10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                    to

Commission File Number 0-25581

PRICELINE.COM INCORPORATED

(Exact name of Registrant as specified in its charter)

Delaware	06-1528493
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

800 Connecticut Avenue

Norwalk, Connecticut 06854

(address of principal executive offices)

(203) 299-8000

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x

Number of shares of Common Stock outstanding at November 1, 2006:

Common Stock, par value $0.008 per share	36,398,235
(Class)	(Number of Shares)

priceline.com Incorporated

Form 10-Q

For the Quarter Ended September 30, 2006

PART I - FINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements
Consolidated Balance Sheets (unaudited) at September 30, 2006 and December 31, 2005	2
Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2006 and September 30, 2005	3
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) For the Nine Months Ended September 30, 2006	4
Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2006 and September 30, 2005	5
Notes to Unaudited Consolidated Financial Statements	6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.  Controls and Procedures	54
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6. Exhibits and Reports on Form 8-K	55
SIGNATURES	57

PART I – FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

priceline.com Incorporated

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except share and per share data)

	September 30,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	308,670		$	80,341
Restricted cash	17,795			22,308
Short-term investments	32,686			72,745
Accounts receivable, net of allowance for doubtful accounts of $1,274 and $1,377, respectively	58,577			30,043
Prepaid expenses and other current assets	19,902			18,245
Total current assets	437,630			223,682
Property and equipment, net	20,738			18,271
Intangible assets, net	153,114			149,675
Goodwill	218,813			198,417
Deferred taxes	182,822			146,553
Other assets	21,417			17,430
Total assets	$	1,034,534		$	754,028
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	53,806		$	37,851
Accrued expenses and other current liabilities	43,239			29,545
Deferred merchant bookings	7,295			3,619
Total current liabilities	104,340			71,015
Deferred taxes	42,986			42,375
Other long-term liabilities	12,260			10,889
Minority interest	20,710			23,659
Long-term debt	523,718			223,549
Total liabilities	704,014			371,487
Series B mandatorily redeemable preferred stock, $0.01 par value; 80,000 authorized shares; $1,000 liquidation value per share; 80,000 shares issued and 13,470 shares outstanding	13,470			13,470
Stockholders’ equity:
Common stock, $0.008 par value; authorized 1,000,000,000 shares, 42,947,649 and 42,195,004 shares issued, respectively	329			323
Treasury stock, 6,597,701 and 2,496,326 shares, respectively	(486,253		)	(350,628		)
Additional paid-in capital	2,066,003			2,069,165
Deferred compensation	—			(6,810		)
Accumulated deficit	(1,275,265		)	(1,334,572		)
Accumulated other comprehensive income (loss)	12,236			(8,407		)
Total stockholders’ equity	317,050			369,071
Total liabilities and stockholders’ equity	$	1,034,534		$	754,028

See Notes to Unaudited Consolidated Financial Statements.

2

priceline.com Incorporated

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Merchant revenues	$	238,558		$	222,142		$	699,520		$	686,174
Agency revenues	73,326			35,497			159,599			69,280
Other revenues	1,583			1,158			3,913			3,293
Total revenues	313,467			258,797			863,032			758,747
Cost of merchant revenues	189,920			178,272			561,450			555,280
Cost of agency revenues	—			523			—			523
Cost of other revenues	—			—			—			—
Total costs of revenues	189,920			178,795			561,450			555,803
Gross profit	123,547			80,002			301,582			202,944
Operating expenses:
Advertising – Offline	6,665			7,320			24,962			26,482
Advertising – Online	34,560			19,865			86,914			42,001
Sales and marketing	11,204			9,645			31,494			27,967
Personnel, including stock-based compensation of $3,543, $1,270, $10,277 and $2,974, respectively	21,658			13,820			56,869			34,804
General and administrative, including option payroll taxes of $54, $10, $273 and $66, respectively	6,643			4,814			19,638			14,502
Information technology	2,551			2,508			7,190			8,023
Depreciation and amortization	8,664			7,138			24,970			17,651
Restructuring charge, net	—			2,000			135			1,664
Total operating expenses	91,945			67,110			252,172			173,094
Operating income	31,602			12,892			49,410			29,850
Other income (expense):
Interest income	2,626			1,102			6,322			4,271
Interest expense	(1,550		)	(1,245		)	(4,603		)	(3,777		)
Other	354			(77		)	(157		)	(558		)
Total other income (expense)	1,430			(220		)	1,562			(64		)
Earnings before income taxes, equity in income (loss) of investees and minority interests	33,032			12,672			50,972			29,786
Income tax benefit	18,113			158,573			13,277			158,527
Equity in income (loss) of investees and minority interests	(2,328		)	325			(3,015		)	626
Net income	48,817			171,570			61,234			188,939
Preferred stock dividend	(1,063		)	(976		)	(1,927		)	(1,854		)
Net income applicable to common stockholders	$	47,754		$	170,594		$	59,307		$	187,085
Net income applicable to common stockholders per basic common share	$	1.21		$	4.36		$	1.50		$	4.79
Weighted average number of basic common shares outstanding	39,596			39,156			39,487			39,038
Net income applicable to common stockholders per diluted common share	$	1.05		$	3.71		$	1.34		$	4.12
Weighted average number of diluted common shares outstanding	46,385			46,485			46,153			46,441

See Notes to Unaudited Consolidated Financial Statements.

3

priceline.com Incorporated

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

(In thousands)

	Common Stock			Additional Paid-			Accumulated			Accumulated Other Comprehensive			Treasury Stock					Deferred
	Shares	Amount		in Capital			Deficit			Income (Loss)			Shares		Amount			Compensation			Total
Balance, January 1, 2006	42,195	$	323	$	2,069,165		$	(1,334,572	)	$	(8,407	)	(2,496	)	$	(350,628	)	$	(6,810	)	$	369,071
Net income applicable to common stockholders	—	—		—			59,307			—			—		—			—			59,307
Unrealized gain on marketable securities	—	—		—			—			107			—		—			—			107
Currency translation adjustment	—	—		—			—			20,536			—		—			—			20,536
Comprehensive income	—	—		—			—			—			—		—			—			79,950
Issuance of restricted stock, net of forfeitures	118	1		(1		)	—			—			—		—			—			—
Reclassification of deferred compensation upon adoption of SFAS 123(R)	—	—		(6,810		)	—			—			—		—			6,810			—
Issuance of preferred stock dividend	81	1		1,926			—			—			—		—			—			1,927
Exercise of stock options and vesting of restricted stock units	554	4		9,588			—			—			—		—			—			9,592
Repurchase of common stock	—	—		—			—			—			(4,102	)	(135,625		)	—			(135,625		)
Purchase of conversion spread hedges	—	—		(32,520		)	—			—			—		—			—			(32,520		)
Stock-based compensation	—	—		9,010			—			—			—		—			—			9,010
Tax benefit on equity-related net operating losses	—	—		15,577			—			—			—		—			—			15,577
Excess tax benefit on stock-based compensation	—	—		68			—			—			—		—			—			68
Balance, September 30, 2006	42,948	$	329	$	2,066,003		$	(1,275,265	)	$	12,236		(6,598	)	$	(486,253	)	$	—		$	317,050

See Notes to Unaudited Consolidated Financial Statements.

4

priceline.com Incorporated

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

	Nine Months Ended
	September 30,
	2006			2005
OPERATING ACTIVITIES:
Net income	$	61,234		$	188,939
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	7,551			6,426
Amortization	18,439			12,779
Provision for uncollectible accounts, net	2,921			1,853
Deferred income taxes	(26,106		)	(161,557		)
Stock-based compensation expense	10,277			2,974
Amortization of debt issuance costs	1,061			1,104
Equity in (income) loss of investee, net and minority interests	3,015			(626		)
Restructuring charges, net	135			1,664
Net loss on disposable property and equipment	—			91
Changes in assets and liabilities:
Accounts receivable	(28,491		)	(13,576		)
Prepaid expenses and other current assets	(2,150		)	(35		)
Accounts payable, accrued expenses and other current liabilities	31,831			8,959
Other	567			110
Net cash provided by operating activities	80,284			49,105
INVESTING ACTIVITIES:
Acquisitions and other equity investments, net of cash acquired	(3,104		)	(133,802		)
Purchase of short-term investments	(111,953		)	(49,420		)
Redemption of short-term investments	152,119			119,668
Additions to property and equipment	(9,628		)	(8,034		)
Change in restricted cash	4,538			931
Net cash provided by (used in) investing activities	31,972			(70,657		)
FINANCING ACTIVITIES:
Repurchase of common stock	(135,625		)	—
Proceeds from exercise of stock options	9,592			3,239
Proceeds from issuance of convertible senior notes	300,000			—
Payment of debt issuance costs	(7,900		)	—
Purchase of conversion spread hedges	(32,520		)	—
Excess tax benefit from stock-based compensation	68			—
(Purchase) sale of shares in subsidiary held by minority interest	(19,830		)	18,708
Net cash provided by financing activities	113,785			21,947
Effect of exchange rate changes on cash and cash equivalents	2,288			(1,576		)
Net increase (decrease) in cash and cash equivalents	228,329			(1,181		)
Cash and cash equivalents, beginning of period	80,341			101,270
Cash and cash equivalents, end of period	$	308,670		$	100,089
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for income taxes	$	10,682		$	1,666
Cash paid during the period for interest	$	3,552		$	3,643

See Notes to Unaudited Consolidated Financial Statements

5

priceline.com Incorporated

Notes to Unaudited Consolidated Financial Statements

1.BASIS OF PRESENTATION

Priceline.com Incorporated (“priceline.com” or the “Company”) is responsible for the Unaudited Consolidated Financial Statements included in this document.  The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial statements.  The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting.  As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.  These statements should be read in combination with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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

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

2.BUSINESS ACQUISITION

On July 14, 2005, the Company, through its subsidiary, priceline.com International Limited (“priceline.com International”), acquired 100% of the total issued share capital of Bookings B.V. (“Bookings”), an Amsterdam-based provider of online services for the booking of European hotel reservations.  The total consideration for all of the Bookings shares was approximately $135 million, including direct acquisition costs and certain post-closing adjustments. The acquisition has been accounted for as a purchase business combination. The Company’s Unaudited Consolidated Financial Statements include the results of operations of Bookings since the acquisition in July 2005.

3.STOCK-BASED EMPLOYEE COMPENSATION

The Company has adopted the following stock compensation plans from which broad-based employee grants may be made:  the priceline.com Incorporated 1997 Omnibus Plan (the “1997 Plan”), the priceline.com Incorporated 1999 Omnibus Plan (the “1999 Plan”) and the priceline.com Incorporated 2000 Employee Stock Option Plan (the “2000 Plan”), each of which provides for grants of share based compensation as incentives and rewards to encourage employees, officers, consultants and directors in the long-term success of the Company.  The 1997 Plan, 1999 Plan and 2000 Plan provide for grants of options to purchase up to 3,979,166, 7,895,833 and 1,000,000 shares of priceline.com common stock, respectively, at a purchase price equal to the fair market value on the date of grant.

Stock-based compensation issued under the plans generally consists of non-qualified stock options, restricted stock, “performance shares” and restricted stock units.  Stock options are granted to employees at exercise prices equal to the fair market value of the common stock at the date of grant and have a term of 10 years.  Generally, stock option grants to employees vest over three years from the grant date.  Restricted stock, “performance shares” and restricted stock units generally vest over periods from 1 to 4 years.

The Company issues new shares upon the issuance of restricted stock and the exercise of stock options, restricted stock units and performance shares.

In addition, the Company has granted restricted stock and restricted stock units in shares of priceline.com International to certain managers of its European operations.  These awards generally vest over two to three years.

6

In December 2004, Statement of Financial Accounting Standard No. 123 (Revised 2004), Share-Based Payment (“SFAS 123(R)”) was issued. SFAS 123(R) is a revision of SFAS No. 123, as amended, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123(R) eliminated the alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of stock options. SFAS 123(R) requires that the cost resulting from all share based payment transactions be recognized in financial statements. SFAS 123(R) established fair value as the measurement objective in accounting for share based payment arrangements and requires companies to apply a fair value based measurement method in accounting for share based payment transactions with employees.  Prior to January 1, 2006, the Company accounted for stock awards and stock option grants using the intrinsic value method. Compensation expense relating to restricted stock and restricted stock unit grants was recognized over the period during which the employee rendered service to the Company necessary to earn the award, at fair value on date of grant based on the number of shares granted and the quoted price of the Company’s common stock.

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method. Under this transition method, compensation cost recognized in the three and nine months ended September 30, 2006, includes amounts of: (a) compensation cost of all share based awards granted to employees prior to, but unvested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all stock-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the new provisions of SFAS 123(R). In accordance with the modified prospective method, results for prior periods have not been restated.  Stock-based compensation cost was approximately $10.3 million and $3.0 million for the nine months ended September 30, 2006 and 2005, respectively.  The related tax benefit for the nine months ended September 30, 2006 was approximately $3.7 million.  There was no related tax benefit for the nine months ended September 30, 2005.

The fair value of restricted stock, “performance shares” and restricted stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock on the grant date, and the fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight line method under SFAS 123(R).

The adoption of SFAS 123(R) resulted in an increase in net earnings attributable to the cumulative effect of accounting change caused by SFAS 123(R)’s requirement to apply an estimated forfeiture rate to unvested awards.  The Company previously recorded forfeitures when they occurred. The cumulative effect of accounting change as of January 1, 2006 totaled approximately $211,000 ($131,000 net of related tax effect) and was recorded in personnel expense for the nine months ended September 30, 2006 since its impact on net income and net income per share was not significant.

Prior to the adoption of SFAS 123(R), deferred compensation related to restricted stock and restricted stock unit awards was classified as a separate component of stockholders’ equity. In accordance with the provisions of SFAS 123(R), on January 1, 2006, the balance in deferred compensation was reclassified to additional paid-in capital.

SFAS 123(R) also amends SFAS No. 95, Statement of Cash Flows, requiring the benefits of tax deductions in excess of recognized compensation costs to be reported as financing cash flows, rather than as operating cash flows as previously required. Tax benefits in excess of recognized compensation cost for the three and nine months ended September 30, 2006 amounted to $68,000.

The following table summarizes the effect of adopting SFAS 123(R) on the reported amounts for the nine months ended September 30, 2006 relative to amounts that would have been reported using the intrinsic value method under previous accounting (in thousands, except per share amounts):

	Intrinsic Value Method		SFAS 123(R) Adjustments			As Reported
Operating income	$	53,810	$	(4,400	)	$	49,410
Earnings before income taxes, equity in income (loss) of investees and minority interests	55,372		(4,400		)	50,972
Net income	62,016		(2,709		)	59,307
Net income applicable to common stockholders per basic common share:	$	1.57	$	(0.07	)	$	1.50
Net income applicable to common stockholders per diluted common share:	$	1.40	$	(0.06	)	$	1.34

7

No stock options were granted during the nine months ended September 30, 2006. The fair value of stock options granted during the three months ended September 30, 2005 was estimated at the date of grant using the Black-Scholes option pricing model, assuming no dividends and the following weighted average assumptions:

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

The risk-free interest rate is based on the U.S Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.  The expected lives represent the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise pattern.  The expected volatility is based on historical volatility of the Company’s common stock.

The following table provides relevant information as to reported results for the three and nine months ended September 30, 2005 under the Company’s intrinsic value method of accounting for stock options with supplemental information as if the fair value recognition provisions of SFAS 123 had been applied (in thousands, except per share amounts):

	For the Three Months Ended September 30, 2005			For the Nine Months Ended September 30, 2005
Net income applicable to common stockholders, as reported	$	170,594		$	187,085
Add: Stock-based compensation, as reported, net of taxes	1,270			2,974
Deduct:  Total stock-based compensation determined under SFAS 123 fair value based method for all stock-based compensation, net of taxes	(2,891		)	(8,049		)
Adjusted net income, SFAS 123, fair value method for all stock-based compensation	$	168,973		$	182,010
Net income applicable to common stockholders per basic common share, as reported	$	4.36		$	4.79
Net income applicable to common stockholders per diluted common share, as reported	$	3.71		$	4.12
Net income applicable to common stockholders per basic common share, SFAS 123 adjusted	$	4.32		$	4.66
Net income applicable to common stockholders per diluted common share, SFAS 123 adjusted	$	3.67		$	4.01

8

The following table summarizes stock option activity during the nine months ended September 30, 2006:

Stock Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (000’s)
Outstanding at January 1, 2006	3,871,738		$	52.37	6.7
Granted	—		—
Exercised	(536,159	)	$	17.89
Forfeited/Expired	(90,927	)	$	91.43
Outstanding at September 30, 2006	3,244,652		$	56.98	5.8	$	40,934
Vested or expected to vest at September 30, 2006	3,198,800		$	57.49	5.8	$	40,238
Exercisable at September 30, 2006	2,786,130		$	62.80	5.4	$	33,981

The weighted average grant-date fair value per share was $11.77 for 256,998 options granted during the nine months ended September 30, 2005.  As of September 30, 2006, the total future compensation cost related to unvested options not yet recognized was $4.5 million and the weighted average period over which these awards are expected to be recognized was 1.2 years.  The intrinsic value of options exercised was approximately $6.4 million and $1.8 million for the nine months ended September 30, 2006 and 2005, respectively.

The number of options that vested during the nine months ended September 30, 2006 and 2005, respectively, was 434,305 with a total fair value of approximately $5.1 million and 852,609 with a total fair value of approximately $8.6 million.

