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

Overview

General. We are a leading online travel company that offers our customers a broad range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services. Internationally, we offer our customers hotel room reservations in 78 countries and 29 languages. In the United States, we offer our customers a unique choice: the ability to purchase travel services in a traditional, price-disclosed manner or the opportunity to use our unique Name Your Own Price® service, which allows our customers to make offers for travel services at discounted prices.

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include, among others, the brands Booking.com and Active Hotels in Europe and Agoda in Asia. Our principal goal is to be the leading worldwide online hotel reservation service. At present, we derive substantially all of our revenues from the following sources:

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

† Commissions earned from the sale of price-disclosed hotel room reservation, rental cars, cruises and other travel services;

† Customer processing fees charged in connection with the sale of both Name Your Own Price® and price-disclosed hotel room reservations and Name Your Own Price® airline tickets and rental car services;

† Transaction revenue from our price-disclosed merchant hotel room service;

† Global distribution system ("GDS") reservation booking fees related to both our Name Your Own Price® airline ticket, hotel room and rental car services, and price-disclosed airline tickets and rental car services; and

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

Over the last several years, our business has transitioned from one driven primarily by domestic results to one driven primarily by international results. Prior to 2004, substantially all of our revenues were generated within the United States. In September 2004, we acquired Booking.com Limited (formerly known as Active Hotels Ltd.), a U.K.-based online hotel service; in July 2005, we acquired Booking.com B.V., a Netherlands-based online hotel service (together with Booking.com Limited, "Booking.com"); and in November 2007, we acquired priceline.com Mauritius Company Limited (formerly known as the Agoda Company, Ltd.), an online hotel service with operations in Singapore and Thailand ("Agoda"). During the nine months ended September 30, 2009, our international business - the significant majority of which is currently generated by Booking.com - represented approximately 60% of our gross bookings (an operating and statistical metric referring to the total dollar value, inclusive of all taxes and fees, of all travel services purchased by our customers), and approximately 70% of our consolidated operating income. Given that our international business is primarily comprised of hotel reservation services, revenue earned in connection with the reservation of hotel room nights has come to represent a substantial majority of our gross profit.

Worldwide recession is negatively affecting the broad travel market and, as a result, our business. Since late 2007, global economic and financial market conditions have worsened markedly, creating uncertainty for consumers and pressuring consumer spending on travel. Hotel operators have reported significant decreases in occupancy rates (a common metric that measures hotel customer usage) and average daily rates ("ADRs") in the United States, Europe and Asia for the past several quarters. We believe the worldwide recession and these weakening travel market trends, including, without limitation, decreased consumer demand, further deterioration in ADRs and increases in cancellations, have had a negative impact on our business, particularly in Europe, and will continue to have a negative impact in the near term. We believe that, to date, the positive trends impacting our domestic and international business largely overshadowed these negative influences. We cannot predict the magnitude or duration of this worldwide recession.

We believe our recent performance has been aided by several factors that may not be present in future periods. First, we believe our financial results improved in the third quarter 2009 due to weakening economic conditions in the third quarter of 2008 (i.e., we began to see the effects of the worldwide recession on our business at the end of the third quarter 2008), which has resulted in favorable year-over-year comparisons. Second, as discussed in more detail below, in spring of 2009, several major online travel agents matched our elimination of airline ticket booking fees and reduction of price-disclosed hotel booking fees, which we believe has caused a general increase in traffic to online travel agents overall as compared to supplier websites. In addition, several major suppliers have discounted or reduced their fares or rates, which we believe has helped to stimulate demand for leisure travel. We believe that these factors, among others, impacted our third quarter 2009 financial results and helped our business perform well in the wake of the world wide recession; these positive influences may not be present in future periods.

Over the last year, the hotel industry has experienced a significant decrease in occupancy rates and we have experienced slowing demand growth, an increase in reservation cancellation rates and declining ADRs. While lower occupancy rates have historically resulted in hotel suppliers increasing their distribution of hotel room reservations through third-party intermediaries such as us, our remuneration for hotel transactions changes proportionately with room price, and therefore, lower ADRs generally have a negative effect on our hotel business and a negative effect on our gross profit.

