UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number 0-25581

PRICELINE.COM INCORPORATED

(Exact name of Registrant as specified in its charter)

Delaware		06-1528493
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

800 Connecticut Avenue

Norwalk, Connecticut 06854

(address of principal executive offices)

(203) 299-8000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed, since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES x . NO o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x

Number of shares of Common Stock outstanding at November 1, 2007:

Common Stock, par value $0.008 per share		38,336,422
(Class)		(Number of Shares)

priceline.com Incorporated

Form 10-Q

For the Three Months Ended September 30, 2007

		Page

PART I - FINANCIAL INFORMATION		2

Item 1. Consolidated Financial Statements		2

Consolidated Balance Sheets (unaudited) at September 30, 2007 and December 31, 2006		2
Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2007 and 2006		3
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) For the Nine Months Ended September 30, 2007		4
Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2007 and 2006		5
Notes to Unaudited Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	47

PART II - OTHER INFORMATION		48

Item 1. Legal Proceedings		48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 6. Exhibits and Reports on Form 8-K		49

SIGNATURES		50

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

priceline.com Incorporated

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	September 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	423,508		$	423,577
Restricted cash	2,710			2,459
Short-term investments	73,048			7,983
Accounts receivable, net of allowance for doubtful accounts of $1,641 and $1,651, respectively	103,558			48,536
Prepaid expenses and other current assets	26,998			20,534
Total current assets	629,822			503,089

Long-term investments	18,735			—
Property and equipment, net	25,056			21,691
Intangible assets, net	182,438			152,925
Goodwill	270,807			226,707
Deferred taxes	222,766			179,392
Other assets	21,085			21,844
Total assets	$	1,370,709		$	1,105,648

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	59,359		$	49,032
Accrued expenses and other current liabilities	124,576			46,872
Deferred merchant bookings	7,670			4,768
Convertible debt	569,453			—
Total current liabilities	761,058			100,672

Deferred taxes	47,153			39,714
Other long-term liabilities	12,508			11,885
Minority interest	15,127			22,486
Convertible debt	—			568,865
Total liabilities	835,846			743,622

Series B mandatorily redeemable preferred stock, $0.01 par value; 80,000 authorized shares; $1,000 liquidation value per share; 80,000 shares issued and 0 and 13,470 shares outstanding, respectively	—			13,470
Stockholders’ equity:
Common stock, $0.008 par value; authorized 1,000,000,000 shares, 44,969,857 and 43,215,712 shares issued, respectively	345			331
Treasury stock, 6,641,992 and 6,603,050 shares, respectively	(488,691		)	(486,468		)
Additional paid-in capital	2,112,949			2,070,379
Accumulated deficit	(1,139,368		)	(1,262,033		)
Accumulated other comprehensive income	49,628			26,347
Total stockholders’ equity	534,863			348,556

Total liabilities and stockholders’ equity	$	1,370,709		$	1,105,648

See Notes to Unaudited Consolidated Financial Statements.

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Merchant revenues, including $395 and $18,592 excise tax refund for the three and nine months ended September 30, 2007, respectively	$	275,211		$	238,558		$	776,131		$	699,520
Agency revenues	139,623			73,326			292,478			159,599
Other revenues	2,453			1,583			5,947			3,913
Total revenues	417,287			313,467			1,074,556			863,032

Cost of merchant revenues	214,956			189,920			595,297			561,450
Cost of agency revenues	—			—			—			—
Cost of other revenues	—			—			—			—
Total costs of revenues	214,956			189,920			595,297			561,450
Gross profit	202,331			123,547			479,259			301,582

Operating expenses:
Advertising – Offline	8,413			6,665			29,028			24,962
Advertising – Online	53,844			34,560			129,241			86,914
Sales and marketing	13,093			11,204			36,027			31,494
Personnel, including stock-based compensation of $4,127, $3,543, $10,759 and $10,277, respectively	27,182			21,658			72,108			56,869
General and administrative, including net cost of litigation settlement of $126 and $55,365 for the three and nine months ended September 30, 2007, respectively, and option payroll taxes of $228, $54, $760 and $273, respectively	9,241			6,643			82,893			19,638
Information technology	3,343			2,551			9,406			7,190
Depreciation and amortization	9,131			8,664			26,633			24,970
Restructuring charge, net	—			—			—			135
Total operating expenses	124,247			91,945			385,336			252,172
Operating income	78,084			31,602			93,923			49,410
Other income (expense):
Interest income, including $77 and $3,346 of interest on excise tax refund for the three and nine months ended September 30, 2007, respectively	6,063			2,626			20,377			6,322
Interest expense	(2,607		)	(1,550		)	(7,560		)	(4,603		)
Other	(1,316		)	354			(1,862		)	(157		)
Total other income (expense)	2,140			1,430			10,955			1,562

Earnings before income taxes, equity in income (loss) of investees and minority interests	80,224			33,032			104,878			50,972
Income tax benefit	26,657			18,113			23,287			13,277
Equity in income (loss) of investees and minority interests	(2,516		)	(2,328		)	(3,945		)	(3,015		)
Net income	104,365			48,817			124,220			61,234
Preferred stock dividend	—			(1,063		)	(1,555		)	(1,927		)

Net income applicable to common stockholders	$	104,365		$	47,754		$	122,665		$	59,307
Net income applicable to common stockholders per basic common share	$	2.76		$	1.21		$	3.27		$	1.50
Weighted average number of basic common shares outstanding	37,803			39,596			37,533			39,487
Net income applicable to common stockholders per diluted common share	$	2.27		$	1.05		$	2.79		$	1.34
Weighted average number of diluted common shares outstanding	45,924			46,385			43,924			46,153

See Notes to Unaudited Consolidated Financial Statements.

priceline.com Incorporated

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

(In thousands)

										Accumulated Other
	Common Stock			Additional			Accumulated			Comprehensive			Treasury Stock
	Shares	Amount		Paid-in Capital			Deficit			Income			Shares		Amount			Total

Balance, January 1, 2007	43,216	$	331	$	2,070,379		$	(1,262,033	)	$	26,347		(6,603	)	$	(486,468	)	$	348,556

Net income applicable to common stockholders	—	—		—			122,665			—			—		—			122,665

Unrealized loss on marketable securities	—	—		—			—			(45		)	—		—			(45		)

Currency translation adjustment	—	—		—			—			23,326			—		—			23,326

Comprehensive income																		145,946

Issuance of restricted stock under equity-based compensation plans, net of forfeitures	119	1		(1		)	—			—			—		—			—

Issuance of preferred stock dividend	35	1		1,554			—			—			—		—			1,555

Exercise of stock options and vesting of restricted stock units	843	6		16,190			—			—			—		—			16,196