The following table summarizes the activity of unvested restricted stock, restricted stock units and “performance shares” (“Share Based Awards”) during the nine months ended September 30, 2006:

Share Based Awards	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2006	426,243		$	22.51
Granted	319,000		$	25.03
Vested	(145,163	)	$	22.44
Performance Shares Adjustment	111,150		$	25.38
Forfeited/Expired	(18,570	)	$	23.48
Unvested at September 30, 2006	692,660		$	24.12

The fair value of unvested shares is determined based on the closing stock price on the grant date. As of September 30, 2006, there was $12.4 million of total unrecognized compensation cost related to unvested Share Based Awards to be recognized over a weighted-average period of 2.3 years.

The unvested Share Based Awards at September 30, 2006 include 165,895 shares underlying a broad-based grant of “performance shares” to certain employees in February and June 2006, net of actual forfeitures, with a weighted average grant date fair value of approximately $25.38 per share.  The 165,895 represents the target number of shares of priceline.com common stock that will be issued to employees if the Company achieves certain financial performance versus a peer group of companies.  The actual number of performance shares issued will be determined at the end of the performance period and could range from zero to an additional 331,790 shares over the target number of shares if the maximum performance threshold associated with the “performance shares” is met by the Company.  Stock-based compensation related to the “performance shares” is recorded based upon the estimated probable outcome at the end of the performance period.  During

9

the nine months ended September 30, 2006 the estimated probable number of shares to be issued at the end of the performance period was increased by 111,150 shares.

Unvested shares at September 30, 2006 also include 104,887 restricted stock units with a weighted average grant date fair value of approximately $23.78 per share.

The following table summarizes the activity of unvested restricted stock and restricted stock units related to shares of priceline.com International (“PIL Share Based Awards”) during the nine months ended September 30, 2006:

PIL Share Based Awards	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2006	96,375		$	32.89
Granted	—		—
Vested	—		—
Forfeited/Expired	(3,153	)	$	31.67
Unvested at September 30, 2006	93,222		$	32.93

The fair value of unvested shares is determined based on the estimated fair value on the grant date.  As of September 30, 2006 there was $1.4 million of total unrecognized compensation cost related to unvested PIL Share Based Awards (based upon the exchange rate as of September 30, 2006) to be recognized over a weighted-average period of 1.2 years.  Unvested shares at September 30, 2006 include 46,459 shares of restricted stock units with a weighted average grant date fair value of approximately $33.86 per share.

4.NET INCOME PER SHARE

The Company computes basic and diluted earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based upon the weighted average number of common and common equivalent shares outstanding during the period which is calculated using the treasury stock method for stock options, warrants and restricted stock.  Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.   Contingently issuable shares are included in weighted average shares outstanding for calculating fully diluted earnings per share based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the performance period, if the result would be dilutive.  The shares that would be issued upon the conversion of the Company’s 1%, 2.25%, 0.50% and 0.75% Senior Convertible Notes (See Note 9 to the Unaudited Consolidated Financial Statements) are included in the calculation of diluted earnings per share if their inclusion is dilutive to earnings per share.

10

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2006		2005		2006		2005
Net income applicable to common stockholders	$	47,754	$	170,594	$	59,307	$	187,085
Interest expense on convertible senior notes	762		750		2,323		2,234
Preferred stock dividend	—		976		—		1,854
	$	48,516	$	172,320	$	61,630	$	191,173
Weighted average number of basic common shares outstanding	39,596		39,156		39,487		39,038
Weighted average dilutive stock options, restricted stock, restricted stock units and performance shares	1,029		351		906		408
Weighted average dilutive stock warrants	—		1,218		—		1,235
Assumed conversion of convertible senior notes	5,760		5,760		5,760		5,760
Weighted average number of diluted common and common equivalent shares outstanding	46,385		46,485		46,153		46,441
Anti-dilutive potential common shares	3,885		4,422		4,008		4,253

5.RESTRUCTURING

At September 30, 2006, the Company had a restructuring liability of $1.3 million for the estimated remaining costs related to leased property vacated by the Company in 2000. During the first quarter of 2006, the Company recorded a $135,000 restructuring charge based upon a re-evaluation of the estimated disposal costs related to the vacated leased property.  The Company estimates that, based on current available information, the remaining net cash outflows associated with its restructuring related commitments will be paid in 2006-2011. The current portion of the restructuring accrual in the amount of $655,000 is recorded in “Accrued expenses and other current liabilities” and the $642,000 non-current portion is recorded in “Other long-term liabilities” on the Company’s Unaudited Consolidated Balance Sheet.

6.SHORT-TERM INVESTMENTS

The following table summarizes, by major security type, the Company’s marketable securities as of September 30, 2006 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Commercial paper	$	16,872	$	1	$	—	$	16,873
U.S. government agency – discount notes	15,811		2		—		15,813
Total	$	32,683	$	3	$	—	$	32,686

11

Contractual maturities of marketable securities classified as available-for-sale as of September 30, 2006 are all within one year.  No material gains or losses were realized for the three and nine months ended September 30, 2006 and 2005.

7.INTANGIBLE ASSETS

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

	September 30, 2006							December 31, 2005								Weighted
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Amortization Period	Average Useful Life
Supply and distribution agreements	$	145,727	$	(20,282	)	$	125,445	$	129,781	$	(12,616	)	$	117,165	3 - 13 years	13 years
Technology	20,672		(10,410		)	10,262		17,270		(5,283		)	11,987		3 years	3 years
Patents	1,489		(1,062		)	427		1,494		(1,021		)	473		3 - 15 years	14 years
Customer lists	9,470		(7,076		)	2,394		9,689		(4,842		)	4,847		2 - 3 years	2 years
Internet domain names	6,443		(537		)	5,906		6,443		(54		)	6,389		10 years	10 years
Tradenames	10,089		(1,600		)	8,489		8,848		(148		)	8,700		5 years	5 years
Other	1,076		(885		)	191		326		(212		)	114		3 - 15 years	9 years
Total intangible assets	$	194,966	$	(41,852	)	$	153,114	$	173,851	$	(24,176	)	$	149,675

Intangible assets with determinable lives are primarily amortized on a straight-line basis.   Intangible assets amortization expense was approximately $6.4 million and $5.9 million for the three months ended September 30, 2006 and 2005, respectively, and approximately $18.4 million and $12.8 million for the nine months ended September 30, 2006 and 2005, respectively.

The annual estimated amortization expense for intangible assets for the remainder of 2006, the next five years and thereafter is expected to be as follows (in thousands):

2006	$	6,228
2007	21,005
2008	16,227
2009	14,055
2010	13,494
2011	11,682
Thereafter	70,423
	$	153,114

12

8.OTHER ASSETS

Other assets at September 30, 2006 and December 31, 2005 consist of the following (in thousands):

	September 30, 2006		December 31, 2005
Investment in pricelinemortgage.com	$	9,567	$	10,724
Deferred debt issuance costs, net	11,492		4,653
Other	358		2,053
Total	$	21,417	$	17,430

Investment in pricelinemortgage.com represents the Company’s 49% equity investment in pricelinemortgage.com and, accordingly, the Company recognizes its pro rata share of pricelinemortgage.com’s operating results, not to exceed an amount that the Company believes represents the investment’s estimated fair value. The Company recognized approximately $39,000 and $63,000 representing its pro rata share of pricelinemortgage.com’s operating loss for the three and nine months ended September 30, 2006, respectively.  For the three and nine months ended September 30, 2005, the Company recognized approximately $637,000 and $1.1 million of income from its investment in pricelinemortgage.com, respectively.  The Company earned advertising fees from pricelinemortgage.com of approximately $7,000 and $21,000 in the three months ended September 30, 2006 and 2005, respectively.  Additionally, the Company earned advertising fees from pricelinemortgage.com of approximately $16,000 and $46,000 in the nine months ended September 30, 2006 and 2005, respectively.  Due to recent losses incurred by pricelinemortgage.com, the Company reviewed the carrying value of its investment for impairment.  Based upon recent operating results and future projected results, the Company determined that its investment was impaired on an other-than temporary basis.  Accordingly, in third quarter 2006, the Company recorded a charge of $1.1 million to reduce the carrying value of its equity investment in pricelinemortgage.com to its estimated fair value.

In February 2005, the Company invested $1.0 million in an online advertising company (the “Investee”), representing 20% of that company’s outstanding equity. The investment was accounted for under the cost method.  An additional $1.2 million was invested in January 2006, increasing the Company’s ownership to approximately 42% of the outstanding equity and, accordingly, the Company began accounting for its investment under the equity method of accounting.  In June 2006, the Company purchased the remaining equity for an additional $2.0 million.  The acquisition has been accounted for under the purchase method of accounting.  The acquired company is included in the consolidated financial statements of the Company since the date of acquisition.  Assets acquired totaled $1.6 million and consisted principally of internally developed software and accounts receivable, while liabilities assumed totaled $0.1 million.  Goodwill resulting from this acquisition amounted to approximately $2.6 million.  The Company recognized approximately $219,000 of net loss from its pro rata share of the Investee’s operating results from January to June 2006.  Online advertising fees paid to the Investee prior to acquiring the remaining ownership interest in June 2006 were $435,000 and were $860,000 for the nine months ended September 30, 2005.

Deferred debt issuance costs arose from the Company’s issuance of $125 million aggregate principal amount of 1% Notes in August 2003 and $100 million aggregate principal amount of 2.25% Notes in June 2004.  Deferred debt issuance costs of approximately $4.3 million and $3.3 million, respectively, consisting primarily of underwriting commissions and professional service fees, are being amortized using the effective interest rate method over approximately five years.

In September 2006, the Company issued $150 million aggregate principal amount of 0.5% Notes and $150 million of aggregate principal amount 0.75% Notes.  Deferred debt issuance costs of approximately $4.0 million and $4.0 million, respectively, consisting primarily of underwriting commissions and professional service fees, are being amortized using the effective interest rate method over approximately five years and seven years, respectively.

9.CONVERTIBLE DEBT

In September 2006, the Company issued, in a private placement, $150 million aggregate principal amount of Convertible Senior Notes due September 30, 2011, with an interest rate of 0.50% (the “2011 Notes”), and $150 million aggregate principal amount of Convertible Senior Notes due September 30, 2013, with an interest rate of 0.75% (the “2013 Notes”).  Each $1,000 principal amount of 2011 Notes and the 2013 Notes will initially be convertible into 24.7647 shares of

13

the Company’s common stock, par value $0.008 per share at a conversion price of approximately $40.38 per share, subject to adjustment.  The 2011 Notes and the 2013 Notes are convertible, at the option of the holder, prior to June 30, 2011 in the case of the 2011 Notes, and prior to June 30, 2013 in the case of the 2013 Notes, upon the occurrence of specified events, including, but not limited to a change in control, or if after the calendar quarter ending December 31, 2006, the closing sale price of the Company’s common stock for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter.  In the event that all or substantially all of the Company’s common stock is acquired on or prior to the maturity of the 2011 Notes or the 2013 Notes, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2011 Notes and the 2013 Notes, collectively, in aggregate value ranging from $0 to approximately $57.5 million depending upon the date of the transaction and the then current stock price of the Company. In October 2006, the initial purchasers exercised their over-allotment option to purchase an additional $22.5 million of 2011 Notes and $22.5 million of 2013 Notes, solely to cover over-allotments.

On and after June 30, 2011, with respect to the 2011 Notes, and on and after June 30, 2013, with respect to the 2013 Notes, holders shall have the right to convert all or any portion of such security at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date, regardless of any conditions in place prior to those dates.  Upon conversion, a holder will receive cash for the principal amount of the note and cash or shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock for conversion value in excess of such principal amount.

Neither the 2011 Notes nor the 2013 Notes may be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2011 Notes and the 2013 Notes for cash in certain circumstances.  Interest on the 2011 Notes and the 2013 Notes is payable on March 30 and September 30 of each year, starting March 30, 2007.

In September 2006, the Company entered into hedge transactions relating to potential dilution of the Company’s common stock upon conversion of  the 2011 Notes and the 2013 Notes and (the “Conversion Spread Hedges”) with affiliates of the initial purchasers of the 2011 Notes and the 2013 Notes (the “counterparties”).  Under the Conversion Spread Hedges, the Company is entitled to purchase from the counterparties approximately 7.4 million shares of the Company’s common stock (the number of shares underlying the 2011 Notes and the 2013 Notes) at a strike price of $40.38 per share (subject to adjustment in certain circumstances) and the counterparties are entitled to purchase from the Company approximately 7.4 million shares of the Company’s common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances).   The Conversion Spread Hedges increase the effective conversion price of the 2011 Notes and the 2013 Notes to $50.47 per share from the Company’s perspective and are expected to reduce the potential dilution upon conversion of the 2011 Notes and the 2013 Notes.  If the market value per share of the Company’s common stock at the time of any exercise is above $40.38, the Conversion Spread Hedges will entitle the Company to receive from the counterparties net shares of the Company’s common stock based on the excess of the then current market price of the Company’s common stock over the strike price of the purchased call options.  Holders of the 2011 Notes and the 2013 Notes do not have any rights with respect to the Conversion Spread Hedges.  The Conversion Spread Hedges are separate transactions entered into by the Company with the counterparties, are not part of the terms of the Notes and will not affect the holders’ rights under the 2011 Notes and the 2013 Notes.

The Company analyzed the Conversion Spread Hedges under Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock,” and EITF 01-6, “The Meaning of Indexed to a Company’s Own Stock” and determined that they meet the criteria for classification as equity transactions. As a result, in the third quarter of 2006, the Company recorded the $32.5 million paid to purchase Conversion Spread Hedges as a reduction in additional paid-in capital and the Company will not recognize subsequent changes in fair value of the agreements.  In October 2006, the Company amended the Conversion Spread Hedges to increase the number of notional shares in the underlying agreements by approximately 1.1 million shares at a cost of approximately $4.9 million.  The amendment to the Conversion Spread Hedges was entered into with respect to the 2011 Notes and 2013 Notes sold in connection with the exercise of the initial purchasers’ over-allotment right, as described above.

In August 2003, the Company issued, in a private placement, $125 million aggregate principal amount of Convertible Senior Notes due August 1, 2010, with an interest rate of 1% (the “1% Notes”).  The 1% Notes are convertible, subject to certain conditions, into the Company’s common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $40.00 per share, subject to adjustment upon the occurrence of specified events.  Each $1,000 principal amount of 1% Notes will initially be convertible into 25 shares of the Company’s common stock if, on or

14

prior to August 1, 2008, the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the first day of a conversion period is more than 110% of the then current conversion price of the 1% Notes, or after August 1, 2008, if the closing price of the Company’s common stock is more than 110% of the then current conversion price of the 1% Notes.  The 1% Notes are also convertible in certain other circumstances, such as a change in control of the Company.  In addition, the 1% Notes will be redeemable at the Company’s option beginning in 2008, and the holders may require the Company to repurchase the 1% Notes on August 1, 2008 or in certain other circumstances.  Interest on the 1% Notes is payable on February 1 and August 1 of each year.

In November 2003, the Company entered into an interest rate swap agreement whereby it swapped the fixed 1% interest on its 1% Notes for a floating interest rate based on the 3-month U.S. Dollar LIBOR, minus the applicable margin of 221 basis points, on $45 million notional value of debt.  This agreement expires August 1, 2010.  The Company designated this interest rate swap agreement as a fair value hedge.  The changes in the fair value of the interest rate swap agreement and the underlying debt are recorded as offsetting gains and losses in interest income and expense in the Unaudited Consolidated Statement of Operations.  Hedge ineffectiveness of $33,000 and $37,000 was recorded as an offset to interest expense for the three and nine months ended September 30, 2006, respectively.  Hedge ineffectiveness of $4,000 was recorded as a reduction of interest income for the three months ended September 30, 2005 and $7,000 was recorded as interest income for the nine months ended September 30, 2005.  The fair value cost to terminate this swap as of September 30, 2006 and December 31, 2005, was approximately $1.4 million and $1.5 million, respectively, and has been recorded as a credit in other long-term liabilities with a related adjustment to the carrying value of debt.

In June 2004, the Company issued, in a private placement, $100 million aggregate principal amount of Convertible Senior Notes due January 15, 2025, with an interest rate of 2.25% (the “2.25% Notes”).  The 2.25% Notes are convertible, subject to certain conditions, into the Company’s common stock, par value $0.008 per share, at the option of the holder, at a conversion price of approximately $37.95 per share, subject to adjustment upon the occurrence of specified events.  Each $1,000 principal amount of 2.25% Notes will initially be convertible into 26.3505 shares of the Company’s common stock if, on or prior to January 15, 2020, the closing sale price of our common stock for at least 20 consecutive trading days in the period of 30 consecutive trading days ending on the first day of a conversion period is more than 120% of the then current conversion price of the 2.25% Notes.  The 2.25% Notes are also convertible in certain other circumstances, such as a change in control of the Company.  In the event that all or substantially all of the Company’s common stock is acquired on or prior to January 15, 2010, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments to the holders of the 2.25% Notes of amounts ranging from $0 to $16.4 million depending upon the date of the transaction and the then current stock price of the Company.  The Company’s obligation to make this payment is treated as an embedded derivative which, pursuant to Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), must be assigned its own value separate and apart from the value of the 2.25% Notes.  The estimated value of the derivative has been established based upon several quantitative and qualitative factors and will be amortized as interest expense ratably over approximately a 5 ½ year period.  Pursuant to SFAS 133, any subsequent change in the value of the derivative is recognized as income or expense in the period in which the change in value occurs.  Amortization expense and the effect of marking the instrument to market has not been material in any period.  In addition, the 2.25% Notes will be redeemable at the Company’s option beginning January 20, 2010, and the holders may require the Company to repurchase the 2.25% Notes on January 15, 2010, 2015 or 2020, or in certain other circumstances.  Interest on the 2.25% Notes is payable on January 15 and July 15 of each year.

