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As filed with the Securities and Exchange Commission on March 27, 2003

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Fiscal Year Ended December 31, 2002

HOTELS.COM
(Exact name of registrant as specified in its charter)

Commission File No. 000-29575

10440 North Central Expressway, Suite 400, Dallas, Texas 75231
(Address of Registrant’s principal executive offices)

(Registrant’s telephone number, including area code): (214) 361-7311

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value

     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 o

     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. o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o

     As of March 5, 2003, the following shares of the Registrant’s capital stock were outstanding:

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 28, 2002 was $410,491,394. For the purpose of the foregoing calculation only, USA Interactive and all directors and executive officers of the Registrant are assumed to be affiliates of the Registrant.

     Documents Incorporated By Reference: The Registrant’s Proxy Statement for its 2003 Annual Meeting of Stockholders is incorporated by reference herein in Part III, Items 10, 11, 12 and 13.

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INDEX

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PART I

Item 1. Business

GENERAL

     Hotels.com is a leading provider of discount hotel rooms and other lodging accommodations. Our customers may select and book lodging accommodations in major cities through our websites and toll-free call centers. We contract with hotels in advance for volume commitments and guaranteed availability of hotel rooms and vacation rentals at wholesale rates and make these lodging accommodations available to our customers, often at significant discounts to published rates. In addition, our hotel supply relationships often allow us to offer our customers hotel accommodations for otherwise unavailable dates. At December 31, 2002, we had room supply agreements with over 7,700 lodging properties in 325 major markets in North America, Europe, the Caribbean and Asia. Our websites feature traveler-oriented interfaces that enable travelers to make informed decisions about their hotel accommodations by providing easy access to the description, rates and availability 24 hours a day, 7 days a week.

     In this report, the terms “we,” “us,” “our,” or “our company,” refer to Hotels.com, our subsidiaries and our predecessor entities.

Our History

     Hotels.com was incorporated in Delaware on March 25, 1999 as a direct, wholly-owned subsidiary of USA Interactive (USA), our parent company.

     On April 13, 1999, we entered into a definitive agreement with USA, TMF, Inc., HRN Marketing Corp. and Messrs. David Litman and Robert Diener to acquire substantially all the assets and liabilities of TMF, Inc. and HRN Marketing Corp. This transaction was completed on May 10, 1999. Consequently, TMF, Inc. and HRN Marketing Corp. are, collectively, our predecessor business. Along with their spouses and trusts for the benefit of some members of their families, Messrs. Litman and Diener were the sole stockholders of TMF, Inc. and HRN Marketing Corp. Since the acquisition, Messrs. Litman and Diener have continued on as our Chief Executive Officer and President, respectively.

     On March 1, 2000, we completed our initial public offering of 6.2 million shares of our class A common stock. Our class A common stock is currently traded on the Nasdaq National Market under the symbol “ROOM.”

     On July 1, 2001, we completed a corporate reorganization and transferred substantially all of our operating assets to our newly formed, wholly-owned indirect subsidiary, Hotels.com, L.P. (formerly Hotel Discounts, L.P.).

     On April 24, 2002, we changed our corporate name and identity from Hotel Reservations Network, Inc. to Hotels.com through a “short form” merger with a wholly-owned subsidiary.

Corporate Structure and Controlling Stockholder

     Our capital stock currently consists of class A common stock and class B common stock. All of the outstanding shares of our class B common stock are held by USA. Subject to certain conditions described in our restated certificate of incorporation, each share of class B common stock is convertible into one share of class A common stock. Except as otherwise provided by applicable law, each share of class B common stock has 15 votes on any matter submitted to a vote of our stockholders and each share of class A common stock has one vote on any matter submitted to a vote of our stockholders.

     As of March 5, 2003, USA held approximately 68.6% of our outstanding capital stock and approximately 97.0% of the total voting power of Hotels.com. As a result, USA is effectively able to control the outcome of nearly all matters submitted to a vote of our stockholders. USA also owns a controlling stake in Expedia, Inc. (Expedia), and on March 19, 2003, USA and Expedia announced an agreement under which USA would acquire all of the stock of

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Expedia that it does not already own. As Hotels.com and Expedia have a common controlling shareholder, Hotels.com previously has said that it would explore areas where it might work together with Expedia in a way that would benefit all Hotels.com customers and stockholders. Although there continue to be many areas of our business where Hotels.com has decided that it can best achieve its goals through separate strategies and practices, there have been instances where, fully consistent with its existing contractual agreements, it has worked cooperatively with Expedia, and Hotels.com anticipates that it will continue to explore such possibilities in the future.

     On January 3, 2003, our board of directors authorized the repurchase of up to $100 million of our class A common stock. We believe that utilizing excess cash to repurchase shares of our class A common stock represents an effective means of building shareholder value. Between January 7, 2003 and January 15, 2003, we repurchased approximately 1.55 million shares for an aggregate cost of approximately $73.5 million. As a result of the repurchase of shares, USA currently holds approximately 68.6% of our outstanding capital stock and 97.0% of the total voting power of Hotels.com compared to 66.8% of our outstanding capital stock and 96.8% of the total voting power of Hotels.com at December 31, 2002.

DESCRIPTION OF BUSINESS

Overview

     We are a leading provider of discount hotel rooms and other lodging accommodations, allowing customers to select and book hotel rooms in major cities through our websites, our toll-free call centers and through third-party marketing and distribution agreements. We contract with hotels in advance for volume commitments and guaranteed availability of hotel rooms and vacation rentals at wholesale rates and make these lodging accommodations available to our customers, often at significant discounts to published rates. In addition, our hotel supply relationships often allow us to offer our customers hotel accommodations for otherwise unavailable dates. At December 31, 2002, we had room supply agreements with over 7,700 lodging properties in 325 major markets in North America, Europe, the Caribbean and Asia. Our websites feature easy to use, traveler-oriented interfaces that enable travelers to make informed decisions about their hotel accommodations by providing easy access to the description, rates and availability 24 hours a day, 7 days a week.

     We market our lodging accommodations primarily over the Internet through our own websites, including www.hotels.com, www.hoteldiscount.com and www.travelnow.com, and through our telephone call centers and third-party marketing and distribution agreements. We have negotiated marketing and distribution agreements with numerous travel-related companies, including Travelocity, Continental Airlines, Delta Air Lines, U.S. Airways, Amtrak, Northwest Airlines and America West Airlines.

