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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number 0-25581

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

        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 ý.    NO o.

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES ý.    NO o.

        Number of shares of Common Stock outstanding at November 8, 2004:

priceline.com Incorporated
Form 10-Q

For the Quarter Ended September 30, 2004

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PART I—FINANCIAL INFORMATION

Item 1.    Consolidated Condensed Financial Statements

priceline.com Incorporated
CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except share data)

See Notes to Unaudited Consolidated Financial Statements.

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priceline.com Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)

See Notes to Unaudited Consolidated Financial Statements.

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priceline.com Incorporated
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(unaudited)
(In thousands)

See Notes to Unaudited Consolidated Financial Statements.

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priceline.com Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)

See Notes to Unaudited Consolidated Financial Statements.

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priceline.com Incorporated
Notes to Unaudited Consolidated Financial Statements

1.    BASIS OF PRESENTATION

        Priceline.com Incorporated ("priceline.com" or the "Company") is responsible for the consolidated financial statements included in this document. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 consolidated 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. These statements should be read in combination with the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

        The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, priceline.com Europe Holdings N. V., and its majority-owned subsidiaries, Travelweb LLC and Active Hotels Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates in which the Company does not have control, but has the ability to exercise significant influence, are accounted for by the equity method.

        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 reclassifications have been made to the prior year financial information to conform to the current year presentation.

2.    BUSINESS ACQUISITIONS

Active Hotels Ltd.

        On September 21, 2004, Priceline.com Holdco U.K. Limited, a newly formed English subsidiary of priceline.com Incorporated, entered into a Sale and Purchase Agreement with shareholders and option holders of Active Hotels Ltd. ("Active Hotels"), one of Europe's leading online reservation providers to the hotel industry.

        The total consideration for all of the Active Hotels shares was £90 million (approximately $161 million), which was determined through arms-length negotiation and paid in cash.

        The acquisition has been accounted for as a purchase business combination. The Company's consolidated financial statements and results of operations include the consolidated accounts of Active Hotels since the acquisition in September 2004. Under the purchase method of accounting, the proportion of the assets acquired and liabilities assumed from Active Hotels are recorded at the date of acquisition, at their respective estimated fair values. The acquisition cost, including transaction costs, was allocated to the underlying net assets of Active Hotels in proportion to their respective preliminary estimated fair values. The Company obtained an independent valuation of the assets acquired and liabilities assumed, including the identification of intangible assets other than goodwill. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.

        Assets acquired consisted principally of cash and intangible assets. Liabilities assumed consisted principally of accounts payable, accrued expenses and deferred taxes. Goodwill resulting from this transaction amounted to approximately $96 million.

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        A preliminary list of the estimated fair value and useful lives of the most significant acquired identifiable intangible assets is as follows:

        In connection with the Company's acquisition of Active Hotels, the Company sold a 2.3% equity interest in Active Hotels (the "Purchased Shares") to a group of Active Hotels employees for a cash purchase price per share equal to the purchase price per share paid by the Company to acquire Active Hotels. The Company also granted restricted stock (the "Granted Shares") representing an additional 1.1% equity interest in its Active Hotels subsidiary to certain employees of Active Hotels. Such amount will be expensed over the respective vesting period.

Active Hotels Revenue Recognition

        Active Hotels principal source of revenues comes from commission payments that it receives from hotel suppliers for acting as an agent in the booking of hotel rooms by its customers. Active Hotels' hotel suppliers are billed for their commission payments owed to Active Hotels and Active Hotels recognizes revenue at the time that Active Hotels' customers complete their stay at the hotel. Commissions earned appear as Agency revenues in our consolidated statements of operations.

Travelweb LLC.

        In May 2004, Lowestfare.com, a wholly-owned subsidiary of (the Company, acquired 71.4% of the equity interest in Travelweb LLC, a Delaware limited liability company ("Travelweb") owned by Marriott International, Inc. ("Marriott"), Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), InterContinental Hotels Group ("InterContinental") and Pegasus Solutions, Inc. ("Pegusus"), or their affiliates. Travelweb is a full-service, automated hotel distribution network founded by Marriott, Hilton, Hyatt, Starwood Hotels, Pegasus and InterContinental. The equity interests acquired were all but those held by InterContinental. The Company entered into an agreement with InterContinental whereby the Company may acquire those interests at a future date.

        The purchase price for the interests acquired was $20.8 million, which the Company paid in cash; in addition, the Company will potentially pay an earn-out after 12 months of approximately 954,547 shares of its common stock to the sellers in the event certain performance goals are met.

        The purchase price for the equity interests in Travelweb was determined through arms' length negotiations between management of the Company on the one hand and Travelweb members on the other hand. Prior to the acquisition, Lowestfare.com owned 14.3% of the equity interest in Travelweb, and Jeffery Boyd, a director of the Company and its Chief Executive Officer and President, was a member of the board of directors of Travelweb. Jeffery Boyd is also a member of the board of directors

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of Lowestfare.com and its Chief Executive Officer. All of Travelweb's founding hotel chains also participate in the Company's Name Your Own Price® hotel service.

        The acquisition increased Lowestfare.com's total ownership of Travelweb to 85.7%. The aggregate investment in Travelweb to date is $28.2 million, consisting of $20.8 million paid in cash in May 2004, the Company's initial 2003 investment in Travelweb and direct acquisition costs.

        The acquisition has been accounted for as a purchase business combination. The Company's consolidated financial statements and results of operations include the consolidated accounts of Travelweb since the acquisition of the additional 71.4% in May 2004. Prior to the May 2004 acquisition, the Company accounted for its investment in Travelweb under the equity method of accounting. Under the purchase method of accounting, the proportion of the assets acquired and liabilities assumed from Travelweb are recorded at the date of acquisition, at their respective estimated fair values. The acquisition cost, including transaction costs, was allocated to the underlying net assets of Travelweb in proportion to their respective estimated fair values. The Company obtained an independent valuation of the assets acquired and liabilities assumed, including the identification of intangible assets other than goodwill. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.