Repurchase of common stock	—	—		—			—			—			(39	)	(2,223		)	(2,223		)

Stock-based compensation	—	—		9,906			—			—			—		—			9,906

Exercise of warrants	756	6		13,464			—			—			—		—			13,470

Issuance of shares related to convertible debt	1	—		23			—			—			—		—			23

Excess tax benefit on stock-based compensation	—	—		1,434			—			—			—		—			1,434
Balance, September 30, 2007	44,970	$	345	$	2,112,949		$	(1,139,368	)	$	49,628		(6,642	)	$	(488,691	)	$	534,863

See Notes to Unaudited Consolidated Financial Statements.

priceline.com Incorporated

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

	Nine Months Ended September 30,
	2007			2006
OPERATING ACTIVITIES:
Net income	$	124,220		$	61,234
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	8,260			7,551
Amortization	18,373			18,439
Provision for uncollectible accounts, net	2,138			2,921
Deferred income taxes	(49,883		)	(26,106		)
Stock-based compensation expense	10,759			10,277
Amortization of debt issuance costs	2,356			1,061
Equity in (income) loss of investee, net and minority interests	3,945			3,015
Restructuring charges, net	—			135
Changes in assets and liabilities:
Accounts receivable	(53,568		)	(28,491		)
Prepaid expenses and other current assets	(4,950		)	(2,150		)
Accounts payable, accrued expenses and other current liabilities	26,501			31,831
Other	1,183			567
Net cash provided by operating activities	89,334			80,284
INVESTING ACTIVITIES:
Purchase of investments	(118,255		)	(111,953		)
Redemption of investments	35,202			152,119
Acquisitions and other equity investments, net of cash acquired	—			(3,104		)
Additions to property and equipment	(11,011		)	(9,628		)
Change in restricted cash	(228		)	4,538
Net cash provided by (used in) investing activities	(94,292		)	31,972
FINANCING ACTIVITIES:
Repurchase of common stock	(2,223		)	(135,625		)
Proceeds from exercise of stock options	16,196			9,592
Proceeds from issuance of Convertible Senior Notes	—			300,000
Payment of debt issuance costs	(1,309		)	(7,900		)
Purchase of Conversion Spread Hedges	—			(32,520		)
Purchase of shares held by minority interest	(15,013		)	(19,830		)
Excess tax benefit from stock-based compensation	1,434			68
Net cash provided (used in) by financing activities	(915		)	113,785
Effect of exchange rate changes on cash and cash equivalents	5,804			2,288
Net increase (decrease) in cash and cash equivalents	(69		)	228,329
Cash and cash equivalents, beginning of period	423,577			80,341
Cash and cash equivalents, end of period	$	423,508		$	308,670

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the period for income taxes	$	22,111		$	10,682

Cash paid during the period for interest	$	5,847		$	3,552

See Notes to Unaudited Consolidated Financial Statements

priceline.com Incorporated

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF PRESENTATION

Priceline.com Incorporated (“priceline.com” or the “Company”) is responsible for the Unaudited Consolidated Financial Statements included in this document. The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The Unaudited Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates in which the Company does not have control, but has the ability to exercise significant influence, are accounted for by the equity method.

Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

2. STOCK-BASED EMPLOYEE COMPENSATION

The Company has adopted stock compensation plans which provide for grants of share based compensation as incentives and rewards to encourage employees, officers, consultants and directors to contribute towards the long-term success of the Company. Stock-based compensation cost included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $4.1 million and $3.5 million, and $10.8 million and $10.3 million for the three and nine months ended September 30, 2007 and 2006, respectively. These amounts include stock-based compensation for restricted stock and restricted stock units related to shares of priceline.com International.

During the three months ended March 31, 2007, the Company granted 125,550 shares of restricted stock, 83,740 restricted stock units and 75,750 performance share units. The share based awards generally vest on the third anniversary of the date of grant and had a total grant date fair value of $14.8 million based upon the grant date fair value per share of $51.93. The actual number of shares of common stock issued in connection with the performance share units, if any, will be determined at the end of the performance period, assuming there is no accelerated vesting for, among other things, a change in control or termination of employment in certain circumstances, and could range from zero to an additional 75,750 shares over the “target” number of shares if the maximum performance threshold associated with the performance share units is met by the Company. Stock-based compensation related to the performance share units is recorded based upon the probable outcome at the end of the performance period. During the three months ended September 30, 2007, the estimated probable number of shares to be issued at the end of the performance period was increased by 75,750 shares.

During the three months ended June 30, 2007, the Company granted 8,070 shares of restricted stock. The share based awards generally vest over four years and had a total grant date fair value of $0.5 million based upon the grant date fair value per share of $56.75.

During the three months ended September 30, 2007, the Company granted 2,140 shares of restricted stock. The share based awards generally vest over four years and had a total grant date fair value of $0.16 million based upon the grant date fair value per share of $76.82.

3. NET INCOME PER SHARE

The Company computes basic and diluted net income per share in accordance with SFAS No. 128, “Earnings per Share.” Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common and common equivalent shares outstanding during the period.

Common equivalent shares related to stock options, restricted stock, restricted stock units, performance share units and warrants are calculated using the treasury stock method. Performance share units are included in the weighted average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive. The warrants underlying Series B Preferred Stock were considered for inclusion in fully diluted net income per share using the “if-converted” method.

The Company’s convertible debt issues have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company’s common stock (see Note 8). Pursuant to EITF 90-19, “Convertible Bonds with Issuer Options to Settle for Cash upon Conversion,” the convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.

Prior to the Company executing an exchange offer in November 2006 that modified certain terms in the 1% Notes and 2.25% Notes, such notes were convertible into a fixed amount of common stock if certain specified conditions were met. Pursuant to EITF 04-08 “Effect of Contingently Convertible Debt on Diluted Earnings per Share”, these convertible notes were included in the calculation of diluted earnings per share if their inclusion was dilutive to earnings per share under the “if-converted” method for the three and nine months ended September 30, 2006.

