PRICELINE COM INC - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

FORM 10-Q

(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

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 / /.

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

Number of shares of Common Stock outstanding at May 7, 2003:

Common Stock, par value $0.008 per share 225,615,266
- ----------------------------------------------- -----------------------------
(Class) (Number of Shares)

priceline.com Incorporated
Form 10-Q

For the Quarter Ended March 31, 2003

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Condensed Financial Statements

Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002..........................3
Consolidated Statements of Operations For the Three Months
Ended March 31, 2003 and 2002 (unaudited).............................................................4
Consolidated Statement of Changes in Stockholders' Equity For the Three Months
Ended March 31, 2003 (unaudited)......................................................................5
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2003 and 2002 (unaudited)
Notes to Unaudited Consolidated Financial Statements.....................................................6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........14

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

Item 4. Controls and Procedures.........................................................................34

PART II - OTHER INFORMATION

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

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

CERTIFICATIONS..........................................................................................37

2

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

PRICELINE.COM INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See Notes to Unaudited Consolidated Financial Statements.

3

PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See Notes to Unaudited Consolidated Financial Statements.

4

PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)

See Notes to Unaudited Consolidated Financial Statements.

5

PRICELINE.COM INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

See Notes to Unaudited Consolidated Financial Statements.

6

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 generally
accepted accounting principles in the United States ("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, 2002.

During the first quarter of 2003, the Company enhanced its financial
reporting format. In the past, the Company reported revenue segmented between
travel and other revenue, a format that was driven by the Company's pursuit of
businesses outside of the travel industry. With the repositioning of the
Company's long distance and new car products in the fourth quarter of 2002, the
Company's ongoing plan to keep its strategic focus on the online travel sector
and its recent commitment to compliment its core Name Your Own Price(R) products
by developing agency-based retail travel products, the decision was made to
provide revenue and gross profit reporting in three categories: Merchant
(encompassing substantially all of its Name Your Own Price(R) travel services),
Agency (encompassing substantially all of its priced-disclosed retail services)
and Other (encompassing all remaining revenue, the largest component of which is
advertising revenue). The Company believes that this presentation is more useful
to the reader. Historical results have been presented to conform to the current
period presentation. In addition, certain other amounts in prior periods'
financial statements have been reclassified to conform to the current period
presentation.

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.

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

7

Basic and diluted loss per share as reported $ (0.04) $ 0.02

Basic and diluted loss per share SFAS 123
adjusted $ (0.07) $ (0.10)

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:

3. NET (LOSS) INCOME 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 months ended March 31, 2003, for the purpose
of calculating earnings per share - basic, the weighted average number of common
shares outstanding was 224,859,514. Since the Company incurred a loss applicable
to common stockholders for the three-month period ended March 31, 2003, 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 this period. For the three months ended March 31,
2002, for the purpose of calculating earnings per share - basic, the weighted
average number of common shares outstanding was 227,503,011 and for the purpose
of calculating earnings per share - diluted, the weighted average number of
common shares outstanding was 239,969,718, which includes 12,466,707 shares
representing the dilutive effect of common stock equivalents.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2002, the Financial Standards Board ("FASB") issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections". Among other things, under the provision of FSAS
No. 145, gains and losses from the early extinguishment of debt are no longer
classified as an extraordinary item, net of income taxes, but are included in
the determination of pretax earnings. The adoption of this standard, effective
January 1, 2003, had no effect on the Company's financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). This statement
addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance that the Emerging issues Task Force ("EITF") as set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and EITF 94-3 is that
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred versus the EITF
94-3 where a liability was recognized on the date an entity committed to an exit
plan. SFAS 146 is effective for exit and disposal activities that are initiated
after December 31, 2002. The Company adopted the new standard on January 1,
2003, with no effect on the Company's financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This

8

interpretation expands the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees and requires
the guarantor to recognize a liability for the fair value of an obligation
assumed under a guarantee. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument
that is related to an asset, liability, or equity security of the guaranteed
party. Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation. Other guarantees are subject to
the disclosure requirements of FIN 45 but not to the recognition provisions and
include, among others, a guarantee accounted for as a derivative instrument
under SFAS 133. The disclosure requirements of FIN 45 are effective for the
Company as of December 31, 2002, and require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. The adoption of FIN 45 did not have
a material impact on results of operations, financial position or liquidity.

In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities" which clarifies the application of Accounting
Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. This interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does not have any equity
investments in variable interest entities.

5. RESTRUCTURING CHARGE

In the fourth quarter of 2002, the Company recorded a restructuring charge
of approximately $4.7 million. This restructuring charge resulted from the
repositioning of the Company's non-travel businesses, and a reduction in
headcount by 50 full-time employees at its Norwalk, Connecticut location, and 4
full-time employees at its Europe location. The repositioning was designed to
reduce operating expenses and focus resources on the Company's travel business.
The charge related to severance payments, real estate costs and asset
impairments.

In 2000, the Company recorded a restructuring charge of approximately $32.0
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. During the first quarter of 2002, as a result of the sub-leasing of
office space under more favorable terms than originally anticipated (reflected
in the "Restructuring charge (reversal)" line of the Company's Consolidated
Statements of Operations), the Company decreased the liability for the
restructuring charge by $824,000.

