EXPEDIA INC, 424B1, 1999-11-10

EXPEDIA INC
424B1, 1999-11-10
TRANSPORTATION SERVICES

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<PAGE>

Filed Pursuant to Rule 424(b)(1)
Registration No. 333-87623
5,200,000 Shares

[EXPEDIA, INC. LOGO]

Common Stock

------------

This is an initial public offering of shares of common stock of Expedia,
Inc. This prospectus relates to an offering of 4,160,000 shares in the United
States. In addition, 1,040,000 shares are being offered outside the United
States in an international offering. All of the 5,200,000 shares of common
stock are being sold by Expedia.

Prior to this offering, there has been no public market for the common
stock. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "EXPE."

See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the common stock.

------------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................ $14.00 $72,800,000
Underwriting discount.................................... $ 0.98 $ 5,096,000
Proceeds, before expenses, to Expedia.................... $13.02 $67,704,000
</TABLE>

To the extent that the underwriters sell more than 5,200,000 shares of
common stock, the underwriters have the option to purchase up to an additional
780,000 shares from Expedia at the initial public offering price less the
underwriting discount.

------------

The underwriters expect to deliver the shares in New York, New York on
November 16, 1999.

------------

Joint Book-Running Managers

Goldman, Sachs & Co. Morgan Stanley Dean Witter

------------

Prospectus dated November 9, 1999.
<PAGE>

INSIDE FRONT COVER

[ARTWORK]

The Expedia Travel Marketplace

Consumers
Leisure Travelers
Small Business Travelers
Corporate Travelers

[Expedia, Inc. Logo]

Suppliers
Airlines
Hotels
Car Rental Companies
Vacation Packagers
Cruise Lines
Destination Services Merchants

[horizontal rule]

Global Reach and Presence
United States
Launched in October 1996
[Expedia.com logo]
[Image of USA flag]
Canada
Launched in April 1997
[Expedia.ca logo]
[Image of Canada flag]
United Kingdom
Launched in November 1998
[Expedia.co.uk logo]
[Image of Union Jack flag]
Germany
Launched in August 1999
[Expedia.de logo]
[Image of German flag]
<PAGE>

INSIDE GATEFOLD
[ARTWORK in background is version of Expedia, Inc. logo]

Commerce
Expedia.com offers one-stop travel shopping and reservation services, providing
access to schedule, pricing and availability information [screenshot of home
page of Expedia.com]

Community
Expedia.com community features enable consumers to make choices on their travel
purchases. Our Fare Compare feature allows consumers to review fares that other
Expedia.com customers have found on similar flights.

[screenshot of Fare Compare, with heading that says Deals found by other
Expedia.com customers]

Customer Service
Expedia.com offers customers 24-hour access to toll-free telephone and email
customer service.

[screenshot of Customer Service area on Expedia.com, with a photograph of
customer service agent]

Content
Expedia.com consumers use our editorial content to research destinations, read
travel tips provided by other Expedia travelers, and gain more insight before
leaving on a trip.

[screenshot of places to go page with a photograph and caption titled The Grand
Canal]

[Expedia, Inc. Logo]

Expedia.com and Expedia are either registered trademarks or trademarks of
Expedia, Inc. in the United States and/or other countries.

<PAGE>

SUMMARY

This summary may not contain all the information that may be important to
you. You should read this entire prospectus before making an investment
decision.

In this prospectus, the terms "Expedia" and "we" refer to Expedia, Inc. and
our subsidiaries and our predecessor, the travel business unit of Microsoft
Corporation, except where it is clear that such terms mean only Expedia, Inc.

Expedia, Inc.

The Internet is dramatically changing the way that consumers and businesses
communicate, share information and buy and sell goods and services. The
Internet reduces inefficiencies in markets characterized by the presence of
large numbers of geographically dispersed buyers and sellers and purchase
decisions involving large amounts of information from multiple sources. We
believe that the worldwide travel industry, which exemplifies these
characteristics, is especially well-suited to benefit from increased Internet
and electronic commerce adoption. As a result, travel has already become the
largest online retail category with estimated online transactions of $7.8
billion in 1999, growing to $32 billion in 2004, according to Forrester
Research.

To address this market opportunity, we attract a large global base of
consumers and travel suppliers to our Internet-based travel marketplace and
enable them to research, buy and sell travel-related services online. Our
global travel marketplace offers consumers a convenient, comprehensive and
personalized source of travel information and services. At the same time, our
marketplace enables travel suppliers to reach a large, global audience of
consumers who are actively engaged in planning and purchasing travel services.
In our marketplace, suppliers can pursue a range of innovative, targeted
merchandising and advertising strategies designed to increase revenues, while
reducing overall transaction and customer service costs.

We have built an underlying technology infrastructure that enables both
buyers and sellers to transact through our websites in a reliable, scalable and
secure environment. In addition to generating revenues from transactions and
advertising on our websites, we also license key components of our technology
and editorial content to selected airlines as a platform for their electronic
commerce websites.

Since launching our online travel service in October 1996, we have
experienced significant growth in our traffic and the amount of travel
purchased through our websites. As of September 30, 1999, over $790 million in
airline ticket purchases and hotel and car rental reservations had been made
through our websites by over 930,000 consumers and 7.5 million users had
registered on our websites. In addition, as of September 30, 1999, over $500
million in airline ticket purchases and hotel and car rental reservations had
been made through the websites of our licensees by over 470,000 customers and
5.5 million users had registered on the websites of our licensees. According to
Media Metrix, Expedia.com was the #1 most visited website for travel services
for each of the six months ended September 30, 1999.

We are located at 4200 150th Avenue NE, Redmond, Washington 98052, and our
phone number is (425) 705-5161.

3
<PAGE>

Our Strategy

Our objective is to enhance our position as a leading online travel
marketplace. The key elements of our strategy are as follows:

Increase brand awareness. We plan to pursue an aggressive brand development
strategy that will include a substantial advertising presence in both online
media and traditional media, such as print, radio and television. We will also
continue to offer co-branded promotions with selected suppliers.

Enhance supplier relationships. Investing in and building on strong
supplier relationships are crucial to the success of our business. We will
continue to work with suppliers to develop new advertising and travel services
for our websites and new tools to facilitate suppliers' entry of pricing,
availability and description information directly into our marketplace.

Enhance technology platform and product functionality. We plan to continue
to enhance the underlying infrastructure and functionality of our websites. The
operation of our own websites and those of our licensees has given us extensive
experience at handling rapid increases in transaction volumes. In addition to
continuously updating software features and editorial content, we believe that
increasing the level of personalization in our marketplace is critical to
providing a rich consumer experience.

Expand internationally. We operate localized websites in the United
Kingdom, Germany and Canada. We selected these countries due to their large
travel markets and the rapid growth of online commerce in these markets. We
plan to expand our international presence by entering other important travel
markets, after evaluating both the size of the local travel market and the
popularity of online commerce. In developing customized websites in these and
other international markets, we will continue to draw on our experience in the
United States with technology, user interface and supplier relationships while
tailoring our international websites to specific characteristics of each local
marketplace.

Broaden our marketplace into new travel services categories. We plan to
expand our travel service offerings to include more complex travel products and
destination service offerings. Currently, the majority of our commerce revenues
are derived from sales of airline tickets, with a smaller percentage
represented by hotel reservations and car rentals. We plan to extend our
offerings in each of these core segments and expand the range of offerings into
other segments, such as cruises and vacation packages.

4
<PAGE>

Our Relationship with Microsoft Corporation

In October 1996, Microsoft launched its online travel services through
Expedia. On October 1, 1999, Microsoft separated the Expedia assets and
contributed them to us in exchange for 33,000,000 shares of common stock or
100% of our outstanding common stock at that date. After giving effect to this
offering, Microsoft will own approximately 86.4% of our outstanding common
stock, or approximately 84.7% if the underwriters' over-allotment options are
exercised in full. Microsoft will continue to include us in its consolidated
federal tax returns as long as it owns at least 80% of our outstanding stock
and will continue to include our financial data in its consolidated financial
reports as long as it maintains control of our outstanding common stock.

Microsoft will cancel all of the unvested options of Microsoft employees
who choose to join Expedia prior to this offering and we will replace the
canceled options with Expedia options, that will have equivalent vesting
schedules and in-the-money values and comparable other terms as the canceled
Microsoft options.

We have also entered into a number of other agreements which were necessary
to separate the Expedia assets from Microsoft and to facilitate the operation
of the Expedia assets after such separation. One of these agreements provides
that for a three-year period Microsoft will not compete directly or indirectly
in the business of offering an online service for reserving or purchasing
travel services. These agreements were not negotiated on an arm's length basis.

Risk Factors

An investment in our common stock involves a high degree of risk. We have
incurred substantial net losses and negative cash flows on both an annual and
interim basis, including a net loss of $5.0 million for the three months ended
September 30, 1999 and, in the same period, negative cash flow from operating
and investing activities of $6.3 million. As of September 30, 1999, we had an
accumulated deficit of $91.7 million. We expect our operating losses and
negative cash flow to continue for the foreseeable future. We also expect to
incur a non-cash charge of approximately $115 million related to the issuance
of stock options to our employees to replace their unvested Microsoft options.
Before deciding whether to invest in shares of our common stock, you should
carefully consider the risks and uncertainties described in "Risk Factors"
beginning on page 8 of this prospectus.

5
<PAGE>

The Offering

<TABLE>
<S> <C>
Common stock offered by Expedia
U.S. offering................ 4,160,000 shares
International offering....... 1,040,000 shares
Total...................... 5,200,000 shares
Common stock to be outstanding
after this offering........... 38,200,000 shares
Use of proceeds................ Working capital and general corporate
purposes
Nasdaq National Market symbol.. "EXPE"
</TABLE>

In addition to the shares of common stock to be outstanding after this
offering, we may issue additional shares of common stock under the following
plans and arrangements:

. 14.1 million shares issuable upon exercise of outstanding options at a
weighted average exercise price of $5.99 per share as of November 9,
1999.

. 4,435,000 shares available for future issuance upon exercise of options
not yet granted or for future issuance under our various stock plans.

6
<PAGE>

Summary Financial Data

<TABLE>
<CAPTION>
Three
months ended
Years ended June 30, September 30,
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
----- ------- -------- -------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ 2,742 $ 13,827 $ 38,699 $ 6,057 $15,268
Cost of revenues........ -- -- 3,279 9,692 15,950 3,177 5,364
----- ------- -------- -------- -------- ------- -------
Gross profit (loss)..... -- -- (537) 4,135 22,749 2,880 9,904
Operating expenses:
Product development... 818 6,263 16,211 18,506 21,180 4,977 5,393
Sales and marketing... -- 17 8,820 10,823 14,888 2,060 6,732
General and
administrative....... 145 1,520 3,353 4,284 6,283 1,050 2,729
----- ------- -------- -------- -------- ------- -------
Total operating
expenses........... 963 7,800 28,384 33,613 42,351 8,087 14,854
----- ------- -------- -------- -------- ------- -------
Loss from operations and
net loss............... $(963) $(7,800) $(28,921) $(29,478) $(19,602) $(5,207) $(4,950)
===== ======= ======== ======== ======== ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (.59) $ (.15)
======== =======
Shares used in computing
pro forma net loss per
share.................. 33,000 33,000
======== =======
</TABLE>

<TABLE>
<CAPTION>
As of
September 30, 1999
---------------------
As
Actual adjusted
--------- ----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital........................................... $ 2,608 $ 68,512
Total assets.............................................. 7,018 72,922
Accumulated deficit....................................... (91,714) (91,714)
Total owner's net deficit/stockholders' equity............ (373) 65,531
</TABLE>

The as adjusted amounts reflect the receipt by Expedia of the net proceeds
of $65.9 million from the sale of the 5,200,000 shares of common stock offered
by Expedia in this offering after deducting the estimated offering expenses and
underwriting discounts and commissions, based upon the public offering price of
$14.00 per share.

Unless we note otherwise, all of the information that we have included in
this prospectus assumes that the underwriters have not exercised their over-
allotment options. See "Underwriting" for a discussion of the over-allotment
options.

<PAGE>

RISK FACTORS

An investment in our common stock involves a high degree of risk. You
should consider the following factors carefully before deciding to purchase
shares of common stock. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations.

Our operating results are volatile and difficult to predict. If we fail to
meet the expectations of securities analysts or investors, the market price of
our common stock may decline significantly.

Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile
and difficult to predict, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It
is likely that in some future quarter our operating results will fall below
the expectations of securities analysts or investors. In this event, the
trading price of our common stock may decline significantly.

Factors that may cause us to fail to meet the expectations of securities
analysts or investors include the following:

. our inability to obtain new customers at reasonable cost, retain
existing customers or encourage repeat purchases

. decreases in the number of visitors to our websites or our inability
to convert visitors to our websites into customers

. our inability to adequately maintain, upgrade and develop our
websites, the systems that we use to process customers' orders and
payments or our computer network

. our inability to retain existing airlines, hotels, rental car
companies and other suppliers of travel services ("travel suppliers")
or to obtain new travel suppliers

. our inability to obtain travel products on satisfactory terms from our
travel suppliers

. the ability of our competitors to offer new or enhanced websites,
services or products

. fluctuating gross margins due to a changing mix of revenues

. the termination of existing relationships with key service providers
or failure to develop new ones

. the amount and timing of operating costs relating to expansion of our
operations

. economic conditions specific to the Internet, online commerce and the
travel industry

Because we have a limited operating history, it is difficult to evaluate our
business and prospects.

Our business began operations in July 1994 and we launched our online
travel service in October 1996. As a result, we have only a limited operating
history from which you can evaluate our historical business. It is also
difficult to evaluate our prospective business because we face the risks
frequently encountered by early stage companies using new and unproven
business models and entering new and rapidly evolving markets, such as online
commerce. These risks include our potential failure to:

. attract additional travel suppliers and consumers to our service

. maintain and enhance our brand

8
<PAGE>

. expand our service offerings

. operate, expand and develop our operations and systems efficiently

. maintain adequate control of our expenses

. raise additional capital

. attract and retain qualified personnel

. respond to technological changes

. respond to competitive market conditions

We depend on our relationships with travel suppliers, licensees and computer
reservation systems; adverse changes in these relationships could affect our
inventory of travel offerings and license revenues.

Our business model relies on relationships with travel suppliers, and it
would be negatively affected by adverse changes in these relationships. We
depend on travel suppliers to enable us to offer our customers comprehensive
access to travel services and products. Consistent with industry practices, we
currently have few agreements with our travel suppliers obligating them to
sell services or products through our websites. It is possible that travel
suppliers may choose not to make their inventory of services and products
available through online distribution. Travel suppliers could elect to sell
exclusively through other sales and distribution channels or to restrict our
access to their inventory, either of which could significantly decrease the
amount or breadth of our inventory of available travel offerings. We also
depend on travel suppliers for advertising revenues. Adverse changes in any of
these relationships could reduce the amount of inventory which we are able to
offer through our websites.

In addition to our relationships with travel suppliers, our business model
relies on our relationships with licensees and computer reservations systems.
Our license revenues are generated through a small number of licensees and our
computer reservation systems, particularly Worldspan, L.P. and Pegasus
Systems, Inc., provide us access to travel suppliers. Adverse changes in any
of these relationships could have a material adverse effect on the revenue
which we generate from these licenses.

A decline in commission rates or the elimination of commissions could reduce
our revenues.

A substantial majority of our online revenues depends on the commissions
paid by travel suppliers for bookings made through our online travel service.
Generally, we do not have written commission agreements with our suppliers. As
is standard practice in the travel industry, we rely on informal arrangements
for the payment of commissions. Travel suppliers are not obligated to pay any
specified commission rate for bookings made through our websites. We cannot
assure you that airlines, hotel chains or other travel suppliers will not
reduce current industry commission rates or eliminate commissions entirely,
either of which could reduce our revenues.

For example, in 1995, most of the major airlines placed a cap on per-
ticket commissions payable to all travel agencies for domestic airline travel.
In September 1997, the major United States airlines reduced the commission
rate payable to traditional travel agencies from 10% to 5%. In 1997, the major
United States airlines reduced the commission rate payable for online
reservations from 8% to 5%. In addition, since 1998, many airlines have
implemented a fixed-rate commission of $10.00 for domestic online roundtrip
ticket sales. Because a high percentage of our business relates to airline
ticket sales, a further reduction in airline ticket commissions could reduce
our revenues.

9
<PAGE>

Consumers, travel suppliers and advertisers may not accept our websites as
valuable commercial tools, which would harm the growth of our business.

For us to achieve significant growth, consumers, travel suppliers and
advertisers must accept our websites as valuable commercial tools. Consumers
who have historically purchased travel products using traditional commercial
channels, such as local travel agents and calling airlines directly, must
instead purchase these products through our websites. Consumers frequently use
our websites for route pricing and other travel information and then choose to
purchase airline tickets or make other reservations directly from travel
suppliers or other travel agencies. If this practice increases, it could limit
our growth.

Similarly, travel suppliers and advertisers will also need to accept or
expand their use of our websites. Travel suppliers will need to view our
websites as efficient and profitable channels of distribution for their travel
products. Advertisers will need to view our websites as effective ways to
reach their potential customers.

In order to achieve the acceptance of consumers, travel suppliers and
advertisers contemplated by our business plan, we will need to continue to
make substantial investments in our technology and brand. However, we cannot
assure you that these investments will be successful. Our failure to make
progress in these areas will harm the growth of our business.

We expect our losses and negative cash flows to continue.

We have incurred substantial net losses and negative cash flows on both an
annual and interim basis. For the fiscal year ended June 30, 1999, we had a
net loss of $19.6 million and negative cash flow from operating and investing
activities of $18.0 million. For the quarter ended September 30, 1999, we had
a net loss of $5.0 million and negative cash flow from operating and investing
activities of $6.3 million. As of September 30, 1999, we also had an
accumulated deficit of $91.7 million. In addition, we expect to incur a non-
cash charge of approximately $115 million related to the issuance of stock
options to our employees to replace their unvested Microsoft options. This
charge will be amortized over the vesting period of the new options. We expect
to continue to incur net losses and negative cash flows for the foreseeable
future and we cannot assure you that we will ever achieve profitability or
generate positive cash flows.

We expect to grow our operating expenses significantly, especially in the
areas of sales and marketing and operations. These increased expenses will
result primarily from our launch of a significant advertising campaign in
fiscal 2000, extension of the coverage of our advertising sales force and
expansion of our domestic and international operations. In addition, we may
experience an increase in general and administrative expenses as we develop
and purchase resources in areas where we currently rely on Microsoft to
provide services and in other areas required to operate as a stand-alone
entity. As a result, we will need to increase our revenues to become
profitable. If our revenues do not grow as expected, or if increases in our
expenses are not in line with our plans, there could be a material adverse
effect on our business, operating results and financial condition.

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

The markets for the products and services offered by us are intensely
competitive. We compete with other online travel reservation services,
traditional travel agencies, travel suppliers offering their services directly
and international travel service providers competing in critical national or
regional markets, such as the United Kingdom, Germany and Canada. We also
compete with many of the same parties and others in the licensing of
technology to airlines and corporate travel agencies.

10
<PAGE>

We compete with a variety of companies with respect to each product or
service we offer. These competitors include:

. Internet travel agents such as Travelocity, which is operated by The
Sabre Group Holdings, Inc., a majority-owned subsidiary of American
Airlines, and Preview Travel, Inc.; Travelocity has recently announced
its intention to acquire Preview Travel

. local, regional, national and international traditional travel
agencies

. consolidators and wholesalers of airline tickets and other travel
products, including online consolidators such as Cheaptickets.com and
Priceline.com

. individual airlines, hotels, rental car companies, cruise operators
and other travel service providers, some of which are suppliers to our
websites

. operators of travel industry reservation databases

In addition to the traditional travel agency channel, many travel
suppliers also offer their travel services as well as third-party travel
services directly through their own websites. These travel suppliers include
many suppliers with which we do business. Suppliers also sell their own
services directly to consumers, predominantly by telephone. As the market for
online travel services grows, we believe that travel suppliers, traditional
travel agencies, travel industry information providers and other companies
will increase their efforts to develop services that compete with our services
by selling inventory from a wide variety of suppliers. We cannot assure you
that our online operations will compete successfully with any current or
future competitors.

Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial,
marketing and other resources than we have and may enter into strategic or
commercial relationships with larger, more established and better-financed
companies. Some of our competitors may be able to secure services and products
from travel suppliers on more favorable terms, devote greater resources to
marketing and promotional campaigns and commit more resources to website and
systems development than we are able to devote. In addition, the introduction
of new technologies and the expansion of existing technologies may increase
competitive pressures. Increased competition may result in reduced operating
margins, as well as loss of market share and brand recognition. We cannot
assure you that we will be able to compete successfully against current and
future competitors. Competitive pressures faced by us could have a material
adverse effect on our business, operating results and financial condition.

If we fail to increase our brand recognition among consumers, we may not be
able to attract and expand our online traffic.

We believe that establishing, maintaining and enhancing the Expedia brand
is a critical aspect of our efforts to attract and expand our online traffic.
The number of Internet sites that offer competing services increases the
importance of establishing and maintaining brand recognition. Many of these
Internet sites already have well-established brands in online services or the
travel industry generally. Promotion of the Expedia brand will depend largely
on our success in providing a high-quality online experience supported by a
high level of customer service. In addition, we intend to increase our
spending substantially on marketing and advertising with the intention of
expanding our brand recognition to attract and retain online users and to
respond to competitive pressures. However, we cannot assure you that these
expenditures will be effective to promote our brand or that our marketing
efforts generally will achieve our goals.

11
<PAGE>

If we are unable to introduce and sell new products and services, our brand
could be damaged.

We need to broaden the range of travel products and services and increase
the availability of products and services that we offer in order to enhance
our service. We will incur substantial expenses and use significant resources
trying to expand the range of products and services that we offer. However, we
may not be able to attract sufficient travel suppliers and other participants
to provide desired products and services to our consumers. In addition,
consumers may find that delivery through our service is less attractive than
other alternatives. If we launch new products and services and they are not
favorably received by consumers, our reputation and the value of the Expedia
brand could be damaged.

Our relationships with consumers and travel suppliers are mutually
dependent since consumers will not use a service that does not offer a broad
range of travel services. Similarly, travel suppliers will not use a service
unless consumers actively make travel purchases through it. We cannot predict
whether we will be successful in expanding the range of products and services
that we offer. If we are unable to expand successfully, this could also damage
our brand.

