PRICELINE COM INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended June 30, 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 06-1528493
- -------------------------------------- --------------------------------------
(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 August 1, 2003:

Common Stock, par value $0.008 per share 38,024,469
- ------------------------------------------ ------------------------------
(Class) (Number of Shares)

priceline.com Incorporated
Form 10-Q

For the Quarter Ended June 30, 2003

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Condensed Financial Statements

Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002....................................3
Consolidated Statements of Operations For the Three and Six Months
Ended June 30, 2003 and 2002 (unaudited)...................................................................4
Consolidated Statement of Changes in Stockholders' Equity For the Six Months
Ended June 30, 2003 (unaudited)............................................................................5
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2003 and 2002 (unaudited).................6
Notes to Unaudited Consolidated Financial Statements..............................................................7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................16

Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................39

Item 4. Controls and Procedures..................................................................................39

PART II - OTHER INFORMATION

Item 1. Legal Proceedings........................................................................................39
Item 4. Submission of Matters to a Vote of Security Holders......................................................40
Item 6. Exhibits and Reports on Form 8-K.........................................................................41

SIGNATURES.......................................................................................................42

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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 SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)

See Notes to Unaudited Consolidated Financial Statements.

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

See Notes to Unaudited Consolidated Financial Statements.

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PRICELINE.COM INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Priceline.com Incorporated ("priceline.com" or the "Company") is
responsible for the consolidated financial statements included in this document.
The financial statements have been prepared in accordance with 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.

On June 9, 2003, the Company's shareholders approved a one-for-six reverse
stock split of the Company's outstanding common stock. The reverse stock split
was effected at 12:01 a.m. on June 16, 2003 and, as a result, the Company's
issued and outstanding common stock was reduced from approximately 227.6 million
to approximately 37.9 million shares. The par value of the common stock was not
affected by the reverse stock split and remains at $0.008 per share.
Consequently, on the Company's balance sheet, the aggregate par value of the
issued common stock was reduced by reclassifying the par value amount of the
eliminated shares of common stock to Additional Paid-in Capital. All per share
amounts and outstanding shares, including all common stock equivalents (stock
options and warrants), have been retroactively restated in the Consolidated
Condensed Financial Statements and in the Notes to the Unaudited Consolidated
Financial Statements for all periods presented to reflect the reverse stock
split.

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):

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Deduct: Total stock-based compensation determined
under fair value based method for all stock based
compensation (7,218) (28,506) (14,272) (57,013)
------------ ------------- ------------- -----------
Adjusted net income (loss), fair value method for
all stock based compensation $ 541 $ (21,947) $ (14,541) $ (46,317)
------------ ------------- ------------- -----------
Basic and diluted income (loss) per share as
reported $ 0.20 $ 0.16 $ (0.01) $ 0.26
Basic and diluted income (loss) per share SFAS 123
adjusted $ 0.01 $ (0.55) $ (0.39) $ (1.16)

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 INCOME (LOSS) PER SHARE

The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share." SFAS 128 requires the Company to report both basic earnings per
share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per share, which is based on the weighted
average number of common shares outstanding and all dilutive potential common
shares outstanding. For the three and six months ended June 30, 2003, for the
purpose of calculating earnings per share - basic, the weighted average number
of common shares outstanding was 37,634,646 and 37,556,053, respectively. For
the three months ended June 30, 2003, for the purpose of calculating earnings
per share - diluted, the weighted average number of common shares outstanding
was 39,283,553, which includes 1,648,907 shares representing the dilutive effect
of common stock equivalents. Total anti-dilutive stock options and warrants
excluded from earning per share for the three months ended June 30, 2003 were
5,288,103. Since the company incurred a loss applicable to common stockholders
for the six month period ended June 30, 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 that period. Total anti-dilutive stock options and warrants excluded
from the calculation of net loss per share for the six months ended June 30,
2003 were 6,903,378. For the three and six months ended June 30, 2002, for the
purpose of calculating earnings per share - basic, the weighted average number
of common shares outstanding was 38,279,764 and 38,099,468, respectively, and
for the purpose of calculating earnings per share - diluted, the weighted
average number of common shares outstanding was 39,917,062 and 39,923,894,
respectively, which includes 1,637,298 shares and 1,824,426 shares,
respectively, representing the dilutive effect of common stock equivalents.
Total anti-dilutive stock options and warrants excluded from the calculation of
earning per share for the three and six months ended June 30, 2002 were
7,427,110 and 7,239,982, respectively.

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

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currently accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") 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 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 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. 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
impact the Company's disclosure, 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.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company does not
expect the adoption of SFAS 150 to have a material impact on its results of
operatons or financial condition.

5. SPECIAL AND RESTRUCTURING CHARGES

During the second quarter of 2002, the Company decreased the liability
for the special charge by approximately $200,000. The reduction resulted from
the favorable resolution of certain matters. The adjustment was reflected in
the "Special charge (reversal)" line on the Company's Consolidated Statements
of Operations.

During the first quarter 2002, the Company 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. The adjustment was reflected in the "Restructuring
charge (reversal)" line on the Company's Consolidated Statements of
Operations.

At December 31, 2002, the Company had a restructuring charge liability of
$5.1 million related to restructuring provisions made in 2002 and 2000.

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During 2003, the liability for the restructuring charge decreased by
approximately $2.6 million. The reductions resulted primarily from cash payments
made during the year.