        In connection with the acquisition, the Company expects to incur costs of approximately $2.5 million for severance and contract terminations related to the acquired business. The Company has identified and notified the affected Travelweb personnel and vendors. Such exiting costs are expected to be paid out in cash and $708,000 was paid as of September 30, 2004.

        The proportionate fair value of assets acquired and liabilities assumed amounted to approximately $23.8 million and $19.7 million, respectively. Assets acquired consisted principally of cash and intangible assets. Liabilities assumed consisted principally of accounts payable, accrued expenses and deferred merchant bookings. Goodwill resulting from this transaction amounted to approximately $24.1 million.

        A preliminary list of the estimated fair value and useful lives of acquired identifiable intangible assets with determinable useful lives is as follows:

Travelweb Revenue Recognition and Deferred Merchant Bookings

        Merchant revenues for Travelweb are derived from transactions where its customers use the Travelweb service to purchase hotel rooms from hotel suppliers at rates which are subject to contractual limitation. Charges are billed to customers at the time of booking and are included in Deferred Merchant Bookings until the customer completes his or her stay. Such amounts are generally refundable upon cancellation prior to stay, subject to cancellation penalties in certain cases. Merchant

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revenues and accounts payable to the hotel supplier are recognized at the conclusion of the customer's stay at the hotel. Travelweb records the difference between the selling price and the cost of the hotel room as merchant revenue.

Pro Forma Results.

        The following unaudited pro forma financial information presents the combined results of operations of the Company to give effect to the acquisition of Travelweb and Active Hotels as if the acquisitions had occurred as of the beginning of the periods presented. These statements include certain one-time purchase accounting entries and are not necessarily indicative of the actual results of operations that might have occurred, nor are they necessarily indicative of expected results in the future.

3.    STOCK BASED EMPLOYEE COMPENSATION

        The following table summarizes relevant information as to reported results under the Company's APB Opinion No. 25 method of accounting for stock options with supplemental information as if the

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fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation," had been applied (in thousands, except per share amounts):

        The fair value of stock options granted was determined on the date of grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following weighted average assumptions:

        The Company records stock based employee compensation expense related to the amortization of restricted stock awards made to employees. All restricted stock grants to employees represent a fixed number of shares. Accordingly, pursuant to APB Opinion No. 25, the values associated with the awards are fixed at the date of grant and compensation expense is recognized ratably over the vesting period of the grant.

4.    NET INCOME PER SHARE

        The Company computes basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings per Share." SFAS No. 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 potential dilutive common shares outstanding.

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        For purposes of calculating basic and diluted earnings per share, we used the following weighted average shares outstanding (in thousands):

(1)

Potentially dilutive common shares includes shares which would be issued upon conversion of convertible debt. These shares are not included in the Diluted Shares provided above.

5.    RECENT ACCOUNTING PRONOUNCEMENTS

        In September 2004, the Emerging Issues Task Force ("EITF") issued statement EITF Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08"). Contingently convertible debt instruments are generally convertible into common shares of an issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (the "market price contingency"). EITF 04-08 requires that shares issuable upon conversion of contingently convertible debt, such as the Company's 2.25% Convertible Senior Notes due January 15, 2005 (the "2.25% Notes") and 1.00% Convertible Senior Notes due August 1, 2010 (the "1% Notes" and, together with the 2.25% Notes, the "Notes"), be included in diluted earnings per share computations regardless of whether the market price contingency contained in the debt instrument has been met. The Company has historically excluded the potential dilutive effect of the conversion feature from diluted earnings per share. EITF 04-08 is effective for reporting periods ending after December 15, 2004 and requires restatement of prior periods to the extent applicable. The adoption of EITF 04-08 will require the Company to include approximately 3,125,000 and 2,635,046 additional shares, respectively, of common stock underlying the 1% Notes and 2.25% Notes in its diluted earnings per share calculation. The dilutive impact of the additional shares in the calculation of our 2003 and 2004 earnings per share will be substantially offset by exclusion of approximately $1 million of quarterly interest and amortization expense associated with the Notes. The Company does, however, expect that the adoption of EITF 04-08 will result in a $.01 reduction in its reported earnings per share for the second quarter of 2004. The adoption of EITF 04-08 could result in a material reduction in our reported earnings per share in future periods.

        In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities". In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation issues. The Company does not hold any significant interest in, nor is it a primary beneficiary of any variable interest entities.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is

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generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has limited involvement with derivative financial instruments and does not use them for trading or speculative purposes. As of September 30, 2004, the Company's only derivative financial instrument is an interest rate hedge agreement in relation to $45 million of the outstanding borrowings of the Convertible Senior Notes. The adoption of SFAS No. 149 on July 1, 2003, as required, had no impact on the Company's consolidated financial statements.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the new standard on July 31, 2003, with no effect on the Company's consolidated financial statements.

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6.    RESTRUCTURING

        At September 30, 2004, the restructuring liability consisted of estimated remaining severance, real estate costs and professional fees related to the Company's 2000 and 2002 restructuring activities. A roll forward of the Company's restructuring obligation is as follows (in thousands):

7.    SHORT-TERM INVESTMENTS

        Short-term investments consist of investments with maturities exceeding three months. The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". All marketable securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses included in "Accumulated Other Comprehensive Income" on the Consolidated Balance Sheet and Statement of Changes in Stockholders' Equity. The Company recorded an unrealized loss of approximately $563,000 for the nine months ended September 30, 2004. The specific-identification method is used to determine the cost of all securities. The marketable securities are presented as current assets in the accompanying Consolidated Balance Sheets, as they are available to meet the short-term working capital needs of the Company.

        The fair value of the investments is based on the quoted market price of the securities at the balance sheet dates. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

        The following table summarizes, by major security type, the Company's marketable securities as of September 30, 2004 (in thousands):

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        Contractual maturities of marketable securities classified as available-for-sale as of September 30, 2004 are as follows (in thousands):

        No significant gains or losses were realized for the three and nine months ended September 30, 2004.