We believe the current worldwide recession and lower ADRs are also responsible for the increase in the number of hotel cancellations, particularly at our international operations. Our international operations distribute hotel room reservations primarily through an "agency" model where reservations are generally cancellable, as opposed to "merchant" models operated by us (principally in the U.S.) and our competition and through which reservations are paid for in advance and therefore less likely to be cancelled. As ADRs decline, customers who have existing reservations may cancel those reservations and rebook at a lower rate, and in times of economic stress, travelers are more likely to cancel their vacation plans outright. While decreasing ADRs and a worldwide recession make it relatively more attractive for consumers to make a cancellable agency reservation than a pre-paid reservation, our agency business will likely have higher cancellation rates compared to companies that offer predominantly merchant model hotel room reservations.

International Trends. The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet adoption rates and e-commerce adoption rates of international consumers have trailed those of the United States. However, international consumers are rapidly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to exceed, the growth rates within the United States. In addition, the base of hotel suppliers in Europe is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends and factors have enabled us to become the top online hotel service provider in Europe.

As our international operations have become significant contributors to our results and international hotel bookings have become of increased importance to our earnings, we have seen, and expect to continue to see, changes in certain of our operating expenses and other financial metrics. For example, because our international operations utilize online search and affiliate marketing as the principal means of generating traffic to their websites, our online advertising expense has increased significantly over recent years, a trend we expect to continue throughout the remainder of 2009 and beyond. In addition, and as discussed in more detail below, we have seen the effects of seasonal fluctuations on our operating results change as a result of different revenue recognition policies that apply to our price-disclosed services (including our international hotel service) as compared to our Name Your Own Price® services.

Another impact of the growing importance that our international operations represent to our business is our increased exposure to foreign currency exchange risk. Because we are conducting a significant and growing portion of our business outside the United States and are reporting our results in U.S. Dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency (principally the Euro and the British Pound Sterling) into U.S. Dollars upon consolidation. Our international operations contributed approximately $316.9 million and $629.1 million to our revenues for the three and nine months ended September 30, 2009, which compares to $223.7 million and $492.3 million for the same periods in 2008, respectively. Revenue attributable to our international operations increased, on a local currency basis, by approximately 50% and 42% in the three and nine months ended September 30, 2009, respectively compared to the same periods in 2008. The U.S. Dollar generally weakened from when we acquired Booking.com B.V. in July 2005, until mid-2008, and as a result, the year-over-year growth rates in our international results, when reported in U.S. Dollars, were positively impacted by changes in foreign exchange rates. Since mid-2008 until recently, the U.S. Dollar strengthened against the Euro and the British Pound Sterling, which has caused a decrease in our net assets, revenues, operating expenses and it has become increasingly difficult for us to grow our gross bookings, revenues and earnings on a U.S. Dollar denominated basis. Recently, the U.S. Dollar has again weakened against the Euro and the British Pound Sterling. In general, if the U.S. Dollar weakens against the local currency, the translation of our foreign-currency-denominated balances will result in increased net assets, gross bookings, revenues, operating expenses, and net income.

As of September 30, 2009, derivatives not designated as hedging instruments with a notional value of 20 million Euros were outstanding. Subsequent to September 30, 2009, we entered into additional derivatives with a notional value of 10 million Euros and 5 million British Pounds Sterling. These contracts are all scheduled to mature in December 2009. As of September 30, 2008, derivatives with notional values of 25.0 million Euros were outstanding. Our derivative instruments are not designed to hedge against currency fluctuation that could impact our foreign currency denominated gross bookings, revenue or gross profit. As of September 30, 2009, the Company had forward currency contracts for 136.7 million Euros to hedge a portion of our net investment in a foreign subsidiary against adverse change in exchange rates. These contracts are all short-term in nature. Mark-to-market adjustments for the net investment hedges are recorded as currency translation adjustments.

In April 2009, the World Health Organization (WHO) issued a Disease Outbreak Notice confirming the infection of a number of people in Mexico and the United States by Influenza H1N1. Shortly thereafter, the WHO declared Influenza H1N1 a public health emergency of international concern and stated that containment of the outbreak is not feasible. We are unable to predict the scope or duration of Influenza H1N1 outbreak or its impact on the travel industry generally, or our business in particular. However, concerns relating to the health risk posed by Influenza H1N1 could result in decreased demand for our travel services and an increase in cancellations of existing travel plans, either of which could adversely affect our business. In addition, an outbreak of Influenza H1N1 could disrupt our workforce or the workforces of suppliers or third-party service providers upon which we rely.

