Edgar Filing: PRICELINE COM INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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

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For the year ended: December 31, 2001 Commission File No.: 0-25581

priceline.com INCORPORATED
(Exact name of Registrant as specified in its charter)

DELAWARE 0-25581 06-1528493
(State or other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
800 CONNECTICUT AVENUE,
NORWALK, CONNECTICUT 06854
(Address of Principal Office) (Zip Code)

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

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Securities Registered Pursuant to Section 12(b) of the Act
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.008 per share

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

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

The aggregate market value of common stock held by non-affiliates of
priceline.com as of March 21, 2002 was approximately $599,434,055 million based
upon the closing price reported for such date on the Nasdaq National Market. For
purposes of this disclosure, shares of common stock held by persons who are
known by priceline.com to own more than 5% of the outstanding shares of common
stock and shares held by current executive officers and directors of
priceline.com have been excluded because such persons may be deemed to be
affiliates of priceline.com. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of outstanding shares of priceline.com's common stock was
229,502,040 as of March 21, 2002.

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DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report on Form 10-K,
to the extent not set forth in this Form 10-K, is incorporated herein by
reference from priceline.com's definitive proxy statement relating to the annual
meeting of stockholders to be held on May 23, 2002 to be filed with the
Securities and Exchange Commission within 120 days after the end of
priceline.com's fiscal year ended December 31, 2001.

priceline.com Incorporated Form 10-K for the Year Ended December 31, 2001
Index

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PART I
Item 1. Business................................................................................... 1
Item 2. Properties................................................................................. 19
Item 3. Legal Proceedings.......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................................ 23

PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................... 24
Item 6. Selected Financial Data.................................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 26
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 48
Item 8. Consolidated Financial Statements and Supplementary Data................................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 48

PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 49
Item 11. Executive Compensation..................................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 49
Item 13. Certain Relationships and Related Transactions............................................. 49

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 50
Signatures ........................................................................................... 55
Consolidated Financial Statements..................................................................... 57

THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED, IMPLIED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS.

EXPRESSIONS OF FUTURE GOALS AND SIMILAR EXPRESSIONS INCLUDING, WITHOUT
LIMITATION, "MAY," "WILL," "SHOULD," "COULD," "EXPECTS," "DOES NOT CURRENTLY
EXPECT," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS,"
"POTENTIAL," "TARGETS," OR "CONTINUE," REFLECTING SOMETHING OTHER THAN
HISTORICAL FACT ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE
FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS: ADVERSE
CHANGES IN GENERAL MARKET CONDITIONS FOR LEISURE AND OTHER TRAVEL PRODUCTS AS
THE RESULT OF, AMONG OTHER THINGS, TERRORIST ATTACKS OR HOSTILITIES; ADVERSE
CHANGES IN OUR RELATIONSHIPS WITH AIRLINES AND OTHER PRODUCT AND SERVICE
PROVIDERS; THE EFFECTS OF INCREASED COMPETITION; SYSTEMS-RELATED FAILURES AND/OR
SECURITY BREACHES; OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS;
LOSSES BY US AND OUR LICENSEES; ANY ADVERSE IMPACT FROM NEGATIVE PUBLICITY AND
NEGATIVE CUSTOMER REACTION TO SUCH PUBLICITY; LEGAL AND REGULATORY RISKS AND THE
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. THESE FACTORS AND OTHERS ARE
DESCRIBED IN MORE DETAIL BELOW IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT
FUTURE RESULTS." UNLESS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE REPORTS
AND DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT
REPORTS ON FORM 8-K.

PART I

ITEM 1. BUSINESS

GENERAL

Priceline.com Incorporated ("priceline.com," the "Company," "we," "us" or
"our") has 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(SM) --
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:

o leisure airline tickets, provided by 10 domestic and 23
international airline participants, and travel insurance;

o 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;

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

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

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

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

o fixed-price cruises and cruise packages, through a third party agent
representing major cruise lines; and

o vacation packages, in many U.S. markets.

For the year ended December 31, 2001, we had revenues of approximately
$1.17 billion. Revenues for the year ended December 31, 2001 consisted primarily
of: (1) travel revenue and (2) other revenue. Travel revenue, which represented
99.2% of our total revenue in 2001, consisted primarily of: (1) transaction
revenues representing the selling price of airline tickets, hotel rooms and
rental cars and (2) ancillary fees, including Worldspan reservation booking fees
and customer processing fees charged in connection with the sale of our travel
products. Other revenues consisted primarily of: (1) transaction revenues and
fees from long distance phone service and (2) commissions and fees from our home
financing and automobile services and fees from our licensees.

Priceline.com was formed as a Delaware limited liability company in 1997
and was converted into a Delaware corporation in July 1998. Our common stock is
listed on the Nasdaq National Market under the symbol "PCLN." Our principal
executive offices are located at 800 Connecticut Avenue, Norwalk, Connecticut
06854.

THE priceline.com BUSINESS MODEL

We have developed a unique pricing system known as a "demand collection
system" that uses the information sharing and communications power of the
Internet to create a new way of pricing products and services. We believe we
have created a new balance between the interests of buyers, who are willing to
accept trade-offs in order to save money, and sellers, who are prepared to
generate incremental revenue by selling products at below retail prices,
provided that they can do so without disrupting their existing distribution
channels or retail pricing structures. Our demand collection system allows
consumers to specify the price they are prepared to pay when submitting an offer
for a particular product or service within a specified range of
substitutability. We then access databases or, in some instances, communicate
that demand to participating sellers to determine whether we can fulfill the
customer's offer and then decide whether we want to accept the offer at the
price designated by the consumer. 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 to
enable us to fulfill their offers from inventory provided by participating
sellers. Once fulfilled, offers generally cannot be canceled. This system uses
the flexibility of buyers to enable sellers to accept a lower price in order to
sell excess inventory or capacity or increase sales velocity. We believe that
our demand collection system addresses limitations inherent in traditional
seller-driven pricing mechanisms in a manner that offers substantial benefits to
both buyers and sellers. We believe that the principal advantages of our system
include the following:

o COST SAVINGS. Our NAME YOUR OWN PRICE(SM) demand collection system
allows consumers to save money in a simple and compelling way.
Buyers effectively trade off flexibility about brands, product
features and/or sellers in return for prices that are lower than
those that can be obtained at that time through traditional retail
distribution channels.

o INCREMENTAL REVENUE FOR SELLERS. Sellers use priceline.com as a
revenue management tool to generate incremental revenue without
disrupting their existing distribution channels or retail pricing
structures. We require consumers to be flexible with respect to
brands and product features. As a result, with the exception of our
cruise, vacation, automobile, long distance and wireless products,
sellers' brands are not revealed to customers prior to the
consummation of a transaction, thereby protecting their brand
integrity. This shielding of brand identity enables sellers to sell
products and services at discounted prices without cannibalizing
their own retail sales by publicly announcing discount prices and
without competing against their own distributors.

o PROPRIETARY SELLER NETWORKS. We have assembled proprietary networks
of industry leading sellers that represent high quality brands. By
establishing attractive networks of seller participants with
reputations for quality, scale and national presence, we believe
that we foster increased participation by both buyers and sellers.

THE priceline.com STRATEGY

During the second half of 2000, we experienced a decrease in the momentum
of our business as the result of a number of different events. As a result, in
the fourth quarter 2000, we formulated a turnaround plan to restore our business
momentum, regain consumer confidence in our value proposition and achieve
profitability. The key elements of our strategy were to refocus on our core
businesses, particularly travel; strengthen our product offering and customer
service; strengthen our international relationships; and motivate and retain our
employees. Below is a summary of our success in each of these points of our
turnaround plan:

o REFOCUS ON CORE BUSINESSES, PARTICULARLY TRAVEL. Throughout 2001, we
focused our resources and attention primarily on our travel business
with the intent of achieving profitability which we did in the
second quarter of 2001. We successfully expanded our travel
offerings to include cruises, cruise packages, a resort option on
our hotel product, and in February, 2002, vacation packages.

o STRENGTHEN OUR PRODUCT OFFERING AND CUSTOMER SERVICE. During 2001,
we continued to implement significant enhancements to the
functionality, clarity, speed and convenience of our website in an
attempt to improve each customer's experience. In addition, we
worked with participating sellers to develop modifications and/or
refinements to our existing product offerings to enhance our
customer proposition. For example, in addition to expanding our
product offering to include cruises, cruise packages and resorts, we
reduced the time between when a customer makes an offer and when he
or she gets a response from one hour to fifteen minutes.

o STRENGTHEN INTERNATIONAL RELATIONSHIPS. We concentrated our
attention on our international initiatives in Europe and Asia by
providing our expertise and assistance to our international
licensees. In late December 2001, we acquired a majority interest in
priceline.com europe Ltd., the operating company that holds the
rights to develop the priceline.com business in Europe.

o MOTIVATE AND RETAIN EMPLOYEES. A critical component of our success
depends, in part, on our ability to retain, attract, integrate and
motivate highly qualified technical and managerial personnel, for
whom competition is intense. As a result, we implemented, and intend
to continue to evaluate and enhance as necessary, an employee
compensation and retention plan, comprised primarily of new equity
incentives, designed to retain and motivate our employees and
managers as we implemented our turnaround plan. During the year
ended December 31, 2001, we did not experience significant employee
attrition.

PRODUCTS AND SERVICES

TRAVEL SERVICES

LEISURE AIRLINE TICKETS. There are a total of 10 domestic airlines and 23
international airlines participating in our airline ticket service.

Consumers can make offers to purchase airline tickets through our website
or the 1-800-PRICELINE call center. The vast majority of all airline ticket
requests are made through our website. To make an offer, a customer specifies
(1) the origin and destination of the trip, (2) the dates on which the customer
wishes to depart and return, (3) the price the customer is willing to pay and
(4) the customer's valid credit card to guarantee the offer. When making an
offer, consumers must agree to:

o fly on any major full-service airline;

o leave at any time of day between 6 a.m. and 10 p.m. on their desired
dates of departure and return;

o purchase only round trip economy class tickets between the same two
points of departure and return;

o accept at least one stop or connection;

o receive no frequent flier miles or upgrades; and

o accept tickets that cannot be refunded or changed.

When we receive an offer, we determine whether to fulfill the offer based
upon the available fares, rules and inventory provided to us by our
participating airlines. A customer is notified whether his or her offer has been
accepted within fifteen minutes, and we have recently reduced the average
response times to customer offers to about 4 minutes. If we are able to obtain
an airline ticket within the parameters specified by the customer, the
customer's offer is accepted and his or her credit card is charged the offer
price, plus applicable taxes, surcharges and standard processing fees, and the
ticket is delivered to the customer by the delivery method specified by the
customer. For customers who request it, we guarantee no more than one connection
per leg of trip with a maximum of a 3 hour stop. As with our other travel
products, once a customer's offer for airline tickets is accepted, that offer,
in almost all cases, cannot be withdrawn or cancelled.

If a customer's offer is not accepted, but we believe the offer is
reasonably close to a price that we would be willing to accept, we will attempt
to "rehabilitate" the customer's offer. In such cases, when the customer is told
that his or her offer has not been accepted, we provide guidance to the customer
indicating the amount that such offer would need to be increased in order to
significantly increase the chances of the offer being accepted.

HOTELS. Our hotel room reservation service currently is available in
substantially all major cities and metropolitan areas in the United States.
Seller participants in the hotel room reservation service include most of the
significant national hotel chains as well as several important real estate
investment trusts and independent property owners. Hotels participate by filing
secure private discounted rates with related inventory control rules in a global
distribution system database in a central reservation system for hotel rooms.
These specific rates generally are not available to the general public or to
consolidators and other discount distributors who sell to the public. However,
hotel participants may make similar rates available to consolidators or other
discount providers under other arrangements.

Our hotel room reservation service operates in a manner similar to our
airline ticket service. Consumers are required to accept certain trade-offs with
respect to brands or product features in return for saving money. For example,
consumers are required to accept a reservation in any hotel within a specified
geographic area within a designated "class" of service (1, 2, 3, 4 or 5-star)
and must accept limitations on changes and cancellations. As with the airline
ticket service, the target market for our hotel room reservation service is the
leisure travel market.

In May 2001, we expanded our hotel product to include resorts. Resorts are
hotels that typically have more extensive facilities, including a spa or fitness
facility, one or more pools, and multiple food and beverage choices. Priceline
resorts reflect the season and the area in which they are located with
recreational options such as water sports, tennis, snow skiing or golf.

RENTAL CARS. We offer two different rental car services. In December 1999,
priceline.com launched its Insiders Rates(SM) service and, in February 2000, we
launched our NAME YOUR OWN PRICE(SM) service. Our rental car services are
currently available in substantially all major United States airport markets.
The top five brand name airport rental car companies in the United States are
seller participants in our rental car program.

Under our Insiders Rates(SM) service, participating car rental companies
offer customers who have successfully purchased an airline ticket from us rates
on car rentals in connection with a customer's planned travel arrangements. The
offer is provided to customers by e-mail and on our website when a customer
checks the status of his or her request.

Our NAME YOUR OWN PRICE(SM) rental car service operates in a manner
similar to our airline ticket and hotel reservation services. Consumers can
access our website and select where and when they want to rent a car, what kind
of car they want to rent (i.e., economy, compact, mid-size, SUV) and the price
they want to pay per-day, excluding taxes, fees and surcharges. When we receive
an offer, we determine whether to fulfill the offer based upon the available
rates, rules and inventory. A customer is notified whether his or her offer has
been accepted within fifteen minutes. If a customer's offer is accepted, we will
immediately reserve the rental car, charge the customer's credit card and notify
the customer of the car rental company and location providing the rental car.

TRAVEL INSURANCE. In July 2000, we started making available to our airline
customers an optional travel insurance package that offers our customers
coverage for, among other things, trip cancellation, medical expenses, emergency
evacuation, and loss of baggage, property and travel documents. The travel
insurance is provided by member companies of American International Group, Inc.,
a leading United States-based international insurance and financial services
organization. We receive a fixed fee from AIG member companies for every
optional insurance package purchased by our customers. The travel insurance
program is made available to every eligible customer who makes an offer for a
priceline.com airline ticket. If a traveler chooses the insurance program, the
cost is charged to the traveler's credit card only if he or she succeeds in
getting a priceline.com airline ticket. If the traveler's ticket offer is not
successful, the cost of the insurance package is not charged.

OTHER TRAVEL SERVICES. In September 2001, we began offering fixed-price
cruise trips through National Leisure Group, Inc., an agent representing major
cruise lines. Our cruise product allows consumers to search for and compare
cruise pricing and availability information and to purchase cruises by selecting
from our published offerings and prices. In addition, consumers can combine
their cruise purchase with airline tickets to the port of departure of the
cruise. In February 2002, we began offering our vacation package product, which
allows consumers to determine their own price for packages consisting of airfare
and hotel or resort room nights.

While we are currently focused on the travel products and services
described above, over time, we may evaluate introducing other products and
services within the leisure travel industry.

HOME FINANCING SERVICES

Under the terms of an agreement with Alliance Partners, L.P., our
financing service allows consumers to name their interest rate and points for
mortgages of a specified term, including purchase money mortgages, refinancings
and home equity loans. As a general matter, to obtain a loan, consumers access
our website and specify the amount of the loan, the term, the interest rate and
the points that they are willing to pay. Customers complete a simplified loan
application as part of the process of making an offer. In connection with making
an offer, customers are required to guarantee with a major credit card the
payment of a $250 deposit that is applied towards closing costs and returned if
we cannot find a participating lender to accept the offer. We notify a customer
within six hours whether his or her offer has been accepted by a participating
lender. Participating lenders may submit counteroffers through us for up to one
business day following the customer's offer.

We offer home financing services through pricelinemortgage.com, of which
we own 49%. Pursuant to an intellectual property license from us,
pricelinemortgage utilizes the priceline.com NAME YOUR OWN PRICE(SM) business
model. Pricelinemortgage is controlled by First Alliance Bank, a federally
chartered savings association supervised by the Office of Thrift Supervision and
a wholly owned subsidiary of Alliance Partners. Pricelinemortgage has access to
the management resources and expertise of Alliance Partners and its affiliates,
including Alliance Mortgage Company, a residential mortgage lender since 1962.
Alliance Partners provides management services to pricelinemortgage, including
the procurement of personnel and office space and assistance in obtaining
regulatory approvals. Robert J. Mylod, our Chief Financial Officer, is a
director of, and an investor in, Alliance Capital Partners Inc., the parent
company of Alliance Partners. Pricelinemortgage is operating in all 50 states.

LONG DISTANCE AND WIRELESS SERVICE

Our pre-paid Name Your Own Price(SM) long distance service is available
for purchase and use in substantially all United States markets and is targeted
for use by residential customers. Our service is currently provided by three
telecommunications providers, Net2Phone, DeltaThree and CNM Networks, Inc.
Customers access our website and select the country they wish to call, the
number of minutes they want to purchase, the phone number(s) from where they
plan to place their calls and the price they are willing to pay for a block of
prepaid minutes. Customers are generally notified within 15 minutes whether we
have accepted their offer.

On December 10, 2001, we introduced our home long distance services, which
allows customers to choose their provider from participating long distance
carriers. This sign-up service complements our pre-paid Name Your Own Price(SM)
long distance service which does not require users to change their long distance
carrier. Also on December 10, 2001, we launched the only Name Your Own Price(SM)
Phone Card offered in the United States. This service allows consumers to make
phone card purchases online and use their phone card minutes anywhere in the
continental United States.

On December 10, 2001, we also launched our wireless phone and service
marketplace. Wireless phones and service plans are available for purchase and
use in substantially all United States markets and are targeted for use by the
same consumers who would use our long distance product.

NEW CAR SALES

Our new automobile service is offered in every state except Alaska. Our
new car sales service accepts offers for every major brand of automobile. To
purchase a new car through our service, the customer identifies the exact
vehicle desired to be purchased or leased, including the make, model and
specified options, the geographic area in which the customer is willing to pick
up the vehicle and the purchase price or lease price the customer is willing to
pay. All sales are made through factory-authorized dealers.

Upon receiving an offer for a new car, we transmit the customer's offer to
factory authorized dealers within the specified geographic radius, without
disclosing the identity of the customer. We direct the sale to the first dealer
that notifies us that it is willing to accept the customer's offer. We then
notify the customer to pick up the vehicle from that dealer and the transaction
is closed directly between them. In most states, when a sale is completed, we
are paid a $50 fee from the customer and a $200 fee from the selling dealer. In
other states, we do not currently receive compensation from the customer or
dealer as a result of regulatory restrictions. If the customer fails to
consummate the transaction within a specified time period after being notified
that an offer is accepted, the customer is charged a cancellation fee.

INTERNATIONAL

ASIA. We are party to agreements with subsidiaries of Hutchison Whampoa
Limited ("HUTCHISON") to introduce our services to several Asian markets. Under
the terms of the agreements, we license our business model and provide our
expertise in technology, marketing and operations to a Hutchison subsidiary,
Hutchison-Priceline Limited. Hutchison owns equity securities in
Hutchison-Priceline Limited. Hutchison-Priceline Limited pays us an annual
licensing fee to use our intellectual property. While we currently have no
equity in Hutchison-Priceline Limited and do not control its board of directors,
we have invested in a note convertible into approximately 35% (on a fully
diluted basis) of the equity of Hutchison-Priceline Limited. Hutchison and
Cheung Kong (Holdings) Limited, a company affiliated with Hutchison, own
approximately 31% of our outstanding common stock and have three seats on our
board of directors. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies and
Estimates."

EUROPE. Priceline.com europe Ltd. is a majority owned subsidiary of ours
that was established to provide our services to several European markets. The
other investors in priceline.com europe Ltd. include affiliates of General
Atlantic Partners, LLC and certain individual investors. William Ford, a
principal of General Atlantic Partners, is a member of our board of directors
and chairman of our audit committee. Priceline.com europe Ltd. began offering
airline tickets in the fourth quarter 2000. Please see Note 7 to our
consolidated financial statements.

MARKETING AND BRAND AWARENESS

Priceline.com has established itself as one of the most recognized
e-commerce brands through an aggressive marketing and promotion campaign. During
2001, we spent $46.9 million on advertising. We intend to continue to pursue a
marketing strategy designed to promote brand awareness and the concept that
consumers can save money on all products and services offered by priceline.com.
Underlying our marketing strategy is our belief that our target market is all
consumers, not just Internet-savvy consumers. To date, substantially all of our
spending has been for television, radio, online and, to a lesser extent,
newspaper advertising. Our television and radio campaigns during the year ended
December 31, 2001 featured the voices of William Shatner and others as our
spokespeople. In 2001, we began shifting our marketing resources from
traditional areas of marketing such as television and radio, toward online
marketing and we expect to continue this trend in 2002. On December 10, 2001, we
entered into a marketing alliance with America OnLine, Inc. and in early 2002,
we entered into an agreement with eBay, Inc. to create a new travel booking
service for eBay Travel. We intend to continue to promote the priceline.com
brand aggressively in 2002.