8.    INTANGIBLE ASSETS

        The Company's intangible assets consist of the following (in thousands):

        Intangible assets with determinable lives are primarily amortized on a straight-line basis. Intangible assets amortization expense was approximately $1.2 million and $153,000 for the three months ended September 30, 2004 and 2003, respectively, and approximately $1.9 million and $347,000 for the nine months ended September 30, 2004 and 2003.

        The estimated amortization expense for the amortizable acquired intangible assets for the remainder of 2004 and years thereafter is expected to be as follows (in thousands):

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9.    OTHER ASSETS

        Other assets at September 30, 2004 and December 31, 2003 consist of the following (in thousands):

        Investment in pricelinemortgage represents the Company's 49% equity investment in Priceline Mortgage Company, LLC dba pricelinemortgage and, accordingly, the Company recognizes its pro rata share of pricelinemortgage's operating results, not to exceed an amount that the Company believes represents the investments' estimated fair value. The Company recognized approximately $9,000 and $422,000 of income from its investment in pricelinemortgage for the three and nine months ended September 30, 2004, respectively, and approximately $1.6 and $2.9 million for each of the three and nine months ended September 30, 2003. The Company earned advertising fees from pricelinemortgage of approximately $3,000 and $82,000 for the three and nine months ended September 30, 2004, and approximately $110,000 and $511,000 for the three and nine months ended September 30, 2003.

        Deferred debt issuance costs arose from the Company's issuance of $125 million aggregate principal amount of 1% Convertible Senior Notes due August 1, 2010 and the issuance of $100 million aggregate principal amount of 2.25% Convertible Senior Notes due January 15, 2025. Deferred debt issuance costs of $7.6 million, consisting primarily of underwriting commissions and professional service fees, are being amortized using the effective interest rate method over approximately five year periods.

10.    CONVERTIBLE DEBT

        In August 2003, the Company issued, in a private placement, $125 million aggregate principal amount of Convertible Senior Notes due August 1, 2010, with an interest rate of 1%. The Company used the net proceeds of the offering for general corporate purposes, strategic purposes and working capital requirements. The notes are convertible, subject to certain conditions, into priceline.com's common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $40.00 per share, subject to adjustment upon the occurrence of specified events. Each $1,000 principal amount of notes will initially be convertible into 25 shares of the Company's common stock if, on or prior to August 1, 2008, the closing price of the Company's common stock for at least 20 trading days in the 30 consecutive trading days ending on the first day of a conversion period is more than 110% of the then current conversion price of the notes, or after August 1, 2008, the closing price of the Company's common stock is more than 110% of the then current conversion price of the notes. The notes are also convertible in certain other circumstances, such as a change in control of the Company. In addition, the notes will be redeemable at the Company's option beginning in 2008, and the holders may require the Company to repurchase the notes on August 1, 2008 or in certain other circumstances. Interest on the notes is payable on February 1 and August 1 of each year.

        In November 2003, the Company entered into an interest rate swap agreement whereby it swapped the fixed 1% interest on its Convertible Senior Notes due August 1, 2010 for a floating interest rate based on the 3-month U.S. Dollar LIBOR, minus the applicable margin of approximately 221 basis points, on $45 million notional value of debt. This agreement expires August 1, 2010. The Company designated this interest rate swap agreement as a fair value hedge. The changes in the fair value of the interest rate swap agreement and the underlying debt are recorded as offsetting gains and losses in interest income and expense in the Consolidated Statement of Operations. Hedge ineffectiveness of approximately $40,000 was recorded as a reduction of interest income for the three months ended

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September 30, 2004. The fair value (cost if terminated) of this swap as of September 30, 2004 was approximately $498,000 and has been recorded in other long-term liabilities and as an adjustment to the carrying value of debt.

        In June 2004, the Company issued, in a private placement, $100 million aggregate principal amount of Convertible Senior Notes due January 15, 2025, with an interest rate of 2.25%. The Company used the net proceeds of the offering for general corporate purposes, strategic purposes and working capital requirements. The notes are convertible, subject to certain conditions, into priceline.com's common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $37.95 per share, subject to adjustment upon the occurrence of specified events. Each $1,000 principal amount of notes will initially be convertible into 26.3505 shares of the Company's common stock if, on or prior to January 15, 2025, certain conditions occur. The notes are also convertible in certain other circumstances, such as a change in control of the Company. In the event that all or substantially all of the Company's common stock is acquired prior to January 15, 2010, in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments to the holders of amounts ranging from $0 to $19.1 million depending upon the date of the transaction and the then current stock price of the Company. The Company's obligation to make this payment is treated as an embedded derivative which, pursuant to SFAS 133, must be assigned its own value separate and apart from the value of the convertible Senior Notes. The estimated value of the derivative has been established based upon several quantitative and qualitative factors and will be amortized as interest expense ratably over approximately a 5¹/2 year period. Pursuant to SFAS 133, any subsequent changes in the value of the derivative will be recognized as income or expense in the period in which the change in value occurs. In addition, the notes will be redeemable at the Company's option beginning January 20, 2010, and the holders may require the Company to repurchase the notes on January 15, 2010, 2015 and 2020, or in certain other circumstances. Interest on the notes is payable on January 15 and July 15 of each year. The Company filed a Registration Statement on Form S-3 for the resale of the notes and the shares of common stock issuable upon conversion of the notes; however, the SEC has not yet declared the Registration Statement to be effective.

11.    TREASURY STOCK

        On July 31, 2002, the Company's Board of Directors authorized the repurchase of up to $40 million of the Company's common stock from time to time in the open market or in privately negotiated transactions. As part of the stock repurchase program, the Company purchased 897,953 shares of its common stock for its treasury during the period ended December 31, 2002 at an aggregate cost of approximately $11.8 million and purchased an additional 690,000 shares of its common stock for its treasury during the year ended December 31, 2003 at an aggregate cost of approximately $12.2 million. All shares were purchased at prevailing market prices. The Company did not repurchase any shares during the nine months ended September 30, 2004.

        The Company may continue or, from time to time, commence or suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company's complete discretion.

        As of September 30, 2004, there were approximately 2.5 million shares of the Company's common stock held in treasury.

