Booking (BKNG) 10-Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

                For the quarterly period ended September 30, 2005

OR

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

                For the transition period from                  to                 

Commission File Number 0-25581

PRICELINE.COM INCORPORATED

(Exact name of Registrant as specified in its charter)

Delaware	06-1528493
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
800 Connecticut AvenueNorwalk, Connecticut	06854
(address of principal executive offices)	(zip code)

(203) 299-8000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed, since last report)

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

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

                Number of shares of Common Stock outstanding at October 31, 2005:

Common Stock, par value $0.008 per share	39,438,903
(Class)	(Number of Shares)

priceline.com Incorporated

Form 10-Q

For the Quarter Ended September 30, 2005

Notes to Unaudited Consolidated Condensed Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

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PART I — FINANCIAL INFORMATION

Item 1.  Consolidated Condensed Financial Statements

priceline.com Incorporated

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except share data)

	September 30,					December 31,
	2005					2004
ASSETS
Current assets:
Cash and cash equivalents	$		100,089			$	101,270
Restricted cash	22,613					23,572
Short-term investments	52,881					122,812
Accounts receivable, net of allowance for doubtful accounts of $1,435 and $1,390, respectively	36,200					18,314
Prepaid expenses and other current assets	19,058					6,578
Total current assets	230,841					272,546
Property and equipment, net	17,706					15,827
Intangible assets, net	158,905					98,908
Goodwill	202,469					138,859
Deferred taxes	148,357					—
Other assets	17,553					15,942
Total assets	$			775,831		$	542,082
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$			48,922		$	40,612
Accrued expenses	25,096					23,649
Deferred merchant bookings	6,065					5,641
Other current liabilities	8,008					4,475
Total current liabilities	88,091					74,377
Deferred taxes	44,585					25,668
Other long-term liabilities	3,091					692
Minority interest	23,916					4,314
Long-term debt	223,562					224,418
Total liabilities	383,245					329,469
Commitments and Contingencies (See Note 16)
Series B mandatorily redeemable preferred stock, $0.01 par value per share; 80,000 authorized shares; $1,000 liquidation value per share; 80,000 shares issued; 13,470 and 13,470 shares outstanding, respectively	13,470					13,470
Stockholders’ equity:
Common stock, $0.008 par value per share, authorized 1,000,000,000 shares, issued 41,934,686 and 41,356,576 shares, respectively	321					317
Treasury stock, 2,496,326 shares	(350,628				)	(350,628			)
Additional paid-in capital	2,077,099					2,064,224
Deferred compensation	(6,917				)	(1,264			)
Accumulated deficit	(1,338,362				)	(1,525,447			)
Accumulated other comprehensive income (loss)	(2,397				)	11,941
Total stockholders’ equity	379,116					199,143
Total liabilities and stockholders’ equity	$	775,831				$		542,082

See Notes to Unaudited Consolidated Condensed Financial Statements.

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priceline.com Incorporated

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Merchant revenues	$	222,142		$	226,453		$	686,174		$	693,324
Agency revenues	35,497			8,671			69,280			23,866
Other revenues	1,158			758			3,293			2,212
Total revenues	258,797			235,882			758,747			719,402
Cost of merchant revenues	178,272			184,627			555,280			570,994
Cost of agency revenues	523			151			523			151
Cost of other revenues	—			—			—			—
Total costs of revenues	178,795			184,778			555,803			571,145
Gross profit	80,002			51,104			202,944			148,257
Operating expenses:
Advertising — Offline	7,320			7,178			26,482			27,459
Advertising — Online	19,865			7,471			42,001			18,961
Sales and marketing	9,645			8,711			27,967			24,513
Personnel, including stock based compensation of $1,270 and $126 for the three months ended September 30, 2005 and 2004 and $2,974 and $344 for the nine months ended September 30, 2005 and 2004, respectively	13,820			8,162			34,804			24,398
General and administrative, including option payroll taxes of $10 and $6 for the three months ended September 30, 2005 and 2004 and $66 and $344 for the nine months ended September 30, 2005 and 2004, respectively	4,814			4,301			14,502			12,264
Information technology	2,508			2,272			8,023			7,241
Depreciation and amortization	7,138			3,359			17,651			8,144
Restructuring charge (reversal), net	2,000			—			1,664			(12		)
Total operating expenses	67,110			41,454			173,094			122,968
Operating income	12,892			9,650			29,850			25,289
Other income (expense):
Interest income	1,102			1,655			4,271			3,794
Interest expense	(1,245		)	(1,299		)	(3,777		)	(2,431		)
Other	(77		)	(2		)	(558		)	4
Total other income (expense)	(220		)	354			(64		)	1,367
Earnings before income taxes, equity in income (loss) of investees and minority interests	12,672			10,004			29,786			26,656
Income tax (expense) benefit	158,573			(67		)	158,527			(67		)
Equity in income (loss) of investees and minority interests	325			67			626			(81		)
Net income	171,570			10,004			188,939			26,508
Preferred stock dividend	(976		)	(740		)	(1,854		)	(1,512		)
Net income applicable to common stockholders	$	170,594		$	9,264		$	187,085		$	24,996
Net income applicable to common stockholders per basic common share	$	4.36		$	0.24		$	4.79		$	0.66
Weighted average number of basic common shares outstanding	39,156			38,684			39,038			38,111
Net income applicable to common stockholders per diluted common share	$	3.71		$	0.23		$	4.12		$	0.63
Weighted average number of diluted common shares outstanding	46,485			42,648			46,441			42,153

See Notes to Unaudited Consolidated Condensed Financial Statements.

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priceline.com Incorporated

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(unaudited)

(In thousands)

	Common Stock				Additional			Accumulated			Accumulated Other Comprehensive			Treasury Stock						Deferred
	Shares	Amount			Paid-in Capital			Deficit			Income (loss)			Shares		Amount				Compensation			Total
Balance, January 1, 2005	41,357	$		317	$	2,064,224		$	(1,525,447	)	$	11,941		(2,496	)	$		(350,628	)	$	(1,264	)	$	199,143
Net income applicable to common stockholders	—	—			—			187,085			—			—		—				—			187,085
Unrealized gain on marketable securities	—	—			—			—			317			—		—				—			317
Currency translation adjustment	—	—			—			—			(14,655		)	—		—				��			(14,655			)
Comprehensive income	—	—			—			—			—			—		—				—			172,747
Issuance of stock under compensation plans	292	2			7,784			—			—			—		—				(7,853		)	(67			)
Amortization of deferred compensation	—	—			—			—			—			—		—				2,200			2,200
Issuance of preferred stock dividend	80	1			1,853			—			—			—		—				—			1,854
Exercise of stock options and warrants	206	1			3,238			—			—			—		—				—			3,239
Balance, September 30, 2005	41,935	$	321		$		2,077,099	$	(1,338,362	)	$	(2,397	)	(2,496	)	$	(350,628		)	$	(6,917	)	$		379,116

See Notes to Unaudited Consolidated Condensed Financial Statements.

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priceline.com Incorporated

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

	Nine Months Ended September 30,
	2005				2004
OPERATING ACTIVITIES:
Net income	$		188,939		$	26,508
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	6,426				3,868
Amortization	12,779				5,658
Provision for uncollectible accounts, net	1,853				1,500
Deferred income taxes	(161,557			)	(124		)
Restructuring charge, net	1,664				(12		)
Net (gain) loss on disposal of property and equipment	91				(6		)
Equity in (income) loss of investee, net and minority interests	(626			)	152
Compensation expense arising from restricted stock awards	2,974				344
Amortization of debt issuance costs	1,104				796
Changes in assets and liabilities:
Accounts receivable	(13,576			)	(8,561		)
Prepaid expenses and other current assets	(35			)	(1,503		)
Accounts payable and accrued expenses	8,959				7,638
Other	110				32
Net cash provided by operating activities	49,105				36,290
INVESTING ACTIVITIES:
Acquisitions and other equity investments, net of cash acquired	(133,802			)	(158,669		)
Redemption of short-term investments, net	70,248				6,792
Additions to property and equipment	(8,034			)	(4,956		)
Proceeds from sale of fixed assets	—				7
Change in restricted cash	931				(2,320		)
Net cash used in investing activities	(70,657			)	(159,146		)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible senior notes	—				100,000
Debt issuance costs	—				(3,503		)
Proceeds from sale of minority interest in subsidiaries	18,708				3,838
Proceeds from exercise of stock options and warrants	3,239				6,016
Net cash provided by financing activities	21,947				106,351
Effect of exchange rate changes on cash and cash equivalents	(1,576			)	54
Net decrease in cash and cash equivalents	(1,181			)	(16,451		)
Cash and cash equivalents, beginning of period	101,270				93,732
Cash and cash equivalents, end of period	$	100,089			$	77,281
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for income taxes	$		1,666		$	—
Cash paid during the period for interest	$		3,643		$	1,372

See Notes to Unaudited Consolidated Condensed Financial Statements.

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priceline.com Incorporated

Notes to Unaudited Consolidated Condensed Financial Statements

1.             BASIS OF PRESENTATION

Priceline.com Incorporated (“priceline.com” or the “Company”) is responsible for the unaudited consolidated condensed financial statements included in this document.  The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results.  The Company prepared the unaudited consolidated condensed financial statements following the requirements of the Securities and Exchange Commission for interim reporting.  As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.  These statements should be read in combination with the consolidated condensed financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The unaudited consolidated condensed financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates in which the Company does not have control, but has the ability to exercise significant influence, are accounted for by the equity method.

Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.  Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.

2.BUSINESS ACQUISITIONS

On July 14, 2005, the Company, through its subsidiary, priceline.com International Limited (“priceline.com International”), acquired 100% of the total issued share capital of Bookings B.V. (“Bookings”), an Amsterdam-based provider of online services for the booking of European hotel reservations.  The total consideration for all of the Bookings shares was approximately $135 million, including direct acquisition costs and certain post-closing adjustments.  Substantially all of the consideration for the Bookings shares was paid in available cash.

The acquisition has been accounted for as a purchase business combination. The Company’s consolidated financial statements include Bookings since the acquisition in July 2005. Under the purchase method of accounting, the assets acquired and liabilities assumed from Bookings have been recorded at the date of acquisition, at their respective preliminary estimated fair values. The Company obtained an independent valuation of the assets acquired and liabilities assumed, including the identification of intangible assets other than goodwill. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill.

Assets acquired consisted principally of accounts receivable and intangible assets. Liabilities assumed consisted principally of accounts payable, accrued expenses and deferred taxes. Goodwill resulting from this transaction amounted to approximately $76 million.

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

	($ in thousands)		Useful lives
Supplier/distributor relationships	$	59,100	13 years
Trade names	6,300		Indefinite
Internally developed software	9,100		3 years
Customer list	4,100		2 years
	$	78,600

As part of the transaction, six key managers of Bookings purchased securities in the form of Series C ordinary shares of priceline.com International, representing approximately6% of the share capital of priceline.com International for total consideration of approximately $18.7 million.  In addition, the key managers of Bookings were granted restricted stock

7

units that are payable in Series C ordinary shares of priceline.com International with an aggregate fair market value of approximately $1,000,000.   Certain managers and employees of Bookings were also granted non-qualified stock options to acquire shares of the Company’s common stock and restricted stock units payable in shares of the Company’s common stock.

The consolidated balance sheet at September 30, 2005 includes a liability in the amount of $2.3 million to Blue Sky Investments B.V (“BSI”), the former owner of Bookings.  BSI is partly owned by certain current managers of Bookings.  The liability is principally related to acquisition post-closing adjustments and Bookings’ income tax liability incurred while part of a consolidated tax group with BSI through July 13, 2005.

Bookings’ principal source of revenues comes from commission payments that it receives from hotel suppliers for the booking of hotel rooms by its customers. Bookings recognizes revenue and invoices hotel suppliers for commission payments earned at the time that customers complete their stay at the hotel. Commissions earned appear as agency revenues in our consolidated statements of operations.

The following unaudited pro forma financial information presents the combined results of operations of the Company and Bookings as if the acquisition had occurred as of the beginning of each period presented. The pro forma financial information includes certain purchase accounting related entries and is not necessarily indicative of the actual results of operations that might have occurred, nor is it necessarily indicative of expected results in the future.

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per common share amounts)	2005			2004			2005			2004
Pro forma revenues	$	260,535		$	240,752		$	777,144		$	730,710
Pro forma net income applicable to common stockholders	170,624			8,160			185,790			20,731
Pro forma per share amounts:
Net income per common share— basic	$		4.36	$		0.21	$		4.76	$	0.54
Net income per common share— diluted	$		3.71	$		0.20	$		4.09	$	0.53

3.             STOCK-BASED EMPLOYEE COMPENSATION

Currently, the Company accounts for stock awards and stock option grants using the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations.  Generally, no compensation expense is recognized for stock option grants to employees if the exercise price is at or above the fair market value of the underlying stock on the date of grant.  Compensation expense relating to other stock awards is recognized over the period during which the employee renders service to the Company necessary to earn the award.  The following table summarizes relevant information as to reported results under APB 25’s method of accounting for stock options with supplemental information as if the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 had been applied (in thousands, except per share amounts):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
Net income applicable to common stockholders, as reported	$	170,594		$	9,264		$	187,085		$	24,996
Add: Stock-based compensation, as reported	1,270			126			2,974			344
Deduct: Total stock-based compensation determined under SFAS 123 fair value based method for all stock-based compensation	(2,891		)	(2,666		)	(8,049		)	(7,671		)
Adjusted net income, SFAS 123, fair value method for all stock-based compensation	$	168,973		$	6,724		$	182,010		$	17,669
Net income applicable to common stockholders per basic common share, as reported	$	4.36		$	0.24		$	4.79		$	0.66
Net income applicable to common stockholders per diluted common share, as reported	$	3.71		$	0.23		$	4.12		$	0.63
Basic income per share SFAS 123 adjusted	$	4.32		$	0.17		$	4.66		$	0.46
Diluted income per share SFAS 123 adjusted	$	3.67		$	0.17		$	4.01		$	0.46

See Note 5 to the unaudited consolidated condensed financial statements.

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2005		2004		2005		2004
Risk-free interest rate	4.1	%	2.8	%	4.1	%	2.8	%
Expected lives	3 years		3 years		3 years		3 years
Volatility	70	%	95	%	70	%	95	%

During the nine months ended September 30, 2005, the Company issued approximately 300,000 shares of restricted common stock to certain of its employees and a director. The restricted stock has vesting periods of 12 months to 49 months.  During the three months ended September 30, 2005, the Company also issued approximately 54,000 restricted stock units to certain employees of Bookings in connection with the acquisition of Bookings.  The restricted stock units have a vesting period of 36 months.  The accrual for deferred compensation expense related to the restricted stock and restricted stock units issued totaled $7.9 million and was recorded at the market value on the date of the grant as deferred compensation and the related stock based compensation expense is being amortized over the vesting period.

In connection with the acquisition of Active Hotels in September 2004, the Company granted restricted stock of Active Hotels to certain employees of Active Hotels.  The fair value of the restricted stock at the grant date was approximately $2.1 million, and will be expensed as stock based compensation over the three-year vesting period.  All of the restricted stock in Active Hotels was exchanged for restricted stock of priceline.com International in the third quarter of 2005.

During the three months ended September 30, 2005, the Company issued approximately 11,000 shares of restricted stock and 32,000 restricted stock units of priceline.com International to certain employees of Active Hotels and Bookings. The restricted stock and the restricted stock units have maximum vesting periods of 30 months. The fair value of the restricted stock and the restricted stock units at the grant date totaled $1.4 million, and is being recorded as stock based compensation expense over the vesting period.

4.             NET INCOME PER SHARE

The Company computes both basic and diluted earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per share is calculated by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based upon the weighted

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average number of common and common equivalent shares outstanding during the period which is calculated using the treasury stock method for stock options, warrants, restricted stock units and restricted stock.  Common equivalent shares for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.  The shares that would be issued upon the conversion of the Company’s 1% and 2.25% Notes (See Notes 5 and 10 to the unaudited consolidated condensed financial statements) are included in the calculation of diluted earnings per share if their inclusion is dilutive to earnings per share.