The Company used a portion of the net proceeds from the issuance of the 2011 Notes and the 2013 Notes to purchase the Conversion Spread Hedges and to repurchase 3.85 million shares of its common stock at a cost of $129.6 million.   The Company used a portion of the net proceeds from the issuance of the 1% Notes and the 2.25% Notes in the acquisitions of Travelweb and Active Hotels in 2004, and in the acquisition of Bookings in July 2005.  The remaining proceeds are available for general corporate purposes, strategic uses and working capital requirements.

On October 10, 2006, the Company commenced an exchange offer for all of its existing 1% Notes and all of its existing 2.25% Notes, whereby the Company offered to exchange $1,000 principal amount of new 2006 1.00% Convertible Senior Notes due 2010 for each $1,000 principal amount of the existing 1% Notes, and $1,000 principal amount of new 2006 2.25% Convertible Senior Notes due 2025 for each $1,000 principal amount of the existing 2.25% Notes. The new notes are substantially the same as the existing notes except that the new notes have a net share settlement feature requiring the Company to settle the principal amount of the debt for cash upon conversion and cash or shares of the Company’s

15

common stock or a combination of cash and shares of the Company’s common stock for the conversion premium.  The new 1% Notes provide for a make whole premium payable in certain circumstances upon conversions occurring as a result of a change in control, while the existing 1% Notes do not provide for such a premium. In the event that all or substantially all of the Company’s common stock is acquired on or prior to August 1, 2008, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the new 1% Notes in aggregate value ranging from $0 to approximately $18.9 million depending upon the date of the transaction and the then current stock price of the Company. The exchange offer expired on November 6, 2006.  Note holders tendered approximately $124.8 million aggregate principal amount of existing 1% Notes, representing approximately 99.85% of the total existing 1% Notes, and $100 million aggregate principal amount of existing 2.25% Notes, representing 100% of the total existing 2.25% Notes, for exchange.

10.TREASURY STOCK

In the fourth quarter of 2005, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock from time to time in the open market or in privately negotiated transactions.  Under this program, the Company repurchased 237,857 shares of its common stock at an aggregate cost of $5.7 million in the first half of 2006, at prevailing market prices.

During the third quarter 2006, the Company’s Board of Directors authorized the repurchase of up to $150 million shares of the Company’s common stock with a portion of the proceeds from the issuance of the 2011 Notes and the 2013 Notes (see Note 9).  In September 2006, the Company purchased 3.85 million shares of its common stock at an aggregate purchase price of approximately $129.6 million.  Additional repurchases of 13,518 shares were made during the third quarter of 2006 to satisfy withholding taxes related to stock-based compensation at prevailing market prices at an aggregate cost of $394,000.

The Company may make additional repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.  Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company’s complete discretion.  As of September 30, 2006, there were approximately 6.6 million shares of the Company’s common stock held in treasury.

11.REDEEMABLE PREFERRED STOCK

In August 2006 and 2005, the Company issued Delta Air Lines, Inc. a dividend on the Series B Redeemable Preferred Stock in the amount of 40,240 shares of the Company’s common stock.  As a result, the Company recorded a non-cash dividend charge of $1.1 million and $976,000 in the third quarter of 2006 and 2005, respectively.  The non-cash dividend charge amounted to $1.9 million in each of the nine month periods ended September 30, 2006 and 2005.

12.GOODWILL

A substantial majority of the Company’s goodwill relates to its acquisitions of Travelweb LLC, Active Hotels Ltd. (“Active Hotels”), and Bookings.

Change in goodwill for the period ended September 30, 2006 consists of the following (in thousands):

Balance at January 1, 2006	$	198,417
Acquisition	2,606
Adjustment to pre-acquisition liabilities	(149		)
Purchase of minority interest	4,766
Currency translation adjustments	13,173
Balance at September 30, 2006	$	218,813

16

13.TAXES

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

The Company recognizes income tax expense related to income generated outside of the United States based upon the applicable tax rates of the foreign countries in which the income is generated.  During the three and nine months ended September 30, 2006, the substantial majority of the Company’s foreign-sourced income has been generated in the United Kingdom and the Netherlands.  In connection with the acquisitions of Active Hotels and Bookings, the Company instituted structural and financial arrangements which it believes are reasonable and customary, but which are subject to review and approval by the relevant foreign taxing jurisdiction.  To the extent such arrangements are not approved by the foreign taxing jurisdictions, it could result in a cumulative adjustment to tax expense and a higher future effective tax rate.

The Company has significant deferred tax assets, resulting principally from domestic net operating loss carryforwards (“NOLs”).  As required by SFAS No. 109, “Accounting for Income Taxes,” the Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available for tax reporting purposes, and other relevant factors. Through June 30, 2005, the Company provided a valuation allowance for the full amount of the deferred tax asset.  Management concluded in the third quarter 2005, based upon its assessment of positive and negative evidence, that it is more likely than not that a portion of the deferred tax assets will be realized.  Accordingly, the Company recorded a non-cash tax benefit in the third quarter 2005, resulting from a $170.5 million reversal of a portion of its valuation allowance on its deferred tax assets.  In the third quarter of 2006, management concluded that based upon current operating results, projected future results, the potential accretive effect of the convertible note offering (see note 9) and revisions to the carryforward periods for certain state net operating losses, it is more likely than not that additional deferred tax assets will be realized.  Accordingly, the Company recorded a non-cash tax benefit and an increase to additional paid-in capital in the third quarter 2006, of $28.1 million and $15.6 million respectively, resulting from an additional $43.7 million reversal of a portion of its valuation allowance on its deferred tax assets.  It is the Company’s belief that it is more likely than not that its remaining deferred tax assets will not be realized and, accordingly, a valuation allowance remains against those assets.  The valuation allowance may need to be adjusted in the future if facts and circumstances change, causing a reassessment of the realization of its deferred tax assets.  The deferred tax asset, net of the valuation allowance, amounted to $194.9 million at September 30, 2006, and $158.7 million at December 31, 2005.  The current portion, in the amount of $12.1 million, is recorded in prepaid expenses and other current assets on the Unaudited Consolidated Balance Sheets at September 30, 2006 and December 31, 2005.

The Company has recorded a deferred tax liability in the amount of $43.0 million at September 30, 2006, and $42.4 million at December 31, 2005, primarily related to the assignment of estimated fair value to certain purchased identifiable intangible assets associated with the acquisitions of Active Hotels and Bookings.

14.MINORITY INTERESTS

In connection with the Company’s acquisitions of Bookings in July 2005 and Active Hotels in September 2004 and the reorganization of its European operations, key managers of Bookings and Active Hotels purchased shares of priceline.com International.  In addition, these key managers were granted restricted stock and restricted stock units in priceline.com International shares that vest over time.  As of September 30, 2006, the total aggregate minority interest in priceline.com International on a fully diluted basis was approximately 6.4%.

The holders of the minority interest in priceline.com International have the right to put their shares to the Company and the Company has the right to call their shares at a purchase price reflecting the fair market value of the shares at the time

17

of the exercise of the put or call right.  Subject to certain exceptions, (a) certain of the shares are subject to the put and call options in March 2007 and 2008 and (b) certain of the shares are subject to the put and call options in August 2007 and 2008.  In April 2006, the Company repurchased shares underlying minority interest with a carrying value of $1.2 million for an aggregate purchase price of $1.6 million based upon fair value.  The excess of the purchase price over the carrying value is recorded as goodwill.  In September 2006, the Company repurchased shares underlying minority interest with a carrying value of $6.7 million for an aggregate purchase price of $18.2 million based upon fair value.  The excess of the purchase price over the carrying value is recorded as an increase of intangible assets, deferred taxes and goodwill.

All purchased securities and vested granted securities described above can be put by the holders of the securities or called by the Company shortly after the consummation of a “change in control” of the Company.  Based upon the latest valuation, the aggregate fair value of the remaining minority interest in priceline.com International is estimated to be approximately $60 million at September 30, 2006, including unvested restricted stock and restricted stock units.

15.COMMITMENTS AND CONTINGENCIES

Litigation Related to Hotel Occupancy and Other Taxes

Statewide Putative Class Actions

A number of cities and counties have filed putative class actions on behalf of themselves and other allegedly similarly situated cities and counties within the same respective state against the Company and other defendants, including, but not in all cases, Hotels.com, L.P.; Hotel.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; Travelweb, LLC and Travelnow.com, Inc.  Each complaint alleges, among other things, that the defendants violated each jurisdiction’s respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each ordinance.  Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief.  Such actions include:

City of Los Angeles v. Hotels.com, Inc., et al.:  On December 30, 2004, a putative class action complaint was filed in the Superior Court for the County of Los Angeles by the City of Los Angeles on behalf of itself and a putative class of California cities, counties and other municipalities that have enacted occupancy taxes.  In addition to the tax claims, the complaint also asserts unfair competition claims under California Business and Professions Code § 17200, et seq. (“Section 17200”).  On May 19, 2005, the court ordered limited discovery.  On August 31, 2005, the City of Los Angeles filed an amended complaint adding a claim for a declaratory judgment.  On September 26, 2005, the court sustained the defendants’ demurrers on the ground of improper joinder of defendants and claims, and therefore, dismissed the amended complaint, with leave to file a second amended complaint.  On February 8, 2006, the City of Los Angeles filed a second amended complaint that asserts the same claims but includes additional allegations of fact.  On March 27, 2006, the defendants filed demurrers to the second amended complaint.  Those demurrers have been fully briefed and are awaiting decision.  On March 31, 2006, the defendants filed a petition to coordinate of this matter with the City of San Diego case (discussed below).  On July 12, 2006, that petition was granted, and, as a result, this case and the City of San Diego case will now proceed in the Superior Court of Los Angeles.

City of Fairview Heights v. Orbitz, Inc., et al.:  On October 5, 2005, a putative class action complaint was filed in the Circuit Court, Twentieth Judicial Circuit, St. Clair County, Illinois by the City of Fairview Heights on behalf of itself and a putative class of Illinois taxing authorities that are allegedly authorized to impose a tax on the business of renting hotel rooms.  In addition to the tax claims, the complaint also asserts claims for violation of the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1, similar laws in other states, conversion and unjust enrichment.  On November 28, 2005, the Company and certain other defendants removed this action to the United States District Court for the Southern District of Illinois.  On January 17, 2006, the defendants moved to dismiss the complaint.  On February 10, 2006, the City of Fairview Heights moved to remand this action to state court.  On July 12, 2006, the court granted defendants’ motion to dismiss all claims other than the tax claim, denied defendants’ motion to dismiss the tax claim, and denied plaintiff’s motion to remand.  The parties are currently conducting discovery.

City of Findlay v. Hotels.com, L.P., et al.:  On October 25, 2005, a putative class action complaint was filed in the Common Pleas Court of Hancock County, Ohio by the City of Findlay on behalf of itself and a putative class of Ohio cities,

18

counties and townships that have enacted occupancy or excise taxes on lodging.  In addition to the tax claims, the complaint also asserts claims for violation of the Ohio Consumer Sales Practices Act, Ohio Revised Code Chapter 1345, et seq., conversion, a constructive trust and a declaratory judgment.  On November 22, 2005, the Company and certain other defendants removed this action to the United States District Court for the Northern District of Ohio.  On January 30, 2006, the defendants moved to dismiss the complaint.  On July 26, 2006, the court granted defendants’ motion to dismiss the Consumer Sales Practices Act claims and denied defendants’ motion to dismiss the remaining claims.  The parties are currently conducting discovery.

City of Rome, Georgia, et al., v. Hotels.com, L.P., et al.:  On November 18, 2005, a putative class action complaint was filed in the United States District Court for the Northern District of Georgia by the City of Rome, Hart County and the City of Cartersville on behalf of themselves and a putative class of Georgia cities, counties and governments which have enacted transient occupancy taxes and/or excise taxes on lodging.  In addition to the tax claims, the complaint also asserts claims for violation of Georgia’s Uniform Deceptive and Unfair Trade Practices Act, conversion, unjust enrichment, a constructive trust and a declaratory judgment.  On February 6, 2006, the Company and certain other defendants moved to dismiss the complaint.  On May 8, 2006, the Court granted defendants’ motion to dismiss all claims relating to the Georgia sales and use tax and denied defendants’ motion to dismiss the excise tax claims.  The plaintiffs filed an amended complaint on June 7, 2006 naming additional plaintiffs.  The parties are currently conducting discovery.

Pitt County v. Hotels.com, L.P., et al.:  On December 1, 2005, a putative class action complaint was filed in the North Carolina General Court of Justice, Superior Court Division by Pitt County on behalf of itself and a putative class of North Carolina political subdivisions that impose occupancy taxes.  In addition to the tax claims, the complaint also asserts claims for violation of North Carolina General Statute § 75-1, et seq., conversion, a constructive trust and a declaratory judgment.  On February 13, 2006, the defendants removed this action to the United States District Court for the Eastern District of North Carolina.  On March 13, 2006, the defendants moved to dismiss the complaint and that motion was heard on October 17, 2006.  The parties are awaiting a decision on the motion to dismiss.

City of San Antonio, Texas v. Hotels.com, L.P., et al.:  On May 8, 2006, a putative class action complaint was filed in the United States District Court for the Western District of Texas, San Antonio Division, by the City of San Antonio on behalf of itself and putative classes of Texas municipalities.  In addition to the tax claims, the complaint also asserts claim for conversion and a declaratory judgment.  On June 30, 2006, the Company and other defendants moved to dismiss the complaint.  On August 28, 2006, the plaintiff moved for class certification.  Following briefing of the motion to dismiss and motion for class certification, on October 30, 2006, the plaintiff filed a first amended complaint that limited the putative classes of Texas municipalities to 175 specifically enumerated municipalities that plaintiff alleges to have hotel occupancy tax ordinances similar to that of the plaintiff.  On November 2, 2006, the Court heard argument on the motion to dismiss and the parties are awaiting a decision.  The Court delayed consideration of the motion for class certification pending briefing on class definition of the first amended complaint.

City of Gallup, New Mexico v. Hotels.com, L.P., et al.:  On May 17, 2006, a putative class action was filed in the Eleventh Judicial District Court, County of McKinley, New Mexico, by the City of Gallup on behalf of itself and a putative class of New Mexico municipalities which have enacted lodgers’ taxes.  In addition to the tax claims, the complaint also asserts claims for conversion and a declaratory judgment.  On June 23, 2006 defendants removed the action to the United States District Court for the District of New Mexico.  On July 31, 2006, the Company and other defendants moved to dismiss the complaint.  That motion is pending.  On September 29, 2006, the company and other defendants moved to stay discovery pending a decision on that motion, and on November 2, 2006, the Court granted that motion in part and stayed all discovery unrelated to class certification.

Lake County Convention and Visitors Bureau, Inc. and Marshall County v. Hotels.com, L.P., et al.:  On June 12, 2006, a putative class action was filed in the United Stated District Court for the Northern District of Indiana, Hammond Division, by the Lake County Convention and Visitors Bureau and Marshall County on behalf of themselves and a putative class of Indiana counties, convention and visitors bureaus and any other local governments which have enacted or benefit from taxes on innkeepers.  In addition to the tax claims, the complaint also asserts claims for conversion, unjust enrichment, and breach of fiduciary duties.  On November 3, 2006, the Company and other defendants moved to dismiss the complaint.  That motion is being briefed.

City of Orange, Texas v. Hotels.com, L.P., et al.:  On July 18, 2006, a putative class action was filed in the United States District Court for the Eastern District of Texas, Beaumont Division, by the City of Orange on behalf of itself and a

19

putative class of Texas municipalities containing hotels in which rooms were marketed, distributed, sold or resold by defendants.  In addition to the tax claims, the complaint also asserts claims for conversion, civil conspiracy, and a declaratory judgment.  On September 12, 2006, the Company and other defendants moved to dismiss the complaint.  The motion is being briefed.

Leon County and Doris Maloy, Leon County Tax Collector v. Hotels.com, L.P., et al.:  On July 27, 2006, a putative class action was filed in the United States District Court for the Southern District of Florida, by Leon County and its tax collector on behalf of themselves and a putative class of Florida counties that collect tourist development taxes.  On September 25, 2006, the Company and other defendants moved to dismiss the complaint.  That motion is being briefed.

City of Jacksonville v. Hotels.com, L.P., et al.:  In July 2006, a putative class action was filed in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida by the City of Jacksonville on behalf of itself and a putative class of Florida counties that collect tourist development taxes and/or convention development taxes and that have elected self administration of such taxes.  In addition to the tax claims, the complaint also asserts claims for conversion, unjust enrichment, a constructive trust, and a declaratory judgment.  On September 22, 2006, the Company and other defendants moved to stay this action in favor of the Leon County case (discussed above), and that motion is pending.

City of Columbus, et al. v. Hotels.com, L.P., et al.:  On August 8, 2006, a putative class action complaint was filed in the United States District Court for the Southern District of Ohio by the Cities of Columbus and Dayton on behalf of themselves and a putative class of Ohio cities, counties and townships that have enacted occupancy or excise taxes on lodging.  In addition to the tax claims, the complaint also asserts claims for unjust enrichment, money had and received, conversion, a constructive trust and a declaratory judgment.  On September 25, 2006, the Company and other defendants moved to dismiss the complaint.  On September 27, 2006, the Company and other defendants moved to transfer the case to the United States District Court for the Northern District of Ohio, where the City of Findlay case (discussed above) is pending.  Those motions are pending.