During the first quarter 2003, the liability for the restructuring charge
decreased by approximately $1.8 million. The reductions resulted entirely from
cash payments made during the quarter.

9

Long-term portion............ $ 422

At March 31, 2003, the restructuring liability consisted of estimated
remaining severance, real estate costs and other professional fees related to
the Company's 2002 restructuring plan and estimated remaining real estate costs
related to the Company's 2000 restructuring plan.

6. OTHER ASSETS

Other assets at March 31, 2003 and December 31, 2002 consist of the
following (in thousands):

In March 2003, Lowestfare.com, a wholly-owned subsidiary of the Company,
invested approximately $8.6 million (including fees relating to the transaction)
in Travelweb LLC. Lowestfare.com's investment represents approximately 14% of
the outstanding equity of Travelweb LLC. The investment is accounted for under
the equity method of accounting. The Company recognizes its pro rata share of
Travelweb LLC's results of operations. The Company's share of the results of
operations (Travelweb LLC is currently incurring operating losses) of Travelweb
LLC was not material in the first quarter 2003. In connection with the
investment, Lowestfare.com and the Company entered into a distribution agreement
with Travelweb LLC. Under the terms of the distribution agreement, Travelweb LLC
will become the exclusive provider of published-price, net rate hotel inventory
in the U.S. and Canada that will be available on both Lowestfare.com and on
priceline.com. Lowestfare.com also has a seat on Travelweb LLC's Board of
Directors.

Investment in 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
operating results, not to exceed an amount that the Company believes
represents the investments' estimated fair value. The Company's pro rata
share of pricelinemortgage's net income for the three months ended March 31,
2003 was approximately $700,000. The Company earned advertising fees from
pricelinemortgage of approximately $204,000 and approximately $477,000 for
the period ended March 31, 2003 and 2002, respectively.

The excess of the carrying value of the Company's equity investments in
Travelweb LLC and pricelinemortgage over its equity in the underlying net assets
of the investees is approximately $8.1 million.

7. TREASURY STOCK

On July 31, 2002, the Company's Board of Directors authorized the
repurchase of up to $40 million of 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 5,387,717 shares of its common stock for its
treasury during the period ended December 31, 2002 at an aggregate cost of
approximately $11.8 million. All shares were purchased at prevailing market
prices.

The Company may continue or, from time to time, 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
March 31, 2003, there were approximately 225.0 million shares of the Company's
common stock outstanding.

10

8. DELTA AIR LINES

During the first quarter of 2001, Delta Air Lines, Inc. ("Delta") received
80,000 shares of a newly created 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 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.

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 13,470 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 to Delta 241,441, 241,441 and 454,308 shares of the
Company's common stock as dividend payments on February 6, 2003, August 6, 2002
and February 6, 2002, respectively. As a result, the Company recorded a non-cash
dividend of approximately $297,000, approximately $490,000 and approximately
$1.85 million in the first quarter of 2003, third quarter of 2002 and the first
quarter of 2002.

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 March 31,
2003, there were 4,537,199 Warrants outstanding.

9. MARRIOTT WARRANTS

In March 2003, in connection with the renewal of a marketing agreement with
Marriott International, Inc. ("Marriott"), the Company issued Marriott 5,000,000
warrants to purchase shares of the Company's common stock at an exercise price
of $1.64 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.

10. COMMITMENTS AND CONTINGENCIES

A description of the material litigation to which the Company is a party is
contained in Part I, Item 3 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.

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

11

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 was filed. 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 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 that motion. None of the claims against the
Company were dismissed. The Company intends to defend vigorously against these
actions.

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.

11. TAXES

For the three months ended March 31, 2003 and 2002, the Company has
recorded no provision for income taxes due to current losses and the
availability of previously fully reserved net operating losses which have been
utilized to offset the income tax provision.

12. SUBSEQUENT EVENTS

On May 1, 2003, the Company announced that its Board of Directors had
authorized the Company to seek stockholder approval of four alternative
amendments to the Company's amended and restated certificate of incorporation to
effect a reverse stock split of all outstanding shares of priceline.com's common
stock at a ratio of one-for-six, one-for-seven, one-for-eight or one-for-nine.

12

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 PRICE(R) - 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 9 domestic and 26 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;

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

- vacation packages, in many United States and certain international
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 a significant
percentage of equity in such entities.

In the days following the commencement of the military conflict with Iraq
on March 19, 2003, we experienced a substantial decline in demand for our travel
products and an increase in customer service costs and ticket refunds and
cancellations. While demand for our travel products gradually recovered, our
first quarter 2003

13

financial results were adversely affected by the war in Iraq.

Our overall financial prospects are significantly dependent upon our sale
of leisure airline tickets and, as a result, the health of our business is
directly related to the health of the airline industry. The domestic airline
industry has experienced significant revenue declines since the beginning of
2001 and most domestic airlines, and many of our major suppliers, are
experiencing significant losses which worsened as a result of the war in Iraq.
If the major airlines are unable to stem these losses, additional bankruptcy
filings by major airlines are likely. See "FACTORS THAT MAY AFFECT FUTURE
RESULTS - THE BANKRUPTCY, DISCONTINUANCE OR CONSOLIDATION OF OUR SUPPLIERS COULD
HARM OUR BUSINESS."