At June 30, 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 June 30, 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 $8.7 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, which
were not material to the Company's results of operations for the three months
ended June 30, 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 recognized approximately $1.3 million of income from its
investment in pricelinemortgage for the three and six months ended June 30,
2003. The Company earned advertising fees from pricelinemortgage of
approximately $197,000 and approximately $195,000 for the three months ended
June 30, 2003 and 2002, respectively, and approximately $401,000 and
approximately $672,000 for the six months ended June 30, 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 $7.8 million.

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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 897,953 shares of its common stock for its
treasury during the period ended December 31, 2002 at an aggregate cost of
approximately $11.8 million. 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
June 30, 2003, there were approximately 1.8 million shares of the Company's
common stock held in treasury.

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 4.5 million shares of the
Company's common stock at an exercise price of $17.81 per share. The exercise
price of the Warrants is paid by surrendering .0178125 shares of Series B
Preferred Stock for each share of the Company's common stock purchased.

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 500,000 shares of the
Company's common stock each year, subject to adjustment as provided for in
the certificate of designations (and as described below as the result of
exercise of the Warrants). The Series B Preferred Stock has a liquidation
preference of $1,000 per share and is subject to mandatory redemption on
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 3.1 million
shares of the Company's common stock and on January 29, 2002, Delta exercised
Warrants to purchase 666,667 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 requirement is 40,240 shares of common
stock. In accordance with the terms of the Series B Preferred Stock, the Company
delivered to Delta 40,240, 40,240 and 75,718 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, respectively.

The Warrants provide that at any time the closing sales price of the
Company's common stock has exceeded $53.4375 (subject to adjustment) for 20
consecutive trading days, the Warrants will automatically be exercised. As of
June 30, 2003, there were 756,200 Warrants outstanding.

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9. MARRIOTT WARRANTS

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

10. COMMITMENTS AND CONTINGENCIES

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

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

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

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Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2169 (District of Connecticut).
- Howard Gunty Profit Sharing Plan v. priceline.com Inc.
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1917 (District of Connecticut).
- Cerelli v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1918 (District of Connecticut)
- Mayer v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1923 (District of Connecticut)
- Anish v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1948 (District of Connecticut)
- Atkin v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1994 (District of Connecticut).
- Lyon v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2066 (District of Connecticut).
- Kwan v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2069 (District of Connecticut).
- Krim v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2083 (District of Connecticut).
- Karas v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2232 (District of Connecticut).
- Michols v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2280 (District of Connecticut).

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

In addition, on November 1, 2000 the Company was served with a complaint
that purported to be a shareholder derivative action against its Board of
Directors and certain of its current and former executive officers, as well as
the Company (as a nominal defendant). The complaint alleged breach of fiduciary
duty and waste of corporate assets. The action is captioned Mark Zimmerman v.
Richard Braddock, J. Walker, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W.
Ford, M. Loeb, N. Nicholas, N. Peretsman, and priceline.com Incorporated
18473-NC (Court of Chancery of Delaware, County of New Castle, State of
Delaware). On February 6, 2001, all defendants moved to dismiss the complaint
for failure to make a demand upon the Board of Directors and failure to state a
cause of action upon which relief can be granted. Pursuant to a stipulation by
the parties, an amended complaint was filed on June 21, 2001. Defendants renewed
their motion to dismiss on August 20, 2001, and plaintiff served his opposition
to that motion on October 26, 2001. Defendants filed their reply brief on
January 7, 2002. On December 20, 2002, the Court granted Defendants' motion
without prejudice. On April 25, 2003, a second amended complaint, adding H.
Miller as a defendant, was filed. The Company intends to defend vigorously
against this action.

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On March 16, March 26, April 27, and June 5, 2001, respectively, four
putative class action complaints were filed in the U.S. District Court for the
Southern District of New York naming priceline.com, Inc., Richard S. Braddock,
Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch,
Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon
Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and
01 Civ. 4956). Shives ET AL. v. Bank of America Securities LLC ET AL., 01 Civ.
4956, also names other defendants and states claims unrelated to the Company.
The complaints allege, among other things, that priceline.com and the individual
defendants violated the federal securities laws by issuing and selling
priceline.com common stock in priceline.com's March 1999 initial public offering
without disclosing to investors that some of the underwriters in the offering,
including the lead underwriters, had allegedly solicited and received excessive
and undisclosed commissions from certain investors. By Orders of Judge Mukasey
and Judge Scheindlin dated August 8, 2001, these cases were consolidated for
pre-trial purposes with hundreds of other cases, which contain allegations
concerning the allocation of shares in the initial public offerings of companies
other than priceline.com, Inc. By Order of Judge Scheindlin dated August 14,
2001, the following cases were consolidated for all purposes: 01 Civ. 2261; 01
Civ. 2576; and 01 Civ. 3590. On April 19, 2002, plaintiffs filed a Consolidated
Amended Class Action Complaint in these cases. This Consolidated Amended Class
Action Complaint makes similar allegations to those described above but with
respect to both the Company's March 1999 initial public offering and the
Company's August 1999 second public offering of common stock. The named
defendants are priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E.
Francis, Nancy B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co.,
Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson
Stephens, Inc. (as successor-in-interest to BancBoston), Credit Suisse First
Boston Corp. (as successor-in-interest to Donaldson Lufkin & Jenrette Securities
Corp.), Allen & Co., Inc. and Salomon Smith Barney, Inc. Priceline, Richard
Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together
with other issuer defendants in the consolidated litigation, filed a joint
motion to dismiss on July 15, 2002. On November 18, 2002, the cases against the
individual defendants were dismissed without prejudice and without costs. In
addition, counsel for plaintiffs and the individual defendants executed
Reservation of Rights and Tolling Agreements, which toll the statutes of
limitations on plaintiffs' claims against those individuals. On February 19,
2003, Judge Scheindlin issued an Opinion and Order granting in part and denying
in part the issuer's motion. None of the claims against the Company were
dismissed. On June 26, 2003, counsel for the plaintiff class announced that they
and counsel for the issuers had agreed to the form of a Memorandum of
Understanding to settle claims against the issuers. The terms of that Memorandum
provide that class members will be guaranteed $1 billion dollars in recoveries
by the insurers of the issuers and that settling issuer defendants will assign
to the class members certain claims that they may have against the underwriters.
Issuers also agree to limit their abilities to bring certain claims against the
underwriters. If recoveries in excess of $1 billion dollars are obtained by the
class from any non-settling defendants, the settling defendants' monetary
obligations to the class plaintiffs will be satisfied; any amount recovered from
the underwriters that is less than $1 billion will be paid by the insurers on
behalf of the issuers. The Memorandum, which is subject to the approval of each
issuer, was approved by a special committee of the priceline.com Board of
Directors on Thursday, July 3, 2003. Any proposed settlement is subject to the
parties entering into a formal written agreement and final approval by the
Court.