We may be unable to plan and manage our operations and growth effectively
after our separation from Microsoft.

Our growth to date has placed, and our anticipated future operations will
continue to place, a significant strain on our management, systems and
resources. We continue to increase the scope of our operations and the size of
our workforce. In addition to needing to train and manage our workforce, we
will need to continue to improve and develop our financial and managerial
controls and our reporting systems and procedures. A failure to plan,
implement and integrate these systems successfully could adversely affect our
business.

In the past, we have used Microsoft's resources in technology, systems,
administration and other areas. Following this offering we will have a
services agreement with Microsoft, but we will need to develop our own
resources in these areas over time.

Our growth may increase our expense levels and the difficulties we face in
managing our operations and our separation from Microsoft.

Declines or disruptions in the travel industry generally could reduce our
revenues.

We rely on the health and growth of the travel industry. Travel is highly
sensitive to business and personal discretionary spending levels, and thus
tends to decline during general economic downturns. In addition, other adverse
trends or events that tend to reduce travel are likely to reduce our revenues.
These may include:

. price escalation in the airline industry or other travel-related
industries

. increased occurrence of travel-related accidents

. airline or other travel-related strikes

. political instability

. regional hostilities and terrorism

. bad weather

12
<PAGE>

Interruptions in service from third parties could impair the quality of our
service.

We rely on third-party computer systems and third-party service providers,
including the computerized central reservation systems of the airline, hotel
and car rental industries to make airline ticket, hotel room and car rental
reservations and credit card verifications and confirmations. Currently, a
majority of our transactions are processed through the Worldspan and Pegasus
systems. We rely on Online Fulfillment Services, a subsidiary of World Travel
Partners, L.P., to provide telephone and email customer support, as well as to
print and deliver airline tickets as necessary. Microsoft will also service
substantially all of our information systems as part of a services agreement.
Any interruption in these third-party services or a deterioration in their
performance could impair the quality of our service. If our arrangement with
any of these third parties is terminated, we may not find an alternate source
of systems support on a timely basis or on commercially reasonable terms. In
particular, any migration from the Worldspan system could require a
substantial commitment of time and resources and hurt our business.

Our success depends on maintaining the integrity of our systems and
infrastructure.

In order to be successful, we must provide reliable, real-time access to
our systems for our customers and suppliers. As our operations grow in both
size and scope, domestically and internationally, we will need to improve and
upgrade our systems and infrastructure to offer an increasing number of
customers and travel suppliers enhanced products, services, features and
functionality. The expansion of our systems and infrastructure will require us
to commit substantial financial, operational and technical resources before
the volume of business increases, with no assurance that the volume of
business will increase. Consumers and suppliers will not tolerate a service
hampered by slow delivery times, unreliable service levels or insufficient
capacity, any of which could have a material adverse effect on our business,
operating results and financial condition.

In this regard, our operations face the risk of systems failures. Our
product development and information management systems, as well as computer
and communications hardware, are hosted by Microsoft in facilities in and
around the Seattle, Washington area. Our systems and operations are vulnerable
to damage or interruption from fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. Our business interruption
insurance may not adequately compensate us for losses that may occur. The
occurrence of a natural disaster or unanticipated problems at our leased
facilities in Seattle, Washington could cause interruptions or delays in our
business, loss of data or render us unable to process reservations. In
addition, the failure of our computer and communications systems to provide
the data communications capacity required by us, as a result of human error,
natural disaster or other operational disruptions, could result in
interruptions in our service. The occurrence of any or all of these events
could adversely affect our reputation, brand and business.

Rapid technological changes may render our technology obsolete or decrease the
competitiveness of our services.

To remain competitive in the online travel industry, we must continue to
enhance and improve the functionality and features of our websites. The
Internet and the online commerce industry are rapidly changing. In particular,
the online travel industry is characterized by increasingly complex systems
and infrastructures. If competitors introduce new services embodying new
technologies, or if new industry standards and practices emerge, our existing
websites and proprietary technology and systems may become obsolete. Our
future success will depend on our ability to do the following:

. enhance our existing services

13
<PAGE>

. develop and license new services and technologies that address the
increasingly sophisticated and varied needs of our prospective
customers and suppliers

. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis

Developing our websites and other proprietary technology entails
significant technical and business risks. We may use new technologies
ineffectively or we may fail to adapt our websites, transaction-processing
systems and network infrastructure to customer requirements or emerging
industry standards. If we face material delays in introducing new services,
products and enhancements, our customers and suppliers may forego the use of
our services and use those of our competitors.

The success of our business will depend on continued growth of online commerce
and the Internet.

Because we do not intend to provide our service through any commercial
medium other than the Internet, our future revenues and profits depend upon
the widespread acceptance and use of the Internet and online services as a
medium for commerce. Rapid growth in the use of the Internet and online
services is a recent phenomenon. This growth may not continue. A sufficiently
broad base of consumers may not accept, or continue to use, the Internet as a
medium of commerce. Demand for and market acceptance of recently introduced
products and services over the Internet involve a high level of uncertainty.

The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and security
and the timely development of complementary products for providing reliable
Internet access and services. Major online service providers and the Internet
itself have experienced outages and other delays as a result of software and
hardware failures and could face such outages and delays in the future.
Outages and delays are likely to affect the level of Internet usage and the
processing of transactions on our websites. In addition, the Internet could
lose its viability because of delays in the development or adoption of new
standards to handle increased levels of activity or of increased government
regulation. The adoption of new standards or government regulation may require
us to incur substantial compliance costs.

We are substantially controlled by Microsoft, which may impede our business
development and may prevent a takeover of Expedia, irrespective of whether it
is beneficial to our shareholders.

Microsoft beneficially owns 33,000,000 shares of common stock, which after
giving effect to this offering will represent approximately 86.4% of the
outstanding shares of common stock. As long as Microsoft controls a
significant percentage of the common stock, it will be able to control all
matters requiring approval by our common shareholders, including the election
of directors and the ability to cause or prevent a change of control of
Expedia. In addition, there are no limits on the ability of Microsoft to
purchase shares of common stock in the open market.

As part of our separation from Microsoft, we have entered into various
agreements with Microsoft relating to the provision of services to us by
Microsoft, our licensing of intellectual property from Microsoft and the
sharing of taxes and purchasing of services. In one of these agreements,
Microsoft has agreed not to compete with us for a period of three years, and
we may face competition from Microsoft after this period. These agreements
were not negotiated on an arm's length basis and potentially give Microsoft a
further ability to influence our operations.

14
<PAGE>

Because we are a Microsoft-affiliated entity, some potential strategic
customers and vendors may not wish to enter, or may even be contractually
prohibited from entering, into strategic relationships with us. If too many
potential strategic partners were to decline strategic relationships with us,
it could have an adverse impact on our strategy and business development.

Microsoft's voting control and provisions of Washington law affecting
acquisitions and business combinations applicable to us may discourage
transactions involving an actual or potential change of control of Expedia,
including transactions in which our shareholders might receive a premium for
their shares over the then-prevailing market price. This voting control and
these provisions of Washington law may also have a negative effect on the
market price of the common stock.

Our business is exposed to risks associated with online commerce security and
credit card fraud.

Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To transmit confidential information such as customer credit
card numbers securely, we rely on encryption and authentication technology.
Unanticipated events or developments could result in a compromise or breach of
the systems we use to protect customer transaction data. Furthermore, our
servers may also be vulnerable to viruses transmitted via the Internet. While
we proactively check for intrusions into our infrastructure, a new and
undetected virus could cause a service disruption.

To date, our results have been impacted due to reservations placed with
fraudulent credit card data. Under current credit card practices, we may be
held liable for fraudulent credit card transactions and other payment disputes
with customers. A failure to control fraudulent credit card transactions
adequately would adversely affect our business.

Our international operations involve risks relating to travel patterns and
practices and Internet-based commerce.

We operate in the United Kingdom, Germany and Canada and may expand our
operations to other countries. In order to achieve wide-spread acceptance in
each country we enter, we believe that we must tailor our services to the
unique customs and cultures of that country. Learning the customs and cultures
of various countries, particularly with respect to travel patterns and
practices, is a difficult task and our failure to do so could slow our growth
in those countries.

We also face risks specific to Internet-based commerce in foreign markets.
Our international risks include:

. delays in the development of the Internet as a broadcast, advertising
and commerce medium in international markets

. difficulties in managing operations due to distance, language and
cultural differences, including issues associated with establishing
management systems infrastructures in individual foreign markets

. unexpected changes in regulatory requirements

. tariffs and trade barriers and limitations on fund transfers

. difficulties in staffing and managing foreign operations

15
<PAGE>

. potential adverse tax consequences

. exchange rate fluctuations

. increased risk of piracy and limits on our ability to enforce our
intellectual property rights

Any of these factors could harm our business. We do not currently hedge our
foreign currency exposures.

We may be found to have infringed on intellectual property rights of others
which could expose us to substantial damages and restrict our operations.

We could face claims that we have infringed the patents, copyrights or
other intellectual property rights of others. In addition, we may be required
to indemnify travel suppliers for claims made against them. Any claims against
us could require us to spend significant time and money in litigation, delay
the release of new products or services, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the subject of
the infringement claims. These licenses, if required, may not be available on
acceptable terms or at all. As a result, intellectual property claims against
us could have a material adverse effect on our business, operating results and
financial condition.

We are a defendant, along with Microsoft, in a lawsuit filed by
Priceline.com that alleges that our Hotel Price Matcher service infringes on a
patent held by them. See "Business--Legal Proceedings."

Because our market is seasonal, our quarterly results will fluctuate.

Our limited operating history and rapid growth make it difficult for us to
assess the impact of seasonal factors on our business. Nevertheless, we expect
our business to experience seasonal fluctuations, reflecting seasonal trends
for the products and services offered by our websites. For example, demand for
travel bookings may increase in anticipation of summer vacations and holiday
periods, but online travel bookings may decline with reduced Internet usage
during the summer months. These factors could cause our revenues to fluctuate
from quarter to quarter. Our results may also be affected by seasonal
fluctuations in the inventory made available to our service by travel
suppliers. Airlines, for example, typically enjoy high demand for tickets
through traditional distribution channels for travel during holiday periods.
As a result, during these periods, airlines may either have less inventory to
offer through our service or available tickets may be less competitively
priced. These same factors are expected to affect rental cars, hotels and
other travel products and services.

Our success depends in large part on the continuing efforts of a few
individuals and our ability to continue to attract, retain and motivate highly
skilled employees.

We depend substantially on the continued services and performance of our
senior management, particularly Richard N. Barton, our Chief Executive Officer
and President. These individuals may not be able to fulfill their
responsibilities adequately and may not remain with us. The loss of the
services of any executive officers or other key employees could hurt our
business.

As of September 30, 1999, we employed a total of 149 full-time Microsoft
employees. As of October 25, 1999, 138 previous Microsoft employees have
accepted offers of employment with us. Pursuant to our services agreement with
Microsoft, we have contracted the services of seven employees who remain
employed by Microsoft, until the earlier of May 20, 2000 or our notice that we
no longer require the service of the employees. We intend to hire new
personnel to replace these contracted employees during this period; however,
competition for personnel throughout the Internet industry is intense. If we
do not succeed in attracting new employees and retaining and motivating our
current personnel, our business will be adversely affected.

16
<PAGE>

Our websites rely on intellectual property, and we cannot be sure that this
intellectual property is protected from copy or use by others, including
potential competitors.

We regard much of our content and technology as proprietary and try to
protect our proprietary technology by relying on trademarks, copyrights, trade
secret laws and confidentiality agreements with consultants. In connection
with our license agreements with third parties, we seek to control access to
and distribution of our technology, documentation and other proprietary
information. Even with all of these precautions, it is possible for someone
else to copy or otherwise obtain and use our proprietary technology without
our authorization or to develop similar technology independently. Effective
trademark, copyright and trade secret protection may not be available in every
country in which our services are made available through the Internet, and
policing unauthorized use of our proprietary information is difficult and
expensive. We cannot be sure that the steps we have taken will prevent
misappropriation of our proprietary information. This misappropriation could
have a material adverse effect on our business. In the future, we may need to
go to court to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. This litigation might result in substantial costs and diversion of
resources and management attention.

We currently license from third parties, including Microsoft, some of the
technologies incorporated into our websites. As we continue to introduce new
services that incorporate new technologies, we may be required to license
additional technology from Microsoft and others. We cannot be sure that these
third-party technology licenses will continue to be available on commercially
reasonable terms, if at all.

Regulatory and legal changes may impose taxes or other burdens on our
business.

The laws and regulations applicable to the travel industry affect us and
our travel suppliers. We must comply with laws and regulations relating to the
sale of travel services, including those prohibiting unfair and deceptive
practices and those requiring us to register as a seller of travel, comply
with disclosure requirements and participate in state restitution funds. In
addition, many of our travel suppliers and computer reservation systems
providers are heavily regulated by the United States and other governments.
Our services are indirectly affected by regulatory and legal uncertainties
affecting the businesses of our travel suppliers and computer reservation
systems providers.

We must also comply with laws and regulations applicable to businesses
generally and online commerce. Currently, few laws and regulations directly
apply to the Internet and commercial online services. Moreover, there is
currently great uncertainty about whether or how existing laws governing
issues such as property ownership, sales and other taxes, libel and personal
privacy apply to the Internet and commercial online services. It is possible
that laws and regulations may be adopted to address these and other issues.
Further, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws. New laws or
different applications of existing laws would likely impose additional burdens
on companies conducting business online and may decrease the growth of the
Internet or commercial online services. In turn, this could decrease the
demand for our products and services or increase our cost of operations.

Federal legislation imposing limitations on the ability of states to tax
Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as
this legislation is known, exempts specific types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible that this legislation will
not be renewed when it terminates in October 2001. Failure to renew this
legislation could allow state and local governments to impose taxes on
Internet-based sales, and these taxes could decrease the demand for our
products and services or increase our costs of operations.

17
<PAGE>

Our common stock price may be volatile.

The market price for our common stock is likely to be highly volatile and
is likely to experience wide fluctuations in response to factors including the
following:

. actual or anticipated variations in our quarterly operating results

. announcements of technological innovations or new services by us or
our competitors

. changes in financial estimates by securities analysts

. conditions or trends in the Internet or online commerce industries

. changes in the economic performance or market valuations of other
Internet, online commerce or travel companies

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

. additions or departures of key personnel

. release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock

. potential litigation

The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. Broad market and industry
factors may adversely affect the market price of our common stock, regardless
of our actual operating performance. In the past, following periods of
volatility in the market price of their stock, many companies have been the
subject of securities class action litigation. If we were sued in a securities
class action, it could result in substantial costs and a diversion of
management's attention and resources and would adversely affect our stock
price.

At various times after this offering, there will be a significant amount of
common stock eligible for sale, which could cause our stock price to fall.

Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.

Upon completion of this offering, we will have outstanding 38,200,000
shares of common stock. Of these shares, the 5,200,000 shares sold in this
offering, plus any shares issued upon exercise of the underwriters' over-
allotment options, will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates," as that term is defined
in Rule 144 under the Securities Act. In general, affiliates include officers,
directors or 10% stockholders.

The remaining 33,000,000 shares outstanding are "restricted securities"
within the meaning of Rule 144. These restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 under the Securities Act. These
rules are summarized under "Shares Eligible for Future Sale." Sales of the
restricted securities in the public market, or the availability of these
shares for sale, could adversely affect the market price of the common stock.

18
<PAGE>

As discussed in "Certain Relationships and Related Transactions--Our
Relationship with Microsoft; Shareholder Agreement," Microsoft has entered
into an agreement with Expedia that it will not offer, sell, contract to sell
or grant any option to purchase or otherwise dispose of our common stock, or
any securities exercisable for or convertible into our common stock, owned by
it for a period of one year after the date of this offering without the prior
approval of Expedia. After this time Microsoft will have the ability to sell
some or all of its common stock. We have agreed to file registration
statements under the Securities Act to register the common stock held by
Microsoft.

In addition, we intend to file immediately after the effectiveness of this
offering a registration statement on Form S-8 under the Securities Act
covering all shares of common stock reserved for issuance under our stock
plans. Shares registered under this registration statement would be available
for sale in the open market unless these shares are subject to vesting
restrictions with Expedia or the contractual restrictions described above.
Within 180 days of the date of this prospectus, we estimate that approximately
1.9 million shares of common stock will become exercisable under outstanding
options held by employees who are not subject to lock-up agreements.

In the future we may need to raise additional capital in order to remain
competitive in the online travel services industry. This capital may not be
available on acceptable terms, if at all.

We will not be able to fund our growth if we lack adequate resources.
Based on our current operating plan, we anticipate that the net proceeds of
this offering will be sufficient to satisfy our anticipated needs for working
capital, capital expenditures and business expansion for the next twelve
months. After that time, we may need additional capital. If we raise
additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be diluted. Any securities could
have rights, preferences and privileges senior to those of the common stock.

We currently do not have any commitments for additional financing. We
cannot be certain that additional financing will be available in the future on
acceptable terms or at all. In this regard, it is important to note that even
though Microsoft will own a controlling interest in our common stock after
this offering, Microsoft has made no commitment to us for additional
financing.

You will experience immediate and substantial dilution.

The initial public offering price is substantially higher than book value
per share of the common stock. Investors purchasing shares of common stock
will incur immediate substantial dilution amounting to $12.28 per share. In
addition, investors purchasing shares in this offering will incur additional
dilution when outstanding options are exercised.

Our management has broad discretion in the application of proceeds, which may
increase the risk that the proceeds will not be applied effectively.

Our management will have broad discretion in determining how to spend the
proceeds of this offering. Accordingly, we could spend the proceeds from this
offering in ways which may be ineffective or with which the stockholders may
not agree.

19
<PAGE>

We would lose revenues and incur significant costs if our systems or those
operated by third parties with which we do business are not year 2000
compliant.

In the year 2000, we could encounter system and processing failures of
date-related data because our computer-controlled systems may use two digits
rather than four to define the applicable year. This could result in system
failure or miscalculations. If this were to happen, we would experience
disruptions of our operations including a temporary inability for us to
process reservations on our websites or to engage in similar normal business
activities.

Our operations could also be harmed if the information technology systems
or other systems that we operate or that are operated by third parties are not
year 2000 compliant. We rely on information technology supplied by third
parties, and our travel suppliers are also heavily dependent on information
technology systems and on their own third party vendors' systems. Year 2000
problems experienced by us or any such third parties could hurt our business
in various ways, including:

. lost sales

. increased operating costs

. loss of customers or persons accessing our websites

. business interruptions of a material nature

. claims of mismanagement, misrepresentation or breach of contract

Finally, our operations in the short term could be affected by any public
reaction to the upcoming turn of the century and the reluctance to travel
anytime on or near January 1, 2000. This reluctance could have a short-term
effect on our results of operations.

This prospectus includes forward-looking statements relating to our industry
and our operations, which are inherently uncertain.

Some statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are forward-looking statements. These forward-looking statements
include, but are not limited to, statements about our industry, plans,
objectives, expectations, intentions, assumptions and other statements
contained in this prospectus that are not historical facts. When used in this
prospectus, the words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate" and similar expressions are generally intended to identify
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties relating to our industry and our operations including
those described in this "Risk Factors" section, actual results may differ
materially from those expressed or implied by these forward-looking
statements. This is particularly true for a company with a limited operating
history such as Expedia and for a young and rapidly evolving industry such as
the online travel industry.

Market data and forecasts relating to our operations which are used in
this prospectus have been obtained from independent industry sources. We have
not independently verified these data and results may be materially different
from these forecasts.

20
<PAGE>

USE OF PROCEEDS

Our net proceeds, after deducting underwriting discounts and estimated
offering expenses, from the sale of the 5,200,000 shares of common stock we
are offering at the public offering price of $14.00 per share will be
approximately $65.9 million, or $76.1 million if the underwriters' over-
allotment options are exercised in full. We intend to use the net proceeds
from this offering for our working capital and general corporate purposes,
including approximately $5 million for the expansion of our facilities and
other infrastructure and approximately $45 million for operating expenses.
Included in this intended allocation for operating expenses are approximately
$10 million for product development, approximately $30 million for sales and
marketing and approximately $5 million for general and administrative
expenses. Pending application of the net proceeds, we will invest the cash in
investment grade debt securities, commercial paper, certificates of deposit
and other short-term investments.

While the principal reason for this offering is to raise capital, we
anticipate receiving additional benefits from this offering which include:

Greater strategic focus and flexibility. As a result of having a separate
board of directors and management team from Microsoft, we expect to have
sharper focus on our business and strategic opportunities and greater
flexibility to address the needs of our customers and suppliers.

More directly aligned incentives for employees. We expect that the
motivation of our employees and the focus of our management will be
strengthened by incentive compensation programs tied to the market performance
of our common stock.

Direct access to capital markets. We will have direct access to the
capital markets and an increased ability to grow through acquisitions and
strategic relationships.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock or
other securities. We currently anticipate that we will retain all of our
future earnings for use in the expansion and operation of our business and do
not anticipate paying cash dividends in the foreseeable future.

21
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 1999
on an actual basis, on a pro forma basis to give effect to the capitalization
of Expedia, Inc. and on a pro forma as adjusted basis to give effect to the
sale of 5,200,000 shares of common stock at the offering price of $14.00
per share after deducting the estimated expenses and underwriting discounts
and commissions payable by Expedia. This table should be read together with
our financial statements and notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
As of September 30, 1999
--------------------------------
Pro forma
Actual Pro forma as adjusted
-------- --------- -----------
(in thousands except share and
per share data)
<S> <C> <C> <C>
Owner's net deficit/stockholders' equity
(deficit):
Preferred stock, $.01 par value, 10,000,000
shares authorized; no shares issued or
outstanding pro forma and pro forma as
adjusted.................................... $ -- $ -- $ --
Common stock, $.01 par value, 120,000,000
shares authorized; no shares issued or
outstanding; 33,000,000 shares issued and
outstanding, pro forma; 38,200,000 shares
issued and outstanding, pro forma as
adjusted.................................... -- 330 382
Net contribution from owner/additional paid-
in capital.................................. 91,341 91,011 156,863
Accumulated deficit.......................... (91,714) (91,714) (91,714)
-------- -------- --------
Total owner's net deficit/stockholders'
equity (deficit).......................... (373) (373) 65,531
-------- -------- --------
Total capitalization....................... $ (373) $ (373) $ 65,531
======== ======== ========
</TABLE>

In addition to the shares of common stock to be outstanding after this
offering, we may issue additional shares of common stock under the following
plans and arrangements:

. 14.1 million shares issuable upon exercise of outstanding options at a
weighted average exercise price of $5.99 per share as of November 9,
1999.