Since the terrorist attacks of September 11, 2001, and, more recently,
following the outbreak of war with Iraq, the major airlines have grounded
portions of their fleets, significantly reducing the number of available airline
seats, and have deeply discounted retail airline tickets to stimulate demand.
These actions have had a detrimental effect on our business. Deep retail
discounting by the airlines affects our demand and our "bind rate" (the
percentage of unique offers that we ultimately fulfill) by hurting our value
proposition and making users less willing to accept the trade-offs associated
with our opaque leisure airline tickets. 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, negatively affecting our bind rate.

We believe that over time, our lower bind rate may also negatively impact
demand for our airline tickets. Lingering effects of September 11, 2001, the war
in Iraq, and the outbreak of Severe Acute Respiratory Syndrome ("SARS"),
continued aggressive discounting by the airlines, competition from other on-line
distribution channels and low-cost carriers, and uncertainty regarding our
domestic economy and additional or protracted hostilities in the Middle East or
elsewhere, we believe have, and may continue to, negatively impact our airline
ticket demand throughout 2003.

As a result, near term forecasting is very difficult and we are not
currently forecasting a recovery in the airline industry or an improvement
during 2003 in our airline ticketing business.

We intend to continue to develop our non-air business, in particular our
hotel business, for which demand and bind remains relatively strong, continue to
evaluate and implement ways to improve offer quality and our bind rate,
diversify our revenue among non-opaque products (such as retail travel products
offered through our wholly-owned subsidiary, Lowestfare.com) and broaden our
customer appeal through marketing efforts relating to both priceline.com and
Lowestfare.com. However, further terrorist attacks, hostilities in the Middle
East, the insolvency of a major domestic airline 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.

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 distributors, such as us, to develop technology
enabling direct connections therefore bypassing 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 pressure
from travel suppliers to rebate all or part of the travel booking fees we
receive from Worldspan, L.P. 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, it could have a material
adverse effect on our business, results of operations and financial condition.
In addition, in March 2003, a corporation newly formed by Citigroup Venture
Capital Equity Partners L.P. and Teachers' Merchant Bank, agreed to purchase
Worldspan, L.P. from its airline owners. It is unclear what effect, if any, a
change in control of Worldspan, L.P. will have on our relationship with
Worldspan, L.P. or our business, results of operations or financial condition.

14

On March 18, 2003, we and Lowestfare.com, our wholly-owned subsidiary,
entered into a distribution agreement with Travelweb LLC. Travelweb LLC is a
full-service automated hotel distribution network owned by various respective
affiliates of Marriott International, Inc., Hilton Hotels Corporation, Hyatt
Corporation, Six Continents Hotels, Inc., Starwood Hotels & Resorts Worldwide,
Inc. and Pegasus Solutions, Inc. Under the terms of the distribution agreement,
Travelweb LLC will become the exclusive provider of published-price, net rate
hotel inventory in the U.S. and Canada that will be available on both
Lowestfare.com and on priceline.com. In connection with the distribution
agreement, Lowestfare.com made an approximately $8.6 million (including fees
relating to the transaction) investment in Travelweb LLC and received
approximately 14% of the equity of Travelweb LLC and a seat on Travelweb LLC's
Board of Directors.

On March 20, 2003, in connection with the renewal of a marketing agreement
with Marriott International, Inc., we issued Marriott 5,000,000 warrants to
purchase shares of our common stock at $1.64 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, we recorded a charge in the first quarter of 2003 of approximately
$6.6 million, or approximately $(0.03) per share.

We believe that our success will depend in large part on our ability to
achieve and maintain profitability, primarily from our 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. Our goal is to reduce operating
losses and improve gross margins in an effort to achieve and maintain
profitability. Our limited operating history and the uncertain environment
described above makes the prediction of future results of operations difficult,
and accordingly, we cannot assure you that we will achieve revenue growth or
achieve and sustain profitability.

FINANCIAL PRESENTATION

During the first quarter of 2003, we enhanced our financial reporting
format. In the past, we reported revenue segmented between travel and other
revenue, a format that was driven by our pursuit of businesses outside of the
travel industry. With the repositioning of our long distance and new car
products in the fourth quarter of 2002, our ongoing plan to keep our strategic
focus on the online travel sector and our recent commitment to compliment our
core Name Your Own Price(R) products by developing agency-based retail travel
products, the decision was made to provide revenue and gross profit reporting in
three categories: Merchant (encompassing substantially all of our Name Your Own
Price(R) travel services), Agency (encompassing substantially all of our
priced-disclosed retail services) and Other (encompassing all remaining revenue,
the largest component of which is advertising revenue).

RECENT DEVELOPMENTS

On May 1, 2003, we announced that our Board of Directors had authorized us
to seek stockholder approval of four alternative amendments to our amended and
restated certificate of incorporation to effect a reverse stock split of all
outstanding shares of priceline.com's common stock at a ratio of one-for-six,
one-for-seven, one-for-eight or one-for-nine.