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.

14

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

11. TAXES

For the six months ended June 30, 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 July 29, 2003, the Company announced the pricing of $100 million of
Convertible Senior Notes due August 1, 2010 in a private placement. The Company
granted the initial purchasers of the notes a thirty-day option to purchase up
to $25 million of additional notes. The sale of the notes closed on August 1,
2003. The Company intends to use the net proceeds of the anticipated offering
for general corporate purposes, strategic purposes and working capital
requirements. Interest on the notes will accrue at an annual rate of 1%. The
notes will be convertible, subject to certain conditions, into priceline.com's
common stock, par value $0.008 per share, at the option of the holder, at a
conversion price of approximately $40.00 per share, subject to adjustment upon
the occurrence of specified events. Each $1,000 principal amount of notes will
initially be convertible into 25 shares of the Company's common stock. In
addition, the notes will be redeemable at the Company's option beginning in
2008, and the holders may require the Company to repurchase the notes on August
1, 2008 or in certain other circumstances. The Company has agreed, pursuant to a
registration rights agreement, to file a shelf registration statement with
respect to the notes and the common stock issuable upon conversion of the notes.
Certain of the Company's warrant holders and stockholders have "piggy-back"
registration rights that would enable them to sell the Company's common stock
under such a shelf registration statement.

The Company is in the process of negotiating a restructuring of its
relationship with Hutchison-Priceline Limited, a subsidiary of Hutchison Whampoa
Limited, or Hutchison, whereby, among other things, the amount of shares
Hutchison-Priceline is authorized to issue would be increased, and the par value
of Hutchison-Priceline common shares would be decreased. Pursuant to the
proposed restructuring agreement, the Company and Hutchison would convert its
outstanding convertible notes into shares of Hutchison-Priceline Limited, and
Hutchison would purchase shares and be granted the right to purchase additional
shares until March 31, 2004. After the restructuring, the Company and Hutchison
would own approximately 15% and 85%, respectively, of the outstanding equity
securities of Hutchison-Priceline Limited. Under the new agreements, the Company
would continue to license its business model and provide its expertise in
technology and operations to Hutchison-Priceline Limited. Hutchison and Cheung
Kong (Holdings) Limited, a company affiliated with Hutchison, own approximately
34% of the Company's outstanding common stock and hold three seats on the
Company's board of directors. The Company holds one seat on
Hutchison-Priceline's board of directors.

15

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 weeks following the commencement of the military conflict with Iraq
on March 19, 2003 and the outbreak of Severe Acute Respiratory Syndrome, or
SARS, in Asia and elsewhere in the second quarter, 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, we believe that our first

16

and second quarter 2003 financial results were adversely affected by the war in
Iraq and the outbreak of SARS.

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
and the outbreak of SARS. If the major airlines are unable to stem these losses,
additional bankruptcy filings by major airlines are possible. 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 and the outbreak of SARS, 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,
hostilities in the Middle East, and the outbreak of SARS, continued aggressive
discounting by the airlines, competition from other on-line distribution
channels and low-cost carriers, and uncertainty regarding our domestic economy,
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 a marked 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., our GDS. 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, on July 1, 2003, a corporation newly formed by
Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank,
purchased 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.

On June 6, 2003, we entered into an amendment of our agreement with
Worldspan, L.P. for the provision of global distribution, or GDS, services. The
amendment contains new obligations for priceline.com and, in certain cases, our
affiliates, to generate various percentages of our U.S. and Canadian airline,
hotel and rental car bookings

17

through the Worldspan GDS. In addition, the amendment changes the inducements
that priceline is paid for each airline, hotel and rental car booking that we
generate through the Worldspan GDS. The agreement is effective as of April 1,
2003 and continues until December 31, 2007.

On June 16, 2003, we effected a 1-for-6 reverse stock split of all
outstanding shares of our common stock, par value $0.008 per share. As a result
of the reverse stock split, each priceline.com stockholder received 1 share of
priceline.com common stock in exchange for every 6 shares. The par value of our
common stock did not change as a result of the reverse stock split. As of June
30, 2003, there were 37,925,178 shares of priceline.com common stock
outstanding.

We believe that our success will depend in large part on our ability to
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 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).