A reconciliation of net income and the weighted average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2007		2006		2007		2006
Net income applicable to common stockholders	$	104,365	$	47,754	$	122,665	$	59,307
Interest expense on convertible senior notes	—		762		—		2,323
	$	104,365	$	48,516	$	122,665	$	61,630

Weighted average number of basic common shares outstanding	37,803		39,596		37,533		39,487

Weighted average dilutive stock options, restricted stock, restricted stock units and performance share units	1,359		1,029		1,386		906

Assumed conversion of convertible senior notes	6,762		5,760		5,005		5,760

Weighted average number of diluted common and common equivalent shares outstanding	45,924		46,385		43,924		46,153

Anti-dilutive potential common shares	9,328		3,885		11,058		4,008

Anti-dilutive potential common shares for the three and nine months ended September 30, 2007 includes approximately 7.5 million shares and 9.3 million shares, respectively, that could be issued under the Company’s convertible debt if the Company experiences substantial increases in its common stock price. Under the treasury stock method, the convertible notes will generally have a dilutive impact on net income per share if the Company’s average stock price for the period exceeds the conversion price for the convertible notes. As an example, at stock prices of $40 per share, $60 per share, $80 per share and $100 per share, common equivalent shares would include approximately 0.1 million, 4.8 million, 7.2 million and 8.6 million equivalent shares, respectively, related to the convertible notes (excluding the offsetting impact of the Convertible Spread Hedges — see Note 8).

4. RESTRUCTURING

At September 30, 2007, the Company had a restructuring liability of $1.2 million for the estimated remaining costs related to leased property vacated by the Company in 2000. During the first quarter of 2006, the Company recorded a $135,000 restructuring charge based upon a re-evaluation of the estimated disposal costs related to the vacated leased property. The Company estimates that, based on current available information, the remaining net cash outflows associated with its restructuring related commitments will be paid in 2007-2011. The current portion of the restructuring accrual in the amount of $697,000 is recorded in “Accrued expenses and other current liabilities” and the $504,000 non-current portion is recorded in “Other long-term liabilities” on the Company’s Unaudited Consolidated Balance Sheet.

5. INVESTMENTS

The following table summarizes, by major security type, the Company’s short-term investments as of September 30, 2007 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Estimated Fair Value
Asset backed obligations	$	1,320	$	—	$	(2	)	$	1,318

Commercial paper	34,724		15		(3		)	34,735

Corporate notes	26,488		—		(6		)	26,483

Government agency notes	10,514		7		(9		)	10,512

Total	$	73,046	$	22	$	(20	)	$	73,048

The Company’s short-term investments as of December 31, 2006 were approximately $8.0 million, comprised of U.S. government agency notes. Contractual maturities of marketable securities classified as available-for-sale as of September 30, 2007 and December 31, 2006, are all within one year. No material gains or losses were realized for the three months or nine months ended September 30, 2007 and 2006.

Long-term investments amounting to $18.7 million as of September 30, 2007 were comprised of government agency and corporate notes with a maturity date greater than one year. There were no material gains or losses related to long-term investments for the three or nine month ended September 30, 2007 and 2006. The Company did not have any long-term investments at December 31, 2006.

6. INTANGIBLE ASSETS AND GOODWILL

The Company’s intangible assets consist of the following (in thousands):

	September 30, 2007							December 31, 2006
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Amortization Period	Weighted Average Useful Life

Supply and distribution agreements	$	190,142	$	(31,186	)	$	158,956	$	151,926	$	(24,237	)	$	127,689	13 years	13 years

Technology	25,294		(19,379		)	5,915		21,454		(12,571		)	8,883		3 years	3 years

Patents	1,489		(1,119		)	370		1,489		(1,076		)	413		15 years	15 years

Customer lists	12,243		(10,214		)	2,029		9,822		(8,049		)	1,773		2 — 3 years	2 years

Internet domain names	6,443		(1,181		)	5,262		6,443		(698		)	5,745		10 years	10 years

Trade names	12,957		(3,549		)	9,408		10,515		(2,195		)	8,320		5 — 20 years	15 years

Other	729		(231		)	498		1,107		(1,005		)	102		3 — 15 years	9 years
Total intangible assets	$	249,297	$	(66,859	)	$	182,438	$	202,756	$	(49,831	)	$	152,925

Intangible assets with determinable lives are primarily amortized on a straight-line basis. Intangible asset amortization expense was approximately $6.1 million and $6.4 million for the three months ended September 30, 2007 and 2006, respectively, and approximately $18.4 million for the nine months ended September 30, 2007 and 2006, respectively.

The annual estimated amortization expense for intangible assets for the remainder of 2007, the next four years and thereafter is expected to be as follows (in thousands):

2007	$	6,643
2008	21,951
2009	17,324
2010	15,724
2011	15,724
Thereafter	105,072
	$	182,438

A substantial majority of the Company’s goodwill relates to its acquisitions of Travelweb LLC and Booking.com Limited in 2004 and Booking.com B.V. in 2005. The change in goodwill for the nine months ended September 30, 2007 consists of the following (in thousands):

Balance at January 1, 2007	$	226,707
Purchase of minority interest	33,220
Currency translation adjustments	10,880
Balance at September 30, 2007	$	270,807

7. OTHER ASSETS

Other assets at September 30, 2007 and December 31, 2006 consist of the following (in thousands):

	September 30, 2007		December 31, 2006
Investment in pricelinemortgage.com	$	9,414	$	9,550
Deferred debt issuance costs, net	10,852		11,899
Other	819		395
Total	$	21,085	$	21,844

Investment in pricelinemortgage.com represents the Company’s 49% equity investment in pricelinemortgage.com and, accordingly, the Company recognizes its pro rata share of pricelinemortgage.com’s operating results, not to exceed an amount that the Company believes represents the investment’s estimated fair value. The Company recognized approximately $113,000 and $136,000 of losses from its investment in pricelinemortgage.com in the three and nine months ended September 30, 2007, respectively. The Company recognized approximately $39,000 and $63,000 of losses from its investment in pricelinemortgage.com in the three and nine months ended September 30, 2006, respectively. The Company earned advertising fees from pricelinemortgage.com of approximately $8,000 and $16,000 in the nine months ended September 30, 2007 and 2006, respectively.

Deferred debt issuance costs arose from the Company’s issuance of $125 million aggregate principal amount of 1% Notes in August 2003, $100 million aggregate principal amount of 2.25% Notes in June 2004, $172.5 million aggregate principal amount of 0.5% Notes in September 2006, $172.5 million of aggregate principal amount 0.75% Notes in September 2006 and a $175 million revolving credit facility in September 2007. Deferred debt issuance costs are being amortized using the effective interest rate method over the term of approximately five years, except for the 0.75% Notes, which are amortized over their term of seven years.

8. DEBT

Revolving Credit Facility

In September 2007, the Company entered into a $175 million five-year revolving credit facility with a group of lenders, which is secured, subject to certain exceptions, by a first-priority security interest on substantially all of the Company’s assets and related intangible assets located in the United States. In addition, the Company’s obligations under the revolving credit facility are guaranteed by substantially all of the assets and related intangible assets of the Company’s material direct and indirect domestic and foreign subsidiaries. Borrowings under the revolving credit facility will bear interest, at the Company’s option, at a rate per annum equal to the greater of (a) JPMorgan Chase Bank, National Association’s prime lending rate and (b) the federal funds rate plus ½ of 1%, plus an applicable margin ranging from 0.25% to 0.75%; or at an adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 1.25% to 1.75%. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.25% to 0.375%.