. 4,435,000 shares available for future issuance upon exercise of options
not yet granted or for future issuance under our various stock plans.

22
<PAGE>

DILUTION

As of September 30, 1999, our historical net tangible book value was a
deficit of approximately $0.4 million or $.01 per share of common stock. Net
tangible book value per share represents total tangible assets less total
liabilities divided by 33,000,000 shares of common stock. After giving effect
to our receipt of the net proceeds from our sale of the 5,200,000 shares of
common stock offered hereby at the offering price of $14.00 per share, the pro
forma net tangible book value at September 30, 1999 would have been
approximately $65.5 million or $1.72 per share. This represents an immediate
increase in net tangible book value of $1.73 per share to our sole existing
shareholder and an immediate dilution of $12.28 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C>
Initial public offering price per share.............................. $14.00
Net tangible book value per share after this offering................ 1.72
------
Dilution per share to new investors.................................. $12.28
======
</TABLE>

The following table summarizes, as of September 30, 1999, the differences
between the number and percentage of shares of common stock issued to
Microsoft, our sole existing shareholder, and new investors purchasing shares
of common stock in this offering, at the initial public offering price of
$14.00 per share, as well as the aggregate consideration and the average price
per share paid by them:

<TABLE>
<CAPTION>
Shares Total
purchased consideration Average
------------------ -------------------- price per
Number Percent Amount Percent share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholder.......... 33,000,000 86.4% $ 91,341,000 55.6% $ 2.77
New investors................. 5,200,000 13.6 72,800,000 44.4 14.00
---------- ------ ------------ ------
Total......................... 38,200,000 100.0% $164,141,000 100.0%
========== ====== ============ ======
</TABLE>

In addition to the shares of common stock to be outstanding after this
offering, we may issue additional shares of common stock under the following
plans and arrangements:

. 14.1 million shares issuable upon exercise of outstanding options at a
weighted average exercise price of $5.99 per share as of November 9,
1999.

. 4,435,000 shares available for future issuance upon exercise of options
not yet granted or for future issuance under our various stock plans.

The following table summarizes, as of September 30, 1999 and on a pro
forma basis to give effect to the exercise of the 14.1 million options
issuable on the date of this offering, the differences between the number and
percentage of shares of common stock issued to pro forma existing shareholders
and to new investors purchasing shares of common stock in this offering, at
the initial public offering price of $14.00 per share, as well as the
aggregate consideration and the average price per share paid by them:

<TABLE>
<CAPTION>
Shares Total
purchased consideration Average
------------------ -------------------- price per
Number Percent Amount Percent share
---------- ------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C>
Pro forma existing
shareholders.............. 47,136,000 90.1% $176,072,000 70.7% $ 3.74
New investors.............. 5,200,000 9.9% 72,800,000 29.3% $14.00
---------- ------------
52,336,000 $248,872,000
========== ============
</TABLE>

23
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read together with our
financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the years ended June 30,
1997, 1998 and 1999 and the balance sheet data as of June 30, 1998 and 1999
are derived from our audited financial statements included elsewhere in this
prospectus which have been audited by Deloitte & Touche LLP, independent
auditors, whose report thereon is also included elsewhere in this prospectus.

The statement of operations data for the years ended June 30, 1995 and
1996 and the balance sheet data as of June 30, 1995, 1996 and 1997 are derived
from unaudited financial statements not included herein. The statement of
operations data for the three months ended September 30, 1998 and 1999 and the
balance sheet data as of September 30, 1999 are derived from our unaudited
financial statements included elsewhere in this prospectus. In the opinion of
management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results
for these periods.

<TABLE>
<CAPTION>
Three months
ended
Years ended June 30, September 30,
-------------------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
----- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statement of Operations
Data:
Net revenues............ $ -- $ -- $ 2,742 $ 13,827 $ 38,699 $ 6,057 $15,268
Cost of revenues........ -- -- 3,279 9,692 15,950 3,177 5,364
----- ------- -------- -------- -------- ------- -------
Gross profit (loss)..... -- -- (537) 4,135 22,749 2,880 9,904
----- ------- -------- -------- -------- ------- -------
Operating expenses:
Product development... 818 6,263 16,211 18,506 21,180 4,977 5,393
Sales and marketing... -- 17 8,820 10,823 14,888 2,060 6,732
General and
administrative....... 145 1,520 3,353 4,284 6,283 1,050 2,729
----- ------- -------- -------- -------- ------- -------
Total operating
expenses........... 963 7,800 28,384 33,613 42,351 8,087 14,854
----- ------- -------- -------- -------- ------- -------
Loss from operations.... (963) (7,800) (28,921) (29,478) (19,602) (5,207) (4,950)
Provision for income
taxes.................. -- -- -- -- -- -- --
----- ------- -------- -------- -------- ------- -------
Net loss................ $(963) $(7,800) $(28,921) $(29,478) $(19,602) $(5,207) $(4,950)
===== ======= ======== ======== ======== ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (.59) $ (.15)
======== =======
Shares used in computing
pro forma net loss per
share.................. 33,000 33,000
======== =======
</TABLE>

<TABLE>
<CAPTION>
As of June 30, As of
-------------------------------------------- Sept. 30,
1995 1996 1997 1998 1999 1999
----- ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Working capital......... $ -- $ -- $ 658 $ 4,814 $ 1,390 $ 2,608
Total assets............ 28 601 1,645 8,333 5,756 7,018
Unearned revenue, net of
current................ -- -- -- 5,820 3,851 4,102
Accumulated deficit..... (963) (8,763) (37,684) (67,162) (86,764) (91,714)
Total owner's investment
(deficit).............. 991 601 (721) (92) (1,675) (373)
</TABLE>

24
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this section has been derived from our
financial statements and should be read together with our financial statements
and related notes included elsewhere in this prospectus. The discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those expressed or implied in these
forward-looking statements as a result of various factors, including those set
forth under "Risk Factors" and elsewhere in this prospectus.

Overview

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

In the past, we conducted business as an operating unit of Microsoft. Our
statements of operations and balance sheets are derived from the historic
books and records of Microsoft and include cost allocations from Microsoft.
Although these allocations are not necessarily indicative of the costs that
would have been incurred by us on a stand-alone basis, we believe that the
allocated amounts are reasonable. Prior to the closing of this offering,
assets, liabilities and operations that comprise our business will be
contributed by Microsoft to us.

Commission revenues are derived from airline ticket transactions and hotel
and car rental reservations. Our commissions and related revenues accounted
for 80% of our total net revenues in fiscal 1997, 71% of our total net
revenues in fiscal 1998, 69% of our total net revenues in fiscal 1999 and 66%
of our total net revenues for the three months ended September 30, 1999. A
substantial majority of these revenues are derived from airline ticket
transactions. Airline ticket commissions are determined by individual airlines
and billed and collected through the Airline Reporting Corporation, an
industry-administered clearinghouse. As is customary in the travel industry,
travel suppliers are not obligated to pay any specified commission rate for
bookings made through our websites. We recognize commission revenues on air
transactions when the reservation is made and secured by a credit card, net of
an allowance for cancellations. We recognize commission revenues on hotel and
car rental reservations either on the receipt of our commission payment or on
notification of entitlement by a third party.

In addition to commissions, we derive revenues from the sales of
advertisements on our websites and fees from the licensing of software to our
airline and corporate customers such as Continental Airlines, Northwest
Airlines and American Express. We recognize advertising revenues either on
display of each individual advertisement or ratably over the advertising
period, depending on the terms of the advertising contract. Revenues from
software license agreements are recognized ratably over the license term.
Advertising revenues accounted for 17% of our total net revenues in fiscal
1997, 15% of our total net revenues in fiscal 1998, 18% of our total net
revenues in fiscal 1999 and 19% of our total net revenues for the three months
ended September 30, 1999. License revenues accounted for 3% of our total net
revenues in fiscal 1997, 14% of our total net revenues in fiscal 1998, 13% of
our total net revenues in fiscal 1999 and 15% of our total net revenues for
the three months ended September 30, 1999.

We launched our websites in Canada in fiscal 1997, in the United Kingdom
in fiscal 1999 and in Germany in fiscal 2000. Revenues from our international
websites amounted to less than 2% of our total net revenues in fiscal 1999 and
increased to 4% of our total net revenues for the three months ended

25
<PAGE>

September 30, 1999. As a result of increased activity from these websites and
future websites in other markets we may enter, we expect international
revenues to continue to increase.

Cost of revenues consists primarily of fees paid to our fulfillment
vendors for the costs associated with issuing airline tickets and related
customer services, fees paid to Worldspan for use of their computer
reservation and information services system, allocated and direct costs for
the operation of our data center and costs related to insertion of banner and
other advertisements.

Our direct product development expenses consist primarily of compensation
for personnel. Our direct sales and marketing expenses consist primarily of
personnel-related costs as well as advertising, distribution and public
relations expenses. In addition to these direct expenses, we have historically
been allocated an amount of product development, sales and marketing and
general and administrative costs from Microsoft. These costs include
allocations for real estate, legal, treasury, human resources, information
technology and other general services. These allocations were not materially
different from the costs that we would have incurred as a stand-alone entity.

In conjunction with this offering, we will enter into a services agreement
with Microsoft. Accordingly, we will no longer be allocated costs from
Microsoft. Under the services agreement, Microsoft will continue to provide us
with the types of services described above. In return, we will pay Microsoft
fees based on the total cost of the services. The services agreement is for an
initial period ending December 31, 2000 with one-year renewals if the parties
agree on fees. The agreement is cancelable by us upon 30 days written notice
and by Microsoft upon 180 days written notice. Following this offering we
intend to develop our own resources in these areas over time.

All permanent Microsoft employees who transfer to Expedia prior to this
offering will cancel their unvested options to purchase Microsoft common stock
and concurrently receive new options to acquire Expedia's common stock. The
number of Expedia options which will replace each Microsoft option will depend
on the offering price of the Expedia common stock and the market price of the
Microsoft common stock on the date of the offering, which will also be the
date on which Expedia issues the options. The Expedia options will have
equivalent vesting schedules, in-the-money value and comparable other terms as
the canceled Microsoft options. For example, if an employee has 1,000 unvested
Microsoft options which have an exercise price of $40 per share, and if the
Microsoft stock price is $100 per share and the Expedia offering price is $10
per share, then the employee's Microsoft options would convert to
10,000 Expedia options ((100/10) x 1000) with an exercise price of $4 per
share (40/(100/10)). This issuance of Expedia options will be treated as a new
grant of stock options. As a result we will incur a non-cash charge because
the exercise price of the new options will be significantly less than the
initial public offering price of our common stock. The amount of the charge
will depend on the market price of Microsoft common stock as referred to
above. We estimate that the charge will be approximately $115 million. This
non-cash charge will be amortized over the vesting period of the Expedia
options, generally between one and 54 months.

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

Our fiscal years end on June 30 of each year. References to a fiscal year,
such as fiscal 1999, are to the twelve months ended June 30 of that year.

26
<PAGE>

Results of Operations

The following table sets forth our results of operations as a percentage
of net revenues.

<TABLE>
<CAPTION>
As a Percentage of Net Revenues
-----------------------------------------
Years ended Three months
June 30, ended Sept. 30,
-------------------- ------------------
1997 1998 1999 1998 1999
------ ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues....................... 100% 100% 100% 100% 100%
------ ---- --- ------- -------
Cost of revenues................... 120 70 41 52 35
------ ---- --- ------- -------
Gross profit (loss)................ (20) 30 59 48 65
Operating expenses:
Product development.............. 591 134 55 82 35
Sales and marketing.............. 322 78 38 34 44
General and administrative....... 122 31 16 18 18
------ ---- --- ------- -------
Total operating expenses....... 1,035 243 109 134 97
Loss from operations............... (1,055) (213) (51) (86) (32)
Provision for income taxes......... -- -- -- -- --
------ ---- --- ------- -------
Net loss........................... (1,055)% (213)% (51)% (86)% (32)%
====== ==== === ======= =======
</TABLE>

Three months ended September 30, 1998 and 1999

Net Revenues. Our net revenues increased 152% from $6.1 million in the
three months ended September 30, 1998 to $15.3 million in the three months
ended September 30, 1999. Approximately $5.9 million of the increase in net
revenues was due to increases in commissions and related revenues. This
increase was primarily attributable to an increase in the number of airline-
related transactions partially offset by a decrease in some air ticket
commission rates. Increased advertising revenues accounted for approximately
$2.1 million of the increase in net revenues. The increase in advertising
revenues was due to new advertising contracts entered into in fiscal 1999.

Cost of Revenues. Cost of revenues increased 69% from $3.2 million the
three months ended September 30, 1998 to $5.4 million in the three months
ended September 30, 1999. As a percentage of net revenues, our cost of
revenues decreased from 52% in the three months ended September 30, 1998 to
35% in the three months ended September 30, 1999. This decrease was due to
efficiencies associated with an increased transaction volume, the allocation
of fixed costs, such as operation of our data center, over a larger revenue
base and the growth in higher margin advertising revenues.

Product Development. Product development costs increased 8% from $5.0
million in the three months ended September 30, 1998 to $5.4 million in the
three months ended September 30, 1999. This increase resulted from an increase
in personnel related costs as compared to the year-earlier quarter. Product
development costs as a percentage of net revenues decreased from 82% in the
three months ended September 30, 1998 to 35% in the three months ended
September 30, 1999, primarily due to an increase in our revenue base.

Sales and Marketing. Sales and marketing costs increased 227% from $2.1
million in the three months ended September 30, 1998 to $6.7 million in the
three months ended September 30, 1999. Sales and marketing costs as a
percentage of net revenues increased from 34% in the three months ended

27
<PAGE>

September 30, 1998 to 44% in the three months ended September 30, 1999. This
increase was primarily attributable to increased promotional activities
intended to drive traffic to our websites, such as radio and paper media
advertising.

General and Administrative. General and administrative costs increased
160% from $1.1 million in the three months ended September 30, 1998 to $2.7
million in the three months ended September 30, 1999. The increase was
primarily due to an increase of $1.1 million of allocated costs from
Microsoft. General and administrative costs as a percentage of net revenues
were 18% in the three months ended September 30, 1998 and the three months
ended September 30, 1999.

Income Taxes. We are included in Microsoft's consolidated returns for
federal income tax purposes. In some states we will file unitary or combined
tax returns with Microsoft and its subsidiaries. No tax benefits for our net
operating losses have been recognized as we will not be allowed to utilize
such losses generated by us as an operating unit of Microsoft. We have entered
into a tax allocation agreement with Microsoft.

Fiscal 1997, 1998 and 1999

Net Revenues. Our net revenues increased 404% from $2.7 million in fiscal
1997 to $13.8 million in fiscal 1998 and increased a further 180% to $38.7
million in fiscal 1999. Approximately $7.6 million of the increase in net
revenues from fiscal 1997 to fiscal 1998 and $16.7 million of the increase in
net revenues from fiscal 1998 to fiscal 1999 were due to increases in
commissions and related revenues. These increases were primarily attributable
to increases in the number of airline-related transactions. Increases in
advertising revenues accounted for approximately $1.6 million of the increase
in net revenues from fiscal 1997 to fiscal 1998 and $4.8 million of the
increase in net revenues from fiscal 1998 to fiscal 1999.

Cost of Revenues. Cost of revenues increased 196% from $3.3 million in
fiscal 1997 to $9.7 million in fiscal 1998 and increased a further 65% to
$16.0 million in fiscal 1999. As a percentage of net revenues, our cost of
revenues decreased from 120% in fiscal 1997 to 70% in fiscal 1998 and to 41%
in fiscal 1999. These decreases are due to efficiencies associated with
increased transaction volume, the allocation of fixed costs, such as operation
of our data center, over a larger revenue base and growth in higher margin
advertising revenues.

In September 1999, we introduced the Hotel Price Matcher reservation
service. As the merchant of record for transactions through our Hotel Price
Matcher service, we will record the entire value of these transactions as
revenues rather than only the commission amount. Likewise, we will record as
cost of revenues the entire cost of the transaction. As such, the gross margin
percentage that we derive from Hotel Price Matcher transactions will be lower
than our recent historical gross margin percentage.

Product Development. Product development costs increased 14% from $16.2
million in fiscal 1997 to $18.5 million in fiscal 1998 and increased a further
14% to $21.2 million in fiscal 1999. The increase in product development costs
from fiscal 1997 to fiscal 1998 resulted primarily from an increase in
personnel and consultant costs of $6.2 million offset by a decrease in product
development allocations from Microsoft of $4.1 million. The increase in
product development costs from fiscal 1998 to fiscal 1999 resulted primarily
from an increase in product development allocations from Microsoft of $2.5
million. Product development costs as a percentage of net revenues decreased
from 591% in fiscal 1997 to 134% in fiscal 1998 and to 55% in fiscal 1999,
primarily due to increases in our revenue base in the

28
<PAGE>

applicable periods. We believe our product development efforts are critical to
the success of our strategic objectives, and accordingly, we expect to
increase the absolute dollar amount of product development expenditures in
future periods.

Sales and Marketing. Sales and marketing costs increased 23% from $8.8
million in fiscal 1997 to $10.8 million in fiscal 1998 and increased a further
38% to $14.9 million in fiscal 1999. The increase in sales and marketing costs
from fiscal 1997 to fiscal 1998 resulted primarily from an increase in
personnel and consultant costs of $1.4 million. The increase from fiscal 1998
to fiscal 1999 was attributable to a $4.8 million increase in the cost of
direct promotional activities intended to drive traffic to Expedia.com, and to
establish, enhance and maintain the Expedia brand, partially offset by a
decrease in marketing and advertising allocations from Microsoft of $0.6
million. Sales and marketing costs as a percentage of net revenues decreased
from 322% in fiscal 1997 to 78% in fiscal 1998 and to 38% in fiscal 1999,
primarily due to increases in our revenue base in the applicable periods. We
believe that establishing, maintaining and enhancing the Expedia brand is a
critical aspect of our efforts to attract and expand online traffic.
Accordingly, we expect to launch a significant advertising campaign in fiscal
2000 and to extend the national coverage of our advertising sales force, both
of which will increase substantially the amount we spend on sales and
marketing in future periods.

General and Administrative. General and administrative costs increased 28%
from $3.4 million in fiscal 1997 to $4.3 million in fiscal 1998 and increased
a further 47% to $6.3 million in fiscal 1999. These increases primarily relate
to increases in general and administrative cost allocations from Microsoft as
we expanded our operations. As a percentage of net revenues, general and
administrative costs decreased from 122% in fiscal 1997 to 31% in fiscal 1998
and to 16% in fiscal 1999 as a result of increases in our revenue base. We may
incur additional general and administrative expenses in future periods as we
transition from being an operating unit of Microsoft to a stand-alone public
company.

29
<PAGE>

Quarterly Unaudited Results of Operations

The following table sets forth our unaudited quarterly results of
operations, in dollars and as a percentage of net revenues, for the periods
presented.

We have prepared this unaudited information on the same basis as the
audited financial statements. This information includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of our financial position and operating results for
the quarters presented. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period and you should not rely on them as such.

<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30
1998 1998 1999 1999 1999
-------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues............... $ 6,057 $ 7,851 $11,219 $13,572 $15,268
Cost of revenues........... 3,177 4,132 3,983 4,658 5,364
------- ------- ------- ------- -------
Gross profit............... 2,880 3,719 7,236 8,914 9,904
Operating expenses:
Product development...... 4,977 5,083 5,254 5,866 5,393
Sales and marketing...... 2,060 2,516 3,119 7,193 6,732
General administrative... 1,050 1,568 1,571 2,094 2,729
------- ------- ------- ------- -------
Total operating
expenses............... 8,087 9,167 9,944 15,153 14,854
------- ------- ------- ------- -------
Loss before income taxes... (5,207) (5,448) (2,708) (6,239) (4,950)
Provision for income
taxes..................... -- -- -- -- --
------- ------- ------- ------- -------
Net loss................... $(5,207) $(5,448) $(2,708) $(6,239) $(4,950)
======= ======= ======= ======= =======
<CAPTION>
As a Percentage of Net Revenues
---------------------------------------------------
Sep.
Sep. 30, Dec. 31, Mar. 31, Jun. 30, 30,
1998 1998 1999 1999 1999
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net revenues............... 100% 100% 100% 100% 100%
Cost of revenues........... 52 52 35 34 35
------- ------- ------- ------- -------
Gross profit............... 48 48 65 66 65
Operating expenses:
Product development...... 82 65 47 43 35
Sales and marketing...... 34 32 28 53 44
General administrative... 18 20 14 16 18
------- ------- ------- ------- -------
Total operating
expenses............... 134 117 89 112 97
------- ------- ------- ------- -------
Loss before income taxes... (86) (69) (24) (46) (32)
Provision for income
taxes..................... -- -- -- -- --
------- ------- ------- ------- -------
Net loss................... (86)% (69)% (24)% (46)% (32)%
======= ======= ======= ======= =======
</TABLE>

Net Revenues. Our net revenues increased sequentially in each quarter
during fiscal 1999 and the first quarter of fiscal 2000, primarily due to
increases in airline transaction and advertising revenues. Advertising
revenues increased as a percentage of total net revenues from 14% in the first
quarter to 19% in the first quarter of fiscal 2000.

30
<PAGE>

Cost of Revenues. Cost of revenues generally increased in absolute dollars
and decreased as a percentage of net revenues in each quarter of fiscal 1999
and in the first quarter of fiscal 2000, as a result of efficiencies
associated with increased transaction volume, the allocation of fixed costs
over a larger revenue base and growth in higher margin advertising revenues.
The decrease in cost of revenues from December 31, 1998 to March 31, 1999 and
the corresponding increase in gross profit as a percentage of net revenues are
due primarily to a decreases in data center costs allocated from Microsoft and
in per unit airline ticket fulfillment costs.