Louisville/Jefferson County Metro Government v. Hotels.com, L.P., et al.:  On September 21, 2006, a putative class action was filed in the United States District Court for the Western District of Kentucky by the Louisville/Jefferson County Metro Government on behalf of itself and a putative class of Kentucky cities, counties and townships that have enacted transient room taxes.  In addition to the tax claims, the complaint also asserts claims for conversion, money had and received, unjust enrichment, a constructive trust, and a declaratory judgment.  The Company and its subsidiaries have agreed to accept service of the complaint.

County of Nassau, New York v. Hotels.com, LP, et al.:  On October 24, 2006, a putative class action was filed in the United States District Court for the Eastern District of New York by Nassau County on behalf of itself and a putative class of New York cities, counties and other local governmental entities that have imposed hotel taxes since March 1, 1995.  In addition to the tax claims, the complaint also asserts claims for conversion, unjust enrichment and a constructive trust.  The Company and its subsidiaries have not been served with the complaint.

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

Actions Filed on Behalf of Individual Cities

Several cities across the country have filed actions relating to the collection of occupancy taxes against the Company and other defendants, including, but not in all cases, Hotels.com, L.P.; Hotel.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Lowestfare.com, Inc.; Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; priceline.com, Inc.; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; Travelweb, LLC and Travelnow.com, Inc..  In each, the complaint alleges, among other things, that each of these defendants violated each jurisdiction’s respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each ordinance.  Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief.  Such actions include:

City of Chicago, Illinois v. Hotels.com, L.P., et al.:  On November 1, 2005, the City of Chicago, Illinois filed a complaint in the Circuit Court of Cook County, Illinois.  In addition to the tax claims, the complaint also asserts claims for

20

conversion, imposition of a constructive trust, and a demand for a legal accounting.  On January 31, 2006, the defendants moved to dismiss the complaint.  Oral argument is scheduled for November 16, 2006.

City of San Diego, California, v. Hotels.com L.P., et al.:  On February 9, 2006, the City of San Diego, California filed a complaint in Superior Court for the County of San Diego.  In addition to the tax claims, the complaint also asserts unfair competition claims under Section 17200.  On March 31, 2006, the defendants filed with a petition to coordinate this matter with the City of Los Angeles case (discussed above).  On July 12, 2006, that petition was granted, and, as a result, this case will now be coordinated with the City of Los Angeles action and will proceed in the Superior Court of Los Angeles.

City of Atlanta, Georgia v. Hotels.com L.P., et al.:  On March 29, 2006, the City of Atlanta, Georgia filed a complaint in the Superior Court of Fulton County, Georgia.  In addition to the tax claims, the complaint also asserts claims for a declaratory judgment, conversion, unjust enrichment, a constructive trust and a demand for an equitable accounting.  On June 5, 2006, certain defendants, including the Company and its subsidiaries, answered the complaint.  The parties are currently conducting discovery.  A motion to dismiss the matter for the Plaintiff’s failure to exhaust its administrative remedies will be heard on November 6, 2006, and trial is presently scheduled to begin December 11, 2006.

City of Charleston, South Carolina v. Hotel.com, et al.:  On April 26, 2006, the City of Charleston, South Carolina filed a complaint in the Court of Common Pleas, Ninth Judicial Circuit of South Carolina.  In addition to the tax claims, the complaint also asserts claims for conversion, a constructive trust and a demand for a legal accounting.  On May 31, 2006, defendants removed the case to the United States District Court for the District of South Carolina, Charleston Division.  On July 7, 2006, the defendants answered the complaint.  The parties are currently conducting discovery.

Town of Mount Pleasant, South Carolina v. Hotels.com, et al.:  On May 23, 2006, the Town of Mount Pleasant, South Carolina filed a complaint in the Court of Common Pleas, Ninth Judicial Circuit of South Carolina.  On July 21, 2006, the defendants removed the case to the United States District Court for the District of South Carolina, Charleston Division.  On September 15, 2006, the defendants answered the complaint.

City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al.:  On August 28, 2006, the City of North Myrtle Beach, South Carolina filed a complaint in the Court of Common Pleas, Fifteenth Judicial Circuit of South Carolina.  On October 27, 2006, the Company and certain other defendants removed the case to the United States District Court for the District of South Carolina, Florence Division.

Miami-Dade County and Ian Yorty, Miami-Dade County Tax Collector v. Internetwork Publishing Corp., et al.:  On September 21, 2006, Miami-Dade County and its tax collector filed a complaint in the Circuit Court, Eleventh Judicial Circuit, in and for Miami-Dade County, Florida.  In addition to the claim for Tourist and Convention Development taxes, the complaint also asserts claims under the Florida Deceptive and Unfair Trade Practices Act, and claims for breach of fiduciary and agency duties, unjust enrichment, an equitable accounting, a declaratory judgment and injunctive relief.  The Company and Lowestfare.com have been served with the complaint and will respond to the claims on November 20, 2006.

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

Consumer Class Actions

Marshall, et al. v. priceline.com, Inc.:  On February 17, 2005, a putative class action complaint was filed in the Superior Court of the State of Delaware for New Castle County by Jeanne Marshall and three other individuals on behalf of themselves and a putative class of allegedly similarly situated consumers nationwide against the Company.  The complaint alleged that the Company violated the Delaware Consumer Fraud Act, Del. Code Ann. Tit. 6, § 2511, et seq., relating to its disclosures and charges to customers to cover taxes under city hotel occupancy tax ordinances nationwide, and service fees.  The Company moved to dismiss the complaint on April 21, 2005.  The Company also moved to stay discovery until a determination of its motion to dismiss the complaint and the Court granted that stay on May 11, 2005.  On June 10, 2005, plaintiffs filed an amended complaint that asserts claims under the Delaware Consumer Fraud Act and for breach of contract and the implied duty of good faith and fair dealing.  The amended complaint seeks compensatory damages, punitive damages, attorneys’ fees and other relief.  On October 31, 2006, the Court granted in part and denied in part the Company’s motion to dismiss.  The Court dismissed all claims arising under the Delaware Consumer Fraud Act.  The Court also

21

dismissed all claims for breach of contract and the implied duty of good faith and fair dealing that relate to Company’s charges for service fees.  The Court denied the Company’s motion to dismiss the breach of contract and implied duty of good faith and fair dealing claims as they relate to the Company’s charges to consumers to cover taxes under city hotel occupancy tax ordinances.

Bush, et al. v. Cheaptickets, Inc., et al.  On February 17, 2005, a putative class action complaint was filed in Superior Court for County of Los Angeles by Ronald Bush and three other individuals on behalf of themselves and other allegedly similarly situated California consumers against the Company and several of the same defendants as named in the City of Los Angeles action (discussed above).  The complaint alleges each of the defendants engaged in acts of unfair competition in violation of Section 17200 relating to their respective disclosures and charges to customers to cover taxes under the above ordinances of the City of Los Angeles and other California cities, and service fees.  The complaint seeks restitution, relief for alleged conversion, including punitive damages, injunctive relief, and imposition of a constructive trust.  On July 1, 2005, plaintiffs filed an amended complaint, adding claims pursuant to California’s Consumer Legal Remedies Act, Civil Code §1750, et seq. and claims for breach of contract and the implied duty of good faith and fair dealing.  On December 2, 2005, the court ordered limited discovery and ordered that motions challenging the amended complaint would be coordinated with any similar motions filed in the City of Los Angeles action.

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

Other Possible Actions

At various times the Company has also received inquiries, threats of litigation or proposed tax assessments from municipalities and other taxing jurisdictions relating to its charges and remittance of amounts to cover state and local hotel occupancy and other related taxes.  The City of New Orleans, Louisiana, the City of Madison, Wisconsin, and the State of Wisconsin Department of Revenue, among others, have stated that they may assert claims against the Company for allegedly unpaid state or local hotel occupancy or related taxes.  The Company is unable at this time to predict whether any such assertions will result in litigation.

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

Litigation Related to Securities Matters

On March 16, March 26, April 27, and June 5, 2001, respectively, four putative class action complaints were filed in the U.S. District Court for the Southern District of New York naming priceline.com, Inc., Richard S. Braddock, Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and 01 Civ. 4956).  Shives et al. v. Bank of America Securities LLC et al., 01 Civ. 4956, also names other defendants and states claims unrelated to the Company.  The complaints allege, among other things, that priceline.com and the individual defendants violated the federal securities laws by issuing and selling priceline.com common stock in priceline.com’s March 1999 initial public offering without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had allegedly solicited and received excessive and undisclosed commissions from certain investors.  By Orders of Judge Mukasey and Judge Scheindlin dated August 8, 2001, these cases were consolidated for pre-trial purposes with hundreds of other cases, which contain allegations concerning the allocation of shares in the initial public offerings of companies other than priceline.com, Inc.  By Order of Judge Scheindlin dated August 14, 2001, the following cases were consolidated for all purposes:  01 Civ. 2261; 01 Civ. 2576; and 01 Civ. 3590.  On April 19, 2002, plaintiffs filed a Consolidated Amended Class Action Complaint in these cases.  This Consolidated Amended Class Action Complaint makes similar allegations to those described above but with respect to both the Company’s March 1999 initial public offering and the Company’s August 1999 second public offering of common stock.  The named defendants are priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E. Francis, Nancy B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson Stephens, Inc. (as successor-in-interest to BancBoston), Credit Suisse First Boston Corp. (as successor-in-interest to Donaldson Lufkin & Jenrette Securities Corp.), Allen & Co., Inc. and Salomon Smith Barney, Inc.  Priceline, Richard Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together

22

with other issuer defendants in the consolidated litigation, filed a joint motion to dismiss on July 15, 2002.  On November 18, 2002, the cases against the individual defendants were dismissed without prejudice and without costs.  In addition, counsel for plaintiffs and the individual defendants executed Reservation of Rights and Tolling Agreements, which toll the statutes of limitations on plaintiffs’ claims against those individuals.  On February 19, 2003, Judge Scheindlin issued an Opinion and Order granting in part and denying in part the issuer’s motion.  None of the claims against the Company were dismissed.  On June 26, 2003, counsel for the plaintiff class announced that they and counsel for the issuers had agreed to the form of a Memorandum of Understanding (the “Memorandum”) to settle claims against the issuers.  The terms of that Memorandum provide that class members will be guaranteed $1 billion in recoveries by the insurers of the issuers and that settling issuer defendants will assign to the class members certain claims that they may have against the underwriters.  Issuers also agree to limit their abilities to bring certain claims against the underwriters.  If recoveries in excess of $1 billion are obtained by the class from any non-settling defendants, the settling defendants’ monetary obligations to the class plaintiffs will be satisfied; any amount recovered from the underwriters that is less than $1 billion will be paid by the insurers on behalf of the issuers.  The Memorandum, which is subject to the approval of each issuer, was approved by a special committee of the priceline.com Board of Directors on Thursday, July 3, 2003.  Thereafter, counsel for the plaintiff class and counsel for the issuers agreed to the form of a Stipulation and Agreement of Settlement with Defendant Issuers and Individuals (“Settlement Agreement”).  The Settlement Agreement implements the Memorandum and contains the same material provisions.  On June 11, 2004, a special committee of the priceline.com Board of Directors authorized the Company’s counsel to execute the Settlement Agreement on behalf of the Company.  The Settlement Agreement is subject to final approval by the Court and the process to obtain that approval is still pending.

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

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

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

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

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

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

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

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

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

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

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

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

Caswell v. priceline.com Inc.,

23

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

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

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

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

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

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

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

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

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

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

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

All of these cases were assigned to Judge Dominic J. Squatrito.  On September 12, 2001, Judge Squatrito ordered that these cases be consolidated under the Master File No. 3:00cv1884 (DJS), and he designated lead plaintiffs and lead plaintiffs’ counsel.  On October 29, 2001, plaintiffs served a Consolidated Amended Complaint.  On February 5, 2002, Amerindo Investment Advisors, Inc., who was one of the lead plaintiffs in the consolidated action, made a motion for leave to withdraw as lead plaintiff.  The Court granted that motion on May 30, 2002.  On February 28, 2002, the Company filed a motion to dismiss the Consolidated Amended Complaint.  On October 7, 2004, the Court issued a Memorandum of Decision granting, in part, and denying, in part, the Company’s motion.  A scheduling order was entered by the Court on November 2, 2004 and the parties are now proceeding with discovery.  On December 8, 2005, the Court issued a Memorandum of Decision and Order stating that the November 2, 2004 scheduling order would be revised, but only after the parties have provided more details about the status of discovery.  Plaintiffs filed a motion for class certification on January 7, 2005 and the Company filed its opposition to that motion.  On April 4, 2006, the Court issued a Memorandum of Decision granting, in part, and denying, in part, the plaintiffs’ motion.  The Court certified a class and approved five of the six proposed class representatives.  On May 4, 2006, the case was transferred to Judge Christopher F. Droney.  Plaintiffs filed a motion for an order approving the proposed notice of class certification on May 5, 2006 and the Company filed its response to that motion.  On May 18, 2006, the case was transferred to Judge Alfred V. Covello.  On October 30, 2006, the Court issued an Order setting forth a partial schedule, designating December 31, 2007 as the deadline for the completion of discovery.  The Company intends to defend vigorously against this action.  The Company is unable to predict the outcome of these suits or reasonably estimate a range of possible loss, if any.

On November 7, 2003, the Company was served with a complaint that purported to be a shareholder derivative action against its Board of Directors and certain of its current and former executive officers, as well as the Company (as a nominal defendant).  The complaint alleged, among other things, breach of fiduciary duty, waste of corporate assets and misappropriation of corporate information.  The claims in the complaint appear to be substantially repetitive of the claims pending in the derivative action in Delaware which is described above.  The action is captioned Don Powell v. Richard S. Braddock, Jay S.

24

Walker, Daniel H. Schulman, Paul A. Allaire, Ralph M. Bahna, Paul J. Blackney, William E. Ford, Marshall Loeb, N. J. Nicholas, Jr., Nancy B. Peretsman, and Heidi G. Miller and priceline.com Incorporated (Superior Court, Judicial District of Stamford/Norwalk, State of Connecticut).  On January 28, 2004, defendants Blackney, Nicholas, Peretsman and Loeb moved to dismiss the complaint for lack of personal jurisdiction.  On January 29, 2004, defendant Miller moved to dismiss the complaint for lack of personal jurisdiction and for insufficient service of process.  On February 27, 2004, defendants Braddock, Walker, Schulman, Allaire, Bahna, Blackney, Loeb, Nicholas, Peretsman, Miller and priceline.com moved to dismiss the complaint for lack of subject matter jurisdiction and defendants Braddock and Schulman also moved to dismiss the complaint for lack of personal jurisdiction and insufficient service of process.  At a hearing on May 3, 2004, the Court stated that it would not rule on the pending motions until the pending motions in the Delaware action described above are decided.  The Court conducted a subsequent status conference on January 10, 2005, at which it requested that the parties report back no later than March 15, 2005 on the status of the Delaware derivative suit.  On March 15, 2005, the parties informed the Court in writing that the oral argument in the Delaware case had been postponed until May 9, 2005, and that the parties would contact the Court with a status report after that hearing was held.  The Delaware Court dismissed three of the four counts in the second amended complaint in the Delaware derivative suit.  All of the counts against the defendants Allaire, Bahna, Blackney, Ford, Loeb, Miller, Peretsman and Schulman have now been dismissed.  The parties in the Connecticut action advised the Connecticut Court of the Delaware Court’s ruling by letter dated June 6, 2005.  The Delaware Court subsequently granted plaintiff leave to file the second amended complaint as to the one remaining count.  Defendants sought an interlocutory appeal of the Delaware Court’s order, and the Delaware Supreme Court accepted that appeal.  The parties in the Connecticut action advised the Connecticut Court of those developments by letter dated November 3, 2005.  On September 12, 2006, the Delaware Supreme Court decided in favor of the Company and the Delaware action was thereafter dismissed by stipulation.

Other Litigation

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

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

With respect to all the above matters, the Company will continue to evaluate the possibility of a loss and will, in accordance with Statement of Financial Accounting Standard No. 5, Accounting for Contingencies, record appropriate provisions, if and when a loss is considered probable and reasonably estimable.

Other

The online travel industry recently received guidance in the form of a ruling from the Internal Revenue Service that the fee earned by online intermediaries in connection with the facilitation of the purchase of airline tickets is not subject to Federal Excise Tax.  Due to the prior lack of clear guidance related to the application of federal excise taxes to amounts earned by online travel intermediaries, the Company historically remitted such taxes on the amounts it earned for facilitating the purchase of airline tickets.  The tax at issue was on the amounts earned by the Company and was not added to the ticket price paid by its customers.  Accordingly, the Company sought refunds of the taxes it paid while the on-line travel industry pursued clarification on the issue.  In response to this ruling, the Company has discontinued remitting tax on these amounts and continues to pursue refunds for taxes previously paid. Successful recovery of previously paid taxes could result in a refund of approximately $15 to $20 million.

