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 28 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 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 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, 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 three months ended March 31, 2009, our international business - the significant majority of which is currently generated by our European operations - represented approximately 56% 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 for full year 2008, 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.

Worldwide recession 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. Hotel operators have continued to report 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. We believe that the positive trends impacting our domestic and international business largely overshadowed these negative influences in 2008 and the first quarter of 2009. However, market conditions have worsened, with particular deterioration in the fourth quarter 2008 and continuing into 2009. We believe 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 cannot predict the magnitude or duration of this worldwide recession, but our current limited visibility does not suggest any near-term improvement.

The hotel industry has recently experienced a significant decrease in occupancy rates and we have experienced slowing demand growth, an increase in reservation cancellation rates and declining ADRs - trends which have continued to deteriorate and for 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 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 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 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 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 throughout the remainder of 2009 and beyond. In addition, and as discussed in more detail below, since the acquisitions of Booking.com, 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 $114.6 million to our revenues for the three months ended March 31, 2009, which compares to $104.2 million for the three months ended March 31, 2008. Excluding the unfavorable impact of foreign currency exchange rates, revenue attributable to our international operations increased by approximately 30% in the three months ended March 31, 2009, compared to the same period 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. If the U.S. dollar strengthens against the Euro and the British Pound Sterling, as it did in the second half of 2008 and the first quarter of 2009, we would experience decreased net assets, revenues, operating expenses and it would become increasingly difficult for us to grow our gross bookings, revenues and earnings on a U.S. dollar denominated basis during the remainder of 2009 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 March 31, 2009 was minimized by certain derivatives we held. As of March 31, 2009, derivatives with a notional value of 30.0 million Euros and 106.9 million Thai Baht were outstanding. Subsequent to March 31, 2009, we entered into additional derivatives with a notional value of 5.0 million Euros and 5.0 million British Pounds Sterling. As of March 31, 2008, derivatives with notional values of 59.4 million Euros and 2.5 million British Pounds Sterling were outstanding. Furthermore, our derivative instruments are not designed to hedge against currency fluctuation that could impact our foreign currency denominated gross bookings, revenue or gross profit.

Domestic Trends. 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 have 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. 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 rooms, and we therefore no longer have a price advantage over those companies on price-disclosed merchant hotel rooms. Currently, each of our competitors' processing fee promotions are temporary, however, if any or all of these promotions are made permanent our results may suffer.

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, 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. Furthermore, we have recently observed a sharp 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, but can be beneficial to 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 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 worldwide recession, terrorist attacks, travel related health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), 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 during the peak booking season in Thailand, a key market for our Agoda business, negatively impacted booking volumes 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, as our retail hotel business continues to grow, we expect our quarterly results to become increasingly impacted by these seasonal factors.

Recent Developments. 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 Swine Influenza H1N1. Shortly thereafter, the WHO declared the swine flu a public health emergency of international concern and stated that containment of the outbreak is not feasible. As of May 5, 2009, 21 countries have officially reported more than 1,000 cases of swine flu infection. Some governmental officials are advising against travel to the United States or Mexico unless the need is urgent. We are unable to predict the scope or duration of the swine flu outbreak or its impact on the travel industry generally, or our business in particular. However, concerns relating to the health risk posed by the swine flu 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.

Results of Operations

Three Months Ended March 31, 2009 compared to the Three Months Ended March 31, 2008

Operating 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 nights, rental car days and airline tickets sold through our domestic and international operations for the three months ended March 31, 2009 and 2008 were as follows (numbers may not total due to rounding):

                                Three Months Ended March 31,
                                   2009              2008         Change

              Domestic        $   851 million   $   721 million     18.1 %
              International     1,092 million     1,038 million      5.3 %
              Total           $ 1,944 million   $ 1,759 million     10.5 %

Gross bookings resulting from hotel room nights, rental car days and airline tickets sold through our agency and merchant models for the three months ended March 31, 2009 and 2008 were as follows:

                              Three Months Ended March 31,
                                 2009              2008         Change

                 Agency     $ 1,470 million   $ 1,370 million      7.3 %
                 Merchant       474 million       389 million     21.9 %
                 Total      $ 1,944 million   $ 1,759 million     10.5 %

Gross bookings increased by 10.5% for the three months ended March 31, 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 18.1% growth in our domestic gross bookings, primarily due to growth in the sale of price-disclosed airline tickets, Name Your Own Price® hotel room nights, merchant price-disclosed hotel room nights and Name Your Own Price® rental car days. International gross bookings, virtually all of which relate to retail hotel room night sales, increased by 5.3%. Excluding the unfavorable impact of foreign currency exchange rates, international gross bookings increased by approximately 23.5% in the three months ended March 31, 2009, compared to the same period in 2008.

Agency gross bookings increased 7.3% for the three months ended March 31, 2009, compared to the same period in 2008, due to growth in the sale of price-disclosed airline tickets and Booking.com hotel room nights. Merchant gross bookings increased 21.9% for the three months ended March 31, 2009, compared to the same period in 2008, due to an increase in the sale of Name Your Own Price® hotel room nights, domestic merchant price-disclosed hotel room nights and Name Your Own Price® rental car days.

              Three Months      Hotel Room      Rental        Airline
              Ended               Nights       Car Days       Tickets

              March 31, 2009   12.8 million   3.0 million   1.5 million

              March 31, 2008    9.4 million   2.6 million   1.2 million

Hotel room nights sold increased by 36.4% for the three months ended March 31, 2009, over the same period in 2008, due primarily to an increase in the sale of Booking.com agency room nights, as well as an increase in the sale of Name Your Own Price® and domestic price-disclosed room nights.

Rental car days sold increased by 15.4% for the three months ended March 31, 2009, over the same period in 2008, due primarily to an increase in the sale of Name Your Own Price® rental car days, as well as an increase in price-disclosed rental car days.

Airline tickets sold increased by 28.0% for the three months ended March 31, 2009, over the same period in 2008, due primarily to an increase in the sale of price-disclosed airline tickets.

Revenues

We classify our revenue into three categories:

† Merchant revenues are derived from transactions where we are the merchant of record and, among other things, select suppliers and determine the price we will accept from the customer. 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 services listed above.

† 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 services listed above 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 $114.6 million to our revenues for the three months ended March 31, 2009, which compares to $104.2 million for the same period in 2008. Excluding the unfavorable impact of foreign currency exchange rates, revenue attributable to our international operations increased by approximately 30% for the three months ended March 31, 2009, compared to the same period in 2008.

                                        Three Months Ended
                                            March 31,
                                              ($000)
                                         2009        2008      Change

                  Merchant Revenues   $  337,034   $ 289,159     16.6 %
                  Agency Revenues        120,225     109,932      9.4 %
                  Other Revenues           4,799       4,089     17.4 %
                  Total Revenues      $  462,058   $ 403,180     14.6 %

Merchant Revenues

Merchant revenues for the three months ended March 31, 2009 increased 16.6% compared to the same period in 2008, primarily due to an increase in the sale of Name Your Own Price® hotel room nights and rental car days.

Agency Revenues

Agency revenues for the three months ended March 31, 2009 increased 9.4% compared to the same period in 2008, primarily as a result of growth in our international operations.

Other Revenues

Other revenues during the three months ended March 31, 2009 consisted primarily of advertising revenues. Other revenues for the three months ended March 31, 2009 increased 17.4%, compared to the same period in 2008, primarily as a result . . .