12.    REDEEMABLE PREFERRED STOCK

        In August 2004 and 2003, the Company issued Delta Air Lines, Inc. a dividend on the Series B Redeemable Preferred Stock in the amount of 40,240 shares of the Company's common stock. As a

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result, the Company recorded a non-cash dividend of $740,000 and $1.2 million in the third quarter of 2004 and 2003, respectively.

13.    MARRIOTT WARRANTS

        In March 2003, in connection with the renewal of a marketing agreement with Marriott International, Inc., ("Marriott") the Company issued Marriott 833,333 warrants to purchase shares of the Company's common stock at an exercise price of $9.84 per share. The warrants, which are not transferable, are fully vested, non-forfeitable, and will be exercisable no earlier than three years from the date of issuance (subject to certain limited exceptions in the event of a reorganization, recapitalization, merger or consolidation involving priceline.com). In connection with the issuance of the warrants, the Company recorded a charge of approximately $6.6 million in the first quarter of 2003 determined by using an option pricing model.

14.    TAXES

        The Company has historically incurred cumulative net operating losses ("NOL's") for financial accounting and tax purposes. The effects of the NOL's have given rise to a substantial deferred tax asset that has been utilized to offset the provision for income taxes on substantially all earnings generated to date within the United States. SFAS No. 109, "Accounting for Income Taxes," requires that the Company record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." At September 30, 2004 the Company has provided a valuation allowance for the full amount of the deferred tax asset.

        Beginning in 2004, the Company became subject to Federal Alternative Minimum Tax ("AMT") for earnings generated within the United States. The Company recognizes AMT expense at the end of each interim period based on the estimated effective AMT tax rate for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.

        The Company recognizes income tax expense related to income generated outside of the United States based upon the applicable tax rates of the foreign countries in which the income is generated. Currently, the substantial majority of the Company's foreign-sourced income is generated in the United Kingdom.

        As part of the purchase accounting associated with the acquisition of Active Hotels, the Company recorded a deferred tax liability in the amount of $25.3 million, primarily related to the assignment of estimated fair value to certain purchases identifiable intangible assets. The deferred tax liability represents an estimate of the differences between future income taxes that will be recognized in the Company's reported operating results and future income taxes that will be incurred and paid as Active Hotels generates future taxable income.

15.    COMMITMENTS AND CONTINGENCIES

Acquisition of Active Hotels.

        In connection with the Company's acquisition of Active Hotels, the Company sold a 2.3% equity interest in Active Hotels (the "Purchased Shares") to a group of Active Hotels employees for a cash purchase price per share equal to the purchase price per share paid by the Company to acquire Active Hotels. The Company also granted restricted stock (the "Granted Shares") representing an additional 1.1% equity interest in its Active Hotels subsidiary to certain employees of Active Hotels. The holders of the Purchased Shares and the Granted Shares can require the Company to purchase the Purchased Shares and the Granted shares at certain future dates for a purchase price equal to their then fair market value. In addition, the Company can require the holders of the Purchased Shares and the Granted Shares to sell the Purchased Shares and the Granted Shares to the Company at certain future dates for a purchase price equal to their then fair market value.

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Acquisition of Travelweb.

        In connection with the Company's acquisition of Travelweb, it reached an agreement with Intercontinental Hotels Group ("IHG") pursuant to which, under certain circumstances, it may purchase the 14.286% equity interest in Travelweb that is owned by IHG for a cash purchase price of no less than approximately $3.5 million and no greater than approximately $4.1 million. Also, in connection with the Company's acquisition of Travelweb, it agreed to pay additional contingent purchase price consideration to the sellers of Travelweb in the event that certain performance targets are met during the 12-month period following the acquisition date of Travelweb. The additional contingent consideration consists of 954,547 shares of its common stock which had a market value of approximately $21.2 million as of September 30, 2004.

Litigation.

        On November 24, 2003, the Company was served with a complaint for patent infringement captioned IMX, Inc. v. E-Loan, Inc., InteractiveCorp, LendingTree, Inc. and priceline.com Incorporated. The complaint alleges, among other things, that the Company has infringed, induced others to infringe and/or committed acts of contributory infringement of U.S. Patent number 5,995,947 entitled "Interactive Mortgage and Loan Information and Real-Time Trading Systems." The complaint seeks injunctive relief; unspecified money damages; an order directing defendants to pay IMX's costs and attorneys' fees; and an award of pre-and post-judgment interest. The Company intends to defend vigorously against this action. On January 23, 2004, the Company answered the complaint, denying IMX's allegations, and filed a counterclaim, which seeks a declaration that the patent-in-suit is invalid and/or that the Company does not infringe any claim of the patent and that it does not contribute to or induce the infringement of any claim of the patent. On or about August 24, 2004, IMX filed an amended complaint naming Priceline Mortgage Company LLC ("pricelinemortgage") as an additional defendant in the case. The Company, which remains a defendant in its own right, owns a 49% interest in pricelinemortgage. The amended complaint alleges, among other things, that pricelinemortgage has infringed, induced others to infringe and/or committed acts of contributory infringement of the U.S. Patent number 5,995,947. The amended complaint seeks, against all defendants, injunctive relief; unspecified money damages; an order directing the defendants to pay IMX's costs and attorneys' fees; and an award of pre- and post-judgment interest. The claim for unspecified money damages includes a claim for willful infringement, which carries with it the potential to increase the total damages to up to three times the amount of compensatory damages. Pursuant to an Order of the Court, the Company is not required to answer the amended complaint; its original answer and counterclaim will serve as its response. On October 4, 2004, pricelinemortgage answered the amended complaint, denying IMX's allegations, and filed a counterclaim, which seeks a declaration that the patent-in-suite is invalid and/or that pricelinemortgage does not infringe any claim of the patent and that it does not contribute to or induce the infringement of any claim of the patent. The case is currently in discovery. The Court has set a trial date of January 9, 2006. The Company is unable at this time to predict the outcome of this suit or reasonably estimate a range of possible loss, if any.

