverse effect on the
Company's results of operations.

9. TAXES

For the six months ended June 30, 2002, the Company has recorded no
provision for income taxes due to the availability of previously fully reserved
net operating losses which have been utilized to offset the income tax
provision.

10. SUBSEQUENT EVENTS

On August 11, 2002, U.S. Airways Group, Inc. announced that it had
filed a voluntary petition for

13

reorganization under Chapter 11 of the United States Bankruptcy Code. In its
announcement, U.S. Airways stated that it had adequate resources to fulfill
all its obligations to customers while it restructures and that all tickets
on U.S. Airways would continue to be honored and accepted. The Company's four
largest airline suppliers, American Airlines, Delta Air Lines, United
Airlines and U.S. Airways, together accounted for approximately 86% of the
Company's airline ticket revenue in the second quarter of 2002. While the
Company does not expect U.S. Airways' bankruptcy filing to have a material
adverse effect on its business and results of operations over the near term,
the Company is unable at this time to assess the long-term impact of U.S.
Airways' bankruptcy filing on its business. If any of the Company's four
largest airline suppliers were unable or unwilling to participate in its
system, the Company's business and results of operations would be materially
and adversely affected.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS, INCLUDED
ELSEWHERE IN THIS FORM 10-Q, AND THE SECTION ENTITLED "SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS" IN THIS FORM 10-Q. AS DISCUSSED IN MORE DETAIL IN
THE SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS," THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE THOSE
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT
MAY AFFECT FUTURE RESULTS."

OVERVIEW

We have pioneered a unique e-commerce pricing system known as a
"demand collection system" that enables consumers to use the Internet to save
money on products and services while enabling sellers to generate incremental
revenue. Using a simple and compelling consumer proposition - Name Your Own
PriceSM - we collect consumer demand, in the form of individual customer offers,
for a particular product or service at a price set by the customer. We then
access databases or, in some instances, communicate that demand to participating
sellers to determine whether we can fulfill the customer's offer. For most of
these transactions, we establish the price we will accept, have total discretion
in supplier selection, purchase and take title to the particular product and are
the merchant of record. Consumers agree to hold their offers open for a
specified period of time and, once fulfilled, offers generally cannot be
canceled. We benefit consumers by enabling them to save money, while at the same
time benefiting sellers by providing them with an effective revenue management
tool capable of identifying and capturing incremental revenues. By requiring
consumers to be flexible with respect to brands, sellers and product features,
we enable sellers to generate incremental revenue without disrupting their
existing distribution channels or retail pricing structures.

Our business model and brand are currently, through us or independent
licensees, supporting several products and service offerings, including the
following:

- leisure airline tickets, provided by 10 domestic and 24
international airline participants, and travel insurance;

- hotel rooms, in substantially all major United States markets
with more than 50 national hotel chains, and in a limited number
of markets outside the United States;

- rental cars, in substantially all major United States airport
markets with five leading rental car chains as participants;

- home financing services, in substantially all major United States
markets, which includes home mortgage services, home equity loans
and refinancing services;

- long distance telephone calling, provided by three carriers, and
wireless telephone service, including sales of wireless
telephones and service plans, in substantially all United States
markets;

- new automobiles, in substantially all major United States
markets;

- fixed-price cruises and cruise packages, through a third party
that accesses major cruise lines; and

- vacation packages, in many United States markets.

In certain instances, we have licensed the priceline.com name and
demand collection system to third parties to offer a particular product or
service (HOME FINANCING) or to offer a number of products or services in a
distinct international region (Asia). Pursuant to these licensee transactions,
we generally receive a royalty under the license and may also receive fees for
services and reimbursement of certain expenses. We also hold convertible
securities

15

entitling us to acquire a significant percentage of such entity's equity
securities upon the occurrence of certain events.

Our financial prospects are significantly dependant upon our sale of
leisure airline tickets. As a result, the health of our business is directly
related to the health of the airline industry. After the events of September 11,
2001, in response to an immediate and severe drop in airline ticket demand, the
major airlines significantly reduced the number of available airline seats by
grounding portions of their fleets. This increased the amount for which an
airline needs to sell an existing seat in order to operate profitably, or even
to break even. Because our business is tailored to marginal leisure travel
(those customers who increase an airline's "load factor", but pay less than the
prescribed fare set by the airlines), some of this additional cost to the
airlines has been passed on to us, as airlines attempt to raise their average
yield per passenger. Our ability to convert demand to sales is a function of our
customers' offer price relative to our cost of supply. Therefore, while we have
not seen deterioration in the average offer price from customers since September
11, 2001, offer prices are lower in proportion to our cost of supply, which has
negatively affected our results.

Historically, the second quarter is our strongest in terms of results
and customer demand. While we believe that demand for airline tickets is
recovering from the events of September 11, that recovery slowed during June of
2002, which has historically been the strongest month of our second quarter. We
believe that this decrease, which negatively affected our results during the
quarter and may continue to do so in the remainder of 2002, was primarily due to
difficult industry conditions, including lingering effects of September 11,
uncertainty regarding the American economy and the continued aggressive
discounting by the airlines. Our results were also, and may continue to be,
negatively impacted by lower average offer prices (relative to cost of supply)
and less available airline ticket inventory.

We believe that the decreased airline capacity discussed above, and
the resulting increase in load factors on existing flights, has reduced
inventory available to us as well as other distribution channels dependant on
leisure demand. These trends - unstable airline prices and reduced inventory -
have adversely impacted our overall ability to bind customer offers and, when
coupled with the significant financial difficulties faced by many of our airline
suppliers, contributed to an uncertain competitive environment in which
near-term forecasting is very difficult. We believe that this uncertainty, which
impacted our results of operations in the first two quarters of 2002, will
extend into the third quarter of 2002 and perhaps beyond. See "Factors that May
Affect Future Results - We Are Dependant On the Airline Industry and Certain
Airlines."

Another important trend in our industry is the growing number of
travel providers competing for share in the online travel market. Consumers have
accepted the idea that the Internet is an important tool in researching travel
plans and destinations and a secure, convenient and cost effective way to make
travel reservations. As a result, the number of companies focusing on and
exclusively providing these services is growing. As competition in this
marketplace has increased, and continues to do so, we have seen, and expect to
continue to see, downward margin pressure. See "FACTORS THAT MAY AFFECT FUTURE
RESULTS--INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR
FINANCIAL PERFORMANCE."

We intend to combat these trends by continuing to develop our non-air
business, in particular our hotel and vacation packages businesses, for which
demand remains strong, and to evaluate and implement ways to improve offer
quality and our bind rate. However, further terrorist attacks, the bankruptcy or
insolvency of a major domestic airline or the withdrawal from our system of an
airline supplier could adversely affect our business and results of operations.