15

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002

REVENUES

MERCHANT REVENUES

Merchant revenues are derived from transactions where we are the merchant
of record and determine the price to be paid by the customer. Merchant revenues
for the three months ended March 31, 2003 and 2002 consisted primarily of: (1)
transaction revenues representing the selling price of Name Your Own Price(R)
airline tickets, hotel rooms and rental cars; (2) ancillary fees, including
Worldspan, L.P. reservation booking fees for merchant transactions only; and (3)
customer processing fees charged in connection with the sale of Name Your Own
Price(R) airline tickets, hotel rooms and rental cars.

During the three months ended March 31, 2003, we sold approximately
439,000, 1.2 million and 636,000 airline tickets, hotel room nights and rental
car days, respectively. During the three months ended March 31, 2002, we sold
approximately 867,000, 909,000 and 738,000 airline tickets, hotel room nights
and rental car days, respectively. We believe that the approximately 49%
decrease in the number of airline tickets sold in the three months ended March
31, 2003, compared to the three months ended March 31, 2002 continued to be due
primarily to the weak retail 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 tradeoff associated
with our products 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. In addition, many airlines grounded
portions of their fleets in the aftermath of the terrorist attacks of September
11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on
existing flights, which we believe reduced airline inventory available to us.

In the past, we have "subsidized" certain offers to purchase airline
tickets by adding a variable amount to some customers' offers to increase the
likelihood that such customers' offers would be successful. These "subsidies"
had the effect of, among other things, increasing our revenues and bind rate. At
the end of 2002, we made the strategic decision to reduce sales of airline
tickets at a loss. To this end, we reduced subsidies we have historically
applied to certain airline ticket offers. While this had the effect of reducing
our revenue in the first quarter 2003, it resulted in an increase in our gross
margin and positively contributed to our gross profit.

Our "bind" rate is the percentage of unique offers that we ultimately
fulfill. Our "bind rate" for all unique airline ticket, hotel room and rental
car offers were as follows:

16

We believe that our merchant revenues and bind rate have been negatively
impacted by the weak retail 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 tradeoff associated
with our products 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. In addition, many airlines grounded
portions of their fleets in the aftermath of the terrorist attacks of September
11, 2001, and upon the outbreak of war in Iraq, thus decreasing capacity on
existing flights, which we believe reduced airline inventory available to us.
Finally, at the end of 2002, we reduced the subsidies applied to certain Name
Your Own Price(R) ticket sales, which also negatively affected our revenues.
These trends, which negatively impacted our revenues and bind rate in the first
quarter of 2002 and 2003, are expected to continue throughout 2003.

We added approximately 749,000 new customers during the three months ended
March 31, 2003, compared to approximately 875,000 new customers during three
months ended March 31, 2002. In addition, we generated approximately 1.5 million
repeat customer offers during the three months ended March 31, 2003, and
approximately the same amount for the same period last year.

Merchant revenues for the three months ended March 31, 2003 decreased
approximately 24% to approximately $199 million from approximately $260 million
for the three months ended March 31, 2002, primarily as a result of the weak
retail environment for airline tickets, reduced airline inventory available to
us and a corresponding decrease in rental car days sold. In particular, we
believe that lower retail pricing causes customers who might normally be willing
to make the tradeoff associated with our products 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. In addition, many
airlines grounded portions of their fleets in the aftermath of the terrorist
attacks of September 11, 2001, and upon the outbreak of war in Iraq, thus
decreasing capacity on existing flights, which we believe reduced airline
inventory available to us. Finally, at the end of 2002, we reduced the subsidies
applied to certain Name Your Own Price(R) ticket sales, which also negatively
affected our revenues. Offsetting the approximately 49% reduction in airline
tickets sold was an approximately 35% increase in hotel room nights sold, which
was principally driven by our recent emphasis on our hotel business, and
specifically by an advertising campaign focused on our hotel product.

Ancillary fee revenues for the three months ended March 31, 2003 decreased
from the same period a year ago as a result of a decrease in Worldspan, L.P.
reservation booking fees and customer processing fees in the airline and rental
car services.

Merchant revenues, particularly airline tickets, continue to account for
the majority of our revenue. Seasonal variations in our travel business have
historically and are expected to continue to impact our quarter to quarter
travel revenues.

AGENCY REVENUES

Agency revenues are derived from travel related transactions where we are
not the merchant of record. Agency revenues for the three months ended March 31,
2003 and 2002 consisted primarily of (1) travel commissions and processing fees,
principally earned through Lowestfare.com, related to the sale of travel
products including the sale of price disclosed airline tickets, cruises and
other travel services; and (2) ancillary fees, including GDS reservation booking
fees related to price-disclosed transactions. Agency revenues for the three
months ended March 31, 2003 increased approximately 361% to approximately $1.0
million from approximately $218 for the three months ended March 31, 2002
primarily as a result of the increase in travel commissions earned.

OTHER REVENUES

Other revenues during the three months ended March 31, 2003 and 2002
consisted primarily of: (1)

17

marketing revenues; (2) commissions and fees from our home financing and
automobile services; (3) transaction revenues and fees from our long distance
phone service, which we repositioned in 2002; and (4) in 2002, license fees from
Hutchison-Priceline Limited.