     We have room supply relationships with a wide range of independent hotel operators and lodging properties, as well as lodging properties associated with national chains, including Hilton, Sheraton, Wyndham, Hyatt, Loews, Radisson, Best Western, La Quinta, Courtyard by Marriott, Doubletree and Hampton Inn. We believe that these suppliers view Hotels.com as an efficient distribution channel to help maximize their overall revenue and occupancy levels. Although we contract in advance for volume room commitments, our supply contracts typically allow us to return unsold rooms to our suppliers without penalty within a specified period of time. In addition, because we contract to secure rooms in advance, we are able to manage billing procedures for the rooms we sell and thereby maintain direct relationships with our customers. We have developed proprietary revenue management and reservation systems software that is integrated with our websites and call center operations. Our revenue management and reservation systems enable us to accurately monitor our room inventory and provide prompt, efficient customer service. We believe that our supply relationships and revenue management and reservation systems differentiate Hotels.com from retail travel agencies and other commission-based resellers of accommodations.

     In addition, our customers may book hotel rooms at over 40,000 hotels (in addition to the hotels with which we have wholesale supply agreements) in over 5,000 cities, air travel on 300 airlines and car rentals through over 60 car rental companies through our subsidiary, TravelNow.com. We have developed proprietary software to interface with multiple electronic global distribution systems (GDS) and to provide customers with access to real-time information regarding the availability and rates of such travel providers and the ability to book reservations online.

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We earn a commission on the booking of such travel products either as a percentage of the gross dollar value of the travel booking or as a fixed dollar amount per booking.

     Our corporate headquarters are located at 10440 North Central Expressway, Suite 400, Dallas, Texas 75231, and our telephone numbers are (214) 361-7311 and (800) 2-HOTELS. Our worldwide websites include www.hotels.com, www.hoteldiscount.com and www.travelnow.com. The information on our websites is not incorporated in this report.

Operations

     Internet Operations. We offer lodging accommodations to our customers through our own websites, including www.hotels.com, www.hoteldiscount.com and www.travelnow.com, and through over 33,000 third-party websites. Our websites are completely automated and allow customers to compare lodging options, price, availability and amenities and to book, charge and confirm orders within seconds. Our websites are designed to provide our customers with quick, efficient and flexible service in a manner that facilitates comparison shopping. Our Internet-generated bookings (which includes bookings made by customers completely over the Internet as well as bookings made in our call centers that originated from our websites or websites of our marketing and distribution partners) accounted for 95.2% of our total bookings 2002, of which 69.7% originated and were completed over the Internet.

     Call Center Operations. Our toll-free call centers handle thousands of calls daily through our general toll-free numbers (such as (800) 2-HOTELS, (800) 96-HOTEL and (800) 715-7666) and through the toll-free numbers of various convention and visitors bureaus, travel clubs and third-party websites for which we provide service. Our toll-free call centers also handle thousands of calls transferred to us daily from the reservation call centers of our airline and rail marketing partners. We currently employ approximately 487 people in our call centers in Dallas, Ft. Worth and Pharr, Texas and in Springfield, Missouri. In addition, we outsource some call center operations to provide us with operational flexibility, but all outsourced call center operations are overseen by our employees. Our highly trained call center sales force is equipped to quickly review a comprehensive list of the hotels and prices in individual markets and to provide information on location and amenities. Our management continuously monitors wait times and telephone conversations to ensure superior sales technique, customer service and compliance with our policies. We staff our call centers to service our customers on a 24-hour-a-day, seven-day-a-week basis. Our call center-generated bookings accounted for 4.8% of our total bookings in 2002. Our call center-completed bookings (which includes bookings made by customer completely through our call centers as well as bookings made in our call centers that originated from our websites or websites of our marketing and distribution partners) accounted for 30.3% of our total bookings in 2002.

     Revenue Management Techniques. We have developed revenue management and reservation systems software that allows us to monitor room inventory, prices and sales trends on a real-time basis. As a result, we can maximize revenue and gross profit, process transactions quickly and provide prompt, effective customer service. We have integrated this software with our websites and call center operations so that customers receive current room availability and pricing information. We are developing enhancements to our software that will enable us to further automate and enhance our revenue management capabilities.

Supply Arrangements

     We contract with hotels and other lodging properties in advance for volume commitments and guaranteed availability of room inventory. We obtain room inventory from over 7,700 lodging properties through two primary methods: (a) contracting for initial room allotments, where we can obtain rooms at predetermined wholesale rates and usually can return unsold inventory to the lodging property within a specified period of time, and (b) prepaying for rooms in advance if we believe that we can sell all of the rooms. Over 99.4% of our room inventory sold in 2002 was sold pursuant to room allotment contracts. Most of our room allotment contracts are not exclusive and must be renewed annually.

     Our proprietary software allows us to update continuously our room availability and keeps us aware of our supply needs. As a result, we are able to monitor our room supply and return rooms or request additional rooms as necessary. We have developed a strong reputation with our suppliers because we are able to fill a significant percentage of our contracted room allotments.

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     In addition, we have entered into contracts with multiple electronic GDSs. Our contracts with these GDSs permit us to use our proprietary software to access information with respect to over 40,000 hotels (in addition to the hotels with which we have wholesale supply agreements) in over 5,000 cities, 300 airlines and 60 car rental companies, including availability and rates for these travel products, and the ability to book reservations online.

Marketing and Sales

     Marketing Sources. Our websites, including www.hotels.com, www.hoteldiscount.com and www.travelnow.com, are among the most accessed and used lodging booking sites on the Internet. We have also negotiated marketing and distribution agreements with thousands of third parties, including leading travel companies such as Travelocity, Continental Airlines, Delta Air Lines, US Airways, Amtrak, Northwest Airlines and America West Airlines. Under terms of our standard marketing and distribution agreement, we pay a commission for bookings originated from our marketing and distribution partners, which are commonly called “affiliates” in our industry.

     Advertising. We advertise in both online and traditional media to promote brand awareness, product enhancements and retail offerings. Our current brand-building campaign focuses on television advertising. In addition, we selectively purchase online, radio and print media advertising.

     Travel Agencies, Travel Clubs and Other Membership Organizations. We consider travel agencies to be marketing and distribution partners and, as such, work with a network of thousands of agencies to ensure awareness of our accommodations and booking options. We pay a commission to travel agents who book rooms on behalf of their customers. Commissions are tracked by the International Airlines Travel Agent Network (IATAN) numbers that are input directly on our websites or provided to our call center agents at the time of booking. We also have marketing and distribution agreements with a variety of travel clubs and membership organizations that promote our company as a source of hotel accommodations. In addition, we provide accommodation booking services for a number of membership clubs on a private label basis.