25

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

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

Overview

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

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

·Commissions earned from the sale of price-disclosed hotel rooms, rental cars, cruises and other travel services;

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

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

·Transaction revenue from our price-disclosed hotel room service; and

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

Trends.  The online sale of travel services has been one of the fastest growing sectors of the Internet since the late 1990s.  While the online market for travel services continues to experience significant annualized growth, we believe that the domestic market share of third-party distributors, like priceline.com, has declined over the recent past and that the growth of the domestic online market for travel services has slowed.  We believe the decline in market share is attributable, in part, to a concerted initiative by travel suppliers to direct customers to their own websites in an effort to reduce distribution expenses and establish more direct control over their pricing.  In addition, over the course of 2005, and through the first nine months of 2006, airlines and hotel chains generally experienced year-over-year increases in load factors (a common metric that measures airplane customer usage) and occupancy rates (a common metric that measures hotel customer usage), respectively, which leaves them with less excess inventory to provide third party intermediaries like priceline.com.  Notwithstanding these trends, we continue to believe that the market for online travel services is an attractive market with continued opportunity for growth, in particular, in certain international markets.

Because we believe that an opportunity for growth exists in certain international markets, and since prior to the fourth quarter of 2004 substantially all of our revenue was generated in the U.S., we have taken steps to expand the markets we serve.  In September 2004, we acquired Active Hotels Ltd., a U.K. based online hotel service.  Active Hotels gives us a strong presence in the U.K.’s online hotel market.  Furthermore, in July 2005, we acquired Amsterdam-based Bookings B.V., one of Europe’s leading Internet hotel reservation services, with offices primarily in Amsterdam, Barcelona, Berlin, Loule, Paris, Rome, Pisa and Vienna.  All of our European operations, including Bookings and Active Hotels, are majority-owned by us.  A minority interest in our European business is held by our European managers responsible for that business.  We work with a range of chain-owned and independently owned hotels across Europe and in major cities around the world to provide hotel reservations on various websites in multiple languages.

26

Our European operations represented approximately 40% of our gross bookings in the first nine months of 2006 and were a substantial contributor to our consolidated operating income during that period and we expect that over the remainder of 2006 and 2007 they will represent a growing percentage of our total gross bookings and operating income.  As our European operations have become more meaningful contributors to our results, we have seen, and expect to continue to see, changes in certain of our operating expenses and other financial metrics.  For example, because our European operations utilize online affiliate and search marketing as principal means of generating traffic to their websites, our online advertising expense has increased significantly since our acquisition of those companies, a trend we expect to continue throughout the remainder of 2006 and 2007.  In addition, and as discussed in more detail below, since the acquisitions of Bookings and Active Hotels, we have seen the effects of seasonal fluctuation on our results change as a result of different revenue recognition policies that apply to our European hotel service (as well as our domestic retail hotel service) and the increased importance of European hotel bookings to our results of operations.

The financial prospects of our domestic business have been and continue to be significantly dependent upon the sale of leisure airline tickets and, as a result, the health of our domestic business has been directly related to the health of the airline industry.  In recent years, most domestic airlines, and many of our major suppliers, experienced significant losses.  Those losses were compounded by competition from low-cost carriers and high fuel prices.  As a result of these and other factors, many of the major airlines deeply discounted retail airline tickets to maintain market share, simplified fare structures by removing restrictions associated with certain airline tickets and reduced their total capacity to increase load factors.  Those actions had a detrimental effect on our overall airline business and, in particular, our Name Your Own Price® airline ticket service, which is negatively impacted by 1) increased load factors as airlines have less excess inventory to provide to third party intermediaries in general, and to lower yielding “opaque” services, in particular, like our Name Your Own Price® service, and 2) deep retail discounting because it hurts our value proposition and makes users less willing to accept the trade-offs associated with the Name Your Own Price® service, for what has become, in many cases, modest fare savings.

We rely on fees paid to us by Worldspan, L.P. and other global distribution systems, or GDSs, for travel bookings made through GDSs for a portion of our gross profit and a substantial portion of our operating income. We rebate certain GDS costs to certain suppliers (e.g., airlines, hotels, etc.) in exchange for contractual considerations such as those relating to pricing and availability, and expect to continue to do so in the future.  During 2006, most agreements between GDSs and the major domestic airlines expired, and most airlines have negotiated new agreements with reduced distribution costs for the airlines that went into effect September 1, 2006.  The structure of these new agreements, along with airline pressure on third-party travel intermediaries, such as us, to operate under the new structures, require us to reduce our aggregate compensation and book through lower cost channels to receive airlines’ full content and avoid airline service fees.  We have entered into new agreements with a number of airlines to obtain access to airline content, and are in continuing discussions with others to obtain similar access.  If we were denied access to airlines’ full content or had to incur service fees on our airline tickets, it could have a material adverse effect on our business, results of operations and financial condition.

Additionally, some travel suppliers are encouraging third-party travel intermediaries, such as us, to develop technology to bypass the traditional GDSs, such as enabling direct connections to the travel suppliers or using alternative global distribution methods recently developed by new entrants to the global distribution marketplace, such as G2 Switchworks Corp.  Such new entrants propose using technology that is less complex than traditional global distribution systems, and that enables the distribution of airline tickets in a manner that is more cost-effective to the airline suppliers.  To this end, in the first quarter 2006, we entered into an agreement with G2 Switchworks for the provision of GDS services.  In addition, to further reduce our dependence on Worldspan, L.P., in the first quarter 2006, we entered into an agreement for the provision of GDS services with Sabre Inc.  Development of the technology to connect to such alternative GDSs, or to enable direct connections to travel suppliers, requires the use of information technology resources and could cause us to incur additional operating expenses, increase the frequency/duration of system problems and delay other projects.  Furthermore, our contractual obligations to Worldspan, L.P. may limit our ability to pursue the most financially attractive GDS options during the term of our agreement with Worldspan, L.P., which expires December 31, 2007.

As a result of the continued decline in sales of Name Your Own Price® airline tickets over the last several years, we have taken and expect to continue to take steps to diversify our revenue among “non-opaque” services, such as allowing our customers to purchase price-disclosed retail airline, hotel, rental car and other travel services, which we believe will help broaden our customer appeal.

We intend to continue to execute on our strategy of diversifying our service offerings and markets, through both continued internal development of services and, if appropriate, acquisitions.  As a result of the diversification described

27

above, the growth rates for our “agency” businesses, which are generally comprised of our price-disclosed retail services, have, over the recent past, significantly exceeded the growth rates for our “merchant” businesses, which are comprised primarily of our slower-growing Name Your Own Price® services.

We believe that our success will depend in large part on our ability to maintain profitability, primarily from our leisure travel business, to continue to promote the priceline.com brand and, over time, to offer other travel services and further expand into international markets. Factors beyond our control, such as the outbreak of an epidemic or pandemic disease; natural disasters such as hurricanes, tsunamis or earthquakes; terrorist attacks, hostilities in the Middle East or elsewhere; or the liquidation of major domestic airlines now in bankruptcy, the bankruptcy of an additional carrier or the withdrawal from our system of a major airline (or the consolidation of our major airline suppliers) or hotel supplier, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above.  We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results.  We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions.  Our goal is to improve volume and sustain gross margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain revenue growth and profitability.

Seasonality.  Prior to introducing a retail travel option to our customers, substantially all of our business was conducted under the Name Your Own Price® system and accordingly, because those services are non-refundable in nature, we recognize travel revenue at the time a booking was generated.  We recognize revenue generated from our retail hotel service, however, including our European operations, at the time that the customer checks out of the hotel.  As a result, a meaningful amount of retail hotel bookings generated earlier in the year, as customers plan and reserve their spring and summer vacations, will not be recognized until future quarters. From a cost perspective, however, we expense the substantial majority of our advertising activities as they are incurred, which is typically in the quarter in which bookings are generated.  Therefore, as our retail hotel business continues to grow, we expect our quarterly results to become increasingly impacted by these seasonal factors.

Recent Accounting Pronouncements.  In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Uncertainty in Income Taxes.” FIN 48 applies to all tax positions and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether the tax position is more likely than not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to recognize.  Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority.  FIN 48 will become effective in the first quarter of 2007. Management is currently evaluating the effect, if any, that adoption of FIN 48 will have on our consolidated results of operations and financial position.

Other.  On September 5, 2006, Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited collectively sold 8.9 million shares of our common stock to Goldman, Sachs & Co., who then distributed shares in an underwritten offering.  The shares sold were covered by a shelf registration statement filed with the Securities and Exchange Commission in May 2004.  The sale represented approximately 70% of the approximately 12.7 million shares of priceline.com common stock owned by Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited, collectively, prior to the sale. Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited continue to have the right to appoint two representatives to our Board of Directors.  Goldman, Sachs & Co. or its affiliates currently own shares of our common stock and may hold a portion of our outstanding convertible notes.

On September 27, 2006, we issued, in a private placement, $150 million aggregate principal amount of Convertible Senior Notes due September 30, 2011, with an interest rate of 0.50% (the “2011 Notes”), and $150 million aggregate principal amount of Convertible Senior Notes due September 30, 2013, with an interest rate of 0.75% (the “2013 Notes”).  We used a portion of the proceeds from the issuance of the 2011 Notes and the 2013 Notes to repurchase approximately 3.85 million shares of our common stock at an aggregate price of approximately $129.6 million, and to enter into hedge transactions relating to potential dilution of our common stock upon conversion of the 2011 Notes and the 2013 Notes and (the “Conversion Spread Hedges”) with affiliates of the initial purchasers of the 2011 Notes and the 2013 Notes (the “counterparties”).  Under the Conversion Spread Hedges, we are entitled to purchase from the counterparties approximately 7.4 million shares of our common stock (the number of shares underlying the 2011 Notes and the 2013 Notes) at a strike price of $40.38 per share (subject to adjustment in certain circumstances) and the counterparties are entitled to purchase from

28

us approximately 7.4 million shares of our common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances).   The Conversion Spread Hedges increase the effective conversion price of the 2011 Notes and the 2013 Notes to $50.47 per share from our perspective and are expected to reduce the potential dilution upon conversion of the 2011 Notes and the 2013 Notes.  If the market value per share of our common stock at the time of any exercise is above $40.38, the Conversion Spread Hedge will entitle us to receive from the counterparties net shares of our common stock based on the excess of the then current market price of our common stock over the strike price of the purchased call options.  Holders of the 2011 Notes and the 2013 Notes do not have any rights with respect to the Conversion Spread Hedges.  The Conversion Spread Hedges are separate transactions entered into by us with the counterparties, are not part of the terms of the Notes and will not affect the holders’ rights under the 2011 Notes and the 2013 Notes.  See Notes 9 and 10 to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

On October 10, 2006, we commenced an exchange offer for all of our existing 1% Notes and all of our existing 2.25% Notes, whereby we offered to exchange $1,000 principal amount of new 2006 1.00% Senior Convertible Notes due 2010 for each $1,000 principal amount of the existing 1% Notes, and $1,000 principal amount of new 2006 2.25% Senior Convertible Notes due 2025 for each $1,000 principal amount of the existing 2.25% Notes. The new notes are substantially the same as the existing notes except that the new notes have a net share settlement feature requiring us to settle the principal amount of the debt for cash upon conversion and cash or shares of our common stock for the conversion premium.  The new 1% Notes provide for a make whole premium payable in certain circumstances upon conversions occurring as a result of a change in control, while the existing 1% Notes do not provide for such a premium. The change to cash settlement of conversions facilitates our use of the treasury stock method of accounting for the shares issuable upon conversion of the new notes. The exchange offer expired on November 6, 2006.  Note holders tendered approximately $124.8 million aggregate principal amount of existing 1% Notes, representing approximately 99.85% of the total existing 1% Notes, and $100 million aggregate principal amount of existing 2.25% Notes, representing 100% of the total existing 2.25% Notes, for exchange.

On October 11, 2006, the initial purchasers in our private offering 2011 Notes and 2013 Notes exercised in full their option to purchase an additional $22.5 million of 2011 Notes and $22.5 million of 2013 Notes, solely to cover over-allotments.  The closing of the sale of the additional 2011 Notes and 2013 Notes took place on October 13, 2006.

Results of Operations

Three and Nine Months Ended September 30, 2006 compared to the Three and Nine Months Ended September 30, 2005

Operating Metrics

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

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

	Gross Bookings		Airline Tickets	Hotel Room Nights	Rental Car Days
Three Months ended September 30, 2006	$	903 million	666,000	5.2 million	2.0 million
Three Months ended September 30, 2005	$	611 million	680,000	3.5 million	1.7 million
Nine Months ended September 30, 2006	$	2.6 billion	2.2 million	14.4 million	5.7 million
Nine Months ended September 30, 2005	$	1.7 billion	2.2 million	8.8 million	4.5 million

29

Gross bookings increased by 47.8% and 52.5% for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005.  The increase was driven primarily by an increase of 74.9% and 98.5% in “agency” bookings for the three and nine months ended September 30, 2006, respectively, which was primarily attributable to (1) growth in our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively; (2) the increased sale of retail rental cars; and (3) an increase in the average fare of our retail ticket service.  Merchant gross bookings increased by 13.0% and 5.8% for the three and nine months ended September 30, 2006, respectively, over the same periods in 2005.  The increase was primarily due to an increase in merchant gross bookings relating to our retail hotel service, an increase in the average daily rate of our Name Your Own Price® hotel service and an increase in the sale of opaque rental car days.  The three months ended September 30, 2006 also benefited from an increase in gross bookings related to our Name Your Own Price® airline ticket service.

Airline tickets sold decreased by 2.1% and 0.1% for the three and nine months ended September 30, 2006, respectively, over the same periods in 2005.  The decrease in the number of airline tickets sold in the three months ended September 30, 2006, compared to the same period in 2005, was primarily attributable to a decrease in the sale of retail airline tickets.  The decrease in the number of airline tickets sold in the nine months ended September 30, 2006, compared to the same period in 2005, was primarily attributable to a significant percentage decrease in the sale of Name Your Own Price® airline tickets, partially offset by an increase in the sale of retail airline tickets.

Hotel room nights sold increased by 49.7% and 63.6% for the three and nine months ended September 30, 2006, respectively, over the same periods in 2005.  The increase in the number of hotel room nights sold in the three and nine months ended September 30, 2006, compared to the same period in 2005, was primarily due to growth in our hotel room nights sold through (1) our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively, and (2) our retail hotel service.  In the nine months ended September 30, 2006, this increase was partially offset by a decrease in the sale of Name Your Own Price® hotel room nights.  Our retail hotel service, which was launched in March 2005, benefited from the enhanced integration of our retail and Name Your Own Price® services.   We believe that the benefit to our retail hotel service came partially at the expense of sales of Name Your Own Price® hotel room nights during the nine months ended September 30, 2006, as some amount of demand that may otherwise have been directed to the Name Your Own Price® service instead was directed to our retail hotel service.

Rental car days sold increased by 20.8% and 25.7% for the three and nine months ended September 30, 2006, respectively, over the same period in 2005, due to increases in sales of our retail and opaque rental car services, which benefited from the launch of enhanced integration of retail and Name Your Own Price® services in the first quarter 2006, as well as from the launch of new features in 2005, including options for one-way destination and off-airport car rentals.

Revenues

We classify our revenue into three categories:

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

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

30

·Other revenues are derived primarily from advertising on our websites.

We continue to experience a shift in the mix of our airline ticket business from a business historically focused exclusively on the sale of merchant (“opaque”) Name Your Own Price® travel services to a business that includes the sale of retail, price-disclosed travel services.  Because merchant Name Your Own Price® travel services are reported on a “gross” basis and retail travel services are primarily recorded on a “net” basis, revenue increases and decreases are impacted by changes in the mix of the sale of merchant and retail travel services and, consequently, gross profit has become an increasingly important measure of evaluating growth in our business.  Additionally, our European operations contributed approximately $65.0 million and $134.5 million to our revenues for the three and nine months ended September 30, 2006.  Revenues generated by our European operations are primarily recorded on a “net” basis.

	Three Months Ended September 30,						Nine Months Ended September 30,
	($000)				%		($000)				%
	2006		2005		Change		2006		2005		Change
Merchant Revenues	$	238,558	$	222,142	7.4	%	$	699,520	$	686,174	1.9	%
Agency Revenues	73,326		35,497		106.6	%	159,599		69,280		130.4	%
Other Revenues	1,583		1,158		36.7	%	3,913		3,293		18.8	%
Total Revenues	$	313,467	$	258,797	21.1	%	$	863,032	$	758,747	13.7	%

Merchant Revenues

Merchant revenues for the three and nine months ended September 30, 2006 increased 7.4% and 1.9%, respectively, compared to the same periods in 2005, primarily due to an increase in the sale of Name Your Own Price® room nights, merchant price-disclosed hotel room nights and Name Your Own Price® rental car days. The three months ended September 30, 2006 also benefited from an increase in gross bookings related to our Name Your Own Price® airline ticket service. A substantial portion of the increase was due to services sold through our agreement with Orbitz, which we entered into on January 1, 2006.  Under our agreement with Orbitz, we pay fees in exchange for a link on the Orbitz website that directs traffic to the Name Your Own Price® service.  The agreement expires on December 31, 2006, and we do not intend to renew it.  While the Orbitz agreement provided us with a good source of traffic, we believe it was likely dilutive in that many of the customers that we paid Orbitz for may have purchased our travel services anyway.  While this decision may result in decreased merchant volume in 2007 — we estimate potentially up to approximately 5% of our 2007 merchant volume after taking into account estimated dilution — it frees up marketing dollars that we may use in other online channels.