Other revenues for the three months ended March 31, 2003 decreased
approximately 56% to approximately $874,000 from approximately $2.0 million for
the three months ended March 31, 2002, primarily as a result of the decrease in
fees earned from our home financing service, and due to our repositioning of our
long distance phone service. There were no revenues generated from our long
distance phone service in 2003.

COST OF REVENUES AND GROSS PROFIT

COST OF REVENUES

COST OF MERCHANT REVENUES

For the three months ended March 31, 2003 and 2002, cost of merchant
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 occupancy tax; and (3) the
cost of rental cars from our suppliers, net of applicable taxes. Cost of
merchant revenues for the three months ended March 31, 2003, decreased
approximately 23.7% primarily due to a decrease in sales of airline tickets, as
discussed in the factors above.

COST OF AGENCY REVENUES

Agency revenues are recorded at their net amount, which are amounts
received less amounts paid to suppliers, if any.

COST OF OTHER REVENUES

For the three months ended March 31, 2002, cost of other revenues consisted
of the cost of long distance telephone service provided by our suppliers. For
the three months ended March 31, 2003, there were no such fees due to the
repositioning of our long distance and new car products in the fourth quarter of
2002.

18

GROSS PROFIT

MERCHANT GROSS PROFIT

Merchant gross profit consists of merchant revenues less the cost of
merchant 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 months ended March 31, 2003, merchant gross profit decreased from the same
period in 2002, primarily due to the weak retail 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
tradeoff associated with our products 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 tradeoffs. In addition, many airlines
grounded portions of their fleets in the aftermath of the terrorist attacks of
September 11, 2001, and upon the outbreak of war in Iraq, thus decreasing
capacity on existing flights, which we believe reduced airline inventory
available to us. Finally, at the end of 2002, we strategically reduced subsidies
applied to certain Name Your Own Price(R) ticket sales. While this resulted in a
reduction in revenue, the subsidy reduction positively affected our gross profit
and increased our gross margin.

AGENCY GROSS PROFIT

Agency gross profit consists of agency revenues which is recorded net of
agency costs. For the three months ended March 31, 2003, agency gross profit
increased over the same period in 2002 due to an increase in agency revenues.

OTHER GROSS PROFIT

For the three months ended March 31, 2003, other gross profit decreased
over the same period in 2002 as a result of the decrease in fees earned in
connection with our long distance phone service, a decrease in fees earned from
our home financing service and the fact that we collected no license fees from
Hutchison-Priceline Limited in the first quarter of 2003.

OPERATING EXPENSES

19

ADVERTISING

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
months ended March 31, 2003, advertising expenses increased over the same period
in 2002 primarily due to the increase in television production and advertising
fees, which was partially offset by a decrease in radio production and
advertising fees. We intend to promote the priceline.com brand aggressively
throughout 2003, and will focus the majority of our marketing resources on our
hotel product.

SALES AND MARKETING

Sales and marketing expenses consist primarily of (1) credit card
processing fees; (2) fees paid to third-party service providers that operate our
call centers; (3) provisions for credit card charge-backs; and (4) compensation
for our sales and marketing personnel. For the three months ended March 31,
2003, sales and marketing expenses decreased over the same period in 2002 due to
a decrease in credit card processing fees, a reduction in the absolute amount of
credit card charge-backs, and a reduction in call center expenses, which are all
primarily variable in nature.

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. General and administrative expenses decreased during
the three months ended March 31, 2003 compared with the same period in 2002 as a
result of the elimination

20

of stock based compensation, partially offset by higher premiums on our
Directors and Officers liability insurance policy.

SYSTEMS AND BUSINESS DEVELOPMENT

Systems and business development expenses consist primarily of: (1)
compensation to our information technology and product development staff; (2)
data communications and other expenses associated with operating our Internet
site; and (3) payments to outside contractors. For the three months ended March
31, 2003, systems and business development expenses decreased over the same
period in 2002, primarily as a result of the decrease in consultant expense, and
a decrease in compensation to our information technology staff as a result of
the fourth quarter 2002 restructuring.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses consist of: (1) amortization of
internally developed and purchased software; (2) depreciation of computer
equipment, (3) depreciation of our leasehold improvements, office equipment and
furniture and fixtures, and (4) amortization of our intangible assets. For the
three months ended March 31, 2003, depreciation and amortization expense
decreased over the same period in 2002, primarily as a result of full
depreciation and amortization of certain assets in prior periods.

RESTRUCTURING CHARGE

During the first quarter of 2002, we decreased the liability for the
restructuring charge by approximately $824,000. The reduction resulted from the
subleasing of office space under more favorable terms than originally
anticipated (reflected in the "Restructuring charge (reversal)" line on our
Consolidated Statements of Operations).

WARRANT CHARGE

21

The warrant charge for the three months ended March 31, 2003, related to
the issuance of warrants to purchase priceline.com common stock to Marriott
International, Inc.

INTEREST INCOME

For the three months ended March 31, 2003, interest income on cash and
marketable securities decreased over the same period in 2002 due to a lower cash
balance and lower interest rates.

EQUITY IN NET INCOME OF PRICELINEMORTGAGE

We did not record income of approximately $700,000 from our 49% equity
investment in pricelinemortgage during the three months ended March 31, 2003
as the carrying value of the investment approximated its estimated fair
value. Equity in net income of pricelinemortgage for the three months ended
March 31, 2002 of $492,000 represented our pro rata share of the net income
of pricelinemortgage.