Technology

     We have developed proprietary reservation systems software that automatically updates room availability and enables us to provide efficient customer service. The software is integrated with our websites and call center operations and completes booking, billing and accounting functions within seconds. In addition, the software reports daily bookings by lodging property, city and room type so that management can monitor room availability.

     Our hardware platform for the Internet consists of redundant IBM RS/6000 servers, Sun 880 Enterprise servers and Silicon Graphics servers used for custom interfaces to external vendors and marketing and distribution partners. We maintain our databases on Dell servers running SQL Server and IBM AS–400 model 830 with RAID disk storage towers and conduct daily backup functions. We access the Internet backbone via T–3 data communication lines. Our call center operations are managed by Avaya Definity G3 ACD switches. We also maintain backup power supplies in the event of power outages. We maintain an Internet firewall to protect our internal systems. All credit card transactions processed through the Internet use encryption technology, including public key cryptology and secured socket layer technology.

Competition

     The market for travel products and services, and particularly the market for lodging accommodations, is intensely competitive and is easy to enter. We believe that competition in the lodging accommodations market is based predominantly on:

	•		price;
	•		selection and availability of lodging alternatives;
	•		selection of destination markets;
	•		ease of use;
	•		customer service;

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	•		reliability; and
	•		travel-related content.

     We compete against other consolidators of lodging accommodations, hotels, travel agencies and other online and off-line travel services. Currently, most hotels sell their services through travel agencies, travel wholesalers or directly to customers, mainly by telephone. Increasingly, major hotels are offering travel products and services directly to consumers through their own websites. We believe that this trend will continue and accelerate. Hotels and travel agents also may continue to rely upon central reservations systems. We also compete against numerous travel-related websites. Additionally, during 2002 five major hotel chains and Pegasus Solutions began to market lodging accommodations over the Internet through Travelweb.com and other websites using a “merchant” business model similar to our business model. As demand for online travel products and services grows, we believe that companies already involved in the online travel products and services industry, as well as traditional travel suppliers and travel agencies, will increase their efforts to develop services that more closely resemble our online products and services. We also face potential competition from Internet companies not yet in the leisure travel market. We are unable to anticipate which other companies are likely to offer services in the future that will compete with the products and services we provide.

     In addition, some of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and greater financial, marketing and other resources than us and may enter into strategic or commercial relationships with larger, more established and well-financed companies. Some of our competitors may be able to secure services and products from travel suppliers on more favorable terms, devote greater resources to marketing and promotional campaigns and devote substantially more resources to website and systems development than our company. New technologies and the continued enhancement of existing technologies also may increase competitive pressures on our company. There can be no assurance that we will be able to compete successfully against current and future competitors or address increased competitive pressures.

Proprietary Rights

     We regard our domain names and similar intellectual property as critical to our success. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, marketing and distribution partners and others to establish and protect our proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without authorization. In addition, there can be no assurance that others will not independently develop substantially similar intellectual property. Although we have obtained registration of some of our key trademarks in the United States, not all of our trade names are eligible to receive trademark protection. In addition, effective trademark protection may not be available or may not be sought by us in every country in which our products and services are made available online, including the United States. Our failure to protect our intellectual property in a meaningful manner could materially adversely affect our business or result in erosion of our brand name.

     From time to time we may be subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by our company. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business.

Travel Industry Regulation

     We must comply with laws and regulations relating to the travel industry and the sale of travel services. These include registering with various states as a seller of travel or timeshare services, complying with certain disclosure requirements and participating in state restitution funds. Both the Federal Trade Commission (FTC) and the Department of Transportation (DOT) take the position that their regulations prohibiting unfair and deceptive advertising practices apply to us. In this regard, the FTC recently released guidance to Internet search companies concerning the inclusion of paid advertising and paid placement within search engine results. The guidance announced the FTC staff’s view that Internet search engines that fail to identify and disclose paid placement and paid advertising may be misleading consumers and may thus violate federal law. Although we do not believe that

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we constitute a “search engine,” the FTC has indicated that its guidance may apply to advertising and placement on travel websites.

     We also are indirectly affected by regulatory and legal changes or uncertainties relating to travel suppliers and computer reservation systems. For example, heightened security procedures applicable to airline travel may affect the demand for such travel. Another example is the DOT’s current review of its rules concerning computer reservations systems. DOT could choose to extend some or all of these rules to online services that sell airline tickets. The current rules are effective through January 31, 2004. If the DOT elects to regulate online travel service providers’ fare displays, which is possible but does not presently appear likely, it may limit our ability to merchandise air travel.

     The underlying services and goods that we sell, such as hotel rooms, vacation rentals and car rentals, are regulated domestically and internationally. Because these regulations directly affect the hotels, vacation rentals, automobile rentals, etc., that we offer, they may affect our business. The laws and regulations applicable to hotels, vacation rentals, automobile rentals, etc., are subject to change and we are unable to predict what changes in law may be adopted and the potential impact on our business.

Regulation of the Internet

     Currently, relatively few laws and regulations apply directly to the Internet and commercial online services and, to the extent such laws exist or apply to our business, we believe we are in compliance with all of them. The following summary does not purport to be a complete discussion of all enacted or pending regulations and policies that may affect our business. This summary focuses primarily on the enacted federal, state and foreign legislation specific to online businesses such as Hotels.com.

     Due to the growth of the Internet and online commerce, coupled with publicity regarding Internet fraud, new laws and regulations are continually being considered (at the federal, state and foreign level) regarding property ownership, sales and other taxes, pricing and content, advertising, intellectual property rights, libel, user privacy, and information security. New laws or different applications of existing laws would likely impose additional burdens on companies conducting business online and may decrease the growth of the Internet or commercial online services. In turn, this could decrease the demand for our products and services or increase its cost of doing business. We cannot predict whether any of the proposed privacy legislation currently pending will be enacted and what effect, if any, it would have on our business.

Regulation of Personally Identifiable Information

     Our customers provide us with personally identifiable information (PII) that has been specifically and voluntarily given. PII includes information that can identify a customer as a specific individual, such as name, telephone number, or e-mail address. This information is used to respond to and fulfill customer requests for products and services offered by our marketing partners and us. We post privacy policies for most of our Internet websites concerning our use and disclosure of user data.

     Privacy has received substantial attention from federal, state and foreign governments. In many jurisdictions, laws and regulations have been approved, and other proposals receive consideration, to safeguard consumer privacy.