A reconciliation of net income and the weighted average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
Net income applicable to common stockholders	$		170,594	$	9,264		$	187,085		$	24,996
Preferred stock dividend	976			—			1,854			—
Interest expense on convertible senior notes	750			533			2,234			1,588
	$	172,320		$		9,797	$		191,173	$	26,584
Weighted average number of basic common shares outstanding	39,156			38,684			39,038			38,111
Weighted average dilutive stock options, restricted stock units and restricted stock	351			387			408			440
Weighted average dilutive stock warrants	1,218			452			1,235			477
Assumed conversion of convertible senior notes	5,760			3,125			5,760			3,125
Weighted average number of diluted common and common equivalent shares outstanding	46,485			42,648			46,441			42,153
Anti-dilutive potential common shares	4,422			10,769			4,253			10,426

5.             RECENT ACCOUNTING PRONOUNCEMENTS

In September 2004, the Emerging Issues Task Force (“EITF”) issued statement EITF No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”). Contingently convertible debt instruments are generally convertible into common shares of an issuer after the common stock price has exceeded a predetermined threshold for a specified period of time (the “market price contingency”). EITF 04-08 requires that shares issuable upon conversion of contingently convertible debt, such as the Company’s 2.25% Convertible Senior Notes due January 15, 2025 (the “2.25% Notes”) and its 1.00% Convertible Senior Notes due August 1, 2010 (the “1% Notes” and, together with the 2.25% Notes, the “Notes”), be included in diluted earnings per share computations regardless of whether the market price contingency contained in the debt instrument has been met. The Company had previously excluded the potential dilutive effect of the conversion feature from its calculation of diluted earnings per share. EITF 04-08 became effective for reporting periods ending after December 15, 2004 and required restatement of prior periods to the extent applicable.  The adoption of EITF 04-08 required the Company to include approximately 3,125,000 and 2,635,046 additional shares, respectively, of common stock underlying the 1% Notes and 2.25% Notes in its diluted earnings per share calculation in the event that their inclusion is dilutive to earnings per share. The impact of the additional shares in the calculation of diluted earnings per share

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is offset by exclusion of coupon interest and amortization of debt issuance costs associated with the Notes.  EITF 04-08 could result in a material reduction in the Company's diluted earnings per share in future periods.

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).  Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.  However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro Forma disclosure is no longer an alternative once the standard is required to be adopted.  The Company will be required to apply SFAS 123(R) as of January 1, 2006.

The Company expects to adopt SFAS 123(R) using the “modified prospective” method in which compensation cost is recognized based on (a) the requirements of SFAS 123(R) for all share-based payments granted after the effective date, January 1, 2006, and (b) the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.  Upon adoption of SFAS 123(R), the impact of unvested stock options granted as of September 30, 2005 is estimated to increase stock based compensation expense by $5.7 million in 2006, $2.0 million in 2007 and $0.1 million in 2008.

6.             RESTRUCTURING

At September 30, 2005 the Company has a restructuring liability of $2.1 million for the estimated remaining costs related to leased property vacated in connection with the Company’s 2000 restructuring. During the three months ended September 30, 2005, the Company recorded a $2.0 million restructuring charge based upon a re-evaluation of the estimated costs related to the vacated leased property.  In the first quarter of 2005, the Company decreased the liability for the restructuring charge by $336,000 based upon a re-evaluation of estimated costs to complete certain European restructuring activities.

The Company estimates, based on current available information, the remaining net cash outflows associated with its restructuring related commitments will be paid in 2005-2011. The current portion of the restructuring accrual in the amount of $532,000 is recorded in “Accrued expenses” and the $1.6 million non-current portion is recorded in “Other long-term liabilities” on the Company’s consolidated balance sheets.

 The Company recorded a reserve of approximately $2.5 million for severance and contract terminations related to the acquisition of Travelweb LLC (“Travelweb”) in May 2004.  The Company identified and notified the affected Travelweb personnel and vendors in 2004.  Such exiting costs will be paid out in cash and approximately $2.1 million was paid as of September 30, 2005.

7.             SHORT-TERM INVESTMENTS

The following table summarizes, by major security type, the Company’s marketable securities as of September 30, 2005 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Estimated Fair Value
United States Government Agencies	$	35,937	$	—	$	(155	)	$	35,782
USGA — Discount Notes	10,117		—		(32		)	10,085
Medium Term Corporate Notes	7,026		—		(12		)	7,014
	$	53,080	$	—	$	(199	)	$	52,881

Contractual maturities of marketable securities classified as available-for-sale as of September 30, 2005 are as follows (in thousands):

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	Amortized Cost		Estimated Fair Value
Due within one year	$	28,061	$	27,989
Due between one year and two years	25,019		24,892
Totals	$	53,080	$	52,881

No material gains or losses were realized for the three or nine months ended September 30, 2005 or 2004.

8.             INTANGIBLE ASSETS

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

	September 30, 2005							December 31, 2004								Weighted
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Amortization Period	Average Useful Life
Intangible assets with determinable lives:
Supply and distribution agreements	$	133,404	$	(10,267	)	$	123,137	$	79,397	$	(3,017	)	$	76,380	1-13 years	13 years
Technology	17,641		(3,926		)	13,715		9,145		(1,193		)	7,952		1-3 years	3 years
Patents	1,494		(1,006		)	488		1,435		(960		)	475		3-15 years	3 years
Customer lists	9,267		(3,273		)	5,994		5,437		(1,074		)	4,363		1-3 years	2 years
Other	304		(211		)	93		359		(203		)	156		1-15 years	9 years
Subtotal	162,110		(18,683		)	143,427		95,773		(6,447		)	89,326
Intangible assets with indefinite lives:
Internet domain names	6,421		—			6,421		6,592		—			6,592
Tradenames	9,057		—			9,057		2,990		—			2,990
Subtotal	15,478		—			15,478		9,582		—			9,582
Total intangible assets	$	177,588	$	(18,683	)	$	158,905	$	105,355	$	(6,447	)	$	98,908

Intangible assets with determinable lives are primarily amortized on a straight-line basis.  Intangible assets amortization expense was approximately $5.9 million and $1.2 million for the three months ended September 30, 2005 and 2004, respectively and approximately $12.8 million and $1.9 million for the nine months ended September 30, 2005 and 2004, respectively.

The estimated amortization expense for the amortizable acquired intangible assets for the remainder of 2005 and years thereafter is expected to be as follows (in thousands):

2005	$		5,724
2006	20,718
2007	15,942
2008	11,471
2009	9,849
Thereafter	79,723
	$	143,427

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9.             OTHER ASSETS

Other assets at September 30, 2005 and December 31, 2004 consist of the following (in thousands):

	September 30, 2005		December 31, 2004
Investment in pricelinemortgage.com	$	10,487	$	9,429
Deferred debt issuance costs, net	5,026		6,130
Other	2,040		383
Total	$	17,553	$	15,942

Deferred debt issuance costs arose from the Company’s issuance of $125 million aggregate principal amount of 1% Convertible Senior Notes due August 1, 2010 and the issuance of $100 million aggregate principal amount of 2.25% Convertible Senior Notes due January 15, 2025.  Deferred debt issuance costs of approximately $4.3 million and $3.3 million, respectively, consisting primarily of underwriting commissions and professional service fees, are being amortized using the effective interest rate method over approximately five years.

10.          CONVERTIBLE DEBT

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

In November 2003, the Company entered into an interest rate swap agreement whereby it swapped the fixed 1% interest on its 1% Notes for a floating interest rate based on the 3-month U.S. Dollar LIBOR, minus the applicable margin of 221 basis points, on $45 million notional value of debt.  This agreement expires August 1, 2010.  The Company designated this interest rate swap agreement as a fair value hedge.  The changes in the fair value of the interest rate swap agreement and the underlying debt are recorded as offsetting gains and losses in interest income and expense in the consolidated statement of operations.  Hedge ineffectiveness of $4,000 was recorded as a reduction of interest income for the three months ended September 30, 2005.  Hedge ineffectiveness of $40,000 was recorded as interest income for the three months ended September 30, 2004.  The fair value (cost if terminated) of this swap as of September 30, 2005 was approximately $1.5 million and has been recorded as a credit in other long-term liabilities with a related adjustment to the carrying value of debt.

In June 2004, the Company issued, in a private placement, $100 million aggregate principal amount of Convertible Senior Notes due January 15, 2025, with an interest rate of 2.25% (the “2.25% Notes”).  The 2.25% Notes are convertible, subject to certain conditions, into priceline.com’s common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $37.95 per share, subject to adjustment upon the occurrence of specified events.  Each $1,000 principal amount of 2.25% Notes will initially be convertible into 26.3505 shares of the Company’s common stock if, on or prior to January 15, 2025, certain conditions occur.  The 2.25% Notes are also convertible in certain other circumstances, such as a change in control of the Company.  In the event that all or substantially all of the Company’s common stock is acquired prior to January 15, 2010, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments to the holders of the 2.25% Notes of amounts ranging from $0 to $18.4 million depending upon the date of the transaction and the then current stock price of the Company.  The Company’s obligation to make this payment is treated as an embedded derivative which, pursuant to Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), must be assigned its own value separate and apart from the value of the 2.25% Notes.  The estimated value of the derivative has been established based upon several quantitative and qualitative factors and will be amortized as interest expense ratably over approximately a 5 ½ year period.  Pursuant to SFAS 133, any

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subsequent changes in the value of the derivative will be recognized as income or expense in the period in which the change in value occurs.  Amortization expense and the effect of marking the instrument to market has not been material in any period.  In addition, the 2.25% Notes will be redeemable at the Company’s option beginning January 20, 2010, and the holders may require the Company to repurchase the 2.25% Notes on January 15, 2010, 2015 and 2020, or in certain other circumstances.  Interest on the 2.25% Notes is payable on January 15 and July 15 of each year.

The Company used a portion of the net proceeds from the issuance of the 1% Notes and the 2.25% Notes in the acquisitions of Travelweb and Active Hotels in 2004, and in the acquisition of Bookings in July 2005.  The remaining proceeds are available for general corporate purposes, strategic uses and working capital requirements.

11.          TREASURY STOCK

On November 2, 2005, the Company announced that its Board of Directors had authorized the repurchase of up to $50 million of the Company’s common stock from time to time in the open market or in privately negotiated transactions.  Previously, in 2002, the Board originally authorized the repurchase of up to $40 million of the Company’s common stock.   The Company purchased approximately 1.6 million shares of its common stock for its treasury at an aggregate cost of approximately $24 million through December 31, 2003.  All shares were purchased at prevailing market prices.  The Company did not repurchase any shares in 2004, during the nine months ended September 30, 2005, or during the period from September 30, 2005 through November 9, 2005.

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

As of September 30, 2005, there were approximately 2.5 million shares of the Company’s common stock held in treasury.

12.          REDEEMABLE PREFERRED STOCK

In August 2005 and 2004, the Company issued Delta Air Lines, Inc. a dividend on the Series B Redeemable Preferred Stock in the amount of 40,240 shares of the Company’s common stock.  As a result, the Company recorded a non-cash dividend charge of $976,000 and $740,000 in the third quarter of 2005 and 2004, respectively.

13.GOODWILL

A substantial majority of the Company’s goodwill relates to its acquisitions of Active Hotels, Travelweb and Bookings.

Goodwill at September 30, 2005 consists of the following (in thousands):

Balance, beginning of year	$	138,859
Deferred tax adjustment related to acquisition of Active Hotels	(4,754		)
Adjustment of pre-acquisition liability related to Travelweb acquisition	(16		)
Acquisition of Bookings BV	76,182
Currency translation adjustments	(7,802		)
Balance at September 30, 2005	$	202,469

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During the nine months ended September 30, 2005, goodwill and deferred taxes were reduced by approximately $4.8 million as a result of a purchase price allocation adjustment related to the assignment of fair values to the acquired assets and liabilities of Active Hotels.

14.          OTHER WARRANTS TO PURCHASE COMMON STOCK

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

15.          TAXES

Income tax expense includes U.S. and international income taxes, determined using an estimate of our annual effective tax rate.  A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards.  A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized.

The Company recognizes income tax expense related to income generated outside of the United States based upon the applicable tax rates of the foreign countries in which the income is generated.  During the three and nine months ended September 30, 2005, the substantial majority of the Company’s foreign-sourced income has been generated in the United Kingdom and the Netherlands.

The Company has significant deferred tax assets, resulting principally from domestic net operating loss carryforwards (“NOLs”).  As required by SFAS No. 109, “Accounting for Income Taxes,” we periodically evaluate the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes, and other relevant factors. Through June 30, 2005, the Company provided a valuation allowance for the full amount of the deferred tax asset.  Management concluded in the third quarter 2005, based upon its assessment of positive and negative evidence, that it is more likely than not that a portion of the deferred tax assets will be realized.  Accordingly, we recorded a net non-cash tax benefit in the third quarter 2005 of $160 million, resulting from a $170 million reversal of a portion of our valuation allowance on our deferred tax assets, partly offset by recording a $10 million non-cash US income tax provision.  It is the Company’s belief that it is more likely than not that its remaining deferred tax assets will not be realized and, accordingly, a valuation allowance remains against those assets.  The valuation allowance may need to be adjusted in the future if facts and circumstances change, causing a reassessment of the realization of its deferred tax assets.

The use of the Company’s NOLs is also subject to limitation under section 382 of the Internal Revenue Code of 1986.  Section 382 imposes limitations on the use of the Company’s NOLs in the event that a 50-percentage point ownership change occurs in the shareholdings of the Company’s common stock.  As a result of a study (the “NOL Study”), it was determined that ownership changes occurred in 2000 and 2002 that had the effect of limiting the amount of NOLs that can be used to offset future taxable income to approximately $69 million annually over the carryforward period.  The aforementioned limitation is based upon certain conclusions in the NOL Study pertaining to the dates of the ownership changes and the value of the Company on the dates of the ownership changes.  The conclusions contained in the NOL Study are subject to interpretation, and therefore, the limitation could be subject to change.

The Company has recorded a deferred tax liability in the amount of $44.6 million, primarily related to the assignment of estimated fair value to certain purchased identifiable intangible assets associated with the acquisitions of Active Hotels and Bookings.

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16.          COMMITMENTS AND CONTINGENCIES

Acquisitions of Active Hotels and Bookings.

The holders of stock of priceline.com International issued in connection with the Company’s acquisition of Bookings can require the Company to purchase their stock at certain future dates for a purchase price equal to their then fair market value.  In addition, the Company can require the holders of the stock to sell the stock to the Company at certain future dates for a purchase price equal to their then fair market value.  Certain of the shares of priceline.com International subject to this buyback provision are the securities for which certain employees of Active Hotels exchanged their minority interests in Active Hotels that they purchased or were granted at the time of our acquisition of Active Hotels.  The Company estimates that at September 30, 2005, the fair value of the securities subject to this buyback provision approximated the carrying value of $23.9 million.

Litigation.

On December 30, 2004, the City of Los Angeles filed a putative class action complaint in Superior Court for the County of Los Angeles, on behalf of itself and other allegedly similarly situated cities in California, naming as defendants:  Hotels.com, L.P.; Hotel.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; Travelweb, LLC and Travelnow.com, Inc.  (City of Los Angeles v. Hotels.com, Inc. et al.). The Company and its wholly owned subsidiaries, Lowestfare.com and Travelweb, have been served with the complaint.  The complaint alleged, among other things, that each of these defendants violated the Uniform Transient Occupancy Tax Ordinance of the City of Los Angeles, and allegedly similar ordinances of other California cities, with respect to the charges and remittance of amounts to cover taxes under such ordinances, and that such practices also constitute acts of unfair competition under California Business and Professions Code Section 17200, et seq. (“Section 17200”).  On August 31, 2004, the City of Los Angeles filed an amended complaint adding a claim for a declaratory judgment.  The amended complaint seeks payment of alleged unpaid taxes owed, relief from conversion, including punitive damages, attorneys’ fees, and imposition of a constructive trust.  On May 19, 2005, the court ordered limited discovery.  On September 26, 2005, the court sustained the defendants’ motion to dismiss on misjoinder grounds, but allowed the City of Los Angeles the opportunity to replead.

On February 17, 2005, a putative class action complaint was filed in the same court by Ronald Bush and three other individuals on behalf of themselves and other allegedly similarly situated California consumers against several of the same defendants as named in the City of Los Angeles action, including the Company (Bush, et al. v. Cheaptickets, Inc., et al.).  The complaint alleged each of the defendants engaged in acts of unfair competition in violation of Section 17200 relating to their respective disclosures and charges to customers to cover taxes under the above ordinances of the City of Los Angeles and other California cities, and service fees.  The complaint sought restitution under Section 17200, relief for alleged conversion, including punitive damages, injunctive relief, and imposition of a constructive trust.  The Company was served with the complaint on February 25, 2005.  The defendants removed this action to the United States District Court for the Central District of California.  On May 9, 2005, the District Court issued an order remanding the action to state court.  Defendants timely appealed to the Ninth Circuit, which, on October 6, 2005, affirmed the order of the District Court.  The case will therefore proceed in the state court.  On July 1, 2005, Plaintiffs filed an amended complaint, adding claims pursuant to California’s Consumer Legal Remedies Act, Civil Code §1750, et seq. and claims for breach of contract and the implied duty of good faith and fair dealing.  A case management conference has been scheduled for December 2, 2005.  At that conference it is anticipated that the court will address the staging and scheduling of motions challenging the amended complaint and appropriate discovery, if any.