In the second quarter 2002, Northwest Airlines terminated its Airline
Participation Agreement with us. While we continue to negotiate with Northwest
Airlines concerning its participation and sell a limited number of Northwest
airline tickets, we no longer receive discounted "net-fares" from Northwest for
sale on our website. We believe that we have been able to direct a majority of
the affected customer demand to our other participating airline suppliers and we
do not expect Northwest's decision not to participate in our system to have a
material adverse effect on our financial results or results of operations. If
other airlines withdraw from our system, however, our results could be
materially adversely affected. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - WE
ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES."

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On May 13, 2002, we announced the launch of our vacation packages
product. Utilizing our Name Your Own Price/SM/ system, our vacation packages
product allows travelers to choose the specific hotel they want, how long they
want to stay, the days on which they want to leave and come back and, the price
they want to pay for their vacation. As with our airline product, the specific
airline and flight times are not disclosed to the consumer in the vacation
packages product. We believe that the Internet is a good medium for delivery of
the content and information customers desire when making a vacation decision and
that the "build-your-own" vacation concept will appeal to a broad segment of the
leisure travel purchasing population that was previously uninterested in
purchasing package products.

On May 31, 2002, we entered into an agreement with Lowestfare.com, LLC
whereby we purchased the trademarks and domain names of Lowestfare.com. We
believe that Lowestfare.com is one of the Internet's strongest discount travel
brands. We began offering, and will continue to offer, a version of our Name
Your Own PriceSM services for airline tickets, hotel rooms, rental and vacation
packages through the www.lowestfare.com Internet site.

We believe that our success will depend in large part on our ability
to continue to maintain profitability, primarily from our travel business, to
continue to promote the priceline.com brand and, over time, to offer other
products and services on our website. We intend to continue to invest in
marketing and promotion, technology and personnel within parameters consistent
with attempts to improve operating results. Our goal is to increase operating
profits and improve gross margins in an effort to achieve and maintain
profitability. Our limited operating history and the uncertain competitive
environment described above makes the prediction of future results of operations
difficult, and accordingly, we cannot assure you that we will maintain revenue
growth or achieve and maintain profitability.

RECENT DEVELOPMENTS

On July 31, 2002, we announced that our board of directors authorized
the repurchase of up to $40 million of our common stock from time to time in the
open market or in privately negotiated transactions. In addition, we announced
that Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited, who together
own approximately 31% of our outstanding common stock, had informed us that they
may purchase up to an additional $40 million of priceline.com common stock in
the open market or in privately negotiated transactions. Whether and when to
initiate and/or complete any purchase of common stock and the amount of common
stock purchased will be determined by each company in its complete discretion.
Any repurchase by us may or may not occur simultaneously or be coordinated with
any purchases of common stock by Cheung Kong and Hutchison Whampoa. As of June
30, 2002, there were approximately 230 million shares of our common stock
outstanding.

On July 31, 2002, we announced the promotion of several executives and
the corresponding re-alignment of our operating and management structure.
Jeffery H. Boyd, our former President and Chief Operating Officer, was named
President and Co-Chief Executive Officer. He will share CEO responsibilities
with Chairman Richard S. Braddock. Mitch Truwit, former Executive Vice
President, Operations, was named as our new Chief Operating Officer. In
addition, the scope of the position of Chief Operating Officer was restructured
so that the position will oversee our airline tickets, rental cars, mortgage and
telecommunications products and operations, as well as customer service, public
relations and our international initiatives. Trey Urbahn, former president of
our airline

17

tickets service, was named Chairman of our Travel Services Group, a newly
created position, and Chris Soder, formerly President, Lodging, Automotive and
Business Development, was named an Executive Vice President.

On July 31, 2002, we announced that our revenues for the month of July
were approximately $92 to $93 million and that we expected our August revenues
to be at or slightly below our July revenues. See "FACTORS THAT MAY AFFECT
FUTURE RESULTS - FURTHER TERRORIST ATTACKS OR HOSTILITIES OR THE FEAR OF FUTURE
ATTACKS COULD HAVE A NEGATIVE IMPACT ON OUR COMPANY."

On August 11, 2002, U.S. Airways Group, Inc. announced that it had
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code. In its announcement, U.S. Airways stated that it had
adequate resources to fulfill all its obligations to customers while it
restructures and that all tickets on U.S. Airways would continue to be
honored and accepted. Our four largest airline suppliers, American Airlines,
Delta Air Lines, United Airlines and U.S. Airways, together accounted for
approximately 86% of our airline ticket revenue in the second quarter of
2002. While we do not expect U.S. Airways' bankruptcy filing to have a
material adverse effect on our business and results of operations over the
near term, we are unable at this time to assess the long-term impact of U.S.
Airways' bankruptcy filing on our business. If any of our four largest
airline suppliers were unable or unwilling to participate in our system, our
business and results of operations would be materially and adversely
affected. See "FACTORS THAT MAY AFFECT FUTURE RESULTS -WE ARE DEPENDENT ON
THE AIRLINE INDUSTRY AND CERTAIN AIRLINES."

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 2001

REVENUES

TRAVEL REVENUES

Travel revenues for the three and six months ended June 30, 2002 and
2001 consisted primarily of: (1) transaction revenues representing the selling
price of airline tickets, hotel rooms and rental cars; and (2) ancillary fees,
including Worldspan reservation booking fees and customer processing fees
offered in connection with the sale of airline tickets, hotel rooms and rental
cars.

During the three months ended June 30, 2002, we sold approximately
921,000, 1,090,000 and 794,000 airline tickets, hotel room nights and rental car
days, respectively. During the six months ended June 30, 2002, we sold
approximately 1.8 million, 2.0 million and 1.5 million airline tickets, hotel
room nights and rental car days, respectively. During the three months ended
June 30, 2001, we sold approximately 1.4 million, 680,600 and 922,500 airline
tickets, hotel room nights and rental car days, respectively. During the six
months ended June 30, 2001, we sold approximately 2.5 million, 1.1 million and
1.5 million airline tickets, hotel room nights and rental car days,
respectively. We believe that the 36% decrease in the number of airline tickets
sold during the three months ended June 30, 2002, from the same period a year
ago, was due primarily to the relatively lower customer offer prices in
proportion to our cost of supply, as increases in our inventory costs exceeded
increases in our average offer prices for airline tickets. Additionally, there
has been a reduction in the inventory of airline seats available to us. These
factors have affected our ability to bind customer offers and have negatively
impacted our travel revenues. The impact of the decrease in the sale of airline
tickets has been partially offset by an increase in the number of hotel room
nights sold.

Our "bind" rate is the percentage of unique offers that we ultimately
fulfill. Since April 1999, each initial offer and any resubmitted offers are
treated as a single offer - a unique offer - for purposes of measuring our total
offer volume and our offer fulfillment rates. Previously, each had been counted
as a separate offer. Therefore, comparisons with prior periods may not be
meaningful. Our "bind rate" for all unique airline ticket, hotel room and rental
car offers were as follows:

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As discussed in the overview to this MD&A, we believe that our travel
revenues and bind rate have been negatively impacted by the weak retail fare
environment for airline tickets and reduced airline inventory available to us.
In particular, we believe that lower retail pricing causes customers who might
normally be willing to make the trade-off associated with our products in
exchange for savings off of relatively high retail rates, to purchase travel
products at the lower retail rates without having to make any trade-offs. In
addition, many airlines grounded portions of their fleets in the aftermath of
the attacks of September 11, thus decreasing capacity and increasing load
factors on existing flights, which we believe reduced airline inventory
available to us. In an effort to increase yields, some airlines have also raised
our cost or limited inventory in certain circumstances. These trends, which
negatively impacted our revenues and bind rate in the fourth quarter of 2001,
continued through the first and second quarters of 2002 and we believe will
extend into the second half of 2002.