     A number of laws have already been enacted with respect to consumer privacy. The most far-reaching of these current laws are focused on financial institutions, health care providers, and companies that voluntarily solicit information from children. For online businesses such as our business, the “Unsolicited Electronic Mail Act of 1999” has been enacted to protect individuals, families, and Internet service providers from unsolicited and unwanted electronic mail, commonly referred to as “spamming.” Additionally, the FTC has authority to police consumer privacy claims made by companies. For example, a claim that a company has violated privacy standards that it has told consumers that it would follow may be actionable by the FTC.

     Pending proposals vary substantially and it is uncertain which, if any, may become law. For example, a proposal that did not become law, but was approved in 2002 by the U.S. Senate Committee on Commerce, Science and Transportation after being amended, originally distinguished between online and offline transactions for

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purposes of privacy such that sellers of the same product or service online and offline (including Hotels.com) would be required to treat customer information from those sales differently. Some proposals allow companies to make use of customer information for various purposes provided that consumers are given a choice and do not “opt-out” of such uses, while other proposals would prevent companies from using such information for various purposes unless consumers are given a choice and explicitly authorize such use, e.g., “opt-in.”

     Most states have enacted or are considering legislation to regulate the protection of consumer information on the Internet. Much of this legislation is focused on financial institutions and health care providers. The legislation that has become state law is a small percentage of the number of proposals still pending, and is similar to what has been enacted at the federal level.

     The primary foreign privacy regulations to which our international operations are subject are Canada’s Personal Information and Protection of Electronic Documents Act and the European Union Data Protection Directive:

	•		Canada: The Personal Information and Protection of Electronic Documents Act (PIPEDA) provides Canadian residents with privacy protection concerning transactions with businesses and organizations in the private sector. PIPEDA recognizes an individual’s right to privacy of their personal information. Additionally, it recognizes the need of organizations to collect, use and share personal information and establishes rules for handling personal information. On January 1, 2004, PIPEDA will extend to the collection, use, or disclosure of personal information in the course of any commercial activity within a province.
	•		Europe: Individual countries within the European Union (EU) have specific regulations related to the transborder dataflow of personal information (i.e., sending personal information from one country to another). The EU Data Protection Directive encompasses many of these individual regulations and requires companies doing business in EU member states to comply with its standards. It provides for specific regulations requiring all non-EU countries doing business with EU member states to provide adequate data privacy protection when sending or receiving personal data from any of the EU member states. Not all of the EU member states have implemented this Directive in a uniform and consistent fashion.
			Effective July 25, 2000, the EU member states adopted a safe harbor arrangement that provides that U.S. organizations can adopt procedures that comply with European privacy regulations and can certify their compliance through notice to the U.S. Department of Commerce. Participation in the safe harbor is voluntary and indicates that the organization provides an adequate level of privacy protection and qualifies the company to receive data from EU member states. A company does not have to join the safe harbor to be in compliance with the EU Data Protection Directive. It may choose instead to seek approval for the data transfers from the specific individual. U.S. companies that avail themselves of the safe harbor arrangement are subject to oversight and possible enforcement actions by the FTC or the Department of Transportation (which has authority over “ticket agents”) if they violate the provisions of their certification. Such violations may be found to be unfair and deceptive practices.
			On July 31, 2002, the EU promulgated its E-Mail Marketing Directive, which provides that the prior explicit consent of a consumer is required before e-mail, fax or automatic calling machines can be used to direct market to that consumer. Because implementation is not required until October 31, 2003, it remains to be seen how the Directive will be translated into national law by member states. It is likely that our subsidiaries operating in Europe will need to adapt their practices.

We cannot predict whether any of the proposed federal, state and foreign privacy legislation currently pending will be enacted and what effect, if any, it would have on our business.

Taxes

     Current U.S. economic conditions are triggering active consideration of stimulus measures by some governments, particularly the federal government, and pressure to generate additional tax revenue, such as at state governments. We cannot predict what changes in tax law or interpretations of such laws may be adopted to assure that such changes or interpretations would not materially impact our business.

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     Federal legislation imposing limitations on the ability of states to impose taxes on Internet-based sales was enacted in 1998 and extended in 2001. The Internet Tax Freedom Act, which was extended by the Internet Nondiscrimination Act, exempts certain types of sales transactions conducted over the Internet from multiple or discriminatory state and local taxation through November 1, 2003. It is possible this legislation will not be renewed when it terminates. Failure to renew this legislation could allow state and local governments to impose taxes on Internet–based sales, and these taxes could decrease the demand for our products and services or increase our cost of operations.

     Some states and localities impose a transient occupancy tax or transient accommodations tax, or a form of sales tax, on the use and occupancy of accommodations. Such taxes are normally collected from the consumer at the time of use. Consistent with industry practice, we pay taxes to the lodging properties based on the rate the lodging property charges and recover the amount paid to the lodging property from the customer. Some tax authorities may assert that in some circumstances we should collect and remit such taxes on that part of the charge to customers that serves as compensation to us for booking services. We have not paid nor agreed to pay such taxes and intend to defend our position vigorously. We believe that we have complied with the law in all or most jurisdictions; however, we are currently conducting an on-going review and interpretation of the tax laws in various states and jurisdictions surrounding state and local sales and occupancy taxes. Should a jurisdiction prevail on such a claim, we may consider limiting liability for future transactions in that jurisdiction by passing on such taxes to the consumer.

Certain Concentrations

     In January 2000, we entered into a long-term affiliation and marketing agreement with Travelocity. Under this agreement, Travelocity markets our hotels and other lodging accommodations on its website, and in return we pay it a commission based upon revenue generated for us. The term of the agreement expires on July 31, 2005. For 2002, 2001 and 2000, 17.7%, 18.0% and 10.5%, respectively, of our total revenue was derived through our agreement with Travelocity.

     We believe that in 2003 and subsequent years, the dollar amount of revenue we derive through the Travelocity agreement will continue to grow, but the percentage of our total revenue is likely to decline as a result of our various other growth initiatives, including (a) the growth of our branded website, hotels.com, (b) the expansion of revenue through other existing marketing and distribution partners, (c) the addition of new marketing and distribution relationships, (d) international expansion, (e) the expansion of revenue from other lodging products such as vacation rentals, and (f) acquisitions.