        On November 7, 2003, the Company was served with a complaint that purported to be a shareholder derivative action against its Board of Directors and certain of its current and former executive officers, as well as the Company (as a nominal defendant). The complaint alleged, among other things, breach of fiduciary duty, waste of corporate assets and misappropriation of corporate information. The claims in the complaint appear to be substantially repetitive of the claims pending in the derivative action in Delaware which is described below. The action is captioned Don Powell v. Richard S. Braddock, Jay S. Walker, Daniel H. Schulman, Paul A. Allaire, Ralph M. Bahna, Paul J. Blackney, William E. Ford, Marshall Loeb, N. J. Nicholas, Jr., Nancy B. Peretsman, and Heidi G. Miller and priceline.com Incorporated (Superior Court, Judicial District of Stamford/Norwalk, State of Connecticut). On January 28, 2004, defendants Blackney, Nicholas, Peretsman and Loeb moved to

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dismiss the complaint for lack of personal jurisdiction. On January 29, 2004, defendant Miller moved to dismiss the complaint for lack of personal jurisdiction and for insufficient service of process. On February 27, 2004, defendants Braddock, Walker, Schulman, Allaire, Bahna, Blackney, Loeb, Nicholas, Peretsman, Miller and priceline.com moved to dismiss the complaint for lack of subject matter jurisdiction and defendants Braddock and Schulman also moved to dismiss the complaint for lack of personal jurisdiction and insufficient service of process. At a hearing on May 3, 2004, the Court stated that it would not rule on the pending motions until the pending motions in the Delaware action described above are decided. The Court has scheduled a status conference for January 10, 2005. The Company intends to defend vigorously against this action. The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss, if any.

        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 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 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 to those described above but with respect to both the Company's March 1999 initial public offering and the Company's 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. On November 18, 2002, the cases against the individual defendants were dismissed without prejudice and without costs. In addition, counsel for plaintiffs and the individual defendants executed Reservation of Rights and Tolling Agreements, which toll the statutes of limitations on plaintiffs' claims against those individuals. On February 19, 2003, Judge Scheindlin issued an Opinion and Order granting in part and denying in part the issuer's motion. None of the claims against the Company were dismissed. On June 26, 2003, counsel for the plaintiff class announced that they and counsel for the issuers had agreed to the form of a Memorandum of Understanding (the "Memorandum") to settle claims against the issuers. The terms of that Memorandum provide that class members will be guaranteed $1 billion dollars in recoveries by the insurers of the issuers and that settling issuer defendants will assign to the class members certain claims that they may have against the underwriters. Issuers also agree to limit their abilities to bring certain claims against the underwriters. If recoveries in excess of $1 billion dollars are obtained by the class from any non-settling defendants, the settling defendants' monetary obligations to the class plaintiffs will be satisfied; any amount recovered from the underwriters that is less than $1 billion will be paid by the insurers on behalf of the issuers. The Memorandum, which is subject to the approval of each issuer, was approved by a special

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committee of the priceline.com Board of Directors on Thursday, July 3, 2003. Thereafter, counsel for the plaintiff class and counsel for the issuers agreed to the form of a Stipulation and Agreement of Settlement with Defendant Issuers and Individuals ("Settlement Agreement"). The Settlement Agreement implements the MOU and contains the same material provisions. On June 11, 2004, a special committee of the priceline.com Board of Directors authorized the Company's counsel to execute the Settlement Agreement on behalf of the Company. The Settlement Agreement is subject to final approval by the Court and the process to obtain that approval is still pending.

        In addition, on November 1, 2000 the Company was served with a complaint that purported to be a shareholder derivative action against its Board of Directors and certain of its current and former executive officers, as well as the Company (as a nominal defendant). The complaint alleged 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. On December 20, 2002, the Court granted defendants' motion without prejudice. On April 25, 2003, a second amended complaint, adding H. Miller, was filed and a motion seeking leave of court to file the second amended complaint was filed on July 28, 2003. That motion has been fully briefed. The Court has yet to rule on the motion. The Company intends to defend vigorously against this action. The Company is unable to predict the outcome of the suit or reasonably estimate a range of possible loss, if any.

        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:

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        All of these cases have been assigned 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

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plaintiff. The court has yet to rule on that motion. On February 28, 2002, the Company filed a motion to dismiss the Consolidated Amended Complaint. On October 7, 2004, the Court issued a Memorandum of Decision granting, in part, and denying, in part, the Company's motion, and ordered the submission of a proposed discovery plan by October 29, 2004. The Company intends to defend vigorously against this action. The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss, if any.

        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.

        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 business, results of operations, financial condition and cash flows.

Uncertainty regarding payment of sales and hotel occupancy and other related taxes.

        The Company is currently conducting a review and interpretation of the tax laws in various states and other jurisdictions relating to the payment of state and local hotel occupancy and other related taxes. In connection with its review, the Company has met and had discussions with taxing authorities in certain jurisdictions but the ultimate resolution in any particular jurisdiction cannot be determined at this time. Currently, hotels collect and remit hotel occupancy and related taxes to the various tax authorities based on the amounts collected by the hotels. Consistent with this practice, the Company recovers the taxes on the underlying cost of the hotel room night from customers and remits the taxes to the hotel operators for payment to the appropriate tax authorities. Several jurisdictions have indicated that they may take the position that sales or hotel occupancy tax is applicable to the differential between the price paid by a customer for the Company's service and the cost to the Company of the underlying room. Historically, the Company has not collected taxes on this differential. Some state and local jurisdictions could assert that the Company is subject to hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively or both. Such actions may result in substantial liabilities for past sales and could have a material adverse effect on the Company's business and results of operations. To the extent that any tax authority succeeds in asserting that such a tax collection responsibility exists, it is likely that, with respect to future transactions, the Company would collect any such additional tax obligation from its customers, which would have the effect of increasing the cost of hotel room nights to the Company's customers and, consequently, could reduce its hotel sales. The Company will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, it will reserve for those estimates of liabilities.