COMPETITION

We compete with both online and traditional sellers of the products and
services offered on priceline.com. Current and new competitors can launch new
sites at a relatively low cost. In addition, the traditional retail industry for
the products and services we offer is intensely competitive. In 2001, we saw the
continuation of a trend in the online travel industry toward vertical
integration. For example, in October 2001, Cendant Corporation, a diversified
global provider of business and consumer services which owns, among other
things, Avis and is the world's largest franchiser of hotels, purchased online
travel provider Cheaptickets.com as well as Galileo International, Inc., a
global distribution system. In addition, in February

2002, USA Networks, Inc., which owns a controlling stake in Hotel Reservations
Network, acquired a controlling stake in Expedia, Inc. If this trend continues,
we might not be able to effectively compete with industry conglomerates that
have access to greater and more diversified resources than we do.

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

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

o traditional travel agencies;

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

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

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

A number of airlines, including a number that participate in our system,
have invested in and offer discount airfares and travel services through the
Orbitz internet travel service, and a number of airlines, including a number
that participate in our system, participate in and have received an equity stake
from Hotwire. The June 2001 launch of Orbitz has had a strong impact on the
online travel industry. Specifically, because Orbitz is airline-owned, it is in
a position to forego certain revenue streams upon which other online travel
suppliers may be dependant, such as commissions and global distribution system
fees. Orbitz's prices, which unlike ours, are disclosed to the consumer, are
typically lower than other online travel providers offering disclosed price
fares. In addition, in February 2002, several major hotel brands announced the
creation of Hotel Distribution System, a joint venture to market hotel rooms
over the Internet through multiple websites. Competition from these and other
sources could have a material adverse effect on our business, results of
operations and financial condition.

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

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

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

We potentially face competition from a number of large Internet companies
and services that have expertise in developing online commerce and in
facilitating Internet traffic, including Amazon.com and Yahoo!, who could choose
to compete with us either directly or indirectly through affiliations with other
e-commerce or off-line companies. Other large companies with strong brand
recognition, technical expertise and experience in Internet commerce could also
seek to compete with us. Competition from these and other sources could have a
material adverse effect on our business, results of operations and financial
condition.

Many of our current and potential competitors, including Internet
directories and search engines and large traditional retailers, have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical and other resources than
we have. Some of these

competitors may be able to secure products and services on more favorable terms
than we can. In addition, many of these competitors may be able to devote
significantly greater resources to: (1) marketing and promotional campaigns, (2)
attracting traffic to their websites, (3) attracting and retaining key
employees, (4) securing vendors and inventory and (5) website and systems
development.

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

OPERATIONS AND TECHNOLOGY

Our business is supported by a systems platform, which was designed with
an emphasis on scalability, performance and reliability. Our core demand
collection and offer processing systems are proprietary to priceline.com. The
software platform and architecture are built on server-side Java, C++ and SQL
scripts integrated with an Oracle relational database system. This internal
platform was designed to include open application protocol interfaces that can
provide connectivity to vendors in the range of industries in which we operate.
These include large global inventory systems, such as airline and hotel room
reservation systems and financial service providers, as well as individual
inventory suppliers, such as auto dealers and individual hotels. Our Internet
servers utilize Verisign digital certificates to help us conduct secure
communications and transactions.

We out-source most of our call center and customer service functions, and
use a real-time interactive voice response system with transfer capabilities to
our call centers and customer service centers in Norwalk, Connecticut, Columbus,
Ohio, and Sunrise, Florida.

Our systems infrastructure, Web and database servers are hosted at Exodus
Communications, Inc. in Jersey City, New Jersey, which provides communication
lines from multiple providers including UUNet and AT&T, as well as 24-hour
monitoring and engineering support. Exodus has its own generator and multiple
back-up systems in Jersey City. Substantially all of our computer hardware for
operating our services is currently located at Exodus Communications, Inc. in
New Jersey. We also maintain a second Web hosting facility at AT&T in New York
City. Our network operations center monitors both Web hosting facilities and is
located in our Norwalk, Connecticut headquarters. Both facilities have an
uninterruptible power supply system, generators and redundant servers. On
September 26, 2001, Exodus filed a petition for Chapter 11 bankruptcy
protection. On February 1, 2002, Exodus announced that Cable and Wireless plc
had completed the acquisition of a majority of the business activities of Exodus
and substantially all of its U.S. customer contracts, including our contract. If
Exodus is unable, for any reason, to support our primary web hosting facility,
we would need to activate our secondary site at AT&T which would be a
substantial burden to us and could adversely affect our results. See "Factors
That May Affect Future Results - We Rely on Third-Party Systems."

We also offer phone service through our toll-free number,
1-800-PRICELINE(SM), which allows consumers who do not have access to a computer
to phone in their orders for airline tickets. In addition, consumers who choose
not to transmit their credit card information via the Internet have the option
of submitting their credit card information through the phone service. We also
use our toll-free number to provide customer service.

INTELLECTUAL PROPERTY

We currently hold nine issued United States patents, Nos. 5,794,207,
5,797,127, 5,897,620, 6,041,308, 6,085,169, 6,108,639, 6,134,534, 6,240,396 and
6,332,129 over 20 pending United States patent applications and corresponding
pending international patent applications. We file additional patent
applications on new inventions, as appropriate.

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

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

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

o 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;

o 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;

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

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

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

We hold the exclusive rights to the trade names and service marks
PRICELINE and PRICELINE.COM, U.S. service mark registrations Nos. 2,313,827;
2,481,750; 2,481,752 and 2,481,112, including all attendant goodwill therefor.
We own pending U.S. service mark applications Nos. 75/610,935; 75/610,936 and
76/061,138 for NAME YOUR OWN PRICE(SM), and U.S. service mark registration No.
2,313,827 for NAME YOUR PRICE!(SM). In addition, we own pending U.S. service
mark application No. 78/109,131 for I THINK THEREFORE I SAVE. We seek to protect
our copyrights, service marks, trademarks, trade dress and trade secrets on an
ongoing basis through a combination of laws and contractual restrictions, such
as confidentiality agreements. For example, we attempt to register our
trademarks and service marks in the United States and internationally and
currently hold over one hundred service marks in the United States and
internationally and currently hold over one hundred service mark registrations
worldwide. However, effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our services
are or will be made available online, regardless of our continuous efforts to
police and register our marks. See "Additional Factors That May Affect Future
Results - Our Success Depends On Our Ability To Protect Our Intellectual
Property."

We currently own the Internet domain name PRICELINE.COM in the United
States. Domain names are generally regulated by Internet regulatory bodies. The
relationship between trademark and unfair competition laws and domain name
registration is evolving. The 1999 Anti-Cybersquatting Consumer Protection Act
and the Uniform Dispute Resolution Policy have both significantly enhanced the
ability to prevent incorporation of trademarks into domain names by third
parties. We actively pursue significant infringers who improperly misappropriate
our trademarks and misspellings thereof as domain names, as appropriate, to
maintain and enhance the strength of our trademarks. See "Additional Factors
That May Affect Future Results - Our Success Depends On Our Ability To Protect
Our Intellectual Property."

GOVERNMENTAL REGULATION

The products and services we provide are subject to various federal, state
and local regulations. For example, our travel service is subject to laws
governing the offer and/or sale of travel services as well as laws

requiring us to register as a "seller of travel." As a further example, with
respect to our new car sales service, we are subject to regulations governing
the registration and conduct of automobile dealers and brokers.

We are also subject to laws governing the licensing and conduct of persons
providing mortgage brokerage services. Such laws typically require certain
consumer protection disclosures and loan solicitation procedures. For example,
the Real Estate Settlement Procedures Act prohibits the payment and receipt of
mortgage loan referral fees, and permits persons to be compensated only for the
fair market value of non-referral services. Accordingly, our home financing
service provides non-referral services such as website development and
advertising to a licensed mortgage broker who, in turn, provides the back-end
processing for loan referrals.

All of our services are subject to federal and state consumer protection
laws and regulations prohibiting unfair and deceptive trade practices.

We are also subject to regulations applicable to businesses conducting
online commerce. Today there are relatively few laws specifically directed
toward online services. However, due to the increasing popularity and use of the
Internet and online services, it is possible that laws and regulations will be
adopted with respect to the Internet or online services. These laws and
regulations could cover issues such as online contracts, user privacy, freedom
of expression, pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain, but any such new legislation could
have a material adverse effect on our business, operating results and financial
condition. In addition, some states may require us to qualify in that state to
do business as a foreign corporation because our service is available in that
state over the Internet. Although we are qualified to do business in a number of
states, failure to meet the qualifications of certain states could subject us to
taxes and penalties.

Priceline.com europe Ltd. and Hutchison-Priceline Limited are subject to
various foreign regulations and governing bodies that might limit their products
and services. They may be affected by unexpected changes in regulatory
requirements and various tariffs and trade barriers in connection with online
commerce. Any failure by priceline.com europe Ltd. or Hutchison-Priceline
Limited to comply may have an adverse effect on us.

EMPLOYEES

As of March 21, 2002, we employed approximately 360 full-time employees.
We also retain independent contractors to support our customer service and
system support functions.

We have never had a work stoppage and our employees are not represented by
any collective bargaining unit. We consider our relations with our employees to
be good. Our future success will depend, in part, on our ability to continue to
attract, integrate, retain and motivate highly qualified technical and
managerial personnel, for whom competition is intense.

FACTORS THAT MAY AFFECT FUTURE RESULTS

WE MAY CONTINUE TO INCUR LOSSES

As of December 31, 2001, we had an accumulated deficit of $1.5 billion
and, for the year ended December 31, 2001, a net loss of $7.3 million. Despite
the progress we have made towards sustained profitability, we may incur losses
and may not be profitable in future years. In particular, a depressed retail
environment for the sale of airline tickets and the general decline in leisure
travel since the events of September 11, 2001 have had a negative impact on our
business and results of operations. We may not have decreased our operating
expenses in connection with our recent restructuring on an on-going basis
sufficiently to achieve and sustain profitability in this difficult environment.

FURTHER TERRORIST ATTACKS OR HOSTILITIES COULD HAVE A NEGATIVE IMPACT ON
OUR COMPANY

Our business, like most in the travel industry, was directly and adversely
impacted by the terrorist attacks of September 11, 2001. We experienced an
immediate and substantial decline in demand for our travel products in the days
following the attacks and a significant increase in customer service costs and
ticket refunds and cancellations. Further terrorist attacks or hostilities
within the United States or abroad (whether or not such attacks involve
commercial aircraft) or continued or increased hostilities in the Middle East or
elsewhere, are likely to contribute to a general reluctance by the public to
travel by air and, as a result, materially and adversely affect our business and
results of operations.

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

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

WE ARE DEPENDENT ON THE AIRLINE INDUSTRY AND CERTAIN AIRLINES

Our financial prospects are significantly dependent upon our sale of
leisure airline tickets. Sales of leisure airline tickets represented a
substantial majority of total revenue for the year ended December 31, 2001.
Leisure travel, including the sale of leisure airline tickets, is dependent on
personal discretionary spending levels. As a result, sales of leisure airline
tickets and other leisure travel products tend to decline during general
economic downturns and recessions. In addition, unforeseen events, such as
terrorist attacks, political instability, regional hostilities, increases in
fuel prices, imposition of taxes or surcharges by regulatory authorities,
travel-related accidents and unusual weather patterns also may adversely affect
the leisure travel industry. As a result, our business also is likely to be
affected by those events. Further, work stoppages or labor unrest at any of the
major airlines could materially and adversely affect the airline industry and,
as a consequence, our business.

Sales of airline tickets from our seven largest airline suppliers
accounted for approximately 92% of airline ticket revenue for the year ended
December 31, 2001. As a result, currently we are substantially dependent upon
the continued participation of these airlines in the priceline.com service in
order to maintain and continue to grow our total airline ticket revenues and, as
a consequence, our overall revenues.

We currently have 33 participating airlines. However, our airline
participation agreements:

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

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

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

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

o generally, can be terminated upon relatively short notice.

These agreements also outline the terms and conditions under which ticket
inventory provided by the airlines may be sold.

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

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

POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL FORECASTING
DIFFICULT

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

WE MAY NOT BE ABLE TO INTRODUCE NEW PRODUCTS AND SERVICES

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

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

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

We have entered into, and may enter into in the future, licensing or other
arrangements with third parties in connection with the expansion of the
priceline.com service. For example, we licensed our name

and business model to Alliance Capital Partners in connection with our home
financing services and to other third parties in connection with the development
of our business model abroad. These new businesses, including priceline.com
europe Ltd., typically incur start-up costs and operating losses and may not be
successful. If these new businesses are not favorably received by consumers or
are unsuccessful, the association of our brand name and business model with
these new entities may adversely affect our business and reputation and may
dilute the value of our brand name. Further, to the extent that these new
businesses are not successful, we may not be able to recover or be reimbursed
for our ongoing costs associated with their development, which could have a
material adverse effect on our business and results of operations.

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

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

TWO LARGE STOCKHOLDERS BENEFICIALLY OWN APPROXIMATELY 31% OF OUR STOCK

Hutchison Whampoa Limited and its 49.94% shareholder, Cheung Kong
(Holdings) Limited, collectively beneficially owned approximately 31% of our
outstanding common stock, based on public filings with the Securities and
Exchange Commission. Together, Cheung Kong (Holdings) Limited and Hutchison
Whampoa Limited have appointed three of the twelve members of our Board of
Directors. As a result of their ownership and positions, Cheung Kong (Holdings)
Limited and Hutchison Whampoa Limited collectively are able to significantly
influence all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may also have the effect of delaying or preventing a change in
control of our company. In addition, both Cheung Kong (Holdings) Limited and
Hutchison Whampoa Limited have registration rights with respect to their shares
of priceline.com. On September 20, 2001, Cheung Kong (Holdings) Limited and
Hutchison Whampoa Limited withdrew a request they had made for us to file a
shelf registration statement to sell shares and obtained rights to purchase up
to a 37.5% stake 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.

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

WE RELY ON THIRD-PARTY SYSTEMS

We rely on certain third-party computer systems and third-party service
providers, including the computerized central reservation systems of the airline
and hotel industries to satisfy demand for airline tickets and hotel room
reservations. In particular, our travel business is substantially dependent upon
the computerized reservation system of Worldspan, an operator of a database for
the travel industry. Any interruption in these third-party services systems,
including Worldspan's, or deterioration in their performance could prevent us
from booking airline, hotel and rental car reservations and have a material

adverse effect on our business. Our agreements with third-party service
providers are terminable upon short notice and often do not provide recourse for
service interruptions. In the event our arrangement with any of such third
parties is terminated, we may not be able to find an alternative source of
systems support on a timely basis or on commercially reasonable terms and, as a
result, our business and results of operations could be materially and adversely
affected.

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

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

CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS

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

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

o unanticipated disruptions in service;

o slower response times;

o decreased customer service and customer satisfaction; or

o delays in the introduction of new products and services;

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

Like many online businesses, we have experienced system failures from time
to time. For example, in May 2001, our primary website was interrupted for a
period of 12 hours. In addition to placing increased burdens on our engineering
staff, these outages create a significant amount of user questions and
complaints that need to be addressed by our customer support personnel. Any
unscheduled interruption in our service could result in an immediate loss of
revenues that can be substantial and may cause some users to switch to our
competitors. If we experience frequent or persistent system failures, our
reputation and brand could be permanently harmed. We have been taking steps to
increase the reliability and redundancy of our system.

These steps are expensive, may reduce our margins and may not be successful in
reducing the frequency or duration of unscheduled downtime.

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

OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY

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

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

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

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

o 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;

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

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

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

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

LEGAL PROCEEDINGS

We are a party to the legal proceedings described in Item 3 of Part I of
this Form 10-K - "Legal Proceedings." The defense of the actions described in
Item 3 may increase our expenses and an adverse outcome in any of such actions
could have a material adverse effect on our business and results of operations.

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

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

ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS

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

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

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

OUR STOCK PRICE IS HIGHLY VOLATILE

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

o quarterly variations in our operating results;

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

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

o changes in our capital structure;

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

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

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

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

o changes in the status of our intellectual property rights;

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

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

o additions or departures of key personnel; and

o stock market price and volume fluctuations.

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

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

We are defendants in a number of securities class action litigations. In
the past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its securities.
To the extent our stock price declines or is volatile, we may in the future be
the target of additional litigation. Securities and other litigation could
result in substantial costs and divert management's attention and resources. See
Item 3 - Legal Proceedings

UNCERTAINTY REGARDING STATE TAXES

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

income derived from such sales. Such proposals, if adopted, could substantially
impair the growth of e-commerce and adversely affect our opportunity to achieve
and sustain profitability.

REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS

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

ITEM 2. PROPERTIES

Our executive, administrative, operating offices and network operations
center are located in approximately 92,000 square feet of leased office space
located in Norwalk, Connecticut. In addition, we currently lease approximately
47,000 square feet in another location in Wilton, Connecticut that is unoccupied
and that we currently intend to sublease. We also have a lease for approximately
2,500 square feet of office space in New York City. Priceline.com europe Ltd.
leases approximately 1,900 square feet of office space in London, England. We do
not own any real estate as of March 15, 2002.

ITEM 3. LEGAL PROCEEDINGS

On January 6, 1999, we 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 our U.S. Patent
5,794,207. We are currently awaiting information from the Patent Office
regarding whether it will initiate an interference proceeding.

On January 19, 1999, Marketel International Inc. ("Marketel"), a
California corporation, filed a lawsuit against us, among others. On February
22, 1999, Marketel filed an amended and supplemental complaint. On March 15,
1999, Marketel filed a second amended complaint. On May 9, 2000, Marketel filed
a third amended complaint against us and Priceline Travel, Inc. The third
amended complaint alleged causes of action for misappropriation of trade
secrets, conversion, false advertising and for correction of inventorship of
U.S. Patent 5,794,207. In its third amended complaint, Marketel alleged, among
other things, that the defendants conspired to misappropriate Marketel's
business model, which allegedly was provided in confidence approximately ten
years ago. The third amended complaint also alleged that four former Marketel
employees are the actual sole inventors or co-inventors of U.S. Patent
5,794,207, which was issued on August 11, 1998 and had been assigned to us.
Marketel asked that the patent's inventorship be corrected accordingly.

On February 5, February 10 and March 31, 1999, we filed answers
respectively, to the complaint, amended complaint and second amended complaint,
in which we denied the material allegations of liability. On May 19, 2000, we
filed a motion to dismiss the third amended complaint for failure to state a
claim upon which relief could be granted. We strongly disputed the material
legal and factual allegations contained in Marketel's third amended complaint
and believe that the amended complaint is without merit. In addition, on July
13, 2000, we filed a motion for summary judgment alleging that Marketel had not
identified legally protectable trade secrets and is not entitled to correction
of inventorship of U.S. Patent 5,794,207.

On December 5, 2000, the United States District Court for the Northern
District of California granted our motion for summary judgment with respect to
Marketel's theft of trade secret and patent inventorship claims, and ruled that
there were triable issues of fact as to Marketel's false advertising claims,
although Judge Legge volunteered that it was unlikely that Marketel could
establish damages and suggested that these claims should be voluntarily
dismissed. The false advertising claims were subsequently dismissed by
stipulation, and on February 1, 2001, Judge Legge clarified his inventorship
ruling in favor of us and

entered final judgment in favor of us. On March 13, 2001, Marketel filed a
Notice of Appeal to the United States Court of Appeals for the Federal Circuit.
Briefing was completed on October 9, 2001, and oral argument was presented on
March 5, 2002. The parties await the Federal Circuit's decision. Pursuant to an
indemnification agreement, Walker Digital has agreed to indemnify, defend and
hold us harmless for damages, liabilities and legal expenses incurred in the
future in connection with the Marketel litigation.

Subsequent to our announcement on September 27, 2000 that revenues for the
third quarter 2000 would not meet expectations, we were served with the
following putative class action complaints:

o Weingarten v. priceline.com Incorporated
and Jay S. Walker
300 CV 1901 (District of Connecticut).

o Twardy v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1884 (District of Connecticut).

o Berdakina v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1902 (District of Connecticut).

o Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1924 (District of Connecticut).

o Fialkov v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1954 (District of Connecticut).

o Licht v. priceline.com Incorporated and
Jay S. Walker 300 CV 2049 (District of Connecticut).

o Ayach v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2062 (District of Connecticut).

o Zia v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1968 (District of Connecticut).

o Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1980 (District of Connecticut).

o Bazag v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2122 (District of Connecticut).

o Breier v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2146 (District of Connecticut).

o Farzam et al. v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker

300 CV 2176 (District of Connecticut).

o Caswell v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2169 (District of Connecticut).

o Howard Gunty Profit Sharing Plan v. priceline.com Inc.
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1917 (District of Connecticut).

o Cerelli v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1918 (District of Connecticut)

o Mayer v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1923 (District of Connecticut)

o Anish v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1948 (District of Connecticut)

o Atkin v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 1994 (District of Connecticut).

o Lyon v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2066 (District of Connecticut).

o Kwan v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2069 (District of Connecticut).

o Krim v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2083 (District of Connecticut).

o Karas v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2232 (District of Connecticut).

o Michols v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
300 CV 2280 (District of Connecticut).

