Travelocity terminated the exclusivity to which Hotels.com was entitled under the hotel supply agreement between Hotels.com and Travelocity.
In response to that improper action and other prior breaches of the agreement by Travelocity over the past year, Hotels.com announced today that the company has terminated the agreement in full and ceased offering its industry-leading lodging inventory on the Travelocity web site. Given that the agreement between Hotels.com and Travelocity had precluded full cooperation and cross selling initiatives between Hotels.com and its sister company Expedia, both wholly-owned businesses of IAC/InterActiveCorp, the actions of Travelocity will now allow Hotels.com and Expedia to significantly accelerate coordination and cooperation between the two companies.

As a result, Hotels.com the largest specialized provider of discount lodging worldwide, and Expedia, the world`s leading online travel service and the fourth largest travel agency in the United States, are commencing full-scale cooperation and cross-selling initiatives.

The initiatives between Hotels.com and Expedia will provide consumers with better travel product offerings on both sites. We will work to make both companies more efficient and offer more demand to travel partners, better products to affiliates, and better values to consumers, stated Bob Diener, president and co-founder of Hotels.com. We had generally enjoyed the working relationship with Travelocity, and so their actions in recent months are unfortunate. But we`re also excited because increasing cooperation between Hotels.com and Expedia is something we`ve been eager to implement, and now we will be able to do so at a much faster pace. At the same time, we will continue to focus on growing the Hotels.com brand, serving our hotel partners and customers and supporting our expansive affiliate base of more than 40,000 affiliates as we move the resources we had been devoting to Travelocity to these affiliates.

We value all of our customers, Mr. Diener continued. All reservations made via Travelocity will be honored. Customers that have previously viewed Hotels.com special rates on Travelocity will no longer be able to book these rates directly with Travelocity. These special rates will be available directly via www.hotels.com. As we begin the busy fall travel season, Hotels.com and Expedia will have substantially stronger product offerings than any other online travel sites.

Expedia and Hotels.com have complementary strengths in hotel inventory, technology and business processes. Combining these strengths will result in better rates and inventory for the hotels and packages offerings on our sites, said Erik Blachford, Expedia president and CEO. By combining the best business practices of two industry leaders, customers ultimately win by gaining access to more unique travel offerings and more great deals. We are very pleased to work with Hotels.com to improve our mutual hotel and packages offerings and extend our leadership positions as the top sellers of hotel rooms online.

Hotels.com`s inventory of discount lodging accommodations has historically made up a substantial portion of Travelocity`s hotel bookings. However, the financial benefits from working with Travelocity have decreased over time. Revenues derived from Travelocity declined from approximately 4% of IAC`s revenues in Q2 2002 to approximately 3% in Q2 2003 and were marginally profitable in Q2 2003, representing approximately 2.5% of IAC`s Operating Income before Amortization. The exclusivity arrangement in the hotel supply agreement was scheduled to expire in December 2004 and the agreement was due to expire in July 2005. The expected impact to IAC`s financial results from today`s actions is marginally negative in Q3 2003 and marginally negative to neutral in Q4 2003. Hotels.com expects to roll out significant cross-selling initiatives and cooperate with Expedia on product and technology, which is expected to result in a positive financial impact in 2004.