On June 9, 2003, our shareholders approved a one-for-six reverse stock
split of our outstanding common stock. The reverse stock split was effected at
12:01 a.m. on June 16, 2003, and, as a result, our issued and outstanding common
stock was reduced from approximately 227.6 million to approximately 37.9 million
shares. The par value of the common stock was not affected by the reverse stock
split and remains at $0.008 per share. Consequently, on our balance sheet, the
aggregate par value of the issued common stock was reduced by reclassifying the
par value amount of the eliminated shares of common stock to Additional Paid-in
Capital for all periods presented. All per share amounts and outstanding shares,
including all common stock equivalents (stock options), have been retroactively
restated in the Consolidated Condensed Financial Statements and in the Notes to
the Unaudited Consolidated Financial Statements for all periods presented to
reflect the reverse stock split.

RECENT ACCOUNTING PRONOUNCEMENTS

A description of recent accounting pronouncements is contained in Note 4 to
the Notes to Unaudited Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.

RECENT DEVELOPMENTS

On July 29, 2003, we announced the pricing of $100 million of Convertible
Senior Notes due August 1, 2010 in a private placement. We granted the initial
purchasers of the notes a thirty-day option to purchase up to $25 million of
additional notes. The sale of the notes closed on August 1, 2003. We intend to
use the net proceeds of the anticipated offering for general corporate purposes,
strategic purposes and working capital requirements. Interest on the notes will
accrue at an annual rate of one percent. The notes will be convertible, subject
to certain conditions, into priceline.com's common stock, par value $0.008 per
share, at the option of the holder, at a conversion price of approximately
$40.00 per share, subject to adjustment upon the occurrence of specified events.

18

Each $1,000 principal amount of notes will initially be convertible into 25
shares of our common stock. In addition, the notes will be redeemable at our
option beginning in 2008, and the holders may require us to repurchase the notes
on August 1, 2008 or in certain other circumstances. We have agreed, pursuant to
a registration rights agreement, to file a shelf registration statement with
respect to the notes and the common stock issuable upon conversion of the notes.
Certain of our warrant holders and stockholders have "piggy-back" registration
rights that would enable them to sell our common stock under such a shelf
registration statement. See "FACTORS THAT MAY AFFECT FUTURE RESULTS - TWO LARGE
STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 34% OF OUR STOCK."

We are in the process of negotiating a restructuring of our relationship
with Hutchison-Priceline Limited, a subsidiary of Hutchison Whampoa Limited, or
Hutchison, whereby, among other things, the amount of shares Hutchison-Priceline
is authorized to issue would be increased, and the par value of
Hutchison-Priceline common shares would be decreased. Pursuant to the proposed
restructuring agreement, priceline.com and Hutchison would convert its
outstanding convertible notes into shares of Hutchison-Priceline Limited, and
Hutchison would purchase shares and be granted the right to purchase additional
shares until March 31, 2004. After the restructuring, priceline.com and
Hutchison would own approximately 15% and 85%, respectively, of the outstanding
equity securities of Hutchison-Priceline Limited. Under the new agreements, we
would continue to license our business model to Hutchison-Priceline Limited.
Hutchison and Cheung Kong (Holdings) Limited, a company affiliated with
Hutchison, own approximately 34% of our outstanding common stock and hold three
seats on our board of directors. We hold one seat on Hutchison-Priceline's board
of directors.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 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 and six months ended June 30, 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 June 30, 2003, we sold approximately 446,000,
1.5 million and 828,000 airline tickets, hotel room nights and rental car days,
respectively. During the six months ended June 30, 2003, we sold approximately
885,000, 2.7 million and 1.5 million airline tickets, hotel room nights and
rental car days, respectively. During the three months ended June 30, 2002, we
sold approximately 921,000, 1.1 million and 794,000 airline tickets, hotel room
nights and rental car days, respectively. During the six months ended June 30,
2002, we sold approximately 1.8 million, 2.0 million and 1.5 million airline
tickets, hotel room nights and rental car days, respectively. We believe that
the decrease in the number of airline tickets sold in the three and six months
ended June 30, 2003, compared to the three and six months ended June 30, 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

19

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 and the
outbreak of SARS, thus decreasing capacity on existing flights, which we believe
reduced airline inventory available to us.

The year-over-year decrease in the number of airline tickets sold, however,
was partially offset by the increase in hotel room nights sold in the first and
second quarters of 2003. During the three months ended June 30, 2003, we sold
approximately 1.5 million hotel room nights, an approximate 270,000 room nights
over the three months ended March 31, 2003. Hotel unit sales during the three
months ended June 30, 2003 increased approximately 38% compared to the same
period in 2002. We attribute the growth of our hotel product to the success of
our marketing campaign and the competitive room inventory and pricing we receive
from our hotel partners.

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 expense of lower gross margins. 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 and second quarters of
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:

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 and second quarters of 2003, are expected
to continue throughout 2003.

We added approximately 902,000 and approximately 1.7 million new customers
during the three and six months ended June 30, 2003, compared to approximately
964,000 and approximately 1.8 million new customers during three and six months
ended June 30, 2002. In addition, we generated approximately 1.8 million and
approximately 3.3 million repeat customer offers during the three and six months
ended June 30, 2003, and approximately the same amount for the same periods last
year.

20

Merchant revenues for the three and six months ended June 30, 2003
decreased approximately 22% compared to the three and six months ended June
30, 2002, primarily as a result of 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. Offsetting the approximately 52%
year-over-year reduction in airline tickets sold in the second quarter of
2003 was an approximately 38% 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 June 30, 2003
decreased from the same periods a year ago as a result of a decrease in
Worldspan, L.P. reservation booking fees and customer processing fees in the
airline services due to lower volume.

