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

Overview

General. We are a leading online travel company that offers our customers a broad range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services. 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. Internationally, we offer our customers hotel room reservations in 60 countries and 22 languages.

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 services and airline ticket, as well as our vacation packages service;

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

† Customer processing fees charged in connection with the sale of both Name Your Own Price® and price-disclosed hotel rooms and Name Your Own Price® airline tickets and rental cars services. We eliminated processing fees for our price-disclosed airline ticket service in June 2007;

† 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, a U.K.-based online hotel service, in July 2005, we acquired Booking.com B.V., a Netherlands-based online hotel service, and in November 2007, we acquired Agoda Company, Ltd. ("Agoda") and AGIP LLC ("AGIP," and together with Agoda, the "Agoda Companies"), an online hotel service with operations in Singapore and Thailand. During each of the three and nine month periods ended September 30, 2008, our international business - the significant majority of which is currently generated by our European operations - 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 contributed more than two-thirds 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.

Economic turmoil in the United States and Europe is negatively affecting the broad travel market and, as a result, our business. Most recently, global economic and financial market conditions have worsened markedly, creating uncertainty for consumers and pressuring consumer spending on travel. For example, we have recently observed decreases in occupancy rates (a common metric that measures hotel customer usage) and average daily rates ("ADRs") in both the United States and Europe. We believe that the positive trends impacting our domestic and international business overshadowed these negative influences in the first nine months of 2008. However, market conditions have worsened significantly recently, with particular deterioration in September that continued into early November. We

believe macro economic turmoil 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 cannot predict the magnitude or duration of this downturn, but our current limited visibility does not suggest any near-term improvement.

The hotel market has, until recently, been characterized by robust demand and limited supply, leading to increased occupancy rates, and in turn, increased ADRs. However, the hotel industry has recently experienced a general decrease in occupancy rates, and we have experienced slowing demand growth, an increase in reservation cancellation rates and declining ADRs - trends in which we do not anticipate any near-term improvement. While lower occupancy rates have historically resulted in hotel suppliers increasing their distribution of hotel rooms 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 economic downturn 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 rooms 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 generally not cancellable without penalty. 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 an uncertain economic environment 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 who offer predominantly merchant model hotel rooms.

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 have enabled us to become the top online hotel service provider in Europe, and will allow us to successfully expand our service offerings internationally beyond 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 affiliate and search marketing as the principal means of generating traffic to their websites, our online advertising expense has increased significantly since our acquisition of those companies, a trend we expect to continue through the remainder of 2008 and beyond. In addition, and as discussed in more detail below, since the acquisitions of Booking.com Limited and Booking.com B.V., 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 $223.7 million and $492.3 million to our revenues for the three and nine months ended September 30, 2008, respectively, which compares to $131.8 million and $270.1 million for the same periods in 2007, respectively. Approximately $8.6 million and $31.8 million, respectively, of this increase is due to fluctuations in currency exchange rates. As a result, our year-over-year revenue growth in the three and nine months ended September 30, 2008, was approximately 63.2% and 70.5%, respectively, on a local currency basis compared to approximately 69.7% and 82.3%, respectively, after giving effect to currency fluctuations. The U.S. dollar has generally weakened since we acquired Booking.com B.V. in July 2005, and as a result, the year over year growth rates in our international results, when reported in U.S. dollars, have been positively impacted by changes in foreign exchange rates. However, the U.S. dollar has recently strengthened significantly against the Euro and the British Pound Sterling, which results in decreased net assets, revenues, operating expenses, and net income, and in October 2008, for the first time since our acquisition of Booking.com B.V., the foreign exchange impact was negative rather than positive. Accordingly, it will become increasingly difficult for us to grow our gross bookings, revenues and earnings on a dollar-denominated basis during the fourth quarter of 2008 and beyond. 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. The impact of short-term currency fluctuations on our income for the three months ended September 30, 2008, was minimized by certain derivatives we held. These derivatives expire on December 31, 2008, and we have no foreign exchange hedges currently in place past that date. Furthermore, our derivative instruments do not hedge against fluctuation in our gross bookings.