The revolving credit facility provides for the issuance of up to $50.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, which are available in U.S. dollars, Euros, Pounds Sterling and any other foreign currency agreed to by the lenders. The Company may request that an additional $100.0 million be added to the revolving credit facility or to enter into one or more tranches of additional term loans. The proceeds of loans made under the facility will be used for working capital and general corporate purposes. As of September 30, 2007 there were no amounts outstanding under the facility.

Convertible Debt

The Company’s convertible debt is convertible into the Company’s common stock subject to certain conditions. Upon conversion, a holder will receive cash for the principal amount of the note and cash or shares of the Company’s common stock for the conversion value in excess of such principal amount. Based upon the closing price of the Company’s common stock for the prescribed measurement periods during the three months ended September 30, 2007, the contingent conversion thresholds on each of the Company’s convertible senior note issues were exceeded. As a result, the notes are convertible at the option of the holder as of September 30, 2007 and, accordingly, have been classified as a current liability in the Unaudited Consolidated Balance Sheets as of that date. The convertible debt may be classified as long-term debt in future quarters if the contingent conversion thresholds are not met in such quarters. Convertible debt consists of the following as of September 30, 2007 and December 31, 2006 (in thousands):

	September 30, 2007		December 31, 2006
$125 million aggregate principal amount of 1.00% Convertible Senior Notes due August 2010	$	124,453	$	123,865
$172.5 million aggregate principal amount of 0.50% Convertible Senior Notes due September 2011	172,500		172,500
$172.5 million aggregate principal amount of 0.75% Convertible Senior Notes due September 2013	172,500		172,500
$100 million aggregate principal amount of 2.25% Convertible Senior Notes due January 2025	100,000		100,000

	$	569,453	$	568,865

The $125 million aggregate principal amount of Convertible Senior Notes due August 1, 2010, with an interest rate of 1.00% (the “1% Notes”) are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $40.00 per share. Prior to August 1, 2008, the 1% Notes will be convertible if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the first day of a conversion period is more than 110% of the then current conversion price of the 1% Notes, or after August 1, 2008, if the closing price of the Company’s common stock is more than 110% of the then current conversion price of the 1% Notes. The 1% Notes are also convertible in certain other circumstances, such as a change in control of the Company. In addition, the 1% Notes will be redeemable at the Company’s option beginning in 2008, and the holders may require the Company to repurchase the 1% Notes on August 1, 2008 or in certain other circumstances. In the event that all or substantially all of the Company’s common stock is acquired on or prior to August 1, 2008, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of 1% Notes in aggregate value ranging

from $0 to approximately $16.5 million depending upon the date of the transaction and the then current stock price of the Company. Interest on the 1% Notes is payable on February 1 and August 1 of each year.

In November 2003, the Company entered into an interest rate swap agreement whereby it swapped the fixed 1% interest on its 1% Notes for a floating interest rate based on the 3-month U.S. Dollar LIBOR, minus the applicable margin of 221 basis points, on $45 million notional value of debt. This agreement expires August 1, 2010. The Company designated this interest rate swap agreement as a fair value hedge. The changes in the fair value of the interest rate swap agreement and the underlying debt are recorded as offsetting gains and losses in interest expense in the Unaudited Consolidated Statement of Operations. Hedge ineffectiveness was not significant in the three or nine months ended September 30, 2007 and 2006. The fair value cost to terminate this swap as of September 30, 2007 and December 31, 2006, was approximately $0.5 million and $1.2 million, respectively, and has been recorded in accrued expenses and other current liabilities at September 30, 2007, and other long-term liabilities at December 31, 2006, with a related adjustment to the carrying value of debt.

The $172.5 million aggregate principal amount of Convertible Senior Notes due September 30, 2011, with an interest rate of 0.50% (the “2011 Notes”), and $172.5 million aggregate principal amount of Convertible Senior Notes due September 30, 2013, with an interest rate of 0.75% (the “2013 Notes”) are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $40.38 per share. The 2011 Notes and the 2013 Notes are convertible, at the option of the holder, prior to June 30, 2011 in the case of the 2011 Notes, and prior to June 30, 2013 in the case of the 2013 Notes, upon the occurrence of specified events, including, but not limited to a change in control, or if the closing sale price of the Company’s common stock for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company’s common stock is acquired on or prior to the maturity of the 2011 Notes or the 2013 Notes, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2011 Notes and the 2013 Notes, collectively, in aggregate value ranging from $0 to approximately $57.5 million depending upon the date of the transaction and the then current stock price of the Company. As of June 30, 2011, with respect to the 2011 Notes, and as of June 30, 2013, with respect to the 2013 Notes, holders shall have the right to convert all or any portion of such security. Neither the 2011 Notes nor the 2013 Notes may be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2011 Notes and the 2013 Notes for cash in certain circumstances. Interest on the 2011 Notes and the 2013 Notes is payable on March 30 and September 30 of each year, starting March 30, 2007.

The Company entered into hedge transactions relating to potential dilution of the Company’s common stock upon conversion of the 2011 Notes and the 2013 Notes (the “Conversion Spread Hedges”). Under the Conversion Spread Hedges, the Company is entitled to purchase from the counterparties approximately 8.5 million shares of the Company’s common stock (the number of shares underlying the 2011 Notes and the 2013 Notes) at a strike price of $40.38 per share (subject to adjustment in certain circumstances) and the counterparties are entitled to purchase from the Company approximately 8.5 million shares of the Company’s common stock at a strike price of $50.47 per share (subject to adjustment in certain circumstances). The Conversion Spread Hedges increase the effective conversion price of the 2011 Notes and the 2013 Notes to $50.47 per share from the Company’s perspective and are designed to reduce the potential dilution upon conversion of the 2011 Notes and the 2013 Notes. If the market value per share of the Company’s common stock at the time of any exercise is above $40.38, the Conversion Spread Hedge will entitle the Company to receive from the counterparties net shares of the Company’s common stock based on the excess of the then current market price of the Company’s common stock over the strike price of the purchased call options. Holders of the 2011 Notes and the 2013 Notes do not have any rights with respect to the Conversion Spread Hedges. The Conversion Spread Hedges are separate transactions entered into by the Company with the counterparties, are not part of the terms of the Notes and will not affect the holders’ rights under the 2011 Notes and the 2013 Notes. The Conversion Spread Hedges are exercisable at dates coinciding with the scheduled maturities of the 2011 Notes and 2013 Notes.