Agency Revenues

Agency revenues for the three and nine months ended September 30, 2006 increased 106.6% and 130.4%, respectively, compared to the same periods in 2005, primarily as a result of (1) growth in our European operations, which contributed $64.1 million and $131.7 million of agency revenue for the three and nine months ended September 30, 2006, respectively, and $26.9 million and $44.6 million of agency revenue for the three and nine months ended September 30, 2005, respectively; and (2) increased sales of retail hotel room nights and retail rental car days.  Results from our European operations are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively.

Other Revenues

Other revenues during the three and nine months ended September 30, 2006 consisted primarily of: (1) advertising revenues; and (2) fees for referring customers to pricelinemortgage.com for home financing services.  Other revenues for the three and nine months ended September 30, 2006 increased 36.7% and 18.8%, respectively, compared to the same periods in 2005, primarily as a result of higher online advertising revenue related to the inclusion of results of operation from our online advertising company since it was acquired in June 2006.

31

Cost of Revenues and Gross Profit

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Cost of Merchant Revenues	$	189,920		$	178,272		6.5	%	$	561,450		$	555,280		1.1	%
% of Merchant Revenues	79.6		%	80.3		%			80.3		%	80.9		%
Cost of Agency Revenues	—			523			(100.0	)%	—			523			(100.0	)%
% of Agency Revenues	0.0		%	1.5		%			0.0		%	0.8		%
Cost of Other Revenues	—			—			—		—			—			—
% of Other Revenues	0.0		%	0.0		%			0.0		%	0.0		%
Total Cost of Revenues	$	189,920		$	178,795		6.2	%	$	561,450		$	555,803		1.0	%
% of Revenues	60.6		%	69.1		%			65.1		%	73.3		%

Cost of Revenues

During the three and nine months ended September 30, 2006, cost of revenues increased 6.2% and 1.0%, respectively, compared to the same periods in 2005, due primarily to the fact that merchant revenues increased comparably in the same periods.  Cost of revenues entirely reflect merchant Name Your Own Price® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue while retail transactions are recorded “net” with no corresponding cost of revenues.

Cost of Merchant Revenues

For the three and nine months ended September 30, 2006, cost of merchant revenues consisted primarily of: (1) the cost of opaque hotel rooms from our suppliers, net of applicable taxes, (2) the cost of opaque airline tickets from our suppliers, net of the federal air transportation tax, segment fees and passenger facility charges imposed in connection with the sale of airline tickets; and (3) the cost of opaque rental cars from our suppliers, net of applicable taxes.  Cost of merchant revenues for the three and nine months ended September 30, 2006 increased 6.5% and 1.1%, respectively, compared to the same periods in 2005, due primarily to the fact that merchant revenues increased comparably in the same periods.  Merchant price-disclosed hotel revenues are recorded at their net amounts, which are amounts received less amounts paid to suppliers and therefore, there are no associated costs of merchant price-disclosed hotel revenues.

Cost of Agency Revenues

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

Cost of Other Revenues

For the three and nine months ended September 30, 2006 and 2005, there were no costs of other revenues.

Gross Profit

Total gross profit for the three and nine months ended September 30, 2006 increased by 54.4% and 48.6% compared to the same periods in 2005, primarily as a result of increased revenue from (1) our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively; and (2) increased sales of retail hotel room nights and retail rental car days.  The three months ended September 30, 2006 also benefited from an increase in gross bookings related to our Name Your Own Price® airline ticket service.  The contribution to gross profit from airline ticket sales during the three and nine months ended September 30, 2006 was

32

negatively impacted by a decrease in net GDS fees per ticket as compared to the same periods in 2005, which contributed to lower margins on retail ticket sales in particular. Total gross margin (gross profit expressed as a percentage of total revenue) increased during the three months ended September 30, 2006, compared to the same period in 2005, because Name Your Own Price® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of transactions compared to retail, price-disclosed transactions which are primarily recorded “net” with no corresponding cost of revenues.  Because Name Your Own Price® transactions are reported “gross” and retail transactions are primarily recorded on a “net” basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business.

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Merchant Gross Profit	$	48,638		$	43,870		10.9	%	$	138,070		$	130,894		5.5	%
Merchant Gross Margin	20.4		%	19.7		%			19.7		%	19.1		%
Agency Gross Profit	73,326			34,974			109.7	%	159,599			68,757			132.1	%
Agency Gross Margin	100.0		%	98.5		%			100.0		%	99.2		%
Other Gross Profit	1,583			1,158			36.7	%	3,913			3,293			18.8	%
Other Gross Margin	100.0		%	100.0		%			100.0		%	100.0		%
Total Gross Profit	$	123,547		$	80,002		54.4	%	$	301,582		$	202,944		48.6	%
Total Gross Margin	39.4		%	30.9		%			34.9		%	26.7		%

Merchant Gross Profit

Merchant gross profit consists of merchant revenues less the cost of merchant revenues. For the three and nine months ended September 30, 2006, merchant gross profit increased from the same periods in 2005, primarily due to an increase in the sale of merchant price-disclosed hotel room nights and Name Your Own Price® rental car days.  The three months ended September 30, 2006 also benefited from an increase in gross bookings related to our Name Your Own Price® airline ticket service.  The contribution to merchant gross profit from Name Your Own Price® airline ticket sales during the three and nine months ended September 30, 2006 was negatively impacted by a decrease in net GDS fees per ticket as compared to the same periods in 2005.  Merchant gross margin increased primarily because Name Your Own Price® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of transactions in the three and nine months ended September 30, 2006, when compared to merchant price-disclosed hotel transactions, which are recorded “net” with no corresponding cost of revenues.

Agency Gross Profit

Agency gross profit consists of agency revenues, which are recorded net of agency costs, if any.  For the three and nine months ended September 30, 2006, agency gross profit increased over the same periods in 2005, primarily as a result of (1) growth in our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively; and (2) increased sales of retail hotel room nights and rental car days.

33

Other Gross Profit

During the three and nine months ended September 30, 2006, other gross profit increased from the same period in 2005 primarily as a result of higher online advertising revenues related to including results of operating from our online advertising company since it was acquired in June 2006.

Operating Expenses

Advertising

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Offline Advertising	$	6,665		$	7,320		(8.9	)%	$	24,962		$	26,482		(5.7	)%
% of Total Gross Profit	5.4		%	9.1		%			8.3		%	13.0		%
Online Advertising	$	34,560		$	19,865		74.0	%	$	86,914		$	42,001		106.9	%
% of Total Gross Profit	28.0		%	24.8		%			28.8		%	20.7		%

Offline advertising expenses consist primarily of: (1) the expenses associated with domestic television, radio and print advertising; and (2) agency fees, the cost for creative talent and production costs for television and radio commercials. For the three and nine months ended September 30, 2006, offline advertising expenses were lower than in the same periods in 2005, as we shifted some of our domestic offline advertising budget to online advertising.  Online advertising expenses primarily consist of the costs of (1) search engine keyword purchases; (2) affiliate programs; (3) banner and pop-up advertisements; and (4) e-mail advertisements.  For the three and nine months ended September 30, 2006, online advertising expenses increased over the same periods in 2005, primarily due to an increase in online advertising expenses related to (1) our European operations, which rely primarily on online advertising to drive their businesses and an increase in our domestic online advertising, and (2) fees paid pursuant to our current agreement with Orbitz.

Sales and Marketing

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Sales and Marketing	$	11,204		$	9,645		16.2	%	$	31,494		$	27,967		12.6	%
% of Total Gross Profit	9.1		%	12.1		%			10.4		%	13.8		%

Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third-party service providers that operate our call centers; and (3) provisions for credit card chargebacks.  For the three and nine months ended September 30, 2006, sales and marketing expenses, which are substantially variable in nature, increased over the same periods in 2005, primarily due to increased gross booking volumes.

34

Personnel

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Personnel	$	21,658		$	13,820		56.7	%	$	56,869		$	34,804		63.4	%
% of Total Gross Profit	17.5		%	17.3		%			18.9		%	17.1		%

Personnel expenses consist of compensation to our personnel, including salaries, bonuses, taxes, employee health benefits and stock-based compensation. For the three and nine months ended September 30, 2006, personnel expenses increased over the same periods in 2005, primarily due to increased personnel expenses associated with our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively, increased employee performance bonus expense and an increase in stock-based compensation due mainly to the adoption of SFAS 123(R) on January 1, 2006, which requires companies to record non-cash compensation expense related to stock-based awards granted to employees.  Stock-based compensation expense was approximately $3.5 million and $10.3 million, for the three and nine months ended September 30, 2006, respectively, and approximately $1.3 million and $3.0 million for the three and nine months ended September 30, 2005, respectively.

General and Administrative

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
General and Administrative	$	6,643		$	4,814		38.0	%	$	19,638		$	14,502		35.4	%
% of Total Gross Profit	5.4		%	6.0		%			6.5		%	7.1		%

General and administrative expenses consist primarily of: (1) fees for outside professionals; (2) occupancy expenses; (3) business insurance; and (4) litigation related expenses. General and administrative expenses increased during the three and nine months ended September 30, 2006 over the same periods during 2005, due to increased general and administrative expenses associated with our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively, additional fees for outside professionals and expenses related to pending litigation.  This increase was partially offset by the one-time receipt of certain franchise tax credits from the state of Connecticut in the amount of approximately $1.7 million.

Information Technology

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Information Technology	$	2,551		$	2,508		1.7	%	$	7,190		$	8,023		(10.4	)%
% of Total Gross Profit	2.1		%	3.1		%			2.4		%	4.0		%

Information technology expenses consist primarily of: (1) system maintenance and software license fees; (2) data communications and other expenses associated with operating our Internet sites; and (3) payments to outside contractors. For the nine months ended September 30, 2006, information technology expenses decreased domestically from the same period in 2005, in part due to efficiencies resulting from the integration of Travelweb’s operations.  This decrease was partially offset by increased information technology expenses associated with our European operations, which are

35

substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively.

Depreciation and Amortization

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Depreciation and Amortization	$	8,664		$	7,138		21.4	%	$	24,970		$	17,651		41.5	%
% of Total Gross Profit	7.0		%	8.9		%			8.3		%	8.7		%

Depreciation and amortization expenses consist of:  (1) amortization of intangible assets with determinable lives; (2) amortization of internally developed and purchased software, (3) depreciation of computer equipment; and (4) depreciation of leasehold improvements, office equipment and furniture and fixtures.  For the three and nine months ended September 30, 2006, depreciation and amortization expense increased from the same periods in 2005, primarily as a result of increased non-cash acquisition related amortization expenses associated with our European operations, which are substantially comprised of Bookings and Active Hotels, which were acquired in the third quarters of 2005 and 2004, respectively.

Restructuring Charge

	Three Months Ended September 30,							Nine Months Ended September 30,
	($000)					%		($000)						%
	2006		2005			Change		2006			2005			Change
Restructuring Charge, net	—		$	2,000		(100.0	)%	$	135		$	1,664		(91.9	)%
% of Total Gross Profit	0.0	%	2.5		%			0.1		%	0.8		%

In the nine months ended September 30, 2006, we recorded a restructuring charge of approximately $135 related to vacated leased property.  In the nine months ended September 30, 2005, we recorded a net restructuring charge of approximately $1.7 million, consisting of a $2 million restructuring charge related to vacated leased property and a $336,000 restructuring reversal related to estimated costs to complete certain restructuring activities in Europe.

Interest

	Three Months Ended September 30,								Nine Months Ended September 30,
	($000)						%		($000)						%
	2006			2005			Change		2006			2005			Change
Interest Income	$	2,626		$	1,102		138.3	%	$	6,322		$	4,271		48.0	%
Interest Expense	(1,550		)	(1,245		)	24.5	%	(4,603		)	(3,777		)	21.9	%
Total	$	1,076		$	(143	)	(852.4	)%	$	1,719		$	494		248.0	%

For the three and nine months ended September 30, 2006, interest income on cash and marketable securities increased over the same periods in 2005, primarily due to higher prevailing interest rates.  Interest expense increased for the three and nine months ended September 30, 2006 over the same period in 2005 due primarily to an increase in prevailing interest rates on the variable portion of the interest rate swap agreement related to our 1% Convertible Senior Notes.

36

Taxes

	Three Months Ended September 30,						Nine Months Ended September 30,
	($000)				%		($000)				%
	2006		2005		Change		2006		2005		Change
Income Tax Benefit	$	18,113	$	158,573	(88.6	)%	$	13,277	$	158,527	(91.6	)%

Income tax benefit includes U.S. and international income taxes, determined using an estimate of our annual effective tax rate.  Income tax benefit for the three and nine month periods ended September 30, 2006 and 2005 differs from the expected tax expense at the U.S. statutory rate of 35% because it includes a $28.1 million and $170.5 million credit, respectively, resulting from a reversal of a portion of the valuation allowance on our deferred tax assets.  We commenced recording a U.S. tax provision in the third quarter of 2005 upon recording the initial reversal of a portion of our valuation allowance on our deferred tax assets.   Due to our significant net operating loss carryforwards, we do not expect to pay significant cash taxes on our U.S. federal taxable income tax for the foreseeable future.  We expect to make cash payments for U.S. alternative minimum tax and for certain international taxes.  Other items resulting in a difference between our effective tax rate and the statutory rate include the foreign tax benefit of certain structural and financial arrangements, and lower foreign tax rates, partly offset by state income taxes. In connection with the acquisitions of Bookings and Active Hotels, we instituted structural and financial arrangements which we believe are reasonable and customary, but which are subject to review and approval by the relevant foreign taxing jurisdiction.  To the extent such arrangements are not approved by the foreign taxing jurisdictions, it could result in a cumulative adjustment to tax expense and a higher future effective tax rate.

Equity in Income (Loss) of Investees and Minority Interests

	Three Months Ended September 30,							Nine Months Ended September 30,
	($000)					%		($000)					%
	2006			2005		Change		2006			2005		Change
Equity in Income (Loss) of Investees and Minority Interests	$	(2,328	)	$	325	(816.3	)%	$	(3,015	)	$	626	(581.6	)%

Equity in income of investees and minority interests for the three and nine months ended September 30, 2006 and 2005, represented (1) minority interests associated with the ownership of priceline.com International that is held by certain managers of that business; and (2) equity in income (loss) of investees, principally comprised of our pro rata share of pricelinemortgage.com’s net results.  The change in equity in income of investees and minority interests versus the prior year was primarily due to an increase in the minority interest in the earnings of priceline.com International and a decrease in earnings of and an impairment charge recorded for our investment in pricelinemortgage.com.  Due to recent losses incurred by pricelinemortgage.com, we reviewed the carrying value of our investment for impairment.  Based upon recent operating results and future projected results, we determined that our investment was impaired on an other-than temporary basis.  Accordingly, in the third quarter September 30, 2006, we recognized a charge of $1.1 million to reduce the carrying value of our equity investment in pricelinemortgage.com to its estimated fair value.

Liquidity and Capital Resources

As of September 30, 2006, we had $359.2 million in cash, cash equivalents, short-term investments and restricted cash. Approximately $17.8 million is restricted cash on deposit collateralizing letters of credit issued in favor of our credit card processor, certain suppliers and landlords.  We generally invest excess cash to make such funds readily available for operating purposes.  Cash equivalents and short-term investments are primarily comprised of highly liquid, high quality, investment grade debt instruments.

Our merchant transactions are structured such that we collect cash up front from our customers and then we pay most of our suppliers at a subsequent date.  We therefore tend to experience significant swings in supplier payables

37

depending on the absolute level of our cost of revenue during the last few weeks of every quarter.  This can cause volatility in working capital levels and impact cash balances more or less than our operating income would indicate.

Net cash provided by operating activities for the nine months ended September 30, 2006 was $80.3 million, resulting from net income of $61.2 million, non-cash items not affecting September 30, 2006 cash flows of $17.3 million and $1.8 million of changes in working capital.  The changes in working capital for the nine months ended September 30, 2006, were primarily related to a $28.5 million increase in accounts receivable, offset by a $31.8 million increase in accounts payable, accrued expenses and other current liabilities.  The increases in accounts receivable and accounts payable were primarily seasonal in nature.  Our bookings and revenues are generally higher in the third quarter of the year than in the fourth quarter of the year which results in higher accounts receivable and accounts payable at September 30 compared to December 31.  We do not believe there has been any significant change in credit risk regarding our accounts receivable.  Accounts receivable are generally higher than the prior year due to the acquisition of Bookings B.V. and the growth in our European revenues.  Non-cash items were primarily associated with the deferred income tax benefit, stock-based compensation expense, depreciation and amortization, primarily related to intangible assets acquired in our acquisitions of Travelweb, Active Hotels and Bookings.  The increase in the deferred income tax asset resulted primarily from the $28.1 million non-cash reversal of a portion of our deferred income tax valuation.  Net cash provided by operating activities for the nine months ended September 30, 2005 was $49.1 million, resulting from net income of $188.9 million, non-cash items not affecting September 30, 2005 cash flows of $135.3 million and $4.5 million of changes in working capital.  The changes in working capital for the nine months ended September 30, 2005, were primarily related to a $13.6 million increase in accounts receivable, partially offset by a $9.0 million increase in accounts payable, accrued expenses and other current liabilities.  The increases in accounts payable and accounts receivable were primarily seasonal in nature.  Non-cash items were primarily associated with the deferred income tax benefit, depreciation and amortization primarily related to intangible assets acquired in our acquisitions of Travelweb, Active Hotels and Bookings. The deferred income tax benefit resulted primarily from the $170 million non-cash reversal of a portion of our deferred tax valuation allowance, partly offset by a $10 million non-cash U.S. income tax charge.