Domestic Trends. 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 recent past and that the growth of the domestic online market for travel services has slowed. We believe the decline in market share is attributable, in part, to a concerted initiative by travel suppliers to direct customers to their own websites in an effort to reduce distribution expenses and establish more direct control over their pricing.

In addition, airlines have generally experienced year-over-year increases in load factors (a common metric that measures airplane customer usage), which leaves them with less excess supply to provide third party intermediaries like priceline.com. Recent decreases in domestic airline capacity and the emerging prospect of industry consolidation, as evidenced by the recent merger agreement between Delta Air Lines and Northwest Airlines, could further reduce the amount of airline tickets available to us. In addition, major airline carriers began significant reductions in U.S. capacity in September 2008. These reductions are expected to result in increased fares and lower traveler demand. Higher fares and lower traveler demand could negatively impact our domestic air business, which could in turn negatively impact our domestic hotel and rental car businesses. In addition, current domestic economic conditions are partially responsible for a change in the arrangements between rental car companies and automobile manufacturers. Where manufacturers have historically supplied cars to rental car companies under a lease or another arrangement whereby the manufacturer would buy the car back when it is taken out of the fleet, manufacturers have begun to require the rental car companies purchase the cars for their fleets, which shifts the burden of risk of selling the car to the rental car company. Because of the recent economic turmoil, rental car companies have struggled to sell such cars, and as a result, they are faced with excess supply. This, along with an intensely competitive environment, leads to lower retail rental car rates, which in turn, are beneficial to our retail rental car business, but detrimental to our Name Your Own Price® business. Notwithstanding these trends, 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 priceline.com brand in the United States, the Booking.com brand internationally, 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 terrorist attacks, political instability, regional hostilities, increases in fuel prices, global economic slowdown, imposition of taxes or surcharges by regulatory authorities, travel related accidents, travel related health concerns, 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 during the peak booking season in Thailand, a key market for our Agoda business, is negatively impacting booking volumes. 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. In addition, we currently do not have operations in geographic areas such as South America, and therefore may consider strategic alternatives in those areas. 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, as 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, 2008 compared to the Three and Nine Months Ended September 30, 2007

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. 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 nights, rental car days and airline tickets sold through our domestic and international operations for the three and nine months ended September 30, 2008 and 2007 were as follows (numbers may not total due to rounding):

                   Three Months Ended September 30,                   Nine Months Ended September 30,
                             (in millions)                                     (in millions)
                      2008                  2007          Change         2008                 2007         Change

Domestic        $             800     $             602     32.8 % $          2,393     $          1,629     46.9 %
International               1,251                   788     58.6 %            3,526                1,995     76.7 %
Total           $           2,050     $           1,391     47.4 % $          5,919     $          3,624     63.3 %

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, 2008 and 2007 were as follows (numbers may not total due to rounding):

              Three Months Ended September 30,                   Nine Months Ended September 30,
                        (in millions)                                     (in millions)
                 2008                  2007          Change         2008                 2007         Change

Agency     $           1,604     $           1,043     53.8 % $          4,631     $          2,672     73.3 %
Merchant                 447                   348     28.3 %            1,288                  952     35.4 %
Total      $           2,050     $           1,391     47.4 % $          5,919     $          3,624     63.3 %

Gross bookings increased by 47.4% and 63.3% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. The increase in the three and nine month periods was primarily attributable to growth of 58.6% and 76.7%, respectively, in our international gross bookings, virtually all of which relates to retail hotel room night sales (including the $110 million and $401 million favorable impact of foreign currency exchange rates in the three and nine month periods ended September 30, 2008, respectively). Domestic gross bookings increased in the three and nine months ended September 30, 2008, by 32.8% and 46.9%, respectively, primarily due to growth in the sale of retail airline tickets, Name Your Own Price®hotel room nights, price-disclosed hotel room nights and Name Your Own Price® airline tickets.