Also on February 17, 2005, a putative class action complaint was filed in the Superior Court of the State of Delaware for New Castle County by Jeanne Marshall and three other individuals on behalf of themselves and a putative class of allegedly similarly situated consumers nationwide against the Company (Marshall, et al. v. priceline.com, Inc.).  The complaint alleged that the Company violated the Delaware Consumer Fraud Act, Del. Code Ann. Tit. 6, § 2511, et seq., relating to its disclosures and charges to customers to cover taxes under city hotel occupancy tax ordinances nationwide, and service fees.  The Company was served with the complaint on March 2, 2005 and moved to dismiss the complaint on April 21, 2005.  The Company also moved to stay discovery until a determination of its motion to dismiss the complaint and the Court granted that stay on May 11, 2005.  On June 10, 2005, Plaintiffs filed an amended complaint that asserts claims under the Delaware Consumer Fraud Act and for beach of contract and the implied duty of good faith and fair dealing.  The

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amended complaint seeks compensatory damages, punitive damages, attorneys’ fees and other relief.  On July 15, 2005, the Company filed a motion to dismiss the amended complaint on the basis that it fails to allege sufficient facts to state a cause of action.  The motion has been fully briefed.  The Company’s motion to dismiss was heard by the Court on November 4, 2005 and the parties are awaiting a decision.

On July 12, 2005, the City of Philadelphia, Pennsylvania, filed a complaint in the Court of Common Pleas for Philadelphia County, Pennsylvania against Hotels.com; Hotels.com GP, LLC; Hotwire.com; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; Travelweb, LLC and Travelnow.com, Inc.  (City of Philadelphia, Pennsylvania v. Hotels.com, et al.).  The complaint alleges, among other things, that each of these defendants violated the hotel room rental tax provisions of Section 19-2401, et seq., of the Philadelphia Municipal Code with respect to the charges and remittance of amounts to cover taxes under the Code.  The complaint also asserts claims for conversion, imposition of a constructive trust, and a demand for a legal accounting.  The complaint seeks payment of alleged unpaid taxes owed, disgorgement and restitution of all funds allegedly owed to Plaintiff, an accounting, attorneys’ fees, and other relief.  The defendants removed this action to the United States District Court for the Eastern District of Pennsylvania.  On October 11, 2005, the District Court issued an order remanding the action to state court.  On October 19, 2005, the City of Philadelphia moved for leave to file an amended complaint.

On September 21, 2005, the City of Bellingham filed a putative class action complaint in the Superior Court of Washington for Whatcom County on behalf of itself and other similarly situated taxing entities in Washington, against Hotels.com, L.P.; Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding, LLC; Orbitz, Inc.; Orbitz, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com, L.P.; Travelweb, LLC and Travelnow.com, Inc. (City of Bellingham v. Hotels.com, L.P., et al.).  The complaint alleges, among other things, that each of these defendants violated Section 4.62.010, et seq., of the Bellingham Municipal Code and similar laws of other Washington taxing entities with respect to the charges and remittance of amounts to cover taxes under the Municipal Code.  The complaint also asserts claims for violation of the Washington Consumer Protection Act RCW § 19.86.010, et seq., conversion and unjust enrichment.  The complaint seeks compensatory damages, statutory treble damages, penalties, attorneys’ fees and other reflief.  Travelweb has been served with the complaint, but the Company and Lowestfare.com have not.  On November 3, 2005, the Company, Lowestfare.com, Travelweb and certain other defendants removed this action to the United States District Court for the Western District of Washington.

On October 5, 2005, the City of Fairview Heights filed a putative class action complaint in the Circuit Court, Twentieth Judicial Circuit, St. Clair County, Illinois on behalf of itself and other similarly situated taxing entities in Illinois, against Orbitz, Inc.; Orbitz, LLC; Hotels.com, L.P.; Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com, L.P.; Travelweb, LLC and Travelnow.com, Inc. (City of Fairview Heights v. Orbitz, Inc., et al.).  The complaint alleges, among other things, that each of these defendants violated Section 36-2-1, et seq., of the Revised Ordinances of the City of Fairview Heights, Illinois and similar laws of other Illinois taxing entities with respect to the charges and remittance of amounts to cover taxes under the ordinances.  The complaint also asserts claims for violation of the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1, similar laws in other states, conversion and unjust enrichment.  The complaint seeks compensatory damages, attorneys’ fees and other relief.  Travelweb has been served with the complaint, but the Company and Lowestfare.com have not.

On October 25, 2005, the City of Findlay filed a putative class action complaint in the Common Pleas Court of Hancock County, Ohio on behalf of itself and other similarly situated taxing entities in Ohio, against Hotels.com, L.P.; Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding, LLC; Orbitz, Inc.; Orbitz, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com, L.P.; Travelweb, LLC and Travelnow.com, Inc. (City of Findlay v. Hotels.com, L.P., et al.).  The complaint alleges, among other things, that each of these defendants violated Ohio Revenue Code § 5739 and the Certified Ordinances of the City of Findlay and other putative class members with respect to the charges and remittance of amounts to cover taxes under the Ohio transient occupancy tax ordinances.  The complaint also asserts claims for violation of Ohio Revised Code Chapter 1345, et seq., conversion, a constructive trust and a declaratory judgment.  The complaint seeks compensatory damages, disgorgement, penalties

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available by law, attorneys’ fees and other relief.  The Company has been served with a copy of the complaint, but its wholly owned subsidiaries, Lowestfare.com and Travelweb, have not.

On November 1, 2005, the City of Chicago, Illinois, filed a complaint in the Circuit Court of Cook County, Illinois against Hotels.com, L.P.; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding, LLC; Maupintour, LLC; Orbitz, Inc.; Orbitz, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; Travelweb, LLC and Travelnow.com, Inc.  (City of Chicago, Illinois v. Hotels.com,  L.P., et al.)  The complaint alleges, among other things, that each of these defendants violated the Chicago Hotel Accommodations Tax Ordinance of Chapter 3-24 of the Municipal Code of Chicago with respect to the charges and remittance of amounts to cover taxes under the Code.  The complaint also asserts claims for conversion, imposition of a constructive trust, and a demand for a legal accounting.  The complaint seeks payment of alleged unpaid taxes owed, disgorgement and restitution of all funds allegedly owed to Plaintiff, an accounting, penalties, attorneys’ fees, and other relief.  The Company and its wholly owned subsidiaries, Lowestfare.com and Travelweb, have not been served with a copy of the complaint.

The Company intends to defend vigorously against all of the aforementioned actions.  The Company is unable at this time to predict the outcome of these suits or reasonably estimate a range of possible loss, if any.

On March 16, March 26, April 27, and June 5, 2001, respectively, four putative class action complaints were filed in the U.S. District Court for the Southern District of New York naming priceline.com, Inc., Richard S. Braddock, Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and 01 Civ. 4956).  Shives et al. v. Bank of America Securities LLC et al., 01 Civ. 4956, also names other defendants and states claims unrelated to the Company.  The complaints allege, among other things, that priceline.com and the individual defendants violated the federal securities laws by issuing and selling priceline.com common stock in priceline.com’s March 1999 initial public offering without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had allegedly solicited and received excessive and undisclosed commissions from certain investors.  By Orders of Judge Mukasey and Judge Scheindlin dated August 8, 2001, these cases were consolidated for pre-trial purposes with hundreds of other cases, which contain allegations concerning the allocation of shares in the initial public offerings of companies other than priceline.com, Inc.  By Order of Judge Scheindlin dated August 14, 2001, the following cases were consolidated for all purposes:  01 Civ. 2261; 01 Civ. 2576; and 01 Civ. 3590.  On April 19, 2002, plaintiffs filed a Consolidated Amended Class Action Complaint in these cases.  This Consolidated Amended Class Action Complaint makes similar allegations to those described above but with respect to both the Company’s March 1999 initial public offering and the Company’s August 1999 second public offering of common stock.  The named defendants are priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E. Francis, Nancy B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson Stephens, Inc. (as successor-in-interest to BancBoston), Credit Suisse First Boston Corp. (as successor-in-interest to Donaldson Lufkin & Jenrette Securities Corp.), Allen & Co., Inc. and Salomon Smith Barney, Inc.  Priceline, Richard Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together with other issuer defendants in the consolidated litigation, filed a joint motion to dismiss on July 15, 2002.  On November 18, 2002, the cases against the individual defendants were dismissed without prejudice and without costs.  In addition, counsel for plaintiffs and the individual defendants executed Reservation of Rights and Tolling Agreements, which toll the statutes of limitations on plaintiffs’ claims against those individuals.  On February 19, 2003, Judge Scheindlin issued an Opinion and Order granting in part and denying in part the issuer’s motion.  None of the claims against the Company were dismissed.  On June 26, 2003, counsel for the plaintiff class announced that they and counsel for the issuers had agreed to the form of a Memorandum of Understanding (the “Memorandum”) to settle claims against the issuers.  The terms of that Memorandum provide that class members will be guaranteed $1 billion in recoveries by the insurers of the issuers and that settling issuer defendants will assign to the class members certain claims that they may have against the underwriters.  Issuers also agree to limit their abilities to bring certain claims against the underwriters.  If recoveries in excess of $1 billion are obtained by the class from any non-settling defendants, the settling defendants’ monetary obligations to the class plaintiffs will be satisfied; any amount recovered from the underwriters that is less than $1 billion will be paid by the insurers on behalf of the issuers.  The Memorandum, which is subject to the approval of each issuer, was approved by a special committee of the priceline.com Board of Directors on Thursday, July 3, 2003.  Thereafter, counsel for the plaintiff class and counsel for the issuers agreed to the form of a Stipulation and Agreement of Settlement with Defendant Issuers and Individuals (“Settlement Agreement”).  The Settlement Agreement implements the Memorandum and contains the same material provisions.  On June 11, 2004, a special committee of the priceline.com Board of Directors authorized the Company’s counsel to execute the Settlement

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Agreement on behalf of the Company.  The Settlement Agreement is subject to final approval by the Court and the process to obtain that approval is still pending.

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

Weingarten v. priceline.com Incorporated and Jay S. Walker
3:00 CV 1901 (District of Connecticut).

Twardy v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1884 (District of Connecticut).

Berdakina v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1902 (District of Connecticut).

Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1924 (District of Connecticut).

Fialkov v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1954 (District of Connecticut).

Ayach v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2062 (District of Connecticut).

Zia v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1968 (District of Connecticut).

Mazzo v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1980 (District of Connecticut).

Bazag v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2122 (District of Connecticut).

Breier v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2146 (District of Connecticut).

Farzam et al. v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2176 (District of Connecticut).

Caswell v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2169 (District of Connecticut).

Howard Gunty Profit Sharing Plan v. priceline.com Inc.
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1917 (District of Connecticut).

Cerelli v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1918 (District of Connecticut).

Mayer v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1923 (District of Connecticut).

Anish v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1948 (District of Connecticut).

Atkin v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 1994 (District of Connecticut).

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Lyon v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2066 (District of Connecticut).

Kwan v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2069 (District of Connecticut).

Krim v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2083 (District of Connecticut).

Karas v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2232 (District of Connecticut).

Michols v. priceline.com Inc.,
Richard S. Braddock, Daniel H. Schulman and Jay S. Walker
3:00 CV 2280 (District of Connecticut).

All of these cases have been assigned to Judge Dominic 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 was one of the lead plaintiffs in the consolidated action, made a motion for leave to withdraw as lead plaintiff.  The Court granted that motion on May 30, 2002.  On February 28, 2002, the Company filed a motion to dismiss the Consolidated Amended Complaint.  On October 7, 2004, the Court issued a Memorandum of Decision granting, in part, and denying, in part, the Company’s motion.  A scheduling order was entered by the Court on November 2, 2004 and the parties are now proceeding with discovery.  Plaintiffs filed a motion for class certification on January 7, 2005, and the Company has filed its opposition to that motion.  The Company intends to defend vigorously against this action.  The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss, if any.

In addition, on November 1, 2000 the Company was served with a complaint that purported to be a shareholder derivative action against its Board of Directors and certain of its current and former executive officers, as well as the Company (as a nominal defendant).  The complaint alleged breach of fiduciary duty and waste of corporate assets.  The action is captioned Mark Zimmerman v. Richard Braddock, J. Walker, D. Schulman, P. Allaire, R. Bahna, P. Blackney, W. Ford, M. Loeb, N. Nicholas, N. Peretsman, and priceline.com Incorporated, 18473-NC (Court of Chancery of Delaware, County of New Castle, State of Delaware).  On February 6, 2001, all defendants moved to dismiss the complaint for failure to make a demand upon the Board of Directors and failure to state a cause of action upon which relief can be granted.  Pursuant to a stipulation by the parties, an amended complaint was filed on June 21, 2001.  Defendants renewed their motion to dismiss on August 20, 2001, and plaintiff served his opposition to that motion on October 26, 2001.  Defendants filed their reply brief on January 7, 2002.  On December 20, 2002, the Court granted defendants’ motion without prejudice.  On April 25, 2003, a second amended complaint, adding H. Miller, was filed and a motion seeking leave of court to file the second amended complaint was filed on July 28, 2003.  That motion was fully briefed, and oral argument took place on May 9, 2005. Immediately following oral argument, the Court dismissed three of the four counts in the second amended complaint.  All of the counts against defendants Allaire, Bahna, Blackney, Ford, Loeb, Miller, Peretsman and Schulman have now been dismissed.  On September 8, 2005, the Court granted plaintiff leave to file the second amended complaint as to the one remaining count.  Defendants filed a motion requesting that the Court certify its September 8 order for interlocutory appeal to the Delaware Supreme Court, and the Court granted that motion on October 6, 2005.  On October 17, 2005, the Delaware Supreme Court accepted the interlocutory appeal.  Defendants’ opening brief on appeal is due on November 21, 2005.  Discovery in the case and the time in which Defendants are required to respond to the second amended complaint have been stayed pending the Delaware Supreme Court’s entry of mandate.   The Company intends to defend vigorously against this action.  The Company is unable to predict the outcome of the suit or reasonably estimate a range of possible loss, if any.

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

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Stamford/Norwalk, State of Connecticut).  On January 28, 2004, defendants Blackney, Nicholas, Peretsman and Loeb moved to dismiss the complaint for lack of personal jurisdiction.  On January 29, 2004, defendant Miller moved to dismiss the complaint for lack of personal jurisdiction and for insufficient service of process.  On February 27, 2004, defendants Braddock, Walker, Schulman, Allaire, Bahna, Blackney, Loeb, Nicholas, Peretsman, Miller and priceline.com moved to dismiss the complaint for lack of subject matter jurisdiction and defendants Braddock and Schulman also moved to dismiss the complaint for lack of personal jurisdiction and insufficient service of process.  At a hearing on May 3, 2004, the Court stated that it would not rule on the pending motions until the pending motions in the Delaware action described above are decided.  The Court conducted a subsequent status conference on January 10, 2005, at which it requested that the parties report back no later than March 15, 2005 on the status of the Delaware derivative suit.  On March 15, 2005, the parties informed the Court in writing that the oral argument in the Delaware case had been postponed until May 9, 2005, and that the parties would contact the Court with a status report after that hearing was held.  The Delaware Court dismissed three of the four counts in the second amended complaint in the Delaware derivative suit.  All of the counts against the defendants Allaire, Bahna, Blackney, Ford, Loeb, Miller, Peretsman and Schulman have now been dismissed.  The parties in the Connecticut action advised the Connecticut Court of the Delaware Court’s ruling by letter dated June 6, 2005.  The Delaware Court subsequently granted plaintiff leave to file the second amended complaint as to the one remaining count.  Defendants sought an interlocutory appeal of the Delaware Court’s order, and the Delaware Supreme Court accepted that appeal.  The parties in the Connecticut action advised the Connecticut Court of those developments by letter dated November 3, 2005.  The Company intends to defend vigorously against this action.  The Company is unable to predict the outcome of this suit or reasonably estimate a range of possible loss, if any.

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

From time to time, the Company has been and expects to continue to be subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third party intellectual property rights by it.  Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management’s attention from our business objectives and could adversely affect the Company’s business, results of operations, financial condition and cash flows.

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

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

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

The following discussion should be read in conjunction with our financial statements, including the notes to those statements, included elsewhere in this Form 10-Q, and the Section entitled “Special Note Regarding Forward Looking Statements” in this Form 10-Q.  As discussed in more detail in the Section entitled “Special Note Regarding Forward Looking Statements,” this discussion contains forward-looking statements, which involve risks and uncertainties.  Our actual results may differ materially from the results discussed in the forward-looking statements.  Factors that might cause those differences include, but are not limited to, those discussed in “Factors That May Affect Future Results.”