We added approximately 964,000 and 1.8 million new customers during
the three and six months ended June 30, 2002 as compared to 1,025,000 and 1.9
million new customers during the three and six months ended June 30, 2001. In
addition, we generated approximately 1.8 and 3.4 million repeat customer offers
during the three and six months ended June 30, 2002, respectively, as compared
to 1.6 and 2.8 million repeat customer offers during the three and six months
ended June 30, 2001, respectively.

Travel revenues for the three months ended June 30, 2002 decreased
approximately 16.4% to $303 million from $362 million for the three months ended
June 30, 2001. Travel revenues for the six months ended June 30, 2002 decreased
approximately 10.6% to $563 million from $630 million for the six months ended
June 30, 2001. These decreases are primarily attributable to the factors
described above.

OTHER REVENUES

Other revenues during the three and six months ended June 30, 2002 and
2001 consisted primarily of: (1) transaction revenues and fees from our long
distance phone service; (2) commissions and fees from our home financing and
automobile services; (3) license fees from our international licensees; and (4)
marketing revenues.

Other revenues for the three and six months ended June 30, 2002
decreased approximately 30.5% and 28.1%, respectively, from the same periods a
year ago, primarily as a result of the decrease in revenues from our long
distance phone service.

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COST OF REVENUES AND GROSS PROFIT

COST OF REVENUES

COST OF TRAVEL REVENUES. For the three and six months ended June 30,
2002 and 2001, cost of travel revenues consisted primarily of: (1) the cost of
airline tickets from our suppliers, net of the federal air transportation tax,
segment fees and passenger facility charges imposed in connection with the sale
of airline tickets; (2) the cost of hotel rooms from our suppliers, net of hotel
tax; and (3) the cost of rental cars from our suppliers, net of applicable
taxes. While the cost of travel revenues decreased in total dollars due to
reduced sales volume, the relative cost of travel revenues as a percentage of
travel revenues increased due to the higher cost of airline tickets from our
suppliers.

COST OF OTHER REVENUES. For the three and six months ended June 30,
2002 and 2001, cost of other revenues consisted of the cost of long distance
telephone service provided by our suppliers.

GROSS PROFIT

TRAVEL GROSS PROFIT. Travel gross profit consists of travel revenues
less the cost of travel revenues. We are able to manage the level of gross
margins by controlling the price at which we will cause offers to be fulfilled.
For the three and six month period ended June 30, 2002, travel gross profit and
related travel gross margin decreased from the same periods in 2001 due to
pressure on our bind rate and margin for airline tickets due to the factors
discussed above. This was partially mitigated by an increase in travel gross
profit from the growth in sales of our

20

hotel service. The reduction in travel revenues and increased cost of travel
revenues also negatively impacted total gross profit and related total gross
margin.

OPERATING EXPENSES

SALES AND MARKETING

Sales and marketing consists of advertising expenses and other sales
and marketing expenses. Advertising expenses consist primarily of: (1)
television and radio advertising; (2) online and email advertisements; and (3)
agency fees, creative talent and production costs for television and radio
commercials. For the three and six months ended June 30, 2002, advertising
expenses decreased over the same period in 2001 primarily due to an overall
decline in the cost of advertising and an effort to reduce our advertising
spending. In 2001, we began shifting the focus of our marketing resources from
traditional areas of marketing such as television, toward radio advertising and
online marketing. We intend to continue to pursue an advertising and branding
campaign in order to continue to attract new users and retain existing users,
and expect to continue to shift resources to online marketing. In addition,
during the third quarter of 2002, we intend to launch television advertisements.

Other sales and marketing expenses consist primarily of: (1) credit
card processing fees; (2) provisions for credit card charge-backs; (3) fees paid
to third-party service providers that operate our call centers; and (4)
compensation for our sales and marketing personnel. For the three and six months
ended June 30, 2002, other sales and marketing expenses decreased from the same
period in 2001 due to the variable nature of these costs and the overall
reduction in related sales volume and by a reduction in the absolute amount of
credit card chargebacks.

21

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of: (1) costs
for personnel; (2) occupancy expenses; (3) telecommunications costs; and (4)
fees for outside professionals. For the three months ended June 30, 2002,
general and administrative expenses increased over the same period in 2001
primarily as a result of an increase in our directors and officers insurance
premium, and an increase in costs due to the consolidation of our European
operations. General and administrative expenses decreased during the six months
ended June 30, 2002 over the same period in 2001 as a result of a decrease in
legal fees and telecom expenses, partially offset by an increase in costs due to
the consolidation of our European operations. For the three and six months ended
June 30, 2002, stock based compensation decreased over the same periods in 2001
as a result of the completion of the amortization of restricted stock.

SYSTEMS AND BUSINESS DEVELOPMENT

Systems and business development expenses consist primarily of: (1)
compensation to our information technology and product development staff; (2)
depreciation and amortization on computer hardware and software; (3) payments to
outside contractors; and (4) data communications and other expenses associated
with operating our Internet site. For the three and six months ended June 30,
2002, systems and business development expenses increased over the same period
in 2001 primarily due to the increase in costs due to the consolidation of our
European operations.

22

RESTRUCTURING AND SPECIAL CHARGES

During 2002, we decreased the liability for the 2000 special charge by
approximately $738,000. The reductions primarily resulted from the favorable
resolution of certain matters and disbursements made during the quarter. The
adjustment was reflected in the "special charge (reversal)" line of the
statement of operations.

During 2002, we decreased the liability for the 2000 restructuring
charge by approximately $2.3 million. The reductions resulted from disbursements
made and the subleasing of office space under more favorable terms than
originally estimated. The adjustment was reflected in the "restructuring charge
(reversal)" line of the statement of operations.

EQUITY IN NET INCOME OF PRICELINEMORTGAGE

Equity in net income of pricelinemortgage for the three and six months
ended June 30, 2002, of $245,000 and $737,000 represents the Company's pro rata
share of income from the Company's 49% equity investment in pricelinemortgage.
There was no comparable income for the three and six months ended June 30, 2001.

INTEREST INCOME

For the three and six months ending June 30, 2002, interest income on
cash and marketable securities decreased primarily due to lower interest rates.