Agency gross bookings increased 53.8% and 73.3% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, due to growth in our international hotel operations and in the sale of retail airline tickets. Merchant gross bookings increased 28.3% and 35.4% for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007, due to an increase in the sale of Name Your Own Price® hotel room nights, the inclusion of room nights sold by Agoda, which was acquired in November 2007, domestic merchant price-disclosed hotel room nights and Name Your Own Price® airline tickets. Agoda gross bookings amounted to $32.4 million and $81.2 million for the three and nine months ended September 30, 2008, respectively.

                                         Hotel Room      Rental        Airline
                                           Nights       Car Days       Tickets

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

Three Months ended September 30, 2007   8.0 million    2.3 million   0.8 million

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

Nine Months ended September 30, 2007    21.2 million   6.6 million   2.1 million

Hotel room nights sold increased by 43.6% and 49.7% for the three and nine months ended September 30, 2008, respectively, over the same periods in 2007, primarily due to an increase in the sale of agency room nights in connection with our international operations, an increase in the sale of Name Your Own Price® and price-disclosed hotel room nights in the United States and the inclusion of room nights sold by Agoda, which was acquired in November 2007.

Rental car days sold were flat for the three months ended September 30, 2008 due to increases in sales of price-disclosed rental cars being offset by decreases in sales of Name Your Own Price® rental cars. Rental car days sold increased by 17.3% for the nine months ended September 30, 2008, over the same period in 2007, due to increases in sales of both our price-disclosed and Name Your Own Price® rental car services.

Airline tickets sold increased by 44.8% and 73.3% for the three and nine months ended September 30, 2008, respectively, over the same periods in 2007, due primarily to an increase in the sale of price-disclosed airline tickets due in part to our elimination of processing fees in June 2007 and increased marketing support.

Revenues

We classify our revenue into three categories:

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

† Agency revenues are derived from travel related transactions where we are not the merchant of record and where the prices of our services are determined by third parties. Agency revenues include travel commissions, customer processing fees and GDS reservation booking fees related to certain of the aforementioned transactions and are reported at the net amounts received, without any associated cost of revenue. In June 2007, we eliminated processing fees on the priceline.com price-disclosed airline ticket service.

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

We continue to experience a shift in the mix of our travel business from a business historically focused exclusively on the sale of domestic point-of-sale travel services to a business that includes significant sales of international point-of-sale hotel services, a significant majority of which are currently generated in Europe. Because our domestic services include merchant Name Your Own Price®travel services, which are reported on a "gross" basis, while both our domestic and international retail travel services are primarily recorded on a "net" basis, revenue increases and decreases are impacted by changes in the mix of the sale of merchant and retail travel services and, consequently, gross profit has become an increasingly important measure of evaluating growth in our business. Our international operations contributed approximately $223.7 million and $492.3 million to our revenues for the three and nine months ended September 30, 2008, respectively, which compares to $131.8 million and $270.1 million for the same periods in 2007, respectively. Approximately $8.6 million and $31.8 million, respectively, of this increase is due to favorable fluctuations in currency exchange rates. Agoda

accounted for approximately $4.2 million and $11.7 million of the revenue attributable to our international operations for the three and nine months ended September 30, 2008, respectively.

                      Three Months Ended                  Nine Months Ended
                        September 30,                      September 30,
                            ($000)             %               ($000)               %
                       2008        2007      Change      2008          2007       Change

Merchant Revenues   $  323,957   $ 275,211     17.7 % $   949,345   $   776,131     22.3 %

Agency Revenues        232,638     139,623     66.6 %     515,819       292,478     76.4 %

Other Revenues           5,014       2,453    104.4 %      13,600         5,947    128.7 %

Total Revenues      $  561,609   $ 417,287     34.6 % $ 1,478,764   $ 1,074,556     37.6 %
. . .