All of these cases have been transferred to Judge Dominick J. Squatrito.
On September 12, 2001, Judge Squatrito Ordered that these cases be consolidated
under the Master File No. 3:00cv1884 (DJS), and he designated lead plaintiffs
and lead plaintiffs' counsel. On October 29, 2001, plaintiffs served a
Consolidated Amended Complaint. On February 5, 2002, Amerindo Investment
Advisors, Inc., who is one of the lead plaintiffs in the consolidated action,
made a motion for leave to withdraw as lead plaintiff in this action. The court
has yet to rule on that motion. On February 28, 2002, we filed a motion to
dismiss the Consolidated Amended Complaint. Plaintiffs have sixty days to file
papers in opposition to that motion, and thereafter we will have thirty days to
file our reply brief. We intend to defend vigorously against this action.

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

On March 16, March 26, April 27, and June 5, 2001, respectively, four
putative class action complaints were filed in the U.S. District Court for the
Southern District of New York naming priceline.com, Inc., Richard S. Braddock,
Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch,
Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon
Smith Barney, Inc. as defendants (01 Civ. 2262, 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 us. The
complaints allege, among other things, that priceline.com and the individual
defendants named in the complaints violated the federal securities laws by
issuing and selling priceline.com common stock in priceline.com's March 1999
initial public offering without disclosing to investors that some of the
underwriters in the offering, including the lead underwriters, had allegedly
solicited and received excessive and undisclosed commissions from certain
investors. By Orders of Judge Mukasey and Judge Scheindlin dated August 8, 2001,
these cases were consolidated for pre-trial purposes with hundreds of other
cases, which contain allegations concerning the allocation of shares in the
initial public offerings of companies other than priceline.com, Inc. By Order of
Judge Scheindlin dated August 14, 2001, the following cases were consolidated
for all purposes: 01 Civ. 2262; 01 Civ. 2576; and 01 Civ. 3590. On December 6,
2001, an Amended Class Action complaint was filed in one of these cases,
Lifshitz et al. v. priceline.com Inc. et al., 01 Civ 2590. This Amended Class
Action Complaint makes similar allegations to those described above but with
respect to both our March 1999 initial public offering and our August 1999
second public offering of common stock. This Amended Class Action Complaint also
names as defendants Timothy G. Brier, Nancy Peretsman, Allen & Co., Inc.,
Donaldson Lufkin & Jenrette Securities Corp. and Goldman Sachs & Co. in addition
to the defendants listed above. Our time to respond to these complaints has been
postponed and not yet rescheduled by the court. We intend to defend vigorously
against these actions.

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

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

From time to time, we have been and expect 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
us. Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and could adversely affect our
results of operations and business.

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

No matters were submitted for a vote of stockholders of priceline.com
during the fourth quarter of the year ended December 31, 2001.

PART II

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

PRICE RANGE OF COMMON STOCK

Our common stock has been quoted on the Nasdaq National Market under the
symbol "PCLN" since our initial public offering on March 29, 1999. Prior to such
time, there was no public market for our common stock. The following table sets
forth, for the periods indicated, the high and low closing sales prices per
share of the common stock as reported on the Nasdaq National Market:

2002 HIGH LOW
---- ---- ---

January 1 to March 21 ................... $ 6.32 $ 3.67

2001 HIGH LOW
---- ---- ---

First Quarter ........................... $ 3.50 $ 1.41
Second Quarter .......................... 9.05 2.53
Third Quarter ........................... 9.91 2.03
Fourth Quarter .......................... 6.26 3.42

2000 HIGH LOW
---- ---- ---

First Quarter ........................... $ 95.94 $ 50.13
Second Quarter .......................... 78.06 36.13
Third Quarter ........................... 40.56 10.75
Fourth Quarter .......................... 10.88 1.125

HOLDERS

As of March 21, 2002, there were approximately 1,085 stockholders of
record of priceline.com's common stock, although we believe that there are a
significantly larger number of beneficial owners.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our capital stock since
our inception and do not expect to pay any cash dividends for the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. Under the terms of the certificate of designation
relating to our Series B Preferred Stock, we cannot issue any dividends on
shares of our common stock unless full cumulative dividends have been paid on
the Series B Preferred Stock for all dividend periods ending on or prior to the
proposed date of payment of a dividend on our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

On January 29, 2002, Delta Air Lines, Inc. notified us that they were
exercising warrants to purchase 4.0 million shares of priceline.com common
stock. The warrants were issued to Delta in February 2001 in connection with
Delta's exchange of priceline.com Series A Convertible Redeemable PIK Preferred
Stock for Series B Redeemable Preferred Stock. As required by the terms of the
warrants, Delta exercised the warrants by surrendering 11,875 shares of Series B
Preferred Stock. As a result, on January 29, 2002, after giving effect to the
exercise of the warrants, there were 13,469 shares of Series B Preferred Stock
outstanding having an aggregate liquidation preference of approximately $13.5
million. As a result of this exercise, the Series B Preferred Stock will pay
dividends of approximately 242,000 shares of priceline.com common stock
semi-annually. In connection with the sale of the shares issued upon exercise of
the warrants, we relied upon Section 4(2) of the Securities Act of 1933, as
amended. See Note 11 to our consolidated financial

statements.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

The selected financial data presented below are derived from the
consolidated financial statements and related notes of the Company, and should
be read in connection with those statements, some of which are included herein.
All share and per share amounts have been retroactively adjusted to reflect the
1.25:1 stock split during 1999.

JULY 18 TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------- ------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Consolidated Statement of Operations Data:
Revenues
Travel ........................................ $ 1,162,223 $ 1,217,160 $ 480,979 $ 35,224 $ --
Other ......................................... 9,530 18,236 1,431 13
----------- ----------- ----------- --------- --------
Total Revenues ..................................... 1,171,753 1,235,396 482,410 35,237 --
Cost of Revenues:
Travel ........................................ 976,035 1,040,306 424,579 36,525 --
Other ......................................... 2,812 2,921 -- -- --
----------- ----------- ----------- --------- --------
Total Cost of Revenues ............................. 978,847 1,043,227 424,579 36,525 --
----------- ----------- ----------- --------- --------
Gross Profit ....................................... 192,906 192,169 57,831 (1,288) --
----------- ----------- ----------- --------- --------
Operating Expenses:
Sales and marketing ........................... 115,366 148,133 79,577 24,388 441
General and administrative (including $909,
$8,788 and $1,812 of option payroll taxes
in 2001, 2000 and 1999, respectively) ...... 29,568 60,982 27,609 18,004 1,012
Stock based compensation ...................... 16,508 1,711 -- -- --
Systems and business development .............. 41,293 39,192 14,023 11,132 1,060
Special charge ................................ (1,218) 34,824 -- -- --
Restructuring charge .......................... (136) 32,006 -- -- --
Severance charge .............................. 5,412 -- -- -- --
Warrant costs, net ............................ -- 8,595 998,832 57,979 --
Write-off of WebHouse warrant ................. -- 189,000 -- -- --
----------- ----------- ----------- --------- --------
Total operating expenses ................... 206,793 514,443 1,120,041 111,503 2,513
----------- ----------- ----------- --------- --------
Operating loss ................................ (13,887) (322,274) (1,062,210) (112,791) (2,513)
Other income .................................. 6,584 7,129 7,120 548 --
----------- ----------- ----------- --------- --------
Net loss ...................................... (7,303) (315,145) (1,055,090) (112,243) (2,513)
Preferred stock dividend ...................... (8,563) (14,382) -- -- --
Accretion on preferred stock .................. -- -- (8,354) (2,183) --
Net loss applicable to common shareholders .... $ (15,866) $ (329,527) $(1,063,444) $(114,426) $ (2,513)
=========== =========== =========== ========= ========
Net loss applicable to common shareholders
per basic and diluted common share ......... $ (0.08) $ (1.97) $ (7.90) $ (1.41) $ (.05)
=========== =========== =========== ========= ========
Weighted average number of basic and
diluted common shares outstanding .......... 205,000 166,952 134,622 81,231 50,834
=========== =========== =========== ========= ========

AS OF DECEMBER 31,
------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS)

Consolidated Balance Sheet Data:
Cash, cash equivalents, short-term investments and
restricted cash .................................. $ 164,608 $ 106,018 $ 177,299 $ 53,903 $ 16
Working capital .................................... 98,015 51,925 172,489 49,922 (2,389)
Total assets ....................................... 262,190 195,078 441,886 66,572 1,449
Long-term obligations and redeemable preferred stock 28,183 364,688 -- 1,015 51
Total liabilities .................................. 90,134 84,405 39,250 11,296 2,706
Total stockholders' equity ......................... 146,711 (248,907) 402,636 55,276 (1,257)

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

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES TO THOSE STATEMENTS,
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AND THE LEAD-IN
IMMEDIATELY PRECEDING PART I OF THIS ANNUAL REPORT ON FORM 10-K. AS DISCUSSED IN
MORE DETAIL IN THE LEAD-IN IMMEDIATELY PRECEDING PART I OF THIS ANNUAL REPORT ON
FORM 10-K, 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(SM) -
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:

o leisure airline tickets, provided by 10 domestic and 23
international airline participants, and travel insurance;

o 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;

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

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

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

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

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

o vacation packages, in many United States markets.

In certain instances, we have licensed the priceline.com name and demand
collection system to third parties to offer a particular product or service
(HOME FINANCING) or to offer a number of products or services

in a distinct international region (ASIA). Pursuant to these licensee
transactions, we generally receive a royalty under the license and may also
receive fees for services and reimbursement of certain expenses. We also hold
convertible securities entitling us to acquire a significant percentage of such
entity's equity securities upon the occurrence of certain events.

As described in more detail in RESULTS OF OPERATIONS below, our business,
like most in the travel industry, was directly and adversely impacted by the
terrorist attacks on September 11, 2001. Not only did we experience an immediate
and substantial decline in demand for our travel products in the days following
the attacks, we also experienced a significant increase in customer service
costs and ticket refunds and cancellations. While we believe that demand for
airline tickets has substantially recovered since the attacks on September 11,
our airline ticket sales have lagged behind due to, among other things, lower
average offer prices by our customers and less available airline ticket
inventory. We believe that the lower offer prices by our customers are
substantially attributable to the depressed retail environment for airline
tickets, which affords consumers the opportunity to purchase airline tickets at
very low retail rates without making the tradeoffs associated with our air
product. In addition, at the same time that our average offer price has
decreased, many airlines grounded portions of their fleets, thus decreasing
capacity and increasing load factors on existing flights, which we believe has
reduced inventory available to us. These trends - lower offer prices and reduced
inventory - have adversely impacted our overall ability to bind customer offers
and, when coupled with the significant financial difficulties faced by many of
our airline suppliers, contributed to an uncertain competitive environment in
which near-term forecasting is very difficult. We believe that this uncertainty
will extend into the second quarter of 2002 and perhaps beyond. We intend to
combat these trends by continuing to develop our non-air business, for which
demand remains strong. However, further terrorist attacks or the bankruptcy or
insolvency of a major domestic airline would adversely affect our business and
results of operations.

Several other important developments occurred during the year ended
December 31, 2001. Over the course of 2001, Hutchison Whampoa Limited and Cheung
Kong (Holdings) Limited became our largest stockholders and obtained three seats
on our board of directors. In February 2001, Hutchison and Cheung Kong purchased
$50 million of common stock from us and, over the course of the year, purchased
additional shares of common stock in private transactions and in the open
market. As of March 21, 2001, Hutchison and Cheung Kong owned approximately 31%
of our outstanding common stock. In addition, in February 2001, Delta Air Lines,
Inc. restructured its investment in our company by exchanging its Series A
Convertible Redeemable PIK Preferred Stock for Series B Redeemable Preferred
Stock with an aggregate liquidation preference of $80.0 million and warrants to
purchase 27 million shares of our common stock. As of March 21, 2002, Delta had
exercised approximately 22.4 million warrants since February of 2001, which by
their terms required Delta to surrender shares of the Series B Preferred Stock
to pay the exercise price, and, as a result, reduced the aggregate liquidation
preference on the Series B Preferred Stock to approximately $13.5 million. See
Note 11 to our Consolidated Financial Statements.

On September 1, 2001, we exercised our right to acquire a 49% equity
interest in pricelinemortgage, a broker and/or lender of residential mortgage
loans that utilizes our business model. Accordingly, we began recognizing 49% of
pricelinemortgage's net income (loss) in September of 2001 and will continue to
recognize our pro rata share of pricelinemortgage's net income (loss) in the
future. On December 21, 2001, we acquired a majority interest in the equity of
priceline.com Europe Holdings, N.V., in a transaction that gives us control of
priceline.com europe Ltd., a company established to introduce our business model
in Europe. In connection with the acquisition, we restructured priceline.com
europe Ltd.'s operations and significantly reduced its operating expenses. We
currently expect that the acquisition will reduce our quarterly operating income
by approximately $0.01 per share for the next several quarters. See Note 7 to
our Consolidated Financial Statements.

On October 1, 2001, we entered into a long-term worldwide technology
agreement with Worldspan, L.P. pursuant to which Worldspan acts as our preferred
global distribution system and provides us with product development resources.
Worldspan's chief executive officer, Paul Blackney, is a member of our Board of
Directors and our Audit Committee. See Notes 2 and 15 to our Consolidated
Financial Statements.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles. Our significant accounting policies are more fully described in Note
2 to our consolidated financial statements. Certain of our accounting policies
are particularly important to the portrayal of our financial position and
results of operations and require us to make significant judgments. In applying
those policies, our management uses its judgment to determine the appropriate
assumptions to be used in the determination of certain estimates. On an on-going
basis, we evaluate our estimates, including those related to credit card
charge-backs and refunds, investments in licensees, intangible assets, income
taxes, restructuring, special charges and severance, and contingencies and
litigation. Those estimates are based on historical experience, terms of
existing contracts, our observance of trends in the travel industry and on
various other assumptions that we believe to be reasonable under the
circumstances. Our actual results may differ from these estimates under
different assumptions or conditions. Our significant accounting policies
include:

o REFUNDS. In limited circumstances, we make certain accommodations for
customers or provide refunds to customers. Based on our historical
experience and our contractual arrangements with our suppliers, we
establish reserves for estimated losses resulting from refunds or
cancellations. In the event that we experience either an unanticipated
increase in refunds or cancellations, as we did in the weeks following the
terrorist attacks of September 11, or our suppliers refuse to accept
certain refunds or cancellations or challenge refunds granted outside of
their policies, our costs of revenues could increase.

o ALLOWANCE FOR CREDIT CARD CHARGE-BACKS. Because we are the merchant of
record on most of our transactions, we are responsible for credit card
transactions on our website that are disputed by customers with their
credit card companies (including disputes involving fraudulent
transactions). Accordingly, we record an allowance based on our historical
charge-back experience for estimated losses resulting from credit card
charge-backs.

o INVESTMENT IN CERTAIN LICENSEE. We have loaned money to
Hutchison-Priceline Limited, our Asian licensee. Currently we own no
equity and do not control the board of directors of Hutchison-Priceline
Limited. Sources, other than us, currently own all the outstanding equity
of Hutchison-Priceline Limited and have provided other funding to
Hutchison-Priceline Limited. In accordance with our licensing agreement,
we provide services to Hutchison-Priceline Limited and also incur expenses
on their behalf. We charge Hutchison-Priceline Limited for the services
rendered by us. Pursuant to the terms of the agreements governing our loan
to Hutchison-Priceline Limited, we may be requested in the future to loan
additional funds to Hutchison-Priceline Limited. Future adverse changes
could result in losses or an inability to recover the full carrying value
of the loan and we will record a charge if we believe the loan is
impaired.

o VALUATION OF LONG-LIVED ASSETS. We evaluate whether events or
circumstances have occurred which indicate that the carrying amounts of
long-lived assets (principally property and equipment and goodwill) may be
impaired or not recoverable. The significant factors that are considered
that could trigger an impairment review include: changes in business
strategy, market conditions, or the

manner of use of an asset; underperformance relative to historical or
expected future operating results; and negative industry or economic
trends. In evaluating an asset for possible impairment, management
estimates that asset's future undiscounted cash flows to measure whether
the asset is recoverable. If it is determined that the asset is not
recoverable, we measure the impairment based on the projected discounted
cash flows of the asset over its remaining life. While we believe that our
estimates of future cash flows are reasonable, different assumptions
regarding such cash flows could materially affect these evaluations. In
2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets," which among other things, eliminates the amortization of goodwill
and certain other intangible assets and requires that goodwill be
evaluated annually for impairment by applying a fair value-based test. We
adopted the standard effective January 1, 2002 and, in accordance with the
standard, will complete our first fair value-based impairment tests by
June 30, 2002.

o NET OPERATING LOSSES. We recorded a valuation allowance for our entire
net deferred tax assets since currently it is more likely than not that
such benefit will not be realized. At December 31, 2001, we had
approximately $3 billion of net operating loss carryforwards for income
tax purposes expiring from December 31, 2018 to December 31, 2021, which
are subject to limitation on future utilization under Section 382 of the
Internal Revenue Code of 1986. Section 382 imposes limitations on the
availability of a company's net operating losses after a more than 50
percentage point ownership change occurs. As a result of the completion of
a detailed and complex study in 2001 (the "NOL Study"), we determined that
such an ownership change occurred in 2000. Under Section 382, the amount
of our net operating losses incurred prior to the ownership change is
limited (the "Loss Limitation") based on our value on the date of the
ownership change. We estimate that Section 382 will reduce the amount of
net operating loss that is available to offset future taxable income to
approximately $61 million annually. The estimate of the annual Loss
Limitation is based upon certain conclusions in the NOL Study pertaining
to the date of the ownership change and the value of priceline.com on the
date of the ownership change. The overall determination of the Loss
Limitation and the conclusions contained in the NOL Study are subject to
interpretation, and therefore, the annual Loss Limitation could be subject
to change.

o PRESENTATION OF REVENUES. Revenues are primarily recognized, if and
when, we accept and fulfill a customer's offer. Transaction revenue, which
represents a substantial majority of our overall revenues, primarily
represents the selling price of airline tickets, hotel rooms, rental cars
and long distance phone service. For 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. We record as revenue the amount received from the customer, net of
taxes, surcharges and other fees.

RECENT DEVELOPMENTS

On January 31, 2002, we invested an additional $10 million in
priceline.com Europe Holdings, N.V., the parent company of priceline.com europe
Ltd. The other investors in priceline.com europe Ltd. include affiliates of
General Atlantic Partners, LLC and certain individual investors. William Ford, a
principle of General Atlantic Partners, is a member of our board of directors
and chairman of our audit committee. Please see Note 7 to our consolidated
financial statements.

On January 31, 2002, we entered into an agreement with eBay Inc. pursuant
to which we will work with eBay to create a new travel booking service for eBay.
The service, which will be powered by priceline.com, will serve as the
cornerstone of eBay's travel business and will include airline, hotel, rental
car, cruises and vacation packages. The new travel booking service will provide
users the ability to book flights, hotel and car reservations in an auction
style or "Buy it Now" format. We will be responsible for the technology,
development, transaction processing infrastructure, and ongoing support of the
booking service.

On February 19, 2002, we launched our vacation packages product, which
allows users to make offers for hotel room reservations and airline tickets as a
bundled package. The vacation packages product is a combination of our air and
hotel products, and uses the same technology to search for available airline
tickets and hotel rooms that meet a user's criteria, including the price set by
the user for the package. There can be no assurance that our vacation packages
product, or other services we may decide to offer, will be successful.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

REVENUES

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

TRAVEL REVENUES ............................ $1,162,223 $1,217,160 (5%)

OTHER REVENUES ............................. $ 9,530 $ 18,236 (48%)

TOTAL REVENUES ............................. $1,171,753 $1,235,396 (5%)

Revenues for the twelve months ended December 31, 2001 and 2000 consisted
primarily of: (1) travel revenues and (2) other revenues.

TRAVEL REVENUES

Travel revenues for the twelve months ended December 31, 2001 and 2000
consisted primarily of: (1) transaction revenues representing the selling price
of airline tickets, hotel rooms and rental cars; and (2) ancillary fees,
including Worldspan reservation booking fees, customer processing fees and
offered in connection with the sale of airline tickets, hotel rooms and rental
cars.