Net cash provided by investing activities was $32.0 million for the nine months ended September 30, 2006.  Investing activities were affected by $40.2 million of net redemptions of short-term investments for the nine months ended September 30, 2006.  Net cash used in investing activities was $70.7 for the nine months ended September 30, 2005.  Investing activities in the nine months ended September 30, 2005 was affected by net redemptions of short-term investments in the amount of $70.2 million.  During the nine months ended September 30, 2005, we invested $133.8 million, net of cash acquired, in acquisitions, the substantial majority of which related to Bookings.Cash invested in purchases of property and equipment was $9.6 million and $8.0 million in the nine months ended September 30, 2006 and 2005, respectively.

Net cash provided by financing activities was approximately $113.8 million for the nine months ended September 30, 2006.  The cash provided by financing activities during the nine months ended September 30, 2006 was primarily related to the issuance of $300 million of convertible senior notes and $9.6 million of proceeds from the exercise of employee stock options, offset by $135.6 million of treasury stock purchases, $7.9 million of debt issuance costs, $32.5 million for the purchase of conversion spread hedges and the purchase of $19.8 million of stock in priceline.com International held by minority interest shareholders. Approximately $130 million of the treasury stock purchases during the third quarter 2006 were made from the buyers of our 2011 Notes and our 2013 Notes, and we believe that the purchase may have helped limit short selling of our common stock in the open market by the buyers of our notes. Net cash provided by financing activities of $21.9 million for the nine months ended September 30, 2005 was primarily proceeds from the sale of our minority interest in subsidiary and the exercise of employee stock options.

As more fully discussed in Note 14 to the Unaudited Consolidated Financial Statements, as of September 30, 2006, the total aggregate minority interest in priceline.com International on a fully diluted basis was approximately 6.4%.  Based upon the latest valuation, the aggregate fair value of the remaining minority interest in priceline.com International is estimated to be approximately $60.0 million at September 30, 2006, including unvested restricted stock and restricted stock units.  We expect the future fair value of the minority interest to grow based upon expected continued strong performance of the European business.

We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. However, if during that period or thereafter, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plan, either of which could have a material adverse effect on our future financial condition or results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted.  There are no assurances that we will generate sufficient cash flow from operations in the future, that revenue growth or sustained profitability will be realized or that future borrowings or

38

equity sales will be available in amounts sufficient to make anticipated capital expenditures or finance our strategies.

Off-Balance Sheet Arrangements.

As of September 30, 2006, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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

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

Risk Factors

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

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

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

Throughout 2006, our European operations have grown their gross bookings by well in excess of 100% on an annualized basis. This growth rate has contributed significantly to our growth in revenue, gross profit and earnings per share. We expect our European operations to experience a significant decline in their growth rate in future years because of the sheer size of their business (i.e., annualized growth rates are expected to decline as performance is compared to stronger fourth quarter 2005 and full-year 2006 results) and the competitiveness of the market. The expected decline in our European operations’ growth rate could have a resulting negative impact on our future revenue and earnings per share growth rates.

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

Historically, the majority of our European operations’ business has been located in the U.K.  The strategy of our European operations involves rapid expansion into other European countries, many of which have different customs,

39

different levels of customer acceptance of the Internet and different legislation, regulatory environments and tax schemes.  Compliance with foreign legal, regulatory or tax requirements will place demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences.  If our European operations are unsuccessful in rapidly expanding into other European countries, our business, results of operations and financial condition would be adversely affected.

We are dependent on the airline industry and certain airlines.

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

During the three months ended September 30, 2006, sales of airline tickets from our five largest and two largest airline suppliers accounted for approximately 80% and 44% of total airline tickets sold, respectively.  As a result, we are currently substantially dependent upon the continued participation of these airlines in priceline.com in order to maintain and continue to grow our total gross profit.

Our arrangements with the airlines that participate in our system – either Name Your Own Price® or price-disclosed service – generally do not require the airlines to provide any specific quantity of airline tickets or to make tickets available for any particular route or at any particular price.  During the course of our business, we are in continuous dialogue with our major airline suppliers about the nature and extent of their participation in our system. The significant reduction on the part of any of our major suppliers of their participation in our system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition.  Moreover, the airline industry has experienced a shift in market share from full-service carriers to low-cost carriers that focus primarily on discount fares to leisure destinations and we expect this trend to continue.  Some low-cost carriers, such as Southwest and JetBlue generally, do not distribute their tickets through us or other third-party intermediaries.  In addition, certain airlines have significantly limited or eliminated sales of airline tickets through “opaque” channels, preferring to consistently show the lowest available price on their own website.  If one or more participating airlines were to further limit or eliminate discounting through opaque channels, it could have a material adverse effect on our business, results of operations and financial condition.

Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing.  Several major U.S. airlines are struggling financially and have either filed for reorganization under the United States Bankruptcy Code or discussed publicly the risks of bankruptcy.  Two of our largest airline suppliers, Delta Air Lines and Northwest Airlines, are currently operating under the protection of federal bankruptcy laws. If any of our suppliers currently in bankruptcy liquidates or does not emerge from bankruptcy and we are unable to replace such supplier as a participant in priceline.com, our business would be adversely affected. In addition, in the event that another of our major suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected.  To the extent other major U.S. airlines that participate in our system declare bankruptcy, they may be unable or unwilling to honor tickets sold for their flights. Our policy in such event would be to direct customers seeking a refund or exchange to the airline, and not to provide a remedy ourselves. Because we are the merchant-of-record on sales of Name Your Own Price® airline tickets to our customers, however, we could experience a significant increase in demands for refunds or credit card charge backs from customers, which could materially and adversely affect our operations and financial results. In addition, because Name Your Own Price® customers do not choose the airlines on which they are to fly, the bankruptcy of a major U.S. airline or even the possibility of a major U.S. airline declaring bankruptcy could discourage customers from using our Name Your Own Price® system to book airline tickets.

If one of our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than the previous supplier.  For example, in September 2005,

40

US Airways and America West merged.  US Airways was a meaningful participant in our Name Your Own Price® system, but America West participated on a very limited basis.  The resulting entity participates in our Name Your Own Price® system, but at much lower levels than US Airways’ historical participation, which is the equivalent of US Airways significantly reducing its participation in our Name Your Own Price® system.  The loss of any major airline participant in our Name Your Own Price® system could result in other major airlines electing to terminate their participation in the Name Your Own Price® system, which would further negatively impact our business, results of operations and financial condition.  In addition, fewer independent suppliers reduces opacity and competition among suppliers.  In such event, if we are unable to divert sales to other suppliers, our business results of operations and financial condition may be adversely affected.

In addition, given the concentration of the airline industry, particularly in the domestic market, our competitors could exert pressure on other airlines not to supply us with tickets. Moreover, the airlines may attempt to establish their own buyer driven commerce service or participate or invest in other similar services.

We are dependent on certain hotels.

Our financial prospects are significantly dependent upon the sale of hotel room nights.  During the three months ended September 30, 2006, sales of Name Your Own Price® hotel room nights from our five largest hotel suppliers accounted for approximately 34.2% of total Name Your Own Price® hotel room nights sold.  As a result, we are currently substantially dependent upon the continued participation of these hotels in priceline.com’s hotel service in order to maintain and continue to grow our total gross profit.

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

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

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

·do not require the hotels to deal exclusively with us in the public sale of discounted hotel rooms.

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

Our merchant price-disclosed hotel service facilitates the purchase of hotel rooms by customers pursuant to a retail merchant model, which is based on merchant arrangements we make directly with individual hotel chains and independent hotel properties. We receive access to inventory directly from a hotel at a negotiated rate, and determine the retail price at which we will offer our services to the consumer, within contractual limitations.  Many hotels use merchant arrangements with companies like ours to dispose of excess hotel room inventory at wholesale rates. If hotels experience increased demand for rooms, they might reduce the amount of room inventory they make available through our merchant price-disclosed hotel service.  The recent improvement in occupancy rates discussed above could cause hotels to reduce the amount of inventory they make available through our merchant price-disclosed hotel service.

In addition, certain hotels have begun initiatives to reduce margins received by third party intermediaries on retail merchant transactions, which is the primary method we employ to distribute retail hotel room reservations in the United States.  Many hotels distribute room inventory through their own websites and therefore might increase negotiated rates for merchant rate inventory sold through our merchant price-disclosed hotel service, decreasing the margin available to us.  While our merchant price-disclosed hotel agreements with our leading hotel suppliers provide for specified discounts, if one or more participating hotels were to require us to limit our merchant margins, upon contract renewal or otherwise, it could have a material adverse effect on our business, results of operations and financial condition.

41

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

We compete with both online and traditional sellers of the services we offer. The market for the services we offer is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. In addition, the major online travel companies with which we compete have significantly greater financial resources and capital than we do.  We may not be able to effectively compete with industry conglomerates such as Travelport, Sabre or Expedia, each of which have access to significantly greater and more diversified resources than we do.

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

·Internet travel services such as Expedia, Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com, which are owned by the Sabre Group; Orbitz.com, Cheaptickets, Gullivers.com, ebookers plc, octopustravel and Flairview, which are currently owned by Travelport, a subsidiary of the Blackstone Group and Superbreak, Venere, hotel.de and Hotel Reservation Service;

·travel suppliers such as airlines, hotel companies and rental car companies, many of which have their own branded websites to which they drive business;

·large online portal and search companies, such as AOL (including AOL Travel), Yahoo! (including Yahoo! Travel) and Google;

·traditional travel agencies;

·online travel search sites such as SideStep.com, Mobissimo.com, Cheapflights.com, FareChase.com, Kayak.com (sometimes referred to as “meta-search”) and travel research sites that have search functionality, such as TripAdvisor and Travelzoo; and

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

Competitors of our European operations include, among others, Expedia (including hotels.com), Travelport (including ebookers, octopustravel, Gullivers.com and Flairview), Sabre Group (including lastminute.com), Superbreak, Venere, hotel.de and Hotel Reservation Service.

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

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

42

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

·marketing and promotional campaigns;

·attracting traffic to their websites;

·attracting and retaining key employees;

·securing vendors and inventory; and

·website and systems development.

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

Our outstanding convertible senior notes could result in substantial shareholder dilution.

Our convertible senior notes contain features that call for the delivery of an increasing number of shares of our common stock to the holders in the event that our common stock trades at prices above approximately $40 per share. Specifically, our diluted shares outstanding are expected to increase by approximately 280,000 shares for every one dollar increase in the price of our common stock above $40 per share. In order to mitigate against the potential dilutive impact of our convertible notes, we purchased conversion spread hedges. However, the conversion spread hedges will only partially offset the dilutive impact of our convertible senior notes in the event that our stock trades above $40 per share. Therefore, increases in the price of common stock above $40 per share could be dilutive to our existing shareholders and have a negative impact on future earnings per share.

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

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

We are exposed to fluctuations in currency exchange rates.

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

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

We rely on fees paid to us by Worldspan, L.P. and other global distribution systems, or GDSs, for travel bookings made through GDSs for a portion of our gross profit and a substantial portion of our operating income. We rebate certain GDS costs to certain suppliers (e.g., airlines, hotels, etc.) in exchange for contractual considerations such as those relating to inventory, pricing and availability, and expect to continue to do so in the future.  During 2006, most agreements between GDSs and the major domestic airlines expired, and most airlines have negotiated new agreements with reduced distribution costs for the airlines that went into effect September 1, 2006.  The structure of these new agreements, along with airline pressure on us to operate under the new structures, require us to reduce our aggregate compensation and book through lower

43

cost channels to receive airlines’ full content and avoid airline service fees.  We have entered into new agreements with a number of airlines to obtain access to airline content, and are in continuing discussions with others to obtain similar access.  If we were denied access to airlines’ full content or had to impose service fees on our airline tickets, it could have a material adverse effect on our business, results of operations and financial condition.

Additionally, some travel suppliers are encouraging third-party travel intermediaries, such as us, to develop technology to bypass the traditional GDSs, such as enabling direct connections to the travel suppliers or using alternative global distribution methods recently developed by new entrants to the global distribution marketplace, such as G2 Switchworks Corp.  Such new entrants propose using technology that is less complex than traditional global distribution systems, and that enables the distribution of airline tickets in a manner that is more cost-effective to the airline suppliers.  To this end, in the first quarter 2006, we entered into an agreement with G2 Switchworks for the provision of GDS services.  In addition, to further reduce our dependence on Worldspan, L.P., in the first quarter 2006, we entered into an agreement for the provision of GDS services with Sabre Inc.  Development of the technology to connect to such alternative GDSs, or to enable direct connections to travel suppliers, requires the use of information technology resources and could cause us to incur additional operating expenses, increase the frequency/duration of system problems and delay other projects.  Furthermore, our contractual obligations to Worldspan, L.P. may limit our ability to pursue the most financially attractive GDS options during the term of our agreement with Worldspan, L.P., which expires on December 31, 2007.

We recently began utilizing the services of G2 Switchworks to search for and book, and Sabre Inc. to search for, some of the airline tickets we make available to consumers.  We believe that this arrangement provides us with the opportunity to access favorable GDS economics with respect to a certain portion of our airline ticket business.  As discussed above, G2 Switchworks is a new entrant to the GDS marketplace and receives its search technology from ITA Software, a third party.  If our access to G2 Switchworks search services becomes limited or unavailable due to technical problems on the part of G2 Switchworks, issues between G2 Switchworks and ITA, or any other reason beyond our control, we would not be able to utilize our most efficient channel for those airline ticket bookings, and our business, results of operations and financial condition could suffer.

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

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

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

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

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

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

44

Acquisitions could result in operating difficulties.

As part of our business strategy, in September 2004, we acquired Active Hotels and, in July 2005, Bookings.  We may enter into additional business combinations and acquisitions in the future.  Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, incurrence of debt and amortization of expenses related to intangible assets acquired.  In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures.  The acquisitions of Bookings and Active Hotels were accompanied by a number of risks, including, without limitation:

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

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

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

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

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

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

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

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

We may experience similar risks in connection with any future acquisitions. We may not be successful in addressing these risks or any other problems encountered in connection with the acquisitions of Bookings and Active Hotels or that we could encounter in future acquisitions, which would harm our business or cause us to fail to realize the anticipated benefits of our acquisitions.  As of September 30, 2006, we had approximately $326 million assigned primarily to the intangible assets and goodwill of Bookings and Active Hotels, and therefore, the occurrence of any of the aforementioned risks could result in a material adverse impact, including a material impairment of these assets, which could cause us to have to write-down goodwill.  Any such write-down of goodwill could adversely impact our operating results, which would cause our stock price to decline significantly.

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

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

We may not be able to keep up with rapid technological and other changes.

The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, consolidation, frequent new service and product announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the emerging nature of the Internet and the apparent need of companies from many industries to offer Internet based products

45

and services. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure.

Online or internal security breaches could harm our business.

The secure transmission of confidential information over the Internet is essential in maintaining consumer and supplier confidence in the priceline.com services. Substantial or ongoing security breaches whether instigated internally or externally on our system or other Internet based systems could significantly harm our business. We currently require customers who use certain of our services to guarantee their offers with their credit card, either online or, in some instances, through our toll-free telephone service. It is possible that advances in computer circumvention capabilities, new discoveries or other developments could result in a compromise or breach of customer transaction data.

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

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

We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet, and any publicized security problems could inhibit the growth of the Internet and, therefore, the priceline.com service as a means of conducting commercial transactions.  Additionally, security breaches at the third-party, supplier or distributor systems upon which we rely could result in negative publicity.

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

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

In addition, in the aftermath of the terrorist attacks of September 11, 2001 in the United States, government agencies have been contemplating or developing initiatives to enhance national and aviation security, including the Transportation Security Administration’s Computer-Assisted Passenger Prescreening System, known as CAPPS II.  These initiatives may result in conflicting legal requirements with respect to data handling.  As privacy and data protection has become a more sensitive issue, we may also become exposed to potential liabilities as a result of differing views on the privacy of travel data.

46

Travel businesses have also been subjected to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of passenger information.  These and other privacy developments that are difficult to anticipate could adversely impact our business, results of operations and financial condition.

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

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

We may be unable to generate sufficient cash to repay or repurchase our $570 million Convertible Senior Notes and the Notes could result in dilution to our earnings per share.

In August 2003, we issued $125 million aggregate principal amount of Convertible Senior Notes due 2010, with an interest rate of 1% (the “1% Notes”), in June 2004, we issued $100 million aggregate principal amount of Convertible Senior Notes due 2025, with an interest rate of 2.25% (the “2.25% Notes”) and in September 2006, we issued $150 million aggregate principal amount of Convertible Senior Notes due 2011, with an interest rate of 0.50% (the “2011 Notes”) and $150 million aggregate principal amount of Convertible Senior Notes due 2013, with an interest rate of 0.75% (the “2013 Notes, and collectively with the 1% Notes, the 2.25% Notes and the 2011 Notes, the “Notes”).  Additionally, in October 2006, the initial purchasers of the 2011 Notes and the 2013 Notes exercised their over-allotment option to purchase an additional $22.5 million of 2011 Notes and $22.5 million of 2013 Notes, solely to cover over-allotments.  The holders of the 1% Notes may require us to repurchase the notes on August 1, 2008, the holders of the 2.25% Notes may require us to repurchase the notes on January 15, 2010, 2015 or 2020, and the holders of the 2011 Notes and the 2013 Notes may require us to repurchase the notes upon certain designated events.  It is possible that we may not have sufficient funds or may be unable to arrange for additional financing to pay the principal amount or repurchase price due.  We are increasingly reliant on our European operations as a source of cash flow and in the event we are required to repay or repurchase the notes, we would likely incur expenses to repatriate such cash to the United States.  If we are unable to repurchase, repay or refinance the Notes when due, we would be in default under our indentures and our business, results of operations and financial condition would be adversely affected.