     In connection with the Travelocity agreement, we issued to Travelocity a performance warrant to acquire up to 2,447,955 shares of our class A common stock with an exercise price of $16.00 per share, our initial public offering price, the vesting of which was to be subject to achieving certain performance targets. As of December 31, 2002, 475,171 of the shares underlying the performance warrant had not yet vested. In order for the remaining shares underlying the performance warrant to vest fully, Travelocity, among other things, must generate over $397.0 million in additional revenue through Hotels.com prior to the expiration of the Travelocity agreement on July 31, 2005. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-Cash Distribution and Marketing Expense” for further discussion of the performance warrant.

     Under the terms of our agreement with Travelocity, we are the exclusive third-party provider of negotiated rate hotel rooms (excluding those hotel rooms sold by Travelocity as part of a travel package) in 80 of our markets, including New York, Las Vegas, Orlando, Chicago and others. Over 81.1% of our total revenue (from all sources, including Travelocity) was derived from these 80 markets in 2002.

Employees

     As of December 31, 2002, we had approximately 1,150 employees. We have never experienced a work stoppage and none of our employees are represented by a labor union. We consider our employee relationships to be positive.

Forward-Looking Statements

     This report contains “forward-looking statements” within the meaning of the securities laws. We have based these forward-looking statements on our current expectations and projections about future events, based on

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the information currently available to us. Such forward-looking statements are principally contained in the sections “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1. Business.” The forward-looking statements include, among other things, statements relating to our anticipated financial performance, business prospects, new developments, and similar matters.

     These forward-looking statements are subject to risks, uncertainties and assumptions that may affect the operations, performance, development and results of our business and include, but are not limited to, the risk factors described under the section “Risk Factors” in this report, and the following:

	•		material adverse changes in economic conditions generally or in our markets;
	•		future regulatory or legislative actions and conditions in our operating areas;
	•		competition from others;
	•		the ability to expand into and successfully operate in international markets;
	•		product demand and market acceptance;
	•		the ability to protect proprietary information and technology or to obtain necessary licenses on commercially reasonable terms;
	•		the ability to obtain and retain key executives and employees;
	•		acts of terrorism; and
	•		war or political instability.

     We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur.

Risk Factors

     In the future, if we are unable to obtain arrangements with lodging suppliers similar to those we currently have, our business may suffer. If we are unable to maintain satisfactory relationships with our existing lodging suppliers or if our lodging suppliers establish similar or more favorable relationships with our competitors, our operating results and our business would be harmed because we would not have the necessary supply of rooms to satisfy the needs of our customers or our marketing and distribution partners. Consequently, we would not be able to successfully compete for customers. Our business depends significantly upon our ability to contract with lodging properties in advance for volume purchases and guaranteed availability. We rely on our suppliers to provide us with rooms at wholesale prices. However, our contracts with suppliers are not exclusive and most must be renewed annually. At times in the past, lodging properties have reduced our allotment of rooms or renewed our contracts on less favorable terms and they may do so again in the future. Furthermore, in order to maintain and grow our business, we will need to establish new arrangements with lodging properties in our existing markets and in new markets. There can be no assurance that we will be able to identify appropriate hotels or enter into agreements with those hotels on favorable terms, if at all. This failure could harm the growth of our business and, consequently, our stock price.

     If we are unable to maintain our marketing and distribution partnerships or obtain new marketing and distribution partnerships with other travel service providers, we may lose access to customers and face increased competition. We derive significant benefits, including revenue and customer awareness, from our arrangements with leading travel websites on the Internet. Although we currently have marketing and distribution agreements with these travel companies, they also may compete with us for hotel bookings. If a substantial number of these companies were to terminate their marketing and distribution partnerships with us, we would lose access to their customers. Alternatively, if our marketing and distribution partners offer their own lodging accommodations or if they develop relationships with our competitors, we would face increased competition for customers. A loss of distribution could be detrimental to our ability to maintain or enhance our relationships with our suppliers. The failure or loss of these distributions would impair our growth strategy because we would lose access to customers and face increased competition and, consequently, the profitability of our business could suffer.

     Our operating results fluctuate because our reliance upon leisure travel. Our operating results fluctuate because our business is seasonal and because we rely significantly upon revenue from leisure travelers. Therefore, there are numerous factors beyond our control that affect our operating results. For any of the reasons listed below,

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or for other reasons we do not presently anticipate, it is possible that our operating results will be below market expectations, including the expectations of financial analysts and investors.

     Leisure travelers are typically sensitive to discretionary spending levels, tend to curtail travel during general economic downturns and are affected by other trends or events that may include:

	•		bad weather or natural disasters;
	•		fuel price increases;
	•		travel-related accidents;
	•		hotel, airline or other travel-related strikes;
	•		financial instability of the airline industry;
	•		terrorism; or
	•		war or political instability.

                    Other factors that may adversely affect our quarterly operating results include, but are not limited to:

	•		the number of rooms we are able to sell;
	•		our ability to expand into new markets;
	•		our ability to develop strong brand recognition and customer loyalty;
	•		our ability to increase the level of traffic on our websites;
	•		our ability to retain or expand our wholesale supply arrangements, obtain satisfactory discounts or obtain sufficient inventory of rooms; and
	•		the announcement or introduction of lower prices or new travel services and products by our competitors.

     We are controlled by USA and, as a result, our other stockholders will have little or no influence over stockholders’ decisions. USA currently owns 38,999,100 shares of our class B common stock, which has 15 votes per share compared to one vote per share of our class A common stock. Consequently, USA controls approximately 97.0% of the total voting power of our common stock and, therefore, effectively has the right to control the outcome of any matter submitted to a vote or for the consent of our stockholders, except for matters as to which a separate class vote of the holders of class A common stock is required by Delaware law. In addition, officers and directors of USA comprise a majority of our board of directors. As a result, USA may be able to cause changes to our company or to our business without the approval of the other members of the board and without seeking the approval of any other person. These changes may not be to our advantage or in the best interest of our other stockholders.

     We may face potential conflicts of interest with USA, which may harm our business. Conflicts of interest may arise between us, on the one hand, and USA and its affiliates, on the other hand, in areas relating to past, ongoing and future relationships, corporate opportunities, indemnity agreements, tax and intellectual property matters, potential acquisitions or financing transactions, sales or other dispositions by USA of shares of our common stock held by it and the exercise by USA of its ability to control our management and affairs. For example, USA is engaged in a diverse range of businesses, such as Expedia, Home Shopping Network and Ticketmaster, and these businesses may have interests that conflict with or overlap in some manner with our business. In particular, USA’s Expedia subsidiary, which is much more widely known than we are, offers products and services similar to those we offer. In addition, on March 19, 2003, USA and Expedia announced an agreement under which USA would acquire all of the stock of Expedia that it does not already own. USA is under no obligation to share any future business opportunities available to it with us, unless Delaware law requires it to do so, and our restated certificate of incorporation specifically includes provisions that release USA from this obligation and any liability that would result from a breach of these obligations. There can be no assurance our business will not be harmed by, or our financial condition or results of operations will not be negatively impacted by, any conflicts that may arise between us and USA or any of its affiliates, including Expedia, any loss of a corporate opportunity to USA or any of its affiliates, including Expedia, that may otherwise be available to us, or any engagement by USA in any activity that is similar to our business because these conflicts of interest or loss of a corporate opportunity could result in a loss of customers and, therefore, business.