During the twelve months ended December 31, 2001, we sold approximately
4.5 million, 2.8 million and 3.1 million airline tickets, hotel room nights and
rental car days, respectively. During the twelve months ended December 31, 2000,
we sold approximately 4.6 million, 1.7 million and 1.8 million airline tickets,
hotel room nights and rental car days, respectively. Our rental car service was
not launched until the first quarter 2000. We believe that the approximately 3%
decrease in the number of airline tickets sold in the twelve months ended
December 31, 2001 over the twelve months ended December 31, 2000 was due
primarily to the significant decline in the demand for airline tickets following
the September 11 terrorist attacks. The demand for airline tickets recovered in
the weeks following the September 11 attacks. However, that recovery was slowed,
in part, by disruptions in the availability of inventory related to anticipated
schedule changes by the airlines.

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

UNIQUE OFFERS FOR
-----------------

AIRLINE HOTEL RENTAL
TICKETS ROOMS CARS
------- ----- ----

Year Ended December 31, 2001 50.9% 61.7% 50.0%

Year Ended December 31, 2000 47.9% 48.4% 44.7%

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

We added approximately 3.7 million new customers during the twelve months
ended December 31, 2001. In addition, we generated approximately 5.9 million
repeat customer offers during the twelve months ended December 31, 2001.

Travel revenues for the twelve months ended December 31, 2001 decreased
approximately 5% to $1,162 million from approximately $1,217 million for the
twelve months ended December 31, 2000, primarily as a result of the lingering
effects in the first quarter of 2001 of the decrease in the momentum of our
business during the second half of 2000, and, as discussed above, the difficult
conditions that persisted in the travel industry, primarily the airline sector,
after September 11.

Ancillary fee revenues for the twelve months ended December 31, 2001
increased from the same period a year ago as a result of increases in Worldspan
reservation booking fees and customer processing fees in the airline and hotel
room and rental car services.

The average revenue per total booked travel offer decreased 16.8%, to $238
in the twelve months ended December 31, 2001 from $286 in the twelve months
ended December 31, 2000. We believe that this decline in the average revenue per
total booked travel offer was primarily driven by a change in the mix of our
travel services sold. Specifically, revenues from our hotel and rental car
businesses grew as a percentage of total travel revenue in 2001 as compared to
the 2000. However, the average price of an airline ticket booked on
priceline.com decreased approximately 12% compared to 2000 primarily as a result
of a drop in average offer prices caused by a decline in consumer expectations
for the cost of travel as a result of retail fare wars and the events of
September 11.

Adaptive marketing revenues for the year ended December 31, 2000 were
approximately $20 million. During the fourth quarter 2000, we eliminated
adaptive marketing revenues, which were historically accretive to our travel
revenues and gross margins, but which we now believe negatively impacted
customer satisfaction. Travel products, particularly airline tickets, continue
to account for the majority of our revenue. Seasonal variations in our travel
business have historically and are expected to continue to impact our travel
revenues.

The following table represents the percentage of travel revenue by
quarter:

Year Ended December 31, 2001 Year Ended December 31, 2000
--------------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------------- -----------------------------------------

TRAVEL REVENUE 23% 31% 26% 20% 26% 28% 28% 18%

OTHER REVENUES

Other revenues during the twelve months ended December 31, 2001 and 2000
consisted primarily of: (1) transaction revenues and fees from our long distance
phone service and (2) commissions and fees from our home financing and
automobile services, and license fees from our international licensees and in
2000, included fees from WebHouse Club.

Other revenues for the twelve months ended December 31, 2001 decreased
approximately 48% to $9.5 million from $18.2 million for the twelve months ended
December 31, 2000, primarily as a result of the decrease in fees earned in
connection with our long distance phone service. Other revenues and reimbursable
expenses from WebHouse Club were approximately $1.3 million and $9.7 million,
respectively, in 2000 and ceased during the fourth quarter 2000 with the
shutdown of the WebHouse Club business.

COST OF REVENUES AND GROSS PROFIT

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

COST OF TRAVEL REVENUES ......................... $976,035 $1,040,306 (6.2%)
% OF TRAVEL REVENUES ........................ 84.0% 85.5%
COST OF OTHER REVENUES .......................... $ 2,812 $ 2,921 (3.7%)
% OF OTHER REVENUES ......................... 29.5% 16.0%
TOTAL COST OF REVENUES .......................... $978,847 $1,043,227 (6.2%)
% OF REVENUES ............................... 83.5% 84.4%

COST OF REVENUES

COST OF TRAVEL REVENUES. For the twelve months ended December 31, 2001 and
2000, cost of travel revenues consisted primarily of: (1) the cost of airline
tickets from our suppliers, net of the federal air transportation tax, segment
fees and passenger facility charges imposed in connection with the sale of
airline tickets; (2) the cost of hotel rooms from our suppliers, net of hotel
tax; and (3) the cost of rental cars from our suppliers, net of applicable
taxes.

Our supplier warrant costs for the twelve month periods ended December 31,
2001 and 2000 were $0 and approximately $1.5 million, respectively, and, in
2000, represented a non-cash expense related to the issuance of warrants to one
of our airline program participants in January 1999.

COST OF OTHER REVENUES. For the twelve months ended December 31, 2001 and
2000, cost of other revenues consisted of the cost of long distance telephone
service provided by our suppliers.

GROSS PROFIT

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

TRAVEL GROSS PROFIT ....................... $186,188 $176,854 5.3%
TRAVEL GROSS MARGIN ................... 16.0% 14.5%
OTHER GROSS PROFIT ........................ $ 6,718 $ 15,315 (56.1%)
OTHER GROSS MARGIN ..................... 70.5% 84.0%
TOTAL GROSS PROFIT ........................ $192,906 $192,169 0.4%
TOTAL GROSS MARGIN ..................... 16.5% 15.6%

TRAVEL GROSS PROFIT. Travel gross profit consists of travel revenues less
the cost of travel revenues. We are able to manage the level of gross margins by
controlling the price at which we will cause offers to be fulfilled. Consistent
with our strategy of increasing our gross margins, for the twelve months ended
December 31, 2001, travel gross profit and related travel gross margin increased
over the same period in 2000 as a result of increased transactional sales volume
and increased Worldspan reservation booking and customer processing fee
revenues. In addition to increasing transactional volume, we also have increased
the average margin on air tickets, hotel rooms and rental cars as compared to
the same period in 2000. Margin also increased in 2001 as a result of our new
contract with Worldspan that was executed in the fourth quarter of 2001 and
provided us with supplemental payments to be used for marketing programs and
incentives for our customers and travel suppliers.

OTHER GROSS PROFIT. For the twelve months ended December 31, 2001, other
gross profit decreased over the same period in 2000 as a result of the decrease
in fees earned in connection with our long distance phone service and the fees
earned from WebHouse Club.

OPERATING EXPENSES

We developed an infrastructure in 2000 that supported our operations and
the existing and anticipated future operations of our various licensees. Many of
our licensees no longer exist, and in certain cases, we have not been able to
take all of these additional costs out of our business.

SALES AND MARKETING

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

ADVERTISING............................... $ 46,875 $ 67,205 (30.3%)

OTHER SALES & MARKETING................... $ 68,491 $ 80,928 (15.4%)
--------- --------

TOTAL..................................... $ 115,366 $148,133 (22.1%)

% OF REVENUES............................. 9.8% 12.0%

Sales and marketing consists of advertising expenses and other sales and
marketing expenses. Advertising expenses consist primarily of: (1) television
and radio advertising; (2) online and email advertisements; and (3) agency fees,
creative talent and production costs for television and radio commercials. For
the twelve months ended December 31, 2001, advertising expenses decreased over
the same period in 2000 primarily due to an overall decline in the cost of
advertising and an effort to reduce our advertising spending. In 2001, we began
shifting our marketing resources from traditional areas of marketing such as
television and radio, toward online marketing. We intend to continue to pursue
an advertising and branding campaign in order to continue to attract new users
and retain existing users and expect to continue to shift resources to online
marketing.

Other sales and marketing expenses consist primarily of: (1) credit card
processing fees; (2) provisions for credit card charge-backs; (3) fees paid to
third-party service providers that operate our call centers; and (4)
compensation for our sales and marketing personnel. For the twelve months ended
December 31, 2001, other sales and marketing expenses decreased over the same
period in 2000 due to reductions in the customer service transaction and average
credit card costs, partially offset by an increase in credit card charge backs.

GENERAL AND ADMINISTRATIVE

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

GENERAL & ADMINISTRATIVE ....................... $28,659 $52,194 (45.1%)

PAYROLL TAX EXPENSE ON EMPLOYEE STOCK
OPTIONS ........................................ 909 8,788 (89.7%)

STOCK BASED COMPENSATION ....................... 16,508 1,711 864.8%
------- -------

TOTAL .......................................... $46,076 $62,693 (26.5%)

% OF REVENUES .................................. 3.9% 5.1%

General and administrative expenses consist primarily of: (1) costs for
personnel; (2) occupancy expenses; (3) telecommunications costs; and (4) fees
for outside professionals. General and administrative expenses decreased during
the twelve months ended December 31, 2001 over the same period in 2000 as a
result of decreased headcount and resulting payroll and overhead costs
associated with the shift in focus to our core travel products, which was part
of our turn-around and restructuring plan implemented in the fourth quarter of
2000. In addition, for the twelve months ended December 31, 2001, we recorded
charges of approximately $900,000 for payroll taxes relating to options
exercised in accordance with our employee stock option plans. For the twelve
months ended December 31, 2000, payroll taxes relating to the exercise of
employee stock options were $8.8 million. Stock based compensation increased
over the same period in 2000 as a result of the amortization and the
acceleration of vesting of restricted stock. Specifically, on November 1, 2001,
we accelerated the vesting of restricted stock held by certain employees based
on the anticipated achievements of earnings performance targets established at
the time of grant, in the fourth quarter of 2000. As a result of the
acceleration of the vesting of the restricted stock, we recorded a charge of
approximately $3.3 million in the fourth quarter 2001. In addition, in
connection with the accelerated vesting of restricted stock, we paid the tax
withholding liability associated with the vesting of such shares, including
amounts in excess of the minimum statutory tax withholding, by withholding from
delivery to certain employees shares of stock and, as a result, recorded a
charge of approximately $3.1 million.

SYSTEMS AND BUSINESS DEVELOPMENT

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

SYSTEMS & BUSINESS DEVELOPMENT ................. $ 41,293 $ 39,192 5.4%

% OF REVENUES .................................. 3.5% 3.2%

Systems and business development expenses for both periods consist
primarily of: (1) compensation to our information technology and product
development staff; (2) depreciation and amortization on computer hardware and
software; (3) payments to outside contractors; and (4) data communications and
other expenses associated with operating our Internet site. For the twelve
months ended December 31, 2001, systems and business development expenses
increased over the same period in 2000 primarily as a result of a decrease in
the amounts reimbursed by licensees, and an increase in our costs associated
with expanding the redundancy capabilities of our data centers.

SEVERANCE, RESTRUCTURING AND SPECIAL CHARGES

In the second quarter of 2001, our Board of Directors announced that
Richard S. Braddock had been reappointed as Chief Executive Officer. Mr.
Braddock replaced Daniel H. Schulman, our prior President and Chief Executive
Officer. In connection with Mr. Schulman's separation, we recorded a severance
charge of $5.4 million in the second quarter of 2001. This severance charge
resulted from the forgiveness of outstanding loans to Mr. Schulman and the
payment of severance, all of which was required by the terms of Mr. Schulman's
employment agreement. We also accelerated, pursuant to the terms of Mr.
Schulman's employment agreement, the vesting of 2,000,000 shares of restricted
common stock and 1,000,000 shares underlying stock options granted to Mr.
Schulman, resulting in a charge of approximately $770,000. The balance due to
Mr. Schulman ($345,000) is expected to be paid by the end of the second quarter
2002.

In the first quarter of 2001, we recorded a restructuring charge of
approximately $1.4 million. This restructuring charge related primarily to our
reduction of our workforce by approximately 25 full-time employees in February
2001. The charge relates primarily to severance payments and the entire amount
of the charge was disbursed in 2001.

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

The components of the restructuring charge are as follows (in thousands):

Expected to be Paid in
2004
Charged Non-cash Paid in Balance Charged Paid Balance and
in 2000 Charges 2000 12/31/00 in 2001 in 2001 Adjustments 12/31/01 2002 2003 thereafter
------- ------- ------- ------- ------ ------- ----------- -------- ------ ------ ----------

Employee
termination costs $ 3,807 $ -- $ 1,167 $ 2,640 $1,400 $ 3,358 $ (311) $ 371 $ 371 $ -- $ --

Real estate costs 9,603 -- 317 9,286 -- 3,155 (1,036) 5,095 2,257 1,359 1,479

Asset impairments 17,474 15,709 809 956 -- 835 (114) 7 7 -- --

Other 1,122 -- 534 588 -- 320 (75) 193 193 -- --
------- ------- ------- ------- ------ ------- ------- ------ ------ ------ ------

$32,006 $15,709 $ 2,827 $13,470 $1,400 $ 7,668 $(1,536) $5,666 $2,828 $1,359 $1,479
======= ======= ======= ======= ====== ======= ======= ====== ====== ====== ======

As a result of the fourth quarter 2000 restructuring, our work force was
reduced by approximately 125 full-time employees. The employee termination costs
primarily represent severance. The real estate costs primarily represent the
estimated net lease expense related to space we decided we no longer needed and
which we will not utilize in the future along with certain required
refurbishments to that space. Some of these leases run through 2011. As part of
the restructuring, we chose to abandon our plan to open a new network operations
center in that leased space. This decision accounted for a significant portion
of the real estate costs and a portion of the asset impairment, as previously
capitalized costs were expensed. Asset impairments are comprised of computer
hardware and software costs related to our plans not to pursue certain potential
product offerings and activities, as well as abandoned equipment and software
projects ($11.0 million). Asset impairments also include costs related to the
abandonment of plans to participate in the establishment of a licensee in Japan
($3.1 million) and other potential product offerings and intellectual property
no longer to be pursued in accordance with our restructuring plan ($1.9
million). Certain asset costs that were expensed have yet to be paid. Other
restructuring charges include professional and other fees and costs incurred in
2000 associated with the restructuring activities.

The components of the special charge follow (in thousands):

Paid
Charged Non-cash Paid in Balance in Balance Expected to be Paid in
in 2000 Charges 2000 12/31/00 2001 Adjustments 12/31/01 2002
------- ------- ------- -------- ---- ----------- -------- ----

Employee costs $14,482 $ 8,036 $ 142 $ 6,304 $ 6,297 $ -- $ 7 $ 7

Asset impairments 17,107 13,583 1,915 1,609 25 (1,218) 366 366

Other 3,235 -- 55 3,180 1,079 -- 2,101 2,101
------- ------- ------- ------- ------- ------- ------ ------

$34,824 $21,619 $ 2,112 $11,093 $ 7,401 $(1,218) $2,474 $2,474
======= ======= ======= ======= ======= ======= ====== ======

Employee costs primarily represent costs associated with retention
programs and the acceleration of employee loan forgiveness of $8.0 million.
During the fourth quarter 2000, we incurred $5.7 million of expense related to
retention bonuses paid to employees as part of our 2000 turnaround plan.

Asset impairments consist primarily of the write-down to estimated net
realizable value of receivables or loans (either loans to independent licensees
or receivables that represented reimbursable expenses that were incurred on the
licensee's behalf as part of the contractual arrangement) from independent
licensees that ceased or significantly restructured their operations during the
fourth quarter 2000, including approximately $7.8 million related to Myprice,
the Australian based company launched in early 2000 to introduce our
buyer-driven commerce platform to Australia and New Zealand, $1.7 million
related to WebHouse Club and $1.1 million related to Perfect Yardsale. Asset
write-downs also includes a charge of $6.3 million of the estimated
unrecoverable reimbursable expenses due to us from Walker Digital in connection
with Walker Digital's contractual obligations to fund certain patent and
intellectual property

litigation costs. Other includes estimated amounts accrued for the litigation
related to shareholder lawsuit costs or potential settlements and amounts
accrued for other claims.

During 2001, we decreased the liability for the restructuring charge by
approximately $1.5 million and the liability for the special charge by
approximately $1.2 million. These reductions, recorded in 2001, resulted from
the favorable resolution in 2001 of certain matters, primarily the collection of
certain receivables and the settlement of real estate commitments, and were
reflected as an adjustment to the appropriate income statement category
originally charged.

WARRANT COSTS

In the fourth quarter 2000, we amended the terms of certain warrants to
purchase our common stock held by Delta Air Lines, Inc. As a result, we recorded
an $8.6 million non-cash charge determined by using an option pricing model. In
connection with the amendment, we reduced the number of shares underlying the
warrant to 4.67 million shares from 5.5 million shares and reduced the exercise
price from $56.63 per share to $4.72 per share.

WRITE-OFF OF WEBHOUSE CLUB WARRANT

On October 5, 2000, the Priceline WebHouse Club, Inc., a privately-held
licensee of ours, announced that it would be ceasing operations. In the fourth
quarter 1999, we received a warrant in WebHouse Club in exchange for services
rendered and, upon receipt of the warrant, recognized approximately $189 million
of income representing the estimated fair value of the warrant, based on an
independent valuation. As a result of WebHouse Club ceasing operations, in the
third quarter 2000, we recorded a non-cash loss of approximately $189 million to
expense the full carrying value of the warrant.

INTEREST INCOME

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2001 2000
---- ----

INTEREST INCOME ......................... $6,996 $9,687 (27.8%)

For the twelve months ending December 31, 2001, interest income on cash
and marketable securities decreased primarily due to lower interest rates.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

TRAVEL REVENUES ....... $1,217,160 $480,979 153%

OTHER REVENUES ........ $ 18,236 $ 1,431 1,174%

TOTAL REVENUES ........ $1,235,396 $482,410 156%

Revenues for the twelve months ended December 31, 2000 and 1999 consisted
primarily of: (1) travel revenues and (2) other revenues.

TRAVEL REVENUES

Travel revenues for the twelve months ended December 31, 2000 consisted
primarily of: (1) transaction revenues representing the selling price of airline
tickets, hotel rooms and rental cars; and (2) ancillary fees we earned in
connection with the sale of our travel products, including Worldspan reservation
booking fees, customer processing fees and fee income from marketing programs
offered in connection with the sale of airline tickets, hotel rooms and rental
cars. Travel revenues for the twelve months ended December 31, 1999 consisted
primarily of: (1) transaction revenues representing the selling price of airline
tickets and hotel rooms; and (2) ancillary fees we earned in connection with the
sale of our travel products, including Worldspan reservation booking fees,
customer processing fees and fee income from marketing programs offered in
connection with the sale of airline tickets and hotel rooms.

During the twelve months ended December 31, 2000, we sold approximately
4.6 million, 1.7 million and 1.8 million airline tickets, hotel room nights and
rental car days, respectively. During the twelve months ended December 31, 1999,
we sold approximately 2.0 million and 500,000 airline tickets and hotel room
nights, respectively. Our rental car service was not launched until the first
quarter 2000.

UNIQUE OFFERS FOR
-----------------

AIRLINE HOTEL RENTAL
TICKETS ROOMS CARS
------- ----- ----

Year Ended December 31, 2000 47.9% 48.4% 44.7%

Year Ended December 31, 1999 34.1% 32.2% N/A

Travel revenues, and total revenues, increased during the twelve months
ended December 31, 2000 over the prior year primarily as a result of the
substantial development of our unique customer base, to which we added
approximately 5.2 million new customers during the twelve months ended December
31, 2000. In addition, we generated approximately 4.3 million repeat customer
offers during the twelve months ended December 31, 2000. A unique customer is
defined as someone who has made a guaranteed offer for at least one of our
products. We believe our customer base grew during the twelve months ended
December 31, 2000 as a result of the substantial increase in our advertising
expenditures throughout 2000, and due to the availability of additional product
inventory generated from adding three additional domestic air carriers during
the fourth quarter 1999 and two additional major rental cars companies during
the second quarter 2000.

Travel revenues for the twelve months ended December 31, 2000 increased
approximately 153% to $1,217.0 million from approximately $481.0 million for the
twelve months ended December 31, 1999, primarily as a result of an increase in
revenues from airline ticket sales. Ancillary fee revenues we earned in
connection with the sale of our travel products for the twelve months ended
December 31, 2000 increased from the same period in the prior year as a result
of volume driven increases in Worldspan reservation booking fees and customer
processing fees in the airline and hotel room and rental car services. The
processing fees for the airline and hotel room services were introduced during
the second quarter 1999.

Adaptive marketing revenues for the year ended December 31, 2000 decreased
$2.3 million, or 10.3%, compared to the same period in the prior year. During
the fourth quarter 2000, we eliminated adaptive marketing revenues, which were
historically accretive to our travel revenues and gross margins, but which we
now believe negatively impacted customer satisfaction. Seasonal variations in
our travel business, where the third and fourth quarters are typically weaker
than the first two quarters, have historically and are expected to continue to
impact our travel revenues. Travel products, particularly airline tickets,
account for the majority of our revenue.