Merchant revenues 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 and six months ended
June 30, 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 and six months ended June 30, 2003 increased
approximately 600% and 478%, respectively, from the same periods a year ago,
primarily as a result of our increased focus on the retail airline ticket
business and the resulting increase in travel commissions earned.

OTHER REVENUES

Other revenues during the three and six months ended June 30, 2003 and 2002
consisted primarily of: (1) marketing revenues; (2) fees from our home financing
and automobile services; (3) fees and, in 2002, transaction revenue 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 June 30, 2003 decreased
approximately 27% to approximately $1.1 million from approximately $1.6 million
for the three months ended June 30, 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 transaction revenues generated
from our long distance phone service in 2003.

21

COST OF REVENUES AND GROSS PROFIT

COST OF REVENUES

COST OF MERCHANT REVENUES

For the three and six months ended June 30, 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 and six months ended June 30, 2003, decreased
approximately 22% and 23%, respectively, primarily due to a decrease in sales of
airline tickets, as discussed 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 and six months ended June 30, 2002, cost of other revenues
consisted of the cost of long distance telephone service provided by our
suppliers. For the three and six months ended June 30, 2003, there were no such
costs due to the repositioning of our long distance telephone service in the
fourth quarter of 2002.

22

GROSS PROFIT

Total gross profit, as a percentage of revenue, increased for the three
months ended June 30, 2003 as compared to the three months ended June 30, 2002,
primarily as a result of growth in agency retail sales and improvement in
merchant margins.

MERCHANT GROSS PROFIT

Merchant gross profit consists of merchant revenues less the cost of
merchant revenues. For the three and six months ended June 30, 2003, merchant
gross profit decreased from the same periods 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. We are,
however, able to manage the level of gross margins by controlling the price
at which we will cause offers to be fulfilled. 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. In addition, our overall gross margin increased year-over-year as the
result of higher margins on the sale of our Name Your Own Price(R) products
and a shift in mix from air to non-air product.

AGENCY GROSS PROFIT

Agency gross profit consists of agency revenues which is recorded net of
agency costs. For the three and six months ended June 30, 2003, agency gross
profit increased over the same period in 2002 due to an increase in agency
revenues.

OTHER GROSS PROFIT

For the three and six months ended June 30, 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 and a decrease in fees
earned from our home financing service. There were no license fees received from
Hutchison-Priceline Limited for the three and six months ended June 30, 2003.

23

OPERATING EXPENSES

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
and six months ended June 30, 2003, advertising expenses decreased over the same
periods in 2002 primarily due to the decrease in radio production and
advertising fees, which was partially offset by a increase in television
production and advertising fees. We intend to continue to promote the
priceline.com brand aggressively throughout the remainder of 2003, and will
focus the majority of our advertising 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 and six months ended June
30, 2003, sales and marketing expenses decreased over the same periods in 2002
due to a decrease in credit card processing fees and a reduction in call center
expenses, which are primarily variable in nature, and a reduction in product
promotion expenses.

24

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of: (1) compensation
to our personnel; (2) occupancy expenses; (3) telecommunications costs; and (4)
fees for outside professionals. General and administrative expenses decreased
during the three and six months ended June 30, 2003 compared with the same
periods in 2002 as a result of the decrease in professional fees, a decrease in
personnel costs as a result of our fourth quarter 2002 restructuring, and the
decrease in 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 and six months
ended June 30, 2003, systems and business development expenses decreased over
the same periods in 2002, primarily as a result of a decrease in compensation to
our information technology staff as a result of the fourth quarter 2002
restructuring and a decrease in consultant expenses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expenses consist of: (1) amortization of
internally developed and purchased

25

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 and six months ended June
30, 2003, depreciation and amortization expense decreased over the same periods
in 2002, primarily as a result of a smaller depreciable asset base and a
reduction in capital expenditures in 2003.

SPECIAL AND RESTRUCTURING CHARGES

During the second quarter of 2002, we decreased the liability for the
special charge by approximately $200,000. The reduction resulted from the
favorable resolution of certain matters. The adjustment was reflected in the
"Special charge (reversal)" line on our Consolidated Statements of Operations.

During the first quarter 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. The adjustment was reflected in the "Restructuring charge
(reversal)" line on our Consolidated Statements of Operations.

WARRANT CHARGE

The warrant charge for the six months ended June 30, 2003, related to the
issuance of warrants to purchase priceline.com common stock to Marriott
International, Inc.

INTEREST INCOME

For the three and six months ended June 30, 2003, interest income on cash
and marketable securities decreased over the same period in 2002 due to a lower
invested cash balance and lower interest rates.

26

EQUITY IN INCOME OF INVESTEES, NET

Equity in income of investees, net for the three and six months ended June
30, 2002 of $1.1 million represented our pro rata share of the net income of
pricelinemortgage and our pro rata share of the net loss of Travelweb, LLC.
During the second quarter 2003, the estimated fair value of pricelinemortgage
exceeded its carrying value.

TAXES

For the three and six months ended June 30, 2003 and June 30, 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 June 30, 2003, we had approximately $149.2 million in cash, cash
equivalents, short-term investments and restricted cash. Approximately $16.9
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 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. See "RECENT DEVELOPMENTS" for a discussion of priceline.com's pricing
of $100 million of Convertible Senior Notes.