TAXES

For the three months ended March 31, 2003 and March 31, 2002, we have
recorded no provision for income taxes due to current losses and the
availability of fully reserved net operating losses which have been utilized to
offset the income tax provision, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2003, we had approximately $139.8 million in cash, cash
equivalents, short-term investments and restricted cash. Approximately $17.0
million is restricted cash collateralizing certain letters of credit issued in
favor of certain suppliers and landlords. Also included in restricted cash are
amounts held by our credit card processor company. We generally invest excess
cash to make such funds readily available for operating

22

purposes. Cash equivalents and short-term investments are primarily comprised of
highly liquid, high quality, investment grade debt instruments, having
maturities of less than one year.

Because we collect cash up front from our customers and then pay our
suppliers over a ten to fifteen day period, we tend to experience significant
swings in supplier payables depending on the absolute level of our cost of
revenue during the last few weeks of every quarter. This can cause volatility in
working capital levels and impact cash balances more or less than our operating
income would indicate.

Net cash used in operating activities for the three months ended March 31,
2003, was approximately $840,000, resulting from a net loss of approximately
$7.7 million together with approximately $4.3 million of negative changes in
working capital offset by non-cash items not affecting first quarter cash flows
of approximately $11.2 million. The changes in working capital for the three
months ended March 31, 2003, were primarily related to an approximately $3.1
million increase in accounts receivable, and an approximately $1.8 million
decrease in accounts payable and accrued expenses. The increase in accounts
receivable was primarily due to the increase in revenue from the three months
ended December 31, 2002. The decrease in accounts payable and accrued expenses
is primarily due to cash severance payments resulting from the 2002
restructuring, and the settlement of other liabilities. Non-cash items were
primarily associated with the Marriott warrant charge and the depreciation and
amortization of property and equipment. Net cash provided by operating
activities for the three months ended March 31, 2002 was approximately $14.1
million, resulting from our net income of approximately $5.7 million, offset by
non-cash items of approximately $3.9 million and positive changes in working
capital of approximately $4.4 million.

Net cash used in investing activities was approximately $14.0 million and
approximately $24.3 million for the three months ended March 31, 2003 and 2002,
respectively. During the three months ended March 31, 2003, Lowestfare.com, our
wholly-owned subsidiary, invested approximately $8.6 million in Travelweb LLC.
In both years, 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 three months ended March 31, 2003 and March 31, 2002 was the
purchase of short-term investments and marketable securities in the amount of
approximately $6.0 million and approximately $19.1 million, respectively.

Capital expenditures for additions to property and equipment is expected to
aggregate approximately $8 to $12 million in 2003. On July 31, 2002, our board
of directors authorized the repurchase of up to $40 million of common stock from
time to time in the open market or in privately negotiated transactions. We may
purchase additional shares of our common stock in the future.

We believe that our existing cash balances and liquid resources will be
sufficient to fund our operating activities, 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 operations. If additional funds were raised through the issuance
of equity securities, the percentage ownership of our then current stockholders
would be diluted. There are no assurances 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 expectations similar expressions including,
without limitation, "may," "will," "should," "could," "expects," "does not
currently expect," "plans," "anticipates," "intends," "believes,"

23

"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 war; adverse
changes in our relationships with airlines, hotels and other product and service
providers including, without limitation, the withdrawal of suppliers from the
priceline.com system, the bankruptcy or insolvency of a major domestic airline;
the effects of increased competition; systems-related failures and/or security
breaches; our ability to protect our intellectual property rights; losses by us
and our licensees; any adverse impact from negative publicity and negative
customer reaction to such publicity; 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 ANNUAL
REPORT 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 March 31, 2003, we had an accumulated deficit of approximately $1.6
billion, and for the three months ended March 31, 2003, a net loss of
approximately $8.0 million. Despite the progress we have made towards improving
our financial results, 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 a 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 sufficiently to achieve and
sustain profitability in this difficult operating environment.

OUR BUSINESS WAS NEGATIVELY IMPACTED BY THE WAR IN IRAQ AND COULD BE
FURTHER DAMAGED BY TERRORIST ATTACKS OR THE FEAR OF FUTURE TERRORIST ATTACKS

In the weeks following the commencement of the military conflict with Iraq
on March 19, 2003, we experienced a substantial decline in demand for our travel
products and an increase in customer service costs and ticket refunds and
cancellations. Our first quarter 2003 financial results were adversely affected
by the war in Iraq. Further military conflict in that region could have a
material adverse effect on our business, results of operations and financial
condition. In addition, terrorist attacks (whether or not such attacks involve
commercial aircraft), the fear of future terrorist attacks or hostilities
involving the United States in other areas of the world, are likely to
contribute to a general reluctance by the public to travel and, as a result, to
have a material adverse effect on our business, results of operations and
financial condition.

WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES

Our financial prospects are significantly dependent upon our sale of
leisure airline tickets. Leisure airline tickets represented 30% of booked
offers, and an even greater percentage of our revenue for the three months ended
March 31, 2003. 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

24

major airlines could materially and adversely affect the airline industry and,
as a consequence, have a material adverse effect on our business, results of
operations and financial condition.