Overview

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

•Transaction revenues from our Name Your Own Price^® airline ticket, hotel room and rental car services, as well as our vacation packages service;

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

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

•Worldspan, L.P. reservation booking fees related to both our Name Your Own Price^® airline ticket, hotel room and rental car service, and price-disclosed airline tickets and rental car service;

•Transaction revenue from our price-disclosed hotel room service, facilitated principally through our retail merchant model hotel service, which was integrated after our second quarter 2004 acquisition of Travelweb LLC; and

•Other revenues derived primarily from selling advertising on our websites.

Trends.  The on-line sale of travel services has been one of the fastest growing sectors of the Internet since the late 1990s.  While the online market for travel services continues to experience significant annualized growth, we believe that the market share of third-party distributors, like priceline.com, has declined over the recent past and that the growth of the domestic on-line market for travel services has slowed.  We believe the decline in market share is attributable, in part, to a concerted initiative by airlines and hotel chains to direct customers to their own web sites in an effort to reduce distribution expenses and, in the case of hotel chains, establish more direct control over their pricing.  In addition, over the course of 2005, airlines and hotel chains have generally experienced year-over-year increases in load factors (a common metric that measures airplane customer usage) and occupancy rates (a common metric that measures hotel customer usage), respectively, which leaves them with less excess inventory to provide third party intermediaries like priceline.com.  Notwithstanding these trends, we continue to believe that the market for on-line travel services is an attractive market with continued opportunity for growth, in particular, in certain international markets.

Because we believe that an opportunity for growth exists in certain international markets, and since prior to the fourth quarter of 2004, substantially all of our revenue was generated in the U.S., we have taken steps to expand the markets we serve.  In September 2004, we acquired Active Hotels Ltd., a U.K. based on-line hotel service.  Active Hotels gives us a strong presence in the U.K.’s on-line hotel market.  Furthermore, in July 2005, we acquired Amsterdam-based Bookings B.V., one of Europe’s leading Internet hotel reservation services, with offices in Amsterdam, Barcelona, Berlin, Paris and Pisa.  All of our European operations, including Active Hotels and Bookings, are majority-owned by us.  A minority interest

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in our European business is held by our managers responsible for that business.  We work with a range of chain-owned and independently owned hotels across Europe and in major cities around the world.

We believe acquisitions of businesses such as Active Hotels and Bookings create opportunities for us to expand our businesses both in Europe and the U.S., and that our European operations have become and will continue to become an increasingly important contributor to our business.  In addition to the ongoing businesses of our European operations, which consist primarily of offering European hotel rooms to European customers, we intend to utilize our European operations to promote the priceline.com brand in Europe generally, to offer European customers access to our U.S. based travel services and to enhance the European travel services that we currently offer U.S. customers.

Our overall financial prospects have been and continue to be significantly dependent upon the sale of leisure airline tickets and, as a result, the health of our business has been directly related to the health of the airline industry.  Most domestic airlines, and many of our major suppliers, have experienced, and continue to experience, significant losses.  These losses have been compounded by competition from low-cost carriers and, more recently, by high fuel prices, which we believe increase the possibility of the additional bankruptcy and/or the liquidation of one or more of the major domestic airlines.  As a result of these and other factors, many of the major airlines have deeply discounted retail airline tickets to maintain market share, simplified fare structures by removing restrictions associated with certain airline tickets and, as discussed in more detail in “Other” below, put pressure on third-party intermediaries like us to reduce airline distribution costs.  These actions have had, and continue to have, a detrimental effect on our overall airline business and, in particular, our Name Your Own Price^® airline ticket service, which historically represented a significant portion of our total airline ticket revenues.

As a result of the continued decline in sales of Name Your Own Price^® airline tickets over the last three years, we have taken and expect to continue to take steps to diversify our revenue among “non-opaque” services, such as allowing our customers to purchase price disclosed retail airline, hotel and rental car travel services, which we believe will help broaden our customer appeal.  To this end, in the fourth quarter of 2003, we began offering customers the ability to purchase airline tickets at disclosed, retail prices and, in March 2005, we launched a price disclosed hotel service using the retail merchant model hotel service of Travelweb LLC, which we acquired in May 2004, and have integrated into our operations and on our web site, www.priceline.com.  In October 2004, we launched a search and booking engine on priceline.com to allow customers to choose between a Name Your Own Price^® or a price-disclosed rental car offering and, in the second quarter of 2004, we implemented a new feature on our vacation packages path that allows customers to choose between an “opaque” or a disclosed flight itinerary.  Our intent is to provide customers maximum flexibility by allowing them to select a retail price disclosed service or to make use of the Name Your Own Price^® service.

We intend to continue to execute on our strategy of diversifying our service offerings and markets, through both continued internal development of services and, if appropriate, acquisitions.  As a result of the initiatives described above, the growth rates for our “agency” businesses, which are generally comprised of our price-disclosed retail services, have, over the recent past, significantly exceeded the growth rates for our “merchant” businesses, which are comprised primarily of our slower-growing Name Your Own Price^® services.

Other.  A number of travel suppliers, particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be “expensive” distribution channels such as global distribution systems (GDSs).  A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS.  We have agreed to rebate certain GDS costs to certain suppliers in exchange for contractual considerations such as those relating to inventory pricing and availability, and expect to continue to do so in the future.  Additionally, travel suppliers are encouraging third-party travel intermediaries, such as us, to develop technology to bypass the GDS, such as enabling direct connections to the travel suppliers or using other alternatives to traditional GDSs.  Development of such technology would require the use of information technology resources and could cause us to incur additional operating expenses and delay other projects.  We have been and believe that we will continue to be under significant pressure from travel suppliers, including most of the major domestic airlines and many of our significant hotel suppliers, to rebate all or part of the travel booking fees we receive from Worldspan, L.P., our GDS, and to significantly reduce or eliminate their distribution costs.

We believe that our success will depend in large part on our ability to maintain profitability, primarily from our leisure travel business, to continue to promote the priceline.com brand and, over time, to offer other travel services and further expand into international markets. Factors beyond our control, such as the outbreak of an epidemic or pandemic disease, natural disasters such as hurricanes, tsunamis or earthquakes, terrorist attacks, hostilities in the Middle East or

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elsewhere, the liquidation of major domestic airlines now in bankruptcy, the bankruptcy of an additional carrier or the withdrawal from our system of a major airline (or the consolidation of our major airline suppliers) or hotel supplier, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above.  We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results.  We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions.  Our goal is to improve volume and sustain gross margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain revenue growth and profitability.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment,” was issued in December 2004.  SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  We will be required to apply SFAS 123(R) as of January 1, 2006.

Results of Operations

Three and Nine Months Ended September 30, 2005 compared to the Three and Nine Months Ended September 30, 2004

Operating Metrics

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

The number of airline tickets, hotel room nights and rental car days sold through our web sites and the related gross bookings were as follows:

	Airline Tickets	Hotel Room Nights	Rental Car Days	Gross Bookings
Three Months ended September 30, 2005	680,000	3.5 million	1.7 million	$	611.1 million
Three Months ended September 30, 2004	725,000	2.1 million	1.4 million	$	435.3 million
Nine Months ended September 30, 2005	2.2 million	8.8 million	4.5 million	$	1,690.3 million
Nine Months ended September 30, 2004	2.2 million	5.8 million	4.0 million	$	1,271.6 million

Airline tickets sold decreased by 6.2% and increased by 2.1% for the three and nine months ended September 30, 2005, respectively, over the same periods in 2004.  The decrease in the number of airline tickets sold in the three months ended September 30, 2005, compared to the same period in 2004, was primarily attributable to a deceleration in the growth rate of our retail airline ticket service and a significant percentage decrease in the sale of Name Your Own Price^® airline tickets.  The increase in the number of airline tickets sold in the nine months ended September 30, 2005, compared to the same period in 2004, was primarily attributable to the growth of our retail airline ticket service in the first quarter of 2005, compared to the first quarter of 2004, which was the first full-quarter in which we offered a retail choice for airline tickets, and that growth more than offset the large annualized percentage decrease in Name Your Own Price^® airline tickets sold in the period.

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Hotel room nights sold increased by 67.7% and 52.5% for the three and nine months ended September 30, 2005, respectively, over the same periods in 2004.  The increase in the number of hotel room nights sold in the three and nine months ended September 30, 2005, compared to the same periods in 2004, was primarily due to the inclusion of hotel room nights sold through our European operations, which are substantially comprised of Active Hotels and Bookings, which were acquired in the third quarters of 2004 and 2005, respectively, and our retail merchant model hotel service, which was integrated after our acquisition of Travelweb during the second quarter 2004.

Rental car days sold increased by 24.0% and 13.0% for the three and nine months ended September 30, 2005, respectively, over the same periods in 2004 due to increases in sales of our opaque rental car service, increases in sales of our retail choice rental car service, which was launched in the fourth quarter of 2004, and the launch of new features, including an option for one-way destination car rentals.

Gross bookings increased by 40.4% and 32.9% for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004.  The increase was driven primarily by an increase of 118.7% and 89.3% in “agency” bookings for the three and nine months ended September 30, 2005, respectively, which was primarily attributable to (1) the inclusion of approximately $165 million and $314 million, respectively, of gross bookings from our European operations; (2) the increased sale of retail airline tickets, a service which was launched in the fourth quarter of 2003; and (3) the inclusion of agency gross bookings relating to our retail merchant model hotel service.  Merchant gross bookings decreased by 3.8% and increased by 2.1% for the three and nine months ended September 30, 2005, respectively.  The lack of significant growth in merchant gross bookings was primarily attributable to a decrease in the sale of opaque airline tickets and a reduction in retail merchant model hotel bookings resulting from a restructuring of our marketing relationship with Orbitz LLC, pursuant to which we relieved Orbitz of its obligation to generate a certain volume of retail merchant model hotel bookings through our system in exchange for which Orbitz agreed to make us its exclusive provider of opaque airline tickets, hotel rooms and rental cars in 2006.

Revenues

We classify our revenue into three categories:

•Merchant revenues are derived from transactions where we are the merchant of record and are responsible for, among other things, collecting receipts from our customers, remitting payments to our suppliers and establishing the price of services we offer.  Merchant revenues include (1) transaction revenues representing the selling price of Name Your Own Price^® airline tickets, hotel rooms, rental cars and price disclosed vacation packages; (2) transaction revenues representing the amount charged to a customer, less the amount charged by suppliers in connection with the hotel rooms provided through our retail merchant model hotel service; (3) customer processing fees charged in connection with the sale of Name Your Own Price^® airline tickets, hotel rooms and rental cars and retail merchant hotels; and (4) ancillary fees, including Worldspan, L.P. reservation booking fees related to certain of the aforementioned transactions.

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

•Other revenues are derived primarily from advertising on our web sites.

We continue to experience a shift in the mix of our airline ticket business from a business historically focused exclusively on the sale of merchant (“opaque”) Name Your Own Price^® travel services to a business that includes the sale of retail, price-disclosed travel services.  Because merchant Name Your Own Price^® travel services are reported on a “gross” basis and retail travel services are primarily recorded on a “net” basis, revenue increases and decreases are impacted by changes in the mix of the sale of merchant and retail travel services and, consequently, gross profit has become an increasingly important measure of evaluating growth in our business.  Additionally, our European operations contributed approximately $27.8 million and $47.9 million to our revenues for the three and nine months ended September 30, 2005, respectively.  Revenues generated by our European operations are primarily recorded on a “net” basis.

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	Three Months Ended September 30,  ($000)						% Change		Nine Months Ended September 30, ($000)						% Change
	2005			2004					2005			2004
Merchant Revenues	$		222,142	$	226,453		(1.9	)%	$	686,174		$	693,324		(1.0	)%
Agency Revenues	35,497			8,671			309.4	%	69,280			23,866			190.3	%
Other Revenues	1,158			758			52.8	%	3,293			2,212			48.9	%
Total Revenues	$	258,797		$		235,882	9.7	%	$		758,747	$		719,402	5.5	%

Merchant Revenues

Merchant revenues for the three and nine months ended September 30, 2005 and 2004, consisted primarily of:  (1) transaction revenues representing the selling price of Name Your Own Price^® airline tickets, hotel rooms, rental cars and price disclosed vacation packages; (2) transaction revenues representing the amount charged to a customer, less the amount charged by suppliers in connection with the hotel rooms provided through our retail merchant model hotel service; (3) customer processing fees charged in connection with the sale of Name Your Own Price^® airline tickets, hotel rooms and rental cars and retail merchant model hotels; and (4) ancillary fees, including Worldspan, L.P. reservation booking fees related to certain of the aforementioned transactions.

Merchant revenue for the three and nine months ended September 30, 2005 decreased by 1.9% and 1.0%, respectively, compared to the same periods in 2004 due to a substantial percentage decrease in the sale of Name Your Own Price^® airline tickets, which was partially offset by increased revenue from retail merchant model hotel transactions and Name Your Own Price^® rental car transactions.  We believe that the decrease in the number of Name Your Own Price^® airline tickets sold continued to be due primarily to low retail airline ticket prices and the availability of retail tickets on our web site.  In particular, we believe that lower retail pricing causes customers who might normally be willing to make the trade­offs associated with our Name Your Own Price^® airline service in exchange for savings off of higher retail rates, to purchase travel services at the lower retail rates, or from “low-cost” carriers, without having to make any trade-offs.

Agency Revenues

Agency revenues for the three and nine months ended September 30, 2005 and 2004 consisted primarily of: (1) processing fees and third-party supplier commissions related primarily to the sale of travel services including the sale of retail airline tickets, non-merchant model hotels, rental cars, cruises and other travel services; and (2) ancillary fees, including Worldspan, L.P. reservation booking fees related to certain price-disclosed transactions.  Agency revenues for the three and nine months ended September 30, 2005 increased from the same periods a year ago, primarily as a result of (1) the inclusion of approximately $27.8 million and $47.9 million of agency revenue for the three and nine months ended September 30, 2005, respectively, from our European operations; and (2) increased sales of retail airline tickets.

Other Revenues

Other revenues during the three and nine months ended September 30, 2005 and 2004 consisted primarily of: (1) advertising revenues; and (2) fees for referring customers to pricelinemortgage.com for home financing services.  Other revenues for the three and nine months ended September 30, 2005 increased compared to the same periods in 2004, primarily as a result of higher on-line advertising revenue.

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Cost of Revenues and Gross Profit

	Three Months Ended September 30,						%		Nine Months Ended September 30,							%
	($000)						Change		($000)							Change
	2005			2004					2005			2004
Cost of Merchant Revenues	$	178,272		$	184,627		(3.4	)%	$	555,280		$		570,994		(2.8	)%
% of Merchant Revenues	80.3		%	81.5		%			80.9		%	82.4			%
Cost of Agency Revenues	523			151			246.4	%	523			151				246.4	%
% of Agency Revenues	1.5		%	1.7		%			0.8		%	0.6			%
Cost of Other Revenues	—			—			—		—			—				—
% of Other Revenues	0.0		%	0.0		%			0.0		%	0.0			%
Total Cost of Revenues	$	178,795		$	184,778		(3.2	)%	$	555,803		$	571,145			(2.7	)%
% of Revenues	69.1		%	78.3		%			73.3		%	79.4			%

Cost of Revenues

During the three and nine months ended September 30, 2005, cost of revenues decreased by approximately 3.2% and 2.7%, respectively, over the same periods last year, due primarily to a shift in the mix of revenue from merchant services toward agency services that have higher gross margins.  Merchant Name Your Own Price^® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of transactions as compared to retail transactions which are recorded “net” with no corresponding cost of revenues.

Cost of Merchant Revenues

For the three and nine months ended September 30, 2005 and 2004, cost of merchant revenues consisted primarily of: (1) the cost of opaque hotel rooms from our suppliers, net of hotel occupancy tax, (2) the cost of opaque airline tickets from our suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets; (3) the cost of opaque rental cars from our suppliers, net of applicable taxes; and (4) non-cash acquisition related amortization expenses associated with the acquisition of Travelweb.  Cost of merchant revenues for the three and nine months ended September 30, 2005 decreased approximately 3.4% and 2.8%, respectively, compared to the same periods in 2004, due primarily to a decrease in overall merchant revenues.  Retail merchant model hotel revenues are recorded at their net amounts, which are amounts received less amounts paid to suppliers and therefore, there are no associated costs of retail merchant model hotel revenues.