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 provided by operating activities for the six months ended June
30, 2003, was approximately $8.0 million, resulting from a net loss of
approximately $42,000 together with approximately $6.0 million of negative
changes in certain assets and liabilities offset by non-cash items not
affecting June 30 cash flows of approximately $14.0 million. The changes in
working capital for the six months ended June 30, 2003, were primarily
related to an approximately $11.6 million increase in accounts receivable,
and an approximately $6.5 million increase in accounts payable and accrued
expenses. The increase in accounts receivable and accounts payable and
accrued expenses was primarily due to the increase in hotel revenues.
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 six months ended June 30, 2002 was
approximately $16.8 million, resulting from our net income of approximately
$12.1 million, non-cash items of approximately $8.7 million and offset by
negative changes in certain assets and liabilities of approximately $3.9
million.

Net cash used in investing activities was approximately $10.7 million and
approximately $21.6 million for the six months ended June 30, 2003 and 2002,
respectively. During the six months ended June 30, 2003, Lowestfare.com, our
wholly-owned subsidiary, invested approximately $11.7 million in an equity
investment and other acquisitions. 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 six months ended June 30,
2002 was the purchase of short-term investments and marketable securities in the
amount of approximately $13.2 million.

27

Capital expenditures for additions to property and equipment is expected to
aggregate approximately $5 to $7 million in the last six months of 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.

Net cash provided by financing activities was approximately $4.7 million
and approximately $3.0 million for the six months ended June 30, 2003 and 2002,
respectively, which resulted entirely from proceeds from the exercise of
employee stock options.

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 or similar expressions
including, without limitation, "may," "will," "should," "could," "expects,"
"does not currently expect," "plans," "anticipates," "intends," "believes,"
"estimates," "predicts," "potential," "targets," or "continue," reflecting
something other than historical fact are intended to identify forward-looking
statements. The factors described below in the section entitled "Factors That
May Affect Future Results" could cause our actual results to differ materially
from those described in the forward-looking statements. 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 QUARTERLY
REPORT ON FORM 10-Q SHOULD BE CAREFULLY CONSIDERED. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY
ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR
BUSINESS, FINANCIAL CONDITION, OPERATING RESULTS AND CASH FLOWS COULD BE
MATERIALLY ADVERSELY AFFECTED.

WE MAY CONTINUE TO INCUR LOSSES

As of June 30, 2003, we had an accumulated deficit of approximately $1.6
billion, and for the six months ended June 30, 2003, a net loss of approximately
$42,000. 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
profitability in this difficult operating environment. If our revenues do not
grow as expected, we may continue to incur losses and may not achieve or sustain
profitability in future years.

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OUR BUSINESS WAS NEGATIVELY IMPACTED BY THE WAR IN IRAQ AND THE OUTBREAK OF
SEVERE ACUTE RESPIRATORY SYNDROME AND COULD BE FURTHER DAMAGED BY FUTURE
TERRORIST ATTACKS, TRAVEL-RELATED HEALTH CONCERNS OR THE FEAR OF FUTURE
TERRORIST ATTACKS OR TRAVEL-RELATED HEALTH CONCERNS

In the weeks following the commencement of the military conflict with Iraq
on March 19, 2003 and the outbreak of Severe Acute Respiratory Syndrome, or
SARS, in Asia and elsewhere in the second quarter, we experienced a substantial
decline in demand for our travel products and an increase in customer service
costs and ticket refunds and cancellations. We believe that our first quarter
and second quarter 2003 financial results were adversely affected by the war in
Iraq and the outbreak of SARS. Further military conflict or new outbreaks of
SARS or another travel-related health concern could have a material adverse
effect on our business, results of operations and financial condition. In
addition, terrorist attacks, the fear of future terrorist attacks, hostilities
involving the United States in other areas of the world or the fear of future
outbreaks like SARS are likely to contribute to a general reluctance by the
public to travel and, as a result, may have a material adverse effect on our
business, results of operations and financial condition.

OUR "BIND RATE" MAY BE ADVERSELY AFFECTED BY A NUMBER OF FACTORS OUTSIDE OF
OUR CONTROL

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.

Additionally, our bind rate has been negatively impacted by the weak retail
environment for airline tickets. 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. Further, 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 2002
and the first half of 2003, are expected to continue throughout 2003. As a
result, general near term forecasting is very difficult, and more specifically,
we are not currently forecasting a recovery in the airline industry or an
improvement during 2003 in our airline ticketing business.

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

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 28% of booked
offers, and an even greater percentage of our revenue, for the six months ended
June 30, 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, travel-related health concerns and unusual weather
patterns also may adversely affect the leisure travel industry. As a result, our
business also is likely to be affected by those events. Further, work stoppages
or labor unrest at any of the major airlines could materially and adversely
affect the airline industry and, as a consequence, have a material adverse
effect on our business, results of operations and financial condition.

29

During the six months ended June 30, 2003, sales of airline tickets from
our five largest and two largest airline suppliers accounted for approximately
92.9% and 48.9% 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. 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 LLC, an airline-owned website that competes directly
with us.

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, 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. In
addition, in the event that another of our major suppliers

30

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. Further, as discussed in "WE ARE
DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES", because our customers
do not choose the airline, hotel or rental car company on which they are booked,
the bankruptcy of a major supplier or even the possibility of a major supplier
declaring bankruptcy, could discourage consumers from booking their travel
products through us. As of July 28, 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 would have a material adverse effect
on our business, results of operations and financial condition.

If one of our major suppliers merges or consolidates with, or is acquired
by, another company that either does not participate in the priceline.com system
or that participates on substantially lower levels, the surviving company may
elect not to participate in our system or to participate at lower levels than
the previous supplier. In such event, if we are unable to divert sales to other
suppliers, our business results of operations and financial condition may be
adversely affected.