Operating Expenses. Operating expenses increased in absolute dollars in
each quarter of fiscal 1999 as we continued to increase our product
development and sales and marketing activities. Operating expenses as a
percentage of net revenues decreased in the first three quarters of fiscal
1999, primarily due to our increasing revenue base over prior quarters. The
increase in operating expenses during the fourth quarter of fiscal 1999 and
the first quarter of fiscal 2000 resulted from increased sales and marketing
expenses primarily attributable to product marketing promotions.

Liquidity and Capital Resources

Historically, we have financed our activities exclusively through
contributions from Microsoft. Although we have been an operating unit of
Microsoft in the past, and Microsoft has made a net contribution to our
operations of $91.3 million through September 30, 1999, Microsoft will not
continue to be a source of liquidity for us following this offering. We had an
accumulated deficit of $91.7 million at September 30, 1999. We anticipate that
our liquidity needs over the next twelve months will be met with proceeds
generated from this offering. We do not have a credit facility and are not
currently negotiating with any party to obtain a credit facility.

Net cash used in operations of $27.1 million in fiscal 1997, $29.5 million
in fiscal 1998, $17.4 million in fiscal 1999 and $5.7 million in the three
months ended September 30, 1999 resulted primarily from net losses of $28.9
million, $29.5 million, $19.6 million and $5.0 million, respectively. Net cash
used in investing activities of $519,000 in fiscal 1997, $631,000 in fiscal
1998, $650,000 in fiscal 1999 and $599,000 in the three months ended September
30, 1999 resulted from capital expenditures on personal computers and servers
that support our online travel operations. At September 30, 1999, we had no
material commitments for capital expenditures, but we expect our capital
expenditures for fiscal 2000 to be approximately $5.0 million.

We have multi-year agreements with specific travel service providers that
make available the services accessed through our websites. Under these
agreements, we pay monthly service fees to the service providers based on the
volume of activity. Additionally, we are party to a cooperative advertising
agreement with one of our airline licensees that requires us to set aside a
portion of the proceeds from transactions to be used for joint advertising
initiatives. These commitments amounted to $87,000 in fiscal 1998 and $245,000
in fiscal 1999.

We are a party to a carriage and cross-promotion agreement with Microsoft
for premium placement of Expedia.com on the Microsoft Network internet site
("MSN"). We are required to make payments of $167,000 per month under this
agreement. We are also party to a services agreement with Microsoft which
requires us to make minimum payments of approximately $365,000 per month. In
addition, we will be obligated to pay additional amounts based on our
headcount and usage of services under the services agreement. These additional
amounts would approximate $450,000 per month based on our headcount of
approximately 150 employees at September 30, 1999. These additional payments
may increase if our headcount increases. Net payments to Microsoft for
operating and allocated expenses have historically been recorded as a
contribution from owner. Following the consummation of this offering, we will
be

31
<PAGE>

required to pay Microsoft for the services received under the services
agreement and begin managing our own working capital. As a result, the levels
of recorded accounts payable and accrued expenses will be higher than those in
the historical financial statements. See "Certain Relationships and Related
Transactions--Our Relationship with Microsoft."

We have never held derivative financial instruments nor had debt
outstanding at any time. Accordingly, we have not been exposed to near-term
adverse changes in interest rates, foreign currency exchange rates or other
market prices. We may however experience such adverse changes if we incur debt
or hold derivative financial instruments in the future. Additionally, we do
not expect inflation to have a material effect on our results of operations.

Year 2000 Issues

Our operations could also be harmed if the information technology systems
or other systems that we operate or that are operated by third parties are not
year 2000 compliant. We have completed an assessment of our internal and
external information technology and other systems. This assessment included
joint large scale tests with our key service providers, Worldspan and Online
Fulfillment Services. We have also already processed travel reservations for
travel in the year 2000 across many hundreds of different travel suppliers.
Based on the results of our assessment, we are not aware of any year 2000
problems relating to our systems or third parties' systems that would have a
material effect on our business, results of operations or financial condition.
We are aware of one issue that could have a material effect on our corporate
travel booking product, which is scheduled to be corrected by the end of
November 1999.

We anticipate that costs associated with fixing any information technology
or other systems will not exceed $100,000. To date, our costs for assessing,
remediating and developing a remediation plan relating to year 2000 issues
have not been significant. We do not currently expect that our financial
condition or results of operations will be adversely affected by the year 2000
issue. However, our financial condition or results of operations could be
adversely affected if:

. our systems are not converted in a timely manner

. the systems of other companies on which our systems rely are not
converted in a timely manner

. other companies do not convert their systems at all or in a manner
compatible with our systems

If our assessment is finalized and there are no additional material
systems we operate or that are operated by third parties that are found to be
non-compliant, the worst case year 2000 scenario is a systemic failure beyond
our control. This failure could include a prolonged telecommunications,
Internet or electrical failure. Such a failure could affect our business by:

. preventing us from operating our business

. preventing users from accessing our websites

. changing the behavior of advertising customers or persons accessing
our websites

32
<PAGE>

If such a failure were to happen, we believe that the primary business
risks would include any or all of the following:

. lost sales

. increased operating costs

. loss of customers or persons accessing our websites

. business interruptions of a material nature

. claims of mismanagement, misrepresentation or breach of contract

Any of the above business risks could have a material adverse effect on
our business, results of operations and financial condition. We do not intend
to create a contingency plan to address such risks.

Recent Accounting Pronouncements

In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 will be effective for fiscal 2000. SOP 98-1 provides
guidance on accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. We will begin capitalizing these costs in fiscal
2000 although we do not expect them to be material.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 is effective for fiscal 2000. This SOP provides
guidance on the financial reporting of start-up costs and organization costs.
It requires the costs of start-up activities and organization costs to be
expensed as incurred. We were incorporated in fiscal 2000 and our organization
costs were expensed as incurred.

33
<PAGE>

BUSINESS

Business Overview

We are a leading provider of branded online travel services for leisure
and small business travelers. We operate our own website, located at
Expedia.com, with localized versions in the United Kingdom, Germany and
Canada. We offer one-stop travel shopping and reservation services, providing
reliable, real-time access to schedule, pricing and availability information
for over 450 airlines, 40,000 hotels and all major car rental companies. Our
websites' consumer-oriented interfaces enable consumers to make informed
choices about their travel purchases by providing quick and easy access to
travel information and content, 24 hours a day, 7 days a week.

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

Since launching our online travel service in October 1996, we have
experienced significant growth in our traffic and the amount of travel
purchased through our websites. As of September 30, 1999, over $790 million in
airline ticket purchases and hotel and car rental reservations had been made
through our websites by over 930,000 customers and 7.5 million users had
registered on our websites. In addition, as of September 30, 1999, over $500
million in airline ticket purchases and hotel and car rental reservations had
been made through the websites of our licensees by over 470,000 customers and
5.5 million users had registered on the websites of our licensees.

Industry Background

Growth of the Internet and Online Commerce

The Internet is dramatically changing the way that consumers and
businesses communicate, share information and buy and sell goods and services.
The Internet's broadly distributed and easily accessible environment creates
the ideal foundation for new online marketplaces, which provide increased
search efficiency, comprehensive information and competitive pricing. In an
online environment, consumers have access to information and software tools
that enable them to evaluate and compare product and service offerings,
community forums within which to discuss relevant experiences and preferences
and tools to complete e-commerce transactions. In addition, suppliers can
extend their online marketing reach to a larger base of potential customers
and can efficiently target those customers who are most likely to buy their
products and services. The Internet brings efficiencies to markets
characterized by the presence of large numbers of geographically dispersed
buyers and sellers and purchase decisions involving large amounts of
information from multiple sources. We believe that the worldwide travel
industry, which exemplifies these characteristics, is especially well-suited
to benefit from increased Internet and e-commerce adoption.

The Worldwide Travel Industry

The travel industry is very large in terms of both dollars spent and
number of participants. According to the United States Department of
Transportation, there will be over 700 million air passengers worldwide in
1999, rising to one billion air passengers in 2010. The World Travel and
Tourism Council estimates that spending on travel and tourism worldwide will
reach $3.7 trillion in 1999, growing to $7.5 trillion in 2010. According to
the World Travel and Tourism Council, approximately 72% of the revenues in
this market are attributable to personal travel and tourism.

34
<PAGE>

Consumers planning and purchasing a trip generally engage in a predictable
process that begins with consideration of destinations, dates and budgets and
progresses to a series of purchase decisions involving transportation,
accommodations and destination activities. This planning and purchasing
process is inefficient due in large part to the limitations of the
infrastructure of the traditional worldwide travel industry, which causes
consumers to spend a significant amount of time piecing together the
information they need to plan and purchase a trip. One critical reason for
this inefficiency is the absence of a central source of comprehensive travel
information that addresses all stages of the planning process and incorporates
a reliable and secure purchasing process. As a result, consumers, especially
to the extent they are price sensitive, frequently consult multiple sources,
such as guidebooks, magazines, travel agents, friends, co-workers and
disparate travel suppliers, to shop for each element of their trip.

Travel suppliers located around the world compete for business from travel
consumers. This supplier community includes hundreds of airlines, thousands of
hotels, dozens of car rental companies, numerous vacation packagers and cruise
lines and hundreds of thousands of destination services merchants such as
restaurants, attractions, and local transportation and tour providers. These
suppliers spend substantial amounts of money to reach and attract potential
purchasers. For example, according to the Air Transport Association, the
combined revenue of United States airlines in 1997 was $109 billion, and the
airlines spent an average of 13% of total revenues on promotions and sales
expenses. The fragmented nature of the global consumer travel market makes it
difficult and inefficient for suppliers to target those consumers with the
greatest propensity to purchase travel services. Traditional advertising
channels, such as print, television and radio, do not eliminate inefficiency
because only a limited portion of any traditional advertising audience is
planning a trip at the time the advertisement is run.

Consumers and suppliers have traditionally relied on travel agents as
intermediaries. However, traditional travel agents are often unable to reduce
the inefficiencies of the travel market. We believe that many traditional
travel agents cannot provide consumers with a reliable, personalized source
for comprehensive travel information. Although traditional travel agents
generally have access to comprehensive information on the availability and
pricing of airline seats through computer reservations systems such as
Worldspan, Sabre and Apollo, time and resource constraints frequently make it
difficult for travel agents to provide consumers with the full set of options
available in a given computerized reservation system. Furthermore, due to
budgetary or time constraints, traditional travel agents often have limited
access to other sources of travel information such as consumer ratings,
editorial content or information about destination services. In addition,
productivity demands often restrict the amount of time traditional travel
agents can spend with any single customer to learn about preferences and
tailor recommendations. As a result, many consumers hesitate to rely solely on
traditional travel agents and consult multiple sources to plan and purchase
trips.

The traditional travel agency channel also does not provide suppliers with
an efficient distribution network. Computerized reservation systems are
effective in maintaining information about travel inventory, such as airline
seats or rental cars, that does not require extensive description. However,
these databases are not well-suited to maintaining detailed information about
travel inventory such as resorts, cruises and vacation packages that is
difficult to understand and sell in the absence of more descriptive editorial
or visual material. In addition, it is difficult and inefficient for suppliers
to use traditional travel agents as a distribution channel because the travel
agency market is fragmented and the cost of training and servicing travel
agents is high.

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Our Opportunity

The emergence of the Internet provides new opportunities for travelers and
suppliers to find one another. Travel has already become the largest online
retail category with users making an estimated $7.8 billion in airline ticket
purchases and hotel and car rental reservations through travel websites in
1999, growing to $32 billion in 2004, according to Forrester Research. Travel
suppliers are beginning to sell their inventory directly from their websites,
and third-party providers of travel services have emerged online. Some of
these third parties attempt to replicate the traditional travel agency
experience on the Internet, some focus on providing travel-related content and
others offer a less comprehensive travel service as a part of a larger e-
commerce effort. Each of these solutions is incomplete because it does not
address fundamental consumer requirements for comprehensive information and
reliable service integrated with a secure and efficient means to complete a
purchase.

A significant opportunity exists for a new online global travel
marketplace that brings consumers and travel suppliers together, enables
consumers to find and act more easily upon a diverse selection of travel
information and enables suppliers to market and distribute their products and
services more efficiently. To be successful, this new travel marketplace must
offer consumers a blend of content, community, commerce and customer service,
delivered in a highly reliable and personalized manner. It must scale to
accommodate growth in users and it must be international in scope and
localized by region, creating a new and efficient channel for local and global
travel suppliers to reach consumers who are actively engaged in travel
planning and purchasing.

Our Solution

We have created a leading online marketplace for researching, buying and
selling travel-related services. Our Internet-based travel marketplace offers
consumers a convenient, comprehensive and personalized source of travel
information and services and satisfies the needs of a broad range of travel
suppliers to market and sell their services cost-effectively to a large,
global audience that is actively engaged in planning and purchasing travel
services. We have built an underlying technology infrastructure that enables
buyers and sellers to transact in a reliable, scalable and secure environment.

Leading Travel Services Marketplace

Expedia.com, our travel website aimed at the United States consumer
market, brings together a large base of consumers and travel suppliers.
According to Media Metrix, Expedia.com was the #1 most visited Internet travel
site in each month from April 1999 through September 1999, and in September
attracted approximately 4.1 million unique visitors. We offer consumers access
to dozens of vacation and cruise suppliers and to an increasing number of
local destination services providers. In the fiscal quarter ended September
30, 1999, approximately $193 million in airline ticket purchases and hotel and
car rental reservations were made through our websites. In addition, for the
fiscal quarter ended September 30, 1999, approximately $129 million in airline
ticket purchases and hotel and car rental reservations were made through the
websites of our licensees.

Compelling Value for Consumers

We believe that consumers value Expedia services because we provide the
control, flexibility and access to information necessary for them to identify
competitive prices for a wide range of travel options, to evaluate and
purchase travel-related services at any time of day or night and to enhance
the travel planning experience with high-quality editorial content. Our travel
marketplace is also designed to be

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more convenient, comprehensive and personalized and delivers a higher quality
of service than alternative travel planning and purchase methods. Expedia.com
and our localized international websites offer a unique blend of content,
community, commerce and customer service, enabling consumers to easily
identify, evaluate and purchase travel services in a single location and a
secure, reliable transactional environment.

Compelling Value for Travel Suppliers

Recognizing the limitations of traditional travel solutions for suppliers,
we have worked with our suppliers to design our websites to address their
specific needs on both a local and multinational basis. Through our websites,
suppliers worldwide can reach a large audience of consumers who are actively
engaged in planning and purchasing travel. Suppliers can pursue a range of
innovative, targeted merchandising and advertising strategies designed to
increase revenues while at the same time reducing transaction and customer
service costs. Suppliers can also use remote inventory management tools
located on our ExpediaPartners.com website, to introduce new products,
services and promotions quickly and easily. In addition, we are creating an
aggregated, secure database of customer purchase and shopping patterns that
will allow suppliers to offer more tailored services through our marketplace
while preserving consumer privacy.

Global Reach and Presence

We designed our travel marketplace to be global. Localized versions of our
websites accommodate not only differences in language and culture, but also
differences in travel purchase behavior and supplier inventory preferences.
These localized websites, such as Expedia.co.uk in the United Kingdom and
Expedia.de in Germany, are designed to replicate Expedia.com's success in
addressing the needs of both consumers and suppliers in the United States
market. For example, because negotiated fares are important to consumers in
the United Kingdom, we developed a custom airfare pricing engine that allows
us to offer unique integration of negotiated fares with published fares in a
single display.

Reliable, Secure and Scalable Technology Platform

We have designed our platform to provide a high level of reliability,
security and scalability. Our multi-layered platform design allows us to
deliver a high-performance website capable of managing high transaction
volumes and ensuring reliable access for our customers and suppliers. We also
offer advanced security features, maintain excess capacity to handle peak
traffic loads in the rapidly expanding online travel market and have built
dedicated distributed storage for critical data such as customer profile
information. Our technology leadership and the scalability of our platform
have enabled us to generate revenue by licensing core parts of our platform to
Continental Airlines, Northwest Airlines and American Express.

Superior Business Model

We have created a multi-dimensional business model, which we believe has
several advantages relative to traditional and other online travel vendors.
Because our marketplace is Internet-based, we are able to support substantial
growth in transactions with a smaller staff than required by a traditional
travel agency experiencing similar growth and without a large network of
physical retail outlets. We also have a more diversified stream of revenues
than our principal online competitors. Our revenues come from transactions,
advertising and licensing, creating multiple growth opportunities.

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Strategy

Our objective is to enhance our position as a leading online global travel
marketplace. The key elements of our strategy are as follows:

Increase Brand Awareness

We plan to increase brand awareness among consumers by pursuing an
aggressive brand development strategy. We have not yet pursued a substantial
brand-building campaign and less than 10 percent of our traffic reaches our
websites through our advertisements. To build on this success, we intend to
launch a brand-building campaign that will include a substantial advertising
presence in both online media and traditional media, such as print, radio and
television. We will also continue to offer co-branded promotions with selected
suppliers and to pursue targeted press coverage.

Enhance Supplier Relationships

Investing in and building on strong supplier relationships are crucial to
the success of our business. We will continue to work with suppliers to
develop new advertising and promotional inventory for our websites and new
tools, such as our Vacation and Cruise Wizards, to facilitate suppliers' entry
of pricing, availability and description information directly into our
marketplace. We will also work with suppliers to develop new distribution
channels that address their needs. For example, in September 1999, we launched
our new Hotel Price Matcher service. This service allows hotels in major
markets to fill unsold rooms in a way that minimizes the impact on their
existing rate structures. We have also addressed supplier needs specific to
our international websites, such as specific supplier offers on our Holiday
Shop section of our United Kingdom website. In addition, to extend our share
of the emerging online advertising market, we are establishing a dedicated
media advertising sales force to service the United States and international
markets to raise our worldwide profile in the advertising and travel
industries.

Enhance Technology Platform and Product Functionality

We plan to continue to enhance the underlying infrastructure and
functionality of our websites.

. Scalability, Security and Reliability. We have invested heavily in
core infrastructure with the objective of eliminating downtime on our
websites. The operation of our own websites and those of our licensees
has given us extensive experience at handling rapid increases in
transaction volumes. We are also planning to move mission-critical
processing activity from the mainframes of computerized reservation
systems to more flexible and cost-effective servers based on the
Windows NT platform.

. Feature Differentiation. We will continuously update new software
features and editorial content to our websites. We believe increasing
the level of personalization in our marketplace is critical to
providing a rich consumer experience and more efficient and targeted
merchandising and advertising opportunities for suppliers. We will
also continue to develop features that meet the needs of specific
market segments, such as small business travelers. We are improving
the accessibility of our websites through various Internet access
channels, such as wireless hand-held devices, and are providing
multimedia applications.

Expand Internationally

We operate localized websites in the United Kingdom, Germany and Canada.
We selected these countries due to their large travel markets and the rapid
growth of online commerce in these markets. According to the World Travel and
Tourism Council, spending on travel and tourism is expected to be $209 billion
in the United Kingdom, $301 billion in Germany and $111 billion in Canada in
1999, rising

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to $380 billion in the United Kingdom, $557 billion in Germany and $212
billion in Canada in 2010. We plan to extend our international presence by
entering other important travel markets, after evaluating both the size of the
local travel market and the popularity of online commerce. Potential markets
for expansion include other major European markets, Japan and other Far
Eastern markets. In developing customized websites in these and other
international markets, we will continue to draw on our experience in the
United States with technology, user interface and supplier relationships while
tailoring our international websites to specific characteristics of each local
marketplace.

Broaden our Marketplace Into New Travel Services Categories

We plan to expand our travel service offerings to include more complex
travel products and destination service offerings. Currently, the majority of
our transaction revenues are derived from sales of airline tickets, with a
smaller percentage represented by hotel reservations and car rentals. We plan
to extend our offerings in each of these core segments and expand the range of
offerings into other segments. For example, we intend to enable online booking
for cruises and vacation packages, including proprietary vacation packages.
Other new travel services categories may include offering additional price
matching features, retailing travel-related goods such as luggage and
accessories, selling travel insurance and entering into strategic
relationships with third-party providers of ground transportation, tours and
similar services.

Our Websites

Expedia.com

Through our Expedia.com website, customers can easily access the wide
selection of our online travel services to shop for and book airline tickets,
car rentals and hotel reservations, and to search and book the offerings of
selected vacation packagers, cruise lines, specialty lodging providers and
travel-related retailers.

For consumers engaging in travel planning, we feature extensive editorial
content covering over 350 popular destinations, travel advice and
recommendations from acknowledged industry experts, feature articles on
specific destinations and specialty travel sections geared to the needs of
specific groups such as families and business travelers. Consumers looking for
advice from fellow travelers can take advantage of extensive community
interaction, including bulletin boards and chat rooms. To accommodate the
needs of consumers who are searching for price and availability information,
we complement our core flight, hotel and car rental shopping and purchase
functionality with a number of powerful comparison shopping tools. After
building a specific itinerary, customers can complete the purchase of airline
tickets, hotel rooms or car rentals by entering credit card and address
information. Customers instantly receive email confirmation of the purchase
and are directed via links on our website to explore relevant destination
information and take advantage of our proprietary Expedia Maps. We also
provide a twenty-four hour toll-free customer service center that customers
can call for assistance.

Using our websites, consumers and suppliers engage in a heavy volume of
transactions across multiple systems and networks. We rely on third-party
computer systems and third-party service providers, including the computerized
central reservation systems of the airline, hotel and car rental industries.
The nature and size of the reservation process require frequent expansion of
our operations, and upgrades of our systems and infrastructure in order to
deal with the increasing number of customers and travel suppliers. Upgrades
are also required to enable the enhanced features and functionality which we
need to compete in our industry. The complexity of these processes and the
multiple parties involved result inevitably in our customers and suppliers
occasionally encountering problems in accessing or distributing information
through our marketplace or in completing transactions.

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Commerce

The core Expedia.com feature set provides consumers with access to
purchase information such as reliable price comparisons, availability and
itinerary details, an integrated purchase path and post-purchase confirmation.

. Flight, Hotel and Car Wizards. Consumers can search for and
compare airline, rental car and hotel room pricing and
availability information and can also purchase tickets, make
reservations and obtain additional information on hotels in our
hotel directory.

. Vacation and Cruise Wizards. These tools search a proprietary
database of vacation and cruise packages. The content of this
database is regularly updated by suppliers using the inventory
management tools offered on ExpediaPartners.com.