TAXES

For the three and six months ended June 30, 2002, we have recorded no
provision for income taxes due to the availability of fully reserved net
operating losses which have been utilized to offset the income tax provision.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146").
SFAS 146 will be effective for us for disposal activities initiated after
December 31, 2002. We are in the process of evaluating the effect that adopting
SFAS 146 will have on our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2002 we had approximately $180.2 million in cash, cash
equivalents, short-term investments and restricted cash. Approximately $19.6
million is restricted cash collateralizing certain letters of credit issued in
favor of certain suppliers and landlords and amounts held by our credit card
processor company. We generally invest excess cash, cash equivalents and
short-term investments predominantly in debt instruments that are highly liquid,
of high-quality investment grade, and predominantly have maturities of less than
one year with the intent to make such funds readily available for operating
purposes.

Net cash provided by operating activities was $16.8 million for the
six months ended June 30, 2002, including $12.1 million of net income.
Depreciation and amortization and other non-cash items adjusted our net

23

income by $8.7 million. An increase in accounts receivable of $6.8 million and
an increase in prepaid expenses of $2.1 million reduced cash provided by
operating activities. Net cash provided by operating activities during the
period ended June 30, 2001 was $21.2 million. This was primarily attributable to
changes in working capital and operations.

Net cash used in investing activities was $21.6 million and $22.5
million for the six months ended June 30, 2002 and 2001, respectively. In both
periods, net cash used in investing activities was partially related to
purchases of property and equipment. Also affecting net cash used in investing
activities in the six months ended June 30, 2002 and June 30, 2001 was the
purchase of short-term investments and marketable securities in the amount of
$13.2 million and $20.0 million, respectively.

We have certain commitments for capital expenditures as part of our
ongoing business cycle. None of these commitments are material to our financial
position either individually or in the aggregate. Expenditures for additions to
property and equipment, is expected to aggregate approximately $12.0 to $20.0
million in 2002. In addition, as discussed in "RECENT DEVELOPMENTS," during the
second half of 2002, we may use up to $40.0 million to repurchase our common
stock from time to time in the open market or privately negotiated transactions.

Net cash provided by financing activities was $3.0 million for the six
months ended June 30, 2002. This was primarily the result of proceeds from the
exercise of employee stock options. Net cash provided by financing activities
was $48.5 million for the six months ended June 30, 2001, and was primarily the
result of the sale of 23.8 million shares of common stock at a price of $2.10
per share to Hutchison-Whampoa Limited and Cheung Kong (Holdings) Limited in
February 2001. Based on public filings with the Securities and Exchange
Commission, Hutchison-Whampoa Limited and Cheung Kong (Holdings) Limited
collectively owned approximately 31% of our outstanding common stock as of June
30, 2002. See "Factors that May Affect Future Results - Two Large Stockholders
Beneficially Own Approximately 31% of Our Stock."

We may elect to loan additional amounts to Hutchison-Priceline Limited
in the second half of 2002.

We believe that our existing cash balances and liquid resources will
be sufficient to fund our operating activities, any share repurchase, capital
expenditures and other obligations through at least the next twelve months.
However, if during that period or thereafter, we are not successful in
generating sufficient cash flow from operations or in raising additional capital
when required in sufficient amounts and on terms acceptable to us, we may be
required to reduce our planned capital expenditures and scale back the scope of
our business plan, either of which could have a material adverse effect on our
projected financial condition or results of operation. If additional funds were
raised through the issuance of equity securities, the percentage ownership of
our then current stockholders would be diluted. We cannot assure you that we
will generate sufficient cash flow from operations in the future, that revenue
growth will be realized or that future borrowings or equity contributions will
be available in amounts sufficient to make anticipated capital expenditures or
finance our business plan.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Sections of this Form 10-Q including, in particular, our Management's
Discussion and Analysis of Financial Condition and Results of Operations above,
contain forward-looking statements. These forward-looking statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to predict; therefore, actual results may
differ materially from those expressed, implied or forecasted in any such
forward-looking statements.

Expressions of future goals and similar expressions including, without
limitation, "may," "will," "should," "could," "expects," "does not currently
expect," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "targets," or "continue," reflecting something other than
historical fact are intended to identify forward-looking statements. The
following factors, among others, could cause our actual results to differ
materially from those described in the forward-looking statements: adverse
changes in general market conditions for leisure and other travel products as
the result of, among other things, terrorist attacks or hostilities; adverse
changes in our relationships with airlines and other product and service
providers, including, without limitation, the withdrawal of providers from the
priceline.com system; the bankruptcy or insolvency of a major domestic airline;
the effects of

24

increased competition; systems-related failures and/or security breaches; our
ability to protect our intellectual property rights; losses by us and our
licensees; legal and regulatory risks and the ability to attract and retain
qualified personnel. These factors and others are described in more detail below
in the section entitled "Factors That May Affect Future Results." Unless
required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the reports and
documents we file from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.

FACTORS THAT MAY AFFECT FUTURE RESULTS

THE FOLLOWING RISK FACTORS AND OTHER INFORMATION INCLUDED IN THIS FORM
10-Q SHOULD BE CAREFULLY CONSIDERED. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, OPERATING RESULTS AND CASH FLOWS COULD BE MATERIALLY ADVERSELY
AFFECTED.

WE MAY CONTINUE TO INCUR LOSSES

As of June 30, 2002, we had an accumulated deficit of $1.5 billion.
Despite the progress we have made towards sustained profitability, we may incur
losses and may not be profitable in future years. In particular, a depressed
retail environment for the sale of airline tickets and the general decline in
leisure travel since the events of September 11, 2001 have had a negative impact
on our business and results of operations. We may not have decreased our
operating expenses in connection with our recent restructuring on an on-going
basis sufficiently to achieve and sustain profitability in this difficult
operating environment.

WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES

Our financial prospects are significantly dependent upon our sale of
leisure airline tickets. Sales of leisure airline tickets represented a
substantial majority of total revenue for the quarter ended June 30, 2002.
Leisure travel, including the sale of leisure airline tickets, is dependent on
personal discretionary spending levels. As a result, sales of leisure airline
tickets and other leisure travel products tend to decline during general
economic downturns and recessions. In addition, unforeseen events, such as
terrorist attacks, political instability, regional hostilities, increases in
fuel prices, imposition of taxes or surcharges by regulatory authorities,
travel-related accidents and unusual weather patterns also may adversely affect
the leisure travel industry. As a result, our business also is likely to be
affected by those events. Further, work stoppages or labor unrest at any of the
major airlines could materially and adversely affect the airline industry and,
as a consequence, our business.

Sales of airline tickets from our five largest airline suppliers
accounted for approximately 88.1% and 79.9% of airline ticket revenue for the
six months ended June 30, 2002 and 2001, respectively. As a result, currently we
are substantially dependent upon the continued participation of these airlines
in the priceline.com service in order to maintain and continue to grow our total
airline ticket revenues and, as a consequence, our overall revenues.

We currently have 33 participating airlines. However, our arrangements
with the airlines that participate in our system:

- do not require the airlines to make tickets available for
any particular routes;

- do not require the airlines to provide any specific
quantity of airline tickets;

- do not require the airlines to provide particular prices or
levels of discount;

- do not require the airlines to deal exclusively with us in
the public sale of discounted airline tickets;

25

- often limit the manner in which we can sell inventory; and

- generally, can be terminated upon little or no notice.