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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

        General.    We are a leading online travel company that offers our customers a broad range of travel products, including airline tickets, hotel rooms, car rentals, vacation packages and cruises. We offer our customers a unique choice: the ability to purchase certain travel products in a traditional, price-disclosed manner or the opportunity to use our unique Name Your Own Price® service, which allows our customers to make offers for travel products at discounted prices. At present, we derive substantially all of our revenues from the following sources:

•

Transaction revenues from our Name Your Own Price® airline tickets, hotel rooms and rental cars service;



•

Customer processing fees charged in connection with the sale of both Name Your Own Price® and price-disclosed airline tickets, hotel rooms and rental cars service;



•

Worldspan reservation booking fees related to the sale of both Name Your Own Price® airline tickets, hotel rooms and rental cars, and price-disclosed airline tickets and rental cars;



•

Commissions primarily related to the sale of price-disclosed hotel rooms, rental cars, cruises and other travel services;



•

Transaction revenue from the sale of price-disclosed hotel rooms through our majority-owned subsidiary, Travelweb LLC; and



•

Other revenues derived primarily from advertising on our websites and fees for referring customers to affiliates and others.

        Trends.    Our overall financial prospects have been and continue to be significantly dependent upon the sale of leisure airline tickets and, as a result, the health of our business has been directly related to the health of the airline industry. Most domestic airlines, and many of our major suppliers, have experienced, and continue to experience, significant losses. These losses have been compounded by competition from low-cost carriers and, most recently, by high fuel prices, which we believe increase the possibility of the additional bankruptcy and/or the liquidation of one or more of the major domestic airlines. As a result of these and other factors, many of the major airlines have deeply discounted retail airline tickets to maintain market share and, as discussed in more detail in "Other" below, put pressure on third-party intermediaries like us to reduce airline distribution costs. These actions have had, and continue to have, a detrimental effect on our overall airline business and, in particular, our Name Your Own Price®airline ticket service, which represents a significant portion of our total airline ticket revenues. Deep retail discounting by the airlines negatively affects demand for our Name Your Own Price® airline ticket service because it hurts our value proposition and makes users less willing to accept the trade-offs associated with our service for what has become modest fare savings. In addition, decreased airline capacity hurts our business by reducing the levels of inventory available to us and increasing our cost of inventory. Customer offer prices have not kept pace with the increase in our cost of inventory and are, therefore, lower in proportion to our average cost of supply, which has, for the

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better part of the last two years, materially and negatively affected the number of Name Your Own Price® tickets sold.

        Despite the trends associated with our Name Your Own Price® airline ticket service, the online travel sector, overall, continues to grow, and we believe the opportunity exists for us to broaden our participation in that growth. In an effort to participate in that growth and counter some of the trends described above, we have taken a number of initiatives to diversify our service offerings. We have taken and expect to continue to take steps to diversify our revenue among non-"opaque" products, such as retail airline, hotel and rental car travel products, which we believe will help broaden our customer appeal. To this end, in the fourth quarter of 2003, we began offering customers the ability to purchase airline tickets at disclosed, retail prices. We believe that the results of the launch of our retail airline ticket service, and the related marketing effort, have been positive and we believe we are making progress towards stabilizing and growing total unit sales of airline tickets, which, as discussed above, declined significantly over the past two years. The launch of a retail airline service has had a positive effect on the overall number of airline tickets bought by our customers. While some customers presented with a display of low disclosed prices may opt to select such a ticket or make a lower offer for a Name Your Own Price® ticket, we believe the gross profit contribution from the increased sale of retail airline tickets has, to date, more than offset any loss in the number of Name Your Own Price® tickets sold.

        As part of our strategy to broaden the appeal of our hotel product and lessen our dependence on our Name Your Own Price® airline ticket service, we have invested in and focused our marketing efforts on our non-airline travel products, including, in particular, our hotel business. In May 2004, Lowestfare.com, the Company's wholly-owned subsidiary, acquired all of the equity interest in Travelweb LLC owned by Marriott, Hilton, Hyatt, Starwood Hotels and Pegasus Solutions, and entered into an agreement whereby we may acquire all of the equity interest held by InterContinental Hotels Group at a future date. We intend to use inventory from Travelweb to launch a price disclosed hotel product on the priceline.com site in the first half of 2005. Our intent is to provide customers maximum flexibility by allowing them to select a retail itinerary or to make use of the Name Your Own Price® service.

        Additionally, in September 2004, we acquired Active Hotels Ltd., a United Kingdom based Internet hotel reservation distributor, in a cash transaction valued at approximately $161 million. Active Hotels works with a wide range of 8,000 properties in the United Kingdom and throughout Europe, including international chains and independent properties. Its distribution network encompasses company-owned Web sites, such as activereservations.com, as well as over 1,000 Web sites operating throughout Europe. Active Hotels' reservation services are available in English, French, Spanish, German and Italian. We believe the acquisition creates opportunities for us to expand our businesses. For example, Active Hotels has longstanding distribution relationships with a significant number of other European travel sites and we intend to support these relationships with added product from priceline.com and Travelweb for U.S. travel. In addition, we believe that we can offer Active Hotels' services to our U.S. customer base for European travel.

        We also intend to continue to develop our other non-air business, in particular our rental car and vacation package businesses, for which demand remains relatively strong. In May 2004, we launched a new retail rental car search and booking engine on RentalCars.com, and in June 2004, we implemented that functionality on BreezeNet.com. In addition, in the second quarter of 2004, we implemented a new feature on our vacation packages path that allows customers to choose between an opaque, or a disclosed flight itinerary.

        With respect to pricelinemortgage, interest rates have increased from recent lows and this has resulted in a slowdown in home refinancings and a reduction in the number of loans that pricelinemortgage originates. A reduction in loan originations negatively affects the results of

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pricelinemortgage and if this trend continues, our results attributable to pricelinemortgage could be significantly impacted. In addition, the results of pricelinemortgage could be adversely impacted by the costs to defend an on-going patent infringement lawsuit. We are unable at this time to predict the outcome of this suit or reasonably estimate a range of possible loss, if any. However, we intend to continue to defend vigorously against this action. See Note 15 to our Unaudited Consolidated Financial Statements.