UNCERTAINTY REGARDING PAYMENT OF HOTEL OCCUPANCY TAXES

We are currently conducting a review and interpretation of the tax laws
in various states and other jurisdictions relating to the payment of state
and local hotel occupancy taxes. Currently, hotels collect and remit hotel
occupancy taxes to the various tax authorities based on the amounts collected
by the hotels. Consistent with this practice, we recover the taxes on the
underlying cost of the hotel room night from customers and remit the taxes to
the hotel operators for payment to the appropriate tax authorities. Several
jurisdictions have indicated that they may take the position that hotel
occupancy tax is applicable to the differential between the price paid by a
customer for our service and the cost to us of the underlying room.
Historically, we have not collected taxes on this differential. Some state
and local jurisdictions could assert that we are subject to hotel occupancy
taxes on this differential and could seek to collect such taxes, either
retroactively or prospectively or both. Such actions could have a material
adverse effect on our business and results of operations. To the extent that
any tax authority succeeds in asserting that such a tax collection
responsibility exists, it is likely that, with respect to future
transactions, we would collect any such additional tax obligation from our
customers, which would have the effect of increasing the cost of hotel room
nights to our customers and, consequently, could reduce our hotel sales. We
will continue to assess the risks of the potential financial impact of
additional tax exposure, and to the extent appropriate, we will reserve for
those contingencies.

WE MAY BE UNABLE TO REPURCHASE OUR OUTSTANDING NOTES AS REQUIRED BY
THEIR TERMS

On August 1, 2008, holders of our 1% convertible senior notes may
require us to repurchase the notes. In addition, if a change in control, as
defined in the indenture relating to the notes, occurs, each holder of the
notes may require us to repurchase all or a portion of that holder's notes.
It is possible that we may not have sufficient funds or may be unable to
arrange for additional financing to pay the principal amount or repurchase
price due. Under the terms of the indenture for the notes, we may elect,
subject to certain conditions, to pay all or a portion of the repurchase
price with shares of common stock. Any future borrowing arrangements or
agreements relating to debt to which we become a party may contain
restrictions on, or prohibitions against, our repayments or repurchases of
the notes. If the maturity date or change in control occurs at a time when
our other arrangements prohibit us from repaying or repurchasing the notes,
we could try to obtain the consent of the lenders under those arrangements,
or we could attempt to refinance the borrowings that contain the
restrictions. If we do not obtain the necessary consents or refinance these
borrowings, we would be unable to repay or repurchase the notes. In that
case, our failure to repurchase any tendered notes or repay the notes upon
maturity would constitute an event of default under the indenture.

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 February 2003, InterActive Corp.,
formerly USA Interactive, Inc., which owns a controlling stake in Hotels.com
L.P., acquired all of Expedia, Inc. InterActive Corp. also recently acquired
all of Hotels.com L.P. shares it did not already own. In addition, Hilton
Hotels Corporation, Hyatt Corporation, Marriott International, Inc.,
Intercontinental Hotels Group, 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 may 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 L.P.,
Orbitz, Hotels.com and Hotwire, a website that offers discounted fares
on opaque inventory;

- traditional travel agencies;

31

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

- individual or groups of airlines, hotels, rental car companies, cruise
operators and other travel service providers (all of which may provide
services by telephone or through 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, including us, may be dependent, 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 business, results of
operation and financial condition will be adversely affected.

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 2003, InterActive Corp. acquired 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, 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
priceline.com. 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:

- marketing and promotional campaigns;

- attracting traffic to their websites;

- attracting and retaining key employees;

- securing vendors and inventory; and

- website and systems development.

Increased competition could result in reduced operating margins, loss of
market share and damage to 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.

32

OUR GROWTH CANNOT BE ASSURED. EVEN IF WE DO EXPERIENCE GROWTH, WE CANNOT
ASSURE YOU THAT WE WILL GROW PROFITABLY

Our business strategy is dependent on the growth of our business. For us to
achieve significant growth, consumers and travel suppliers must accept our
website as a valuable commercial tool. Consumers who have historically purchased
travel products using traditional commercial channels, such as local travel
agents and calling suppliers directly, must instead purchase these products on
our website. Similarly, travel suppliers will also need to accept or expand
their use of our website and view our website as an efficient and profitable
channel of distribution for their travel products. Our ability to enhance
awareness of the priceline.com brands and offer products and services that will
attract and retain a significant number of new consumers and travel suppliers is
not certain, and therefore, our growth may be limited.

WE MAY LOSE OR BE SUBJECT TO REDUCTION OF GLOBAL DISTRIBUTION SYSTEM FEES

We rely on fees paid to us by Worldspan, L.P. for travel bookings made
through Worldspan, L.P.'s global distribution system, or 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 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.

On July 1, 2003, Worldspan was acquired by a corporation newly formed by
Citigroup Venture Capital Equity Partners L.P. and Teachers' Merchant Bank. It
is unclear what effect, if any, this 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 AND LOCAL 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 these sales.

Current economic conditions in the United States are triggering active
consideration on ways to generate additional tax revenues by both the federal
and state and local governments. We cannot predict what changes in tax law or
interpretations of such laws may be adopted or assure that such changes or
interpretations would not materially impact our business.

Federal legislation imposing limitations on the ability of states to tax
Internet-based sales was enacted in 1998. The Internet Tax Freedom Act
exempts specific types of sales transactions conducted over the Internet from
multiple or discriminatory state and local taxation through November 1,
2003. If this legislation is not renewed, state and local goverments could
impose taxes on Internet-based sales. These taxes could decrease the demand
for our products and services or increase our costs of operations, which
would have a meterial adverse effect on our business, financial condition and
results of operations.