. Hotel Price Matcher. This shopping tool offers consumers the
ability to request specific prices for hotel rooms in popular
cities, such as New York, San Francisco and Las Vegas. We search
our proprietary database of negotiated hotel rates for available
rooms that can fulfill consumer requests.

. Fare Tracker. This service enables subscribers to specify three
routes and receive updates on special fares and offers via weekly
email as well as via a personalized summary on our website. As of
September 30, 1999, we had over 3.9 million Fare Tracker
subscribers.

. My Travel. This personalization feature enables consumers to
define a personal travel page which provides easy access to
existing travel itineraries and personal profiles. My Travel
encourages consumers to return to Expedia.com and build an ongoing
customer relationship.

. Mileage Miner. Working with a third-party partner, Expedia.com
helps consumers manage their frequent flyer programs online.

Content

Consumers can use our editorial content extensively at the beginning of
the travel planning and purchase process for researching destinations and
travel tips. Consumers can also use content more extensively after they have
purchased travel as a way to gain more insight before their trip begins. Some
examples of content include:

. World Guide. Expedia.com offers consumers a library of destination
information on over 350 popular destinations around the world,
based on content purchased from the publishers of the Fieldings
and Moon guidebook series and updated by the Expedia.com editorial
staff.

. Expedia Maps. We maintain a proprietary database of street maps of
the United States and highway maps for the rest of the world that
we offer as stand-alone applications and that we integrate with
other features such as the Hotel Wizard.

. Specialty Travel Sections. Expedia.com has recently launched two
new editorial sections that target families and business
travelers. We intend to launch new editorial sections that target
other consumer groups in response to perceived consumer and
advertiser demand.

. Travel Features. We provide travel content that uses multimedia
technologies such as 360-degree photography and video clips. We
also offer editorial features on travel destinations and other
special interest travel topics.

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. Travel News. We provide regularly updated information on fare
sales, changing travel conditions and specific weather and
security advisories.

. Flight Information. Consumers can use this feature to check the
expected arrival times of flights in progress.

. Directory of Web Links. To extend our own travel research tools,
we offer consumers a selection of links to useful travel-related
and destination-related websites.

. Expedia Radio. We work with a licensee that produces a travel-
related radio show, Expedia Radio, that is broadcast in 40 markets
in the United States. Expedia.com visitors can play Expedia Radio
audio content from our website.

. Search. Our proprietary search engine allows consumers to generate
a quick list of information relating to a particular destination
or travel theme, such as Hawaii or scuba diving.

Community

Because one of the best resources for travel recommendations is other
travelers, we have developed features to encourage a sense of community among
the four million consumers who visit Expedia.com in a typical month. Some
examples of our community services are as follows:

. Fare Compare. This benchmarking feature allows consumers to review
airfares that other Expedia.com consumers have found on particular
routes.

. Chat Rooms. Expedia.com visitors can communicate directly with one
another in chat rooms maintained by Microsoft through MSN.com.

. Bulletin Boards. Travelers can post their questions and answers on
bulletin boards maintained by Microsoft through MSN.com and
moderated by travel experts on contract to Expedia.com.

. From Experience. This section of our website contains feedback
from travelers organized according to destination.

Customer Service

We strive to provide superior service to our customers to enhance their
experience and to assist them with travel plans.

. Telephone and Email Service Center. Expedia contracts with Online
Fulfillment Services to provide toll-free 24-hour telephone and
email customer service. Over 200 trained travel agents and service
personnel staff the customer service center.

Supplier Functionality

We offer an array of functionality to address the specific needs of our
travel suppliers.

. Promotional and Advertising Inventory. We provide advertising
banners and other placements throughout the website. Suppliers
participating in the Expedia Travel Network have access to a wide
variety of promotional opportunities, including front-page
placement, travel category targeting, inclusion in our Special
Deals database and access to our Vacation and Cruise Wizard
database.

. Inventory Management Tools. We enable selected suppliers to upload
information related to vacation and cruise packages into a
proprietary database maintained at ExpediaPartners.com. This
inventory is then available on our website.

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. Email Promotions. We work with suppliers to tailor email-based
promotions for selected segments of our customer base.

International Websites

We offer localized websites in the United Kingdom, Germany and Canada.

Expedia.co.uk

In the United Kingdom, we operate a leading online travel service at
Expedia.co.uk. This marketplace offers a number of features customized to the
needs of consumers and suppliers in the United Kingdom, such as:

. Negotiated Fares. We offer fares negotiated with airlines by MTG
Limited UK (Thomas Cook) and integrate both negotiated and
published fares in a single display.

. Holiday Shop. This service allows customers in the United Kingdom
to browse vacation package offerings leaving from the United
Kingdom.

. Localized Customer Service. Expedia.co.uk customer service is
provided by MTG Limited UK (Thomas Cook) in the United Kingdom and
is tailored to the needs of United Kingdom travelers.

. Localized Editorial Content. The editorial advice and feature
articles offered on the United Kingdom website are developed with
a British point of view. Though we use content developed for the
United States market where appropriate, our goal is to offer a
local product to the United Kingdom travel market.

. United Kingdom Strategic Relationships. We have developed
strategic relationships in the United Kingdom with British
Airways, MTG Limited UK (Thomas Cook) and the local service of
AOL, among others. These relationships enable us to expand our
localization features such as negotiated fares, provide local
editorial content and extend our regional distribution channels.

. Travel Insurance. We offer travelers the ability to purchase
travel insurance in the United Kingdom through our website.

Expedia.de

In Germany, we recently launched a new website at Expedia.de. In addition
to relevant language and currency changes, other features on our website
include:

. Package Tours Database. Because package tours are a popular
vacation purchase in Germany, we provide customers with an
interface to a third-party database of packaged tour inventory.

. Negotiated Fares. We offer fares negotiated with airlines by
Deutsches Reiseburo and integrate negotiated and published fares
in a single display on our website.

. Localized Customer Service. Expedia.de customer service is
provided by Deutsches Reiseburo in Germany and is tailored to the
needs of German travelers.

. Localized Editorial Content. The editorial advice and feature
articles offered on Expedia.de are developed with a German point
of view. Therefore, most of our feature articles and editorials
are not translations of articles that run on Expedia.com but
instead are original German articles.

. German Strategic Relationships. We have developed strategic
relationships in Germany with Lufthansa, Touristik Union
International and Deutsches Reiseburo, among others.

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. Travel Insurance. We offer travelers the ability to purchase
travel insurance in Germany through our website.

Expedia.ca

In Canada, we operate Expedia.ca, which is similar to Expedia.com, with
localized currency and date formats. This website offers a number of features
to address the needs of the Canadian marketplace, including localized customer
service.

Licensing of Expedia Products

We license components of our technology and editorial content to selected
airlines and American Express as a platform for their websites. We may in the
future offer licenses to additional airlines, other travel suppliers and other
corporate travel agencies. Licensing selected components of our technology
allows us to participate in online bookings whether they are placed through
airline websites and corporate travel agencies or on our websites.

Licensing of Travel Website Technology to Airlines

Our current airline licensees include Continental Airlines and Northwest
Airlines. Airlines license technology from us in order to take advantage of
our reliable, scalable infrastructure, to leverage our large development
investment and to avoid the cost of building and maintaining dedicated
internal development and testing teams. We deliver a subset of the features
included on our websites and develop some features specifically to address the
needs of suppliers distributing inventory directly from their own websites.
Some examples of functionality provided to licensees include:

. Core Shopping and Purchasing Technology. Licensees use our technology
to enable shopping and purchasing of airline tickets and making of car
rental and hotel reservations.

. Broad Customization. Licensees are able to control the setting of over
200 parameters to customize their websites.

. Electronic Coupon Redemption. Selected airline licensees have the
ability to redeem coupons electronically.

. Selected Editorial Information. Licensees have access to our World
Guide library of destination information, but not to our daily news
features and other editorial content that is closely identified with
the Expedia brand.

Licensing of Travel Website Technology to Corporate Travel Agencies

Our initial corporate travel agency licensee is American Express.
Corporate travel agencies can use our technology to increase efficiency by
providing automated travel policy enforcement and negotiated rate management
tools. In addition to a substantial subset of the features included on our
websites, we also deliver features designed to address the needs of corporate
travel agencies. Some examples of functionality provided to licensees include:

. Core Shopping and Purchasing Technology. Licensees use our technology
to enable shopping and purchasing of airline tickets and making of car
rental and hotel reservations.

. Negotiated Rate Management. Corporate travel managers can upload
negotiated rate agreements with airline, hotel and rental car
suppliers in order to have those rates available to employees.

. Policy Enforcement Tools. Corporate travel managers can incorporate
travel policies into the displays used by employees to book business-
related travel. Employees attempting to book travel that conflicts
with corporate policy can be notified online, asked for explanations
and offered alternatives.

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. Shared Itinerary Management. Employees can designate travel arrangers,
typically administrative assistants, and can make selected itineraries
available for intracompany use in order to facilitate group and small
meeting travel.

Strategic Relationships

We pursue strategic relationships to increase our access to online
customers, to build brand recognition and to expand our online presence. To
date, we have established the following alliances, among others, for
distribution and product enhancement:

Strategic Customers

. Continental and Northwest. We license components of the technology
underlying our websites to these airlines to run transaction engines
on their websites.

. American Express. American Express licenses components of the
technology underlying our websites on a non-exclusive basis to over
140 of its large corporate customers as "AXI--American Express
Interactive."

Strategic Vendors

. Worldspan. Worldspan, our primary computer reservation service
provider, processes a substantial majority of airline ticket and car
rental reservations for Expedia.com, a portion of airline ticket and
car rental reservations for our websites in the United Kingdom,
Germany and Canada, and a portion of the hotel reservations for our
websites.

. World Travel Partners. World Travel Partners' subsidiary, Online
Fulfillment Services, provides telephone and email customer support
and provides mailing and other fulfillment services for Expedia.com.
World Travel Partners was the fourth largest travel agency in the
United States in 1998, according to Travel Weekly, focusing on
corporate travel services.

. Pegasus. Pegasus is our primary provider of connectivity to hotel
reservation systems for both our Hotel Wizard reservations channel and
our Hotel Price Matcher service.

. MTG Limited UK (Thomas Cook). Thomas Cook, a leading travel agency in
the United Kingdom, is our primary customer service and negotiated
rates provider in the United Kingdom.

. Deutsches Reiseburo. Deutsches Reiseburo, a leading travel agency and
tour operator in Germany, is our primary customer service and
negotiated rates provider in the German market.

. Microsoft. Microsoft supplies us with premium placement on the MSN.com
website, the Hotmail email service and the WebTV platform. Microsoft
also supplies us with technology and systems infrastructure under
license agreements. MSN.com is the third most visited site on the
Internet, attracting over 28 million unique visitors in August 1999
according to Media Metrix. Hotmail, with over 30 million active
monthly users in August 1999, is one of the largest email systems in
the world, and WebTV is one of the largest providers of television-
based Internet access.

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Technology

We believe that the quality of our technology differentiates our websites
from those of our competitors. Our goal has been to build a reliable, scalable
and secure environment for consumers to plan and purchase travel. Since
inception, we have supported substantial growth in traffic, commerce and
advertising inventory with our present architecture.

A single software code base supports our United States and international
websites, including those of our licensees. This approach allows us to
efficiently distribute central code base improvements to benefit multiple
services where appropriate. Our core booking engine connects to each of the
four major computer reservations systems: Worldspan, Sabre, Apollo and
Amadeus, giving our websites and our licensees the ability to choose which
computerized reservation system to support.

We have built a multi-layered system using powerful and expandable
Internet hardware and software. From inception, we have distributed
functionality across multiple layers of our platform. One layer handles the
demands of serving webpages. Another layer manages the demands of high-volume
message traffic between our servers and those of our suppliers and
intermediaries. A third layer manages storage of critical data such as
customer profiles, marketing database information and editorial content. Our
hardware consists of multiple Compaq Proliant servers. Our data center is
connected to the Internet through the equivalent of eight T3 connections.
Microsoft Back Office technology, including Windows NT, SQL Server and
Internet Information Server, is the foundation for our operating service
software. Multiple redundant servers support each key layer of the
architecture to help manage heavy user traffic. Microsoft hosts substantially
all of our systems, software and hardware.

Consumer Marketing

We believe that important drivers of our business are our ability to
attract visitors to our websites, our ability to convert those visitors into
purchasing customers and our ability to convert first-time purchasers into
repeat customers. We plan to continue to attract new visitors to our websites
by increasing our brand enhancement efforts and promotional advertising, both
online and in traditional television, radio and print media, and by continuing
to work with influential press and industry analysts. Our strategy to convert
visitors into purchasers includes a combination of broad purchase-related
promotions, increased emphasis on merchandising of available offers and
increased efforts to work with our travel suppliers to offer superior
selection and quality of travel inventory. We plan to convert first-time
purchasers to repeat customers by focusing on enhanced customer satisfaction
and new personalization features and launching a loyalty program.

Sales and Supplier Relations

Our sales efforts are directed toward building long-term relationships
with the travel supplier community and key advertising partners, including
advertising agencies. We are expanding our sales force to extend our national
sales coverage and to build a dedicated advertising sales force. Our
salespeople make frequent sales calls at advertiser and supplier offices and
attend trade shows, conferences and other industry events. Our sales efforts
are complemented by public relations and other channel marketing efforts,
including advertisement placements in industry trade publications.

Competition

The online travel services market is new, rapidly evolving and intensely
competitive, and we expect competition to increase. We compete on the basis of
service, merchandising, reliability, amount and

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accessibility of information and breadth of products and services offered. We
make available to our customers a wide range of products and prices offered by
our travel suppliers.

In the United States, we compete primarily with online travel services and
with traditional travel agent distribution channels. In the online travel
services market, we compete with other entities that maintain commercial
websites providing online travel services, such as Travelocity (operated by
Sabre), Preview Travel, CheapTickets.com, Cendant Corporation, TravelWeb
(operated by Pegasus), GetThere.com, Biztravel.com (operated by Rosenbluth
Travel) and Trip.com. Travelocity has recently announced its intention to
acquire Preview Travel. We also compete with companies that offer travel as
part of a larger electronic commerce portfolio, such as Priceline.com and
Yahoo. Several traditional travel agencies, including larger travel agencies
such as Uniglobe Travel and Carlson Wagonlit Travel, have established, or may
establish in the future, commercial websites offering online travel services.
We also compete with many of these same parties and others in the licensing of
technology to airlines and corporate travel agencies.

Internationally we compete with a different set of participants in each
market, ranging from traditional travel agents, market-specific websites and
global competitors, including Travelocity, GetThere.com and Leisure Planet,
which have expanded beyond the United States market. In the United Kingdom,
local online competitors include Deckchair.com, e-bookers and A2Btravel. In
Germany, local online competitors include Travelchannel.de and iFAO.

As the market for online travel services grows, we believe that the range
of companies involved in the online travel services industry, including travel
suppliers, traditional travel agencies, travel industry information providers,
online portals and e-commerce providers, will increase their efforts to
develop services that compete with our websites. Many airlines and other
travel suppliers offer travel services directly through their own websites,
including services from other travel suppliers. We are unable to anticipate
which companies will offer competitive services in the future. As the market
for online travel service grows, we believe that companies involved in the
travel services industry will increase their efforts to develop services that
compete with our services. We cannot assure you that our online operations
will compete successfully with any current or future competitors.

Proprietary Rights

Our intellectual property rights relate to trademarks and domain names
associated with the name "Expedia" and copyrights and other rights associated
with our websites, our software and other aspects of our business and
technology. We rely on trademark and trade secret protection law, copyright
law and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our proprietary rights. We pursue
the regulation of our key trademarks and service marks in the United States
and internationally.

We license the right to use some of Microsoft's retail products and other
technology pursuant to our license agreements with Microsoft. In addition, we
license, on a perpetual and royalty-free basis, patent rights from Microsoft
that relate to our business. See "Certain Relationships and Related
Transactions-- Our Relationship with Microsoft; License Agreements."

We license components of our travel website technology and editorial
content to selected airlines and American Express. In addition, we license
trademark rights to the Expedia brand to a third party who operates Expedia
Radio and to Microsoft for use with some of its software products. We may
license other intellectual property rights to third parties in the future.

46
<PAGE>

Government Regulation

The laws and regulations applicable to the travel industry affect us and
our travel suppliers. We must comply with laws and regulations relating to the
sale of travel services, including those prohibiting unfair and deceptive
practices and requiring us to register as a seller of travel, to comply with
disclosure requirements and to participate in state restitution funds. In
addition, many of our travel suppliers and computer reservation systems
providers are heavily regulated by the United States and other governments.
Our services are indirectly affected by regulatory and legal uncertainties
affecting the businesses of our travel suppliers and computer reservation
systems providers.

We must also comply with laws and regulations applicable to businesses
generally and online commerce specifically. Currently, few laws and
regulations apply directly to the Internet and commercial online services.
Moreover, there is currently great uncertainty whether or how existing laws
governing issues such as property ownership, sales and other taxes, libel and
personal privacy apply to the Internet and commercial online services. It is
possible that laws and regulations may be adopted to address these and other
issues. Further, the growth and development of the market for online commerce
may prompt calls for more stringent consumer protection laws. New laws or
different applications of existing laws would likely impose additional burdens
on companies conducting business online and may decrease the growth of the
Internet or commercial online services. In turn, this could decrease the
demand for our products and services or increase our cost of doing business.

Federal legislation imposing limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, exempts certain types of sales
transactions conducted over the Internet from multiple or discriminatory state
and local taxation through October 21, 2001. It is possible this legislation
will not be renewed when it terminates in October 2001. Failure to renew this
legislation could allow state and local governments to impose taxes on
Internet-based sales, and these taxes could decrease the demand for our
products and services or increase our cost of operations.

Employees

As of September 30, 1999, we employed a total of 149 full-time Microsoft
employees. As of October 25, 1999, 138 previous Microsoft employees have
accepted offers of employment from us. Pursuant to our services agreement with
Microsoft, we have contracted the services of seven employees who remain
employed by Microsoft, until the earlier of May 20, 2000 or our notice that we
no longer require the service of the employees. We intend to hire new
personnel to replace these contracted employees during this period. In
addition, we contract for the services of 45 employees of temporary staffing
firms.

Our ability to attract and retain highly qualified employees will be
important to our success in maintaining online leadership. We have a policy of
using equity-based compensation programs to reward and motivate significant
contributors among our employees. Competition for qualified personnel in our
industry is intense. Our employees are not presently represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.

Our employees will continue to participate in Microsoft's various benefit
plans. We plan to adopt our own benefit plans for our employees, some of which
we will adopt prior to this offering and some of which will be adopted
effective January 1, 2000. Our employees who were previously employees of
Microsoft will transition into our employee benefit plans over time. Prior to
the effective date of these plans, these employees will continue to be
eligible for Microsoft's plans.

47
<PAGE>

Properties

We are headquartered in Redmond, Washington, in space leased from
Microsoft. We expect to move in December 1999 to leased space in Bellevue,
Washington. This new leased space will consist of approximately 67,000 square
feet, housing our principal administrative, sales and marketing, customer
service and computer and communications systems facilities. Our lease for this
space expires in five years with an option to renew for an additional five-
year term.

Legal Proceedings

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

. unspecified damages, including treble and punitive damages

. an injunction against further alleged infringement

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

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

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

. pay substantial damages, including treble and punitive damages

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

. obtain a license for the technology or spend significant resources to
develop noninfringing technology

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

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

. unspecified damages, including punitive damages

. a permanent injunction requiring us to comply with the agreement

48
<PAGE>

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

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

. costs and attorneys' fees

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

49
<PAGE>

MANAGEMENT

Executive Officers and Directors

The names, ages and positions of our executive officers and directors as
of November 9, 1999 are listed below along with their business experience
during the past five years. The business address of all of our executive
officers is 4200 150th Ave. NE, Redmond, Washington 98052. Directors will be
elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
Executive officers of Expedia are appointed by the Board of Directors. No
family relationships exist among any of the directors or executive officers of
Expedia.

<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Richard N. Barton.......... 32 President, Chief Executive Officer and Director
Byron D. Bishop............ 35 Vice President, Product Development
Erik C. Blachford.......... 32 Vice President, Marketing
Simon J. Breakwell......... 34 Vice President, Sales
Mark S. Britton............ 32 Vice President, General Counsel and Secretary
Kathleen K. Dellplain...... 40 Vice President, Human Resources
Seth E. Eisner............. 40 Vice President, Operations
Gregory S. Stanger......... 35 Vice President and Chief Financial Officer
Gregory B. Maffei.......... 39 Chairman of the Board
Brad Chase................. 39 Director
Gerald Grinstein........... 67 Director
Laurie McDonald Jonsson.... 50 Director
Richard D. Nanula.......... 39 Director
</TABLE>

Richard N. Barton founded Expedia in 1994. He has served as a Director of
Expedia since September 1999. Prior to this, he worked for Microsoft from 1991
to 1994 in various product management roles involving Windows and MS-DOS.
Prior to joining Microsoft in 1991, he worked as a strategy consultant for
Alliance Consulting Group. Mr. Barton received a B.S. in industrial
engineering from Stanford University. Mr. Barton also serves as a director of
VacationSpot.com, Inc.

Byron D. Bishop joined Expedia in 1994 as a founding member, with the
principal focus of building and managing Expedia's product development team.
Mr. Bishop has been a Microsoft employee since 1986. During this time, he
created and managed three other development groups within Microsoft, including
the "Windows for Pen Computing" operating system and Microsoft's first
handheld operating system. Mr. Bishop received a B.S. in computer science and
mathematics from the University of Washington.

Erik C. Blachford joined Expedia in 1995. Previously, he served as General
Manager at Kroll Travel Watch, a travel information services division of Kroll
Associates Inc. from 1994 to 1995. Prior to this, he held various marketing
and new product development positions at Butterfield & Robinson Travel Inc.
from 1989 to 1992. Mr. Blachford received a B.A. from Princeton University and
an M.B.A. from Columbia Business School.

Simon J. Breakwell joined Expedia in 1997. Previously, Mr. Breakwell held
various sales positions at British Airways from 1987 to 1993 and various
senior sales management positions from 1993 to 1997. During this period, Mr.
Breakwell managed sales strategy, distribution, sales technology and
commercial agreements with British Airways corporate customers in the United
Kingdom. Mr. Breakwell received an Honors Politics Degree from Portsmouth
Polytechnic and an M.B.A. from Lancaster University.