Cost of Agency Revenues

Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any, and therefore, there are no costs of agency revenues.  For the three and nine months ended September 30, 2005 and 2004, cost of agency revenues consisted exclusively of non-cash acquisition related amortization expenses associated with our recent acquisitions.

Cost of Other Revenues

For the three and nine months ended September 30, 2005 and 2004, there were no costs of other revenues.

Gross Profit

Total gross profit increased for the three and nine months ended September 30, 2005, as compared to the same periods in 2004, by 56.5% and 36.9%, respectively, primarily as a result of increased revenue from (1) the inclusion of results from our European operations; and (2) increased sales of retail travel services.  Total gross margin (gross profit expressed as a percentage of total revenue) increased during the three and nine month period ended September 30, 2005, compared to the same periods in 2004, because Name Your Own Price^® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of transactions compared to retail merchant transactions which are primarily recorded “net” with no corresponding cost of revenues.  Because Name Your Own Price^® transactions are reported “gross” and retail merchant transactions are primarily recorded on a “net” basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business.

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	Three Months Ended September 30								%		Nine Months Ended September 30,								%
	($000)								Change		($000)								Change
	2005				2004						2005				2004
Merchant Gross Profit	$		43,870		$	41,826			4.9	%	$	130,894			$	122,330			7.0	%
Merchant Gross Margin	19.7			%	18.5			%			19.1			%	17.6			%
Agency Gross Profit	$		34,974		$	8,520			310.5	%	$	68,757			$	23,715			189.9	%
Agency Gross Margin	98.5			%	98.3			%			99.2			%	99.4			%
Other Gross Profit	$	1,158			$		758		52.8	%	$		3,293		$		2,212		48.9	%
Other Gross Margin	100.0			%	100.0			%			100.0			%	100.0			%
Total Gross Profit	$	80,002			$		51,104		56.5	%	$		202,944		$		148,257		36.9	%
Total Gross Margin	30.9			%	21.7			%			26.7			%	20.6			%

Merchant Gross Profit

Merchant gross profit consists of merchant revenues less the cost of merchant revenues. For the three and nine months ended September 30, 2005, merchant gross profit increased from the same periods in 2004, primarily due to the inclusion of gross profit relating to our retail merchant model hotel service and growth in our Name Your Own Price^® rental car service, partially offset by a substantial decrease in the sale of Name Your Own Price^® airline tickets.  Merchant gross margin increased primarily because Name Your Own Price^® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of transactions in the three and nine months ended September 30, 2005, when compared to retail transactions (primarily our retail merchant model hotel service), which are recorded “net” with no corresponding cost of revenues.

Agency Gross Profit

Agency gross profit consists of agency revenues, which are recorded net of agency costs, if any.  For the three and nine months ended September 30, 2005, agency gross profit increased over the same periods in 2004, primarily due to the inclusion of the results of our European operations, and an increase in the sale of retail airline tickets, hotel rooms, rental cars and related processing fees and travel commissions.

Other Gross Profit

During the three and nine months ended September 30, 2005, other gross profit increased from the same periods in 2004 primarily as a result of higher on-line advertising revenues.

Operating Expenses

Advertising

	Three Months Ended September 30,							%		Nine Months Ended September 30,						%
	($000)							Change		($000)						Change
	2005			2004						2005			2004
Offline Advertising	$	7,320		$		7,178		2.0	%	$	26,482		$	27,459		(3.6	)%
% of Total Gross Profit	9.1		%	14.0			%			13.0		%	18.5		%
Online Advertising	$	19,865		$	7,471			165.9	%	$	42,001		$	18,961		121.5	%
% of Total Gross Profit	24.8		%	14.6			%			20.7		%	12.8		%

Offline advertising expenses consist primarily of: (1) the expenses associated with television and radio advertising;

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and (2) agency fees, the cost for creative talent and production costs for television and radio commercials. For the three and nine months ended September 30, 2005, offline advertising expenses were generally consistent with offline advertising expenses in the same periods in 2004.  Online advertising expenses primarily consist of the costs of (1) affiliate programs; (2) search engine keyword purchases; (3) banner and pop-up advertisements; and (4) e-mail advertisements.  For the three and nine months ended September 30, 2005, online advertising expenses increased over the same periods in 2004, primarily due to the inclusion of the online advertising expenses related to our European operations and our retail merchant model hotel service, each of which relies primarily on online advertising to drive its businesses.  We intend to continue to promote the priceline.com brand aggressively.

Sales and Marketing

	Three Months Ended September 30,						%		Nine Months Ended September 30,						%
	($000)						Change		($000)						Change
	2005			2004					2005			2004
Sales and Marketing	$	9,645		$	8,711		10.7	%	$	27,967		$	24,513		14.1	%
% of Total Gross Profit	12.1		%	17.0		%			13.8		%	16.5		%

Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third-party service providers that operate our call centers; and (3) provisions for credit card charge-backs.  For the three and nine months ended September 30, 2005, sales and marketing expenses, which are substantially variable in nature, increased over the same periods in 2004, due to increased gross booking volumes and the inclusion of sales and marketing expenses associated with our European operations.

Personnel

	Three Months Ended September 30, ($000)						% Change		Nine Months Ended September 30, ($000)						% Change
	2005			2004					2005			2004
Personnel	$	13,820		$	8,162		69.3	%	$	34,804		$	24,398		42.7	%
% of Total Gross Profit	17.3		%	16.0		%			17.1		%	16.5		%

Personnel expenses consist of compensation to our personnel, including salaries, bonuses, taxes, employee health benefits and stock based compensation. For the three and nine months ended September 30, 2005, personnel expenses increased over the same periods in 2004, primarily due to the inclusion of personnel expenses associated with our European operations and an increase in stock-based compensation associated with restricted stock grants to employees and directors.  Stock based compensation was approximately $1.3 million and $3 million for the three and nine months ended September 30, 2005, respectively, and approximately $126,000 and $344,000 for the three and nine months ended September 30, 2004, respectively.

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General and Administrative

	Three Months Ended September 30,						%		Nine Months Ended September 30,						%
	($000)						Change		($000)						Change
	2005			2004					2005			2004
General and Administrative	$	4,814		$	4,301		11.9	%	$	14,502		$	12,264		18.2	%
% of Total Gross Profit	6.0		%	8.4		%			7.1		%	8.3		%

General and administrative expenses consist primarily of: (1) fees for outside professionals; (2) business insurance; (3) occupancy expenses; and (4) litigation related expenses. General and administrative expenses increased during the three and nine months ended September 30, 2005 over the same periods during 2004, due to additional fees for outside professionals and expenses related to pending litigation, as well as the inclusion of general and administrative expenses associated with our European operations.

Information Technology

	Three Months Ended September 30,						%		Nine Months Ended September 30,						%
	($000)						Change		($000)						Change
	2005			2004					2005			2004
Information Technology	$	2,508		$	2,272		10.4	%	$	8,023		$	7,241		10.8	%
% of Total Gross Profit	3.1		%	4.4		%			4.0		%	4.9		%

Information technology expenses consist primarily of: (1) system maintenance and software license fees; (2) data communications and other expenses associated with operating our Internet sites; and (3) payments to outside contractors. For the three and nine months ended September 30, 2005, information technology expenses increased from the same periods in 2004 primarily due to the inclusion of information technology expenses associated with our European operations.

Depreciation and Amortization

	Three Months Ended September 30,						%		Nine Months Ended September 30,						%
	($000)						Change		($000)						Change
	2005			2004					2005			2004
Depreciation and Amortization	$	7,138		$	3,359		112.5	%	$	17,651		$	8,144		116.7	%
% of Total Gross Profit	8.9		%	6.6		%			8.7		%	5.5		%

Depreciation and amortization expenses consist of:  (1) amortization of intangible assets with determinable lives; (2) amortization of internally developed and purchased software, (3) depreciation of computer equipment; and (4) depreciation of leasehold improvements, office equipment and furniture and fixtures.  For the three and nine months ended September 30, 2005, depreciation and amortization expense increased from the same period in 2004, primarily as a result of the inclusion of non-cash acquisition related amortization expenses associated with our European operations.

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Interest

	Three Months Ended September 30,						%		Nine Months Ended September 30,						%
	($000)						Change		($000)						Change
	2005			2004					2005			2004
Interest Income	$	1,102		$	1,655		(33.4	)%	$	4,271		$	3,794		12.6	%
Interest Expense	(1,245		)	(1,299		)	(4.2	)%	(3,777		)	(2,431		)	55.4	%
Total	$	(143	)	$	356		(140.2	)%	$	494		$	1,363		(63.8	)%

For the three months ended September 30, 2005, net interest income on cash and marketable securities decreased over the same period in 2004, primarily due to the decrease in cash resulting from our acquisition of Bookings in the third quarter of 2005.  For the nine months ended September 30, 2005, interest income on cash and marketable securities increased over the same period in 2004, primarily due to higher overall cash and investment balances as well as higher prevailing interest rates.  Interest expense increased for the nine months ended September 30, 2005 over the same period in 2004 because our 2.25% Convertible Senior Notes issued in June 2004 were outstanding for the entire nine month period in 2005.

Other

Other consists primarily of foreign exchange related gains and losses and gains and losses on dispositions of property and equipment.  In the three months ended September 30, 2005, other expense increased primarily due to losses on dispositions of property and equipment.  In the nine months ended September 30, 2005, other expense increased primarily due to the incurrence of foreign exchange losses related to our European operations.

Taxes

For the three and nine months ended September 30, 2005 we recorded income tax benefits of approximately $158.6 million and $158.5 million, respectively.  This principally resulted from a net non-cash tax benefit in the quarter ended September 30, 2005 of $160 million, recording a $170 million reversal of a portion of our valuation allowance on our deferred tax assets, partly offset by a $10 million non-cash U.S. income tax provision.  The non-cash tax benefit was recorded pursuant to the provisions of Statement of Financial Accounting Standards No. 109, that require a company to release a portion of its deferred tax asset valuation allowance when it is more likely than not that it will realize all or some portion of its net operating loss carryforward. Due to our significant net operating loss carryforwards, we do not expect to pay cash taxes on our U.S. federal taxable income for the foreseeable future.  As a result of the reversal, we began to record in our consolidated financial statements in the third quarter 2005, and will continue to record in future periods, a non-cash provision for U.S. income tax expense.  As a result, our reported net income and earnings per share will be materially negatively impacted by this non-cash U.S. income tax provision in subsequent periods as compared to prior periods.   We expect to make cash tax payments for U.S. alternative minimum taxes and for certain international taxes.

Equity in Income (Loss) of Investees, and Minority Interests

	Three Months Ended September 30,				%		Nine Months Ended September 30,					%
	($000)				Change		($000)					Change
	2005		2004				2005		2004
Equity in Income (Loss) of investees and minority interests	$	325	$	67	385.1	%	$	626	$	(81	)	872.8	%

Equity in income of investees and minority interests for the three and nine months ended September 30, 2005, represented (1) our pro rata share of pricelinemortgage.com’s net results, (2) minority interests associated with the 8.5% ownership of priceline.com International that is held by certain managers of that business and (3) until May 2004, our pro rata share of Travelweb’s net results.  The increase in equity in income of investees and minority interests versus both

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comparable prior year periods was primarily due to increases in equity in income of investees related to (1) our equity in the increase in pricelinemortgage.com’s net income in both periods and (2) the exclusion of our equity in the net loss of Travelweb subsequent to our acquisition of Travelweb in May 2004.  This increase was partially offset by the inclusion of the aforementioned minority interests in priceline.com International.

Liquidity and Capital Resources

As of September 30, 2005, we had $175.6 million in cash, cash equivalents, short-term investments and restricted cash. Approximately $22.6 million is restricted cash on deposit collateralizing letters of credit issued in favor of certain suppliers and landlords. Also included in restricted cash are amounts held by our credit card processor company. We generally invest excess cash to make such funds readily available for operating purposes.  Cash equivalents and short-term investments are primarily comprised of highly liquid, high quality, investment grade debt instruments.

All of our merchant transactions are structured such that we collect cash up front from our customers and then we pay most of our suppliers at a subsequent date.  We therefore tend to experience significant swings in supplier payables depending on the absolute level of our cost of revenue during the last few weeks of every quarter.  This can cause volatility in working capital levels and impact cash balances more or less than our operating income would indicate.

Net cash provided by operating activities for the nine months ended September 30, 2005 was $49.1 million, resulting from net income of $188.9 million, non-cash items not affecting September 30, 2005 cash flows of $135.3 million and $4.5 million of changes in working capital.  The changes in working capital for the nine months ended September 30, 2005, were primarily related to a $13.6 million increase in accounts receivable, partially offset by a $9.0 million increase in accounts payable and accrued expenses.  The increases in accounts receivable and accounts payable were primarily due to increases in revenues and related cost of revenues attributable to increased hotel, vacation package and rental car transactions.  Non-cash items were primarily associated with the deferred income tax benefit, depreciation and amortization of property and equipment and intangible assets, primarily those acquired in our acquisitions of Travelweb, Active Hotels and Bookings.  The deferred income tax benefit resulted primarily from the $170 million non-cash reversal of a portion of our deferred tax valuation allowance, partly offset by a $10 million non-cash U.S. income tax charge.  Net cash provided by operating activities for the nine months ended September 30, 2004 was $36.3 million, resulting from net income of $26.5 million, non-cash items not affecting September 30, 2004 cash flows of $12.3 million, partially offset by $2.5 million of changes in working capital. The changes in working capital for the nine months ended September 30, 2004, were primarily related to a $8.6 million increase in accounts receivable, offset by a $7.6 million increase in accounts payable and accrued expenses. The increases in accounts receivable and accounts payable were primarily due to increases in revenues and related cost of revenues attributable to increased hotel, vacation package and rental car transactions. Non-cash items were primarily associated with the depreciation and amortization of property and equipment and intangible assets, primarily those acquired in our acquisitions of Travelweb and Active Hotels.

Net cash used in investing activities was $70.7 and $159.1 million, respectively, for the nine months ended September 30, 2005 and 2004, respectively.  Investing activities in the nine months ended September 30, 2005 was affected by redemption of short-term investments and marketable securities in the amount of $70.2 million.  During the nine months ended September 30, 2005, we invested $133.8 million, net of cash acquired, in acquisitions, the substantial majority of which related to Bookings.  In both periods, net cash used in investing activities was also affected by purchases of property and equipment.  During the nine months ended September 30, 2005, this amount was higher than previous periods due to increased spending on capitalized development activities, especially those related to the launch of our retail hotel service, purchases of computer hardware and the inclusion of capital spending by subsidiaries.  While we expect total capital expenditures for 2005 to exceed those of 2004, quarterly amounts for the remainder of the year are expected to be below those that took place in the three months ended September 30, 2005.  During the nine months ended September 30, 2004, we invested $158.7 million, net of cash acquired, in acquisitions, the substantial majority of which related to Active Hotels.

Net cash provided by financing activities was approximately $21.9 and $106.3 for the nine months ended September 30, 2005 and 2004, respectively.  The cash provided by financing activities during the nine months ended September 30, 2005 was primarily proceeds from the sale of our minority interest in subsidiary and the exercise of employee stock options, while a majority of the proceeds for the nine months ended September 30, 2004 was provided by the issuance of $100 million of convertible senior notes.

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

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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 future financial condition or results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted.  There are no assurances that we will generate sufficient cash flow from operations in the future, that revenue growth or sustained profitability will be realized or that future borrowings or equity sales will be available in amounts sufficient to make anticipated capital expenditures or finance our strategies.

Off-Balance Sheet Arrangements.

As of September 30, 2005, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Sections of this Form 10-Q including, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations above, contain forward-looking statements.  These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements.

Expressions of future goals and expectations or similar expressions including, without limitation, “may,” “will,” “should,” “could,” “expects,” “does not currently expect,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,” “potential,” “targets,” or “continue,” reflecting something other than historical fact are intended to identify forward-looking statements.  The factors described below in the section entitled “Factors That May Affect Future Results” could cause our actual results to differ materially from those described in the forward-looking statements.  Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  However, readers should carefully review the reports and documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Factors That May Affect Future Results

The following risk factors and other information included in this Quarterly Report should be carefully considered.  The risks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.  If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

We are dependent on the airline industry and certain airlines.

Our financial prospects are significantly dependent upon our sale of leisure airline tickets.  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 services tend to decline during general economic downturns and recessions. In addition, unforeseen events, such as terrorist attacks, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel-related accidents, travel-related health concerns and unusual weather patterns also may adversely affect the leisure travel industry. As a result, our business also is likely to be affected by those events. Further, work stoppages or labor unrest at any of the major airlines could materially and adversely affect the airline industry and, as a consequence, have a material adverse effect on our business, results of operations and financial condition.