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

To date, our results have been negatively 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, our business, results of
operations and financial condition could be materially adversely affected.

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FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE QUARTERLY COMPARISONS AND
FINANCIAL FORECASTING DIFFICULT

Our revenues and operating results have varied significantly from quarter
to quarter because our business experiences seasonal fluctuations, which reflect
seasonal trends for the travel products offered by our website. Traditional
leisure travel bookings are higher in the first two calendar quarters of the
year in anticipation of spring and summer vacations and holiday periods, but
online travel reservations may decline with reduced Internet usage during the
summer months. In the last two quarters of the calendar year, demand for travel
products generally declines and the number of bookings flattens. Our results may
also be affected by seasonal fluctuations in the inventory made available to us
by airlines, hotels and rental car suppliers. Our revenues and operating results
may continue to vary significantly from quarter to quarter because of these
factors. 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 relatively new and unproven business model and an uncertain
environment in the travel industry, it may be difficult to predict our future
revenues or results of operations.

Because of these fluctuations and uncertainties, our operating results may
fail to meet the expectations of securities analysts and investors. If this
happens, the trading price of our common stock would almost certainly be
materially 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. These individuals have acquired specialized
knowledge and skills with respect to priceline.com and our operations. We do not
have "key person" life insurance policies. Our ability to retain key employees
could be materially adversely affected by the decline in the market price of our
common stock, 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 on our ability to issue additional equity incentives. If
we do not succeed in attracting new employees or retaining and motivating
current and future employees or executive officers, our business could suffer
significantly.

WE RELY ON THE VALUE OF THE PRICELINE.COM BRAND, AND THE COSTS OF
MAINTAINING AND ENHANCING OUR BRAND AWARENESS ARE INCREASING

We believe that maintaining and expanding the priceline.com brand
(including Lowestfare.com and Rentalcars.com) are important aspects of our
efforts to attract and expand our user and advertiser base. We also believe that
the importance of brand recognition will increase due to the relatively low cost
for competitors to launch new sites. Promotion of the priceline.com brand will
depend largely on our success in satisfying our customers. In addition, we have
spent considerable money and resources to date on the establishment and
maintenance of the priceline.com brands, and we will continue to spend money on,
and devote resources to advertising, marketing and other brand-building efforts
to preserve and enhance consumer awareness of the priceline.com brands. We may
not be able to successfully maintain or enhance consumer awareness of the
priceline.com brands, and, even if we are successful in our branding efforts,
such efforts may not be cost-effective. If we are unable to maintain or enhance
customer awareness of the priceline.com brands in a cost-effective manner, our
business, results of operations and financial condition would be adversely
affected.

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.

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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 June 30, 2003, based on public filings with the
SEC. Together, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited have
appointed three of the eleven 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. See Note 12 to the Notes to Unaudited Consolidated Financial
Statements.

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 system, 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 currently does business under the MCI brand name and has filed for
bankruptcy protection. If WorldCom, Inc. is unable, for any reason, to

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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

A substantial amount of our computer hardware for operating our services is
currently 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 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.

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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.

LEGAL PROCEEDINGS

We are a party to the legal proceedings described in Note 10 to our
unaudited consolidated financial statements in our Quarterly Report on Form 10-Q
for the three months ended June 30, 2003. The defense of the actions described
in Note 10 may increase our expenses and an adverse outcome in any of these
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.

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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 supplier 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 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 significantly.
In addition, fluctuations in our stock price and our price-to-earnings multiple
may have made our stock attractive to momentum, hedge or day-trading investors
who often shift funds into and out of stocks rapidly, exacerbating price
fluctuations in either direction, particularly when viewed on a quarterly basis.

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 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. Negative 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. This additional litigation could result in
substantial costs and divert management's attention and resources.

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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.

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

Prior to filing 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 as of June 30,
2003, our disclosure controls and procedures were 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A description of material legal proceedings to which we are a party 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 June 30,
2003.

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

We held our Annual Meeting of Stockholders on June 9, 2003. Listed below
are descriptions of the maters voted on and the results of such meeting. The
numbers of shares voted are on a "pre-split" basis and, as a result, do not give
effect to priceline.com's one-for-six reverse stock split which was effected on
June 16, 2003 after our annual meeting of stockholders.

Paul A. Allaire did not stand for re-election as a director.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

+ Portions of this document have been omitted pursuant to a confidential
treatment request.

(b) REPORTS ON FORM 8-K

On April 24, 2003, we filed a report on Form 8-K in connection with the
election of Patricia L. Francy and Jeffrey E. Epstein to our Board of Directors.
On May 2, 2003, we furnished a report on Form 8-K in connection with our first
quarter 2003 earnings announcement. On May 21, 2003, we furnished a report on
Form 8-K in connection with the presentation of materials at the Goldman Sachs
Internet New Media Conference in Las Vegas, Nevada. On June 5, 2003, we filed a
report on Form 8-K in connection with the notification from Paul A. Allaire that
he intended to resign from priceline.com's Board of Directors, and that he would
not stand for re-election to priceline.com's Board of Directors at
priceline.com's annual meeting of stockholders on Monday, June 9, 2003. On June
10, 2003, we furnished a report on Form 8-K in connection with our Annual
Meeting of Stockholders, and the presentation of the materials at the annual
meeting. On June 16, 2003, we filed a report on Form 8-K in connection with the
1-for-6 reverse stock split of all outstanding shares of our common stock, par
value $0.008 per share.

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SIGNATURES

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

PRICELINE.COM INCORPORATED
(Registrant)

Date: August 14, 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)

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