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

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

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

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

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

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

47

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

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

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

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

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

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

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

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

A substantial portion of our computer hardware for operating our services is currently located at the facilities of SAVVIS in New Jersey, AT&T in New York City, IX EUROPE in London, England, TrueServer BV and Redbus Interhouse Netherlands.  If SAVVIS is, for any reason, unable to support our website, we would need to quickly complete the activation of our secondary site at the AT&T web hosting facility.  Any of these conditions could cause disruptions to our business or exposure to potentially damaging press coverage of the problems, and would have a material adverse effect on our business, results of operations, and financial condition.

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

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

Capacity constraints and system failures could harm our business.

We rely on supplier and distribution systems, including those of Worldspan, L.P., Pegasus Solutions, Sabre Inc., G2 Switchworks Corp., ITA and Navitaire.  If any of these systems becomes inaccessible, or partially inaccessible to us, due to system failure or otherwise, for any significant amount of time, our ability to process reservations could be adversely affected, in which case our results would suffer.  We also depend upon Paymentech to process our credit card transactions. If

48

Paymentech was wholly or partially compromised, our cash flows could be disrupted until such a time as a replacement process could be put in place with a different vendor.  As we add complexity to our systems infrastructure by adding new supplier and distribution, our total system availability could decline and our results could suffer.

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

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

·unanticipated disruptions in service;

·slower response times;

·decreased customer service and customer satisfaction; or

·delays in the introduction of new products and services,

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

Like many online businesses, we have experienced system failures from time to time. For example, in May 2001, our primary website was interrupted for a period of 12 hours. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that can be substantial and may cause some users to switch to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We have been taking steps to increase the reliability and redundancy of our system. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime.

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

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

We recently began integrating our entire European hotel offerings into a single extranet operated by Bookings, in order to allow customers of both Bookings and Active Hotels to access hotels which may have previously been available only through either Bookings or Active Hotels.  Because all of our European operations’ hotel offerings will therefore be on one platform, in the event that the extranet operated by Bookings experiences a system failure, our European operations could be unable to generate hotel bookings, which could have a material adverse effect on our business, results of operations and financial condition.  In addition, in the second quarter of 2006, we started to implement a new financial accounting system at Bookings, which is expected to improve efficiency and support growth.  The financial accounting system is new to us, however, and could present unforeseen technical or other issues, including without limitation, systems failures, any of which would place further demands on our European technology and business resources and could adversely impact our European operations.

49

Uncertainty regarding state and local taxes.

We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we pay sales and other taxes, including hotel occupancy taxes, to suppliers related to travel services sold through the priceline.com service.  We believe that this practice is consistent with the tax laws of all jurisdictions. On an ongoing basis, we conduct a review and interpretation of the tax laws in various states and other jurisdictions relating to the payment of state and local hotel occupancy and other related taxes.  In connection with our review, we have met and had discussions with taxing authorities in certain jurisdictions but the ultimate resolution in any particular jurisdiction cannot be determined at this time.  Currently, hotels collect and remit hotel occupancy and related taxes to the various tax authorities based on the amounts collected by the hotels. Consistent with this practice, we recover the taxes on the underlying cost of the hotel room night from customers and pay that amount to the hotel operators for payment to the appropriate tax authorities.  As discussed in Note 15 to our Unaudited Consolidated Financial Statements in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, several jurisdictions have initiated lawsuits indicating the position that sales or hotel occupancy tax is applicable to the differential between the price paid by a customer utilizing our service and the cost of the underlying room. Historically, we have not collected taxes on this differential. Additional state and local jurisdictions could assert that we are subject to sales or hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively or both. A number of proposals have been made at state and local levels that could impose additional taxes on the sale of products and services through the Internet or the income derived from these sales. Such actions may result in substantial tax liabilities for past and/or future sales and could have a material adverse effect on our business and results of operations. To the extent that any tax authority succeeds in asserting that any such tax collection responsibility exists, it is likely that, with respect to future transactions, we would collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room nights to our customers and, consequently, could reduce our hotel sales. We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those estimated liabilities.

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

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

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

Two large stockholders are represented on our Board of Directors.

Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited, which is a 49.97% shareholder of Hutchison Whampoa Limited, owned approximately 10% of our outstanding common stock as of September 27, 2006, and have the right to appoint two representatives to our Board of Directors.  Ian F. Wade and Dominic Kai Ming Lai are Hutchison Whampoa Limited’s representatives on our Board of Directors.  These stockholders could exert significant influence over us and our strategic direction, and deter or prevent certain fundamental transactions involving our company.

In June 2000, we entered into definitive agreements with subsidiaries of Hutchison Whampoa Limited to introduce our services to several Asian markets.  Under the terms of the agreements we license our business model and provide our expertise in technology, marketing and operations to Hutchison-Priceline Limited.  Hutchison-Priceline Limited reimburses us for the cost of services provided and is required to pay us a licensing fee for any year in which Hutchison-Priceline Limited achieves profitability.  We and Hutchison Whampoa Limited currently own approximately 15% and 85%, respectively, of the outstanding equity securities of Hutchison-Priceline Limited.  Jeffery H. Boyd, our President and Chief Executive Officer, is priceline.com’s representative on the board of directors of Hutchison-Priceline Limited.

50

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

Our revenues and operating results have varied significantly from quarter to quarter because our business experiences seasonal fluctuations, which reflect seasonal trends for the travel services offered by our websites. Traditional leisure travel bookings in the United States are higher in the second and third calendar quarters of the year as consumers take spring and summer vacations. In the first and fourth quarters of the calendar year, demand for travel services in the United States generally declines and the number of bookings flattens.  Travel revenues in Europe, on the other hand, have been higher in the third and fourth quarters than in the first and second quarters.  Furthermore, prior to introducing a retail travel option to our customers, substantially all of our business was conducted under the Name Your Own Price® system and accordingly, because those services are non-refundable in nature, we recognize travel revenue at the time a booking was generated.  We recognize revenue generated from our retail hotel service, however, including our European operations, at the time that the customer checks out of the hotel.  As a result, we have seen and expect to continue to see, that a meaningful amount of retail hotel bookings generated earlier in the year, as customers plan and reserve their spring and summer vacations, will not be recognized until future quarters.  This could result in a disproportionate amount of our annual earnings being recognized in later quarters.

Our results may also be affected by seasonal fluctuations in the inventory made available to us by airlines, hotels and rental car suppliers. Our revenues and operating results may continue to vary significantly from quarter to quarter because of these factors. As a result, quarter-to-quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history, a relatively new and unproven business model and an uncertain environment in the travel industry, it may be difficult to predict our future revenues or results of operations.

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

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

We commenced recording a U.S. tax provision in the third quarter of 2005 upon recording the reversal of a portion of our valuation allowance on our deferred tax assets.  This non-cash provision will materially negatively impact future net income and earnings per share as compared to prior periods.  Due to our significant net operating loss carryforwards, we do not expect to pay cash taxes on our U.S. federal taxable income tax for the foreseeable future.  We expect to make cash payments for U.S. alternative minimum tax and for certain international taxes.

Our stock price is highly volatile.

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

·quarterly variations in our operating results;

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

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

·changes in our capital structure;

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

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

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

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

51

·changes in the status of our intellectual property rights;

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

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

·additions or departures of key personnel; and

·stock market price and volume fluctuations.

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

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

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

We are party to legal proceedings which, if adversely decided, could materially adversely affect us.

We are a party to the legal proceedings described in Note 15 to our Unaudited Consolidated Financial Statements in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.  The defense of the actions described in Note 15 to our Unaudited Consolidated Financial Statements of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 may increase our expenses and an adverse outcome in any of such actions could have a material adverse effect on our business, results of operations and financial condition.

Regulatory and legal uncertainties could harm our business.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We manage our exposure to interest rate risk and foreign currency risk through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We use derivative financial instruments, including an interest rate hedge to manage interest risk and conversion spread hedges to protect against share dilution in the event of conversion of certain of our Convertible Senior Notes, and forward contracts to manage currency risk. Additional information regarding our interest rate hedge is contained within “Item 7. Management’s Discussion and Analysis of

52

Financial Condition and Results of Operations — Critical Accounting Policies and Estimates – Derivative Financial Instruments” in our December 31, 2005 Annual Report on Form 10-K.

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

We did not experience any material changes in interest rate exposures during the three months and nine months ended September 30, 2006.  Based upon economic conditions and leading market indicators at September 30, 2006, we do not foresee a significant adverse change in interest rates in the near future.

As of September 30, 2006, the carrying value of our debt is $523.7 million.  We estimate that the fair market value of our debt was approximately $574.4 million as of September 30, 2006.

As of September 30, 2006, we held an interest rate swap agreement on $45 million notional value of our fixed rate debt.  The fair value cost to terminate this swap as of September 30, 2006 was approximately $1.4 million.  A 10% adverse fluctuation in the 3-month LIBOR rate as of September 30, 2006, would increase the cost to terminate the interest rate swap by approximately $341,000.  Any increase or decrease in the fair value of the Company’s interest rate sensitive derivative instruments would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying asset, liability, or cash flow.

In September 2006, using a portion of the proceeds from the issuance of the 2011 Notes and the 2013 Notes, we entered into hedge transactions relating to potential dilution of our common stock upon conversion of the 2011 Notes and the 2013 Notes and (the “Conversion Spread Hedges”) with affiliates of the initial purchasers of the 2011 Notes and the 2013 Notes (the “counterparties”).  Under the Conversion Spread Hedges, we are entitled to purchase from the counterparties approximately 7.4 million shares of our common stock (the number of shares underlying the 2011 Notes and the 2013 Notes) at a strike price of $40.38 per share (subject to adjustment in certain circumstances) and the counterparties are entitled to purchase from us approximately 7.4 million shares of our common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances).   The Conversion Spread Hedges increase the effective conversion price of the 2011 Notes and the 2013 Notes to $50.47 per share from our perspective and are expected to reduce the potential dilution upon conversion of the 2011 Notes and the 2013 Notes.  If the market value per share of our common stock at the time of any exercise is above $40.38, the Conversion Spread Hedges will entitle us to receive from the counterparties net shares of our common stock based on the excess of the then current market price of our common stock over the strike price of the purchased call options.  Holders of the 2011 Notes and the 2013 Notes do not have any rights with respect to the Conversion Spread Hedges.  The Conversion Spread Hedges are separate transactions entered into by us with the counterparties, are not part of the terms of the Notes and will not affect the holders’ rights under the 2011 Notes and the 2013 Notes.  See Notes 9 and 10 to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

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

53

typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.

As of September 30, 2006, contracts with notional values of 2.5 million British Pounds and 19.4 million Euros were outstanding to minimize the impact of short-term foreign currency fluctuations on our consolidated operating results.  We may enter into additional forward contracts or other economic hedges in the future.

Additionally, fixed rate investments are subject to interest rate volatility.  To the extent that changes in interest rates and currency exchange rates affect general economic conditions, priceline.com would also be affected by such changes.

Item 4.Controls and Procedures

Prior to filing this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2006, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports.

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

In July 2005, we acquired Bookings, and as a result of that acquisition, we have undertaken a review of Bookings’ internal controls and intend to make changes, if necessary, that we believe to be appropriate to those internal controls as we integrate its business with ours. In addition, in the second quarter of 2006, we started to implement a new financial accounting system at Bookings, which is expected to improve efficiency and support growth. The implementation of this financial accounting system is expected to occur in phases through 2007 and will likely affect the processes that constitute the Company’s internal control over financial reporting.  As we further integrate Bookings’ business and continue with the system implementation, we will continue to review its internal controls and may take further steps to ensure that its internal controls are effective and integrated appropriately.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

A description of material legal proceedings to which we are a party is contained in Note 15 to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered sales of equity securities.  On September 27, 2006, we issued $150 million aggregate principal amount of Convertible Senior Notes due September 30, 2011, with an interest rate of 0.50% (the “2011 Notes”), and $150 million aggregate principal amount of Convertible Senior Notes due September 30, 2013, with an interest rate of 0.75% (the “2013 Notes”).  The initial purchasers of the 2011 Notes and the 2013 Notes were Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith, who purchased the notes from us at face value with an underwriting discount of 2.5%. Each $1,000 principal amount of 2011 Notes and the 2013 Notes will initially be convertible into 24.7647 shares of our common stock, par value $0.008 per share at a conversion price of approximately $40.38 per share, subject to adjustment.   The 2011 Notes and the 2013 Notes are convertible, at the option of the holder, on or prior to June 30, 2011 in the case of the 2011 Notes, and June 30, 2013 in the case of the 2013 Notes, upon the occurrence of specified events, including, but not limited to a change in control, or if after the calendar quarter ending December 31, 2006, the closing sale price of the Company’s common stock for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter.  The offer and sale of the 2011 Notes and the 2013 Notes were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2).

54

Issuer purchases of equity securities.  The following table sets forth information relating to repurchases of our equity securities during the three months ended September 30, 2006:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2006 – July 31, 2006	0	$	0	0	$	32,120,000	(1)
August 1, 2006 – August 31, 2006	13,518	$	29.11	13,518	$	31,726,558	(1)
September 1, 2006 – September 30, 2006	3,850,000	$	33.65	3,850,000	$	20,448,000	(2)
Total	3,863,518	$	33.63	3,863,518	$	20,448,000	(2)

(1)Pursuant to a stock repurchase program announced on November 2, 2005, whereby the Company was authorized to repurchase up to $50,000,000 of its common stock. This program was effectively terminated by the new repurchase program announced on September 21, 2006.

(2)Pursuant to a stock repurchase program announced on September 21, 2006, whereby the Company was authorized to repurchase up to $150,000,000 of its common stock.

Item 6.Exhibits and Reports on Form 8-K

(a)Exhibits

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

(b)Reports on Form 8-K

On August 8, 2006, we filed a report on Form 8-K in connection with the company’s second quarter 2006 earnings, on September 6, 2006, we filed a report on Form 8-K in connection with the sale of priceline.com Incorporated common stock by Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited, on September 7, 2006, we filed a report on Form 8-K in connection with an underwriting agreement with Goldman, Sachs & Co., on September 21, 2006, we filed a report on Form 8-K in connection with our revised third quarter 2006 and full-year 2007 guidance and our intention to offer $300 million of convertible senior notes in a private placement, on September 22, 2006, we filed a report on Form 8-K in connection with the pricing of our convertible debt offering and the purchase of convertible note hedges, on September 27,

55

2006, we filed a report on Form 8-K in connection with the purchase agreement related to our convertible debt offering, and on September 28, 2006, we filed a report on Form 8-K in connection with the closing of our convertible debt offering and the repurchase of 3.85 million shares of our common stock.

56

SIGNATURES

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

	PRICELINE.COM INCORPORATED
	(Registrant)
Date: November 9, 2006	By:	/s/ Robert J. Mylod, Jr.
		Name:	Robert J. Mylod, Jr.
		Title:	Chief Financial Officer
			(On behalf of the Registrant and
			as principal financial officer)

57

Exhibit Index

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

58

EX-12.1

Exhibit 12.1

priceline.com Incorporated
CALCULATION OF RATIO
OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	($000)						($000)
	2006			2005			2006			2005
Fixed Charges Computation :
Preferred stock dividend	$	1,063		$	976		$	1,927		$	1,854
Interest expense, including amortization of debt issuance costs	1,550			1,245			4,603			3,777
Total fixed charges and preferred dividends	$	2,613		$	2,221		$	6,530		$	5,631
Earnings Computation :
Earnings before income taxes, equity in income (loss) of investees and minority interests	$	33,032		$	12,672		$	50,972		$	29,786
Less :
Preferred stock dividend	(1,063		)	(976		)	(1,927		)	(1,854		)
Minority interests	(1,708		)	(473		)	(2,365		)	(659		)
Add :
Fixed charges	2,613			2,221			6,530			5,631
Earnings as adjusted	$	32,874		$	13,444		$	53,210		$	32,904
Ratio of earnings to fixed charges	21.2		x	10.8		x	11.6		x	8.7		x
Ratio of earnings to fixed charges and preferred dividends	12.6		x	6.1		x	8.1		x	5.8		x

1

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Jeffery H. Boyd, certify that:

1.I have reviewed the Quarterly Report on Form 10-Q of priceline.com Incorporated (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the Registrant and we have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated:November 9, 2006		/s/ Jeffery H. Boyd
	Name:	Jeffery H. Boyd
	Title:	President & Chief Executive Officer

1

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Robert J. Mylod, certify that:

1.I have reviewed the Quarterly Report on Form 10-Q of priceline.com Incorporated (the “Registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and we have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated:November 9, 2006		/s/ Robert J. Mylod
	Name:	Robert J. Mylod
	Title:	Chief Financial Officer

1

EX-32.1

Exhibit 32.1

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of priceline.com Incorporated, a Delaware corporation (the “Company”), hereby certifies that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:November 9, 2006		/s/ Jeffery H. Boyd
	Name:	Jeffery H. Boyd
	Title:	President & Chief Executive Officer

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

1

EX-32.2

Exhibit 32.2

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of priceline.com Incorporated, a Delaware corporation (the “Company”), hereby certifies that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:November 9, 2006		/s/ Robert J. Mylod
	Name:	Robert J. Mylod
	Title:	Chief Financial Officer

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

1