OTHER REVENUES

Other revenues during the twelve months ended December 31, 2000 consisted
primarily of: (1) transaction revenues and fees from our long distance phone
service and (2) commissions and fees from our home financing and automobile
services, and license fees from WebHouse Club and our international licensees.
Other revenues during the twelve months ended December 31, 1999 consisted
primarily of commissions and fees from our home financing and automobile
services and from WebHouse Club.

Other revenues for the twelve months ended December 31, 2000 increased
approximately 1,174% to $18.2 million from $1.4 million for the twelve months
ended December 31, 1999, primarily as a result of $10.3 million of transaction
revenue and fees received from our long distance telephone service, launched
during the second quarter 2000. In addition, we received fee income from our
financial and auto service products introduced in the first quarter of 2000.
Other revenues from WebHouse Club and Myprice pty. ltd. were approximately $1.3
million and $600,000, respectively, in 2000 and ceased during the fourth quarter
2000 with the shutdown of the WebHouse Club business and the indefinite
postponement of the launch of Myprice's services in Australia.

COST OF REVENUES AND GROSS PROFIT

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

COST OF TRAVEL REVENUES .... $1,040,306 $424,579 145%

% OF TRAVEL REVENUES ... 85.5% 88.3%

COST OF OTHER REVENUES ..... $ 2,921 -- --

% OF OTHER REVENUES .... 16.0% --

TOTAL COST OF REVENUES ..... $1,043,227 $424,579 146%

% OF REVENUES .......... 84.4% 88.0%

COST OF REVENUES

COST OF TRAVEL REVENUES. Cost of travel revenues consist of product costs
and supplier warrant costs. For the twelve months ended December 31, 2000,
product costs consisted of: (1) the cost of airline tickets from our suppliers,
net of the federal air transportation tax, segment fees and passenger facility
charges imposed in connection with the sale of airline tickets; (2) the cost of
hotel rooms from our suppliers, net of hotel tax; and (3) the cost of rental
cars from our suppliers, net of applicable taxes. For the twelve months ended
December 31, 1999, our product costs consisted 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; and (2) the cost of hotel rooms from our suppliers, net of
hotel tax.

Our supplier warrant costs for the twelve month periods ended December 31,
2000 and 1999 were approximately $1.5 million in each period, which represent a
non-cash expense related to the issuance of common stock warrants to one of our
airline program participants in January 1999. The cost of the warrants has been
fully amortized and, accordingly, we will not incur this expense in the future.

COST OF OTHER REVENUES. For the twelve months ended December 31, 2000,
cost of other revenues consisted of the cost of long distance telephone service
incurred by priceline.com.

GROSS PROFIT

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

TRAVEL GROSS PROFIT ........ $176,854 $56,400 213.6%

TRAVEL GROSS MARGIN .... 14.5% 11.7%

OTHER GROSS PROFIT ......... $ 15,315 $ 1,431 970.2%

OTHER GROSS MARGIN ...... 84.0% 100%

TOTAL GROSS PROFIT ......... $192,169 $57,831 232.3%

TOTAL GROSS MARGIN ...... 15.6% 12.0%

TRAVEL GROSS PROFIT. Travel gross profit consists of travel revenues less
the cost of travel revenues. For the twelve months ended December 31, 2000,
travel gross profit increased over the same period in 1999 as a result of
increased transactional sales volume and increased Worldspan reservation booking
and customer processing fee revenues. In addition to increasing transactional
volume, the average margin on air tickets and hotel rooms increased during the
year ended December 31, 2000, as compared to the same period in 1999. The fee
portion of the travel transactions are an integral component in pricing
acceptance decisions we make.

For the twelve months ended December 31, 2000, travel gross margin
increased from the same period of 1999 as a result of increased average margin
on air tickets and hotel rooms and increased Worldspan and customer processing
fees.

OTHER GROSS PROFIT. Other gross profit consists of other revenues less the
cost of other revenues. For the twelve months ended December 31, 2000, other
gross profit increased over the same period in 1999 as a result of the
introduction of the long distance telephone product, the expansion of financial
and auto services and fees from certain licensees.

For the twelve months ended December 31, 2000, other gross margin
increased from the same period of 1999 as a result of the introduction and
expansion of additional products for long distance telephone, financial and
autos services during 2000.

OPERATING EXPENSES

SALES AND MARKETING

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

ADVERTISING .................. $ 67,205 $40,684 65.2%

OTHER SALES & MARKETING ...... $ 80,928 $38,893 108.1%
-------- -------

TOTAL ........................ $148,133 $79,577 86.2%

% OF REVENUES ................ 12.0% 16.5%

Sales and marketing consists of advertising expenses and other sales and
marketing expenses. Advertising expenses consist primarily of: (1) television
and radio advertising; (2) agency fees and production costs for television and
radio commercials; and (3) online and print advertisements. For the twelve
months ended December 31, 2000, advertising expenses increased over the same
period in 1999 primarily due to substantial expenses related to the television
advertising campaign launched in January 2000 and television advertising
launched in the fourth quarter 2000 (approximately $18.9 million) as part of a
customer retention program designed to counteract the effects of our negative
momentum in the third and fourth quarter 2000 and restore customer confidence.

Other 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 customer credit card charge-backs; and (4)
compensation for our sales and marketing personnel. For the twelve months ended
December 31, 2000, other sales and marketing expenses increased over the same
period in 1999 due to increased costs to run the customer service call centers,
increased credit card processing fees, and increased payroll and related
expenses resulting from growing our employee base. The increases in other sales
and marketing expenses were driven by substantial increases in customer offers
and revenue.

GENERAL AND ADMINISTRATIVE

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

GENERAL & ADMINISTRATIVE ...... $53,905 $25,797 109.0%

PAYROLL TAX EXPENSE ON EMPLOYEE
STOCK OPTIONS ................. 8,788 1,812 385.0%
------- -------

TOTAL ......................... $62,693 $27,609 127.1%

% OF REVENUES ................. 5.1% 5.7%

General and administrative expenses consist primarily of: (1) compensation
for personnel; (2) fees for outside professionals; (3) telecommunications costs;
and (4) occupancy expenses. General and administrative expenses increased during
the twelve months ended December 31, 2000 over the same period in 1999 as a
result of increased headcount and resulting payroll and overhead costs
associated with the expansion of our product offerings and increases in our
revenue base. In addition, for the twelve months ended December 31, 2000, we
incurred charges of $8.8 million for payroll taxes relating to options exercised
under our employee stock option plans. For the twelve months ended December 31,
1999, payroll taxes relating to options exercised in accordance with our
employee stock option plans amounted to $1.8 million.

SYSTEMS AND BUSINESS DEVELOPMENT

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

SYSTEMS & BUSINESS DEVELOPMENT $39,192 $14,023 179.5%

% OF REVENUES ................ 3.2% 2.9%

Systems and business development expenses for all periods consist
primarily of: (1) payments to outside contractors, (2) depreciation and
amortization on computer hardware and software, (3) compensation to our
information technology and product development staff, and (4) data
communications and other expenses associated with operating our internet site.
For the twelve months ended December 31, 2000, systems and business development
expenses increased over the same periods in 1999 due to increased staffing
requirements and resulting consulting, payroll and overhead costs related to the
expansion of our product offerings and technological infrastructure. In
addition, in 2000, we recognized increased depreciation and amortization
expenses resulting primarily from capital expenditures and increased internal
software development costs.

INTEREST INCOME

YEAR ENDED %
DECEMBER 31, CHANGE
------------ ------
($000)

2000 1999
---- ----

INTEREST INCOME ............... $9,687 $7,501 29.1%

For the twelve months ending December 31, 2000, interest income on cash
and marketable securities increased primarily due to higher balances resulting
from our initial public offering of common stock in April of 1999 and our
follow-on public offering of common stock in August of 1999.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2001 we had approximately $165 million in cash, cash
equivalents, short-term investments and restricted cash. Approximately $15
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, cash equivalents and short-term investments predominantly in debt
instruments that are highly liquid, of high-quality investment grade, and
predominantly have maturities of less than one year with the intent to make such
funds readily available for operating purposes.

Net cash provided by operating activities was $28 million for the twelve
months ended December 31, 2001, including $48 million of net income adjusted for
non-cash items. An increase in accounts receivable of $20 million reduced cash
provided by operating activity. Net cash used in operating activities during
2000 was $19 million. This was primarily attributable to net loss from
operations.

Net cash used in investing activities was $56 million and $43 million for
the twelve months ended December 31, 2001 and 2000, respectively. 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
2001 was the purchase of short-term investments and marketable securities in the
amount of $39 million and the investment in Europe of approximately $14 million
discussed in more detail below. In 2000, $26 million was used to purchase
convertible notes and warrants in certain licensees.

We have certain commitments for capital expenditures as part of our
ongoing business cycle. None of these commitments are material to our financial
position either individually or in the aggregate. Expenditures for additions to
property and equipment, and to a much lesser extent, resolution of certain
claims, is expected to aggregate approximately $12 to $20 million in 2002.

Net cash provided by financing activities was $51 million for the twelve
months ended December 31, 2001. This was primarily the result of the sale of
23.8 million shares of common stock at a price of $2.10 per share to
Hutchison-Whampoa Limited and Cheung Kong (Holdings) Limited in February 2001.
Also, we had cash inflow of $10 million related to the exercise of employee
stock options. Net cash provided by financing activities was $14 million for the
twelve months ended December 31, 2000, and was a result of the cash inflow
related to the exercise of stock options by employees.

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 operation. If additional funds were raised through the issuance of
equity securities, the percentage ownership of our then current stockholders
would be diluted. We cannot assure you that we will generate sufficient cash
flow from operations in the future, that revenue growth will be realized or that
future borrowings or equity contributions will be available in amounts
sufficient to make anticipated capital expenditures or finance our business
plan.

On June 28, 2001 and August 10, 2001, priceline.com europe Ltd. issued and
sold to us an $8.5 million promissory note and a $1.5 million promissory note,
respectively, in exchange for an aggregate of $10.0 million. On December 21,
2001, we acquired a majority interest in the equity of priceline.com europe
Ltd., $10.0 million of which was paid for by cancellation of the outstanding
promissory notes. The transaction gives us control of priceline.com europe Ltd.
On January 31, 2002, we invested an additional $10 million in priceline.com
Europe Holdings, N.V., the parent company of priceline.com europe Ltd. Certain
investors in priceline.com Europe Holdings, N.V., including certain affiliates
of General Atlantic Partners, LLC, have the right to put their shares of
priceline.com Europe Holdings, N.V. to us, at fair market value, in the event of
a change in control of us. These investors own 45,539,999 shares of
priceline.com Europe Holdings, N.V.

We may elect to loan additional amounts to Hutchison-Priceline Limited in
2002.

The following table represents the Company's material contractual
obligations and commitments as of December 31, 2001:

Payments due by Period (in thousands)

Less than One to Three Four to Five After Five
Total One Year Years Years Years

Operating lease obligations $24,783 $ 3,513 $5,813 $4,746 $10,711

Letters of credit 9,703 9,703 -- -- --

Employment agreements 4,153 4,153 -- -- --
------- ------- ------ ------ -------

Total $38,639 $17,369 $5,813 $4,746 $10,711
======= ======= ====== ====== =======

Priceline leases certain property, primarily buildings in Norwalk and
Wilton, Connecticut and New York City. These leases are accounted for as
operating leases. The operating lease obligations represents the minimum
payments for our operating leases. See Note 15 to Consolidated Financial
Statements.

The letters of credit were issued in favor of certain suppliers and
landlords. The letters of credit expire between March and December of 2002 and
are generally subject to automatic renewal upon expiration of the letter of
credit.

The employment agreements are with certain members of senior management
and provide for minimum annual compensation.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that identifiable intangible assets other than goodwill be amortized over their
useful lives. We will adopt SFAS No. 142 in 2002. We are required to complete
the initial step of a transitional impairment test within six months of adoption
of SFAS No. 142 and to complete the final step of the transitional impairment
test by December 31, 2002. Any impairment loss resulting from the transitional
impairment test would be recorded as a cumulative effect of a change in
accounting principle. Subsequent impairment losses, if any, will be reflected in
operating income or loss. We do not believe that a material adjustment will be
necessary upon adoption of SFAS No. 142. The amount of amortization of goodwill
in 2001 was not material to operations.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which supersedes both Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS 121) and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. SFAS 144 retains the
basic provisions of Opinion 30 on how to present discontinued operations in the
income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS 121, an impairment
assessment under SFAS 144 will not result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142, Goodwill and Other
Intangible Assets.

We are required to adopt SFAS 144 no later than our first fiscal year
beginning after December 15, 2001. We do not expect the adoption of SFAS 144 for
long-lived assets held for use to have a material impact on our consolidated
financial position or results of operations because the impairment assessment
under SFAS 144 is largely unchanged from SFAS 121. The provisions of this
statement for assets held for sale or other disposal generally are required to
be applied prospectively after the adoption date to newly initiated disposal
activities and therefore, will depend on future actions, if any, initiated by
us. As a result, we cannot determine the potential effects that adoption of SFAS
144 will have on our consolidated financial position or results of operations
with respect to future disposal decisions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Priceline.com currently has no floating rate indebtedness, holds no
derivative instruments (other than through investments in licensees described in
this Annual Report on Form 10-K) 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. 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Company and the
independent auditors' report are filed as part of this Annual Report on Form
10-K (See Item 14):

Balance Sheets as of December 31, 2001 and December 31, 2000; Statements
of Operations, Changes in Stockholders' Equity and Cash Flows for the years
ended December 31, 2001, December 31, 2000 and December 31, 1999; Notes to
Consolidated Financial Statements and Independent Auditors' Report.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the Company's directors and executive officers and
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, required by Part III, Item 10, will be included in our Proxy Statement
relating to our annual meeting of stockholders to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year ended
December 31, 2001.

ITEM 11. EXECUTIVE COMPENSATION

Information required by Part III, Item 11, will be included in our Proxy
Statement relating to our annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days after the end of our fiscal
year ended December 31, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by Part III, Item 12, will be included in our Proxy
Statement relating to our annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days after the end of our fiscal
year ended December 31, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain of our relationships and related
transactions will be included in our Proxy Statement relating to our annual
meeting of stockholders to be filed with the Securities and Exchange Commission
within 120 days after the end of our fiscal year ended December 31, 2001.

PART IV

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

(a) List of Documents Filed as a Part of this Annual Report on Form 10-K:

The following consolidated financial statements of the Company and the
independent auditors' report are filed as part of this Annual Report on Form
10-K.

Balance Sheets as of December 31, 2001 and December 31, 2000; and the
related Statements of Operations, Changes in Stockholders' Equity and Cash Flows
for the years ended December 31, 2001, December 31, 2000, and December 31, 1999;
Notes to Consolidated Financial Statements; and Independent Auditors' Report.

(b) Reports on Form 8-K:

During the fourth quarter 2001, priceline.com filed Current Reports on
Form 8-K dated October 3, 2001 and November 2, 2001.

The exhibits listed below are filed as a part of this Annual Report on
Form 10-K.

EXHIBIT INDEX

EXHIBIT NUMBER DESCRIPTION
-------------- -----------

10.9(a) Airline Participation Agreement, dated April 1998, by and
among the Registrant, Priceline Travel, Inc. and Trans World
Airlines, Inc.
10.10(a)+ Airline Participation Agreement, dated October 2, 1998, by
and among the Registrant, Priceline Travel, Inc. and
Northwest Airlines, Inc.
10.11.1(a)+ General Agreement, dated August 31, 1998, by and among the
Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc.
10.11.2(a)+ Airline Participation Agreement, dated August 31, 1998, by
and among the Registrant, Priceline Travel, Inc. and Delta
Air Lines, Inc.
10.11.3(a)+ Amendment to the Airline Participation Agreement and the
General Agreement, dated December 31, 1998, between and
among the Registrant, Priceline Travel, Inc. and Delta Air
Lines, Inc.
10.11.4(c) Letter Agreement, dated July 16, 1999, between the
Registrant and Delta Air Lines, Inc.
10.11.5(e) Master Agreement, dated November 17, 1999, between the
Registrant and Delta Air Lines, Inc.
10.11.6(e) Amendment to the Airline Participation Agreement and the
General Agreement, dated November 17, 1999, by and among the
Registrant, Priceline Travel, Inc. and Delta Air Lines, Inc.
10.11.7+ Participation Warrant Agreement, dated as of November 17,
1999, between the Registrant and Delta Air Lines, Inc.
10.12(a)+ Airline Participation Agreement, dated December 31, 1998, by
and among the Registrant, Priceline Travel, Inc. and America
West Airlines.
10.13(a)+ Internet Marketing and Licensing Agreement, as of August 1,
1998, between the Registrant and LendingTree, Inc.
10.14(a) Systems Access Agreement, dated as of August 4, 1997,
between the Registrant and WORLDSPAN, L.P.
10.15(a) Master Agreement for Outsourcing Call Center Support, dated
as of April 6, 1998, between the Registrant and CALLTECH
Communications, Incorporated.
10.16(a) Form of Participation Warrant Agreement.
10.17.1(a)+ Participation Warrant Agreement, dated as of December 31,
1998.
10.17.2(a)+ Amendment No. 1, dated as of February 4, 1999, to Warrant
Participation Agreement, dated as of December 31, 1998.
10.17.3(a)+ Amendment No. 2, dated as of March 3, 1999, to Participation
Warrant Agreement, dated as of December 31, 1998, as
previously amended by Amendment No. 1 to Warrant
Participation Agreement, dated as of February 4, 1999.
10.18(c) Employment Agreement, dated as of June 14, 1999, between the
Registrant and Daniel H. Schulman.
10.19.1(c) Airline Participation Agreement, dated July 16, 1999,
between the Registrant and Continental Airlines, Inc.
10.19.2(c) Participation Warrant Agreement, dated July 16, 1999,
between the Registrant and Continental Airlines, Inc.
10.19.3(e) First Amendment to Participation Warrant Agreement, dated as
of November 17, 1999, by and between the Registrant and
Continental Airlines, Inc.
10.19.4+ Participation Warrant Agreement, dated November 17, 1999,
between the Registrant and Continental Airlines, Inc.
10.20(d) License Agreement, dated July 20, 1999 between Walker
Digital Corporation and the Registrant.
10.21(e) Sublease, dated October 1999, between Oxford Health Plans,
Inc., as Sub-Landlord, and the Registrant, as Sub-Tenant,
and Agreement of Lease, dated June 16, 1993, as amended,
between Prudential Insurance Company of America, as
Landlord, and Oxford Health Plans, Inc., as Tenant.
10.22.1(e) Securityholders' Agreement, dated as of October 26, 1999,
among the Registrant, Priceline WebHouse Club, Inc., Walker
Digital, LLC and the Investors signatory thereto.
10.22.2+ Intellectual Property License Agreement, dated as of October
26, 1999, between the Registrant and Priceline WebHouse
Club, Inc.
10.22.3+ Marketing and Technical Services Agreement, dated as of
October 26, 1999, between the Registrant and Priceline
WebHouse Club, Inc.
10.22.4+ Warrant Agreement, dated as of October 26, 1999, between the
Registrant and Priceline WebHouse Club, Inc.
10.22.5+ Services Agreement, dated as of October 26, 1999, between
the Registrant and Priceline WebHouse Club, Inc.
10.23.1+ Airline Participation Agreement, dated as of November 15,
1999, by and between the Registrant and United Air Lines,
Inc.
10.23.2+ Participation Warrant Agreement, dated as of November 15,
1999, by and between the Registrant and United Air Lines,
Inc.