50
<PAGE>

Mark S. Britton joined Expedia in November 1999. Prior to this, he was an
attorney with the Seattle office of Preston Gates & Ellis LLP from 1997 to
1999, being elected to this firm's partnership in 1999. Mr. Britton served as
Senior Counsel to the Division of Corporation Finance of the SEC from 1994 to
1997. Mr. Britton received a juris doctorate degree from the National Law
Center, George Washington University, and a B.B.A. from Gonzaga University.

Kathleen K. Dellplain joined Expedia in September 1999. Previously, Ms.
Dellplain served as Vice President, Human Resources, for IDX Systems
Corporation, a healthcare information technology company, from 1997 to 1999.
Prior to this, Ms. Dellplain was the Senior Director, Human Resources, for
PHAMIS, Inc., from 1990 until its merger with IDX Systems Corporation in 1997.
She has over 15 years experience in various human resources management
positions in health care information systems, health care and manufacturing
industries. Ms. Dellplain received a B.B.A. from the University of Hawaii,
Honolulu and an M.B.A. from the University of Washington.

Seth E. Eisner joined Expedia in 1998. Before joining Expedia, Mr. Eisner
spent two and a half years within Microsoft's Information Technology Group,
serving as Director of Development, and later as Corporate Data Manager. Mr.
Eisner also managed all technical and business operations for Sidewalk,
Microsoft's Local City Guide from 1997 to 1998. Mr. Eisner joined Microsoft in
1994. Mr. Eisner's work history includes 18 years of experience with IT
systems and, in particular, construction and deployment of high performance,
real-time transactional systems. Mr. Eisner received a B.S. in mathematics
from Washington University, St Louis.

Gregory S. Stanger joined Expedia in September 1999. Prior to joining
Expedia, he served as Senior Director, Corporate Development at Microsoft from
1998 to 1999. Prior to this, he held various positions in Microsoft's
Corporate Development department from 1993 to 1998, and elsewhere within
Microsoft's Finance Organization from 1991 to 1993. Prior to joining
Microsoft, Mr. Stanger worked as an investment banker with PaineWebber from
1987 to 1989. Mr. Stanger received a B.A. from Williams College and an M.B.A.
from the University of California at Berkeley. Mr. Stanger serves on the board
of directors of E-Stamp Corporation.

Gregory B. Maffei has served as Chairman of the Board of Directors and a
Director of Expedia since September 1999. Since 1997 he has been Senior Vice
President, Finance & Administration and Chief Financial Officer of Microsoft
Corporation. Previously, Mr. Maffei has held a number of positions at
Microsoft, including Vice President of Corporate Development, Treasurer, and
Director, Business Development & Investments. Prior to joining Microsoft in
1993, he was with Citicorp Venture Capital, Pay N Pak Stores and Dillon Read.
Mr. Maffei received an A.B. degree from Dartmouth College and an M.B.A. from
Harvard Business School, where he was a Baker Scholar. Mr. Maffei serves on
the board of directors of Ragen MacKenzie and Starbucks.

Brad Chase has served as a Director of Expedia since November 1999. Since
April 1999 he has been Senior Vice President of the Consumer and Commerce
Group of Microsoft Corporation. Prior to his current position, since July 1987
Mr. Chase held a number of positions at Microsoft, most recently managing the
Windows Marketing and Developer Relations Group. Previously, he managed the
marketing and development teams for Microsoft Plus!, served as General Manager
for MS-DOS and served in a variety of other management roles at Microsoft in
the applications division. Mr. Chase received a B.S. from the University of
California at Berkeley and an M.B.A. from Northwestern's Kellogg Graduate
School of Management.

Gerald Grinstein has served as a Director of Expedia since November 1999.
Mr. Grinstein has been non-Executive Chairman of Agilent Technologies since
1999 and non-Executive Chairman of the Board of Delta Air Lines, Inc. since
1997. He is also a principal of Madrona Investment Group, L.L.C., a

51
<PAGE>

Seattle-based investment company. From 1985 to 1991, Mr. Grinstein held a
number of positions at Burlington Northern, Inc. and served as Chairman and
Chief Executive Officer from 1991 until his retirement in 1995. He is also a
director of PACCAR Inc., Vans, Inc., The Pittston Company and Imperial Sugar
Corporation. He previously served as a director of Browning-Ferris Industries,
Inc. and Sundstrand Corporation.

Laurie McDonald Jonsson has served as a Director of Expedia since November
1999. Since 1987 she has served as Chairperson and CEO of Stellar Travel, a
Seattle-based travel agency specializing in family, business and cruise
vacation travel, and President and CEO of Stellar International, an
international investment company. She also co-founded both Sundance Cruises
and Admiral Cruises. Ms. McDonald Jonsson serves on the board of directors of
the Commerce Bank, the Harvard University, John F. Kennedy School of
Government, Women's Leadership Board, and is also chair of Governor Locke's
Executive Women's Council, which sponsored the first all-women's trade and
study mission to Central Europe. She received a B.A. from the University of
Washington, an M.S.W. from the University of Michigan and completed Stanford
University's Executive Business Program.

Richard D. Nanula has served as a Director of Expedia since November 1999.
He was the President and Chief Operating Officer of Starwood Hotels & Resorts,
Inc. from 1998 to 1999. Previously, Mr. Nanula held a variety of positions at
The Walt Disney Company from 1986 to 1998, serving most recently as Senior
Executive Vice President and Chief Financial Officer from 1996 to 1998, as
President of The Disney Stores from 1994 to 1996 and as Executive Vice
President and Chief Financial Officer from 1991 to 1994. Mr. Nanula received a
B.S. from the University of California, Santa Barbara and an M.B.A. from
Harvard Business School.

Board Composition

Our Bylaws currently provide for a Board of Directors consisting of at
least 3 and no more than 11 members. All directors hold office until the next
annual meeting of our stockholders and until their successors have been
elected and qualified. Our officers are appointed annually and serve at the
discretion of the Board of Directors. We anticipate appointing one additional
independent director to the board.

Board of Directors Committees

Expedia has an Audit Committee and a Compensation Committee. Our Audit
Committee, which will consist of Messrs. Grinstein, Maffei and Nanula, reviews
the results and scope of the audits and other services provided by our
independent accountants.

Our Compensation Committee, which will consist of Messrs. Chase and
Grinstein and Ms. McDonald Jonsson, reviews and approves the compensation and
benefits for our executive officers, administers our stock purchase and stock
option plans and makes recommendations to the Board of Directors regarding
such matters.

Historically, we have had no Compensation Committee and decisions
regarding compensation have been made by Microsoft. Following the completion
of this offering, compensation decisions will be made by the Compensation
Committee.

Board Compensation

Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are also our
employees are eligible to participate in our 1999 Stock Option Plan and will
be eligible to participate in our Purchase Plan. Directors who are not
employees are eligible to participate in our 1999 Stock Option Plan for Non-
Employee Directors. See "--Stock Plans."

52
<PAGE>

Executive Compensation

Summary Compensation Table

The following table sets forth compensation awarded to, earned by, or paid
to our Chief Executive Officer and our four other most highly compensated
executive officers whose total cash compensation exceeded $100,000 for the
fiscal year ended June 30, 1999 (collectively, the "Named Executive
Officers"). While this compensation is indicative of the historical
compensation paid by Microsoft to the Named Executive Officers, it is not
necessarily indicative of the compensation which Expedia will pay to such
individuals going forward.

<TABLE>
<CAPTION>
Annual Compensation
----------------------------
Securities
Name and Fiscal Underlying All Other
Principal Position(1) Year Salary($)(2) Bonus($) Options(#)(3) Compensation($)
--------------------- ------ ------------ -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard N. Barton.......... 1999 119,072 50,000 -- --
President, Chief
Executive Officer
and Director
Byron D. Bishop............ 1999 128,231 49,000 -- --
Vice President, Product
Development
Simon J. Breakwell......... 1999 105,157 6,500 10,000 8,194(4)
Vice President, Sales
Seth E. Eisner............. 1999 108,584 23,700 10,000 --
Vice President, Operations
Gregory S. Stanger......... 1999 101,427 35,591 40,000 --
Vice President and
Chief Financial Officer
</TABLE>
- -------
(1) Prior to October 1, 1999, each of these officers was employed by
Microsoft.
(2) Includes amounts deferred at the election of the Named Executive Officers
pursuant to Microsoft's 401(k) plan.
(3) While this number includes all options which Microsoft granted to the
Named Executive Officers in fiscal 1999, only those options which are
unvested will be assumed by Expedia. See "Certain Relationships and
Related Transactions--Our Relationship with Microsoft."
(4) Reflects a one-time reimbursement for moving expenses.

Option Grants During Fiscal 1999

Vested and Unvested Microsoft Options

The following table provides information regarding stock options granted by
Microsoft to the Named Executive Officers during fiscal 1999. Microsoft has
not granted any stock appreciation rights.

<TABLE>
<CAPTION>
Potential Realizable Value at
% of Total Assumed Annual
Options Rates of Stock Appreciation
Granted to Exercise or for Option Term(3)
Options Employees in Base Price Expiration -----------------------------
Name Granted(#)(1) Fiscal Year ($/share)(2) Date 5%($) 10%($)
---- ------------- ------------ ------------ ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Barton....... -- -- % $ -- -- $ -- $ --
Byron D. Bishop......... -- -- -- -- -- --
Simon J. Breakwell...... 10,000 0.01 53.625 7/2/05 218,308 508,750
Seth E. Eisner.......... 10,000 0.01 53.625 7/2/05 218,308 508,750
Gregory S. Stanger...... 40,000 0.05 53.625 7/2/05 873,230 2,034,998
</TABLE>
- -------
(1) While this number includes all options which Microsoft granted to the
Named Executive Officers in fiscal 1999, only those options which are
unvested will be assumed by Expedia. See the table below, as well as the
sections entitled "Certain Relationships and Related Transactions--Our
Relationship with Microsoft" and "--Stock Plans; Stock Option Plan."
(2) The exercise price was the lowest price of Microsoft common stock during
July 1998.
(3) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation on the Microsoft common stock underlying the options
over the term of the options. These numbers do not take into account
provisions for termination of the option following termination of
employment, nontransferability or vesting over periods of up to 54 months.

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<PAGE>

Unvested Microsoft Options to be Replaced with Expedia Options

The following table provides information regarding stock options granted
by Microsoft to the Named Executive Officers during fiscal 1999 which have not
yet vested. Expedia will issue replacement options only for these unvested
options. See "--Stock Plans; Stock Option Plan" for a discussion of the
formula relating to such replacement. This table reflects the closing price of
the Microsoft common stock on the date of the offering of $88.875 per share.

<TABLE>
<CAPTION>
Potential
% of Total Realizable
Options Value at the
Granted to Exercise or Public
Options Employees in Base Price Expiration Offering
Name Granted(#)(1) Fiscal Year ($/share)(2) Date Price(3)
---- ------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Richard N. Barton....... -- -- % $ -- -- $ --
Byron D. Bishop......... -- -- -- -- --
Simon J. Breakwell...... 8,750 0.01 53.625 7/2/05 308,438
Seth E. Eisner.......... 8,750 0.01 53.625 7/2/05 308,438
Gregory S. Stanger...... 35,000 0.05 53.625 7/2/05 1,233,750
</TABLE>
- --------
(1) Messrs. Breakwell's and Eisner's options will be replaced by 55,547
Expedia options and Mr. Stanger's options will be replaced by 222,188
Expedia options.
(2) The exercise price was the lowest price of Microsoft common stock during
July 1998. Once these options are replaced with Expedia options, their
exercise price will be $8.45.
(3) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the market price is equal
to the initial public offering price. These numbers do not take into
account provisions for termination of the option following termination of
employment, nontransferability or vesting over periods of up to 54 months.

Option Exercises During Fiscal 1999 and Fiscal Year-End Option Values

The following table sets forth information concerning options granted by
Microsoft to purchase Microsoft common stock exercised by the Named Executive
Officers during fiscal 1999. The table also sets forth the number and value of
unexercised in-the-money options at June 30, 1999. Microsoft has no
outstanding stock appreciation rights.

<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised in-the-Money
Options at Fiscal Options at Fiscal
Year-End (#) Year-End ($)(1)
Shares Acquired ------------------------- -------------------------
Name on Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Barton....... 15,682 $1,074,736 41,870 158,128 $3,348,757 $ 9,679,384
Byron D. Bishop......... 20,000 1,246,311 64,402 168,238 5,122,706 10,460,412
Simon J. Breakwell...... 250 17,000 4,550 22,000 302,291 1,162,875
Seth E. Eisner.......... 4,000 203,499 66,240 40,480 5,292,520 2,532,698
Gregory S. Stanger...... 27,000 2,204,125 87,900 77,300 7,067,186 4,105,283
</TABLE>
- --------
(1) Value is calculated on the basis of the difference between the option
exercise price and the market price of Microsoft common stock of $90.19 at
June 30, 1999. While this number includes all options which Microsoft
granted to the Named Executive Officers in fiscal 1999, only those options
which are unvested will be replaced by Expedia. See "Certain Relationships
and Related Transactions--Our Relationship with Microsoft."

54
<PAGE>

Stock Plans

Stock Option Plan

Our 1999 Stock Option Plan (the "Stock Option Plan") was adopted by the
Board of Directors and approved by our sole stockholder in October 1999. In
addition to the approximately 14.1 million options which we will issue in
order to replace the cancelled Microsoft options of our employees, we have
reserved a total of 4,000,000 shares of common stock for issuance under the
Stock Option Plan. The Stock Option Plan provides for the grant to our
employees, officers and employee directors of nonstatutory stock options. Non-
employee directors are not eligible for option grants under the Stock Option
Plan. Messrs. Chase and Maffei are considered to be employee directors and
will be eligible to participate in the Stock Option Plan.

The Stock Option Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Administrator"). The Administrator
determines the terms of options granted under the Stock Option Plan, including
the number of shares to be issued upon exercise of the option, exercise price,
term and exercisability. The exercise price of any stock option granted to an
optionee who owns stock representing more than 10% of the voting power of our
outstanding capital stock (a "10%+ Stockholder") must equal at least 110% of
the fair market value of the common stock on the date of grant. The exercise
price of all stock options other than to 10%+ Stockholders may be less than,
equal to or greater than the fair market value of our common stock on the date
of grant. Payment of the exercise price may be made in cash, check, delivery
of shares of our common stock, if the Optionee is an officer of Expedia, or
other consideration determined by the Administrator. The Administrator
determines the term of options. The term of any stock option granted under the
Stock Option Plan may not exceed 10 years; provided, however, that
the term of an option qualifying under Section 422 of the Code may not exceed
five years for 10%+ Stockholders. Options may not be transferred by the
optionee other than by will or the laws of descent or distribution or for
estate planning purposes. Options granted are exercisable at such times and
under such conditions as determined by the Board at the time of the grant or
as permissible under the terms of the Stock Option Plan.

In the event of a change in control as defined in the plan, the Stock
Option Plan requires that each outstanding option be assumed or an equivalent
option substituted by the successor corporation. In the event that a successor
corporation refuses to assume each option or substitute an equivalent option,
the Administrator shall provide for the optionee to have the right to exercise
the option as to all of the shares covered by the option, including shares as
to which the option would not otherwise be exercisable, in which case each
option will be exercisable for 15 days from the date of such determination.
The Board of Directors has the authority to amend or terminate the Stock
Option Plan as long as such action does not affect any outstanding option and
provided that stockholder approval shall be required for an amendment to
increase the number of shares reserved for the Stock Option Plan. If not
terminated earlier, the Stock Option Plan will terminate in ten years.

55
<PAGE>

10,000 Expedia options ((100/10) x 1000) with an exercise price of $4 per
share (40/(100/10)). This issuance of Expedia options will be treated as a new
grant of stock options.

Employee Stock Purchase Plan

Our 1999 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board of Directors and approved by our sole stockholder in October 1999. A
total of 300,000 shares of common stock has been reserved for issuance under
the Purchase Plan. The Purchase Plan, which is intended to qualify under
Section 423 of the Code, generally will be implemented in a series of twelve
separate consecutive six-month offering periods commencing on January 1 and
July 1 of each year. The first such offering period will commence on January
1, 2000. The Purchase Plan will be administered by the Board of Directors or
by a committee appointed by the Board of Directors. Our employees, officers
and employee directors, or employees of any majority owned subsidiary
designated by the Board of Directors, are eligible to participate if they are
employed by us or any such subsidiary for at least 20 hours per week and more
than 5 months per year. The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 10% of
an employee's compensation, at a price equal to the lower of (a) 85% of the
fair market value of our common stock at the beginning of the offering period
or (b) 85% of the fair market value of our common stock on the last business
day of the offering. Employees may end their participation in the offering at
any time during the offering period, and participation ends automatically on
termination of employment with us.

The Purchase Plan provides that in the event of a merger of us with or
into another corporation or a sale of substantially all of our assets, the
Board of Directors may make such adjustments as it may deem appropriate in the
number, kind and price of shares available under the Purchase Plan and in the
number of shares employees are entitled to purchase. The Board of Directors
has the power to amend or terminate the Purchase Plan as long as such action
does not adversely affect any outstanding rights to purchase stock thereunder
and provided that stockholders approval shall be required for an amendment to
increase the number of shares subject to the Purchase Plan. If not terminated
earlier, the Purchase Plan will automatically terminate December 31, 2005.

Stock Option Plan for Non-Employee Directors

The 1999 Stock Option Plan for Non-Employee Directors (the "Directors'
Plan") was adopted by the Board of Directors and approved by our sole
stockholder in October 1999. A total of 135,000 shares of common stock has
been reserved for issuance under the Directors' Plan. The Directors' Plan
provides for discretionary grants of nonstatutory stock options to our
nonemployee directors. The Directors' Plan will be administered by the Board
of Directors or by a committee appointed by the Board of Directors.

The Directors' Plan provides that the Board of Directors may grant in its
discretion an option to any person who is a nonemployee director.

The Directors' Plan sets a maximum of 10,000 shares for which options may
be granted to any one nonemployee director in any year, or, in the case of a
newly elected director, a maximum of 15,000 shares in the year in which the
director is first elected. Without Board consent, no option granted under the
Directors' Plan is transferable by the optionee other than by will or the laws
of descent or distribution and each option is exercisable, during the lifetime
of the optionee, only by such optionee. The Directors'
Plan provides that options shall become exercisable as set by the Board of
Directors in its discretion. The exercise price of all stock options granted
under the Directors' Plan shall be set by the Board of Directors in its
discretion. Options granted under the Directors' Plan have a maximum term of
10 years unless they are terminated early upon death of the holder or his
departure from the Board.

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<PAGE>

In the event of a change in control, the Board of Directors may amend or
terminate the Directors' Plan; provided, however, that stockholder approval is
required for any amendment that will increase the total number of shares as to
which options may be granted under the Directors' Plan, modify the class of
persons eligible to receive options or otherwise as required by law. The Board
may not amend the Directors' Plan more than once every six months, other than
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act or the rules thereunder. If not terminated earlier, the
Directors' Plan will have a term of 10 years.

Employment Agreement

We have entered into an employment agreement with Richard N. Barton which
provides that, if he is terminated by Expedia during his first two years of
employment for reasons set forth in the agreement, he will receive the salary
and stock option vesting which he would have otherwise received as an Expedia
employee.

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<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Our Relationship with Microsoft

Along with contributions of ownership of intellectual property described
below, Microsoft contributed to Expedia other assets such as computers and
securities of Expedia Canada Corp. and of a private company in the travel
industry.

Microsoft assigned to us a number of contracts having to do with the
Expedia business. Many of these have intellectual property components.
Generally, where the contract only impacts the Expedia business and no other
units of Microsoft, it is being assigned to Expedia. Microsoft has agreed to
obtain consents to these assignments where applicable.

We have also entered into a number of other agreements which were
necessary to separate the Expedia assets from Microsoft and to facilitate the
operation of the Expedia assets after such separation. Each of these
agreements are summarized below. Although these agreements were not negotiated
on an arm's length basis, we believe that the terms of these agreements, when
taken as a whole, are at least as favorable to Expedia as those which would
have resulted from arm's length negotiations with parties other than
Microsoft. We intend to negotiate any future agreements with Microsoft on the
same basis.

Services Agreement

We entered into a services agreement with Microsoft whereby Microsoft will
provide us with employee and other administrative and operational services.

Microsoft will provide us with the full-time services of the Microsoft
employees who worked in the travel business unit of Microsoft prior to the
formation of Expedia but chose not to leave Microsoft to join Expedia. These
employees will continue to work in the same positions they had prior to the
separation of the Expedia assets from Microsoft. These services will be
provided until the earlier of May 20, 2000 or our notice that we no longer
require the services of these employees.

Microsoft will also provide us with administrative and operational
services in the following general areas: legal, tax, real estate and
facilities, information technology, online advertising, product localization,
corporate accounting, treasury, human resources and product localization.

These services will be provided until December 31, 2000 but the parties
may agree to extend this date for some or all of the administrative and
operational service.

We will pay Microsoft for the services under this agreement on either an
estimated or actual cost reimbursement and will also pay any sales and
occupancy taxes associated with these services.

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License Agreements

In a set of license agreements, Microsoft provides us with rights to
intellectual property to be used in our business.

Microsoft assigned to us the trademarks and domain names associated with
the name "Expedia." In addition, Microsoft assigned to us copyrights for
software relating to online travel services.

We license the right to use some of Microsoft's retail products and other
technology pursuant to our license agreements with Microsoft. We also license
the server technology related to the Expedia Maps service. In addition, we
have a license to all of Microsoft's patents relating to the operation of our
websites. All of the licenses relating to Expedia specific software content
and data and patents are royalty-free and perpetual.

Microsoft holds licenses to various third-party software programs, content
and data that are useful in our business. Where the license to Microsoft
permits, Microsoft sublicensed these rights to us. We must reimburse Microsoft
for any fees due to the licensor for these sublicenses. As part of the
licenses granted by Microsoft to us for technology and data related to our
Expedia Maps service, we have agreed to provide Microsoft websites with
mapping services to the extent the services are requested by Microsoft.

Tax Allocation Agreement

We entered into a tax allocation agreement with Microsoft Corporation that
generally adopts the "percentage of tax liability" method of Regulations
section 1.1552-1(a)(2) as its "basic method" and the "percentage" method of
Regulations section 1.1502-33(d)(3) as its complementary method.