During the three months ended September 30, 2005, sales of airline tickets from our five largest and two largest airline suppliers accounted for approximately 80% and 43% of total airline tickets sold, respectively.  As a result, currently we are substantially dependent upon the continued participation of these airlines in priceline.com in order to maintain and continue to grow our total gross profit.

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Our arrangements with the airlines that participate in our system — either Name Your Own Price^® or price-disclosed service — generally do not require the airlines to provide any specific quantity of airline tickets or to make tickets available for any particular route or at any particular price, and can generally be terminated upon little or no notice.  During the course of our business, we are in continuous dialogue with our major airline suppliers about the nature and extent of their participation in our system. The significant reduction on the part of any of our major suppliers of their participation in our system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition.  Moreover, the airline industry has experienced a shift in market share from full-service carriers to low-cost carriers that focus primarily on discount fares to leisure destinations and we expect this trend to continue.  Some low-cost carriers, such as Southwest and JetBlue, do not distribute their tickets through us or other third-party intermediaries.  In addition, certain airlines have significantly limited or eliminated sales of airline tickets through “opaque” channels, preferring to consistently show the lowest available price on their own web site.  If one or more participating airlines were to further limit or eliminate discounting through opaque channels, it could have a material adverse effect on our business, results of operations and financial condition.

Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing.  Several major U.S. airlines are struggling financially and have either filed for reorganization under the United States Bankruptcy Code or discussed publicly the risks of bankruptcy. To the extent other major U.S. airlines that participate in our system declare bankruptcy, they may be unable or unwilling to honor tickets sold for their flights. Our policy in such event would be to direct customers seeking a refund or exchange to the airline, and not to provide a remedy ourselves. Because we are the merchant-of-record on sales of Name Your Own Price^® airline tickets to our customers, however, we could experience a significant increase in demands for refunds or credit card charge-backs from customers, which could materially and adversely affect our operations and financial results. In addition, because Name Your Own Price^® customers do not choose the airlines on which they are to fly, the bankruptcy of a major U.S. airline or the possibility of a major U.S. airline declaring bankruptcy could discourage customers from using our Name Your Own Price^® system to book airline tickets.

In addition, given the concentration of the airline industry, particularly in the domestic market, 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.

We are dependent on certain hotels.

Our financial prospects are significantly dependent upon the sale of hotel room nights.  During each of the three and nine months ended September 30, 2005, sales of Name Your Own Price^® hotel room nights from our five largest hotel suppliers accounted for approximately 36% of total Name Your Own Price^® hotel room nights sold.  As a result, currently we are substantially dependent upon the continued participation of these hotels in priceline.com’s hotel service in order to maintain and continue to grow our total gross profit.

We currently have more than 40 national hotel chains participating in the Name Your Own Price^® system.  However, our arrangements with the hotels that participate in our Name Your Own Price^® system generally:

•do not require the hotels to make available to our customers any specific quantity of hotel rooms;

•do not require the hotels to provide particular prices or levels of discount;

•do not require the hotels to deal exclusively with us in the public sale of discounted hotel rooms; and

•generally, can be terminated upon little or no notice.

As a general matter, during the course of our business, we are in continuous dialogue with our major hotel suppliers about the nature and extent of their participation in our system.  Improving economic conditions are creating increased demand for hotel rooms and some hotels may reduce the amount of inventory they sell through our service or increase the negotiated rates at which they are willing to provide inventory.  If hotel occupancy rates improve to the point that our hotel suppliers no longer place the same value on our distribution systems, such suppliers may reduce the amount of inventory they make available through priceline.com and/or our European operations.  The significant reduction on the part of any of our major suppliers of their participation in our system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition.

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In addition, certain hotels have begun initiatives to reduce margins received by third party intermediaries on retail merchant transactions, which is the primary method we employ to distribute retail hotel room reservations.  While our retail merchant model agreements with our leading hotel suppliers provide for specified discounts, if one or more participating hotels were to require us to limit our merchant margins, upon contract renewal or otherwise, it could have a material adverse effect on our business, results of operations and financial condition.

Our ability to satisfy customers may be adversely affected by a number of factors outside of our control.

Most of our revenue is derived from suppliers in the leisure travel industry, and is, therefore, subject to increase and decrease with the level of activity in the leisure travel industry, a factor almost entirely out of our control.  The travel industry is seasonal and our revenue varies significantly from quarter to quarter. Factors that may adversely affect leisure travel activity include, without limitation,  economic downturns and recessions; global security issues, political instability, acts of terrorism, civil unrest, hostilities and war; increased airport security that could reduce the convenience of air travel; inclement weather or natural disaster such as hurricane, tsunami or earthquake; increased occurrence of, or widely publicized travel-related accidents; the outbreak of an epidemic or pandemic such as SARS or avian bird flu; and the financial condition of travel suppliers.

Most domestic airlines, and many of our major suppliers, have experienced, and continue to experience, significant losses.  These losses have been compounded by competition from low-cost carriers and, more recently, by high fuel prices.  As a result of these and other factors, many of the major airlines have deeply discounted retail airline tickets to maintain market share, which has had a detrimental effect on our business.  Deep retail discounting by the airlines affects our demand by hurting the Name Your Own Price^® value proposition and making users less willing to accept the trade-offs associated with our Name Your Own Price^® leisure airline tickets service.  In particular, we believe that lower retail pricing causes customers who might normally be willing to make the tradeoff associated with our Name Your Own Price^® service in exchange for savings off of higher retail rates, to purchase travel services at the lower retail rates or from low-cost carriers without having to make any trade-offs.

We rely on the global distribution system (“GDS”) of Worldspan, L.P. in the sale of airline tickets, opaque hotel room reservations, and rental car reservations, and Pegasus Solutions, Inc. in the sale of retail hotel reservations.  We do not have a back-up GDS and if the Worldspan, L.P. or Pegasus GDS becomes inaccessible, or partially inaccessible to us, due to system failure or otherwise, for any significant amount of time, our ability to book airline tickets, opaque hotel reservations and rental car reservations in the case of Worldspan, L.P., and retail hotel reservations in the case of Pegasus, would be adversely affected, and our results would suffer.

The bankruptcy, discontinuance or consolidation of our suppliers could harm our business.

We are heavily dependent on our suppliers.  Three of our largest airline suppliers, United Airlines, Delta Air Lines and Northwest Airlines, are currently operating under the protection of federal bankruptcy laws. If any of our suppliers currently in bankruptcy liquidates or does not emerge from bankruptcy and we are unable to replace such supplier as a participant in priceline.com, our business would be adversely affected. In addition, in the event that another of our major suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. Further, as discussed in “We are dependent on the airline industry and certain airlines”, because our Name Your Own Price^® customers do not choose the airline, hotel or rental car company on which they are booked, the bankruptcy of a major supplier or even the possibility of a major supplier declaring bankruptcy, could discourage consumers from booking their travel through us.  If any or all of such companies discontinue their business, and we are unable to find other suppliers, it would have a material adverse effect on our business, results of operations and financial condition.

If one of our major suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than the previous supplier.  For example, in September 2005, US Airways and America West merged.  US Airways is a meaningful participant in our Name Your Own Price^® system, but America West participates on a very limited basis.  Failure of the resulting entity to participate in our Name Your Own Price^® system on a meaningful basis would be the equivalent of US Airways pulling out of, or significantly reducing its participation

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in, our Name Your Own Price^® system and could have a material adverse effect on our business, results of operations and financial condition.  The loss of any major participant in our Name Your Own Price^® system could result in other major participants electing to terminate their participation in the Name Your Own Price^® system, which would further negatively impact our business, results of operations and financial condition.  In addition, fewer independent suppliers reduces opacity and competition among suppliers.  In such event, if we are unable to divert sales to other suppliers, our business results of operations and financial condition may be adversely affected.

Intense competition could reduce our market share and harm our financial performance.

We compete with both online and traditional sellers of the services offered on priceline.com. The market for the services we offer is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. In addition, the major on-line travel companies with which we compete have significantly greater financial resources and capital than we do.  For instance, the Cendant Corporation owns Orbitz.com, Inc., Cheaptickets.com, Lodging.com and European travel sites ebookers plc and Gullivers.com, and Sabre Group owns Travelocity.com and lastminute.com plc, a European full-service travel site.  In addition, InterActive recently spun-off its on-line travel business, including Hotels.com and Hotwire.com, our primary competitor in the sale of “opaque” travel services, into Expedia, which, as a stand-alone company, continues to have significantly greater resources and capital than priceline.com.  We may not be able to effectively compete with industry conglomerates such as Cendant, Sabre or Expedia, each of which have access to significantly greater and more diversified resources than we do.

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

•Internet travel services such as Expedia, Hotels.com and Hotwire, which are owned by Expedia; Gullivers.com, Travelocity and lastminute.com, which are owned by the Sabre Group; and Cheaptickets, Orbitz.com, ebookers plc and Lodging.com, which are owned by the Cendant Corporation;

•traditional travel agencies;

•individual or groups of airlines, hotels, rental car companies, cruise operators and other travel service providers (all of which may provide services by telephone or through their branded web site);

•on-line travel search sites such as SideStep.com, Mobissimo.com, Cheapflights.com, FareChase, Kayak.com, or any substantially similar on-line travel search business using a business model sometimes referred to as “meta-search”; and

•operators of travel industry reservation databases such as Galileo, Worldspan, L.P. and Amadeus.

Hotwire, which is our primary competitor in the sale of opaque travel services, provides airline tickets, hotel rooms and rental car reservations at disclosed prices, although supplier identity and exact flight times are undisclosed until after the customer agrees to the purchase.  In addition, Hotwire recently launched a retail airline ticket offering and implemented functionality that allows users to specify general time bands in which they want to fly.  Since its launch, Hotwire has been successful in establishing itself in the online travel marketplace through aggressive advertising, which has had the effect of decreasing our market share in the opaque channel.  If we are unable to effectively compete with Hotwire, our business, results of operation and financial condition will be adversely affected.

Competitors of our European operations include, among others, Expedia (including hotels.com), Cendant Corporation (including ebookers, octopustravel and hotelclub), Sabre Group (including lastminute.com), Superbreak, Venere and Hotel Reservation Service.

With respect to financial services, competitors of pricelinemortgage.com include banks and other financial institutions and online and traditional mortgage and insurance brokers, including E*Trade, ditech.com, mortgage.com, Quicken Mortgage, E-Loan, Lending Tree, which is owned by InterActive Corp., and iOwn, Inc.

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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, AOL, MSN, Google.com and Yahoo!, which compete with us either directly or indirectly through affiliations with other e-commerce or off-line companies.  We also compete with “meta-search” companies, which are companies that leverage their search technology to aggregate travel search results across supplier, travel agent and other web sites.  In July 2004, Yahoo! acquired FareChase, a travel search-engine that searches for fares and hotel rates at travel supplier and third-party websites, and refers traffic to those sites, and in November 2004, AOL entered into a marketing and technology agreement, and took a minority interest in, Kayak.com, another leading meta-search company.  Other established search engine companies as well as start-ups are attempting to enter the online travel marketplace in this manner.  If Yahoo!, Google or other portals decide to refer significant traffic to travel search engines, it could result in more competition from supplier websites and higher customer acquisition costs for third-party sites such as ours.  Competition from these and other sources could have a material adverse effect on our business, results of operations and financial condition.

Many of our current and potential competitors, including Internet directories, search engines and large traditional retailers, have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical and other resources than priceline.com. Some of these competitors may be able to secure products and services on more favorable terms than we can. In addition, many of these competitors may be able to devote significantly greater resources to:

•marketing and promotional campaigns;

•attracting traffic to their websites;

•attracting and retaining key employees;

•securing vendors and inventory; and

•web site and systems development.

In addition, many airline, hotel and rental car suppliers have begun to focus on driving online demand to their own websites in lieu of third-party distributors such as us.  Certain suppliers have attempted to charge additional fees to customers who book airline reservations through an on-line channel other than their own web site.  Furthermore, many low cost airlines, who are having increasing success in the marketplace, distribute their inventory exclusively through their own websites.  Suppliers who sell on their own websites typically do not charge a processing fee, and, in some instances, offer advantages such as bonus miles or loyalty points, which could make their offerings more attractive to consumers than models like ours.

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

Our business could be negatively affected by changes in search engine algorithms and dynamics.

We utilize Internet search engines, principally through the purchase of travel-related keywords, to generate traffic to our web sites.  Our European operations, in particular, rely to a significant extent upon third-party distribution partners that derive substantial business from search engines.  Within the past year, at least one major search engine changed the logic which determines the placement and display of results of a user’s search, such that the placement of links to our sites, and particularly those of our European operations and their affiliates, was negatively affected.  In a similar way, a significant amount of our European business is directed to our own websites through participation in pay-per-click advertising campaigns on Internet search engines whose pricing and operating dynamics can experience rapid change both technically and competitively.  If a major search engine changes its algorithms in a manner that further negatively affects the search engine ranking of us or our third-party distribution partners or changes its pricing, operating or competitive dynamics in a negative manner, our business, results of operations and financial condition would be adversely affected.

We may lose or be subject to reduction of global distribution system fees.

We rely on fees paid to us by Worldspan, L.P. for travel bookings made through Worldspan, L.P.’s global distribution system, or GDS, for a substantial portion of our gross profit and net income. A number of travel suppliers,

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particularly airlines, have indicated publicly that, as part of an effort to reduce distribution costs, they intend to reduce their dependence over time on what they view to be “expensive” distribution channels such as GDSs. A number of travel suppliers have reached agreements with travel distributors that require rebates of all or part of the fees received from the GDS.  We have agreed to rebate certain GDS costs to certain suppliers in exchange for contractual considerations such as those relating to inventory pricing and availability, and expect to continue to do so in the future.  Additionally, travel suppliers are encouraging distributors, such as us, to develop technology enabling direct connections, therefore bypassing the GDS. Development of direct connection technology would require the use of information technology resources and could cause us to incur additional operating expenses and delay other projects. We have been and believe that we will continue to be under pressure from travel suppliers, including most of the major domestic airlines and many of our significant hotel suppliers, to rebate all or part of the travel booking fees we receive from Worldspan, L.P. To the extent that we are required to rebate travel booking fees we currently receive to travel suppliers, and are unable to recover such amounts by charging customers, or, if one or a number of travel suppliers pull out of our service because they are unhappy with existing distribution costs, it could have a material adverse effect on our business, results of operations and financial condition.

In addition, some airlines are exploring alternative global distribution methods recently developed by new entrants to the global distribution marketplace.  Such new entrants propose using technology that is less complex than traditional global distribution systems, and that enables the distribution of airline tickets in a manner that is more cost-effective to the airline suppliers.  Our airline suppliers might pressure us to implement such a distribution system, but our contractual obligations to Worldspan, L.P. would limit our ability to do so during the term of our agreement with Worldspan, L.P.  If, as a result, any of such suppliers reduces or ceases its participation in priceline.com, it could have a material adverse effect on our business, results of operations and financial condition.

Defending against intellectual property claims could be expensive and disruptive to our business.

From time to time, in the ordinary course of our business, we have been subject to, and are currently subject to, legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims, in particular patent claims, against us, particularly as we expand the complexity and scope of our business.  We endeavor to defend our intellectual property rights diligently, but intellectual property litigation is extremely expensive and time consuming, and has and is likely to continue to divert managerial attention and resources from the Company’s business objectives.  Successful infringement claims against us could result in significant monetary liability or prevent us from operating our business, or portions of our business.  In addition, resolution of claims may require us to obtain licenses to use intellectual property rights belonging to third parties, which may be expensive to procure, or possibly to cease using those rights altogether.  Any of these events could have a material adverse effect on our business, results of operations or financial condition.

Acquisitions could result in operating difficulties.

As part of our business strategy, in September 2004, we acquired Active Hotels and, in July 2005, Bookings.  We may enter into additional business combinations and acquisitions in the future.  Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, incurrence of debt and amortization of expenses related to intangible assets.  In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures.  The acquisitions of Active Hotels and Bookings were accompanied by a number of risks, including:

•the need to implement or remediate controls, procedures and policies appropriate for a larger public company at companies that prior to the acquisition lacked such controls, procedures and policies;

•the difficulty of assimilating the operations and personnel of  Active Hotels and Bookings, which are principally located in Cambridge, England, and Amsterdam, The Netherlands, respectively, with and into our operations, which are headquartered in Norwalk, Connecticut;

•the potential disruption of our ongoing business and distraction of management;

•the difficulty of incorporating acquired technology and rights into our services and unanticipated expenses related to such integration;

•the failure to further successfully develop acquired technology resulting in the impairment of amounts currently capitalized as intangible assets;

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•the impairment of relationships with customers of Active Hotels, Bookings or our own customers as a result of any integration of operations;

•the impairment of relationships with employees of Active Hotels, Bookings or our own business as a result of any integration of new management personnel;

•the potential unknown liabilities associated with Active Hotels or Bookings.