The $100 million aggregate principal amount of Convertible Senior Notes due January 15, 2025, with an interest rate of 2.25% (the “2.25% Notes”) are convertible, subject to certain conditions, into the Company’s common stock at a conversion price of approximately $37.95 per share. The 2.25% Notes will be convertible if, on or prior to January 15, 2020, the closing sale price of our common stock for at least 20 consecutive trading days in the period of 30 consecutive trading days ending on the first day of a conversion period is more than 120% of the then current conversion price of the 2.25% Notes. The 2.25% Notes are also convertible in certain other circumstances, such as a change in control of the Company. In the event that all or substantially all of the Company’s common stock is acquired on or prior to January 15, 2010, in a transaction in which the consideration paid to holders of the Company’s common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of common shares to the holders of the 2.25%

Notes of amounts ranging from $0 to $14.7 million depending upon the date of the transaction and the then current stock price of the Company. In addition, the 2.25% Notes will be redeemable at the Company’s option beginning January 20, 2010, and the holders may require the Company to repurchase the 2.25% Notes on January 15, 2010, 2015 or 2020, or in certain other circumstances. Interest on the 2.25% Notes is payable on January 15 and July 15 of each year.

In the third quarter 2007, the Financial Accounting Standards Board (“FASB”) issued for comment a proposed FASB Staff Position No. APB 14-a, “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-a”) that would significantly impact the accounting for convertible debt. The FSP would require cash settled convertible debt, such as the Company’s $570 million aggregate principal amount of convertible senior notes that are currently outstanding, to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component would be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value would be recorded as a debt discount and amortized to interest expense over the life of the bond. Although FSP APB 14-a would have no impact on the Company’s actual past or future cash flows, it would require the Company to record a significant amount of non-cash interest expense as the debt discount is amortized. As a result, there would be a material adverse impact on the Company’s results of operations and earnings per share. In addition, if the Company’s convertible debt is redeemed or converted prior to maturity, any unamortized debt discount would result in a loss on extinguishment. FSP APB 14-a, if approved, will become effective January 1, 2008, and require retrospective application.

9. TREASURY STOCK

In the fourth quarter of 2005, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock from time to time in the open market or in privately negotiated transactions. In addition, in the third quarter 2006, the Company’s Board of Directors authorized the repurchase of up to an additional $150 million of the Company’s common stock with a portion of the proceeds from the issuance of the 2011 Notes and the 2013 Notes. The Company’s Board of Directors has also given the Company the general authorization to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation.

Under these programs, the Company repurchased approximately 4.1 million shares of its common stock at an aggregate cost of $135.7 million in the nine months ended September 30, 2006, at prevailing market prices. Repurchases of 38,942 and 35,147 shares at aggregate costs of $2.2 million and $0.9 million were made in the nine months ended September 30, 2007 and 2006, respectively, to satisfy employee withholding taxes related to stock-based compensation.

The Company may make additional repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company’s complete discretion. As of September 30, 2007, there were approximately 6.6 million shares of the Company’s common stock held in treasury.

10. REDEEMABLE PREFERRED STOCK

In the first quarter of 2007, Delta Airlines, Inc. exercised warrants to purchase 756,199 shares of the Company’s common stock by surrendering 13,470 shares of Series B Preferred Stock, representing all of the remaining outstanding shares of Series B Preferred Stock, and the Company issued a final pro-rated dividend to Delta Airlines, Inc. in the amount of 34,874 shares of common stock, resulting in a non-cash dividend charge of $1.6 million. The exercise of the warrant was a non-cash transaction.

11. TAXES

Income tax expense includes U.S. and international income taxes, determined using an estimate of the Company’s annual effective tax rate. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized.

The Company recognizes income tax expense related to income generated outside of the United States based upon the applicable tax rates of the foreign countries in which the income is generated. During the three and nine months ended September 30, 2007 and 2006, the substantial majority of the Company’s foreign-sourced income has been generated in the United Kingdom and the Netherlands. Income tax expense for the three and nine months ended September 30, 2007 and 2006

differs from the expected tax benefit at the U.S. statutory rate of 35% due to reversal of a portion of the deferred tax valuation allowance, state income taxes, lower foreign tax rates and the foreign tax benefit of interest expense on intercompany debt.

The Company has significant deferred tax assets, resulting principally from domestic net operating loss carryforwards (“NOLs”). As required by SFAS No. 109, “Accounting for Income Taxes,” the Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available for tax reporting purposes, and other relevant factors. In the third quarter of 2007, management concluded that based upon current operating results and projected future results, it is more likely than not that additional deferred tax assets will be realized. Accordingly, the Company recorded a non-cash tax benefit of $47.9 million resulting from the reversal of a portion of its valuation allowance on its deferred tax assets. It is the Company’s belief that it is more likely than not that its remaining deferred tax assets will not be realized and, accordingly, a valuation allowance remains against those assets. In the third quarter of 2006, the Company also recorded a $28.1 million non-cash tax benefit resulting from a $43.7 million reversal of a portion of its valuation allowance on its deferred tax assets. The total deferred tax asset at September 30, 2007 and December 31, 2006 amounted to $236.2 million and $191.7 million, respectively. The current portion is $13.5 million and $12.3 million at September 30, 2007 and December 31, 2006, respectively, and is recorded in prepaid expenses and other current assets in the Unaudited Consolidated Balance Sheet. The valuation allowance may need to be adjusted in the future if facts and circumstances change, causing a reassessment of the amount of deferred tax assets more likely than not to be realized.

The Company has recorded a deferred tax liability in the amount of $47.2 million at September 30, 2007, and $39.7 million at December 31, 2006, primarily related to the assignment of estimated fair value to certain purchased identifiable intangible assets associated with the acquisitions of Booking.com Limited and Booking.com B.V.

In July 2006, the FASB issued Interpretation No. 48, “Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether the tax position is more likely than not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to recognize. Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s consolidated results of operations and financial position.

The Company’s U.K., Netherlands, U.S. Federal and Connecticut income tax returns, constituting the returns of the major taxing jurisdictions, are subject to examination by the taxing authorities for all open years as prescribed by applicable statute. No waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute.

12. MINORITY INTEREST

In connection with the Company’s acquisitions of Booking.com B.V. in July 2005 and Booking.com Limited in September 2004 and the reorganization of its international operations, key managers of Booking.com B.V. and Booking.com Limited purchased shares of priceline.com International. In addition, these key managers were granted restricted stock and restricted stock units in priceline.com International shares that vest over time.