        Further terrorist attacks, hostilities in the Middle East, the liquidation of major domestic airlines now in bankruptcy, the bankruptcy of an additional carrier or the withdrawal from our system of a major airline or hotel supplier, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above.

        Other. A number of travel suppliers, particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be "expensive" distribution channels such as global distribution systems (GDSs). A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS. Additionally, travel suppliers are encouraging third-party travel intermediaries, such as us, to develop technology enabling direct connections to bypass the GDS. Development of direct connection technology would require the use of information technology resources and could cause us to incur additional operating expenses and delay other projects. We have been and believe that we will continue to be under significant pressure from travel suppliers, including most of the major domestic airlines and many of our significant hotel suppliers, to rebate all or part of the travel booking fees we receive from Worldspan, L.P., our GDS, and to use direct connection technology. To the extent that we are required to rebate travel booking fees we currently receive from our GDS to travel suppliers, and are unable to recover such amounts by charging customers, or, if one or a number of travel suppliers pull out of our service because they are unhappy with existing distribution costs, it could have a material adverse effect on our business, results of operations and financial condition.

        We believe that our success will depend in large part on our ability to maintain profitability, primarily from our leisure travel business, to continue to promote the priceline.com brand and, over time, to offer other travel 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. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. Our goal is to improve volume and sustain gross margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain revenue growth and profitability.

Financial Presentation

        Starting with the fourth quarter 2003, we began reporting our metrics in a new format that provides greater visibility into the operations of our retail businesses. We now combine merchant and agency unit bookings (which are explained in detail in the lead-in to "Results of Operations," below) for air, hotel and rental car services. The format change reflects the increased importance of agency unit sales to our operating results and gives a better view into the full scale of our operating activities. In connection with this change in format, we stopped presenting "bind rate" and other related customer metrics since we believe such data, which reflects sales of opaque products only, no longer presents a complete view of our financial results or business trends.

        In addition, starting with the three months ended September 30, 2004, we began reporting "online advertising" and "offline advertising" instead of "advertising expense" on our Unaudited Consolidated Statement of Operations. We made this change because Travelweb and Active Hotels rely primarily on

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online advertising to drive their respective businesses, and our acquisitions of Travelweb and Active Hotels have resulted in a large increase in our consolidated online advertising spending. We have added a discussion of the operating metric "Gross Bookings", which represents the total dollar value, inclusive of taxes and fees, of all travel products purchased by our customers.

        Lastly, starting with the three months ended September 30, 2004, we began combining (1) warrant costs with sales and marketing expenses, (2) stock compensation expense with personnel costs and (3) option taxes with general and administrative expenses, in order to better display the total cost of the associated activity.

Recent Accounting Pronouncements

        See Note 5 to our Unaudited Consolidated Financial Statements for a description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

        In addition, the FASB recently issued an exposure draft that would amend FASB Statement 128, "Earnings per Share," to require that, commencing with reporting periods ending after December 15, 2004, if a convertible financial instrument has an option to settle a required redemption in cash or shares, then the "if converted" method should be applied based on the current share price and not according to the conversion price (the current accounting guidelines) when computing diluted earnings per share. Holders of the Notes have the right to require the Company to purchase their Notes on certain dates or upon the occurrence of certain specified events ("Put Rights"). At the Company's option, it has the right to satisfy the Put Rights in cash, ordinary shares or a combination of cash and shares. If the exposure draft is adopted, it could potentially have a significant impact on the Company's diluted earnings per share computations. The Company's board of directors has authorized the Company to amend the Notes by waiving its right to a share settlement upon exercise of Put Rights and committing to a cash settlement. Following an amendment to the Notes, the new accounting rule is not expected to impact the Company's calculation of weighted average diluted shares outstanding or diluted earnings per share.

Results of Operations

Three and Nine Months Ended September 30, 2004 compared to the Three and Nine Months Ended September 30, 2003

Operating Metrics

        Our financial results are driven by certain operating metrics that encompass the selling activity generated by our travel services. Specifically, sales of airline tickets, hotel room nights and rental car days capture the volume of units purchased by our customers. Gross Bookings capture the total dollar value inclusive of taxes and fees of all travel products purchased by our customers.

        The number of airline tickets, hotel room nights and rental car days sold were as follows:

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        Airline tickets sold increased by 64.8% and 57.1% respectively for the three and nine months ended September 30, 2004. The increase in each period was driven entirely by the introduction of retail choice to our suite of travel services. The growth in each period was partially offset by large annualized percentage decreases in sales of opaque airline tickets sold in each period. See "Managements Discussion and Analysis of Financial Condition and Results of Operations—Overview—Trends" above.

        Hotel room nights sold increased by 31.3% and 29.5% respectively for the three and nine months ended September 30, 2004. The increase in each period was driven by (1) the continued success of our opaque hotel product which benefited from continued direct advertising support and (2) the inclusion of hotel room nights sold by Travelweb and Active Hotels during their respective periods in 2004, subsequent to their acquisitions.

        Rental car days sold increased by 12.3% and 45.2% for the three and nine months ended September 30, 2004, over the same periods in 2003, respectively, due primarily to increases in sales of our retail rental car product through RentalCars.com and BreezeNet.com.

        Gross Bookings increased by 43.8% and 49.4% respectively for the three and nine months ended September 30, 2004 compared to the comparable period in the prior year. The increase in each period was driven primarily by 358.4% and 425.9% respective increases in agency bookings for the three and nine months ended September 30, 2004 as a result of (1) the introduction of retail choice airline tickets to our suite of product offerings and (2) the inclusion of bookings from BreezeNet.com, RentalCars.com and Active Hotels in our 2004 results. Gross bookings also increased as a result of 3.8% and 7.5% respective increases in merchant bookings for the three and nine months ended September 30, 2004 as a result of (1) the continued success of our opaque hotel, rental car and vacation package products which more than offset significant annualized declines in bookings of our opaque airline ticket service; and (2) the inclusion of bookings from Travelweb in our 2004 results.