     Our business may suffer if tourism or business travel to New York declines. We derived approximately 16.9% of our total revenues in 2002 from the New York market. If tourism or business travel to New York were to

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decline significantly for any reason, including further acts of terrorism or war or political instability, our business may suffer.

     Our business may suffer if Travelocity terminates its marketing and distribution agreement with us. We derived approximately 17.7% of our total revenues in 2002 through our marketing and distribution agreement with Travelocity. The term of the marketing and distribution agreement expires on July 31, 2005. If Travelocity fails to renew the marketing and distribution agreement or if terminates the marketing and distribution agreement early for any reason, our business may suffer.

     The travel industry, particularly the market for lodging accommodations, is highly competitive. If we do not compete successfully, we will not be able to attract customers and maintain our arrangements with our hotel suppliers. We primarily compete with other consolidators of hotel accommodations, online travel reservation services and entities that maintain travel-related websites, traditional travel agencies and hotels. We may face more competition, directly or indirectly, from lodging properties as they enter the discount rate market or book discount accommodations through travel agents. During 2002, five major hotel chains and Pegasus Solutions began to market lodging accommodations over the Internet through Travelweb.com and other websites using a “merchant” business model similar to our business model. In addition, the proliferation of special rate offers by lodging properties may affect the rates that we can charge our customers, which would affect our profit margins and, in turn, our business results. Increased competition could reduce our operating margins and profitability, result in loss of market share and diminish our brand recognition.

     Some of our actual and potential competitors may have competitive advantages, such as longer operating histories, larger customer bases, potential to offer greater selection at better prices, greater brand recognition, more website traffic, or significantly greater financial, marketing or other resources. We cannot assure you that we will be able to compete successfully against current and future competitors.

     Because our business has grown so rapidly, our business could suffer if we do not successfully manage this growth and potential future growth. Our business has grown very quickly in its few years of operation. We have rapidly expanded our operations and anticipate further expansion. We began operations in 1991, and since then, we have launched our online operations, expanded the number of destinations we offer and increased the number of lodging properties with which we have supply arrangements. In addition, we entered into our first Internet marketing arrangement in 1995 and implemented our first proprietary website in 1997. These changes have increased our volume of sales and have placed, and we expect they will continue to place, a strain on our management and operational resources. There can be no assurance that we will be able to efficiently or effectively manage the growth of our operations and any failure to do so may limit our future growth and hamper our business strategy.

     The amortization of deferred distribution and marketing expenses resulting from the issuance of performance warrants and potential future warrant issuances will have an adverse impact on our future operating results, the magnitude of which is difficult to predict. We issued a performance warrant to Travelocity in connection with the execution of a marketing and distribution agreement in January 2000 and amended the terms of the performance warrant in March 2001. To the extent earned, the value of the performance warrant will be recorded as a non-cash deferred distribution and marketing expense. In addition, pursuant to other marketing and distribution agreements, we may be required to issue additional warrants in the future if certain performance goals are met, the value of which would also be recorded as additional non-cash deferred distribution and marketing expense when such warrant is issued.

     At this time, we cannot determine the amount of this expense because we do not know to what degree we will achieve the performance targets, or the value of the warrants when vested or issued. If our stock price rises significantly during the term of these marketing and distribution relationships, the value of the warrants when vested or issued will increase. If the amount of that expense increases, it will have an adverse effect on our income and operating results. If we are forced to expense the entire performance warrant in one year, the effect on our net income and operating results for that year will be even more adverse. For a more detailed description of the potential financial impact of the warrants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-Cash Distributing and Marketing Expense.”

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     Our business depends substantially on the continuing efforts of our key employees and our future success depends on our ability to retain our key employees. We depend substantially on the continued services and performance of our senior management, particularly David Litman, our Chief Executive Officer, Robert Diener, our President, and some other key personnel. The loss of services of either of these executive officers or other key employees could harm the management of our business and our operating results because of the significant role these employees play in the operation of our business.

     Acquisitions, which may expose us to risks that could significantly harm our business, are a part of our growth strategy. One part of our growth strategy is to broaden the scope and content of our existing business through acquisitions. Although we are not currently committed to any particular acquisitions, our management regularly evaluates acquisition opportunities as a way for us to grow our business. Our failure to successfully complete acquisitions could adversely affect our ability to compete. Even if we are successful in acquiring and integrating businesses, the acquisitions may be time-consuming, costly or unwise, which may cause our acquisitions not to have the desired or predicted effects on our operating results and may adversely affect our growth strategies. Acquisitions that are completed in the future would expose us to potential risks, including risks associated with the assimilation of new operations, sites and personnel, unforeseen liabilities, the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue or content to offset the costs and expenses of acquisitions, and potential loss of, or harm to, relationships with employees, customers and suppliers as a result of integration of new businesses.

     We could be liable for breaches of security on our websites and fraudulent transactions by users of our websites. In our business, secured transmission of confidential information (such as customers’ itineraries, hotel and other reservation information, credit card numbers and expiration dates, personal information and billing addresses) over public networks is essential to maintaining consumer and supplier confidence. Although we employ measures such as encryption technology, our current security measures may not be adequate. Security breaches also could expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer or supplier information and could have a detrimental effect on our reputation and could adversely affect our ability to attract customers. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions, failure to mitigate such fraud may adversely affect our operating results.

     We may not be able to prevent others from using our domain names, trade names or other intellectual property, which may harm our business and expose us to litigation. Because our hotel and lodging accommodations reservations business is to a great extent leisure and retail-oriented, customer name recognition and the “look and feel” (as well as the underlying functionality) of our websites are very important to our ability to maintain our competitive position. Therefore, we regard our domain names and similar intellectual property as critical to our success. Failure to effectively protect our intellectual property could harm us through erosion of our brand name or the misappropriation of our proprietary technologies by our competitors, thereby hindering our ability to compete effectively. Some of our trade names are not eligible to receive trademark protection in every country where our products and services are available.