The holders of the minority interest in priceline.com International have the right to put their shares to the Company and the Company has the right to call their shares at a purchase price reflecting the fair market value of the shares at the time of the exercise of the put or call right. Subject to certain exceptions, (a) certain of the shares are subject to the put and call options in March 2007 and 2008 and (b) certain of the shares are subject to the put and call options in August 2007 and 2008. In April 2007 (in connection with the March 2007 put and call options), the Company repurchased 92,125 shares underlying minority interest with a carrying value of $3.7 million for an aggregate purchase price of approximately $15.0 million based upon fair value. In October 2007 (in connection with the August 2007 put and call options), the Company repurchased 197,538 shares underlying minority interest with a carrying value of $9.9 million for an aggregate purchase price of approximately $61.0 million based upon fair value. Accordingly, the Company has accrued this repurchase obligation at September 30, 2007 and reflected the obligation in accrued expenses and other liabilities. The repurchase will be reflected in the consolidated statement of cash flows during the fourth quarter of 2007. After giving effect to these purchases, the minority interest in priceline.com International is reduced on a fully diluted basis to 3.3%.

All purchased securities and vested granted securities described above can be put by the holders of the securities or called by the Company shortly after the consummation of a “change in control” of the Company. The aggregate fair value of the minority interest in priceline.com International subject to future puts or calls is estimated to be approximately $97.1 million at September 30, 2007, including unvested restricted stock and restricted stock units.

13. COMMITMENTS AND CONTINGENCIES

Litigation Related to Hotel Occupancy and Other Taxes

Statewide Putative Class Actions

A number of cities and counties have filed putative class actions on behalf of themselves and other allegedly similarly situated cities and counties within the same respective state against the Company and other defendants, including, but not in all cases, Lowestfare.com Incorporated and Travelweb LLC, both of which are subsidiaries of the Company, and Hotels.com, L.P.; Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Travelport, Inc. (f/k/a Cendant Travel Distribution Services Group, Inc.); Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; and Travelnow.com, Inc. Each complaint alleges, among other things, that the defendants violated each jurisdiction’s respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each ordinance. Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief. Such actions include:

• City of Los Angeles v. Hotels.com, Inc., et al.

• City of Fairview Heights v. Orbitz, Inc., et al.

• City of Rome, Georgia, et al., v. Hotels.com, L.P., et al.

• Pitt County v. Hotels.com, L.P., et al.

• City of San Antonio, Texas v. Hotels.com, L.P., et al.

• Lake County Convention and Visitors Bureau, Inc. and Marshall County v. Hotels.com, L.P., et al.

• City of Orange, Texas v. Hotels.com, L.P., et al.

• City of Jacksonville v. Hotels.com, L.P., et al.

• City of Columbus, et al. v. Hotels.com, L.P., et al.

• Louisville/Jefferson County Metro Government v. Hotels.com, L.P., et al.

• County of Nassau, New York v. Hotels.com, LP, et al.

• City of Fayetteville v. Hotels.com, L.P., et al.

• City of Jefferson, Missouri v. Hotels.com, LP, et al.

• City of Gallup, New Mexico v. Hotels.com, L.P., et al.

A discussion of each of the aforementioned legal proceedings can be found in the section titled “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2006 and/or in the section titled “Commitments and Contingencies” of our Quarterly Reports on Form 10-Q for the three months ended March 31, 2007 or June 30, 2007.

The following developments regarding such legal proceedings occurred during or after the three months ended September 30, 2007:

City of Los Angeles v. Hotels.com, Inc., et al.: On July 27, 2007, the court sustained the defendants’ demurrers and dismissed the City’s third amended complaint without prejudice to re-filing upon the exhaustion of the City’s mandatory administrative procedures for tax collection, and stayed the action pending such exhaustion. The City is presently conducting those administrative procedures.

City of Fairview Heights v. Orbitz, Inc., et al.: On August 1, 2007, the City of Fairview Heights moved for class certification. That motion is being briefed. The parties are currently conducting discovery.

Pitt County v. Hotels.com, L.P., et al.: On August 13, 2007, the court granted defendants’ motion for reconsideration of the court’s prior order denying the defendants’ motion to dismiss, and dismissed the action in its entirety. On September 6, 2007, Pitt County filed a notice of appeal of that decision to the United States Court of Appeals for the Fourth Circuit. The appeal is currently being briefed.

City of San Antonio, Texas v. Hotels.com, L.P., et al.: On September 7, 2007, the defendants filed a motion for reconsideration of the court’s March 21, 2007 order denying the defendants’ motion to dismiss. On October 1, 2007, the court denied the defendants’ motion for reconsideration. The City of San Antonio’s motion for class certification remains pending.

City of Orange, Texas v. Hotels.com, L.P., et al.: On September 5, 2007, the Magistrate Judge issued a report and recommendation that the defendants’ motion to dismiss the complaint be granted and the complaint dismissed. On September 21, 2007, the court adopted that report and recommendation and dismissed the case with prejudice. The City of Orange did not appeal that dismissal.

City of Jacksonville v. Hotels.com, L.P., et al.: On August 21, 2007, the court granted defendants’ motion to dismiss the complaint for the City of Jacksonville’s failure to exhaust its mandatory administrative procedures for tax collection. On September 10, 2007, the City of Jacksonville moved for a stay of proceedings pending the outcome of that administrative process. That motion is pending.

City of Columbus, et al. v. Hotels.com, L.P., et al.: On July 10, 2007, the United States District Court for the Southern District of Ohio transferred the case to the United States District Court for the Northern District of Ohio. On July 23, 2007, the court in the Northern District of Ohio granted defendants’ motion to dismiss the plaintiffs’ Consumer Sales Practices Act claims and denied defendants’ motion to dismiss the remaining claims, adopting the reasoning of the court’s opinion on the motion to dismiss in the City of Findlay case. On August 31, 2007, the defendants answered the complaint. On November 5, 2007, the parties jointly moved to consolidate the City of Columbus action with the City of Findlay action for pre-trial purposes, and that motion was granted on November 6, 2007.

Louisville/Jefferson County Metro Government v. Hotels.com, L.P., et al.: On August 10, 2007, the court denied the defendants’ motion to dismiss. On September 13, 2007, the defendants answered. On October 26, 2007, the defendants filed a motion for reconsideration of the court’s order denying the defendants’ motion to dismiss, or, in the alternative, certification of interlocutory appeal to the Kentucky Supreme Court or the United States Court of Appeals for the Sixth Circuit. That motion is being briefed.

City of Fayetteville v. Hotels.com, L.P., et al.: On July 24, 2007, the City of Fayetteville filed an amended complaint correcting the names of certain defendants. On August 7, 2007, the defendants moved to dismiss the amended complaint. That motion is pending.