As a general matter, during the course of our business, we are in
continuous dialogue with our major airline suppliers about the nature and extent
of their participation in the priceline.com system. In the second quarter 2002,
Northwest Airlines terminated its Airline Participation Agreement with us. While
we continue to negotiate with Northwest Airlines concerning its participation
and sell a limited number of Northwest airline tickets, we no longer receive
discounted "net-fares" from Northwest for sale on our website. Should any of our
other major suppliers significantly reduce their participation in the
priceline.com system for a sustained period of time or withdraw completely, our
business and results of operations could be materially and adversely affected.

Due to our dependence on the airline industry, we could be severely
affected by changes in that industry, and, in many cases, we will have no
control over such changes or their timing. For example, we believe that our
business has been adversely affected by the general reduction in airline
capacity and increase in airline load factors since September 11. Further, in
the aftermath of the September 11 terrorist attacks, several major U.S. airlines
are struggling financially and have either filed for reorganization under the
United States Bankruptcy Code or discussed publicly the risks of bankruptcy. To
the extent one of the major U.S. airlines that participates in our system
declared bankruptcy, it may be unable or unwilling to honor tickets sold for its
flights. Our policy in such event would be to direct customers seeking a refund
or exchange to the airline, and not to provide a remedy ourselves. Because we
are the merchant-of-record on sales of airline tickets to our customers,
however, we could experience a significant increase in demands for refunds or
credit card charge-backs from customers which would materially and adversely
affect our business. In addition, because our customers do not choose the
airlines on which they are to fly, the bankruptcy of a major U.S. airline or the
possibility of a major U.S. airline declaring bankruptcy could discourage
customers from booking airline tickets through us.

In addition, given the concentration of the airline industry,
particularly in the domestic market, major airlines that are not participating
in the priceline.com service, or our competitors, could exert pressure on other
airlines not to supply us with tickets. Moreover, the airlines may attempt to
establish their own buyer-driven commerce service or participate or invest in
other similar services, like Hotwire, a website that offers discounted fares on
opaque inventory, or Orbitz, that compete directly with us.

THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD
HARM OUR BUSINESS

We are heavily dependant on our suppliers. In the event that one of
our major suppliers voluntarily or involuntarily declares bankruptcy, is unable
to successfully emerge from bankruptcy, and we are unable to replace such
supplier, our business would be adversely affected. In addition, as discussed in
"WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES," because our
customers do not choose the airline, hotel or rental car company on which they
are booked, the bankruptcy of a major supplier or even the possibility of a
major supplier declaring bankruptcy, could discourage consumers from booking
their travel products through us. As of July 30, 2002, three of the five rental
car brands that supply our rental car business are currently under the
protection of the bankruptcy laws. If any or all of such companies discontinue
their business, and we are unable to find other suppliers, our business would
suffer. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - RECENT DEVELOPMENTS."

If one of our major suppliers merges or consolidates with, or is
acquired by, another company who either does not participate in the priceline
system or who participates on substantially lower levels, the surviving company
may elect not to participate in our system or to participate at lower levels
than they were previously participating. In such event, if we are unable to
divert sales to other suppliers, our business could be adversely affected.

INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR
FINANCIAL PERFORMANCE

We compete with both online and traditional sellers of the products
and services offered on priceline.com. Current and new competitors can launch
new sites at a relatively low cost. In addition, the traditional retail industry
for the products and services we offer is intensely competitive. In 2001, we saw
the continuation of a trend in the

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online travel industry toward vertical integration. For example, in October
2001, Cendant Corporation, a diversified global provider of business and
consumer services which owns, among other things, Avis and is the world's
largest franchiser of hotels, purchased online travel provider Cheaptickets.com
as well as Galileo International, Inc., a global distribution system. In
addition, in February 2002, USA Networks, Inc., which owns a controlling stake
in Hotel Reservations Network, acquired a controlling stake in Expedia, Inc. If
this trend continues, we might not be able to effectively compete with industry
conglomerates that have access to greater and more diversified resources than we
do.

We currently or potentially compete with a variety of companies with
respect to each product or service we offer. With respect to travel products,
these competitors include:

- Internet travel services such as Expedia,
Travelocity.com, Orbitz, Trips.com and Hotwire, a
website that offers discounted fares on opaque
inventory;

- traditional travel agencies;

- consolidators and wholesalers of airline tickets and
other travel products, including online consolidators
such as Hotel Reservation Network and Cheaptickets.com;

- individual or groups of airlines, hotels, rental car
companies, cruise operators and other travel service
providers (all of which may provide services by
telephone or through a website); and

- operators of travel industry reservation databases such
as Worldspan and Sabre.

A number of airlines, including a number that participate in our
system, have invested in and offer discount airfares and travel services through
the Orbitz internet travel service, and a number of airlines, including a number
that participate in our system, participate in and have received an equity stake
from Hotwire. The June 2001 launch of Orbitz has had a strong impact on the
online travel industry. Specifically, because Orbitz is airline-owned, it is in
a position to forego certain revenue streams upon which other online travel
suppliers may be dependant, such as commissions and global distribution system
fees. Orbitz's prices, which unlike ours, are disclosed to the consumer, have
typically been lower than other online travel providers offering disclosed price
fares.

Hotwire, which was launched in October 2000, provides airline tickets,
hotel room nights and rental car reservations at disclosed prices, although
supplier identity and flight times remain opaque. Since its launch, Hotwire has
been successful in establishing itself in the online travel marketplace, through
aggressive advertising which has had the effect of decreasing our market share.
If we are unable to effectively compete with Hotwire, our results will suffer.
In addition, in February 2002, several major hotel brands announced the creation
of Hotel Distribution System, a joint venture to market hotel rooms over the
Internet through multiple websites. Competition from these and other sources
could have a material adverse effect on our business, results of operations and
financial condition.

With respect to financial service products, our competitors include
banks and other financial institutions, and online and traditional mortgage and
insurance brokers, including mortgage.com, Quicken Mortgage, E-Loan, LendingTree
and iOwn, Inc.

With respect to long distance and wireless services, our current or
potential competitors include long distance and wireless providers, local
exchange providers that may be entering the long distance market and Internet
Protocol telephone services.

With respect to the sale of new automobiles, our competitors include
online companies as well as traditional car dealers, many of which offer online
shopping capabilities.

We potentially face competition from a number of large Internet
companies and services that have expertise in developing online commerce and in
facilitating Internet traffic, including Amazon.com and Yahoo!, who could

27

choose to compete with us either directly or indirectly through affiliations
with other e-commerce or off-line companies. Other large companies with strong
brand recognition, technical expertise and experience in Internet commerce could
also seek to compete with us. Competition from these and other sources could
have a material adverse effect on our business, results of operations and
financial condition.