     We currently hold the Internet domain name “hotels.com,” as well as various other related names. Domain names generally are regulated by Internet regulatory bodies in the United States and foreign countries, and the regulations are subject to change. Regulatory bodies could modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names in all of the countries in which we conduct business utilizing the terms “hotels” or “hotels.com.” We are aware that other entities or persons have already registered domain names utilizing the term “hotels” or “hotels.com.” For example, others have registered the domain names wwwhotels.com, hotels.net, and hoteles.com in the United States and hotels.fr and hotels.de in France and Germany, respectively. If we are unable to purchase these names on commercially reasonable terms or in the event we were otherwise to lose the ability to use a domain name in a particular country, we would be forced to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging.

     In addition, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear and subject to change. Consequently, we may not be able to maintain domain names in all of the locations where we conduct business or prevent others from acquiring domain names that decrease the value of our domain names.

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     We also may be required to incur significant expenses to protect our rights or to defend claims by others of alleged infringement of trademarks and other intellectual property rights of third parties by us. If we do not prevail, we could be required to stop using our trade names or domain names or to pay damages.

     Our expansion into international markets may make us susceptible to global economic factors, foreign tax law issues, foreign business practices, currency fluctuations and fluctuations in international travel. Our international operations are an increasing portion of our business. Our addition of international destinations may require us to make significant investments to develop relationships in these locations for an extended period of time before we realize returns on these investments, if any. Providing our customers with international destinations to choose from may subject us to particular risks, including:

	•		a decrease in tourism due to adverse political and economic conditions;
	•		a decrease in tourism due to concerns about the risks of international flights related to terrorism;
	•		fluctuations in the value of the U.S. dollar relative to other currencies;
	•		potentially adverse tax consequences;
	•		reduced protection for intellectual property rights and domain names in some countries;
	•		additional regulatory requirements; and
	•		increased seasonality.

     If we do not realize increased sales from our international operations, our profitability could suffer because of the investment we expect to make in this effort.

     We may be subject to occupancy or similar taxes for past sales and our future sales may decrease if we are required to collect such taxes. Most states and local taxing jurisdictions impose sales, occupancy or other similar taxes on the sale of hotel rooms. In accordance with longstanding industry practice, we pay occupancy taxes to the hotels based upon the amount that they charge us, and we recover that amount from our customers. One or more states or local taxing jurisdictions may seek to impose sales, occupancy or other tax collection obligations on us and other Internet travel companies. A successful assertion by one or more states or local taxing jurisdictions that we should collect sales or occupancy taxes on the sale of hotel rooms could result in substantial tax liabilities for past sales, decrease our ability to compete with other Internet travel companies not subjected to collecting sales and occupancy taxes and otherwise harm our business.

     System interruption and the lack of integration and redundancy in our information systems may affect our business. Customer access to our websites directly affects the volume of lodging accommodations and other travel products that we book and the services we offer and thus affects our net revenue and net bookings. We experience occasional system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders or providing services to third parties, which may reduce our net bookings and net revenue and the attractiveness of our products and services. To prevent system interruptions, we continually need to add additional software and hardware and upgrade our systems and network infrastructure to accommodate both increased traffic on our websites and increased sales volume. Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions. Any of these events could cause system interruptions, delays and loss of critical data, and could prevent us from accepting and fulfilling customer bookings. Should this occur, it would make our product offerings less attractive to our customers and our service offerings less attractive to third parties. While we do have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. If any of this were to occur, it could damage our reputation and be expensive to remedy.

     Our business may suffer if we are unable to execute our new vacation packages product line successfully. We launched a new product line, vacation packages, in March 2003. Vacation packages are more complex products than our other lodging offerings and require us to be able to combine customer-selected air, lodging and car components into a single vacation package. We cannot assure you that we will be successful in our vacation package product line or that we will be able to compete successfully with our competitors who offer vacation packages.

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     Our operating results fluctuate because of seasonality. Historically, we have often experienced higher sales and gross profits in the fourth quarter during the heavy domestic holiday travel season because of the travel patterns of our customers; however, during the fourth quarter of 2002 our sales and gross profits were flat compared to the third quarter of 2002, reflecting the increase in the portion of our business from sales of our international properties and a sudden and unexpected decline in average daily rates. Generally, our international sales rise during the second quarter, peak during the third quarter and decline during the first and fourth quarters. We expect additional seasonality in the future as our international sales increase.

Available Information

     Our principal website is www.hotels.com. Hotels.com makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission (SEC). Information contained on our website is not part of this report.

Item 2. Properties

     Our operations are headquartered in Dallas, Texas, where we lease an aggregate of approximately 73,340 square feet of office space. The lease for this space expires in 2010. In addition, we lease approximately 47,700 square feet of office space for our former headquarters. The lease for this space expires in 2003.

     TravelNow.com’s offices are located in Springfield, Missouri, where it leases approximately 15,000 square feet of office space. The lease for this space expires in 2009.

     We lease approximately 14,100 square feet of office space in Pharr, Texas. The lease for this space expires in 2006. We also lease approximately 7,600 square feet of office space in Pharr, Texas. This lease expires in 2004. In addition, we lease approximately 12,700 square feet of office space in Ft. Worth, Texas. This lease expires in 2003. We lease approximately 6,800 square feet of office space in Miami, Florida. The lease for this space expires in 2006. We lease approximately 6,000 square feet of office space in Paris, France. This lease expires in 2009.

     We also lease office space in Atlantic City, New Jersey; Burbank, California; Grand Haven, Michigan; New Orleans, Louisiana; and Hong Kong SAR, China.