Under the "percentage of tax liability" method, a member's allocable share
of consolidated tax liability is equal to the tax liability of the group
multiplied by a fraction, the numerator of which is the separate return tax
liability of such member and the denominator of which is the sum of the
separate return tax liability of all the members.

This basic allocation method is modified by the complementary "percentage"
method. Under the percentage method, in the event a loss or credit is
generated by a member, such member is compensated at the time the loss or
credit is absorbed by the other members of the Microsoft group. In our case,
however, 7.5% of the benefit we generate and is absorbed by the other members
of the Microsoft group will be retained by Microsoft as a "fee" because we are
being paid for tax attributes prior to the time we could have used them to
reduce our tax liability.

Under the terms of this agreement, each party must compute its tax
liability as if it were a separate corporation. In making this computation,
Microsoft will be entitled to deduct on its separate tax return a portion of
the cost attributable to the Microsoft stock options that we assume. The
parties will take this deduction into account under the normal tax accounting
rules, so the deduction will generally occur on the exercise of the options.
The portion of this cost that Microsoft will deduct is equal to the excess of
the fair market value of the shares to be acquired on exercise of the option
on the date we employ the optionee over the exercise price of the assumed
option. We will determine this amount on the date that we employ an optionee.

Carriage and Cross Promotion Agreement

We entered into a five-year carriage and cross promotion agreement with
Microsoft under which we receive premium placement on the MSN.com website. The
travel channel on MSN.com will be a

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<PAGE>

customized version of Expedia.com that includes both our logo and MSN's logo.
This website will be the exclusive travel transaction service offered on
Microsoft's websites, except in international markets where we may not have a
presence. We will develop, maintain and host this website. We will also
receive premium placement on the Hotmail email service and the WebTV platform.

The MSN advertising sales team will sell and keep all revenues from the
sale of up to 52.0 million banner advertisements during the first year of this
agreement and up to 57.2 million banner advertisements during the second year
of the agreement. Revenues resulting from these sales will be received and
retained by Microsoft, in addition to the annual fees which we will pay to
Microsoft under this agreement. We believe that MSN will sell all banner
advertisements at a price responsive to market conditions.

Under the agreement, the parties agreed to restrictions regarding the sale
of banner advertising on MSN.com and the co-branded travel channel on MSN.com.

We will pay Microsoft a flat annual fee of $2.0 million in fiscal 2000 and
$2.2 million in fiscal 2001. In addition, we will pay incentive fees to the
extent that the number of completed airline transactions from the MSN.com
website exceeds our forecasts. The fees and terms of sale of banner
advertisements will depend on agreement between the parties for the remaining
three years under this agreement.

Shareholder Agreement

We entered into a shareholder agreement with Microsoft relating to the
transfer and registration of the common stock owned by Microsoft.

Microsoft has agreed not to dispose of the common stock which it owns for
12 months following this offering. Microsoft may, however, submit a written
request to us to be relieved from this lock-up period prior to its expiration.
Only a majority of our outside directors may grant this request.

Microsoft and Expedia have agreed that, for a period of one year from the
date of this offering, no employee of either company will solicit for the
purpose of hiring any employee of the other company. Microsoft has also agreed
that, for a period of three years following this offering, it will not engage
in our business, including acquiring more than 5% of a competing business. The
shareholder agreement generally defines our business as any online service for
reserving or purchasing travel services, such as airline tickets, hotel rooms,
rental cars, cruises and resort vacation packages, accessed with an
interactive electronic device enabling the user to view information and
respond with additional information.

Microsoft has the right to require us to use our best efforts to register
under the Securities Act all shares of common stock owned by Microsoft. These
demand registration rights include the condition that we would not be required
to effect more than one demand registration in any 12-month period. Microsoft
also has the right to participate, or "piggy-back," in equity offerings
initiated by us, subject to reduction of the size of the offering on the
advice of the managing underwriter. Microsoft will pay all expenses relating
to the demand registration requests under the shareholder agreement, and we
will pay all expenses relating to the performance of, or compliance with,
"piggy-back" registrations under the shareholder agreement. In either case,
however, Microsoft will be responsible for underwriters' discounts and selling
commissions with respect to the registrable shares being sold and the fees and
expenses of its counsel in connection with this registration.

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Conflict of Interest Policies

Following this offering, we will continue to conduct business with
Microsoft, which may give rise to conflicts of interest and our Articles of
Incorporation contain policies relating to the resolution of these conflicts
of interest. These policies regulate and guide our business relationships
generally with the following parties:

. Microsoft

. Microsoft's customers or suppliers

. other corporations, partnerships or other business entities in which
one or more of our directors have a financial interest (a "related
entity")

. the directors and officers of a related entity

. one or more of our officers and directors

If we enter into a contract or transaction with the above parties, the
contract or transaction is not void or voidable solely because:

. the party with which we entered into the contract or transaction was
one of the above parties

. any of our directors or officers who could be considered a related
party were present at or participated in the meeting or their votes
were counted at the meeting of our board of directors which authorized
the contract or transaction

Further, if we enter into a contract or transaction with any of the above
parties, our Articles of Incorporation generally provide that any related
party and any of our directors and officers who could be considered a related
party shall have fully satisfied their fiduciary duties to us and our
stockholders and have been deemed to have acted in good faith and not for an
improper personal benefit as long as any of the following conditions are met:

. the material facts about the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the contract
or transaction is authorized by the affirmative vote of a majority of
the directors who are considered disinterested

. the material facts about the transaction are disclosed or are known to
our stockholders entitled to vote on the transaction, and the
transaction is approved in good faith by vote of the shareholders of a
majority of the then outstanding common stock not owned by Microsoft
or a related entity

. the transaction is completed according to standards which are approved
by the affirmative vote of a majority of the disinterested directors
or by vote of the stockholders of a majority of our then outstanding
common stock not owned by Microsoft or a related entity

. the transaction is fair to us when it is authorized by our board of
directors or our stockholders

Equity Investment in Related Party

In an agreement dated March 1998, between Expedia and VacationSpot.com
Inc., a Seattle-based non-public company, we agreed to provide advertising
services in the form of a link on our Expedia.com website to the
VacationSpot.com website in exchange for an equity interest in
VacationSpot.com. The VacationSpot.com website enables customers to book
leisure lodging such as private vacation condominiums. This agreement is
scheduled to expire in March 2000, but we will be prepared to consider a
renewal of this agreement. Richard N. Barton, the President and Chief
Executive Officer and a Director of Expedia, is a member of the board of
directors of VacationSpot.com. We estimate the fair value of the advertising
services provided to VacationSpot.com to be $400,000.

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PRINCIPAL STOCKHOLDER

As of November 3, 1999, 33,000,000 shares of our common stock were
outstanding, all of which were owned by Microsoft. Upon completion of this
offering, Microsoft will own 86.4% of our outstanding common stock and
approximately 84.7% of our outstanding common stock if the underwriters' over-
allotment options are exercised in full.

Microsoft's address is: Microsoft Corporation, One Microsoft Way, Redmond,
WA 98052-6399. For a description of transactions and arrangements between us
and Microsoft, see "Certain Relationships and Related Transactions--Our
Relationship with Microsoft."

As of November 3, 1999, none of our directors or officers beneficially
owned any shares of our common stock. We intend to make option grants with
respect to approximately 2,830,000 shares of our common stock to our Named
Executive Officers and approximately 1,520,000 shares to our other executive
officers and directors, in each case effective upon completion of this
offering. In particular, we will make an option grant to Gregory B. Maffei,
Chairman of Expedia, of approximately 1,020,000 shares of our common stock and
an option grant to Brad Chase, a director of Expedia, of approximately 159,000
shares of our common stock.

In addition, none of our directors or officers beneficially own more than
1% of Microsoft's outstanding common stock.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 120,000,000 shares of common
stock, $0.01 par value and 10,000,000 shares of preferred stock, $0.01 par
value.

Common Stock

Holders of our common stock have no cumulative voting rights and no
preemptive or conversion rights. There are no redemption or sinking fund
provisions available to the common stock. All outstanding shares of common
stock are fully-paid and non-assessable. Taking into consideration preferences
that may be applicable to any then-outstanding preferred stock, holders of
common stock will be entitled to receive ratably any dividends that may be
declared by our Board of Directors out of funds legally available for these
dividends. In the event of a liquidation, dissolution or winding up of
Expedia, holders of common stock will be entitled to share ratably in all
assets remaining after payment of liabilities and any liquidation preference
to any then-outstanding holders of preferred stock.

As a result of this offering, there will be 38,200,000 shares of common
stock outstanding assuming no exercise of the underwriters' over-allotment
options. As of October 25, 1999, there were 33,000,000 shares of common stock
outstanding, all of which were held of record by Microsoft. The number of
outstanding shares of common stock held by Microsoft will not change as a
result of this offering.

Preferred Stock

Our Articles of Incorporation authorize us to issue preferred stock in one
or more classes or series or upon authorization by our Board of Directors. Our
Board of Directors, without further approval of the shareholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences and any other
rights, preferences, privileges and restrictions applicable to each class or
series of preferred stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting power of the holders of our common
stock and could make it more difficult for a third party to gain control of
us, discourage bids for our common stock at a premium, or otherwise adversely
affect the market price of our common stock.

We currently have no plans to issue any preferred stock.

Business Combination Statute

The Washington Business Act, Section 23B.19 of the Revised Code of
Washington, prohibits a "target corporation," with some exceptions, from
engaging in "significant business transactions," such as a merger or sale of
assets with an "acquiring person" who acquires more than 10% of the voting
securities of the target corporation for a period of five years after the
acquisition of the voting securities, unless the transaction is approved by
the majority of the members of the target corporation's board of directors
prior to the date of the transaction, or unless the aggregate amount of the
cash and the market value of non-cash consideration received by holders of
outstanding shares of any class or series of stock of the target corporation
is equal to specified minimum amounts.

Warrants and Other Rights

As of the date of this prospectus, there are no warrants or similar rights
to purchase common stock, other than the options for employees, officers and
directors described earlier in this prospectus.

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Transfer Agent and Registrar

The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.

Listing

Our common stock will be traded on the Nasdaq National Market under the
trading symbol "EXPE."

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SHARES ELIGIBLE FOR FUTURE SALE

The remaining 33,000,000 shares outstanding are "restricted securities"
within the meaning of Rule 144. These restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. Sales of the restricted securities in the
public market, or the availability of these shares for sale, could adversely
affect the market price of the common stock.

Microsoft, Expedia and our directors and officers have entered into lock-
up agreements in connection with this offering generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of 180 days after
the date of this prospectus without the prior written consent of Goldman,
Sachs & Co. and Morgan Stanley & Co. Incorporated. Additionally, as discussed
in "Certain Relationships and Related Transactions--Our Relationship with
Microsoft; Shareholder Agreement," Microsoft has entered into an agreement
with Expedia that it will not offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by it for a period
of one year after the date of this offering without the prior approval of
Expedia's outside directors. After this time Microsoft will have the ability
to sell some or all of its common stock. We have agreed to file registration
statements under the Securities Act to register the common stock held by
Microsoft.

Taking into account these lock-up agreements, and assuming Goldman, Sachs
& Co. and Morgan Stanley & Co. Incorporated do not release stockholders from
their agreements or Expedia does not release Microsoft from its additional
agreement, the following shares will be eligible for sale in the public market
at the following times:

. beginning on the effective date of this prospectus, only the shares of
common stock sold in the offering will be immediately available for
sale in the public market

. on various dates prior to 180 days after the date of this prospectus,
approximately 1.9 million shares of common stock underlying
exercisable options of Expedia employees not required to sign lock-up
agreements will become eligible for sale under Rule 701 or as a result
of the Form S-8 registration statement described below

. beginning 180 days after the date of this prospectus, approximately
3.0 million additional shares of common stock underlying exercisable
options of Expedia employees will be eligible for sale under Rule 701
or as a result of the Form S-8 registration statement described below

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<PAGE>

. beginning 365 days after the date of this prospectus, essentially all
shares of our common stock will be available for sale, provided there
is compliance with the vesting requirements in the case of shares
underlying exercisable options of Expedia employees. Microsoft will
have registration rights with respect to its common stock. In
addition, Microsoft, any of its affiliates and any holders of shares
of common stock that are restricted securities, may sell shares under
Rule 144.

In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:

. one percent of the number of shares of common stock then outstanding,
which will equal approximately 382,000 shares immediately after this
offering

. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale

Sales under Rule 144, including sales by affiliates, must comply with the
requirements with respect to manner of sale, notice, and the availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been our affiliate at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell these shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares under a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Commencing 90 days after the date of
this offering, Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement and permits
non-affiliates to sell these shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation or notice
provisions of Rule 144.

In addition, we intend to file, immediately after the effectiveness of
this offering, a registration statement on Form S-8 under the Securities Act
covering all shares of common stock reserved for issuance under our stock
plans. See "Management--Stock Plans." Shares registered under this
registration statement would be available for sale in the open market in the
future, provided there is compliance with the vesting restrictions with
Expedia, Rule 144 restrictions in the case of affiliates, and the contractual
restrictions described above.

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UNDERWRITING

Expedia and the underwriters for the U.S. offering (the "U.S.
underwriters") named below have entered into an underwriting agreement with
respect to the shares being offered in the United States. With specific
conditions, each U.S. underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated are the representatives of the U.S. underwriters.

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ................................... 1,880,000
Morgan Stanley & Co. Incorporated....................... 1,880,000
BancBoston Robertson Stephens Inc....................... 50,000
Donaldson, Lufkin & Jenrette Securities Corporation..... 50,000
First Union Securities, Inc. ........................... 50,000
Hambrecht & Quist LLC................................... 50,000
Janney Montgomery Scott LLC............................. 50,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 50,000
Ragen Mackenzie Incorporated............................ 50,000
Volpe Brown Whelan & Company, LLC....................... 50,000
---------
Total................................................. 4,160,000
=========
</TABLE>

----------------

If the U.S. underwriters sell more shares than the total number set forth
in the table above, the U.S. underwriters have an option to buy up to an
additional 624,000 shares from Expedia to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the U.S. underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the U.S. underwriters by Expedia. Such amounts
are shown assuming both no exercise and full exercise of the U.S.
underwriters' option to purchase 624,000 additional shares.

<TABLE>
<CAPTION>
Paid by Expedia
---------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share....................................... $ 0.98 $ 0.98
Total........................................... $4,076,800 $4,688,320
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.58 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $0.10 per share
from the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.

Expedia has entered into an underwriting agreement with the international
underwriters for the sale of 1,040,000 shares outside of the United States in
addition to the 4,160,000 shares offered in the United States. The terms and
conditions of both offerings are the same and the sale of shares in both
offerings are conditioned on each other. Goldman Sachs International and
Morgan Stanley & Co. International Limited are representatives of the
underwriters for the international offering outside of the

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United States. Expedia has granted the international underwriters a similar
option to purchase up to an aggregate of an additional 156,000 shares.

The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters also have agreed that they may sell shares among each
of the underwriting groups.

Microsoft, Expedia and its directors and officers have agreed with the
underwriters not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 180
days after the date of this prospectus, except with the prior written consent
of the representatives. See "Shares Eligible for Future Sale" for a discussion
of transfer restrictions.

Prior to this offering, there has been no public market for the shares.
The initial public offering price has been negotiated among Expedia and the
representatives. Among the factors considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, were Expedia's historical performance, estimates of the business
potential and earnings prospects of Expedia, an assessment of Expedia's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.

The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "EXPE."

In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock
while this offering is in progress.

The representatives may impose a penalty bid on underwriters. This means
that to the extent the representatives purchase in the open market shares of
the common stock sold in this offering to reduce the underwriters' short
position or to stabilize the price of the common stock, they have the option
to reduce the aggregate selling concession paid or payable to each syndicate
member by the amount of the selling concession attributable to the portion of
the repurchased shares sold in the offering by the syndicate member while such
short covering or stabilizing activities are ongoing. To reduce the likelihood
of the imposition of a penalty bid, underwriters, in determining how to
allocate shares in the offering, may take into consideration the history of
investors who have quickly sold their shares in prior offerings. The
imposition of a penalty bid may discourage the immediate resale of shares sold
in this offering.

These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

The underwriters have reserved for sale, at the initial public offering
price, approximately 325,000 shares of the common stock offered hereby for
individuals designated by Expedia who have

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expressed an interest in purchasing such shares of common stock in this
offering. The number of shares available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby.

Expedia estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$1,800,000. The underwriters have agreed to reimburse Expedia for some of its
expenses.

Expedia has agreed to indemnify the underwriters against specific
liabilities, including liabilities under the Securities Act.

This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the international underwriters in the offering being made
outside of the United States, to persons located in the United States.

VALIDITY OF THE COMMON STOCK

The validity of the common stock offered hereby will be passed upon for us
by our counsel, Preston Gates & Ellis LLP, Seattle, Washington and for the
underwriters by Sullivan & Cromwell, Los Angeles, California.

EXPERTS

The financial statements as of June 30, 1999 and 1998 and for the three-
year period ended June 30, 1999 included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to Expedia and the common stock offered in this offering, we
refer you to the registration statement and to the attached exhibits and
schedules. Statements made in this prospectus concerning the content of any
document referred to in this prospectus are not necessarily complete. With
respect to each such document filed as an exhibit to the registration
statement, we refer you to the exhibit for a more complete description of the
matter involved.

You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661. You may obtain copies of
all or any part of our registration statement from the Securities and Exchange
Commission upon payment of prescribed fees. You may also inspect reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission without
charge at a website maintained by the Securities and Exchange Commission at
www.sec.gov.

69
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Statements of Operations.................................................... F-3
Balance Sheets.............................................................. F-4
Statements of Changes in Owner's Net Investment (Deficit)................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Microsoft Corporation
Redmond, Washington

We have audited the accompanying balance sheets of Expedia, an operating
unit of Microsoft Corporation, as of June 30, 1999 and 1998, and the related
statements of operations, changes in owner's net investment (deficit), and
cash flows for the three-year period ended June 30, 1999. These financial
statements are the responsibility of Expedia's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Expedia as of June 30, 1999 and 1998, and
the results of its operations and its cash flows for the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared from the records
maintained by Microsoft Corporation and may not necessarily be indicative of
the conditions that would have existed or the results of operations if Expedia
had been operated as an unaffiliated entity. Portions of certain expenses
represent allocations made from and applicable to Microsoft Corporation as a
whole.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington
October 26, 1999

F-2
<PAGE>

EXPEDIA

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Three months
ended
Years ended June 30, September 30,
---------------------------- ----------------
1997 1998 1999 1998 1999
-------- -------- -------- ------- -------
(in thousands, except per share amounts)
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues................... $ 2,742 $ 13,827 $ 38,699 $ 6,057 $15,268
Cost of revenues............... 3,279 9,692 15,950 3,177 5,364
-------- -------- -------- ------- -------
Gross profit (loss)........ (537) 4,135 22,749 2,880 9,904
Operating expenses:
Product development.......... 16,211 18,506 21,180 4,977 5,393
Sales and marketing.......... 8,820 10,823 14,888 2,060 6,732
General and administrative... 3,353 4,284 6,283 1,050 2,729
-------- -------- -------- ------- -------
Total operating expenses... 28,384 33,613 42,351 8,087 14,854
-------- -------- -------- ------- -------
Loss from operations........... (28,921) (29,478) (19,602) (5,207) (4,950)
Provision for income taxes..... -- -- -- -- --
-------- -------- -------- ------- -------
Net loss....................... $(28,921) $(29,478) $(19,602) $(5,207) $(4,950)
======== ======== ======== ======= =======
Pro forma basic and dilutive
net loss per common share..... $ (0.59) $ (0.15)
======== =======
Weighted average shares used to
compute pro forma basic and
dilutive net loss per common
share......................... 33,000 33,000
</TABLE>

F-3
<PAGE>

EXPEDIA

BALANCE SHEETS

<TABLE>
<CAPTION>
June 30,
------------------ September 30,
1998 1999 1999
-------- -------- -------------
(in thousands)
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ -- $ -- $ --
Accounts receivable........................ 7,059 4,970 5,897
Prepaid expenses and other current assets.. 360 -- --
-------- -------- --------
Total current assets..................... 7,419 4,970 5,897
Property and equipment, net.................. 514 386 721
Investment................................... 400 400 400
-------- -------- --------
Total........................................ $ 8,333 $ 5,756 $ 7,018
======== ======== ========
LIABILITIES AND OWNER'S NET DEFICIT
Current liabilities:
Accounts payable........................... $ 462 $ 1,216 $ 1,062
Accrued expenses........................... -- -- 287
Current portion of unearned revenue........ 2,143 2,364 1,940
-------- -------- --------
Total current liabilities................ 2,605 3,580 3,289
Unearned revenue, net of current portion..... 5,820 3,851 4,102
Commitments and contingencies (Note 6)
Owner's net deficit:
Net contribution from owner................ 67,070 85,089 91,341
Accumulated deficit........................ (67,162) (86,764) (91,714)
-------- -------- --------
Total owner's net deficit................ (92) (1,675) (373)
-------- -------- --------
Total........................................ $ 8,333 $ 5,756 $ 7,018
======== ======== ========
</TABLE>

F-4
<PAGE>

EXPEDIA

STATEMENTS OF CHANGES IN OWNER'S NET INVESTMENT (DEFICIT)

<TABLE>
<CAPTION>
Net Owner's net
contribution Accumulated investment
from owner deficit (deficit)
------------ ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance, July 1, 1996.................... $ 9,364 $ (8,763) $ 601
Net loss............................... -- (28,921) (28,921)
Net contribution from owner............ 27,599 -- 27,599
------- -------- --------
Balance, June 30, 1997................... 36,963 (37,684) (721)
Net loss............................... -- (29,478) (29,478)
Net contribution from owner............ 30,107 -- 30,107
------- -------- --------
Balance, June 30, 1998................... 67,070 (67,162) (92)
Net loss............................... -- (19,602) (19,602)
Net contribution from owner............ 18,019 -- 18,019
------- -------- --------
Balance, June 30, 1999................... $85,089 $(86,764) $ (1,675)
Net loss (unaudited)................... -- (4,950) (4,950)
Net contribution from owner
(unaudited)........................... 6,252 -- 6,252
------- -------- --------
Balance at September 30, 1999
(unaudited)............................. $91,341 $(91,714) $ (373)
======= ======== ========
</TABLE>

F-5
<PAGE>

EXPEDIA

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Three months
ended September
Years ended June 30, 30,
---------------------------- ----------------
1997 1998 1999 1998 1999
-------- -------- -------- ------- -------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.................... $(28,921) $(29,478) $(19,602) $(5,207) $(4,950)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Depreciation............... 487 750 778 206 264
Amortization of noncash
item...................... -- (50) (200) (50) (50)
Cash provided (used) by
changes in operating
assets and liabilities:
Accounts receivable....... (1,012) (6,047) 2,089 4,423 (927)
Prepaid expenses and other
current assets........... -- (360) 360 360 --
Accounts payable and
accrued expenses......... 17 445 754 229 133
Unearned revenue.......... 2,349 5,556 395 -- 526
Recognition of unearned
revenue from prior
periods.................. -- (292) (1,943) (514) (649)
-------- -------- -------- ------- -------
Net cash used by operating
activities............... (27,080) (29,476) (17,369) (553) (5,653)
Investing activities:
Additions to property and
equipment.................. (519) (631) (650) (139) (599)
Financing activities:
Net contribution from
owner...................... 27,599 30,107 18,019 692 6,252
-------- -------- -------- ------- -------
Net increase and beginning and
end of year--cash and cash
equivalents:................. $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======= =======
Supplemental disclosure of
noncash item:
Equity investment received
for advertising services... $ -- $ 400 $ -- $ -- $ --
</TABLE>

F-6
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS

Note 1: Description of Business and Summary of Significant Accounting Policies

Description of business: Expedia (the Company), an operating unit of
Microsoft Corporation (Microsoft), provides Internet-based travel-related
services to retail consumers and corporate clients. The Company is a provider
of branded online travel services for leisure and small business travelers.
The Company operates websites, including Expedia.com and international
versions of Expedia.com, and licenses components of its technology to provide
the platform for travel websites operated by others. The Company derives its
revenues from commissions from transactions on its websites, sales of
advertisements on its websites and licensing fees. Services provided include
the reservation and purchase of airline tickets, hotel rooms, and car rentals
as well as vacation planning and destination information. In addition, the
Company receives fees for website advertising and for the licensing of
components of its technology and editorial content to selected airlines and
corporate travel agencies as a platform for their websites. In October 1999,
Microsoft contributed the assets, liabilities and operations of the Company to
Expedia, Inc.