10.24.1+ Airline Participation Agreement, dated as of November 17,
1999, by and between the Registrant and US Airways, Inc.
10.24.2+ Participation Warrant Agreement, dated as of November 17,
1999, by and between the Registrant and US Airways, Inc.
10.25.1+ Airline Participation Agreement, dated as of November 17,
1999, by and between the Registrant and American Airlines,
Inc.
10.25.2+ Participation Warrant Agreement, dated as of November 17,
1999, by and between the Registrant and American Airlines,
Inc.
10.26+ Participation Warrant Agreement, dated as of November 17,
1999, by and between the Registrant and Trans World
Airlines, Inc.
10.27+ Participation Warrant Agreement, dated as of November 17,
1999, by and between the Registrant and Northwest Airlines,
Inc.
10.28+ Participation Warrant Agreement, dated as of November 17,
1999, by and between the Registrant and America West
Airlines
10.29(e) Continuing Employment Agreement, dated as of December 16,
1999, between the Registrant and Melissa M. Taub.
10.30(f) Employment Agreement, dated December 3, 1999, between the
Registrant and Michael McCadden.
10.31(f) Employment Agreement, dated December 30, 1999 between the
Registrant and Jeffery H. Boyd.
10.32(f) Employment Agreement, dated February 18, 2000, between the
Registrant and Heidi G. Miller.
10.33(f) Promissory Note, dated February 10, 2000 between Jeffery H.
Boyd and the Registrant.
10.34(f) Amendment to Promissory Note, dated March 28, 2000, between
Jeffery H. Boyd and the Registrant.
10.35(f) Promissory Note, dated March 7, 2000, between Heidi G.
Miller and the Registrant.
10.36(f) Stock Option Agreement, dated February 18, 2000, by and
between the Registrant and Heidi G. Miller.
10.37(f) Amendment to Promissory Note, dated March 28, 2000, between
Daniel H. Schulman and the Registrant.
10.38(f) Amendment Number One to the Priceline.com Incorporated 1999
Omnibus Plan.
10.39(f)+ Formation and Funding Agreement, dated as of March 17, 2000,
by and between the Registrant and Alliance Partners, LP.
10.40(g) Certificate of Designation, Preferences and Rights of Series
A Convertible Redeemable PIK Preferred Stock of
priceline.com Incorporated.
10.41(g) priceline.com Incorporated 1999 Omnibus Plan, as amended.
10.42(g) Amended and Restated Promissory Note, dated May 18, 2000,
between priceline.com Incorporated and Daniel H. Schulman.
10.43(g) Amendment to Employment Agreement, dated June 12, 2000,
between priceline.com Incorporated and Richard Braddock
10.44(g) Lease, dated as of May 1, 2000, between the parties listed
therein, as Landlord and priceline.com Incorporated, as
Tenant.
10.45(g) Convertible Note, dated June 27, 2000, between
Hutchison-Priceline Limited, as obligor, and PCLN Asia,
Inc., as holder.
10.46(g) Amended and Restated Promissory Note, dated August 21, 2000,
between priceline.com Incorporated and Heidi Miller.
10.47(h) Amendment Employment Agreement, dated August 21, 2000,
between priceline.com Incorporated and Heidi Miller.
10.48(h) Second Amended and Restated Promissory Note, dated August
21, 2000, between priceline.com Incorporated and Jeffery H.
Boyd.
10.49(h) Amendment to Offer Letter, dated August 21, 2000, between
priceline.com Incorporated and Jeffery H. Boyd.
10.50(h) Second Amended and Restated Promissory Note, dated August
21, 2000, between priceline.com Incorporated and Daniel H.
Schulman.
10.51(h) Amendment to Employment Agreement, dated August 21, 2000,
between priceline.com Incorporated and Daniel H. Schulman.
10.52(i) Certificate of Designation, Preferences and Rights of Series
B Redeemable Preferred Stock of priceline.com Incorporated.

----------

10.53(i) Warrant Agreement, dated February 6, 2001, by and between
priceline.com Incorporated and Delta Air Lines, Inc.
10.54(i) Stockholder Agreement, dated February 6, 2001, between
priceline.com Incorporated and Delta Air Lines, Inc.
10.55(j) Priceline.com 2000 Employee Stock Option Plan.
10.56(j) Employment Agreement, dated November 20, 2000, between
priceline.com Incorporated and Robert Mylod.
10.57(k) Stock Purchase Agreement, dated as of February 15, 2001,
among priceline.com Incorporated, Prime Pro Group Limited
and Forthcoming Era Limited.
10.58(k) Registration Rights Agreement, dated as of February 15,
2001, among priceline.com Incorporated, Prime Pro Group
Limited and Forthcoming Era Limited.
10.59(l) Amended and Restated Employment Agreement, dated December
20, 2000, by and between priceline.com Incorporated and
Daniel H. Schulman.
10.60(l) Promissory Note, dated July 2, 1999, by and between
priceline.com Incorporated and Daniel H. Schulman.
10.61(l) Amended and Restated Employment Agreement, dated November
20, 2000, by and between priceline.com Incorporated and
Jeffery H. Boyd.
10.62(l) Employment Agreement, dated November 20, 2000, by and
between priceline.com Incorporated and Robert Mylod.
10.63(l) Employment Agreement, dated November 20, 2000, by and
between priceline.com Incorporated and W. Michael McCadden.
10.64(l) Employment Agreement, dated December 20, 2000, by and
between priceline.com Incorporated and Ronald Rose.
10.65(l) Amended Participation Warrant Agreement, dated November 2,
2000, by and between priceline.com Incorporated and Delta
Air Lines, Inc.
10.66(m) Employment Letter, dated February 9, 2001, by and between
priceline.com Incorporated and Peter J. Millones
10.67(n) Stockholders' Agreement by and among priceline.com
Incorporated, Prime Pro Group Limited, Forthcoming Era
Limited, Potton Resources Limited and Ultimate Pioneer
Limited, dated as of June 5, 2001.
10.68(o) Priceline.com 1999 Omnibus Plan, as amended.
10.69(p) Amendment to Employment Agreement, dated June 15, 2001, by
and between priceline.com and Robert Mylod
10.70 Amendment to Amended & Restated Employment Agreement, dated
December 10, 2001, by and between priceline.com Incorporated
and Jeffery Boyd.
10.71+ Subscriber Entity Agreement, dated October 1, 2001, by and
between Worldspan, L.P. and priceline.com Incorporated.
10.72+ Amendment to the Worldspan Subscriber Entity Agreement,
dated October 1, 2001, by and between Worldspan, L.P. and
priceline.com Incorporated.
10.73 Employment Letter Agreement, dated January 2, 2002, by and
between priceline.com Incorporated and Brett Keller.
23.1 Consent of Deloitte & Touche LLP.

-----------
(a) Previously filed as an exhibit to the Form S-1 (Registration No.
333-69657) filed in connection with priceline.com's initial public
offering and incorporated herein by reference.
(b) Previously filed as an exhibit to the Form 10-Q filed on May 17, 1999 and
incorporated herein by reference.
(c) Previously filed as an exhibit to the Form S-1 (Registration No.
333-83513) filed in connection with priceline.com's secondary public
offering and incorporated herein by reference.
(d) Previously filed as an exhibit to the Form 10-Q for the quarterly period
ended September 30, 1999.
(e) Previously filed as an exhibit to the Form 10-K for the year ended
December 31, 1999.
(f) Previously filed as an exhibit to the Form 10-Q for the quarterly period
ended March 31, 2000.
(g) Previously filed as an exhibit to the Form 10-Q for the quarterly period
ended June 30, 2000.
(h) Previously filed as an exhibit to the Form 10-Q for the quarterly period
ended September 30, 2000.
(i) Previously filed as an exhibit to the Form 8-K filed on February 8, 2001.
(j) Previously filed as an exhibit to the Form S-8 (Registration No.
333-55578) filed on February 14, 2001.
(k) Previously filed as an exhibit to the Form 8-K filed on February 20, 2001.

(l) Previously filed as an exhibit to the Form 10-K for the year ended
December 31, 2000.
(m) Previously filed as an exhibit to the Form 10-Q for the quarterly period
ended March 31, 2001.
(n) Previously filed as an exhibit to the Form 8-K filed on June 6, 2001.
(o) Previously filed as an exhibit to the Form S-8 (Registration No.
333-65034) filed on July 13, 2001.
(p) Previously filed as an exhibit to the Form 10-Q for the quarterly period
ended June 30, 2001.
(+) Certain portions of this document have been omitted pursuant to a
confidential treatment request.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

By: /s/ Jeffery H. Boyd
------------------------------
Name: Jeffery H. Boyd
Title: Chief Operating Officer
Date: March 29, 2002

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

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Richard S. Braddock Chairman, Chief Executive Officer March 29, 2002
---------------------------- and Director (Principal Executive
Richard S. Braddock Officer)

/s/ Jeffery H. Boyd President, Chief Operating Officer and March 29, 2002
---------------------------- Director (Principal Executive Officer)
Jeffery H. Boyd

/s/ Thomas P. D'Angelo Senior Vice President, Finance and March 29, 2002
---------------------------- Controller (Principal Accounting Officer)
Thomas P. D'Angelo

/s/ Robert Mylod Chief Financial Officer March 29, 2002
---------------------------- (Principal Financial Officer)
Robert Mylod

/s/ Paul A. Allaire Director March 29, 2002
----------------------------
Paul A. Allaire

/s/ Ralph M. Bahna Director March 29, 2002
----------------------------
Ralph M. Bahna

/s/ Paul J. Blackney Director March 29, 2002
----------------------------
Paul J. Blackney

/s/ William E. Ford Director March 29, 2002
----------------------------
William E. Ford

/s/ Edmond Ip Director March 29, 2002
----------------------------
Edmond Ip

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Dominic Lai Director March 29, 2002
----------------------------
Dominic Lai

/s/ Marshall Loeb Director March 29, 2002
----------------------------
Marshall Loeb

/s/ N. J. Nicholas, Jr. Director March 29, 2002
----------------------------
N. J. Nicholas, Jr.

/s/ Nancy B. Peretsman Director March 29, 2002
----------------------------
Nancy B. Peretsman

/s/ Ian F. Wade Director March 29, 2002
----------------------------
Ian F. Wade

PRICELINE.COM INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page No.
--------

Independent Auditors' Report.................................................58

Consolidated Balance Sheets for the years ended
December 31, 2001 and December 31, 2000......................................59

Consolidated Statements of Operations for the years ended
December 31, 2001, December 31, 2000 and December 31, 1999...................60

Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, December 31, 2000
and December 31, 1999........................................................61

Consolidated Statements of Cash Flows for the fiscal years ended
December 31,2001, December 31, 2000 and December 31, 1999....................62

Notes to Consolidated Financial Statements...................................63

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
priceline.com Incorporated

We have audited the accompanying consolidated balance sheets of
priceline.com Incorporated (the "Company") as of December 31, 2001 and 2000, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Stamford, Connecticut
February 4, 2002

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

December 31,
----------------------------
2001 2000
----------- -----------

ASSETS
Current assets:
Cash and cash equivalents $ 99,943 $ 77,024
Restricted cash 15,396 18,042
Short-term investments 49,269 10,952
Accounts receivable, net of allowance for doubtful accounts of
$4,170 and $2,372, respectively 15,665 13,889
Prepaid expenses and other current assets 5,038 11,316
----------- -----------

Total current assets 185,311 131,223
Property and equipment, net 32,266 37,083
Due from employees 11 3,503
Goodwill 23,646 --
Other assets, primarily related parties 20,956 23,269
----------- -----------
Total assets $ 262,190 $ 195,078
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,941 $ 40,691
Accrued expenses 36,240 33,172
Other current liabilities 5,115 5,434
----------- -----------
Total current liabilities 87,296 79,297

Accrued expenses 2,838 5,108
----------- -----------
Total liabilities 90,134 84,405

COMMITMENTS AND CONTINGENCIES (See Notes)

SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, $0.01 par value;
6,000,000 shares authorized; $59.93 liquidation value per share; 6,000,000
shares issued; 0 and 6,000,000 shares outstanding, respectively -- 359,580

SERIES B MANDATORILY REDEEMABLE PREFERRED STOCK, $0.01 par value; 80,000
authorized shares; $1,000 liquidation value per share; 80,000 shares issued;
25,345 and 0 shares outstanding, repsectively 25,345 --

Stockholders' equity (deficiency):
Common stock, $0.008 par value, authorized 1,000,000,000 shares,
229,487,885 and 181,798,204 issued, respectively 1,836 1,454
Treasury stock, 5,450,236 shares (326,633) (326,633)
Additional paid-in capital 2,015,849 1,618,956
Deferred compensation -- (13,053)
Accumulated other comprehsenive loss -- (1,156)
Accumulated deficit (1,544,341) (1,528,475)
----------- -----------
Total stockholders' equity 146,711 (248,907)
----------- -----------

Total liabilities and stockholders' equity $ 262,190 $ 195,078
=========== ===========

See Notes to Consolidated Financial Statements.

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

Years Ended December 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------

Travel revenues $ 1,162,223 $ 1,217,160 $ 480,979
Other revenues 9,530 18,236 1,431
----------- ----------- -----------
Total revenues 1,171,753 1,235,396 482,410

Cost of travel revenues 976,035 1,038,783 423,056
Cost of other revenues 2,812 2,921 --
Supplier warrant costs -- 1,523 1,523
----------- ----------- -----------
Total costs of revenues 978,847 1,043,227 424,579
----------- ----------- -----------

Gross profit 192,906 192,169 57,831
----------- ----------- -----------

Operating expenses:
Sales and marketing 115,366 148,133 79,577
General and administrative (including $909, $8,788 and $1,812
of option payroll taxes, respectively) 29,568 60,982 27,609
Stock based compensation 16,508 1,711 --
Systems and business development 41,293 39,192 14,023
Special charge (1,218) 34,824 --
Restructuring charge (136) 32,006 --
Severance charge 5,412 -- --
Warrant costs, net -- 8,595 998,832
Write-off of WebHouse warrant -- 189,000 --
----------- ----------- -----------
Total operating expenses 206,793 514,443 1,120,041
----------- ----------- -----------

Operating loss (13,887) (322,274) (1,062,210)
Other income (expenses):
Loss on sale of equity investment (946) (2,558) --
Interest income 6,996 9,687 7,501
Equity in net income of pricelineMortgage 551 -- --
Other expense (17) -- (381)
----------- ----------- -----------
Total other income 6,584 7,129 7,120
----------- ----------- -----------

Net loss (7,303) (315,145) (1,055,090)
Preferred stock dividend (8,563) (14,382) --
Accretion on preferred stock -- -- (8,354)
----------- ----------- -----------
Net loss applicable to common stockholders $ (15,866) $ (329,527) $(1,063,444)
=========== =========== ===========

Net loss applicable to common stockholders per
basic and diluted common share $ (0.08) $ (1.97) $ (7.90)
=========== =========== ===========

Weighted average number of basic and diluted
common shares outstanding 205,000 166,952 134,622
=========== =========== ===========

See Notes to Consolidated Financial Statements.

priceline.com Incorporated
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands)

ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
----------------------------------------------------------------------------------

Balance, January 1, 1999 31,126 $ 311 93,225 $ 746 $ 171,158 $ (116,939)

Conversion of Series A
convertible preferred stock (17,289) (173) 21,611 173 -- --
Conversion of Series B
convertible preferred stock (13,837) (138) 17,297 138 -- --
Accretion on preferred stock -- -- -- -- 8,354 (8,354)
Issuance of common stock -- -- 11,000 88 208,329 --
Exercise of options and warrants -- -- 20,734 166 3,233 --
Issuance of warrants to purchase
common stock -- -- -- -- 1,190,634 --
Net loss -- -- -- -- (1,055,090)
----------------------------------------------------------------------------------
Balance, December 31, 1999 -- -- 163,867 1,311 1,581,708 (1,180,383)

Net loss applicable to common shareholders -- -- -- -- -- (329,527)
Unrealized loss on investments -- -- -- -- -- --

Total comprehensive loss -- -- -- -- -- --
Exchange of common stock for Series A
mandatorily redeemable preferred stock -- -- -- -- -- --
Issuance of common stock under
deferred compensation plans -- -- 7,450 60 14,705 --
Amortization of deferred compensation -- -- -- -- -- --
Exercise of options and warrants -- -- 10,481 83 13,948 --
Warrants to purchase common stock -- -- -- -- 8,595 --
Common stock dividends on series A
mandatorily redeemable preferred stock -- -- -- -- -- (18,565)
----------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 181,798 1,454 1,618,956 (1,528,475)

Net loss applicable to common
shareholders -- -- -- -- -- (15,866)
Sale of equity investments -- -- -- -- -- --
Exchange of preferred stock -- -- -- -- 279,530 --
Issuance of common stock under
deferred compensation plans -- -- 170 1 525 --
Cancellation of common stock under
deferred compensation plans -- -- (500) (4) (762) --
Amortization and acceleration of
deferred compensation -- -- -- -- 582 --
Shares reacquired for withholding taxes -- -- (1,754) (14) (8,702) --
Issuance of preferred stock dividend -- -- 986 8 8,555 --
Sale of common stock -- -- 23,810 191 49,318 --
Exercise of options and warrants -- -- 24,978 200 67,847 --
----------------------------------------------------------------------------------

Balance, December 31, 2001 -- $ -- 229,488 $ 1,836 $ 2,015,849 $(1,544,341)
==================================================================================

ACCUMULATED
OTHER
OMPREHENSIVE TREASURY STOCK DEFERRED
LOSS SHARES AMOUNT COMPENSATION TOTAL
--------------------------------------------------------------------------

Balance, January 1, 1999 $ -- -- -- $ -- $ 55,276

Conversion of Series A
convertible preferred stock -- -- -- -- --
Conversion of Series B
convertible preferred stock -- -- -- -- --
Accretion on preferred stock -- -- -- -- --
Issuance of common stock -- -- -- -- 208,417
Exercise of options and warrants -- -- -- -- 3,399
Issuance of warrants to purchase
common stock -- -- -- -- 1,190,634
Net loss -- -- -- -- (1,055,090)
--------------------------------------------------------------------------

Balance, December 31, 1999 -- -- -- -- 402,636

Net loss applicable to common shareholders -- -- -- -- (329,527)
Unrealized loss on investments (1,156) -- -- -- (1,156)
-----------
Total comprehensive loss -- -- -- -- (330,683)
Exchange of common stock for Series A
mandatorily redeemable preferred stock -- (6,000) (359,580) -- (359,580)
Issuance of common stock under
deferred compensation plans -- -- -- (14,765) --
Amortization of deferred compensation -- -- -- 1,712 1,712
Exercise of options and warrants -- -- -- -- 14,031
Warrants to purchase common stock -- -- -- -- 8,595
Common stock dividends on series A
mandatorily redeemable preferred stock -- 550 32,947 -- 14,382
--------------------------------------------------------------------------
Balance, December 31, 2000 (1,156) (5,450) (326,633) (13,053) (248,907)

Net loss applicable to common
shareholders -- -- -- -- (15,866)
Sale of equity investments 1,156 -- -- -- 1,156
Exchange of preferred stock -- -- -- -- 279,530
Issuance of common stock under
deferred compensation plans -- -- -- (526) --
Cancellation of common stock under
deferred compensation plans -- -- -- 766 --
Amortization and acceleration of
deferred compensation -- -- -- 12,813 13,395
Shares reacquired for withholding taxes -- -- -- -- (8,716)
Issuance of preferred stock dividend -- -- 8,563
Sale of common stock -- -- -- -- 49,509
Exercise of options and warrants -- -- -- -- 68,047
--------------------------------------------------------------------------
Balance, December 31, 2001 $ -- (5,450) $(326,633) $ -- $ 146,711
==========================================================================

See Notes to Consolidated Financial Statements.

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

Year ended Year ended Year ended
December 31, December 31, December 31,
------------ ------------ ------------
2001 2000 1999
------------ ------------ ------------

OPERATING ACTIVITIES:
Net loss $ (7,303) $(315,145) $(1,055,090)
Adjustments to reconcile net loss to net cash (used in)
provided by
operating activities:
Depreciation and amortization 16,578 17,385 5,348
Provision for uncollectible accounts 18,548 7,354 3,127
Warrant costs -- 8,595 1,189,111
WebHouse warrant -- 189,000 (189,000)
Net loss on disposal of fixed assets 17 12,398 --
Net loss on sale of equity investments 946 2,558 --
Impairment of Myprice loan -- 4,886 --
Equity in net income of pricelinemortgage (551) -- --
Non-cash severance 3,076 -- --
Enhanced withholding on restricted shares 3,136 -- --
Compensation expense arising from deferred stock awards 13,395 1,711 --
Changes in assets and liabilities:
Accounts receivable (19,768) 7,401 (29,617)
Prepaid expenses and other current assets 699 2,076 (17,089)
Related party receivables -- (3,484) --
Accounts payable and accrued expenses (1,501) 45,155 28,470
Other 824 1,276 (3,331)
-------- --------- -----------
Net cash (used in) provided by operating activities 28,096 (18,834) (68,071)
-------- --------- -----------

INVESTING ACTIVITIES:
Additions to property and equipment (9,415) (37,320) (27,416)
Proceeds from sales of fixed assets 170 -- --
Purchase of convertible notes and warrants of licensees, primarily
related parties -- (25,676) (2,000)
Proceeds from sales/maturities of investments 770 31,101 --
Funding of restricted cash and bank certificate of deposit 2,646 (5,661) (3,743)
Investment in priceline.com europe Ltd. (14,248) -- --
Cash acquired from acquisition of priceline europe Ltd. 2,779 -- --
Investment in short-term investments/marketable securities (38,878) (5,000) (38,771)
-------- --------- -----------
Net cash used in investing activities (56,176) (42,556) (71,930)
-------- --------- -----------

FINANCING ACTIVITIES:
Payment of long-term debt -- -- (1,000)
Principal payments under capital lease obligations -- -- (25)
Shares reacquired for withholding taxes (8,716) -- --
Proceeds from sale of common stock, net 49,459 -- 208,417
Proceeds from exercise of stock options and warrants 10,256 14,031 3,399
-------- --------- -----------
Net cash provided by financing activities 50,999 14,031 210,791
-------- --------- -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,919 (47,359) 70,790

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 77,024 124,383 53,593
-------- --------- -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 99,943 $ 77,024 $ 124,383
======== ========= ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 4 $ 37
======== ========= ===========
Acquisition of priceline.com europe Ltd. - net liabilities assumed $ 7,896 $ -- $ --
======== ========= ===========

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS DESCRIPTION

Priceline.com Incorporated ("priceline.com", or the "Company") has
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(SM)- priceline.com
collects consumer demand, in the form of individual customer offers, for a
particular product or service at a price set by the customer. The Company then
accesses a proprietary database of inventory available to the Company for
purchase and, based upon the customer's offer price, then elects whether or not
to accept that customer offer.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and its majority owned subsidiary, priceline Europe
Holdings N.V. All significant intercompany accounts and transactions have been
eliminated. Investments in affiliates in which the Company does not have
control, but has the ability to exercise significant influence (generally 20-50%
ownership), are accounted for by the equity method. Certain reclassifications
have been made to prior years financial statements to conform to current year
presentation. These reclassifications had no impact on previously reported net
income or stockholders' equity.

USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments,
including cash and cash equivalents, accounts receivable-net and accounts
payable, are carried at cost which approximates their fair value because of the
short-term maturity of these financial instruments.

CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS - The Company
invests excess cash primarily in money market accounts, certificates of
deposits, and short-term commercial paper. All highly liquid instruments with an
original maturity of three months or less are considered cash equivalents.
Investments in equity securities were classified as available for sale and were
recorded at fair value with any unrealized holding gains or losses, net of tax,
included as a component of other comprehensive income during 2000.

RESTRICTED CASH - Restricted cash collateralizes letters of credit issued
in favor of certain suppliers and landlords. The letters of credit expire
between March through December of 2002 and are generally subject to automatic
renewal upon expiration of the letter of credit. Also included in restricted
cash are amounts held by our credit card processor company.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is computed on a
straight-line basis, over the estimated useful lives of the assets or, when
applicable, the life of the lease, whichever is shorter.

GOODWILL - In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that all business combinations be accounted for under the
purchase method only and that certain acquired intangible assets in a business
combination be recognized as

assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
identifiable intangible assets other than goodwill be amortized over their
useful lives. We will adopt SFAS No. 142 in 2002. We are required to complete
the initial step of a transitional impairment test within six months of adoption
of SFAS No. 142 and to complete the final step of the transitional impairment
test by December 31, 2002. Any impairment loss resulting from the transitional
impairment test would be recorded as a cumulative effect of a change in
accounting principle. Subsequent impairment losses, if any, will be reflected in
operating income or loss. We do not believe that a material adjustment will be
necessary upon adoption of SFAS No. 142. See Note 7 to Consolidated Financial
Statements.

IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is considered to be
impaired when the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition exceeds its
carrying amount. The amount of impairment loss, if any, is measured as the
difference between the net book value of the asset and its estimated fair value.

SOFTWARE CAPITALIZATION - Certain direct development costs associated with
internal-use software are capitalized including external direct costs of
material and services and payroll costs for employees devoting time to the
software projects. These costs are included in software and are amortized over a
period not to exceed three years beginning when the asset is substantially ready
for use. Costs incurred during the preliminary project stage, as well as
maintenance and training costs, are expensed as incurred.

REVENUES AND COST OF REVENUES - Revenues and related costs are primarily
recognized, if and when, the Company accepts and fulfills the customer's offer.
The Company provides refunds and makes certain customer accommodations to
satisfy disputes and complaints. The Company accrues for such estimated losses
and classifies the resulting expense as an addition to the allowance for
doubtful accounts. Transaction revenue primarily represents the selling price of
airline tickets, hotel rooms, rental cars and long distance phone service. For
these transactions, the Company, among other things, establishes the price it
will accept, has total discretion in supplier selection, purchases and takes
title and is the merchant of record. The Company records as revenue the amount
received from the customer, net of taxes. The amount that the Company pays the
respective airline, hotel, rental car company or long distance provider is
recorded as a cost of revenue.

Fixed fee or commission revenues primarily represent revenues derived from
home financing, cruises, wireless service, travel insurance and automobile
sales. For those transactions, where the Company receives either a percentage of
the transaction or a fixed fee, revenues are recorded net.

The Company also generates revenues from a customer processing fee for
airline, hotel and rental car services, and ancillary reservation booking fees
from the Worldspan reservation system for booking of airline flight segments and
hotel reservations through the Worldspan system and, prior to 2001, adaptive
marketing fees. Paul Blackney, Chief Executive Officer of Worldspan, serves on
the Company's Board of Directors and is a member of the Company's Audit
Committee.

SALES AND MARKETING - Sales and marketing expenses are comprised primarily
of costs of off-line (television, radio and newspaper) and online (online and
e-mail) advertising, credit card processing fees, provisions for customer
accommodations and charge-backs, costs of the third-party call centers, and
compensation for the Company's sales and marketing personnel. All sales and
marketing costs are expensed as incurred.

SYSTEMS AND BUSINESS DEVELOPMENT - Systems and business development
expenses are comprised primarily of compensation to the Company's information
systems and product development staff and payments to outside contractors, data
communications and other expenses associated with operating the

Company's website, depreciation and amortization on computer hardware and
licensing fees for computer software. Such costs are expensed as incurred.

EQUITY-BASED COMPENSATION - The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB Opinion No. 25, compensation expense is
based on the difference, if any, on the date of grant, between the fair value of
priceline.com's stock and the exercise price of the option.

The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of the date on
which the counterparty's performance is complete or the date on which it is
probable that performance will occur.

INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
temporary difference between the financial statement and tax basis of assets and
liabilities using presently enacted tax rates in effect. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.

NET LOSS PER SHARE - The Company computes basic and diluted earnings per
share in accordance with SFAS No. 128, "Earnings per Share". SFAS No. 128
requires the Company to report both basic earnings per share, which is based on
the weighted average number of common shares outstanding, and diluted earnings
per share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common shares outstanding. Since the
Company incurred losses for all periods presented, the inclusion of stock
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.

SEGMENT REPORTING - The Company operates and manages its business as a
single segment. The only significant discrete financial information, Revenues,
Cost of Revenues and Gross Profit by Travel Services and Other are disclosed in
the statement of operations. Approximately 10% of our assets, including
goodwill, are located in the United Kingdom, with the remainder located in the
United States.

FOREIGN CURRENCY TRANSLATION - For priceline.com europe Ltd., the local
foreign currency is the functional currency. Assets and liabilities are
translated into U.S. dollars at the rate of exchange existing at year-end.
Translation gains and losses will be included as a component of stockholders'
equity. Income statement amounts will be translated at the average monthly
exchange rates. Transaction gains and losses are included in the statement of
operations and were not material.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company is required to adopt SFAS 144 no later than its first fiscal
year beginning after December 15, 2001. Management does not expect the adoption
of SFAS 144 for long-lived assets held for use to have a material impact on the
Company's consolidated financial position or results of operations because the
impairment assessment under SFAS 144 is largely unchanged from SFAS 121. The
provisions of this statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities and therefore, will depend on future
actions, if any, initiated by management. As a result, management cannot
determine the potential effects that adoption of SFAS 144 will have on the
Company's consolidated financial position or results of operations with respect
to future disposal decisions.

3. RESTRUCTURING, SPECIAL AND SEVERANCE CHARGES

In the second quarter of 2001, the Company's Board of Directors announced
that Richard S. Braddock had been reappointed as Chief Executive Officer. Mr.
Braddock replaced Daniel H. Schulman, the Company's prior President and Chief
Executive Officer. In connection with Mr. Schulman's separation from the
Company, the Company recorded a severance charge of $5.4 million in the second
quarter of 2001. This severance charge resulted from the forgiveness of
outstanding loans to Mr. Schulman and the payment of severance, all of which was
required by the terms of Mr. Schulman's employment agreement. The Company also
accelerated, pursuant to the terms of Mr. Schulman's employment agreement, the
vesting of 2,000,000 shares of restricted common stock and 1,000,000 shares
underlying stock options granted to Mr. Schulman, resulting in a charge of
approximately $770,000. The balance due to Mr. Schulman ($345,000) is expected
to be paid by the end of the second quarter 2002.

In the first quarter of 2001, the Company recorded a restructuring charge
of approximately $1.4 million. This restructuring charge related primarily to
the Company's reduction of its workforce by approximately 25 full-time employees
in February 2001. The charge relates primarily to severance payments and the
entire amount of the charge was disbursed in 2001.

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

The components of the restructuring charge are as follows (in thousands):

Expected to be Paid in

2004
Charged Non-cash Paid in Balance Charged Paid Balance and
in 2000 Charges 2000 12/31/00 in 2001 in 2001 Adjustments 12/31/01 2002 2003 thereafter
------- -------- ------- ------- ------ ------- ----------- -------- ------ ------ ----------

Employee
termination costs $ 3,807 $ -- $ 1,167 $ 2,640 $1,400 $ 3,358 $ (311) $ 371 $ 371 $ -- $ --

Real estate costs 9,603 -- 317 9,286 -- 3,155 (1,036) 5,095 2,257 1,359 1,479

Asset impairments 17,474 15,709 809 956 -- 835 (114) 7 7 -- --

Other 1,122 -- 534 588 -- 320 (75) 193 193 -- --
------- ------- ------- ------- ------ ------- ------- ------ ------ ------ ------

$32,006 $15,709 $ 2,827 $13,470 $1,400 $ 7,668 $(1,536) $5,666 $2,828 $1,359 $1,479
======= ======= ======= ======= ====== ======= ======= ====== ====== ====== ======

As a result of the fourth quarter 2000 restructuring, the Company's work
force was reduced by approximately 125 full-time employees. The employee
termination costs primarily represent severance. The real estate costs primarily
represent the estimated net lease expense related to space the Company decided
it no longer needed and which it decided it would not utilize in the future
along with certain required refurbishments to that space. As part of the
restructuring, the Company chose to abandon its plan to open a new network
operations center in that leased space. Some of these leases run through 2011.
This decision accounted for a significant portion of the real estate costs and a
portion of the asset impairment, as previously capitalized costs were expensed.
Asset impairments are comprised of computer hardware and software costs related
to the Company's plans not to pursue certain potential product offerings and
activities, as well as abandoned equipment and software projects ($11.0
million). Asset impairments also include costs related to the abandonment of
plans to participate in the establishment of a licensee in Japan ($3.1 million)
and other potential product offerings and intellectual property no longer to be
pursued in accordance with the Company's restructuring plan ($1.9 million).
Certain asset costs that were expensed have yet to be paid. Other restructuring
charges include professional and other fees and costs incurred in 2000
associated with the restructuring activities.

The components of the special charge follow (in thousands):

Charged Non-cash Paid in Balance Paid in Balance Expected to be Paid in
in 2000 Charges 2000 12/31/00 2001 Adjustments 12/31/01 2002
------- -------- ------- -------- ------- ----------- -------- ------

Employee costs $14,482 $ 8,036 $ 142 $ 6,304 $ 6,297 $ -- $ 7 $ 7

Asset impairments 17,107 13,583 1,915 1,609 25 (1,218) 366 366

Other 3,235 -- 55 3,180 1,079 -- 2,101 2,101
------- ------- ------- ------- ------- ------- ------ ------

$34,824 $21,619 $ 2,112 $11,093 $ 7,401 $(1,218) $2,474 $2,474
======= ======= ======= ======= ======= ======= ====== ======

Employee costs primarily represent costs associated with retention
programs and the acceleration of employee loan forgiveness of $8.0 million.
During the fourth quarter 2000, the Company incurred $5.7 million of expense
related to retention bonuses paid to employees as part of its 2000 turnaround
plan.

Asset impairments consist primarily of the write-down to estimated net
realizable value of receivables or loans (either loans to independent licensees
or receivables that represented reimbursable expenses that were incurred on the
licensee's behalf as part of the contractual arrangement) from independent
licensees that ceased or significantly restructured their operations during the
fourth quarter 2000, including approximately $7.8 million related to Myprice,
the Australian based company launched in early 2000 to introduce the Company's
buyer-driven commerce platform to Australia and New Zealand, $1.7 million
related to WebHouse Club and $1.1 million related to Perfect Yardsale. Asset
write-downs also include a

charge of $6.3 million of the estimated unrecoverable reimbursable expenses due
to the Company from Walker Digital in connection with Walker Digital's
contractual obligations to fund certain patent and intellectual property
litigation costs. Other includes estimated amounts accrued for the litigation
related to shareholder lawsuit costs or potential settlements and amounts
accrued for other claims.

During 2001, the Company decreased the liability for the restructuring
charge by approximately $1.5 million and the liability for the special charge by
approximately $1.2 million. These reductions, recorded in 2001, resulted from
the favorable resolution in 2001 of certain matters, primarily the collection of
certain receivables and the settlement of real estate commitments, and were
reflected as an adjustment to the appropriate income statement category
originally charged.

4. SHORT-TERM INVESTMENTS

Short-term investments at December 31, 2001 and 2000 include the following
(in thousands):

2001 2000
------------------------

US Government Agency Securities $ 30,819 --
Discounted commercial paper 14,949 10,391
Certificates of Deposit 3,501 --
Lending Tree, Inc. -- 561
------------------------
$ 49,269 $10,952
========================

As of December 31, 2000, the Company held a $561,000 equity investment in
Lending Tree, Inc., an internet-based home financing service provider. As of
December 31, 2000, the Lending Tree Investment had been classified as a
short-term investment due to management's intent to sell the Lending Tree stock
in 2001. During the first quarter 2001, the Company sold its remaining shares of
Lending Tree stock and recorded a loss of $946,000.

5. ACCOUNTS RECEIVABLE

A summary of the activity in the allowance for uncollectible accounts for
the years ended December 31, 2001 and 2000 is as follows (in thousands):

2001 2000
------------------------

Balance, beginning of year $ 2,372 $ 1,961
Provision charged to expense 18,548 7,354
Charge-offs (16,750) (6,943)
------------------------
Balance, end of year $ 4,170 $ 2,372
========================

6. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2001 and 2000 consists of the
following (in thousands):

Estimated
Useful Lives
(years) 2001 2000
------------------------------------------

Computer equipment and software 3 $ 57,265 $ 46,647
Office equipment, furniture & fixtures and
leasehold improvements 3 to 7 8,335 5,523
-----------------------
Total 65,600 52,170
Less accumulated depreciation and
amortization (33,334) (15,087)
-----------------------
Property and equipment, net $ 32,266 $ 37,083
=======================

Fixed asset depreciation and amortization expense was approximately $16.3
million, $15.8 million and $5.3 million for the years ended December 31, 2001,
2000 and 1999.

7. ACQUISITIONS

On December 21, 2001, the Company completed the acquisition of
approximately 62% of the issued and outstanding shares of priceline.com Europe
Holdings, N.V., the parent company of priceline.com europe Ltd. for
approximately $24 million, including transaction costs, which was accounted for
as a purchase. Priceline.com europe Ltd. holds the license to the Company's
business model in Europe. Prior to the acquisition of priceline.com europe Ltd.,
General Atlantic Partners, LLC and its affiliated entities ("GAP") owned
approximately 86%. William Ford, a principal of GAP, is a member of the
Company's Board of Directors and chairman of the Company's audit committee. At
the time of the acquisition, GAP owned approximately 5.9 million shares of
priceline.com Incorporated common stock according to documents publicly filed
with the Securities and Exchange Commission. During 2001 and 2000, the Company
charged priceline.com europe Ltd. $1.15 million and $450,000, respectively, in
licensing fees and $4.7 million and $1.8 million, respectively, for reimbursable
expenses, all in accordance with the Company's agreements with priceline.com
europe Ltd. The results of priceline.com europe Ltd. for the period from the
acquisition date to December 31, 2001 are immaterial to revenues and operating
loss for both the quarter and year ended December 31, 2001, respectively.

The excess of the cost of the acquisition over the fair value of the net
assets acquired (approximately $23.6 million) was recorded as goodwill. The
assets and liabilities (net liabilities assumed approximated $7.9 million) were
recorded at their estimated fair values as of the acquisition date. Amounts and
allocations of costs recorded may require adjustment based upon information
coming to the Company's attention that is not currently available. The Company
expects in the near term that priceline.com europe Ltd. will incur operating
losses and since the other stockholders of priceline.europe Ltd. have no
commitment to provide financing, the Company will recognize the entire loss in
its consolidated financial statements subsequent to the acquisition.

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

The following unaudited pro forma information reflects the Company's
actual results adjusted to include priceline.com europe Ltd. as though its
acquisition had occurred on January 1, 2000 (in thousands):

2001 2000
---- ----

Revenues ............................. $1,184,677 $1,235,072

Operating loss ....................... 62,031 343,864

Net loss ............................. 65,984 350,745

Net loss applicable to common
stockholders per basic and diluted
common share ......................... $ 0.32 $ 2.10

8. OTHER ASSETS AND WARRANTS TO PURCHASE COMMON STOCK OF LICENSEES

Other assets at December 31, 2001 and 2000 consists of the following (in
thousands):

2001 2000
---- ----

Convertible loans and other advances-Hutchison Priceline Limited $11,110 $11,110
Convertible loans - MyPrice 1,840 1,840
Investment in pricelinemortgage/convertible loan 5,124 4,616
priceline.com europe Ltd. Warrant -- 3,250
Other 2,882 2,453
------- -------
$20,956 $23,269
======= =======

Convertible loans and other advances-Hutchison Priceline Limited
represents a convertible note from the Company's Asian licensee, Hutchison
Priceline Limited. Included in the prepaid expenses and other current assets
balance is a receivable from the Company's Asian license in the amount of
$856,000. During 2001 and 2000, the Company charged Hutchison Priceline Limited
$500,000 and $250,000, respectively, in licensing fees, and $513,000 and
$333,000, respectively, for reimbursable expenses, in accordance with the
Company's agreements with Hutchison Priceline Limited. Convertible loans-Myprice
represents the estimated net realizable value of the amounts due to the Company
from its Australian licensee. Pricelinemortgage represents the Company's 49%
equity investment in pricelinemortgage. In September 2001, the Company converted
a debt instrument into a 49% equity interest in pricelinemortgage and,
accordingly, has recognized its pro rata share of pricelinemortgage's net
income. At December 31, 2001, the investment in pricelinemortgage consists of
the Company's original investment of $4.6 million and the Company's share of
pricelinemortgage's earnings ($551,000).

In 2000, the warrants to purchase shares of priceline.com europe Ltd. were
carried at cost ($3.2 million), which the Company believes approximated the fair
value.

During 1999, the Company received warrants to purchase shares of its
licensee, Priceline WebHouse Club, Inc. in exchange for services rendered. The
warrants were non-forfeitable, fully vested upon grant, excercisable in 2004 or
earlier upon the occurrence of certain events, and did not require the
performance of any additional services by the Company. Upon receipt of the
warrant, the Company recognized approximately $189 million of income
representing the estimated fair value of the warrants, based on an independent
valuation. During the fourth quarter of 2000, when WebHouse ceased operations,
the Company recorded a non-cash loss of approximately $189 million to write off
the full carrying value of these warrants.

Other revenues and reimbursable expenses from WebHouse Club were
approximately $1.3 million and $9.7 million, respectively, in 2000 and ceased
during the fourth quarter 2000 with the shutdown of the WebHouse Club business.

9. STOCKHOLDERS' EQUITY

In March 1999, the Company effected a 1.25:1 stock split. All share and
per share amounts have been retroactively adjusted to reflect the stock split.

In April 1999, the Company completed an initial public offering in which
it sold 10,000,000 shares of its Common Stock, $0.008 par value. Offering
proceeds to the Company, net of underwriter discounts and commissions and other
related expenses, were approximately $144.3 million. At the time of the
offering, shares of the Series A and Series B Preferred Stock were automatically
converted into an equal number of shares of Common Stock.

In August 1999, the Company completed a public offering in which it sold
1,000,000 shares of its Common Stock and certain stockholders of the Company
sold 3,500,000 shares of Common Stock at a price of $67.00 per share. Offering
proceeds to priceline.com, net of underwriters discounts and commissions and
related expenses, were approximately $62.5 million.

As part of an employee retention program, the Company issued 7.5 million
shares of restricted Common Stock and recorded a charge of approximately $1.7
million during the fourth quarter of 2000. This non-cash charge was included in
General and Administrative expense on the Statement of Operations. The accrual
for the shares issued was recorded at the market value on the date of grant with
a corresponding reduction to Stockholders' Equity (Deferred Compensation).

During the first quarter of 2001, the Company issued 120,000 shares of
restricted Common Stock to employees. The accrual for the shares issued was
recorded at the market value on the date of grant ($2.2187) and the related
compensation expense was amortized over the vesting period. During the second
quarter 2001, the Company issued 50,000 shares of restricted stock to employees.
The accrual for the shares issued was recorded at the market value on the date
of grant ($5.19) and the related compensation expense was amortized over the
vesting period.