Domestic Trends. Competition in the domestic online travel market remains intense and traditional online travel companies are creating new promotions and consumer value features in an effort to gain competitive advantage. In June 2007, we eliminated processing fees for our price-disclosed airline ticket service, and in April 2008, we reduced processing fees for our domestic price-disclosed merchant hotel room service. As a result, since those dates, we had a pricing advantage against other major online travel agents with respect to these travel services. Starting in March 2009, Expedia launched a promotion temporarily suspending air booking fees for bookings made through May 31, 2009, and later made such suspension permanent. Later in March 2009, Travelocity matched the Expedia promotion and in April 2009, Orbitz followed. As a result, we no longer have the price advantage that we have had against our major competitors on price-disclosed airline tickets since June 2007. Similarly, in April 2009, each of Expedia and Orbitz temporarily reduced booking fees on hotel room reservations, and later made such reduction permanent, and we therefore no longer have a price advantage over those companies on price-disclosed merchant hotel rooms. Our growth rates in these businesses may be adversely impacted as a result of no longer having a price advantage. In addition, in October 2009, Travelocity announced the waiver of its cancellation and change fees for hotel and vacation packages, as well as an expanded hotel guarantee, under which consumers who book a hotel room and then find a lower published rate for the same room anytime before the day of check-in are eligible to receive a refund of the difference, and until December 31, 2009, a $50 credit toward future bookings.

Large, established Internet companies with substantial resources and expertise in developing online commerce and facilitating Internet traffic are creating inroads into the online travel market. Google recently launched Google City Tours, an application that offers multi-day travel itineraries in destinations around the world. In addition, Microsoft recently launched Bing Travel, a "meta-search" site based on its Farecast application, which searches for airfare and hotel reservations online and predicts the best time to purchase them. Meta-search sites leverage their search technology to aggregate travel search results across supplier, travel agent and other websites. Google City Search could evolve into a meta-search site and either or both of Google City Search or Bing Travel could evolve into more traditional online travel services which could compete directly with our services.

While demand for online travel services continues to experience annualized growth, we believe that the domestic market share of third-party distributors, like priceline.com, has declined over the long term and that the growth of the domestic online market for travel services has slowed. We believe the decline in market share is attributable, in part, to (1) a concerted initiative by travel suppliers to direct customers to their own websites in an effort to reduce distribution expenses and establish more direct control over their pricing, and (2) a price advantage in that the suppliers generally do not charge a processing fee. However, with the recent elimination and reduction of processing and other fees by all of the major online travel companies, we believe that the domestic market share of third party distributors has stabilized and potentially increased.

In addition, recent decreases in domestic airline capacity, the threat of carrier bankruptcies and the emerging prospect of industry consolidation, as evidenced by the recent merger of Delta Air Lines and Northwest Airlines, could further reduce the amount of airline tickets available to us. Furthermore, we have recently observed a year-over-year decline in passenger traffic and airfares across the airline industry, which we believe is principally due to the worldwide recession and higher oil prices in 2008. Decreases in capacity and lower traveler demand negatively impact our domestic air business, which in turn has negative repercussions on our domestic hotel and rental car businesses. In addition, recent decreases in

rental car fleets have led to increases in retail rental car rates. Higher retail rental car rates can negatively impact our retail rental car service, while decreases in rental car availability can negatively impact our Name Your Own Price® rental car service. We continue to believe that the market for domestic online travel services is an attractive market with continued opportunity for growth.

We also rely on fees paid to us by global distribution systems, or GDSs, for travel bookings made through GDSs for a portion of our gross profit and operating income. Connectivity to a GDS does not guarantee us access to the content of a travel supplier such as an airline or hotel company. We have agreements with a number of suppliers to obtain access to content, and are in continuing discussions with others to obtain similar access. If we were denied access to a suppliers' full content or had to incur service fees in order to access or book such content, our results could suffer.

We believe that our success will depend in large part on our ability to maintain profitability, primarily from our hotel business, to continue to promote the Booking.com brand internationally, the priceline.com brand in the United States, the Agoda brand in Asia and, over time, to offer other travel services and further expand into other international markets. Factors beyond our control, such as worldwide recession, terrorist attacks, travel related health concerns including pandemics and epidemics such as Influenza H1N1, avian bird flu and SARS, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel related accidents, unusual weather patterns, including natural disasters such as hurricanes, tsunamis or earthquakes; or the withdrawal from our system of a major hotel supplier or airline, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above. For example, recent civil unrest in Thailand, a key market for our Agoda business, negatively impacted booking volumes at the time and future civil or political unrest would further disrupt Agoda's business. We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve operating results. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. Our goal is to improve volume and sustain gross margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we cannot provide assurance that we will sustain revenue growth and profitability.