On August 23, 1999, the Company was incorporated in the state of
Washington. The authorized share capital of the Company is 120,000,000 shares
of common stock and 10,000,000 shares of preferred stock.

Basis of presentation: The financial statements present the results of
operations, balance sheets, changes in owner's net deficit, and cash flows
applicable to the operations of the Company. The financial statements of the
Company are derived from the historic books and records of Microsoft.

The Company does not maintain corporate treasury, legal, tax, purchasing,
and other similar corporate support functions. For purposes of preparing the
accompanying financial statements, certain Microsoft corporate costs were
allocated to the Company using the allocation method described in Note 3.

Estimates and assumptions: Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, and expenses. Actual results could differ
from those estimates.

Cash and cash equivalents: The Company considers all highly liquid
instruments purchased with original maturities of 90 days or less to be cash
equivalents.

Property and equipment: Property and equipment consists primarily of
computer equipment, which is stated at cost. Property and equipment is
depreciated using the straight-line method over the estimated useful life of
the assets, ranging from one to three years.

Investment: The Company owns an interest of under 20% of the outstanding
equity in a related party and accounts for this investment under the cost
method.

Certain risks and concentrations: The Company is potentially subject to a
concentration of credit risk from its accounts receivable. The Company
maintains allowances for potential credit losses. Historically, such losses
have not been significant.

Commissions and related revenues accounted for 80%, 71%, and 69% of total
net revenues for fiscal 1997, 1998, and 1999, respectively. The Company relies
on unrelated service entities to accumulate, process, and remit these
revenues. Discontinuance of these services could result in disruption to the
Company's business and accordingly may have a material adverse effect on the
Company's results of operations, financial position, and cash flows.

F-7
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

The Company's business is subject to other risks and uncertainties common
to growing technology-based companies, including rapid technology change,
growth and commercial acceptance of the Internet, dependence on third-party
technology, new service introductions and other activities of competitors,
dependence on key personnel, international expansion, and limited operating
history.

Revenue recognition: Transaction revenues consist of commissions and
related revenues for air travel, hotel rooms, and car rentals, net of
allowances for cancellations. Revenues from air travel are recognized when the
reservation is made and secured by a credit card. Commission revenues from
hotel and car rental reservations are recognized either on receipt of the
commission payment or on notification of entitlement by a third party. The
allowance for cancellations were $3,000 and $10,000 as of June 30, 1998 and
1999, respectively, and $22,000 (unaudited) as of September 30, 1999.
Cancellations approximated $15,000, $57,000, and $132,000 for fiscal 1997,
fiscal 1998, and fiscal 1999, respectively, and $50,000 (unaudited) for the
three-month period ended September 30, 1999.

Additional revenues are derived from sales of advertising on the Company's
websites. Revenues from sales under per-transaction agreements are recognized
upon display of each individual advertisement. Revenues from sales under flat
fee agreements are recognized ratably over the period in which the advertising
is displayed, provided that no significant obligations for the Company remain,
collection of the resulting receivable is probable and evidence of an
arrangement exists.

Software license revenue recognition policies are in compliance with
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions. Revenues for significant
contracts have been recognized ratably over the license term.

Product development: Product development costs consist primarily of
payroll and related expenses for website and software development and are
expensed as incurred.

Capitalized software costs: Financial accounting standards require the
capitalization of certain software product costs after technological
feasibility of the software is established. To date, the period between
achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.

Advertising costs: The Company expenses advertising costs as incurred.

Income taxes: As of June 30, 1999, the Company was not a separate taxable
entity for federal, state, or local income tax purposes and its operations are
included in the consolidated Microsoft returns. The Company's tax provision
has been prepared in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes on a separate return
basis. Accordingly, no tax benefit for the Company's net operating losses has
been recognized.

Deferred taxes result from differences between the financial and tax bases
of the Company's assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized by the Company.

F-8
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

Stock-based compensation: The Company accounts for stock-based compensation
arrangements in accordance with provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complies
with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.

Earnings per share: The Company is not a separate legal entity and has no
historical capital structure. Therefore, historical earnings per share have
not been presented in the financial statements.

Pro-forma net loss per share (unaudited): In October 1999, the net
contribution from owner was converted into an aggregate of 33 million shares
of $.01 par value common stock.

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

Pro forma basic and dilutive net loss per share is as follows (in
thousands, except per share amount):

<TABLE>
<CAPTION>
Year Ended
June 30, Three months ended
1999 September 30, 1999
---------- ------------------
<S> <C> <C>
Net loss......................................... $(19,602) $(4,950)

Weighted average shares used to compute pro forma
basic and dilutive net loss per common share.... 33,000 33,000
-------- -------
Pro forma basic and dilutive net loss per
common share.................................. $ (0.59) $ (0.15)
======== =======
</TABLE>

Segment information: The Company has organized and managed its operations
in a single operating segment providing travel-related services, advertising,
and licenses for related software products. Revenues from customers outside of
the United States were less than 10% of net revenues for all periods presented
in the accompanying statements of operations.

Unaudited Interim Financial Statements: The interim financial information
contained herein is unaudited but, in the opinion of management, reflects all
adjustments which are necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented. All
such adjustments are of a normal, recurring nature. Results of operations for
interim periods presented herein are not necessarily indicative of results of
operations for the entire year.

Recent accounting pronouncements: In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1,
Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 will be effective for the Company's fiscal year ending
June 30, 2000. SOP 98-1 provides guidance on accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company will begin
capitalizing these costs in the fiscal year ending June 30, 2000.

F-9
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-
Up Activities. SOP 98-5 will be effective for the Company's fiscal year ending
June 30, 2000. SOP 98-5 provides guidance on the financial reporting of start-
up costs and organization costs. It requires the costs of start-up activities
and organization costs to be expensed as incurred. Subsequent to June 30,
1999, the Company was incorporated and related organization costs will be
expensed as incurred.

Note 2: Property and Equipment, net

A summary of property and equipment is as follows (in thousands):

<TABLE>
<CAPTION>
June 30,
---------------- September 30,
1998 1999 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Computer equipment.............................. $ 1,771 $ 3,045 $ 3,644
Accumulated depreciation........................ (1,257) (2,659) (2,923)
------- ------- -------
Property and equipment, net................... $ 514 $ 386 $ 721
======= ======= =======
</TABLE>

Fully depreciated computer equipment of $624,000 was transferred into the
Company from Microsoft in the year ended June 30, 1999.

Note 3: Related Party Transactions

Equity investment in related party: In March 1998, the Company received an
equity interest in VacationSpot.com Inc. in exchange for a link on the
Company's website to the VacationSpot.com's website to be provided over a two-
year period. An executive officer of the Company is a member of the Board of
Directors of VacationSpot.com Inc. The fair value of the advertising services
provided to the investee was estimated at $400,000.

F-10
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

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

Management believes that the allocation methods used are reasonable and
reflective of the Company's proportionate share of such expenses and are not
materially different from those that would have been incurred on a stand alone
basis.

The following summarizes the corporate costs allocated to the Company (in
thousands):

<TABLE>
<CAPTION>
Years ended June 30,
----------------------- Three months ended
1997 1998 1999 September 30, 1999
------- ------- ------- ------------------
(unaudited)
<S> <C> <C> <C> <C>
Cost of revenues..................... $ 1,754 $ 2,912 $ 2,147 $ 924
Product development.................. 8,367 4,250 6,727 557
Sales and marketing.................. 1,591 1,622 998 1,497
General and administrative........... 2,921 3,633 5,754 2,086
------- ------- ------- ------
$14,633 $12,417 $15,626 $5,064
======= ======= ======= ======
</TABLE>

Subsequent to June 30, 1999, the Company entered into a services agreement
with Microsoft under which it will pay Microsoft directly for many of the
services that Microsoft formerly provided on an allocated basis. See Note 6.

Note 4: Income Taxes

No provision for income taxes has been recorded because the Company has
incurred net losses since inception and the Company has received no benefit
for such losses from the consolidated Microsoft group. The Company has gross
deferred tax assets related primarily to unearned revenue that is currently
income for tax purposes. Management believes that, based on a number of
factors, the available objective evidence creates sufficient uncertainty
regarding the realizability of the deferred tax assets such that a full
valuation allowance has been recorded.

Deferred tax assets at June 30 are comprised of the following (in
thousands):

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Unearned revenue........................................... $ 2,752 $ 2,105
Other...................................................... 7 35
------- -------
Gross deferred tax assets.................................. 2,759 2,140
------- -------
Deferred tax asset valuation allowance..................... (2,759) (2,140)
------- -------
$ -- $ --
======= =======
</TABLE>

The Company has entered into a tax allocation agreement with Microsoft.
The agreement would not allow Expedia, Inc. to utilize tax net operating
losses previously generated by Expedia as an operating

F-11
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

unit of Microsoft. Under the agreement, the Company will calculate its own tax
liability as if it had filed a separate tax return. Generally, if the Company
contributes a tax benefit which reduces Microsoft's consolidated tax
liability, Microsoft will compensate the Company in an amount equal to 92.5%
of the benefit. Microsoft will be entitled to deduct on its separate tax
return a portion of the cost attributable to the Microsoft stock options that
the Company assumes. The parties will take this deduction into account under
the normal tax accounting rules, so the deduction will generally occur on the
exercise of the options. The portion of this cost that Microsoft will deduct
is equal to the excess of the fair market value of the shares to be acquired
on exercise of the option on the date the Company employs the optionee over
the exercise price of the assumed option. The Company will determine this
amount on the date that an optionee is employed.

Note 5: Employee Benefit Plans

Employees of the Company participate in stock-based compensation and
savings plans that are administered through Microsoft and involve options to
acquire Microsoft stock. Accordingly, option and expense information presented
herein represents the Company's portion of the overall plans.

Employee stock purchase plan: Microsoft has an employee stock purchase
plan for all eligible employees. Under the plan, shares of Microsoft's common
stock may be purchased at six-month intervals at 85% of the lower of the fair
market value on the first or the last day of each six-month period. Employees
may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. During 1997, 1998, and 1999, employees
of the Company purchased 43,600, 29,700, and 18,900 shares, respectively, at
average prices of $14.91, $27.21, and $52.59 per share.

401(k) savings plan: Microsoft has a savings plan which qualifies under
401(k) of the Internal Revenue Code. Participating employees may defer up to
15% of pretax salary, but not more than statutory limits. Microsoft
contributes 50 cents for each dollar a participant contributes, with a maximum
contribution of 3% of a participant's earnings. Matching contributions for
employees of the Company were $126,000, $279,000, and $351,000 in 1997, 1998,
and 1999, respectively.

Stock option plans: Microsoft stock option plans for directors, officers,
and employees provide for nonqualified and incentive stock options. Options
granted prior to 1995 generally vest over four and one-half years and expire
ten years from the date of the grant. Options granted during and after 1995
generally vest over four and one-half years and expire seven years from the
date of the grant, while certain options vest over seven and one-half years
and expire after ten years.

The Company and Microsoft will require all permanent employees who
transfer to the Company, subject to specific tax and legal requirements, to
participate in a program involving the cancellation of all of their unvested
options to purchase Microsoft common stock and the issuance by the Company of
new options to acquire the Company's common stock. The new options will have
comparable terms, vesting schedules and in-the-money value as the canceled
options. This issuance will be treated as a new grant of stock options. As a
result, the Company will incur a non-cash charge of approximately $100 to $150
million as the exercise price of the new options will be significantly less
than the initial public offering price of the Company's common stock. This
non-cash charge will be amortized over the vesting period of the new options,
ranging from one month to 54 months.

Expedia stock plans: In October 1999, the Board of Directors of the
Company adopted the following stock plans:

F-12
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of
300,000 shares of common stock have been reserved for issuance under the
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code. The first offering period will commence on January 1, 2000.

1999 Stock Option Plan (the "Stock Option Plan"). In addition to the
options issued to replace the cancelled unvested Microsoft options, a total of
4,000,000 shares of common stock has been reserved for issuance under the
Stock Option Plan for grants to employees, officers and employee directors of
nonstatutory stock options.

1999 Stock Option Plan for Non-Employee Directors (the "Directors' Plan").
A total of 135,000 shares of common stock has been reserved for issuance under
the Directors' Plan, which sets a maximum of 10,000 shares for which options
may be granted to any one non-employee director in any year, 15,000 shares in
the year in which the director is first elected.

The following information represents data reflecting outstanding Microsoft
employee stock options for Company employees for the three-year period ended
June 30, 1999. Upon the initial public offering, Company employees will be
able to retain their vested Microsoft stock options. Unvested Microsoft
options will be converted to Expedia, Inc. options. The transfer of Microsoft
employees into and out of Expedia are presented below as transfers in and out.

<TABLE>
<CAPTION>
Options outstanding
-----------------------------
Number Weighted average
outstanding exercise price
----------- ----------------
<S> <C> <C>
Balance, June 30, 1996............................ 3,342,027 $ 4.47
Granted......................................... 1,130,720 14.24
Transfers in.................................... 1,611,600 4.68
Exercised....................................... (1,131,704) 3.73
Cancelled and transfers out..................... (1,428,116) 5.25
----------
Balance, June 30, 1997............................ 3,524,527 7.62
Granted......................................... 1,007,096 31.74
Transfers in.................................... 3,661,380 7.30
Exercised....................................... (1,611,934) 4.50
Cancelled and transfers out..................... (1,374,234) 10.68
----------
Balance, June 30, 1998............................ 5,206,835 12.22
Granted......................................... 434,554 54.21
Transfers in.................................... 639,800 12.76
Exercised....................................... (791,887) 6.27
Cancelled and transfers out..................... (795,180) 16.26
----------
Balance, June 30, 1999............................ 4,694,122 16.50
----------
Granted (unaudited)............................. 283,552 86.14
Transfers in (unaudited)........................ 597,405 20.16
Exercised (unaudited)........................... (279,179) 18.07
Cancelled and transfers out (unaudited)......... (14,955) 23.84
----------
Balance, September 30, 1999 (unaudited)........... 5,280,945 $20.55
==========

</TABLE>

F-13
<PAGE>

EXPEDIA

NOTES TO FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Options outstanding at June 30, 1999 Options exercisable at June 30, 1999
-------------------------------------- ------------------------------------
Weighted
average
Weighted remaining
Range of Number average contractual Number Weighted average
exercise prices outstanding exercise price life outstanding exercise price
- ----------------- ----------- -------------- ----------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.85 $ 5.34 1,335,772 $ 3.82 3.0 years 1,335,772 $ 3.82
5.35 12.64 997,840 9.53 3.7 years 810,331 9.12
12.65 29.73 1,186,421 14.50 4.8 years 572,144 14.32
29.74 47.97 826,495 32.24 6.1 years 118,050 31.77
47.98 83.28 347,594 54.66 6.1 years --
--------- --------------------
4,694,122 2,836,297
========= ====================
</TABLE>

Fair value disclosures: Under SFAS No. 123, employee stock options are
valued at the grant date using the Black-Scholes valuation model and the
related compensation cost is recognized ratably over the vesting period. Had
compensation cost for the Microsoft's stock option and employee stock purchase
plans been determined based on the Black-Scholes value at the grant dates for
awards as prescribed by SFAS No. 123, the pro forma net loss for fiscal 1997,
fiscal 1998 and fiscal 1999 would have been $30,100,000, $32,800,000, and
$26,900,000, respectively.

The Company calculated the minimum fair value of each option grant at the
date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended June 30:

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years)...................................... 5 5 5
Risk-free interest rate.................................... 6.5% 5.7% 4.9%
Expected volatility........................................ 30% 32% 32%
Dividend rate.............................................. 0% 0% 0%
</TABLE>

Note 6: Commitments and Contingencies

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

The Company is party to a cooperative advertising agreement with a
corporate airline customer that requires the Company to set aside monies
received from transactions to be used for joint advertising initiatives. Such
commitments amounted to $87,000 and $245,000 in 1998 and 1999, respectively.

The Company has entered into a services agreement with Microsoft whereby
Microsoft will provide the Company with employee, administrative and
operational services. Employee services will be provided until the earlier of
May 20, 2000 or upon notice by the Company that employee services are no
longer required. Administrative and operational services will be provided
until December 31, 2000 but the parties may agree to extend the expiration
date. Fees will be paid to Microsoft for the services under

F-14
<PAGE>

this agreement on either an estimated or actual cost reimbursement, including
any sales and occupancy taxes. Minimum payments are approximately $365,000 per
month. In addition, the Company will be obligated to pay additional amounts
based on its headcount and usage of services, which would approximate $450,000
per month based on current head count of 150 employees.

The Company has entered into a five-year carriage and cross promotion
agreement with Microsoft under which the Company will receive premium
placement on Microsoft's MSN.com website, the Hotmail email service and the
WebTV platform. Under the terms of the agreement, Microsoft is able to
generate revenues by selling up to 52.0 million banner advertisements on the
Company's website during the first year of this agreement and up to 57.2
million banner advertisements during the second year of the agreement. The
Company will pay Microsoft a flat annual fee of $2.0 million in fiscal 2000
and $2.2 million in fiscal 2001 as well as incentive fees to the extent that
the number of completed airline transactions from the MSN.com website exceeds
the Company's forecasts. The fees and terms of sale of banner advertisements
will depend on agreement between the parties for the remaining three years
under this agreement.

On October 13, 1999, Priceline.com Incorporated filed a lawsuit against
Microsoft and the Company alleging patent infringement and use of unfair and
deceptive acts. The lawsuit seeks unspecified damages, including treble and
punitive damages, an injunction against further alleged infringement and from
continuing to operate the Company's Hotel Price Matcher or any similar
service, among other items. Since the lawsuit was recently filed and discovery
has not yet commenced, the Company is unable to estimate the likelihood of an
adverse result or range of possible loss relating to this matter. However, the
Company does not believe this claim has merit and intends to vigorously defend
against this lawsuit.

On October 7, 1999, Reed Elsevier Inc. filed a lawsuit against Microsoft
and the Company alleging a material breach of an agreement between Microsoft
and Reed Elsevier, Inc. The suit alleges conversion and misappropriation of
Reed Elsevier Inc.'s proprietary database, unfair competition, breach of
implied covenant of good faith and fair dealing and interference with a
business relationship. The suit seeks unspecified damages, including punitive
and permanent injunction requiring compliance with the agreement, among other
items. Since the lawsuit was recently filed and discovery has not yet
commenced, the Company is unable to estimate the likelihood of an adverse
result or the range of possible loss relating to this matter. The Company
intends to vigorously defend against this lawsuit and does not expect the
outcome of this lawsuit to have a material adverse effect on the Company's
business.

The Company is also subject to various legal proceedings and claims that
arise in the ordinary course of business.

F-15
<PAGE>

INSIDE BACK COVER

[ARTWORK]

A Global Marketplace, A Local Presence

[screenshot of the front page of Expedia.de, our localized website in Germany]

Customized to Local Needs
Localized versions of Expedia's websites accommodate not only differences in
language and culture, but also differences in travel purchase behavior and
supplier inventory preferences.

Vacation Package Database
Expedia provides European customers with an interface to a third-party database
of packaged tour inventory.

Negotiated Fares
We offer fares negotiated with airlines by our local travel partners and
integrate negotiated and published fares in a single display on our website.

Localized Editorial Content
The editorial advice and feature articles offered on our international sites are
developed with a local point of view.

International Strategic Partners
Expedia has developed strategic relationships in Germany, the United Kingdom and
Canada to provide complete localized services.

Localized Customer Service
Our customer service is provided by our locally-based partners and is tailored
to the needs of travelers in particular regions of the world.
<PAGE>

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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 34
Management............................................................... 50
Certain Relationships and Related Transactions........................... 58
Principal Stockholder.................................................... 62
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Validity of the Common Stock............................................. 69
Experts.................................................................. 69
Where You Can Find More Information...................................... 69
Index to Financial Statements............................................ F-1
</TABLE>

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Through and including December 4, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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5,200,000 Shares

Expedia, Inc.

Common Stock

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[EXPEDIA, INC. LOGO]

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Joint Book-Running Managers

Goldman, Sachs & Co.
Morgan Stanley Dean Witter

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