Item 3. Legal Proceedings

     In re Hotels.com, Inc. Shareholders Litigation, No. 19662-NC (Delaware Court of Chancery). On June 2, 2002, the Company’s Board of Directors received a letter from its majority shareholder, USA, announcing USA’s intention to make an exchange offer in the near future for the shares of Hotels.com that it does not currently own. The Board of Directors formed a Special Committee on June 3, 2002, composed entirely of independent directors to review and evaluate the possible offer by USA if and when the offer is made. On June 3, 2002, the following complaints were filed against the company, the Board of Directors of Hotels.com and USA in Chancery Court in New Castle County, Delaware: David Goldstein, et al. v. Barry Diller, et al.; Wilhelm Unger, et al. v. Hotels.com, et al.; Howard Keebler, et al. v. Hotels.com, et al.; Chavy Weisz, et al. v. Elan J. Blutinger, et al.; and Robert Kemp, et al. v. David Litman, et al. The complaints generally allege that the transaction would be a breach of fiduciary duty and that the indicated exchange ratio is unfair. Each of the complaints seeks, among other things, injunctive relief against consummation of the transaction and damages in an unspecified amount. The actions were subsequently consolidated under the caption In re Hotels.com, Inc. Shareholders Litigation, No. 19662-NC (Delaware Court of Chancery). On December 16, 2002, the plaintiffs in the consolidated actions agreed that all of the defendants have an indefinite extension of time in which to respond to the complaints in those lawsuits, pending a determination by the plaintiffs whether they will proceed with the lawsuits. We believe that the allegations in these actions are without merit and will defend vigorously against them should a defense be necessary.

     In re Hotels.com Securities Litigation, No. 3-03CV00069 (U.S. District Court, N.D. Tex). Between January 10, 2003 and February 13, 2003, several purported shareholder class action complaints were filed in the United States District Court for the Northern District of Texas against us and three of our executives. These actions purport to be brought on behalf of purchasers of our common stock during the period from October 23, 2002 to

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January 6, 2003 (the Class Period), and make certain claims under the federal securities laws. Specifically, the complaints allege that during the Class Period, the defendants knowingly (i) made certain materially false and misleading public statements, in a press release and two press interviews, with respect to the anticipated performance of our company during the fourth quarter of 2002 and (ii) concealed from the investing public certain material events and developments that were likely to render that anticipated performance unattainable. The complaints assert that the individual defendants profited from the rise in our share price caused by their public statements through sales of our stock during the Class Period. The complaints further allege that as a result of our announcement on January 6, 2003 of a downward revision of our guidance for the fourth quarter of 2002, our share price declined precipitously. The plaintiffs seek certification of a class of all non-defendant purchasers of our stock during the Class Period and seek damages in an unspecified amount suffered by the putative class. The plaintiffs and the defendants have agreed to consolidate these actions into a single action bearing the title In re Hotels.com Securities Litigation, No. 3-03CV00069 and an order to that effect has been submitted to the court for its approval. We believe that these lawsuits are without merit, and the defendants intend to defend vigorously against them.

     Pomilio-Wilson v. Blutinger, et al., No. 03-00349J (191st Dist. Ct., Dallas County, Tex.). In a related development, on January 14, 2003, a shareholder derivative action was filed against Hotels.com (as a nominal defendant only), and a number of current and former officers and directors of Hotels.com. The Pomilio-Wilson lawsuit, Anita Pomilio-Wilson, Derivatively on Behalf of Nominal Defendant Hotels.com v. Elan J. Blutinger, et al., No. 03-00349, arises out of substantially the same events and circumstances as the putative class action described above. The gravamen of the complaint is that the nine individual defendants who sold shares in Hotels.com during the period from October 25 to December 3, 2002, breached their fiduciary duty to Hotels.com by misappropriating, and trading and profiting on the basis of, proprietary, material non-public information concerning the financial condition and growth prospects of Hotels.com. The complaint also alleges that all of the individual defendants aided and abetted the selling defendants’ breaches of fiduciary duty by concealing from the market the information on the basis of which the selling defendants allegedly traded and profited. The complaint seeks imposition of a constructive trust in favor of Hotels.com on the profits obtained by the selling defendants on their sales of Hotels.com stock during the period referred to above, as well as unspecified damages resulting from the individual defendants’ alleged breaches of fiduciary duty. We believe that this lawsuit is without merit, and the defendants intend to defend vigorously against it.

     MetroGuide.com, Inc. v. Hotel Reservations Network, Inc. et al., No. 03-20170 (U.S. District Court, S.D. Fl). On January 27, 2003, MetroGuide.com, one of our marketing and distribution partners, sued us in federal court in Miami, Florida. The lawsuit alleges that we encouraged our other marketing and distribution partners to infringe on MetroGuide.com’s copyrighted content from its websites and competed unfairly with MetroGuide.com through the use of predatory advertising and link farms. MetroGuide.com seeks injunctive relief and damages in an unspecified amount. MetroGuide has agreed to an extension of time until April 30, 2003 to file an answer to the complaint. We believe that the allegations are without merit and intend to defend vigorously against it.

     In the ordinary course of business, we and our subsidiaries are parties to litigation involving property, contract and other claims. Although there can be no assurance in this regard, the amounts that may be recovered in these matters are not expected to be material to our financial position or operations.

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

     No matter was submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal year 2002.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Class A Common Stock

     Our class A common stock is quoted on The Nasdaq Stock Market (“NASDAQ”) (Symbol: ROOM). We completed our initial public offering of our class A common stock on February 25, 2000.

     The following table sets forth, for the calendar periods indicated, the high and low sales prices per share for our class A common stock on NASDAQ:

     There were 44 stockholders of record as of March 5, 2003 and the closing price of our class A common stock that day was $46.19. The number of stockholders does not include beneficial owners of our class A common stock whose shares are held in “street name.”

Class B Common Stock

     USA is the only holder of record of our class B common stock and owned 38,999,100 shares as of March 5, 2003. As a result, there is no established public trading market for our class B common stock.

Dividends

     We have not paid cash dividends on our common stock to date and do not anticipate paying cash dividends in the immediate future.

Recent Sales of Unregistered Securities

     On October 15, 2002, we issued 79,627 shares of our class A common stock upon the exercise of warrants previously issued to a strategic partner of the company. The exercise price of the warrant was $16.00.

     On October 24, 2002, we issued 23,344 shares of our class A common stock upon the exercise of warrants previously issued to a strategic partner of the company. The exercise price of the warrant was $16.00.

     The transactions described above were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 3(a)(9) and Section 4(2) of the Securities Act as a transaction by an issuer not involved in any public offering.

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Item 6. Selected Financial Data

     The following table presents selected summary financial data of our company and our predecessor business. The data was derived from our audited financial statements and our predecessor’s audited combined financial statements and reflects the operations and financial position of our company or our predecessor business at the dates and for the periods indicated. The table also presents summary unaudited pro forma combined condensed financial data as of and for the year ended December 31, 1999. The pro forma combined condensed statements of operations data gives effect to the acquisition of substantially all the assets of our predecessor business and to the capital transactions that occurred in connection therewith as if they had occurred on January 1, 1999. The information in this table should be read in conjunction with the financial statements and accompanying notes and other financial data pertaining to our company and our predecessor business as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.