Revenues

        We classify our revenue into three categories:

•

Merchant revenues are derived from transactions where we are the merchant of record and are responsible for, among other things, collecting receipts from our customers and remitting payments to our suppliers. Merchant revenues include (1) the selling price, as established by us, of the opaque airline tickets, hotel rooms and rental cars and are reported on a gross basis; and (2) the amount charged to a customer, less the amount charged by a supplier, in connection with a Travelweb merchant hotel room.



•

Agency revenues are derived from travel related transactions where we are not the merchant of record and where the prices of our products are determined by third parties. Agency revenues include travel commissions, customer processing fees and Worldspan reservation booking fees and are reported at the net amounts received, without any associated cost of revenue.



•

Other revenues are derived primarily from advertising on our websites.

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        We continue to experience a shift in our airline ticket business mix from a primarily merchant opaque model to include a growing number of retail, price disclosed tickets. Because merchant tickets are reported gross and retail tickets are recorded on a net basis, airline ticket revenue increases and decreases are impacted by changes in merchant and retail sales mix and gross profit has become an important measure of evaluating growth in our business. Additionally, our acquisitions of Travelweb and Active Holtels during the second and third quarters, respectively, contributed to the increase in total revenues.

Merchant Revenues

        Merchant revenues for the three and nine months ended September 30, 2004 and 2003, consisted primarily of: (1) transaction revenues representing the selling price of Name Your Own Price® airline tickets, hotel rooms, rental cars and vacation packages; (2) transaction revenues representing the amount charged to a customer, less the amount charged by suppliers in connection with the sale of hotel rooms on Travelweb; (3) customer processing fees charged in connection with the sale of Name Your Own Price® airline tickets, hotel rooms and rental cars and (4) ancillary fees, including Worldspan, L.P. reservation booking fees related to Name Your Own Price® transactions only.

        The $14.1 million decrease in merchant revenue for the three months ended September 30, 2004 compared to the same period in 2003 was primarily attributable to (1) a substantial decrease in the sale of Name Your Own Price® airline tickets, partially offset by continued growth in Name Your Own Price® hotels and vacation package products, and the inclusion of merchant hotel room nights sold by Travelweb in the same periods of 2004, subsequent to our acquisition of Travelweb, and (2) decreased travel caused by the adverse weather in the Southeastern U.S. during the third quarter of 2004. We believe that the decrease in the number of Name Your Own Price® airline tickets sold—and the corresponding effect that decrease had on our overall merchant revenues during the three months ended September 30, 2004—continued to be due primarily to low retail airline ticket prices and the availability of retail tickets on our website. In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoffs associated with our Name Your Own Price® airline product in exchange for savings off of higher retail rates, to purchase travel products at the lower retail rates or from "low-cost" carriers without having to make any trade-offs.

Agency Revenues

        Agency revenues for the three and nine months ended September 30, 2004 and 2003 consisted primarily of: (1) processing fees and third-party supplier commissions related primarily to the sale of travel products including the sale of price-disclosed hotels, rental cars, cruises and other travel services; and (2) ancillary fees, including GDS reservation booking fees related to price-disclosed transactions. Agency revenues for the three and nine months ended September 30, 2004 increased from the same period a year ago, primarily as a result of (1) our increased focus on the retail airline ticket business, driven primarily by new advertising campaigns focused on our retail airline ticket product, (2) increased rental car business, including the aforementioned acquisitions, and the resulting increase in travel commissions, GDS and processing fees earned, and (3) the inclusion of agency revenue of Active Hotels for the last ten days of the third quarter in 2004.

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Other Revenues

        Other revenues during the three and nine months ended September 30, 2004 and 2003 consisted primarily of: (1) advertising revenues; and (2) fees for referring customers to pricelinemortgage for home financing services.

        Other revenues for the three and nine months ended September 30, 2004 decreased compared to the same periods in 2003, primarily as a result of lower financial services fees and reduced on-line advertising revenue.

Cost of Revenues and Gross Profit

Cost of Revenues

        During the three months ended September 30, 2004, cost of revenues decreased by approximately $18 million, over the same period last year, due primarily to a corresponding decrease in revenues. Cost of revenues grew at a slower rate than revenues because opaque transactions, whose revenues are recorded gross with a corresponding cost of revenue, represented a smaller percentage of transactions in both periods as compared to price-disclosed transactions which are recorded net with no corresponding cost of revenues.

Cost of Merchant Revenues

        For the three and nine months ended September 30, 2004 and 2003, cost of merchant revenues consisted primarily of: (1) the cost of opaque hotel rooms from our suppliers, net of hotel occupancy tax, (2) the cost of opaque 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; (3) the cost of opaque rental cars from our suppliers, net of applicable taxes; and (4) non-cash acquisition related amortization expenses associated with the acquisition of Travelweb. Cost of merchant revenues for the three months ended September 30, 2004, decreased approximately 9.0%, due to a decrease in sales of opaque airline tickets, partially offset by an increase in sales of opaque hotel room nights and rental car days.

Cost of Agency Revenues

        Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any, and therefore, there are no costs of agency revenues. For the three and nine months ended September 30, 2004, cost of agency revenues consisted exclusively of non-cash acquisition related amortization expenses associated with the acquisition of Active Hotels.

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Cost of Other Revenues

        For the three and nine months ended September 30, 2004 and 2003, there were no costs of other revenues.

Gross Profit

        Total gross profit increased for the three months ended September 30, 2004, as compared to the three months ended September 30, 2003, by approximately $10.5 million primarily as a result of increased revenue from (1) our opaque hotel and vacation package products; (2) increased sales of price disclosed products; and (3) the inclusion of results from Travelweb and Active Hotels. Total gross margin (gross profit expressed as a percentage of total revenue) increased during the three and nine month periods ended September 30, 2004, compared to the same periods during 2003, because opaque transactions, whose revenues are recorded gross with a corresponding cost of revenue, represented a smaller percentage of transactions in both periods as compared to price-disclosed transactions which are recorded net with no corresponding cost of revenues. Because merchant transactions are reported gross and retail transactions are recorded on a net basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business.