Many of our current and potential competitors, including Internet
directories and search engines and large traditional retailers, have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources than
we have. Some of these competitors may be able to secure products and services
on more favorable terms than we can. In addition, many of these competitors may
be able to devote significantly greater resources to: (1) marketing and
promotional campaigns, (2) attracting traffic to their websites, (3) attracting
and retaining key employees, (4) securing vendors and inventory and (5) website
and systems development.

Increased competition could result in reduced operating margins and
loss of market share and could damage our brand. There can be no assurance that
we will be able to compete successfully against current and future competitors
or that competition will not have a material adverse effect on our business,
results of operations and financial condition.

FURTHER TERRORIST ATTACKS OR HOSTILITIES OR THE FEAR OF FUTURE ATTACKS
COULD HAVE A NEGATIVE IMPACT ON OUR COMPANY

Our business, like most in the travel industry, was directly and
adversely impacted by the terrorist attacks of September 11, 2001. We
experienced an immediate and substantial decline in demand for our travel
products in the days following the attacks and a significant increase in
customer service costs and ticket refunds and cancellations. Advance bookings
for airline travel around the September 2002 time frame have, to date, been
weak; we believe this is attributable in part to ongoing fears surrounding the
anniversary of the September 11th terrorist attacks. Further terrorist attacks,
the fear of future attacks, whether in September or otherwise, or hostilities
within the United States or abroad (whether or not such attacks involve
commercial aircraft) or continued or increased hostilities in the Middle East or
elsewhere, are likely to contribute to a general reluctance by the public to
travel by air and, as a result, materially and adversely affect our business and
results of operations.

NEW BUSINESSES WE MAY ENTER OR OUR EXISTING LICENSEES MAY NOT BE
SUCCESSFUL

We have entered into, and may enter into in the future, licensing or
other arrangements with third parties in connection with the expansion of the
priceline.com service. For example, we license our name and business model to
pricelinemortgage in connection with our home financing services and to
priceline.com Europe, a majority owned subsidiary, and Hutchison-Priceline in
connection with the development of our business model in Europe and Asia,
respectively. These new businesses typically incur start-up costs and operating
losses and may not be successful. Both priceline.com Europe and
Hutchison-Priceline have operating losses and will continue to have operating
losses for the foreseeable future. If these new businesses are not favorably
received by consumers or are unsuccessful, the association of our brand name and
business model with these new entities may adversely affect our business and
reputation and may dilute the value of our brand name. Further, to the extent
that these new businesses are not successful, we may not be able to recover or
be reimbursed for our ongoing costs associated with their development and our
investment could be impaired, which could have a material adverse effect on our
business and results of operations.

We recorded approximately $23.6 million of goodwill on our balance
sheet as a result of our acquisition of priceline.com Europe at the end of 2001.
We reviewed the valuation of our goodwill in relationship to both the current
performance of priceline.com Europe as well as the future business prospects of
priceline.com Europe. While we have thus far successfully managed priceline.com
Europe to meet and exceed the majority of the financial goals that were
established at the time of our acquisition, there can be no assurance that
priceline.com Europe will continue to do so. Such failure could result in our
recognizing a charge for the impairment of goodwill associated with our
investment in priceline.com Europe.

In addition, we hold a convertible note with a face amount of
approximately $11.1 million that is owed to us

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by Hutchison-Priceline and is convertible into approximately 35% (on a fully
diluted basis) of the equity of Hutchison-Priceline. We made this investment at
the formation of Hutchison-Priceline in 2000. Hutchison-Priceline officially
launched its business operations in the second quarter of 2002 and, as is
typical of a newly launched business, it is incurring substantial operating
losses consistent with its business plan. We expect to make an additional
investment in convertible notes of Hutchison-Priceline during the third quarter
of 2002. Should Hutchison-Priceline fail to meet its future business objectives,
the value of our note is likely to become impaired and could result in a charge
to our income statement for the write-down of our note. Our investment in
Hutchison-Priceline is in the form of a convertible note and we do not control
Hutchison-Priceline operations. If we elect to convert the convertible note to
equity it would result in our recognizing approximately 35% of the operating
results of Hutchison-Priceline through the "other income (loss)" line item of
our income statement which possibly could have a material and adverse effect on
our results of operations.

OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD AND
CHARGE-BACKS

To date, our results have been impacted by purchases made using
fraudulent credit cards. Because we act as the merchant-of-record, we are held
liable for fraudulent credit card transactions on our website as well as other
payment disputes with our customers. Accordingly, we calculate and record an
allowance for the resulting credit card charge-backs. During the second half of
2001, we launched a company-wide credit card charge-back reduction project aimed
at preventing fraud. To date, this project has been successful in reducing
fraud, however, if we are unable to continue to reduce the amount of credit card
fraud on our website, our business could be adversely affected.

POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL
FORECASTING DIFFICULT

Our revenues and operating results have varied significantly from
quarter to quarter and our revenues and operating results may continue to vary
significantly from quarter to quarter. As a result, quarter to quarter
comparisons of our revenues and operating results may not be meaningful. In
addition, due to our limited operating history, a business model that is,
especially when compared to "brick and mortar" companies, still relatively new
and unproven, and an uncertain environment in the travel industry, it may be
difficult to predict our future revenues or results of operations accurately. In
late 2000, our operating results fell below the expectations of securities
analysts and investors and may, in one or more future quarters, fall below such
expectations again. If this happens, the trading price of our common stock would
almost certainly be materially and adversely affected.

WE MAY NOT BE ABLE TO INTRODUCE NEW PRODUCTS AND SERVICES

Should we decide to introduce additional products, we may incur
substantial expenses and use significant resources. However, we may not be able
to attract sellers, other participants and licensees to provide such products
and services or consumers to purchase such products and services through the
priceline.com service. In addition, if we or our licensees launch new products
or services that are not favorably received by consumers, our reputation and the
value of the priceline.com brand could be damaged.

The great majority of our experience to date is in the travel
industry. The travel industry is characterized by "expiring" inventories. For
example, if not used by a specific date, an airline ticket, hotel room
reservation or rental car reservation has no value. The expiring nature of the
inventory creates incentives for airlines, hotels and rental car companies to
sell seats, hotel room reservations or rental car reservations at reduced rates.
Because we have only limited experience in selling "non-expiring" inventories on
the priceline.com service, such as new cars or financial services, we cannot
predict whether the priceline.com business model can be successfully applied to
such products and services.

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IF WE LOSE OUR KEY PERSONNEL OR CANNOT RECRUIT ADDITIONAL PERSONNEL,
OUR BUSINESS MAY SUFFER

We depend on the continued services and performance of our executive
officers and other key personnel. We do not have "key person" life insurance
policies. If we do not succeed in attracting new employees or retaining and
motivating current and future employees or executive officers, our business
could suffer significantly. Our ability to retain key employees could be
materially adversely affected by recent developments concerning priceline.com
and the decline in the market price of our common stock and by limitations on
our ability to pay cash compensation that is equivalent to cash paid by
traditional businesses and limitations imposed by our employee benefit plans to
issue additional equity incentives.

TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 31% OF OUR STOCK

Hutchison Whampoa Limited and its 49.94% shareholder, Cheung Kong
(Holdings) Limited, collectively beneficially owned approximately 31% of our
outstanding common stock as of June 30, 2002, based on public filings with the
Securities and Exchange Commission. Together, Cheung Kong (Holdings) Limited and
Hutchison Whampoa Limited have appointed three of the twelve members of our
Board of Directors. As a result of their ownership and positions, Cheung Kong
(Holdings) Limited and Hutchison Whampoa Limited collectively are able to
significantly influence all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may also have the effect of delaying or
preventing a change in control of our company. In addition, both Cheung Kong
(Holdings) Limited and Hutchison Whampoa Limited have registration rights with
respect to their shares of priceline.com. On September 20, 2001, Cheung Kong
(Holdings) Limited and Hutchison Whampoa Limited withdrew a request they had
made for us to file a shelf registration statement to sell shares and obtained
rights to purchase up to a 37.5% stake (on a fully diluted basis) in
priceline.com, subject to certain limitations. There can be no assurance that
Cheung Kong (Holdings) Limited, Hutchison Whampoa Limited, or both, will not
make another request for registration and dispose of all or substantially all of
our common stock held by them at any time after the effectiveness of a shelf
registration statement. Sales of significant amounts of shares held by Cheung
Kong (Holdings) Limited or Hutchison Whampoa Limited, or the prospect of these
sales, could adversely affect the market price of our common stock. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - RECENT DEVELOPMENTS."

WE RELY ON THIRD-PARTY SYSTEMS

We rely on certain third-party computer systems and third-party
service providers, including the computerized central reservation systems of the
airline and hotel industries to satisfy demand for airline tickets and hotel
room reservations. In particular, our travel business is substantially dependent
upon the computerized reservation system of Worldspan, an operator of a database
for the travel industry. Any interruption in these third-party services systems,
including Worldspan's, or deterioration in their performance could prevent us
from booking airline, hotel and rental car reservations and have a material
adverse effect on our business. Our agreements with third-party service
providers are terminable upon short notice and often do not provide recourse for
service interruptions. In the event our arrangement with any of such third
parties is terminated, we may not be able to find an alternative source of
systems support on a timely basis or on commercially reasonable terms and, as a
result, our business and results of operations could be materially and adversely
affected.

Substantially all of our computer hardware for operating our services
is currently located at Exodus Communications, Inc. in New Jersey. On September
26, 2001, Exodus filed a petition for Chapter 11 bankruptcy protection. On
February 1, 2002, Exodus announced that Cable and Wireless plc had completed the
acquisition of a majority of the business activities of Exodus and substantially
all of its U.S. customer contracts, including our contract. If Exodus is unable,
for any reason, to support our primary web hosting facility, we would need to
activate our secondary site at AT&T which would be a substantial burden to us
and adversely affect our results.

Some of our communications infrastructure is provided by WorldCom,
Inc. and Metromedia Fiber Networks, Inc. Both of these companies have filed
for bankruptcy protection. If WorldCom or Metromedia Fiber Networks are

30

unable, for any reason, to support the communications infrastructure that they
provide us, instabilities in our systems could increase until such time as we
were able to replace their services.

We do not maintain fully redundant systems or hosting services, and we
do not carry business interruption insurance sufficient to compensate us for
losses that may occur.

CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS

Substantially all of our computer hardware for operating our services
currently is located at the facilities of Exodus Communications, Inc. in New
Jersey. These systems and operations are vulnerable to damage or interruption
from human error, floods, fires, power loss, telecommunication failures and
similar events. They are also subject to break-ins, sabotage, intentional acts
of vandalism and similar misconduct. In addition, we could experience
interruptions as a result of Exodus' bankruptcy or the transfer of its business
to Cable and Wireless plc. Despite any precautions we may take, the occurrence
of a natural disaster or other unanticipated problems at the Exodus facility
could result in lengthy interruptions in our services. In addition, the failure
by Exodus to provide our required data communications capacity could result in
interruptions in our service. Any system failure that causes an interruption in
service or decreases the responsiveness of the priceline.com service could
impair our reputation, damage our brand name and materially adversely affect our
business and results of operations.

If our systems cannot be expanded to cope with increased demand or
fails to perform, we could experience:

- unanticipated disruptions in service;

- slower response times;

- decreased customer service and customer satisfaction; or

- delays in the introduction of new products and services;

any of which could impair our reputation, damage the priceline.com
brand and materially and adversely affect our revenues. Publicity about a
service disruption also could cause a material decline in our stock price.

Like many online businesses, we have experienced system failures from
time to time. For example, in May 2001, our primary website was interrupted for
a period of 12 hours. In addition to placing increased burdens on our
engineering staff, these outages create a significant amount of user questions
and complaints that need to be addressed by our customer support personnel. Any
unscheduled interruption in our service could result in an immediate loss of
revenues that can be substantial and may cause some users to switch to our
competitors. If we experience frequent or persistent system failures, our
reputation and brand could be permanently harmed. We have been taking steps to
increase the reliability and redundancy of our system. These steps are
expensive, may reduce our margins and may not be successful in reducing the
frequency or duration of unscheduled downtime.

We use internally developed systems to operate the priceline.com
service, including transaction processing and order management systems that were
designed to be scaleable. However, if the number of users of the priceline.com
service increases substantially, we will need to significantly expand and
upgrade our technology, transaction processing systems and network
infrastructure. We do not know whether we will be able to accurately project the
rate or timing of any such increases, or expand and upgrade our systems and
infrastructure to accommodate such increases in a timely manner.

OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY

We regard our intellectual property as critical to our success, and we
rely on trademark, copyright and patent law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. If we are not successful
in protecting our intellectual property, there could be a material adverse
effect on our business.

31

While we believe that our issued patents and pending patent
applications help to protect our business, there can be no assurance that:

- any patent can be successfully defended against challenges
by third parties;

- pending patent applications will result in the issuance of
patents;

- competitors or potential competitors of priceline.com will
not devise new methods of competing with us that are not
covered by our patents or patent applications;

- because of variations in the application of our business
model to each of our products and services, our patents will
be effective in preventing one or more third parties from
utilizing a copycat business model to offer the same product
or service in one or more categories;

- new prior art will not be discovered which may diminish the
value of or invalidate an issued patent; or

- a third party will not have or obtain one or more patents
that prevent us from practicing features of our business or
will require us to pay for a license to use those features.

There has been recent discussion in the press regarding the
examination and issuance of so called "business-method" patents. As a result,
the United States Patent and Trademark Office has indicated that it intends to
intensify the review process applicable to such patent applications. The new
procedures are not expected to have a direct effect on patents already granted.
We cannot anticipate what effect, if any, the new process will have on our
pending patent applications.

We pursue the registration of our trademarks and service marks in the
U.S. and internationally. However, effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which our
services are made available online. We have licensed in the past, and expect to
license in the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation.