County of Nassau, New York v. Hotels.com, LP, et al.: On August 17, 2007, the court granted the defendants’ motion to dismiss the complaint for the County of Nassau’s failure to exhaust its mandatory administrative procedures for tax collection. On September 12, 2007, the County of Nassau filed a notice of appeal of that order to the United States Court of Appeals for the Second Circuit. The appeal is currently being briefed.

City of Jefferson, Missouri v. Hotels.com, LP, et al.: On November 5, 2007, the defendants moved to dismiss the complaint. That motion is being briefed.

In addition to those cases discussed in the section titled “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2006 or in the section titled “Commitments and Contingencies” of our Quarterly Reports on Form 10-Q for the three months ended March 31, 2007 or June 30, 2007, the following additional legal proceeding was filed during or after the three months ended September 30, 2007:

City of Gallup, New Mexico v. Hotels.com, L.P., et al.: On July 6, 2007, a putative class action was filed in the United States District Court for the District of New Mexico by the City of Gallup on behalf of itself and a putative class of New Mexico taxing authorities that have enacted lodgers’ taxes. The complaint asserts claims for violation of the New Mexico Lodger’s Tax Act and municipal ordinances. On August 27, 2007, the defendants answered the City of Gallup’s complaint.

The Company intends to defend vigorously against the claims in all of these proceedings.

Actions Filed on Behalf of Individual Cities and Counties

Several cities, counties, municipalities and other political subdivisions across the country have filed actions relating to the collection of hotel occupancy taxes against the Company and other defendants, including, but not in all cases, Lowestfare.com Incorporated and Travelweb LLC, both of which are subsidiaries of the Company, and Hotels.com, L.P.;

Hotels.com GP, LLC; Hotwire, Inc.; Cheaptickets, Inc.; Cendant Travel Distribution Services Group, Inc.; Expedia, Inc.; Internetwork Publishing Corp. (d/b/a Lodging.com); Maupintour Holding LLC; Orbitz, Inc.; Orbitz, LLC; Site59.com, LLC; Travelocity.com, Inc.; Travelocity.com LP; and Travelnow.com, Inc. In each, the complaint alleges, among other things, that each of these defendants violated each jurisdiction’s respective hotel occupancy tax ordinance with respect to the charges and remittance of amounts to cover taxes under each ordinance. Each complaint typically seeks compensatory damages, disgorgement, penalties available by law, attorneys’ fees and other relief. Such actions include:

• City of Findlay v. Hotels.com, L.P., et al.

• City of Chicago, Illinois v. Hotels.com, L.P., et al.

• City of San Diego, California v. Hotels.com L.P., et al.

• City of Atlanta, Georgia v. Hotels.com L.P., et al.

• City of Charleston, South Carolina v. Hotel.com, et al.

• Town of Mount Pleasant, South Carolina v. Hotels.com, et al.

• City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al.

• Miami-Dade County and Ian Yorty, Miami-Dade County Tax Collector v. Internetwork Publishing Corp., et al.

• Wake County v. Hotels.com, LP, et al.

• Cumberland County v. Hotels.com, LP, et al.

• City of Branson v. Hotels.com, LP, et al.

• Dare County v. Hotels.com, LP, et al.

• Buncombe County v. Hotels.com, LP, et al.

• Horry County, et al. v. Hotels.com, LP, et al.

• City of Myrtle Beach, South Carolina v. Hotels.com, LP, et al.

• City of Houston, Texas v. Hotels.com, LP, et al.

• City of Oakland, California v. Hotels.com, L.P., et al.

The following developments regarding such legal proceedings occurred during or after the three months ended September 30, 2007:

City of Findlay v. Hotels.com, L.P., et al.: On August 2, 2007, the City of Findlay filed a motion seeking leave to amend its complaint to withdraw its allegations seeking to assert claims on behalf of a state-wide class of Ohio cities, counties and townships that have enacted occupancy or excise taxes on lodging. On August 15, 2007, the court granted that motion and an amended complaint withdrawing those class allegations was filed. On September 4, 2007, the defendants answered the amended complaint. On November 5, 2007, the parties jointly moved to consolidate the City of Findlay action with the City of Columbus action for pre-trial purposes, and that motion was granted on November 6, 2007.

City of Chicago, Illinois v. Hotels.com, L.P., et al.: On September 27, 2007, the court denied the defendants’ motion to dismiss. On November 2, 2007, the defendants answered the complaint. The parties are currently conducting discovery.

City of San Diego, California v. Hotels.com, Inc., et al.: On July 27, 2007, the court sustained the defendants’ demurrers and dismissed the City’s third amended complaint without prejudice to re-filing upon the exhaustion of the City’s mandatory administrative procedures for tax collection, and stayed the action pending such exhaustion. The City is presently conducting those administrative procedures.

City of Atlanta, Georgia v. Hotels.com L.P., et al.: On October 26, 2007, the Georgia Court of Appeals affirmed the order of the Georgia Superior Court dismissing the City of Atlanta’s action for the City’s failure to exhaust its administrative procedures for tax collection. On November 5, 2007, the City moved for reconsideration of the October 26, 2007 opinion.

City of Charleston, South Carolina v. Hotel.com, et al.: On June 4, 2007, the defendants moved to dismiss the amended complaint. On November 5, 2007, the court denied that motion. The parties are currently conducting discovery.

Town of Mount Pleasant, South Carolina v. Hotels.com, et al.: On June 4, 2007, the defendants moved to dismiss the amended complaint. On November 5, 2007, the court denied that motion. The parties are currently conducting discovery.

City of North Myrtle Beach, South Carolina v. Hotels.com, LP, et al.: On August 28, 2007, the City of North Myrtle Beach withdrew its motion to remand the action to state court. On September 12, 2007, the court conducted oral argument on the defendants’ motion to dismiss the complaint, and on September 30, 2007, it denied that motion. On October 15, 2007, the defendants answered the complaint.

Wake County v. Hotels.com, LP, et al.; Cumberland County v. Hotels.com, LP, et al.; Buncombe County v. Hotels.com, LP, et al; and Dare County v. Hotels.com, LP, et al.: On July 18, 2007, the court conducted oral argument on all four of the motions to dismiss in these consolidated actions. Those motions remain pending.

City of Branson v. Hotels.com, LP, et al.: On August 30, 2007, the court heard oral argument on the defendants’ motion to dismiss the complaint. That motion is pending.