We may experience similar risks in connection with any future acquisitions. We may not be successful in addressing these risks or any other problems encountered in connection with the acquisitions of Active Hotels and Bookings or that we could encounter in future acquisitions, which would harm our business or cause us to fail to realize the anticipated benefits of our acquisitions.  We currently have approximately $312 million assigned primarily to the intangible assets and goodwill of Active Hotels and Bookings, and therefore, the occurrence of any of the aforementioned risks could result in a material adverse impact, including a material impairment of these assets.

Our growth cannot be assured. Even if we do experience growth, we cannot assure you that we will grow profitably.

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

We may not be successful in the retail hotel market.

To date, we have been able to integrate successfully the sale of retail services for our airline and rental car services.  We launched a retail service for our hotel service in March 2005.  The launch of our retail service for hotels was substantially more complex and required substantially greater financial, human and development resources than did the launch of either our retail airline service or retail rental car service.  There can be no assurance that our retail hotel service will have the same degree of market acceptance among consumers that our airline and rental car services have had thus far.  Many of our competitors have more experience in the retail hotel market than we do, and have invested significantly more than we have in marketing their services.  In addition, we may face difficulty from our suppliers in maintaining access to the inventory necessary to sustain a competitive retail hotel service.  Our failure to successfully anticipate, identify and react to any of the difficulties we might face could have an adverse effect on the success of our retail hotel service or our business, results of operations and financial condition.

Our retail merchant model hotel service exposes us to certain risks that we have not traditionally experienced in the hotel business.

Our retail merchant model hotel service facilitates the purchase of hotel rooms by customers pursuant to a retail merchant model, which is based on merchant arrangements we make directly with individual hotel chains and independent hotel properties. We receive access to inventory directly from a hotel at a negotiated rate, and determine the retail price at which we will offer our services to the consumer, within contractual limitations.  Prior to our acquisition of Travelweb in May 2004, we did not have experience with a retail merchant model hotel service, and there can be no assurance we will have success with such a model in the future.

Many hotels use merchant arrangements with companies like ours to dispose of excess hotel room inventory at wholesale rates. If hotels experience increased demand for rooms, they might reduce the amount of room inventory they make available through our retail merchant model hotel service.  The hotel industry has seen a recent improvement in occupancy rates and this could cause hotels to reduce the amount of inventory they make available through our retail merchant model hotel service.  Similarly, many hotels distribute room inventory through their own websites and therefore might increase negotiated rates for merchant rate inventory sold through our retail merchant model hotel service, decreasing the margin available to us.

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In addition, we make retail merchant model hotel inventory available to certain affiliate travel distributors.  Such affiliates offer such inventory to consumers.  If such affiliates cease distributing retail merchant model hotel inventory, or significantly reduce the amount of retail merchant model hotel inventory they offer to consumers, our business would be negatively impacted.

Our European operations’ business model exposes us to certain risks that we have not traditionally experienced in the hotel business.

Our European operations distribute hotel rooms primarily through a retail model, whereby they secure a reservation with a customer’s credit card, but are not compensated by the hotel property until such customer checks out of the hotel property.  This requires our European operations to pursue collection of commissions relating to hotel room reservations from the hotel properties after the customer has completed his or her stay.  We do not have extensive experience in collecting commissions from hotel properties and failure to sustain an adequate collection rate could negatively impact the business of our European operations.

In addition, our European operations rely heavily on various third parties to distribute hotel room reservations, and our European operations’ distribution channels are concentrated among a number of third parties.  Should one or more of such third parties cease distribution of our European operations’ reservations, or suffer deterioration in its search engine ranking, due to changes in search engine algorithms or otherwise, the business of our European operations could be negatively affected.  Similarly, a significant amount of our European business is directed to our own websites through participation in pay-per-click advertising campaigns on Internet search engines whose pricing and operating dynamics can experience rapid change both technically and competitively.  If a major search engine changes its pricing, operating or competitive dynamics in a negative manner, our business, results of operations and financial condition would be adversely affected.

Historically, the majority of our European operations’ business has been located in the U.K.  The strategy of our European operations involves rapid expansion into other European countries, many of which have different customs, different levels of customer acceptance of the Internet and different legislation, regulatory environments and tax schemes.  If our European operations are unsuccessful in rapidly expanding into other European countries, our business, results of operations and financial condition would be adversely affected.

Our European operations and additional expansion efforts internationally expose us to additional risks and may materially adversely affect our results of operations.

Prior to 2004, substantially all of our revenues were generated within the United States.  In September 2004, we acquired Active Hotels, which is based in the United Kingdom and in July 2005, we acquired Bookings, which is based in Amsterdam.  These European operations provide us with access to the European hotel market.  One of our principal strategies is to continue to grow internationally, both in Europe and elsewhere.  The integration of our current European operations, and any further expansion internationally, requires and will continue to require substantial management attention and financial resources.  Our management has limited prior experience integrating and managing international operations.  Moreover, acquiring or establishing foreign operations is a significant investment that might not produce desired results.  For example, we may experience higher costs as a percentage of revenues in connection with the development and maintenance of our business internationally relative to our domestic experience.

Additionally, like our current European operations, any future acquisitions or expansion internationally would be subject to risks, including:

•the impact of business cycles and downturns in economies outside the United States;

•longer payment cycles and greater difficulty in accounts receivable collections;

•time and resources required to comply with foreign regulatory requirements;

•trade barriers and unexpected changes in regulatory requirements;

•difficulties and costs of staffing and managing foreign operations;

•potentially adverse tax, legal or regulatory consequences;

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•reduced protection for intellectual property rights in some countries;

•unanticipated tax costs associated with the cross-border use of intangible assets;

•political or social unrest, economic instability or terrorist attack (such as the July 7, and July 21, 2005, terrorist bombings in London, England);

•fluctuations in currency exchange rates;

•difficulty in maintaining effective communications with employees and customers due to distance, language and cultural barriers;

•lower brand recognition for priceline.com and our other brands in foreign countries, particularly in non-English speaking countries;

•lower per capita Internet usage in many foreign countries for a variety of reasons, including lower disposable incomes, lack of adequate telecommunications and computer infrastructure and concerns regarding online security for e-commerce transactions; and

•competition in international markets from a broad range of competitors who may have a greater market share, more established branding, greater knowledge with respect to the tastes and preferences of customers residing in their country and/or their focus on a single market.

One or more of these factors could harm our international operations and expansion efforts, and consequently, could have a material adverse effect on our business, financial condition 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, consolidation, 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 or internal 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 from and to our customers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of 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 (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our security systems could steal customer transaction data, 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. Security breaches could also cause customers and potential customers to lose confidence in our security, which would have a negative effect on the value of our brand.  Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

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Companies that we have acquired, such as our European operations, and that we may acquire in the future, may employ security and networking standards at levels we find unsatisfactory.  The process of enhancing infrastructure to attain improved security and network standards may be time consuming and expensive and may require resources and expertise that are difficult to obtain.  Such acquisitions increase the number of potential vulnerabilities, and can cause delays in detection of an attack, as well as the timelines of recovery from any given attack. Failure to raise any such standards that we find unsatisfactory could expose us to security breaches that would have an adverse impact on our business, results of operations and financial condition.

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 processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.

In our processing of travel transactions, we receive and store a large volume of personally identifiable data.  This data is increasingly subject to legislation and regulations in numerous jurisdictions around the world, including the Commission of the European Union through its Data Protection Directive and variations of that directive in the member states of the European Union.  This government action is typically intended to protect the privacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction.  We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations and financial condition.

In addition, in the aftermath of the terrorist attacks of September 11, 2001 in the United States, government agencies have been contemplating or developing initiatives to enhance national and aviation security, including the Transportation Security Administration’s Computer-Assisted Passenger Prescreening System, known as CAPPS II.  These initiatives may result in conflicting legal requirements with respect to data handling.  As privacy and data protection has become a more sensitive issue, we may also become exposed to potential liabilities as a result of differing views on the privacy of travel data.  Travel businesses have also been subjected to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of passenger information.  These and other privacy developments that are difficult to anticipate could adversely impact our business, results of operations and financial condition.

We rely on the value of the priceline.com brand, and the costs of maintaining and enhancing our brand awareness are increasing.

We believe that maintaining and expanding the priceline.com brand, and other owned brands, including Lowestfare.com, Rentalcars.com, Breezenet.com, MyTravelGuide.com, Travelweb, Active Hotels and Bookings, are important aspects of our efforts to attract and expand our user and advertiser base.  As our larger competitors spend increasingly more on advertising, we are required to spend more in order to maintain our brand recognition.  Promotion of the priceline.com brand will depend largely on our success in satisfying our customers. In addition, we have spent considerable money and resources to date on the establishment and maintenance of the priceline.com brands, and we will continue to spend money on, and devote resources to advertising, marketing and other brand-building efforts to preserve and enhance consumer awareness of the priceline.com brands. We may not be able to successfully maintain or enhance consumer awareness of the priceline.com brands, and, even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance customer awareness of the priceline.com brands in a cost-effective manner, our business, results of operations and financial condition would be adversely affected.

We issued $125 million of Convertible Senior Notes due August 2010, which provide for mandatory repayment beginning in 2008 and could result in dilution of our earnings per share.

In August 2003, we issued $125 million aggregate principal amount of Convertible Senior Notes due August 1, 2010, with an interest rate of 1% (the “1% Notes”).  The 1% Notes are convertible, subject to certain conditions, into our common stock at the option of the holder, at a conversion price of approximately $40.00 per share, subject to adjustment upon the occurrence of specified events.  Each $1,000 principal amount of 1% Notes will initially be convertible into 25 shares of our common stock if, on or prior to August 1, 2008, the closing price of our common stock for at least 20 trading

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days in the 30 consecutive trading days ending on the first day of a conversion period, as defined in the offering memorandum related to the 1% Notes, is more than 110% of the then current conversion price of the 1% Notes, or after August 1, 2008, if the closing price of our common stock is more than 110% of the then current conversion price of the 1% Notes. The 1% Notes are also convertible in certain other circumstances set forth in the offering memorandum, such as a change in control of priceline.com. In addition, the 1% Notes will be redeemable at our option beginning in 2008, and the holders may require us to repurchase the 1% Notes on August 1, 2008 or in certain other circumstances. After our July 2005 acquisition of Bookings, we do not currently have sufficient cash or short term investments to repay the 1% Notes, and there can be no assurance that we will be able to repay or refinance the 1% Notes on the repayment date. In addition, the purchase of the 1% Notes with shares of our common stock or the conversion of the 1% Notes into our common stock could result in dilution of our earnings per share. Further, the adoption by the Financial Accounting Standards Board of EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which was effective as of December 15, 2004, requires that contingently convertible debt, such as the 1% Notes, be included in diluted earnings per share, regardless of whether the market price contingently contained in the debt instrument has been met. We have historically excluded the potential dilutive effect of the conversion feature from diluted earnings per share. The 1% Notes were dilutive to earnings per share for the full year 2004, but not for 2003. The adoption of EITF 04-08 required us to include 3,125,000 additional shares of common stock underlying the 1% Notes in our diluted earnings per share calculation in the event that their inclusion is dilutive to earnings per share. The impact of the additional shares in the calculation of diluted earnings per share is partially offset by exclusion of coupon interest and amortization of debt issuance costs associated with the Notes. The adoption of EITF 04-08 could result in a material reduction in our diluted earnings per share in future periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Accounting Pronouncements.”

We issued $100 million of Convertible Senior Notes due January 15, 2025, which provide for mandatory repayment beginning in 2010 and could result in dilution of our earnings per share.

In June 2004, we issued $100 million aggregate principal amount of Convertible Senior Notes due January 15, 2025, with an interest rate of 2.25% (the “2.25% Notes”).  The 2.25% Notes are convertible, subject to certain conditions, into our common stock at the option of the holder, at a conversion price of approximately $37.95 per share, subject to adjustment upon the occurrence of specified events.  Each $1,000 principal amount of 2.25% Notes will initially be convertible into 26.3505 shares of our common stock if, on or prior to January 15, 2025, certain conditions occur.  The 2.25% Notes are also convertible in certain other circumstances set forth in the offering memorandum, such as a change in control of priceline.com.  In the event that all or substantially all of our common stock is acquired prior to January 15, 2010, in a transaction in which the consideration paid to holders of our common stock consists of all or substantially all cash, we would be required to make additional payments to the holders of amounts ranging from $0 to $18.4 million depending upon the date of the transaction and our then current stock price.  In addition, the 2.25% Notes will be redeemable at our option beginning January 20, 2010, and the holders may require us to repurchase the notes on January 15, 2010, 2015 and 2020 or in certain other circumstances.  After our July 2005 acquisition of Bookings, we do not currently have sufficient cash or short term investments to repay the 2.25% Notes, and there can be no assurance that we will be able to repay or refinance the notes on the repayment date.  In addition, the purchase of our 2.25% Notes with shares of our common stock or the conversion of the notes into our common stock could result in dilution of our earnings per share.  Further, the adoption by the Financial Accounting Standards Board of EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which was effective as of December 15, 2004, requires that contingently convertible debt, such as the 2.25% Notes, be included in diluted earnings per share, regardless of whether the market price contingently contained in the debt instrument has been met.  We have historically excluded the potential dilutive effect of the conversion feature from diluted earnings per share.  The 2.25% Notes were not dilutive to earnings per share since their issuance.  The adoption of EITF 04-08 required us to include 2,635,046 additional shares of common stock underlying the 2.25% Notes in our diluted earnings per share calculation in the event that their inclusion is dilutive to earnings per share. The impact of the additional shares in the calculation of diluted earnings per share was offset by exclusion of coupon interest and amortization of debt issuance costs associated with the Notes.  The adoption of EITF 04-08 could result in a material reduction in our diluted earnings per share in future periods.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Accounting Pronouncements.”

We may be unable to generate sufficient cash to repay or repurchase the notes.

The principal amount of the 1% Notes and the 2.25% Notes is due in 2010 and 2025, respectively, and in certain circumstances, the holders of the 1% Notes and the 2.25% Notes may require us to repurchase their notes prior to those dates.  However, it is possible that we may not have sufficient funds or may be unable to arrange for additional financing to pay the

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principal amount or repurchase price due.  Substantially all of the total consideration for our acquisition of Bookings was paid in available cash, and as a result, the total amount of debt under the 1% Notes and 2.25% Notes now exceeds the amount of our available cash and short term investments.  Furthermore, we are increasingly reliant on our European operations as a source of cash flow and in the event we are required to repay or repurchase the notes, we would likely incur expenses to repatriate such cash to the United States.  In the event that we are unable to repurchase, repay or refinance the 1% Notes or the 2.25% Notes when due, whether due to difficulty repatriating cash or otherwise, we would be in default under our indentures and our business, results of operations and financial condition would be adversely affected.

Our success depends on our ability to protect our intellectual property.

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

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

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

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

•competitors or potential competitors of priceline.com will not devise new methods of competing with us that are not covered by our patents or patent applications;

•because of variations in the application of our business model to each of our services, our patents will be effective in preventing one or more third parties from utilizing a copycat business model to offer the same service in one or more categories;

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

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

•our operations do not or will not infringe valid, enforceable patents of third parties.

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

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

Our business is dependent upon third-party systems and service providers.

We rely on certain third-party computer systems and third-party service providers, including the computerized central reservation systems of the airline, hotel and rental car industries to satisfy demand for airline tickets, hotel room and rental car reservations. In particular, our travel business is substantially dependent upon the computerized reservation systems of Worldspan, L.P., and Pegasus Solutions, operators of global distribution systems for the travel industry. Any interruption in these third-party services systems, including Worldspan, L.P.’s or Pegasus’ systems, or deterioration in their performance could prevent us from booking airline, hotel and rental car reservations and have a material adverse effect on our business. Our agreements with third-party service providers are terminable upon short notice and often do not provide recourse for service interruptions. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms and, as a result, it could have a

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

A substantial portion of our computer hardware for operating our services is currently located at a web hosting facility operated by SAVVIS.  If SAVVIS is, for any reason, unable to support our web site, we would need to quickly complete the activation of our secondary site at the ATT web hosting facility.  Any of these conditions could cause disruptions to our business or exposure to potentially damaging press coverage of the problems, and would have a material adverse effect on our business, results of operations, and financial condition.

Our communications infrastructure is provided by vendors such as AT&T, MCI, IX EUROPE and MCI Worldcom B.V.  If they are unable, for any reason, to support the communications infrastructure they provide us, instabilities in our systems could increase until such time as we were able to replace their services.

While we do maintain redundant systems and hosting services for some of our business, it is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for losses that may occur.

Capacity constraints and system failures could harm our business.

We rely on the global distribution system of Worldspan, L.P. in the sale of airline tickets, opaque hotel room reservations, and rental car reservations, and the global distribution system of Pegasus Solutions in the sale of retail hotel room reservations.  We do not have a back-up GDS and if the Worldspan, L.P. or Pegasus GDS becomes inaccessible, or partially inaccessible to us, due to system failure or otherwise, for any significant amount of time, our ability to book airline tickets, opaque and retail hotel reservations and rental car reservations would be adversely affected, and our results would suffer.  We also depend upon Paymentech for our production fulfillment processes. If Paymentech was wholly or partially compromised, our cash flows could be disrupted until such a time as a replacement process could be put in place with a different vendor.

A substantial amount of our computer hardware for operating our services is currently located at the facilities of SAVVIS in New Jersey, IX EUROPE in London, England, Telecity Netherlands and Redbus Interhouse Netherlands. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at the SAVVIS facility, the IX EUROPE facility or the Netherlands facility could result in lengthy interruptions in our services. In addition, the failure by SAVVIS, IX EUROPE or MCI Worldcom B.V. to provide our required data communications capacity could result in interruptions in our service. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition.

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

•unanticipated disruptions in service;

•slower response times;

•decreased customer service and customer satisfaction; or

•delays in the introduction of new products and services,

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

Like many online businesses, we have experienced system failures from time to time. For example, in May 2001, our primary web site 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

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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 both internally developed systems and third-party systems to operate the priceline.com service, including transaction processing, order management and financial systems that were designed to be scaleable and stable. However, if the number of users of our services increases substantially, or if critical third-party systems stop operating as designed, we will need to significantly expand and upgrade our technology, transaction processing systems, financial systems and other infrastructure. We do not know whether we will be able to upgrade our systems and infrastructure to accommodate such conditions in a timely manner.

Companies that we have acquired, such as our European operations, and that we may acquire in the future, may present known or unknown capacity/stability or other types of system challenges.  The process of enhancing infrastructure to attain improved capacity/scalability and other system characteristics may be time consuming and expensive and may require resources and expertise that are difficult to obtain.  Such acquisitions increase potential downtime, customer facing problems and compliance problems.  Failure to successfully make any such improvements to such infrastructures could expose us to potential capacity, stability, and system problems that would have an adverse impact on our business, results of operations and financial condition.

Uncertainty regarding payment of sales and hotel occupancy taxes.

On an ongoing basis, we conduct a review and interpretation of the tax laws in various states and other jurisdictions relating to the payment of state and local hotel occupancy and other related taxes.  In connection with our review, we have met and had discussions with taxing authorities in certain jurisdictions but the ultimate resolution in any particular jurisdiction cannot be determined at this time.  Currently, hotels collect and remit hotel occupancy and related taxes to the various tax authorities based on the amounts collected by the hotels. Consistent with this practice, we recover the taxes on the underlying cost of the hotel room night from customers and remit the taxes to the hotel operators for payment to the appropriate tax authorities. As discussed at length in Note 16 to our consolidated condensed financial statements, several jurisdictions have initiated lawsuits indicating the position that sales tax or hotel occupancy tax is applicable to the differential between the price paid by a customer for our service and the cost to us of the underlying room. Historically, we have not collected taxes on this differential. Some state and local jurisdictions could assert that we are subject to sales or hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively or both. Such actions may result in substantial tax liabilities for past sales and could have a material adverse effect on our business and results of operations. To the extent that any tax authority succeeds in asserting that any such tax collection responsibility exists, it is likely that, with respect to future transactions, we would collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room nights to our customers and, consequently, could reduce our hotel sales. We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those estimates of liabilities.

Uncertainty regarding state and local taxes.

We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we pay sales and other taxes to suppliers on our purchases of travel services sold through the priceline.com service. In certain cases, where appropriate, we remit taxes directly to the tax authorities. We believe that this practice is consistent with the tax laws of all jurisdictions. However, one or more states could seek to impose additional income tax obligations, sales tax collection obligations or other tax obligations on companies, such as ours, which engage in or facilitate online commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from these sales.  To the extent that any tax authority succeeds in asserting that a tax collection responsibility applies to transactions conducted through the priceline.com service, we might have additional tax exposure.  Such actions could have a material adverse effect on our business and results of operations.  We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those estimates of liabilities.

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

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We are exposed to fluctuations in currency exchange rates.

As a result of our acquisitions of our European operations, we will conduct a significant and growing portion of our business outside the United States but will report our results in U.S. dollars.  As a result, we will face exposure to adverse movements in currency exchange rates.  The results of operations of our European operations are exposed to foreign exchange rate fluctuations as the financial results of our European operations are translated from local currency into U.S. dollars upon consolidation.  If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss.  Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. Additionally, foreign exchange rate fluctuations may adversely impact our results of operations as exchange rate fluctuations on transactions denominated in currencies other than the U.S. dollar result in gains and losses that are reflected in our consolidated statement of operations.

Our business is exposed to risks associated with credit card fraud and charge-backs.

To date, our results have been negatively impacted by purchases made using fraudulent credit cards. Because we act as the merchant-of-record in a majority of our transactions, we may be held liable for accepting fraudulent credit cards on our web site as well as other payment disputes with our customers. Additionally, we are held liable for accepting fraudulent credit cards in certain retail transactions when we do not act as merchant of record.  Accordingly, we calculate and record an allowance for the resulting credit card charge-backs.  If we are unable to combat the use of fraudulent credit cards on our web site, our business, results of operations and financial condition could be materially adversely affected.

Two large stockholders beneficially own approximately 32% of our stock.

Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited, which is a 49.97% shareholder of Hutchison Whampoa Limited, owned approximately 32% of the Company’s outstanding common stock as of September 30, 2005, and have the right to appoint three representatives to the Board of Directors.  Ian F. Wade and Dominic Kai Ming Lai are Hutchison Whampoa Limited’s representatives on the Board of Directors.  Cheung Kong (Holdings) Limited currently has no representative on the Board of Directors, however, it retains its right to appoint an additional director in the future.

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 its expertise in technology, marketing and operations to Hutchison-Priceline Limited.  Hutchison-Priceline Limited reimburses the Company for the cost of services provided and is required to pay the Company a licensing fee for any year in which Hutchison-Priceline Limited achieves profitability.  The Company and Hutchison Whampoa Limited currently own approximately 15% and 85%, respectively, of the outstanding equity securities of Hutchison-Priceline Limited.  Jeffery H. Boyd, the Company’s President and Chief Executive Officer, is priceline.com’s representative on the board of directors of Hutchison-Priceline Limited.

In May 2004, the Company filed a shelf registration statement with the Securities and Exchange Commission covering up to 10 million shares of priceline.com common stock held by Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited.

Fluctuations in our financial results make quarterly comparisons and financial forecasting difficult.

Our revenues and operating results have varied significantly from quarter to quarter because our business experiences seasonal fluctuations, which reflect seasonal trends for the travel services offered by our websites. Traditional leisure travel bookings in the United States are higher in the second and third calendar quarters of the year as consumers take spring and summer vacations. In the first and fourth quarters of the calendar year, demand for travel services in the United States generally declines and the number of bookings flattens.  Travel revenues in Europe, on the other hand, have been higher in the third and fourth quarters than in the first and second quarters.  Our results may also be affected by seasonal fluctuations in the inventory made available to us by airlines, hotels and rental car suppliers. Our revenues and operating results may continue to vary significantly from quarter to quarter because of these factors. As a result, quarter-to-quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history, a relatively new and unproven business model and an uncertain environment in the travel industry, it may be difficult to predict our future revenues or results of operations.

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Because of these fluctuations and uncertainties, our operating results may fail to meet the expectations of securities analysts and investors. If this happens, the trading price of our common stock would almost certainly be materially adversely affected.

If we lose our key personnel or cannot recruit additional personnel, our business may suffer.

We depend on the continued services and performance of our executive officers and other key personnel. These individuals have acquired specialized knowledge and skills with respect to priceline.com and our operations. We do not have “key person” life insurance policies. Our ability to retain key employees could be materially adversely affected by the decline in the market price of our common stock, limitations on our ability to pay cash compensation that is equivalent to cash paid by traditional businesses or, in some instances, larger or better capitalized competitors, and limitations imposed by our employee benefit plans on our ability to issue additional equity incentives. If we do not succeed in attracting new employees or retaining and motivating current and future employees or executive officers, our business could suffer significantly.

The adoption by FASB of FASB Statement No. 123 (Revised 2004), “Share-Based Payment,” will negatively impact our reported business results.

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004) (“SFAS 123 (R)”), “Share-Based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”  SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method prescribed by Accounting Principles Board, Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statement of operations.  SFAS 123(R) allows the modified prospective method to be used, which requires that the fair value of new awards granted from the beginning of the year of adoption (plus unvested awards at the date of adoption) be expensed over the vesting term.  We will be required to apply SFAS 123(R) as of January 1, 2006.  SFAS 123(R) will have a significant impact on our consolidated statement of operations as we will be required to expense the fair value of our stock option grants rather than disclose the impact on our consolidated operations within our footnotes.  Upon adoption of SFAS 123(R), the impact of unvested stock options granted as of September 30, 2005 is estimated to increase personnel expense by $5.7 million in 2006, $2.0 million in 2007 and $0.1 million in 2008.

Our financial results will be materially impacted by income taxes in the future.

The Company has significant deferred tax assets, resulting principally from domestic net operating loss carryforwards (“NOLs”).  The NOL deferred tax asset has offset the provision for income taxes on substantially all earnings generated to date within the United States through June 30, 2005.  Management concluded in third quarter 2005 that it is more likely than not that a portion of the deferred tax assets will be realized.  Accordingly, we recorded a net non-cash tax benefit in the quarter ended September 30, 2005 of $160 million, resulting primarily from the effect of a $170 million reversal of a portion of our valuation allowance on our deferred tax assets, partly offset by a $10 million non-cash U.S. income tax provision.  In reporting periods subsequent to the reversal of our valuation allowance, our reported financial results will include a substantially non-cash provision for income taxes based upon the full prevailing blended federal, state and foreign tax rates.   As a result, our future reported net income and earnings per share will be materially negatively impacted.

The use of our NOLs are also subject to limitation under section 382 of the Internal Revenue Code of 1986.  Section 382 imposes limitations on the use of our NOLs in the event that a 50-percentage point ownership change occurs in the shareholdings of our common stock.  As a result of a study (the “NOL Study”), it was determined that ownership changes occurred in 2000 and 2002 that had the effect of limiting the amount of NOLs that can be used to offset future taxable income to approximately $69 million annually over the carryforward period.  The aforementioned limitation is based upon certain conclusions in the NOL Study pertaining to the dates of the ownership changes and the value of our company on the dates of the ownership changes.  The conclusions contained in the NOL Study are subject to interpretation, and therefore, the limitation could be subject to change.  The value of the NOLs could also be materially impaired in the event that another change of control occurs.

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Our stock price is highly volatile.

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

•quarterly variations in our operating results;

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

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

•changes in our capital structure;

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

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

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

•loss of a major supplier participant, such as an airline or hotel chain;

•changes in the status of our intellectual property rights;

•lack of success in the expansion of our business model geographically;

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

•additions or departures of key personnel; and

•stock market price and volume fluctuations.

Sales of a substantial number of shares of our common stock could adversely affect the market price of our common stock by introducing a large number of sellers to the market. Given the volatility that exists for our shares, such sales could cause the market price of our common stock to decline significantly. In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.

The trading prices of Internet company stocks in general, including ours, have experienced extreme price and volume fluctuations. To the extent that the public’s perception of the prospects of Internet or e-commerce companies is negative, our stock price could decline further, regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock.  Negative market conditions could adversely affect our ability to raise additional capital.

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

Legal Proceedings

We are a party to the legal proceedings described in Note 16 to our consolidated condensed financial statements.  The defense of the actions described in Note 16 may increase our expenses and an adverse outcome in any of such actions could have a material adverse effect on our business, results of operations and financial condition.

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Regulatory and legal uncertainties could harm our business.

The products and services we offer through the priceline.com service are regulated by federal and state governments. Our ability to provide such products and services is and will continue to be affected by such regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise have a material adverse effect on our business, results of operations and financial condition.  See “Uncertainty regarding payment of sales and hotel occupancy and other related taxes.”

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We manage our exposure to interest rate risk through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We use derivative financial instruments, including an interest rate hedge to manage market risks. Additional information regarding our interest rate hedge is contained within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Derivative Financial Instruments” in our December 31, 2004 Annual Report on Form 10-K.

The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in interest rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in interest rates on a daily basis. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to expected future interest rates. We utilize this information to determine our own investment strategies as well as to determine if the use of derivative financial instruments is appropriate to mitigate any potential future interest rate exposure that we may face. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives.

We did not experience any material changes in interest rate exposures during the three and nine months ended September 30, 2005.  Based upon economic conditions and leading market indicators at September 30, 2005, we do not foresee a significant adverse change in interest rates in the near future.

As of September 30, 2005, after adjusting for the effect of the interest rate swap agreement, we have fixed rate debt of $223.6 million.  We estimate that the fair market value of our debt was approximately $187.6 million as of September 30, 2005.

As of September 30, 2005, we held an interest rate swap agreement on $45 million notional value of our fixed rate debt.  The fair value cost to terminate this swap as of September 30, 2005 was approximately $1.5 million.  A 10% adverse fluctuation in the 3-month LIBOR rate as of September 30, 2005, would increase the cost to terminate the interest rate swap by approximately $488,000.  Any increase or decrease in the fair value of the Company’s interest rate sensitive derivative instruments would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying asset, liability, or cash flow.

As a result of our acquisitions of our European operations, we will conduct a significant and growing portion of our business outside the United States but will report our results in U.S. dollars.  As a result, we will face exposure to adverse movements in currency exchange rates.  The results of operations of our European operations are exposed to foreign exchange rate fluctuations as the financial results of our European operations are translated from local currency into U.S. dollars upon consolidation.  If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss.  Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. Additionally, foreign exchange rate fluctuations may adversely impact our results of operations as exchange rate fluctuations on transactions denominated in currencies other than the U.S. dollar result in gains and losses that are reflected in our consolidated statement of operations.  Our European operations are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.

In 2005, we entered into foreign exchange forward contracts to minimize the impact of short-term foreign currency fluctuations on our consolidated operating results.  As of September 30, 2005, contracts with notional values of 2 million

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British Pounds and 4 million Euros were outstanding.  We may enter into additional forward contracts or other economic hedges in the future.

Additionally, fixed rate investments are subject to interest rate volatility.  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.

Item 4.    Controls and Procedures

Prior to filing this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2005, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports.  It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals.

In addition, we reviewed our internal controls, and, except as further described in the following paragraph, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls to the date of their last evaluation.  In the course of this evaluation, we modify and refine our internal processes as conditions warrant.

In September 2004, we acquired Active Hotels, and in July 2005, we acquired Bookings, and as a result of those acquisitions, we have undertaken a review of Active Hotels’ and Bookings’ internal controls and intend to make changes, if necessary, that we believe to be appropriate to those internal controls as we integrate their businesses with ours.  As we further integrate Active Hotels’ and Bookings’ businesses, we will continue to review their internal controls and may take further steps to ensure that their internal controls are effective and integrated appropriately.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

A description of material legal proceedings to which we are a party is contained in Note 16 to the Notes to Unaudited Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.

Item 6.  Exhibits and Reports on Form 8-K

(a)Exhibits

Exhibit Number	Description
12.1	Calculation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
31.1	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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(b)Reports on Form 8-K

On July 20, 2005, we filed a report on Form 8-K in connection with our acquisition of Bookings B.V.  On July 25, 2005, we filed a report on Form 8-K in connection with the naming of Andrew J. Phillipps as Chief Executive Officer of priceline.com International Limited and related employment agreement and equity arrangements.  On August 8, 2005, we filed a report on Form 8-K in connection with our second quarter earnings announcement.  On August 9, 2005, we filed a report on Form 8-K/A in connection with our second quarter earnings announcement.  On September 29, 2005, we filed an amendment to our report on Form 8-K in connection with our acquisition of Bookings B.V.

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SIGNATURES

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

		PRICELINE.COM INCORPORATED (Registrant)
Date: November 9, 2005	By:	/s/ Robert J. Mylod, Jr.
		Name:	Robert J. Mylod, Jr.
		Title:	Chief Financial Officer
			(On behalf of the Registrant and as principal financial officer)

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Exhibit Index

Exhibit Number	Description
12.1	Calculation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
31.1	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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