During the three months ended March 31, 2003, sales of airline tickets from
our five largest and two largest airline suppliers accounted for approximately
92.6% and 52.1% of airline ticket revenue, 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 35 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;

- often limit the manner in which we can sell inventory and, in the case
of our agreement with Delta Air Lines, substantially limits which airlines can
participate in our system; 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. The
significant reduction on the part of any of our other major suppliers of their
participation in the priceline.com system for a sustained period of time or
their complete withdrawal could have a material adverse effect on our business,
results of operations and financial condition.

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 since September 11, 2001. Further, since the September 11, 2001
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 other major U.S.
airlines that participate in our system declare bankruptcy, they may be unable
or unwilling to honor tickets sold for their 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, an airline-owned website that competes directly
with us.

25

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

We are heavily dependent on our suppliers. One of our largest airline
suppliers, United Airlines, is currently operating under the protection of
federal bankruptcy laws and certain other major suppliers, including American
Airlines, have disclosed publicly the possibility of seeking the protection of
the federal bankruptcy laws. If any of our suppliers currently in bankruptcy
liquidates or does not emerge from bankruptcy and we are unable to replace such
supplier as a participant in priceline.com, our business would be adversely
affected. Additionally, in the event that another of our major suppliers
voluntarily or involuntarily declares bankruptcy and is subsequently 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 May 7, 2003, two of the five rental car brands that
supply our rental car business are operating 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, it could have a material adverse effect
on our business, results of operations and financial condition. 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.com 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. Recently, we have
seen the continuation of a trend in the 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 Interactive,
Inc., which owns a controlling stake in Hotels.com, acquired a controlling stake
in Expedia, Inc. and, in early 2003, agreed to acquire all of Expedia, Inc.
shares it does not already own. In addition, USA Interactive, Inc. agreed to
acquire all of Hotels.com shares it does not already own. Finally, Hilton Hotels
Corporation, Hyatt Corporation, Marriott International, Inc., Six Continents
Hotels, Starwood Hotels and Pegasus Solutions, Inc. recently formed Travelweb
LLC, a full-service automated distributor of hotel rooms that will compete with
us in the online hotel space. 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,
Hotels.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;

26

- 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 their branded website); and

- operators of travel industry reservation databases such as Worldspan,
L.P. 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 rooms 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.
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. In May 2003, USA Interactive, Inc. announced an agreement to
acquire Lending Tree.

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 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.

WE MAY LOSE OR BE SUBJECT TO REDUCTION OF GDS FEES

We rely on fees paid to us by Worldspan, L.P. for travel bookings made
through Worldspan, L.P.'s global distribution system (GDS) for a substantial
portion of our gross profit and net income. 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 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 distributors, such as us, to develop technology
enabling direct connections therefore bypassing the GDS. Development of direct
connection technology would require the use of information technology resources
and could cause us to incur additional operating expenses

27

and delay other projects. We have been and believe that we will continue to be
under pressure from travel suppliers to rebate all or part of the travel booking
fees we receive from Worldspan, L.P. To the extent that we are required to
rebate travel booking fees we currently receive to travel suppliers, and are
unable to recover such amounts by charging customers, it could have a material
adverse effect on our business, results of operations and financial condition.

In addition, in March 2003, a corporation newly formed by Citigroup Venture
Capital Equity Partners L.P. and Teachers' Merchant Bank, agreed to purchase
Worldspan, L.P. from its airline owners. It is unclear what effect, if any, a
change in control of Worldspan, L.P. will have on our relationship with
Worldspan, L.P. or our business, results of operations or financial condition.

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 pay sales and other taxes
to suppliers on our purchases of travel services sold through the priceline.com
service. In certain cases, where appropriate, we remit taxes directly to the tax
authorities. We believe that this practice is consistent with the tax laws of
all jurisdictions. However, one or more states could seek to impose additional
income tax obligations, sales tax collection obligations, or other tax
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.

We are currently conducting an on-going review and interpretation of the
tax laws in various states and jurisdictions relating to state and local hotel
occupancy taxes. Several jurisdictions have indicated that they may take the
position that hotel occupancy tax is applicable to the gross profit on
merchant hotel transactions. Historically, we have not paid such taxes. Some
state and local jurisdictions could rule that we are subject to hotel
occupancy taxes on the gross profit and could seek to collect such taxes,
either retroactively or prospectively or both.

To the extent that any tax authority succeeds in asserting that a tax
collection responsibility applies to transactions conducted through the
priceline.com service, we might have additional tax exposure. Such actions could
have a material adverse effect on our business, results of operations and
financial condition.

We will continue to assess the risks of any potential financial impact, and
to the extent appropriate, we will reserve for those contingencies.

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 the fraudulent use of credit cards. To date, this project has been
successful in reducing fraud; however, if we are unable to continue to reduce
the fraudulent use of credit cards on our website, it could have a material
adverse effect on our business, results of operations and financial condition.

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.

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

28

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 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.

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.

TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 34% OF OUR STOCK

Hutchison Whampoa Limited and its 49.97% shareholder, Cheung Kong
(Holdings) Limited, collectively beneficially owned approximately 34% of our
outstanding common stock as of March 31, 2003, based on public filings with the
Securities and Exchange Commission. Together, Cheung Kong (Holdings) Limited and
Hutchison Whampoa Limited have appointed three of the thirteen 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 stockholders 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 19, 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.

29

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, hotel and rental car 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, L.P., an
operator of a database for the travel industry. Any interruption in these
third-party services systems, including Worldspan, L.P.'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, it could have a material adverse effect on
our business, results of operations and financial condition.

Substantially all of our computer hardware for operating our services is
currently located at Cable & Wireless plc. in Jersey City, New Jersey. If Cable
& Wireless 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 have a material adverse effect on our business,
results of operations and financial condition.

Some of our communications infrastructure is provided by WorldCom, Inc.
which has filed for bankruptcy protection. If WorldCom, Inc. is unable, for any
reason, to support the communications infrastructure that it provides us,
instabilities in our systems could increase until such time as we were able to
replace its services.

While we do maintain redundant systems and hosting services, it is possible
that we could experience an interruption in our business, 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

Substantial amounts of our computer hardware for operating our services
currently is located at the facilities of Cable & Wireless plc. 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. Despite any precautions we may take, the occurrence of a
natural disaster or other unanticipated problems at the Cable & Wireless
facility could result in lengthy interruptions in our services. In addition, the
failure by Cable & Wireless 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 have a material
adverse effect on our business, results of operations and financial condition.

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

30

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, it could have a material adverse effect
on our business, results of operations and financial condition.

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 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 review 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.

31

LEGAL PROCEEDINGS

We are a party to the legal proceedings described in Note 10 to our
Unaudited Consolidated Financial Statements of this Quarterly Report on Form
10-Q for the three months ended March 31, 2003. The defense of the actions
described in Note 10 may increase our expenses and an adverse outcome in any of
such actions could have a material adverse effect on our business, results of
operations and financial condition.

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.

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

- 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 company 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

32

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
Note 10 to Unaudited Consolidated Financial Statements

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 have a material adverse effect on our business,
results of operations and financial condition.

THE priceline.com WEBSITE. We maintain a website with the address
www.priceline.com. We are not including the information contained on our website
as a part of, or incorporating it by reference into, this Quarterly Report on
Form 10-Q. We make available free of charge through our website our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, and amendments to these reports, as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
Securities and Exchange Commission.

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 described in
this Quarterly Report on Form 10-Q) and does not earn significant
foreign-sourced income. Accordingly, changes in interest rates or currency
exchange rates do not generally have a material direct 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 may indirectly affect consumer
demand for such products and priceline.com's revenue. Additionally, fixed rate
investments are subject to interest rate volatility. 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.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions, and there can be no assurance that any
design will succeed in achieving its stated goals.

In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls to the date of their last evaluation.

33

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A description of material legal proceedings to which we are a party is
contained in Part I, Item 3 of our Annual Report on Form 10-K for the year ended
December 31, 2002. A description of material changes to such proceedings is
contained in Note 10 to the Notes to Unaudited Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q for the quarter ended March 31,
2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

(b) REPORTS ON FORM 8-K

On January 24, 2003, we furnished a report on Form 8-K in connection with
the retirement of William E. Ford from our Board of Directors, and the
appointment of Howard "Skip" Barker, Jr. to our Board of Directors. On February
11, 2003, we furnished a report on Form 8-K in connection with our fourth
quarter 2002 earnings announcement. On February 24, 2003, we furnished a report
on Form 8-K in connection with the presentation materials to be presented at the
Goldman Sachs Technology Investment Symposium in La Quinta, California on
February 24, 2003. On March 20, 2003, we furnished a report on Form 8-K in
connection with the renewal of a marketing agreement with Marriott
International, Inc., and the related issuance of warrants to purchase 5,000,000
shares of priceline.com common stock, par value $0.008.

34

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: May 15, 2003 By: /s/ Robert J. Mylod, Jr.
------------------------------------------
Name: Robert J. Mylod, Jr.
Title: Chief Financial Officer
(On behalf of the Registrant and
as principal financial officer)

35

CERTIFICATIONS

I, Jeffery H. Boyd, certify that:

1. I have reviewed the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 (the "Quarterly Report") of the Registrant;

2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this Quarterly Report;

3. Based on my knowledge, the financial statements, and other
financial information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Quarterly
Report;

4. The Registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;

b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and

c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls;

6. The Registrant's other certifying officer and I have indicated in
this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: May 15, 2003 /s/ Jeffery H. Boyd
------------------------------------
Name: Jeffery H. Boyd
Title: President & Chief Executive Officer

CERTIFICATIONS

I, Robert J. Mylod, Jr., certify that:

1. I have reviewed the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003 (the "Quarterly Report") of the Registrant;

2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this Quarterly Report;

3. Based on my knowledge, the financial statements, and other
financial information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Quarterly
Report;

4. The Registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Quarterly Report is being prepared;

b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Quarterly Report (the "Evaluation
Date"); and

c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls;

6. The Registrant's other certifying officer and I have indicated in
this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: May 15, 2003 /s/ Robert J. Mylod, Jr.
------------------------------------
Name: Robert J. Mylod, Jr.
Title: Chief Financial Officer