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

Results of Operations

Three and Nine Months Ended September 30, 2009 compared to the Three and Nine Months Ended September 30, 2008

Operating and Statistical Metrics

Our financial results are driven by certain operating metrics that encompass the booking activity generated by our travel services. Specifically, reservations of hotel room nights, rental car days and airline tickets capture the volume of units purchased by our customers. Gross bookings is an operating and statistical metric that captures the total dollar value inclusive of taxes and fees of all travel services booked by our customers, and is widely used in the travel business. International gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings for our international brands and operations, and domestic gross bookings reflect gross bookings generated principally by websites owned by, operated by, or dedicated to providing gross bookings by our domestic operations, in each case without regard to the location of the travel or the customer purchasing the travel.

Gross bookings resulting from hotel room night reservations, rental car days and airline tickets sold through our domestic and international operations for the three and nine months ended September 30, 2009 and 2008 were as follows (numbers may not total due to rounding):

                   Three Months Ended September 30,                       Nine Months Ended September 30,
                             (in millions)                                         (in millions)
                      2009                  2008           Change            2009                 2008          Change

Domestic        $             999     $             800        24.9 %  $          2,814     $          2,393        17.6 %
International               1,724                 1,251        37.8 %             4,231                3,526        20.0 %
Total           $           2,723     $           2,050        32.8 %  $          7,046     $          5,919        19.0 %

Gross bookings resulting from hotel room nights, rental car days and airline tickets sold through our agency and merchant models for the three and nine months ended September 30, 2009 and 2008 were as follows (numbers may not total due to rounding):

                   Three Months Ended September 30,                       Nine Months Ended September 30,
                             (in millions)                                         (in millions)
                      2009                  2008           Change            2009                 2008          Change

Agency          $           2,131     $           1,604        32.9 %  $          5,425     $          4,631        17.2 %
Merchant                      592                   447        32.6 %             1,620                1,288        25.8 %
Total           $           2,723     $           2,050        32.8 %  $          7,046     $          5,919        19.0 %

Gross bookings increased by 32.8% for the three months ended September 30, 2009, compared to the same period in 2008, despite year-over-year declines in average selling prices in all of our hotel and airline ticket services in most markets. The increase in gross bookings was primarily attributable to 37.8% growth in our international gross bookings, virtually all of which relate to retail hotel room night reservations. International gross bookings increased on a local currency basis by approximately 49% in the three months ended September 30, 2009, compared to the same period in 2008. Domestic gross bookings increased by 24.9%, primarily due to growth in the sale of price-disclosed airline tickets, Name Your Own Price® hotel room night reservations, merchant price-disclosed hotel room night reservations and price-disclosed rental car days, partially offset by a decline in Name Your Own Price® airline tickets.

Gross bookings increased by 19.0% for the nine months ended September 30, 2009, compared to the same period in 2008, despite year-over-year declines in average selling prices in all of our hotel and airline ticket services in most markets. The increase in gross bookings was primarily attributable to 20.0% growth in our international gross bookings. Domestic gross bookings increased by 17.6% for the nine months ended September 30, 2009, compared to the same period in 2008, primarily due to growth in the sale of Name Your Own Price® hotel room night reservations, price-disclosed airline tickets, merchant price-disclosed hotel room night reservations and Name Your Own Price® rental car days, partially offset by a decline in Name Your Own Price® airline tickets.

Agency gross bookings increased 32.9% and 17.2% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, due to growth in the sale of Booking.com hotel room night reservations, price-disclosed airline tickets and price-disclosed rental car days. Merchant gross bookings increased 32.6% and 25.8% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, due to an increase in the sale of Name Your Own Price® hotel room night reservations, Agoda merchant price-disclosed hotel room night reservations and domestic merchant price-disclosed hotel room night reservations, partially offset by a decline in Name Your Own Price® airline tickets.

                                         Hotel Room      Rental        Airline
                                           Nights       Car Days       Tickets

Three Months ended September 30, 2009   17.9 million   2.6 million   1.5 million

Three Months ended September 30, 2008   11.4 million   2.3 million   1.2 million

Nine Months ended September 30, 2009    46.3 million   8.9 million   4.6 million

Nine Months ended September 30, 2008    31.7 million   7.8 million   3.7 million

Hotel room night reservations sold increased by 56.3% and 46.2% for the three and nine months ended September 30, 2009, respectively, over the same periods in . . .