Expedia 10-Q 2001 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2001

Commission File Number 0-27429

EXPEDIA, INC.
(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of
incorporation or organization) 91-1996083
(I.R.S. Employer
Identification No.)

13810 SE EASTGATE WAY, STE. 400, BELLEVUE, WA 98005
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (425) 564-7200

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.

Yesx   Noo

The number of shares outstanding of the registrant's common stock as of March 31, 2001 was 48,684,000.

EXPEDIA, INC.

FORM 10-Q

For the Quarter Ended March 31, 2001

INDEX

			Page
PART I.	Financial Information		3
Item 1.	Unaudited Condensed Consolidated Financial Statements		3
	a)	Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three Months and Nine Months ended March 31, 2000 and 2001	3
	b)	Unaudited Consolidated Balance Sheets as of June 30, 2000 and March 31, 2001	4
	c)	Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Period from July 1, 2000 to March 31, 2001	5
	d)	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2000 and 2001	6
	e)	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
PART II.	Other Information		18
Item 1.	Legal Proceedings		18
Item 2.	Changes in Securities and Use of Proceeds		18
Item 6.	Exhibits and Reports on Form 8-K		18
SIGNATURES			19

PART I. Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

EXPEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts) (unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2000			2001			2000			2001
Agency revenues		$ 17,049			$ 33,547			$ 38,621			$ 79,285
Merchant revenues		8,134			67,119			8,816			161,131
Advertising and other revenues		6,684			9,579			17,519			25,996
Revenues		31,867			110,245			64,956			266,412
Cost of agency revenues (excluding recognition of stock-based       compensation of $737 and $145 for the three months ended       March 31, 2000 and 2001 and $966 and $412 for the nine       months ended March 31, 2000 and 2001)		12,384			14,220			23,156			37,573
Cost of merchant revenues (excluding recognition of stock-based       compensation of $455 and $91 for the three months ended       March 31, 2000 and 2001 and $913 and $552 for the nine       months ended March 31, 2000 and 2001)		7,104			56,102			7,731			133,829
Cost of advertising and other revenues (excluding recognition of       stock-based compensation of $147 and $28 for the three       months ended March 31, 2000 and 2001 and $223 and       $123 for the nine months ended March 31, 2000 and 2001		730			786			2,009			2,375
Cost of revenues		20,218			71,108			32,896			173,777
Gross profit		11,649			39,137			32,060			92,635
Operating expenses:
Product development (excluding recognition of stock-based       compensation of $20,168 and $4,112 for the three months ended       March 31, 2000 and 2001 and $32,010 and $17,978 for the nine       months ended March 31, 2000 and 2001)		4,765			6,289			14,610			17,421
Sales and marketing (excluding recognition of stock-based       compensation of $2,501 and $488 for the three months ended       March 31, 2000 and 2001 and $3,927 and $2,132 for the nine months       ended March 31, 2000 and 2001)		21,356			24,783			38,672			63,560
General and administrative (excluding recognition of stock-based       compensation of $5,651 and $1,613 for the three months ended       March 31, 2000 and 2001 and $8,872 and $6,047 for the nine       months ended March 31, 2000 and 2001)		2,217			5,240			6,892			15,893
Amortization of goodwill and intangibles		2,332			15,532			2,332			46,596
Recognition of stock-based compensation		29,659			6,477			46,911			27,244
Total operating expenses		60,329			58,321			109,417			170,714
Loss from operations		(48,680	)		(19,184	)		(77,357	)		(78,079	)
Net interest income and other		914			1,567			1,457			4,377
Loss before provision for income taxes		(47,766	)		(17,617	)		(75,900	)		(73,702	)
Provision for income taxes		-			-			-			-
Net loss		$(47,766	)		$(17,617	)		$(75,900	)		$(73,702	)
Net loss		$(47,766	)		$(17,617	)		$(75,900	)		$(73,702	)
Other comprehensive loss:
Currency translation adjustment		-			(70	)		-			(5	)
Comprehensive loss		$(47,766	)		$(17,687	)		$(75,900	)		$(73,707	)
Pro forma basic and diluted net loss per common share		-			-			$    (2.09	)		-
Basic and diluted net loss per common share		$    (1.20	)		$    (0.37	)		-			$    (1.58	)
Weighted average shares used to compute pro forma    basic and diluted net loss per common share		-			-			36,335			-
Weighted average shares used to compute basic    and diluted net loss per common share		39,690			47,791			-			46,617

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)

	June 30, 2000		March 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$   60,670		$  151,746
Accounts receivable, net	13,997		16,906
Prepaid expenses and other current assets	6,452		16,035
Total current assets	81,119		184,687
Property and equipment, net	6,446		15,662
Investments and restricted deposits	7,064		3,438
Intangible assets, net	88,739		56,508
Goodwill, net	89,682		77,002
Total assets	$  273,050		$  337,297
LIABILITIES
Current liabilities:
Accounts payable	$    20,553		$    29,221
Accrued expenses	16,582		29,425
Due to Microsoft	2,392		3,243
Current portion of notes payable	300		81
Current portion of unearned revenue	21,170		49,471
Total current liabilities	60,997		111,441
Notes payable, net of current portion	1,607		1,310
Unearned revenue, net of current portion	2,950		-
Total liabilities	65,554		112,751
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 120,000 shares authorized, 44,489 and 48,684
issued and outstanding at June 30, 2000 and March 31, 2001, respectively	445		487
Preferred stock, $.01 par value, 10,000 shares authorized, none issued and
outstanding at March 31, 2001	-		-
Additional paid-in-capital	369,446		431,001
Unearned stock-based compensation	(49,261	)	(20,111	)
Retained deficit	(113,365	)	(187,067	)
Accumulated other comprehensive income:
Cumulative currency translation adjustment	231		236
Total stockholders' equity	207,496		224,546
Total liabilities and stockholders' equity	$   273,050		$   337,297

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands) (unaudited)

			Additional Paid-in Capital		Unearned Stock-based Compensation		Retained Deficit		Cumulative Currency Translation Adjustment	Total
	Common Stock
	Shares	Amount
Balance, July 1, 2000	44,489	$ 445	$ 369,446		$ (49,261	)	$ (113,365	)	$ 231	$ 207,496
Proceeds from exercise of options	456	5	1,854		-		-		-	1,859
Proceeds from issuance of common   stock and warrants, net of issuance costs	3,739	37	61,607		-		-		-	61,644
Recognition of stock-based compensation	-	-	-		27,244		-		-	27,244
Forfeiture of stock-based compensation	-	-	(1,906	)	1,906		-		-	-
Net loss	-	-	-		-		(73,702	)	-	(73,702	)
Other comprehensive income:										-
Cumulative currency translation       adjustment	-	-	-		-		-		5	5
Balance, March 31, 2001	48,684	$ 487	$ 431,001		$ (20,111	)	$ (187,067	)	$ 236	$ 224,546

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)

	Nine Months Ended March 31,
	2000			2001
Operating activities:
Net loss		$ (75,900	)		$ (73,702	)
Adjustments to reconcile net loss to net cash (used) / provided by operating activities:
Depreciation		1,246			3,744
Recognition of stock-based compensation		46,911			27,244
Amortization of goodwill and intangibles		2,332			46,596
Provision for doubtful accounts		-			300
Cash provided (used) / provided by changes in operating assets and liabilities:
Accounts receivable increase		(8,262	)		(3,266	)
Due to Microsoft (decrease) increase		(390	)		851
Prepaid expenses and other current assets increase		(2,662	)		(9,583	)
Accounts payable and accrued expenses increase		19,659			21,058
Unearned revenue (decrease) increase		(987	)		25,351
Net cash (used) / provided by operating activities		(18,053	)		38,593
Investing activities:
Additions to property and equipment		(4,319	)		(12,960	)
Cash acquired from the acquisition of Travelscape, net of acquisition costs		11,137			(1,175	)
Cash acquired from the acquisition of VacationSpot, net of acquisition costs		7,200			-
(Funding) / return of restricted deposits, net		(4,137	)		3,626
Net cash provided / (used) by investing activities		9,881			(10,509	)
Financing activities:
Repayment of notes payable		(7,029	)		(516	)
Net proceeds from issuance of common stock and warrants		76,646			61,644
Net proceeds from exercise of options		987			1,859
Net contribution from Microsoft		10,331			-
Net cash provided by financing activities		80,935			62,987
Effect of foreign exchange rate changes on cash and cash equivalents		62			5
Net increase in cash and cash equivalents		72,825			91,076
Cash and cash equivalents at beginning of period		-			60,670
Cash and cash equivalents at end of period		$   72,825			$ 151,746
Supplemental disclosures to cash flow statements:
Cash paid for interest		$          70			$        334
Unearned stock-based compensation		$ 110,503
Acquisition of Travelscape		$   95,566
Acquisition of VacationSpot		$   81,662
Forfeiture of stock-based compensation		$     1,127			$     1,906
Cost-based investments received		$            -			$        400

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Business Description

     In October 1996, Microsoft Corporation ("Microsoft") launched its online travel services product called Expedia. Since that launch, Expedia, Inc. (the "Company") has become a leading provider of branded online travel services for leisure and business travelers. The Company operates eight websites, located at Expedia.com, Expedia.co.uk, Expedia.co.de, Expedia.ca, Travelscape.com, VacationSpot.com, LVRS.com, and Rent-a-Holiday.com. The Company offers one-stop travel, shopping and reservation services, providing real-time access to schedule, pricing and availability information for airlines, hotels, car rental and cruise companies.

     The Company was incorporated in the state of Washington on August 23, 1999. On October 1, 1999, Microsoft separated the assets and contributed them in exchange for 33,000,000 shares of Expedia common stock or 100% of the outstanding common stock at that date. Concurrent with this, the Company entered into a number of agreements with Microsoft to facilitate the operation of the Company and its assets after the separation.

     In March 2000, the Company acquired both Travelscape.com, Inc. ("Travelscape"), a Delaware corporation based in Las Vegas, Nevada, and VacationSpot.com, Inc. ("VacationSpot"), a Delaware corporation based in Seattle, Washington. Travelscape is a leading branded internet hotel wholesaler and packager with discounted rate contracts with hotel and travel suppliers worldwide. Inventory from those suppliers is not only available on the Travelscape.com and LVRS.com websites it operates but also on the various Expedia websites. VacationSpot is a leading reservation network for vacation homes, rental condominiums, inns and bed & breakfasts around the world. The VacationSpot.com and Rent-a-Holiday.com websites, acquired as part of the acquisition, offer unique properties in vacation destinations and countries worldwide and operate as independent websites and have links from Expedia’s other websites.

     The Company classifies revenues into three categories: agency, merchant and advertising and other. Agency revenues are derived from travel-related sales transactions where the Company receives commissions from travel suppliers. Merchant revenues comes from travel-related sales transactions where the Company both purchases from the supplier and sells to the customer the requested travel service. In addition the Company derives revenues from advertisements on its websites. The Company also licenses components of its technology and editorial content to selected airlines and American Express as a platform for their websites. Both advertising and license revenues are categorized as “Advertising and Other” revenues in the Company's condensed consolidated financial statements.

2. Basis of Presentation

     The accompanying consolidated balance sheets and related interim consolidated statements of operations, cash flows, and changes in stockholders' equity, are unaudited and in the opinion of management, include all adjustments (consisting only of normal recurring items) necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America. Preparing financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from those estimates. Interim results are not necessarily indicative of results for a full year. Readers of the condensed consolidated financial statements should read the information included in this Form 10-Q in conjunction with Management's Discussion and Analysis and consolidated financial statements and notes thereto included in the Company's Annual Report filed on Form 10-K with the Securities and Exchange Commission on September 28, 2000.

     The condensed consolidated financial statements include the accounts of Expedia, Inc. and its wholly-owned subsidiaries. Both Travelscape and VacationSpot were acquired on March 17, 2000, and have been accounted for under the purchase method of accounting. Significant inter-company transactions and balances have been eliminated.

3. Capitalized Website Development Costs

     The Company has capitalized $1.4 million and $3.9 million of website development costs for the three and nine months ended March 31, 2001, respectively, in accordance with the Company's July 1, 2000 implementation of Emerging Issues Task Force (“EITF”) Issue No. 00-02, Accounting for Website Development Costs. These costs are being amortized over a one year useful life, beginning with the release of the website enhancements to which these costs pertained. The Company has recorded expense of $0.3 million and $0.5 million for the three and nine-month periods ended March 31, 2001, respectively.

4. Recent Accounting Pronouncements

     The EITF reached consensus on Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which establishes indicators to determine the statement of operations' presentation of revenue. The Company is currently evaluating the impact of this consensus, which must be applied by the end of the fiscal year ending June 30, 2001. If, due to the consensus, the Company were to report revenue on a net basis, this would have no effect on the Company's operations, cash flow, gross profit or net loss. However, this would have a material impact on revenues and cost of revenues.

     In December 1999, the United States Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 101 (“SAB No. 101”), Revenue Recognition in Financial Statements, which must be applied in the fourth quarter of fiscal 2001. SAB No. 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. The Company is currently evaluating the impact of applying SAB No. 101 on the condensed consolidated financial statements.

     The Company has adopted the provisions of SFAS No. 133, Accounting for DerivativeInstruments and Hedging Activities, beginning July 1, 2000. The Company has not held derivative financial instruments at any time, therefore, this pronouncement did not have any impact on the condensed consolidated financial statements.

5. Income Taxes

     Effective October 1, 1999, the Company entered into a tax allocation agreement with Microsoft. On March 18, 2000, Microsoft's investment in the Company fell below 80% ownership. As such, from March 18, 2000 onward, the Company must file a separate tax return. Based on the tax allocation agreement, the Company may be reimbursed by Microsoft for tax losses incurred during the period from October 1, 1999 to March 17, 2000 that are utilized on the Microsoft consolidated U.S. federal tax return. As of March 31, 2001, the Company has received no such reimbursement from Microsoft. Any reimbursement from Microsoft will be recorded as a capital contribution.

     At March 31, 2001, the Company has a net operating loss carryforward of approximately $74 million for federal income tax purposes. Of this amount, $5 million is the amount available to the Company from the period ended March 17, 2000. In addition, $31 million of the loss carryforward is from acquired companies, the utilization of which in each carryforward year may be limited by the Internal Revenue Code. A portion of the loss carryforward resulting from the exercise of certain stock options reverts to the benefit of Microsoft per the tax allocation agreement. The net operating loss carryforwards begin to expire in 2017.

     Because of the Company's limited operating history, losses incurred to date and the difficulty in accurately forecasting future results, the Company has established a valuation allowance equivalent to the expected tax benefit from its net operating loss carryforward and other deferred tax assets. As a result, the Company has not recorded abenefit for current federal and state income tax purposes or related deferred tax assets. Management evaluates, on a quarterly basis, the recoverability of the deferred tax assets and the level of the valuation allowance.

6. Net Loss Per Share

     Net loss per share and pro forma net loss per share have been computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Pro forma net loss per share has also been computed in accordance with SAB No. 98 to reflect the pro forma effect of the Company's capitalization. Under the provisions of SFAS No. 128 and SAB No. 98, basic pro forma net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding, using the pro forma effect of the conversion of the net contribution from owner as if the shares issued to capitalize the Company were outstanding over the entire period for which the pro forma net loss per share has been computed. Net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding. Common stock equivalent shares related to stock options, warrants and shares subject to repurchase are excluded from the calculation as their effect is antidilutive. Accordingly, basic and diluted loss per share are equivalent.

7. Related Party Transactions

     Prior to October 1, 1999, the financial statements of the Company reflect certain allocated corporate support costs from Microsoft. Such allocations and charges are based on a percentage of total corporate costs for the services provided, based on factors such as headcount, revenue, gross asset value or the specific level of activity directly related to such costs.

     Management believes that the allocation methods used are reasonable and reflect the Company's proportionate share of

such expenses and are not materially different from those that would have been incurred on a stand-alone basis.

          Costs prior to October 1, 1999 representing allocations from Microsoft (in thousands):

	Nine Months Ended
	March 31, 2000
Cost of revenues	$   (924	)
Product development	(557	)
Sales and marketing	(1,497	)
General and administrative	(2,086	)
Net expense	$ (5,064	)

          Costs and revenue representing charges from the services agreement, as discussed in Note 8, and other agreements withMicrosoft (in thousands):

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2000		2001		2000		2001
Revenues	$       44		$     125		$       88		$    212
Cost of revenues	(606	)	(764	)	(1,617	)	(1,945	)
Product development	(436	)	(415	)	(1,451	)	(1,203	)
Sales and marketing	(655	)	(1,154	)	(900	)	(3,505	)
General and administrative	(708	)	(399	)	(1,165	)	(1,320	)
Net expense	$(2,361	)	$(2,607	)	$(5,045	)	$(7,761	)

          On August 25, 2000, the Company issued 3,011,293 shares of common stock and warrants to purchase an additional602,259 shares of our common stock to TCV IV, L.P. and TCV IV Strategic Partners, L.P. (collectively, “TCV”) in exchange for approximately $50 million in cash. As a result of the investment, one of the partners of TCV became a director of Expedia. On that same date, the Company issued 602,258 shares of common stock and warrants to purchase an additional 120,452 shares of our common stock to Microsoft in exchange for approximately $10 million in cash.

8. Commitments and Contingencies

          The Company has multi-year agreements with certain travel service providers that make available the services accessed through the Company's website. Under these agreements, the Company pays monthly service fees to the service providers based on the volume of activity. The Company expenses these amounts as the services are provided.

          In April 2001, the Company extended its services agreement with Microsoft whereby Microsoft provides the Company with administrative and operational services. These services will be provided until June 30, 2002 but the parties may agree to extend the expiration date for additional six month intervals. Fees are being paid to Microsoft for the services under this agreement on either an estimated or actual cost reimbursement.

          The Company entered into a five-year carriage and cross-promotion agreement with Microsoft under which the Company receives premium placement on Microsoft's domestic and international MSN.com website, the Hotmail email service and the WebTV platform. Microsoft has received a flat annual fee of $2.0 million during the first year of the agreement, which started on December 1, 1999, and will receive $2.2 million during the second year. Microsoft also receives incentive fees to the extent that the number of completed airline transactions from users of the MSN.com website exceeds the Company's forecasts. The fees and terms of sale of banner advertisements will depend on agreement between the parties for the remaining three years under this agreement.

          On January 9, 2001, the Company settled two patent infringement lawsuits with Priceline.com Incorporated ("Priceline.com"). Under the settlement, the Company entered into a royalty arrangement with Priceline.com. This arrangement did not have a material impact on the Company’s financial position or results of operations.

          At March 31, 2001, the Company had $5.5 million of outstanding letters of credit. Of this amount, $0.9 million is collateralized with restricted certificates of deposit. The remaining amount is guaranteed by Microsoft. If Microsoft's investment in Expedia were to fall below 50%, then the Company would be required to collateralize the outstanding letters of credit with cash deposits equaling 105% of the letters of credit's face value in exchange for the release of the Microsoft guarantee. Microsoft's percentage ownership of the shares outstanding at March 31, 2001 was approximately 69%.

          The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. Management believes that the resolution of all such matters will not have a material impact to our financial position, results of operations or cash flows.

9. Acquisitions

          The Company acquired Travelscape on March 17, 2000 in consideration for approximately 3.0 million shares, stockoptions and warrants of the Company in exchange for all outstanding shares, stock options and warrants of Travelscape. The total value of the shares, stock options and warrants exchanged was approximately $96 million. VacationSpot was also acquired on March 17, 2000 in consideration for approximately 2.6 million shares and stock options of the Company in exchange for all the outstanding shares and stock options of VacationSpot. The total value of the shares and stock options exchanged in this transaction was approximately $82 million. Commencing March 18, 2000, the Company has included the results of operations of Travelscape and VacationSpot in its consolidated results of operations.

          The Company has accounted for these transactions under the purchase method of accounting in accordance with the APB Opinion No. 16. Under the purchase method of accounting, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. All material estimates and contingencies have now been identified and no material changes to the condensed consolidated financial statements have been identified. The fair values were determined by an independent appraiser. Certain goodwill and intangibles have been identified and capitalized as part of these transactions.

          The following table summarizes the purchase accounting for the acquisitions (in thousands):

	Travelscape		VacationSpot		Total
Current and long term assets	$  21,459		$  10,320		$  31,779
Intangibles and goodwill	123,432		73,959		197,391
Liabilities assumed	(46,670	)	(729	)	(47,399	)
Net assets acquired	98,221		83,550		181,771
Less: acquisition costs	(2,655	)	(1,888	)	(4,543	)
Purchase price	$  95,566		$  81,662		$ 177,228

          Intangible assets are amortized on a straight-line basis over the estimated useful life of the assets, ranging from two tofour years. Goodwill is amortized on a straight-line basis over five years.

          The following table presents the results of operations of the Company on a pro forma basis. These results are based on the individual historic results of the Company, Travelscape and VacationSpot and reflect adjustments to give effect to the acquisitions as if they occurred at the beginning of the period presented. The only significant adjustment is the amortization of goodwill and intangibles. The pro forma results are as follows (in thousands except per share information):

	Three Months Ended March 31,			Nine Months Ended March 31,
		2000			2000
Revenues		$ 58,772			$  138,384
Loss from operations		$(67,300	)		$(142,772	)
Net loss		$(66,545	)		$(143,039	)
Pro forma basic and diluted net loss per common share		$    (1.56	)		$      (3.59	)
Weighted average shares used to compute pro forma basic and
diluted net loss per common share		42,788			39,852

10. Segment Information

          The Company has five reportable segments: Transportation, Destinations, Advertising, International and Corporate. The Transportation segment serves primarily as an agent for U.S.-originated airline tickets and car rentals. The Destinations segment generates most of its revenues from U.S.-originated hotel bookings where the Company acts as merchant of record. The Advertising segment sells advertisements on the domestic websites. The International segment generates most of its revenues as agency revenues from airline tickets, car rentals and hotel bookings on the United Kingdom, Germany, Belgium and Canada websites. The Corporate segment generates revenues from the licensing to our airline and corporate customers, and generates expenses consisting of the amortization of goodwill and intangibles, recognition of stock-based compensation and certain corporate headquarters costs.

          Segment information is presented in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This standard is based on a management approach, which requires segmentation based upon the Company's internal organization and disclosure of revenue and operating loss based upon internal accounting methods. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies described in Note 2 of the Company's Form 10-K.

          Management evaluates each segment's performance based upon income or loss from operations. This involves significant allocations of various expenses to the non-Corporate segments. These allocations are primarily based on transaction volumes and other metrics.

          During the quarter ended March 31, 2001, the Company changed its methods for allocating certain revenues and expenses amongst its segments. Management believes these allocation methodologies better reflect the revenues generated and related expenses incurred in operating the business within each segment.The Company has reclassified the segment information for the six months ended December 31, 2000 for comparability using the new allocation methods (in thousands):

	Transportation		Destinations		Advertising		International		Corporate		Total
For the six months ended December 31, 2000:
Revenues - As previously stated		$  49,028		$   97,814		$   5,939		$     3,386		$           -		$ 156,167
Reclassify air, advertising and licensing revenues		(1,626)		(7,817)		105		-		9,338		-
Revenues - Reclassified		$  47,402		$   89,997		$   6,044		$     3,386		$    9,338		$ 156,167
Depreciation and amortization - As previously stated		$       338		$       961		$       57		$        125		$  31,613		$   33,094
Reclassify cost of revenues and operating expenses		13		(162)		22		1		126		-
Depreciation and amortization - Reclassified		$       351		$       799		$       79		$        126		$  31,739		$   33,094
Income (loss) from operations - As previously stated		$  11,039		$  (6,072)		$   (772)		$ (11,258)		$ (51,832)		$ (58,895)
Reclassify air, advertising and licensing revenues		(1,626)		(7,817)		105		-		9,338		-
Reclassify cost of revenues and operating expenses		(11,669)		13,138		3,976		3,607		(9,052)		-
Income (loss) from operations - Reclassified		$  (2,256)		$      (751)		$   3,309		$    7,651)		$ (51,546)		$ (58,895)
The segment information for the three and nine months ended March 31, 2001 fully reflects the adoption of the newallocation methods for both periods presented (in thousands):
	Transportation		Destinations		Advertising		International		Corporate		Total
For the three months ended March 31, 2001:
Revenues		$ 39,130		$  59,863		$ 2,391		$     2,768		$     6,093		$    110,245
Depreciation and amortization		$      419		$       459		$      64		$          77		$   16,227		$    17,246
Income (loss) from operations		$   3,899		$    2,275		$    451		$   (5,590)		$ (20,219)		$  (19,184)
For the nine months ended March 31, 2001:
Revenues		$ 86,532		$ 149,860		$  8,435		$     6,154		$   15,431		$  266,412
Depreciation and amortization		$      770		$     1,258		$     143		$        203		$   47,965		$    50,339
Income (loss) from operations		$   1,643		$     1,524		$  3,760		$ (13,241)		$ (71,765)		$ (78,079)

          These segments were developed by management for the first time for the quarter ended September 30, 2000. As such,prior to that quarter, the Company's financial reporting systems reflected one segment. As a result, no comparative segment

information is provided as it is impracticable to do so.

          Assets of the segments are not relevant for management of the businesses. However, depreciation and amortization expense, excluding amortization of goodwill and intangibles that has been exclusively allocated to the Corporate segment, has been allocated to the five segments for these segment disclosures based on a usage metric. There are no reconciling items between the segment information indicated above to the consolidated statements of operations, nor are there any inter-segment revenues.

          The Company has allocated revenues from external customers to geographic areas by selling location. The Transportation, Destinations and Advertising segments derive revenues from the Company's U.S. websites and the International segment derives revenues from the Company's international websites.

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

          The information contained in this section has been derived from our unaudited condensed consolidated financial statements and should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this 10-Q. The discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those expressed or implied in these forward-looking statements as a result of various factors, including those set forth under the section entitled "Risk Factors" in our Registration Statement on Form S-1 (SEC File No. 333-40934) filed on July 21, 2000.

Overview

          Prior to October 1, 1999, we conducted business as an operating unit of Microsoft. Our statements of operations and balance sheets were derived from the historic books and records of Microsoft and included cost allocations from Microsoft. We believe that the allocated amounts are reasonable and reflective of the Company's proportionate share of such expenses and are not materially different from those that would have been incurred on a stand-alone basis. On October 1, 1999, the effective date of the contribution agreement, Microsoft contributed assets in exchange for common stock of Expedia, Inc. From that date forward, our books and records have been maintained separately from Microsoft's.

          Our agency revenues are derived from airline ticket transactions and hotel and car rental reservations. Airline ticket transactions make up the substantial majority of these revenues. This revenue represents both commissions and fees related to the sale of airline tickets. Airline ticket commissions are determined by individual airlines and billed and collected through the Airline Reporting Corporation, an industry-administered clearinghouse. As is customary in the travel industry, travel suppliers are not obligated to pay any specified commission rate for bookings made through our websites. Fees from the sale of airline tickets relate to revenues from our global distribution partner and Express Fee revenues where we charge customers for processing and delivering a paper ticket via express mail if they choose not to have an electronic ticket or an electronic ticket is not available. We recognize transaction revenues on air transactions when the reservation is made and secured by a credit card. We recognize transaction revenues on hotel, cruise and car rental reservations either on receipt of commissions or on notification of entitlement by a third party.

          Our merchant revenue is derived from transactions where we are the merchant of record and determine the ticket price or room rate. Agreements with hotels for blocks of rooms that we sell generate the majority of our total merchant revenues. For all merchant transactions the revenue and related cost of revenues are recorded at gross amounts. If the reservation is non-cancellable, revenue is recorded when the reservation is made. Otherwise, revenue is deferred until the actual flight or stay occurs.

          Two new sources of revenues have been recently introduced. In December 2000, we introduced the new Expedia Packages business and during the March 2001 quarter, we introduced the Expedia Bargain Fares (“EBF”) business. Expedia Packages enable customers to customize their trip by selecting their itinerary, airline and hotel of choice for all one packaged price. The Expedia Packages product consists of a combination of agency and merchant revenues. EBFs represent special negotiated rates with 20 airlines. EBFs show customers the date and price up front but do not disclose the airline or flight times until after the purchase. These revenues are classified as merchant revenues.

          In February 2001, management has made the decision to terminate the Hotel Price Matcher program. Revenues and profits from this program were not material to our financial results.

          Additionally, we derive revenues from the sales of advertisements on our websites and listing revenues from our VacationSpot website. We recognize advertising revenues either on display of each individual advertisement or ratably over the advertising period, depending on the terms of the advertising contract. Fees from the licensing of software to our airline and corporate customers such as Continental Airlines, Northwest Airlines and American Express are another source of revenue. The fixed portion of these license fees are recognized ratably over the lives of the contracts. Transaction-based fees are recognized when the transactions occur.

          We launched our websites in Canada in fiscal 1997, in the United Kingdom in fiscal 1999 and in Germany in fiscal 2000. Rent-a-Holiday.com, based in Belgium, was acquired as part of the VacationSpot acquisition. As a result of increased activity from these websites and future websites in other markets we may enter, we expect international revenues to continue to increase.

          The costs of agency and merchant revenues consist of fees paid to our fulfillment vendors for the costs associated with issuing airline tickets and related customer services, reserves and related payments to the airlines for tickets purchased withfraudulent credit cards, fees paid to Worldspan for use of its computer reservation and information services system and allocated and direct costs for the operation of our data center and call center. In addition, for our merchant of record transactions only, cost

of revenues includes the cost of the hotel room or airline ticket as charged by the provider along with the credit card merchant fees. The cost of advertising and other revenues consists mainly of costs related to the physical placement of banner and other advertisements on the websites.

          Our direct product development expenses and direct general and administrative expenses consist primarily of compensation for personnel. Our product development personnel generally work on maintaining, enhancing and upgrading our websites and the infrastructure which supports our websites. Our direct sales and marketing expenses consist of advertising, distribution and public relations expenses as well as personnel-related costs.

          Segment reporting involves significant allocations of various expenses to our non-Corporate segments. These allocations are primarily based on transaction volumes and other metrics. The amortization of goodwill and intangibles and recognition of stock-based compensation are retained in the Corporate segment.

          Prior to October 1, 1999, we were allocated operating costs incurred by Microsoft for real estate, legal, treasury, human resources, information technology and other general services. We believe that these allocations were not materially different from the costs that we would have incurred as a stand-alone entity.

          In conjunction with the contribution agreement with Microsoft, we entered into a services agreement with Microsoft on October 1, 1999 whereby Microsoft provides us with administrative and operational services. Accordingly, we are no longer being allocated costs from Microsoft. This agreement was in effect until December 31, 2000 and an amended and restated agreement has been put in place covering the period from January 1, 2001 through June 30, 2002, at which time the parties may agree to extend the expiration date for additional six month intervals. Under the services agreement, fees are paid to Microsoft for the services under this agreement on either an estimated or actual cost reimbursement. During the course of the agreement, certain services will be discontinued as we continue to develop our own systems and processes in some of these areas.

          Our revenues are impacted by the seasonality of the travel industry, particularly leisure travel.

          Our fiscal years end on June 30 of each year. References to a fiscal year, such as fiscal 2001, are to the twelve months ended June 30 of that year.

Results of Operations

          The following table sets forth our results of operations as a percentage of revenues for the three and nine months ended March 31, 2001 compared with the same period in 2000. Included in this table is a breakdown of revenue from our three primary sources: agency, merchant, and advertising and other.

(As a Percentage of Revenues)

	Three Months Ended						Nine Months Ended
		March 31,					March 31,
		2000		2001			2000		2001
Agency revenues		54	%	30	%		59	%	30	%
Merchant revenues		26	%	61	%		14	%	60	%
Advertising and other revenues		21	%	9	%		27	%	10	%
Revenues		100	%	100	%		100	%	100	%
Cost of agency revenues		39	%	13	%		36	%	14	%
Cost of merchant revenues		22	%	51	%		12	%	50	%
Cost of advertising and other revenues		2	%	1	%		3	%	1	%
Cost of revenues		63	%	64	%		51	%	65	%
Gross profit		37	%	36	%		49	%	35	%
Operating expenses:
Product development		15	%	6	%		22	%	7	%
Sales and marketing		67	%	22	%		60	%	24	%
General and administrative		7	%	5	%		11	%	6	%
Amortization of goodwill and intangibles		7	%	14	%		4	%	17	%
Recognition of stock-based compensation		93	%	6	%		72	%	10	%
Total operating expenses		189	%	53	%		168	%	64	%
Loss from operations	(153		)%	(17	)%	(119		)%	(29	)%
Net interest income and other		3	%	1	%		2	%	2	%
Loss before provision for income taxes	(150		)%	(16	)%	(117		)%	(28	)%
Provision for income taxes
Net loss	(150		)%	(16	)%	(117		)%	(28	)%

Revenues

		Three Months Ended						Nine Months Ended
		March 31,						March 31,
		2000		2001	% Change			2000		2001	% Change
Agency revenues	$	17,049	$	33,547	97	%	$	38,621	$	79,285	105	%
Merchant revenues		8,134		67,119	725	%		8,816		161,131	1,728	%
Advertising and other revenues		6,684		9,579	43	%		17,519		25,996	48	%
Revenues	$	31,867	$	110,245	246	%	$	64,956	$	266,412	310	%

          Agency revenues reflect strong increases as internet commerce, especially travel sales, continues to gainacceptance and grow substantially. In addition to a greater number of visitors to our websites, we have also been successful in converting a greater percentage of those visitors to make purchases. In addition, during the quarter ended December 31, 2000, we began to earn Express Fee revenues where we charge customers for processing and delivering a paper ticket via express mail if they choose not to have an electronic ticket or an electronic ticket is not available. These revenues are recorded as agency revenues.

          With the acquisition of Travelscape in March 2000 and the introduction of our Expedia Special Rate (“ESR”) business in June 2000, we have significantly increased our merchant revenues. In merchant transactions, we record the full amount of the ticket or hotel room sold to our customers as revenue as opposed to only the amount received from commissions and fees on transactions where we are not merchant of record. Also, in December 2000, we introduced the Expedia Packages business. This product enables customers to customize their trip by selecting their itinerary, airline and hotel of choice all for one packaged price. The Expedia Packages consist of a combination of agency and merchant revenues. The introduction of Expedia’s Expert Searching and Pricing ("ESP") engine in January 2001 has provided consumers with more choice and control in choosing their travel itineraries. In addition, ithas enabled us to succeed in selling more vacation packages and in merchandising a wide range of inventory types. During the March 2001

quarter, we introduced Expedia Bargain Fares (“EBF”), which shows customers the date and price of the airline ticket up front but does not disclose the airline or flight times until after the purchase. EBF revenues are recorded as merchant revenues.

     The remainder of the increase in revenues is due to increases in advertising and licensing-related revenue. The growth rate in this area is lower because a portion of these revenues is fixed over time. In addition, advertising revenues have continued and will continue to increase at a declining rate due to the competitive environment for internet advertising. Over the next three quarters, we anticipate the licensing revenue to decline to zero due to the expected terminations of three licenses.

Cost of Revenues and Gross Profit

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2000		2001		% Change		2000		2001		% Change
Cost of agency revenues	$ 12,384		$ 14,220		15	%	$ 23,156		$ 37,573		62	%
Cost of merchant revenues	7,104		56,102		690	%	7,731		133,829		1,631	%
Cost of advertising and other revenues	730		786		8	%	2,009		2,375		18	%
Cost of revenues	$ 20,218		$ 71,108		252	%	$ 32,896		$173,777		428	%
% of revenues	63	%	64	%			51	%	65	%
Gross profit	$ 11,649		$ 39,137				$ 32,060		$ 92,635
% of revenues	37	%	36	%			49	%	35	%

          The large increase in agency revenues correlates to increased transactions processedby Expedia. As a result, the associated cost of agency revenues related to processing these transactions increased significantly during the quarter in comparison to the preceding year's quarter. In addition, during the quarter ended December 31, 2000, we began to earn Express Fee revenues where we charge customers for processing and delivering paper tickets via express delivery if they choose not to have an electronic ticket or an electronic ticket is not available. The costs associated with Express Fees are recorded as a cost of agency revenues. Partially offsetting the increase in agency costs were decreased expenses related to fraudulent and lost tickets. These costs declined by $5.0 million and $0.6 million for the three and nine months ended March 31, 2001, respectively, compared with the same periods in the year before.

          The cost of merchant revenues have increased significantly as a result of the acquisition of Travelscape in March 2000, the introduction of our ESR business in June 2000, Expedia Packages business in December 2000 and EBF business during the March 2001 quarter. The Expedia Packages product consists of a combination of agency and merchant cost of revenues. As merchant of record, we pay for the costs of rooms, airline tickets and any other various incidental costs such as merchant credit card fees.

          The costs of advertising and other revenues have remained relatively consistent quarter over quarter as the costs associated with earning this revenue is generally fixed in nature. The costs associated with the licensing business, which is expected to go away over the next three quarters, is virtually zero.

          The decrease in the gross profit percentage during the three and nine months ended March 31, 2001 was primarily due to increases in the merchant business. Because we act as the merchant of record in these transactions, the revenue and related cost of revenues are presented at gross amounts, resulting in a lower gross profit percentage on these transactions. Partially offsetting the declines in the gross profit percentage mentioned above are increased transaction volumes, which have created economies of scale, and the growth in advertising and other revenue, which has a high profit margin. The expected termination of the licensing business over the next three quarters combined with the growth in EBFs and other merchant air business will result in a lower gross profit percentage.

Product Development

	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2000		2001		% Change	2000		2001		% Change
Product development	$ 4,765		$ 6,289		32%	$ 14,610		$ 17,421		19%
% of revenues	15	%	6	%		22	%	7	%

           During the three and nine months ended March 31, 2001, we capitalized $1.4 million and $3.9million respectively in product development costs related to website development. Excluding the impact of this capitalization, which was in accordance with new accounting pronouncements, expenses would have increased 61% and 46% from last year for the three and nine month periods reflecting growth in the number of employees focused on product development. In addition, a significant portion of the increase was related to the development of the ESP engine, which improved the choice and control available to our customers in choosing their travel itineraries. ESP was launched in January 2001. The decreases in costs combined with significantly larger revenues result in the large decrease in product development costs as a percentage of revenues.

Sales and Marketing

	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2000		2001		% Change	2000		2001		% Change
Product development	$ 21,356		$ 24,783		16%	$ 38,672		$ 63,560		64%
% of revenues	67	%	22	%		60	%	24	%

          The increases in expenses are primarily attributable to increased promotional activities intended tobring additional customers to our websites. Our promotional activities range from radio to paper media advertising, and includedomestic television ads. Also, our international advertising and promotional activities have increased significantly in order to drive

increasing traffic to our United Kingdom and Germany websites. In addition, the acquisitions of Travelscape and VacationSpot in March 2000 have increased our sales and marketing costs as the three and nine months ended March 31, 2001 fully include expenses for these periods while the same periods in the previous year reflect only fourteen days of these expenses. Although the costs increased, the significantly larger revenues resulted in the large decrease in sales and marketing costs as a percentage of revenues.

General and Administrative

	Three Months Ended			Nine Months Ended
	March 31,			March 31,
	2000	2001	% Change	2000	2001	% Change
General and administrative	$ 2,217	$ 5,240	136%	$ 6,892	$ 15,893	131%
% of revenues	7%	5%		11%	6%

          These costs increased in absolute terms but decreased as a percentage of revenues. We havehired employees to perform certain functions that were not previously necessary when Expedia was an operating unit of Microsoft. We continue to add additional functions as functions previously performed under our services agreement with Microsoft are brought in house. In addition, the acquisitions of Travelscape and VacationSpot in March 2000 have increased our general and administrative costs through increased headcount as well as other related expenses. Legal fees related to the defense of the Priceline litigation and eventual settlement also contributed to the increase in general and administrative expenses for the nine months ended March 31, 2001.

Amortization of Goodwill and Intangibles

	Three Months Ended			Nine Months Ended
	March 31,			March 31,
	2000	2001	% Change	2000	2001	% Change
Amortization of goodwill and intangibles	$ 2,332	$ 15,532	566%	$ 2,332	$ 46,596	1,898%
% of revenues	7%	14%		4%	17%

          Amortization of goodwill and intangibles was related to our acquisitions ofTravelscape and VacationSpot in March 2000.

Recognition of Stock-based Compensation

	Three Months Ended			Nine Months Ended
	March 31,			March 31,
	2000	2001	% Change	2000	2001	% Change
Recognition of stock-based compensation	$ 29,659	$ 6,477	(78)%	$ 46,911	$ 27,244	(42)%
% of revenues	93%	6%		72%	10%

          On the completion of the initial public offering, all the unvested options topurchase Microsoft common stock held by Expedia employees were converted to Expedia options. These stock option issuances were deemed to be new grants and created non-cash compensation expense for the difference between the option exercise price and the fair market value of the common stock at the date of grant. The starting date for amortization coincides with the initial public offering date of November 10, 1999. The decrease in the recognition of stock-based compensation from quarter to quarter relates to amortizing the expense over the vesting period of the individual options in accordance with Financial Accounting Standards Board Interpretation (“FIN”) No. 28. This results in higher amortization amounts during the beginning of the amortization period.

Net Interest Income and Other

	Three Months Ended			Nine Months Ended
	March 31,			March 31,
	2000	2001	% Change	2000	2001	% Change
Net interest income and other	$914	$1,567	71%	$1,457	$4,377	200%
% of revenues	3%	1%		2%	2%

          All of our operations were funded by Microsoft prior to its contribution of assets onOctober 1, 1999. Expedia, Inc. now invests its own cash. The majority of our cash balance is attributable to the net proceeds from our initial public offering of stock on November 10, 1999, our private placement of stock and warrants on August 25, 2000 and our strong positive cash flow during the March 2001 quarter. This has caused interest income to increase despite the general decline of market interest rates.

Segment Results

           The segment results indicated below are for the three and nine months ended March 31, 2001. Since these segments were developed by management for the first time for the quarter ended September 30, 2000, no comparative information for the three and nine months ended March 31, 2000 has been provided.

        The Transportation segment generated $3.9 million and $1.6 million of income from operations for the three and nine months ended March 31, 2001, respectively. This was primarily due to strong revenues from airline transactions, as internet commerce, and especially travel sales, continues to gain acceptance and grow substantially. As a result, in addition to a greater number of visitors to our websites, we have also been successful in converting a greater percentage of those visitors to make purchases.

        The Destinations segment generated a $2.3 million and $1.5 million of income from operations for the three and nine months ended March 31, 2001, respectively. We act as merchant of record on a significant portion of Destinations transactions. The introduction in June 2000 of the ESR business, which consists of offering negotiated rate hotel rooms on Expedia.com, the introduction in December 2000 of the Expedia Packages business and the introduction in January 2001 of the Expedia ESP engine have contributed to the growth in merchant business.

        The Advertising segment generated $0.5 million and $3.8 million of income from operations for the three and nine months ended March 31, 2001, respectively. This segment has experienced revenue growth due to increased traffic to our websites, which has created demand for banner placements and content sponsorships on our websites. Because this segment has low operating costs, it generates a strong profit margin on its revenues.

        The International segment had a $5.6 million and a $13.2 million loss from operations for the three and nine months ended March 31, 2001, respectively. Our International business is still in its development stage and we have invested in expansion by increasing promotional activities such as paper media and television ads in order to bring additional customers to the websites.

        The Corporate segment incurred significant losses from operations of $20.2 million and a $71.8 million for the three and nine months ended March 31, 2001, respectively, due to the amortization of goodwill and intangibles, the recognition of stock-based compensation and certain corporate headquarter expenses. The Corporate segment also generates revenues from the licensing to our airline and corporate customers. Over the next three quarters, we anticipate the licensing revenue to significantly decline to zero due to the expected terminations of three licenses.

Liquidity and Capital Resources

        Prior to October 1, 1999, as a division of Microsoft, we financed our activities through Microsoft. As a result, during the three months ended September 30, 1999, operating and allocated expenses were recorded as a contribution from owner.

          In November 1999, we raised $76.6 million from our initial public offering. In August 2000, we completed a private placement of warrants and common stock consisting of $50.0 million from TCV IV, L.P. and TCV IV Strategic Partners, L.P. and $10.0 million from Microsoft. Proceeds from these sales of stock have been the primary source of funding our operations.

          During the nine months ended March 31, 2001, net cash provided by operating activities was approximately $38.6 million. The net income for this period, excluding the non-cash charges for goodwill and intangibles amortization and recognition of stock compensation, was $0.1 million. A decrease in accounts receivable and prepaid expenses and increase in accounts payable and unearned revenue, combined with non-cash charges, were the primary differences between the income and the cash provided by operating activities. In our merchant business, we receive monies from customers on hotel bookings before the hotel stay has occurred. The payment to the suppliers related to these bookings is not made until after the stay has occurred. Therefore, there is a lag period from the receipt of the cash from the customers to the payment of the monies to the suppliers. This lag contributes to our positive cash flow when business is growing, as it has done this year.

          Net cash used in investing activities for the nine months ended March 31, 2000 and 2001, was $9.9 million and $10.5 million, respectively. These investing activities consisted primarily of capital expenditures, which totaled $13.0 million during the nine months ended March 31, 2001. Of this amount, $3.9 million reflects the capitalization of website development costs, $1.5 million reflects new system-related costs primarily related to our new ad serving system and customer relationship management system, and $2.7 million relates to new leasehold improvements, furniture and fixtures. The remaining capital expenditures reflect normal expenditure levels consistent with our growth as a company. We anticipate other significant capital expenditures during the next twelve months for computers and other system-related costs associated with our expected growth and as we migrate away from Microsoft systems and infrastructure and onto our own. Additional costs will also be capitalized related to further website development efforts. We are attempting to sell the building in Las Vegas we purchased as part of our acquisition of Travelscape.com, Inc. as we have leased other office facilities in Las Vegas for our Travelscape employees. A portion of the proceeds from the sale of this facility will be used to retire the mortgages against the office building.

          Stock option exercises were a source of approximately $1.9 million of cash. We anticipate additional stock option exercises going forward.

          In addition to receiving cash from companies advertising on our websites, in two agreements we also received equity as additional compensation. The fair market value assigned to the equity received during the nine months ended March 31, 2001was $0.4 million.

          In December 2000, we entered into a one year, $7 million letter of credit facility. This facility enables us to terminate existing letters of credit that are fully secured with restricted certificates of deposit, thereby freeing up this cash. Collateral for the new facility is in the form of a guarantee from Microsoft.

          As of March 31, 2001, we had $151.7 million in cash and cash equivalents. We do not currently anticipate needing any other additional cash funding as we believe that our current cash on hand and projected positive cash flow is sufficient to fund our operations.

Recent Accounting Pronouncements

          The EITF reached consensus on Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which establishes indicators to determine the statement of operations' presentation of revenue. We are currently evaluating the impact of this consensus, which must be applied by the end of the fiscal year ending June 30, 2001. If we were to report revenue on a net basis, this would have no effect on our operations, cash flow, gross profit or net loss. However, this would have a material impact on our revenues and cost of revenues.

          In December 1999, the United States Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 101 (“SAB No. 101”), Revenue Recognition in Financial Statements, which must be applied in the fourth quarter of fiscal 2001. SAB No. 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. We are currently evaluating the impact of applying SAB No. 101 on the condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          We have adopted the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, beginning July 1, 2000. We have not held derivative financial instruments at any time, therefore, this pronouncement did not have any impact on the condensed consolidated financial statements. Our notes payable are at fixed and variable interest rates. Since the amount outstanding at March 31, 2001 was only $1.4 million and the debt is comprised only of mortgages on the office building in Las Vegas which will be retired once the building is sold, our exposure to near-term adverse changes in interest rates or other market prices is immaterial. We may, however, experience such adverse changes if we incur variable-rate debt or hold derivative financial instruments in the future. Our international operations expose us to some foreign currency risk. We do not expect any of these risks to have a material effect on our financial results.

PART II. Other Information

Item 1. Legal Proceedings

See Note 8 to Unaudited Condensed Consolidated Financial Statements ("Commitments and Contingencies").

Item 2. Changes in Securities and Use of Proceeds

(a) Recent Sales of Unregistered Securities

          (i) On August 25, 2000, we issued 3,011,293 shares of our common stock and warrants to purchase an additional 602,259 shares of our common stock to TCV IV, L.P. and TCV IV Strategic Partners, L.P. in exchange for approximately $50 million in cash. On that same date, we issued 602,258 shares of our common stock and warrants to purchase an additional 120,452 shares of our common stock to Microsoft Corporation in exchange for approximately $10 million in cash. The exercise price for the warrants issued in these transactions is $16.604167 per share, subject to adjustment for dilutive events. A registration statement on Form S-3 was filed on December 1, 2000 to register those shares issued in this transaction that have not been previously sold. The Form S-3 became effective on February 28, 2001.

          (ii) On March 17, 2000, we acquired Travelscape.com, Inc. by issuing approximately 3.0 million shares, stock options and warrants in exchange for all outstanding shares, stock options and warrants of Travelscape. The total value of the stock exchanged was approximately $96 million. A registration statement on Form S-3 was filed on December 1, 2000 to register those shares issued in this transaction that have not been previously sold. The Form S-3 became effective on February 28, 2001.

          (iii) On March 17, 2000, we also acquired VacationSpot.com, Inc. by issuing approximately 2.6 million shares and stock options in exchange for all of the outstanding shares and stock options of VacationSpot. The total value of the stock exchanged was approximately $82 million. A registration statement on Form S-3 was filed on December 1, 2000 to register those shares issued in this transaction that have not been previously sold. The Form S-3 became effective on February 28, 2001.

          The issuances described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as a transaction by an issuer not involving any public offering and/or reliance upon Regulation D. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with Expedia, to information about Expedia.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits
Exhibit 10.1	Amended and Restated Services Agreement with Microsoft Corporation
Exhibit 10.2	Travelscape Office Lease
(b) Reports on Form 8-K
The Company has filed the following reports on Form 8-K:

     (i) Form 8-K dated April 2, 2001 submitting the press release issued by the Company indicating that it had reached an agreement with Northwest Airlines and KLM regarding commissions.

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.

Date: May 15, 2001

By:	/s/ Gregory S. Stanger
	Gregory S. Stanger
	Senior Vice President and Chief
	Financial Officer
	(Principal Financial and
	Accounting Officer)