LEGAL PROCEEDINGS

We are a party to the legal proceedings described in Note 8 to
Unaudited Consolidated Financial Statements included in this Form 10-Q and Part
I, Item 3 of our Annual Report on Form 10-K for the year ended December 31,
2001. The defense of the actions described in Note 8 may increase our expenses
and an adverse outcome in any of such actions could have a material adverse
effect on our business and results of operations.

WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER
CHANGES

The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
announcements, introductions and enhancements and changing consumer demands. We
may not be able to keep up with these rapid changes. In addition, these market
characteristics are heightened by the emerging nature of the Internet and the
apparent need of companies from many industries to offer Internet-based products
and services. As a result, our future success will depend on our ability to
adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service in response to competitive service and product
offerings and the evolving demands of the marketplace. In addition, the
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require us to incur
substantial expenditures to modify or adapt our services or infrastructure.

32

ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS

The secure transmission of confidential information over the Internet
is essential in maintaining consumer and supplier confidence in the
priceline.com service. Substantial or ongoing security breaches - whether
instigated internally or externally - on our system or other Internet-based
systems could significantly harm our business. We currently require buyers to
guarantee their offers with their credit card, either online or through our
toll-free telephone service. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
discoveries or other developments could result in a compromise or breach of the
technology used by us to protect customer transaction data.

We incur substantial expense to protect against and remedy security
breaches and their consequences. However, we cannot guarantee that our security
measures will prevent security breaches. A party that is able to circumvent our
security systems could steal proprietary information or cause significant
interruptions in our operations. For instance, several major websites have
experienced significant interruptions as a result of improper direction of
excess traffic to those sites, and computer viruses have substantially disrupted
e-mail and other functionality in a number of countries, including the United
States. Security breaches also could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our insurance policies carry
low coverage limits, which may not be adequate to reimburse us for losses caused
by security breaches.

We also face risks associated with security breaches affecting third
parties conducting business over the Internet. Consumers generally are concerned
with security and privacy on the Internet and any publicized security problems
could inhibit the growth of the Internet and, therefore, the priceline.com
service as a means of conducting commercial transactions.

OUR STOCK PRICE IS HIGHLY VOLATILE

The market price of our common stock is highly volatile and is likely
to continue to be subject to wide fluctuations in response to factors such as
the following, some of which are beyond our control:

- quarterly variations in our operating results;

- operating results that vary from the expectations of
securities analysts and investors;

- changes in expectations as to our future financial
performance, including financial estimates by securities
analysts and investors;

- changes in our capital structure;

- changes in market valuations of other Internet or online
service companies;

- announcements of technological innovations or new services
by us or our competitors;

- announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;

- loss of a major seller participant, such as an airline or
hotel chain;

- changes in the status of our intellectual property rights;

- lack of success in the expansion of our business model
horizontally or geographically;

- announcements by third parties of significant claims or
proceedings against us or adverse developments in pending
proceedings;

- additions or departures of key personnel; and

33

- stock market price and volume fluctuations.

Sales of a substantial number of shares of our common stock could
adversely affect the market price of our common stock by introducing a large
number of sellers to the market. Given the volatility that exists for our
shares, such sales could cause the market price of our common stock to decline.

In addition, the trading prices of Internet stocks in general,
including ours, have experienced extreme price and volume fluctuations. To the
extent that the public's perception of the prospects of Internet or e-commerce
companies is negative, our stock price could decline further regardless of our
results. Other broad market and industry factors may decrease the market price
of our common stock, regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions, such as a
recession or interest rate or currency rate fluctuations, also may decrease the
market price of our common stock. The market value of e-commerce stocks has
declined dramatically recently based on profitability and other concerns. The
recent declines in the value of our common stock and market conditions could
adversely affect our ability to raise additional capital.

We are defendants in a number of securities class action litigations.
In the past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its securities.
To the extent our stock price declines or is volatile, we may in the future be
the target of additional litigation. Securities and other litigation could
result in substantial costs and divert management's attention and resources. See
Part II, Item 1 - Legal Proceedings

UNCERTAINTY REGARDING STATE TAXES

We file tax returns in such states as required by law based on
principles applicable to traditional businesses. In addition, we do not collect
sales or other similar taxes in respect of transactions conducted through the
priceline.com service (other than the federal air transportation tax). However,
one or more states could seek to impose additional income tax obligations or
sales tax collection obligations on companies, such as ours, which engage in or
facilitate online commerce. A number of proposals have been made at state and
local levels that could impose such taxes on the sale of products and services
through the Internet or the income derived from such sales. Such proposals, if
adopted, could substantially impair the growth of e-commerce and adversely
affect our opportunity to achieve and sustain profitability.

REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS

The products and services we offer through the priceline.com service
are regulated by federal and state governments. Our ability to provide such
products and services is and will continue to be affected by such regulations.
The implementation of unfavorable regulations or unfavorable interpretations of
existing regulations by courts or regulatory bodies could require us to incur
significant compliance costs, cause the development of the affected markets to
become impractical and otherwise adversely affect our financial performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Priceline.com currently has no floating rate indebtedness, holds no
derivative instruments other than through investments in licensees and does not
earn significant foreign-sourced income. Accordingly, changes in interest rates
or currency exchange rates do not generally have a direct material effect on
priceline.com's financial position. However, changes in currency exchange rates
may affect the cost of international airline tickets and international hotel
reservations offered through the priceline.com service, and so indirectly affect
consumer demand for such products and priceline.com's revenue. In the event of
such weakness, such additional US dollars would have reduced purchasing power.
In addition, to the extent that changes in interest rates and currency exchange
rates affect general economic conditions, priceline.com would also be affected
by such changes. If the US dollar weakens versus the British Pound Sterling, we
may have to invest additional US dollars in priceline.com europe Ltd. to fund
its ongoing operations.

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

We held our Annual Meeting of Stockholders on May 23, 2002. There were
present, in person or by proxy, 191,637,343 shares of common stock at the Annual
Meeting. Following are descriptions of the maters voted on and the results of
such meeting:

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Please see Note 8 to the Notes to Unaudited Consolidated Financial
Statements included in this Form 10-Q and Part I, Item 3 of priceline.com's
Annual Report on Form 10-K for the year ended December 31, 2001.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

REPORTS ON FORM 8-K

On May 2, 2002, we furnished a report on Form 8-K in connection with
our first quarter 2002 earnings release. On May 23, 2002, we furnished a report
on Form 8-K in connection with our Annual Meeting of Stockholders and the
reaffirmation of second quarter 2002 guidance at the Goldman Sachs 3rd Annual
Internet News Media and E-Commerce Conference. On June 26, 2002, we furnished a
report on Form 8-K in connection with the update of our financial guidance for
the second quarter 2002.

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SIGNATURES

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

PRICELINE.COM INCORPORATED
(Registrant)

Date: August 14, 2002 By: /s/ Robert J. Mylod
----------------------------------
Name: Robert J. Mylod
Title: Chief Financial Officer

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