During the fourth quarter of 2001, the Company's Board of Directors
accelerated the vesting of all outstanding unvested shares of the restricted
Common Stock based on the anticipated achievement of earnings performance
targets established at the time of grant, resulting in a charge of approximately
$3.3 million.

During the first quarter 2001, the Company sold approximately 23.8 million
shares of its Common Stock to Hutchison Whampoa Limited and Cheung Kong
(Holdings) Limited in a private placement. The net proceeds were approximately
$49.5 million. Hutchison Whampoa Limited also received a seat on the Company's
Board of Directors. Subsequently, Hutchison Whampoa Limited acquired two
additional seats on the Company's Board of Directors. At the same time,
Hutchison purchased $9.5 million worth of Hutchison-Priceline Limited
convertible notes. In June 2000, the Company entered into definitive agreements
with subsidiaries of Hutchison Whampoa Limited to introduce the Company's
services to several Asian markets. Under the terms of the agreements, the
Company licenses its business model and provides expertise in technology,
marketing and operations.

During 2001, the Company repurchased shares of its common stock at fair
market value from employees upon their option exercise or share vesting, to meet
such employees' minimum tax statutory withholding. For certain employees in the
fourth quarter 2001, in connection with the accelerated vesting of restricted
Common Stock described above, the Company repurchased shares in excess of such
employees' minimum statutory tax withholding and recorded a charge of
approximately $3.1 million. Shares repurchased by the Company have been retired.

10. REDEEMABLE PREFERRED STOCK

In February 2000, the Board of Directors authorized an amendment to the
Company's certificate of incorporation to allow the Company to issue a new
series of preferred stock designated as Series A Convertible Redeemable PIK
Preferred Stock ("Series A Preferred Stock"). The total number of Series A
Preferred Stock that the Company is authorized to issue is 6 million shares, par
value $.01 per share.

The Series A Preferred Stock has special voting powers and preferences.
Specifically, the Series A Preferred Stock has a liquidation preference of
$59.93 per share plus an amount equal to any dividends accrued or accumulated
but not paid. The Series A Preferred Stock accrues dividends payable in shares
of the Company's Common Stock at a rate of 8% per annum commencing April 1,
2000. Dividends on the Series A Preferred Stock are payable semi-annually on
October 1st and April 1st of each year starting October 1, 2000.

The Series A Preferred Stock may be redeemed at the option of the Company
in whole or in part at any time after April 1, 2003 at $59.93 per share in cash,
plus accrued but unpaid dividends. The Series A Preferred Stock is subject to
mandatory redemption on April 1, 2010. The Series A Preferred Stock is
convertible at the option of the holder into shares of the Company's Common
Stock on a one-for-one basis at any time prior to redemption, subject to certain
anti-dilution adjustments. Holders of the Series A Preferred Stock vote together
with holders of Common Stock on all matters and in certain limited circumstances
are entitled to a separate class vote. Holders of Series A Preferred Stock are
entitled to specified cash payments in the event of certain business combination
transactions involving the Company.

In February 2001, the Board of Directors authorized an amendment to the
Company's certificate of incorporation to allow the Company to issue a new
series of preferred stock designated as Series B Redeemable Preferred Stock
("Series B Preferred Stock"). The total number of Series B Preferred Stock that
the Company is authorized to issue is 80,000 shares, par value $.01 per share.

The Series B Preferred Stock has special preferences. Specifically, the
Series B Preferred Stock has a liquidation preference of $1,000 per share plus
an amount equal to any dividends accrued or accumulated but not paid. The Series
B Preferred Stock accrues dividends payable in shares of the Company's Common
Stock at a rate of 11% per annum commencing February 6, 2001. Dividends on the
Series B Preferred Stock are payable semi-annually on February 6 and August 6 of
each year starting August 6, 2001.

The Series B Preferred Stock may be redeemed at the option of the Company
or the holder, in whole or in part, at any time upon a change of control of the
Company at $1,000 per share in cash, plus accrued but unpaid dividends and
dividends that would have accrued through February 6, 2007. The Series B
Preferred Stock is subject to mandatory redemption on February 6, 2007. The
Series B Preferred Stock is not convertible into shares of the Company's Common
Stock or any other security of the Company. Holders of the Series B Preferred
Stock are not entitled to vote on any matter, except in certain limited
circumstances and as specifically required under Delaware General Corporate Law.
Holders of Series B Preferred Stock are entitled to specified cash payments in
the event of certain business combination transactions involving the Company.

11. DELTA AIR LINES

In November 1999, the Company amended the warrant held by Delta Air Lines,
Inc. ("Delta") to provide Delta with a cashless exercise right. Upon the
exercise of the warrant, Delta acquired a total of 16,525,834 shares of Common
Stock of priceline.com. In conjunction with that transaction, Delta sold
2,085,767 shares of Priceline.com Common Stock to priceline.com's founder and
Vice Chairman Jay S. Walker for an aggregate purchase price of $125 million. The
Company further gave Delta the right to exchange six million shares of
priceline.com Common Stock for six million shares of newly issued convertible
preferred stock that may be converted into priceline.com stock on a one-for-one
basis.

During the second quarter of 2000, the Company received six million shares
of its Common Stock held by Delta in exchange for six million shares of its
Series A Convertible Redeemable PIK Preferred Stock with a liquidation
preference of approximately $360 million and a conversion price of $59.93 per
share. The six million shares of Common Stock received by the Company are
included in Treasury Stock on the Company's balance at December 31, 2000. In the
fourth quarter of 2000, the Company issued Delta from treasury stock 549,764
shares of Common Stock as a dividend on the Series A Preferred Stock.

During the fourth quarter of 2000, the Company reached an agreement with
Delta to further amend the terms of previously issued warrants. As part of this
agreement, the strike price of the warrants was reduced to $4.72 per share and
the number of warrants was reduced by approximately 825,000 warrants to
approximately 4.7 million. The Company recorded a $8.6 million charge related to
this transaction determined by using an option pricing model.

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

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

The Warrants provide that at any time the closing sales price of the
Company's Common Stock has exceeded $8.90625 (subject to adjustment) for 20
consecutive trading days, the Warrants will automatically be exercised. The
exercise price of the Warrant is paid by surrendering .00296875 shares of Series
B Preferred Stock for each share of Common Stock purchased. As of December 31,
2001, there were 8,537,199 Warrants outstanding.

During 2001, Delta exercised Warrants to purchase approximately 18.4
million shares of the Company's common stock and on January 29, 2002, Delta
exercised Warrants to purchase 4 million shares of the Company's common stock.
As a result, there are 13,469 shares of Series B Preferred Stock outstanding
with an aggregate liquidation preference of approximately $13.5 million and the
Company's future semi-annual dividend has been reduced to 242,000 shares of
Common Stock. In accordance with the terms of the Series B Preferred Stock, the
Company delivered 986,491 shares of the Company's common stock to Delta on
August 6, 2001 and 454,308 shares of Common Stock on February 6, 2002, as
dividend payments and, as a result, the Company recorded a non-cash dividend of
$8.6 million in the third quarter of 2001 and will record a non-cash dividend of
approximately $1.9 million in the first quarter of 2002.

12. OTHER WARRANTS TO PURCHASE COMMON STOCK

On January 29, 1999, priceline.com issued warrants to an airline to
purchase 1.25 million shares of Common Stock at an exercise price of $6.40 per
share. The warrants became exercisable as follows, 50% on January 29, 2000 and
50% on January 29, 2001. The agreement required the airline to make available to
priceline.com airline ticket inventory on certain specified terms and conditions
for two years. The fair value of the warrant of $3.1 million at the grant date
was capitalized and amortized over the two year period during which services
were provided to the Company.

During July 1999, priceline.com issued to Continental Airlines a warrant
to purchase Common Stock that will become exercisable upon the earlier of July
2004 or upon the achievement of certain performance thresholds. However, the
agreement does not require Continental to make any performance

commitments. Accordingly, priceline.com incurred a non-cash charge of
approximately $88.4 million during the third quarter of 1999 representing the
fair value of the warrant on the grant date.

In November 1999, the Company amended the Continental warrant to allow the
exercise price to fall within the range of the warrants issued to other airlines
discussed below. The amended warrant granted Continental the right to purchase a
total of 1,000,000 shares of priceline.com Common Stock at an exercise price of
$59.93. Priceline.com recorded a charge of approximately $3.5 million during the
fourth quarter of 1999 as a result of the warrant amendment determined by using
an option pricing model.

In November 1999, the Company entered into separate Participation Warrant
Agreements with each of eight major domestic airlines relating to their
inclusion in the Company's leisure airline ticket service. Under the
Participation Warrant Agreements, the airlines were granted warrants to purchase
a total of 20 million shares of priceline.com Common Stock at exercise prices
ranging from $52.625 to $59.933 per share. All warrants were fully vested on the
date of grant, but generally are not exercisable until November 2005, subject to
acceleration under certain circumstances. Priceline.com incurred additional
warrant costs of approximately $1.5 billion during the fourth quarter of 1999 as
a result of the issuance of these warrants.

13. STOCK OPTION PLANS

Priceline.com Incorporated has adopted the 1997 Omnibus Plan (the "1997
Plan"), the 1999 Omnibus Plan (the "1999 Plan") and the 2000 Employee Stock
Option Plan (the "2000 Plan"), each of which provides for grants of options as
incentives and rewards to encourage employees, officers, consultants and
directors in the long-term success of priceline.com Incorporated. The 1997 Plan,
1999 Plan and 2000 Plan provide for grants of options to purchase up to
23,875,000, 35,375,000 and 6,000,000 shares of priceline.com common stock,
respectively, at a purchase price equal to the fair market value on the date of
grant.

In February 2000, in connection with the hiring of Heidi G. Miller,
priceline.com Incorporated's former Chief Financial Officer, priceline.com
Incorporated adopted a stock option plan that authorized the issuance of options
to purchase 2,500,000 million shares of priceline.com Incorporated common stock.
In November 2000, in connection with the hiring of Robert Mylod, pricline.com
Incorporated's current Chief Financial Officer, priceline.com Incorporated
adopted a stock option and restricted stock plan that authorized the issuance of
1,200,000 shares of common stock.

As part of the employee retention program an aggregate of 8.45 million
options to purchase Common Stock were returned to the Company by certain of its
officers in the fourth quarter 2000. Additionally, as part of the employee
retention program during the fourth quarter of 2000, the Company issued
approximately 9.8 million options to purchase shares of Common Stock at the then
fair market value of $2.53 per share.

The following summarizes the transactions pursuant to the Plans:

Weighted
Average Option Price
Shares Option Price Range
-------------------------------------------------------

Balance at January 1, 1999 22,444,220 $ 0.94 $0.80-3.20
Granted 6,481,833 55.99 $3.20-$139.25
Exercised (1,614,697) 1.02 $0.80-$8.00
Forfeited (286,616) 20.74 $0.80-$139.25
-------------------------------------------------------
Balance at December 31, 1999 27,024,740 13.93 $0.80-$139.25
Granted 30,964,852 28.64 $1.53-$95.94
Exercised (9,633,262) (1.46) $0.80-$67.63
Forfeited (5,451,326) 42.74 $0.80-$139.25
Cancelled (8,450,000) 52.85 $25.63-$76.88
-------------------------------------------------------
Balance at December 31, 2000 34,455,004 16.42 $0.80-$139.25
Granted 11,154,744 4.83 $2.1562-10.00
Exercised (6,567,834) 1.57 $0.80-8.00
Forfeited (4,135,195) 24.57 $0.80-131.75
-------------------------------------------------------
Balance at December 31, 2001 34,906,719 $ 14.43 0.80-139.25
=======================================================

2001 2000 1999
Exerciseable at December 31: 21,591,328 14,346,038 16,708,585
=======================================================
Available for grant at December 31: 9,107,488 4,922,037 4,610,563
=======================================================
Weighted average fair value options granted
during the year ended December 31: 3.42 21.28 52.45
=======================================================

Weighted-average assumptions used in
determining fair value of options grants: Grant year
2001 2000 1999

Dividend yield 0% 0% 0%
Expected volatility 127% 141% 107%
Risk-free interest rates 4.0% 6.1% 5.9%
Expected lives 3 years 3 years 3 years

The fair value of options granted during the year was determined on the
date of grant using the Black-Scholes option pricing model.

The following table summarizes information about stock options outstanding
at December 31, 2001:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise as of Remaining Exercise as of Exercise
Prices 12/31/2001 Life Price 12/31/2001 Price
------------------------------------------------------------------ ----------------------------

$ .80- $ .93 6,501,104 6.6 $ 0.81 6,501,104 $ 0.81
1,53- 2.75 8,412,716 8.8 2.44 5,274,211 2.44
3.20- 13.00 10,220,253 7.8 5.46 3,995,861 5.60
20.44-139.25 9,772,646 6.3 43.18 5,820,152 47.94
------------------------------------------ ---------- ------
.80-139.25 34,906,719 7.4 14.43 21,591,328 14.80
========== ==========

Had compensation costs been determined based upon the fair value at grant
date, the Company's pro forma net loss and pro forma net loss per share for the
years ended December 31, 2001, 2000 and 1999 would have been reported as follows
(in thousands, except per share amounts):

2001 Reported Pro Forma
----------------------------------------------------------------------------------------------

Net loss $ 7,303 $ 146,336
Net loss applicable to common shareholders 15,866 154,899
Basic and diluted loss per common share $ 0.08 $ 0.76

2000 Reported Pro Forma
----------------------------------------------------------------------------------------------

Net loss $ 315,146 $ 392,542
Net loss applicable to common shareholders 329,528 406,924
Basic and diluted loss per common share $ 1.97 $ 2.44

1999 Reported Pro Forma
----------------------------------------------------------------------------------------------

Net loss $1,055,090 $1,295,758
Net loss applicable to common shareholders 1,063,444 1,304,112
Basic and diluted loss per common share $ 7.90 $ 9.69

The fair value of options granted during 2001 was determined on the date
of grant using the Black-Scholes method.

14. TAXES

Income Taxes - The Company, since converting from a limited liability
company to a corporation in July, 1998, has incurred net operating losses for
financial accounting purposes of approximately $1.5 billion, and accordingly, no
provision for income taxes is reflected in the accompanying statements of
operations.

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 2001 and 2000 are as follows (in
thousands):

2001 2000
------------------------------

Warrant costs $ 607 $ 627
Net operating loss carryforwards 1,214,614 1,206,385
Capital loss carryforward 76,761 78,874
Restructuring costs 5,332 9,463
Start-up costs 908 1,630
Other 730 (389)
Less valuation allowance (1,298,952) (1,296,590)
------------------------------
Deferred tax asset, net $ -- $ --
==============================

A valuation allowance for the full amount of the net deferred tax asset
was recorded at December 31, 2001 and 2000 and represents the portion of tax
operating loss carryforwards and other items for which it is more likely than
not that the benefit of such items will not be realized. Such valuation
allowance increased by approximately $2 million and $349 million for the years
ended December 31, 2001 and December 31, 2000.

At December 31, 2001, the Company had approximately $3 billion of net
operating loss carryforwards for income tax purposes expiring from December 31,
2018 to December 31, 2021, which are subject to limitation on future utilization
under Section 382 of the Internal Revenue Code of 1986. Section 382 imposes
limitations on the availability of a company's net operating losses after a more
than 50 percentage point ownership change occurs. As a result of the completion
of a detailed and complex study in 2001 (the "NOL Study"), it was determined
that such an ownership change occurred in 2000. The amount of the Company's net
operating losses incurred prior to the ownership change is limited (the "Loss
Limitation") based on the value of the Company on the date of the ownership
change. It is estimated that the effect of Section 382 will reduce the amount of
net operating loss which is available to offset future taxable income to
approximately $61 million annually. The estimate of the annual Loss Limitation
is based upon certain conclusions in the NOL Study pertaining to the date of the
ownership change and the value of the Company on the date of the ownership
change. The overall determination of the Loss Limitation and the conclusions
contained in the NOL Study are subject to interpretation, and therefore, the
annual Loss Limitation could be subject to change.

At December 31, 2001, the Company had approximately $193 million of
capital loss carryforwards, which expire from December 31, 2005 to December 31,
2006. At December 31, 2001, the Company also had approximately $1.4 million of
research credit carryforwards. Such credit carryforwards expire from December
31, 2019 to December 31, 2020. These capital loss and research credit
carryforwards are also subject to annual limitation.

Approximately $734 million of the Company's tax net operating loss at
December 31, 2001 relates to the exercise of stock options which have been
granted under the Company's various stock option plans and gives rise to
compensation which is includable in the taxable income of the applicable
employees and deductible by the Company for federal and state income tax
purposes. Additionally, approximately $1.06 billion of the Company's tax net
operating loss relates to the excess of tax deductions from the exercise of
certain stock warrants granted by the Company in excess of the associated
warrant costs recorded for financial accounting purposes. Finally, the Company
recorded $6 million of costs for financial reporting purposes in excess of the
amount deductible for tax purposes relating to the accelerated vesting of
restricted stock held by certain employees of the Company.

The Company has available for income tax purposes the following net
operating loss, capital loss and research credit carryforwards (in
thousands):

Total Net Research
Equity Operating Loss Capital Loss Credit
Scheduled Operations Transactions* Carryforward Carryforward Carryforward
to Expire:

2005 $ 191,559
2006 946
2018 $ 21,475 -- $ 21,475 --
2019 1,125,534 $1,151,682 2,277,216 -- $ 663
2020 99,859 591,902 691,761 -- 714
2021 11,975 43,628 55,603 --
---------- ---------- ---------- -------- ------
$1,258,843 $1,787,212 $3,046,055 $192,505 $1,377
========== ========== ========== ======== ======

*Tax benefit, if and when realized, will be recorded directly to Additional
Paid-In-Capital.

The effective income tax rate of the Company is different from the amount
computed using applicable statutory federal rates as a result of the following
items (in thousands):

2001 2000 1999
--------------------------------------

Income tax benefit at federal statutory rate $ 2,556.0 $ 110,301 $ 369,281
Adjustment due to:
State taxes and other 103 20,125 64,605
Increase in valuation allowance (2,659.0) (130,426) (433,886)
--------------------------------------
Income tax benefit $ -- $ -- $ --
======================================

15. COMMITMENTS AND CONTINGENCIES

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

On January 19, 1999, Marketel International Inc. ("Marketel"), a
California corporation, filed a lawsuit against the Company, among others. On
February 22, 1999, Marketel filed an amended and supplemental complaint. On
March 15, 1999, Marketel filed a second amended complaint. On May 9, 2000,
Marketel filed a third amended complaint against the Company and Priceline
Travel, Inc. The third amended complaint alleged causes of action for
misappropriation of trade secrets, conversion, false advertising and for
correction of inventorship of U.S. Patent 5,794,207. In its third amended
complaint, Marketel alleged, among other things, that the defendants conspired
to misappropriate Marketel's business model, which allegedly was provided in
confidence approximately ten years ago. The third amended complaint also alleged
that four former Marketel employees are the actual sole inventors or
co-inventors of U.S. Patent 5,794,207, which was issued on August 11, 1998 and
had been assigned to the Company. Marketel asked that the patent's inventorship
be corrected accordingly.

On February 5, February 10 and March 31, 1999, the Company filed answers
respectively, to the complaint, amended complaint and second amended complaint,
in which the Company denied the material allegations of liability. On May 19,
2000, the Company filed a motion to dismiss the third amended complaint for
failure to state a claim upon which relief could be granted. The Company
strongly disputed the material legal and factual allegations contained in
Marketel's third amended complaint and believes that the amended complaint is
without merit. In addition, on July 13, 2000, the Company filed a motion for
summary judgment alleging that Marketel had not identified legally protectable
trade secrets and is not entitled to correction of inventorship of U.S. Patent
5,794,207.

On December 5, 2000, the United States District Court for the Northern
District of California granted the Company's motion for summary judgment with
respect to Marketel's theft of trade secret and patent inventorship claims, and
ruled that there were triable issues of fact as to Marketel's false advertising
claims, although Judge Legge volunteered that it was unlikely that Marketel
could establish damages and suggested that these claims should be voluntarily
dismissed. The false advertising claims were subsequently dismissed by
stipulation, and on February 1, 2001, Judge Legge clarified his inventorship
ruling in favor of the Company and entered final judgment in favor of it. On
March 13, 2001, Marketel filed a Notice of Appeal to the United States Court of
Appeals for the Federal Circuit. Briefing was completed on October 9, 2001, and
oral argument was presented on March 5, 2002. The parties await the Federal
Circuit's decision. Pursuant to an indemnification agreement, Walker Digital has
agreed to indemnify, defend and hold the

Company harmless for damages, liabilities and legal expenses incurred in the
future in connection with the Marketel litigation.

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: