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 December 31, 1999

[_] 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 0-27429

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

Washington 91-1996083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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.

Yes [X] No [_]

The number of shares outstanding of the registrant's common stock as of
December 31, 1999 was 38,984,000.

EXPEDIA, INC.

FORM 10-Q

For the Quarter Ended December 31, 1999

INDEX

Page
----

PART I. Financial Information....................................................... 1

Item 1. Financial Statements................................................... 1
a) Consolidated Statements of Operations for the Three
Months and Six Months Ended December 31, 1998 and 1999............ 1

b) Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1999................................................. 2

c) Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1998 and 1999.................................. 3

d) Consolidated Statements of Stockholders' Equity (Owner's Net
Deficit) for the period from July 1, 1999 to December 31, 1999.... 4

e) Notes to Consolidated Financial Statements......................... 5

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 10

PART II. Other Information.......................................................... 16

Item 1. Legal Proceedings...................................................... 16

Item 2. Changes in Securities and Use of Proceeds.............................. 16

Item 6. Exhibits............................................................... 16

SIGNATURES........................................................................... 17

Part I. Financial Information

Item 1. Financial Statements

EXPEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts) (unaudited)
- -------------------------------------------------------------------------------

Three months ended Six months ended
December 31, December 31,
-------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- --------

Net revenues $ 7,851 $ 17,821 $ 13,908 $ 33,089
Cost of revenues 4,132 7,314 7,309 12,678
-------- -------- -------- --------
Gross profit 3,719 10,507 6,599 20,411

Operating expenses:
Product development 5,083 4,452 10,060 9,845
Sales and marketing 2,516 10,584 4,576 17,316
General and administrative 1,568 1,946 2,618 4,675
Recognition of stock-based
compensation - 17,252 - 17,252
-------- -------- -------- --------
Total operating expenses 9,167 34,234 17,254 49,088
-------- -------- -------- --------
Loss from operations (5,448) (23,727) (10,655) (28,677)
Interest income - 543 - 543
-------- -------- -------- --------
(5,448) (23,184) (10,655) (28,134)
Provision for income taxes - - - -
-------- -------- -------- --------
Net loss $ (5,448) $ (23,184) $ (10,655) $(28,134)
======== ======== ======== ========
Basic and diluted net loss per
common share $ (0.64) $ (0.81)
======== ========
Weighted average shares used to
compute basic and diluted net
loss per common share 36,418 34,709

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands) (unaudited)
- --------------------------------------------------------------------------------

June 30, December 31,
1999 1999
--------- ------------

Assets
Current Assets:
Cash and cash equivalents $ - $ 74,127
Accounts receivable 4,970 9,692
Due from Microsoft - 3,021
Prepaid expenses - 63
--------- ---------
Total Current Assets 4,970 86,903

Property and equipment, net 386 2,353
Investment 400 400
--------- ---------
Total Assets $ 5,756 $ 89,656
========= =========
Current liabilities:
Accounts payable $ 1,216 $ 8,711
Due to Microsoft - 467
Accrued expenses - 314
Current portion of unearned revenue 2,364 2,019
--------- ---------
Total Current Liabilities 3,580 11,511

Unearned revenue, net of current portion 3,851 3,719
--------- ---------
Total Liabilities 7,431 15,230

Stockholders' Equity (Owner's Net Deficit):
Net contribution from Microsoft 85,089 -
Common stock, 120,000,000 shares
authorized; 38,984,000 outstanding - 390
Additional paid-in capital - 191,598
Unearned stock-based compensation - (94,378)
Accumulated deficit (86,764) -
Retained deficit - (23,184)
--------- ---------
Total Stockholders' Equity (Owner's
Net Deficit) (1,675) 74,426
--------- ---------
Total Liabilities & Stockholders' Equity
(Owner's Net Deficit) $ 5,756 $ 89,656
========= =========

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)(unaudited)
- --------------------------------------------------------------------------------

Six months ended
December 31,
----------------------
1998 1999
--------- ---------

Operating activities:
- --------------------
Net loss $(10,655) $(28,134)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 441 586
Amortization of noncash items (100) (100)
Recognition of stock-based compensation - 17,252
Cash provided (used) by changes in operating
assets and liabilities:
Accounts receivable (increase)/decrease 3,084 (4,722)
Due from Microsoft (increase) - (3,021)
Prepaid expenses (increase)/decrease 360 (63)
Accounts payable and accrued expenses
increase 409 7,809
Due to Microsoft increase - 467
Unearned revenue increase - 846
Recognition of unearned revenue from
prior periods (744) (1,223)
--------- ---------
Net cash used by operating activities (7,205) (10,303)

Investing activities:
- --------------------
Additions to property and equipment (317) (2,553)
--------- ---------
Net cash used by investing activities (317) (2,553)

Financing activities:
- --------------------
Net proceeds from issuance of stock - 76,646
Net proceeds from exercise of options - 6
Net contribution from Microsoft 7,522 10,331
--------- ---------
Net cash provided by financing activities 7,522 86,983
--------- ---------
Net increase in cash and cash equivalents - 74,127
--------- ---------
Cash and cash equivalents at beginning of period - -
Cash and cash equivalents at end of period $ - $ 74,127
========= =========

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (Owner's Net Deficit)

(In thousands) (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Net Common Stock Additional Unearned
contribution Accumulated -------------------- Paid-in Stock-Based Retained
from Microsoft deficit Shares Amount Capital Compensation Deficit Total
-------------- ----------- ---------- --------- ---------- ------------ --------- ---------

Balance,
June 30, 1999 85,089 (86,764) -- -- -- -- -- (1,675)
Net loss -- (4,950) -- -- -- -- -- (4,950)
Net contribution
from Microsoft 6,252 -- -- -- -- -- -- 6,252
---------- ---------- --------- --------- --------- --------- --------- --------

Balance,
September 30, 1999 91,341 (91,714) -- -- -- -- -- (373)
Conversion of
Microsoft's net
investment
and additional
contributed assets
to common
stock and
paid-in capital (91,341) 91,714 33,000 330 3,376 -- -- 4,079
Proceeds from
issuance of
common stock,
net of issuance
costs of
$7,074,000 -- -- 5,980 60 76,586 -- -- 76,646
Capitalization of
unearned stock-based
compensation -- -- -- -- 111,630 (111,630) -- --
Proceeds from
exercise of options -- -- 4 -- 6 -- -- 6
Recognition of
stock-based
compensation -- -- -- -- -- 17,252 -- 17,252
Net loss -- -- -- -- -- -- (23,184) (23,184)
---------- ---------- --------- --------- --------- --------- --------- --------

Balance,
December 31, 1999 $ -- $ -- 38,984 $ 390 $ 191,598 $ (94,378) $ (23,184) $ 74,426
---------- ---------- --------- --------- --------- --------- --------- --------

See accompanying notes.

EXPEDIA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)
- --------------------------------------------------------------------------------

1. Business Description

In October 1996, Microsoft Corporation ("Microsoft") launched its online
travel services product called Expedia. Since that launch, we have become a
leading provider of branded online travel services for leisure and business
travelers. We operate our own website, located at Expedia.com, with localized
versions in the United Kingdom, Germany and Canada. We offer one-stop travel
shopping and reservation services, providing reliable, real-time access to
schedule, pricing and availability information for over 450 airlines, 40,000
hotels and all major car rental companies. Our websites feature consumer-
oriented interfaces that enable consumers to make informed choices about their
travel purchases by providing quick and easy access to travel information and
content, 24 hours a day, 7 days a week.

Our global travel marketplace enables travel service suppliers to extend
their marketing reach online. Through our websites, suppliers can reach a large,
global audience of consumers who are actively engaged in planning and purchasing
travel. Suppliers can pursue a range of innovative, targeted merchandising and
advertising strategies designed to increase revenues, while at the same time
reducing transaction and customer service costs. We derive our revenues from
transactions on our websites and sales of advertisements on our websites. We
also license components of our technology and editorial content to selected
airlines and American Express as a platform for their websites.

On August 23, 1999, Expedia, Inc. was incorporated in the state of
Washington. The authorized share capital of the company was 120,000,000 shares
of common stock and 10,000,000 shares of preferred stock. On October 1, 1999,
Microsoft separated our assets and contributed them in exchange for 33,000,000
shares of common stock or 100% of outstanding common stock at that date.
Concurrent with this, we entered into a number of agreements with Microsoft that
were necessary to facilitate the operation of our company and its assets after
the separation. These agreements were discussed in our November 8, 1999 Form
S-1.

2. Initial Public Offering of Common Stock

On November 10, 1999, we completed an initial public offering in which we
sold 5,980,000 shares of common stock at a price of $14.00 per share, raising
$83.7 million in gross proceeds. After deducting $5.3 million in aggregate
underwriters discounts and commissions and $1.8 million in related expenses, net
offering proceeds were $76.6 million. As of December 31, 1999, 39.0 million
shares of common stock were outstanding.

3. Basis of Presentation

In our opinion, the accompanying balance sheets and related interim
statements of operations, cash flows, and stockholders' equity (owner's net
deficit) include all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with generally accepted
accounting principles. Preparing financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Our actual results may differ from our
estimates. Interim results are not necessarily indicative of results for a full
year. You should read the information included in this Form 10-Q in conjunction
with Management's Discussion and Analysis and financial statements and notes
thereto included in our November 8, 1999 Form S-1. Our financial statements are
consolidated and include the accounts of Expedia, Inc. and our wholly-owned
subsidiaries. Significant intercompany transactions and balances have been
eliminated.

4. Recent Accounting Pronouncements

The American Institute of Certified Public Accountants issued Statements
of Position, SOP 98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use, and SOP 98-5, Reporting on the Costs of Start-Up
Activities, which are effective for our fiscal year ending June 30, 2000. These
SOPs have no material effect on our financial statements.

5. Unearned Stock-based Compensation

Microsoft canceled all of the unvested options of Microsoft employees who
joined Expedia prior to its initial public offering. We replaced the canceled
options with Expedia options that have equivalent vesting schedules and in-the-
money values and comparable other terms as the canceled Microsoft options.
Vested options of Microsoft employees who joined Expedia were not converted to
Expedia stock and remained vested options in Microsoft stock. The number of our
options that we issued in order to replace each of the canceled Microsoft
options was a function of the offering price of our common stock and the market
price of Microsoft common stock on the date of the offering. We treated our
issuance of these Expedia options as a new grant of stock options. As a result,
we recorded a non-cash stock-based compensation charge to stockholders' equity
because the exercise price of the new options was significantly less than the
initial public offering price of our common stock. We are amortizing this
unearned stock-based compensation over the vesting period of the Expedia
options. The unearned stock-based compensation will be fully amortized by
December 2004.

6. Income Taxes

Effective October 1, 1999, we entered into a tax allocation agreement with
Microsoft. Per this agreement, if Microsoft is able to utilize our tax losses
during their current fiscal year, they will compensate us for 92.5% of the
benefit. We will retain the tax benefit of any losses not utilized and can
carry them forward to offset any future taxable income.

To date, Expedia has not recorded any provision or benefit for federal and
state income taxes. During the period from October 1, 1999 to December 31,
1999, we generated a net operating loss carry forward of $4.6 million for
federal income tax purposes. However, because of the Microsoft tax allocation
agreement, our limited operating history, losses incurred to date, and the
difficulty in accurately forecasting our future results, we have applied a
valuation allowance equivalent to the net operating loss carry forward. As a
result, we have not recorded any deferred tax asset.

7. Net Loss Per Share

Basic loss per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted loss per share is computed on the
basis of the weighted average number of common shares and outstanding stock
options using the "treasury stock" method. Because we are in a loss position,
the impact of any dilution is not included in the diluted loss per share
calculation as it would be anti-dilutive.

8. Related Party Transactions

As a result of the initial public offering of our stock, Microsoft owns
84.65% of our outstanding common stock at December 31, 1999. The combined
income statement impact of all related party transactions with Microsoft is
summarized in the following tables.

Costs prior to October 1, 1999 representing allocations from Microsoft.

Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1998 1999 1998 1999
-------- --------- -------- --------

Cost of revenues $ (695) - $ (1,261) $ (924)
Product development (1,724) - (3,336) (557)
Sales and marketing (135) - (269) (1,497)
General & administrative (1,482) - (2,410) (2,086)
-------- -------- -------- --------
Net expense $ (4,036) - $ (7,276) $ (5,064)
======== ======== ======== ========

Costs and revenue representing charges from the services agreement and
other agreements with Microsoft.

Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
1998 1999 1998 1999
--------- -------- -------- --------

Net revenues - $ 44 - $ 44
Cost of revenues - (1,011) - (1,011)
Product development - (1,016) - (1,016)
Sales and marketing - (245) - (245)
General & administrative - (457) - (457)
-------- -------- -------- --------
Net expense - $ (2,685) - $ (2,685)
======== ======== ======== ========

In addition to the contributed assets and liabilities identified in the
September 30, 1999 balance sheet of our Form S-1, Microsoft made additional
contributions during the three months ended December 31, 1999 totaling $4.1
million. This consisted of the following: due from Microsoft ($3.0 million);
property and equipment, net ($0.9 million); and other items ($0.2 million).

9. Commitments and Contingencies

We have multi-year agreements with certain travel service providers that
make available the services accessed through our website. Under these
agreements, we pay monthly service fees to the service providers based on the
volume of activity. In addition, we pay certain communication and capacity fees.
We expense these amounts as the services are provided.

We are a party to a cooperative advertising agreement with a corporate
airline customer that requires us to set aside monies received from transactions
to be used for joint advertising initiatives.

We have a five-year lease agreement to rent our office premises. The
lease agreement has been executed in the name of Microsoft Corp.; however, we
make all lease payments directly to the landlord.

On October 13, 1999, Priceline.com Incorporated filed a patent
infringement lawsuit against Microsoft and Expedia in the United States District
Court for the District of Connecticut. The lawsuit alleges that our Hotel Price
Matcher and Flight Price Matcher services infringe on a patent held by
Priceline.com. The suit also alleges that Microsoft and Expedia engaged in
unfair and deceptive acts or practices in violation of the Connecticut Unfair
Trade Practices Act. The suit seeks:

. unspecified damages, including treble and punitive damages

. an injunction against further alleged infringement

. an injunction from continuing to operate our Hotel Price Matcher, Flight
Price Matcher, or any similar service

. interest and costs, attorneys' fees and an accounting of the revenue
received by Microsoft and Expedia relating to Internet travel services

We do not believe that the claims made by Priceline.com have merit.
Accordingly, we intend to vigorously defend ourselves in this lawsuit.
Discovery has not yet commenced; accordingly, we are not presently able to
estimate the likelihood of an adverse result or the range of possible loss
relating to this matter. In the event of an adverse result, we could be
required to do one or more of the following:

. pay substantial damages, including treble and punitive damages

. permanently cease use of our Hotel Price Matcher service, Flight Price
Matcher, and any similar service

. obtain a license for the technology or spend significant resources to
develop non-infringing technology

Any limitation on our ability to market our Hotel Price Matcher service,
Flight Price Matcher service, or the costs and potential delays associated with
redesigning these services, would seriously harm our business, financial
condition, results of operation and cash flows.

On October 7, 1999, Reed Elsevier Inc. filed a complaint in the United
States District Court for the District of New Jersey against Microsoft and
Expedia. The suit alleges that Microsoft and Expedia materially breached an
agreement between Microsoft and Reed Elsevier relating to the development by
Microsoft of a hotel directory for the Internet and the sale of Internet
advertising in that directory. The suit also alleges conversion and
misappropriation of Reed Elsevier's proprietary database, unfair competition,
breach of implied covenant of good faith and fair dealing, and interference with
a business relationship. The suit seeks:

. unspecified damages, including punitive damages

. a permanent injunction requiring us to comply with the agreement

. a permanent injunction prohibiting us from offering or selling Internet
advertising in the hotel directory or competing with Reed Elsevier in
connection with the sale of advertising in the hotel directory and from
utilizing a joint database developed pursuant to the parties' agreement

. rescission of the agreement and return of all payments made by and all
information given by Reed Elsevier under the agreement

. costs and attorneys' fees

Since this lawsuit was recently filed and discovery has not yet commenced,
we are not presently able to estimate the likelihood of an adverse result or the
range of possible loss relating to this matter. We intend to vigorously defend
ourselves in this lawsuit and do not expect the outcome of this lawsuit to have
a material adverse effect on our business.

On December 27, 1999, Expedia, Inc filed a federal court action for
trademark infringement in the Central District of California against Xpedior,
Inc., a newly formed subsidiary of Metamor Worldwide. Xpedior filed its answer
to the complaint on January 14, 2000. The lawsuit alleges that Xpedior's use of
the XPEDIOR trademark constitutes unfair competition, trademark

infringement, and is likely to dilute the brand strength and awareness of the
EXPEDIA mark. The suit seeks:

. preliminary and permanent injunctive relief against future infringement
and dilution;

. unspecified damages, including enhanced and punitive damages; and

. attorneys' fees and costs.

No trial date has been set. Discovery has just commenced and we are not
presently able to estimate the likelihood of success or the range of possible
outcomes and their consequences.

In addition to the matters discussed above, we are subject to various
legal proceedings and claims that arise in the ordinary course of business.

10. Subsequent Events

In January 2000, we signed an agreement to acquire Travelscape.com and its
affiliates, subject to certain conditions. In this transaction, we will issue
approximately 3 million shares, options and warrants, valued at approximately
$95 million, in exchange for all outstanding shares, options and warrants of
Travelscape.com, Inc. We will also assume long-term debt of approximately $8
million as part of the transaction. This transaction is also subject to
provisions that may result in an adjustment to the consideration paid or
termination of the transaction.

In January 2000, we also signed an agreement to acquire VacationSpot.com,
Inc. We will issue approximately 2.6 million shares and options, valued at
approximately $82 million, in exchange for all of the outstanding shares,
options and warrants of VacationSpot.com, Inc.

All shares to be issued in these transactions will be unregistered. The
Company expects to account for both of the transactions under the purchase
method of accounting and expects to incur total transaction expenses of
approximately $4.0 million in connection with these acquisitions. The
transactions are subject to various closing conditions, including shareholder
approval and expiration of the applicable waiting periods under the Hart-Scott-
Rodino Act of 1976.

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
financial statements and should be read together with our 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.333-87623).

Overview

We are a leading provider of branded online travel services for leisure
and business travelers. We operate our own websites, including Expedia.com and
international versions of Expedia.com and we license components of our
technology to provide the platform for travel websites with Continental
Airlines, Northwest Airlines and American Express Travel Related Services. We
derive our revenues from commissions, fees, and direct merchant sales related to
transactions on our websites. We also derive revenues from sales of
advertisements on our websites and licensing fees.

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. Although these allocations are not necessarily indicative of the
costs that would have been incurred by us on a stand-alone basis, we believe
that the allocated amounts are reasonable. 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.

Transaction revenues are derived from airline ticket transactions and
hotel and car rental reservations with airline ticket transactions making up the
substantial majority of these revenues. 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. We recognize transaction
revenues on air transactions when the reservation is made and secured by a
credit card, net of an allowance for cancellations. We recognize transaction
revenues on hotel and car rental reservations either on payment or on
notification of entitlement by a third party. In September 1999, we introduced
Hotel Price Matcher and in December 1999, we introduced Flight Price Matcher.
For both programs, we are the transaction merchant of record and set the ticket
price. As a result, we record the entire value of these transactions as revenue
when the reservation is made, as well as the cost of the actual ticket or hotel
room night.

Additionally, we derive revenues from the sales of advertisements on our
websites. 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 transaction occurs.

We launched our websites in Canada in fiscal 1997, in the United Kingdom
in fiscal 1999 and in Germany in fiscal 2000. 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.

Cost of revenues consists primarily of fees paid to our fulfillment
vendors for the costs associated with issuing airline tickets and related

customer services, fees paid to Worldspan for use of their computer reservation
and information services system, allocated and direct costs for the operation of
our data center and costs related to insertion of banner and other
advertisements. For Hotel Price Matcher and Flight Price Matcher transactions,
cost of revenue is the entire cost of the hotel room or airline ticket as
charged by the provider.

Our direct product development expenses consist primarily of compensation
for personnel. Our direct sales and marketing expenses consist primarily of
personnel-related costs as well as advertising, distribution and public
relations expenses. In addition to these direct expenses, we have historically
been allocated an amount of product development, sales and marketing, and
general and administrative costs from Microsoft. These costs include allocations
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. Accordingly, we are
no longer being allocated costs from Microsoft. Under the services agreement,
Microsoft has continued to provide us with the types of services described
above. In return, we pay Microsoft fees based on the total cost of the services.
The services agreement is for an initial period ending December 31, 2000 with
one-year renewals if the parties agree on fees. The agreement is cancelable by
us upon 30 days written notice and by Microsoft upon 180 days written notice. We
have begun developing our own resources in some of these areas. For additional
services that are no longer needed, adjustments to the services agreement fees
must be mutually agreed upon.

We have incurred and expect to continue to incur substantial losses and
negative cash flows on both an annual and interim basis. In particular, we
intend to increase our focus and spending on brand development, sales and
marketing, product development, website content and strategic relationships.
Additionally, our revenues are impacted by the seasonality of the travel
industry, particularly leisure travel. These factors could adversely affect our
future financial condition and operating results.

Our fiscal years end on June 30 of each year. References to a fiscal year,
such as fiscal 1999, 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 net revenues for the three months and six months ended December 31, 1999
compared to the same periods in 1998.

(As a Percentage of Revenues)

Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
1998 1999 1998 1999
-------- -------- -------- --------

Net Revenues 100% 100% 100% 100%
Cost of Revenues 52% 41% 53% 38%
-------- -------- -------- --------
Gross Profit 48% 59% 47% 62%

Operating Expenses:
Product Development 65% 25% 72% 30%
Sales and Marketing 32% 59% 33% 52%
General and Administrative 20% 11% 19% 14%
Recognition of stock-based
compensation 0% 97% 0% 52%
-------- -------- -------- --------
Total Operating Expenses 117% 192% 124% 148%
-------- -------- -------- --------
Loss from operations (69%) (133%) (77%) (86%)
Interest income 0% 3% 0% 1%
Provision for income taxes - - - -
-------- -------- -------- --------
Net loss (69%) (130%) (77%) (85%)
======== ======== ======== ========

Net Revenues.

($ in thousands) Three Months Six Months
Ended % Ended %
December 31, Change December 31, Change
--------------------------- ---------------------------
1998 1999 1998 1999
-------- -------- -------- --------

Net Revenues $ 7,851 $17,821 127% $13,908 $33,089 138%

Net Revenues. Gross bookings on Expedia's websites, excluding transactions
on licensee websites, increased from the previous year by 158% to $220 million
for the three months ended December 31, 1999. For the six months ended December
31, 1999, gross bookings, excluding bookings on licensee websites, were $413
million, an increase of 168% over the comparable prior year period. A small
decrease in average commission rates resulted in transaction revenue increasing
at a slightly lower pace than gross bookings, as revenue was up 153% for both
the three and six month periods ending December 31, 1999. This corresponds to
transaction revenue increases of $7.5 million and $13.5 million. Increases in
advertising and licensing-related revenue comprised the remainder of the
increase.

Cost of Revenues and Gross Profit.

Cost of Revenues $ 4,132 $ 7,314 77% $ 7,309 $12,678 73%
% of Net Revenues 52% 41% 53% 38%

Gross Profit $ 3,719 $10,507 183% $ 6,599 $20,411 209%
% of Net Revenues 48% 59% 47% 62%

Cost of Revenues and Gross Profit. The increases in the cost of revenues
and gross profit correspond to the growth in net revenues. The increases in the
gross profit percentages are due to efficiencies associated with increased
transaction volumes, as economies of scale are realized. Growth in advertising
revenues, which have a high profit margin, also helped drive the gross profit
percentage increase. Hotel Price Matcher and Flight Price Matcher produce lower
gross profit percentages because we act as merchant of record in these
transactions. As a result, the revenue and related cost of sales are presented
at gross amounts. However, because both programs were recently implemented,
their effects on the gross profit percentage were small. Going forward, we
anticipate their impact will result in higher gross profits, but lower gross
profit percentages.

Product Development.

Product Development $ 5,083 $ 4,452 -12% $10,060 $ 9,845 -2%
% of Net Revenues 65% 25% 72% 30%

Product Development. The decrease in development expenses is due to the
services agreement charge from Microsoft being somewhat lower than the amount
previously allocated from Microsoft for development services. The lower costs
combined with larger net revenues result in the decrease in cost as a percentage
of net revenues.

Sales and Marketing.

Sales and Marketing $ 2,516 $10,584 321% $ 4,576 $ 17,316 278%
% of Net Revenues 65% 25% 72% 30%

Sales and Marketing. The increases in expenses are primarily attributable
to increased promotional activities intended to drive traffic to our websites,
such as radio and paper media advertising. We also incurred production costs
related to a TV advertising campaign that began running in January 2000. We
anticipate continuing to spend a significant portion of net revenues during the
remainder of the fiscal year in order to build greater brand awareness and
increase the number of internet users who access our websites.

General and Administrative.

General and
Administrative $ 1,568 $ 1,946 24% $ 2,618 $ 4,675 79%
% of Net Revenues 20% 11% 19% 14%

General and Administrative. These costs increased in absolute terms but
decreased as a percentage of net revenues. The services agreement took effect
October 1, 1999 and replaced the cost allocation that had previously been
charged by Microsoft. Subsequent to October 1, 1999, permanent Microsoft
employees who were members of the Expedia business unit became employees of
Expedia, Inc. We have also hired employees to perform functions that were not
necessary prior to our being an independent company.

Recognition of Stock-based Compensation.

Recognition of stock-
based compensation $ - $17,252 100% $ - $17,252 100%
% of Net Revenues 0% 97% 0% 52%

Recognition of Stock-based Compensation. Note 5 discloses the source and
reason for the charge. The starting date for amortization coincides with the
initial public offering date of November 10, 1999.

Liquidity and Capital Resources

Historically, we have financed our activities exclusively through
contributions from Microsoft. Although we have been an operating unit of
Microsoft in the past, and Microsoft has made a net contribution to our
operations of $91.3 million through September 30, 1999, we do not expect
Microsoft to continue to be a source of liquidity. As a result, we raised $76.6
million from our initial public offering.

During the six months ending December 31, 1999, net cash used by operating
activities was $10.3 million. Historically, operating and allocated expenses
were recorded as a contribution from owner. With our new capitalization,
management of working capital is now our responsibility. As a result, the levels
of accounts receivable, accounts payable, and accrued expenses are higher than
those in the historical financial statements. So, in addition to the cash
portion of our net losses, changes in working capital will affect our operating
cash. During the six months ending December 31, 1999, the increases in working
capital assets and liabilities approximately offset each other.

At December 31, 1999, we had committed to approximately $2.4 million of
leasehold improvements and related costs for our new office space in Bellevue,
Washington. Of the amount, $0.8 million was capitalized at December 31, 1999.
Total capital expenditures during the six months ending December 31, 1999 were
$2.6 million, which includes $0.9 million of assets contributed by Microsoft.
After factoring in the leasehold improvement capitalization of $0.8 million, the
remaining $0.9 million of capital expenditures reflects 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.

We have entered into agreements for two separate acquisitions, both to be
purchased by issuing shares of Expedia stock. This will cause a dilution to the
current ownership percentage of our existing stockholders. We will incur
transaction expenses of approximately $4 million. The transactions are expected
to close on or around March 31, 2000. For the short term, these acquisitions
will cause our losses and negative cash flow to be greater compared to our
projected results on a stand-alone basis.

As of December 31, 1999, we had $74.1 million in cash and cash
equivalents. We may utilize all of this cash during the next twelve months to

fund Expedia's operations and growth. We do not have a credit facility and are
not currently negotiating with any party to obtain a credit facility. We will
continue to evaluate financing alternatives.

We have not held derivative financial instruments nor had debt outstanding
at any time. Accordingly, we have not been exposed to near-term adverse changes
in interest rates or other market prices. We may however experience such adverse
changes if we incur debt or hold derivative financial instruments in the future.
Additionally, we do not expect inflation to have a material effect on our
results of operations.

PART II. Other Information

Item 1. Legal Proceedings

See Notes to Consolidated Financial Statements.

Item 2. Changes in Securities and Use of Proceeds

On November 10, 1999, we completed our initial public offering. We
issued 5,980,000 shares at an offering price of $14.00 per share, generating
$83.7 million in gross proceeds. The shares had a par value of $0.01. All shares
of common stock sold in the offering were registered on a Registration Statement
on Form S-1 (SEC File No. 333-87623). The Securities and Exchange Commission
declared the Registration Statement effective on November 8, 1999. The managing
underwriters were Goldman, Sachs and Co. and Morgan Stanley Dean Witter. After
deducting underwriter discounts and commissions of $5.3 million and related
expenses of approximately $1.8 million, the net proceeds were $76.6 million.

The net proceeds from this offering are being used for our working
capital and general corporate purposes. This includes the funding of current and
anticipated operating losses as well as the expansion of our facilities and
other infrastructure. The net proceeds will enable us to continue to
significantly increase advertising in order to build greater brand awareness and
increase traffic to our web sites. A portion of the net proceeds will also be
used to cover expenses related to the planned acquisition and integration of
Travelscape.com, Inc. and VacationSpot.com, Inc.

Item 6. Exhibits

Exhibit 10 Lease Agreement between Bellevue Goldwell Associates LLC
and Microsoft Corporation

Exhibit 27 Financial Data Schedule

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: February 14, 2000 BY /s/ GREGORY S. STANGER
----------------------
Gregory S. Stanger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)