City of Houston, Texas v. Hotels.com, LP., et al.: On July 5, 2007, the court denied in part and granted in part the defendants’ special exceptions to the complaint. The court denied the special exceptions relating to the adequacy of the plaintiff’s allegations, but granted the special exceptions requiring the plaintiff to state with specificity the maximum amount of damages claimed. On October 2, 2007, the City of Houston filed an amended complaint adding the Harris County Sports Authority as a plaintiff. On October 15, 2007, the defendants filed special exceptions to the amended complaint. Those special exceptions will be heard by the court on November 9, 2007.

City of Oakland, California v. Hotels.com, L.P., et al.: On September 18, 2007, the defendants moved to dismiss the complaint. On November 6, 2007, the court granted the defendants’ motion and dismissed the City of Oakland’s complaint with prejudice for the City’s failure to exhaust its mandatory administrative procedures for tax collection.

We have also been informed by counsel to the plaintiffs in certain of the aforementioned actions that various, undisclosed municipalities or taxing jurisdictions may file additional cases against the Company, Lowestfare.com Incorporated and Travelweb LLC in the future. In the first quarter 2006, the Company became aware of an opinion by the City Attorney of the City of Madison, Wisconsin that online travel companies were subject to the City of Madison, Wisconsin’s hotel occupancy tax. Since that time, City officials have expressed an interest in filing suit against the Company, but neither the Company nor any of its subsidiaries has been served with or otherwise received any complaint brought on behalf of the City of Madison.

The Company intends to defend vigorously against the claims in all of these proceedings.

Consumer Class Actions

Two purported class actions brought by consumers against the Company are pending.

• Marshall, et al. v. priceline.com, Inc.

• Bush, et al. v. Cheaptickets, Inc., et al.

A discussion of each of the aforementioned legal proceedings can be found in the section titled “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2006.

The Company intends to defend vigorously against the claims in all of the aforementioned proceedings.

Other Possible Actions

At various times the Company has also received inquiries or proposed tax assessments from municipalities and other taxing jurisdictions relating to its charges and remittance of amounts to cover state and local hotel occupancy and other related taxes. The City of Anaheim, California, the City of New Orleans, Louisiana, the City of Philadelphia, Pennsylvania, and state tax officials from Wisconsin, Pennsylvania, and Indiana, among others, have begun formal or informal administrative procedures or stated that they may assert claims against the Company relating to allegedly unpaid state or local hotel occupancy or related taxes. In addition, the State of New Jersey Department of Taxation has begun an audit related to the state’s Corporation Business Tax. The Company is unable at this time to predict whether any such proceedings or assertions will result in litigation.

The Company intends to defend vigorously against the claims in all of the aforementioned proceedings.

Litigation Related to Securities Matters

On March 16, March 26, April 27, and June 5, 2001, respectively, four putative class action complaints were filed in the U.S. District Court for the Southern District of New York naming priceline.com, Inc., Richard S. Braddock, Jay Walker, Paul Francis, Morgan Stanley Dean Witter & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. as defendants (01 Civ. 2261, 01 Civ. 2576, 01 Civ. 3590 and 01 Civ. 4956). Shives et al. v. Bank of America Securities LLC et al., 01 Civ. 4956, also names other defendants and states claims unrelated to the Company. The complaints allege, among other things, that priceline.com and the individual defendants violated the federal securities laws by issuing and selling priceline.com common stock in priceline.com’s March 1999 initial public offering without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had allegedly solicited and received excessive and undisclosed commissions from certain investors. By Orders of Judge Mukasey and Judge Scheindlin dated August 8, 2001, these cases were consolidated for pre-trial purposes with hundreds of other cases, which contain allegations concerning the allocation of shares in the initial public offerings of companies other than priceline.com, Inc. By Order of Judge Scheindlin dated August 14, 2001, the following cases were consolidated for all purposes: 01 Civ. 2261; 01 Civ. 2576; and 01 Civ. 3590. On April 19, 2002, plaintiffs filed a Consolidated Amended Class Action Complaint in these cases. This Consolidated Amended Class Action Complaint makes similar allegations to those described above but with respect to both the Company’s March 1999 initial public offering and the Company’s August 1999 second public offering of common stock. The named defendants are priceline.com, Inc., Richard S. Braddock, Jay S. Walker, Paul E. Francis, Nancy B. Peretsman, Timothy G. Brier, Morgan Stanley Dean Witter & Co., Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Robertson Stephens, Inc. (as successor-in-interest to BancBoston), Credit Suisse First Boston Corp. (as successor-in-interest to Donaldson Lufkin & Jenrette Securities Corp.), Allen & Co., Inc. and Salomon Smith Barney, Inc. Priceline, Richard Braddock, Jay Walker, Paul Francis, Nancy Peretsman, and Timothy Brier, together with other issuer defendants in the consolidated litigation, filed a joint motion to dismiss on July 15, 2002. On November 18, 2002, the cases against the individual defendants were dismissed without prejudice and without costs. In addition, counsel for plaintiffs and the individual defendants executed Reservation of Rights and Tolling Agreements, which toll the statutes of limitations on plaintiffs’ claims against those individuals. On February 19, 2003, Judge Scheindlin issued an Opinion and Order granting in part and denying in part the issuer’s motion. None of the claims against the Company were dismissed. On June 26, 2003, counsel for the plaintiff class announced that they and counsel for the issuers had agreed to the form of a Memorandum of Understanding (the “Memorandum”) to settle claims against the issuers. The terms of that Memorandum provide that class members will be guaranteed $1 billion in recoveries by the insurers of the issuers and that settling issuer defendants will assign to the class members certain claims that they may have against the underwriters. Issuers also agree to limit their abilities to bring certain claims against the underwriters. If recoveries in excess of $1 billion are obtained by the class from any non-settling defendants, the settling defendants’ monetary obligations to the class plaintiffs will be satisfied; any amount recovered from the underwriters that is less than $1 billion will be paid by the insurers on behalf of the issuers. The Memorandum, which is subject to the approval of each issuer, was approved by a special committee of the priceline.com Board of Directors on Thursday, July 3, 2003. Thereafter, counsel for the plaintiff class and counsel for the issuers agreed to the form of a Stipulation and Agreement of Settlement with Defendant Issuers and Individuals (“Settlement Agreement”). The Settlement Agreement implements the Memorandum and contains the same material provisions. On June 11, 2004, a special committee of the priceline.com Board of Directors authorized the Company’s counsel to execute the Settlement Agreement on behalf of the Company. The Settlement Agreement was submitted to the Court for approval. Subsequently, the Second Circuit reversed the District Court’s granting of class certification in certain of the related class actions. As a result, the parties entered into a stipulation and order dated June 25, 2007 which terminated the Settlement Agreement. The Company intends to vigorously defend against the claims in all these proceedings.

On May 3, 2007, the Company entered into a Stipulation and Agreement of Settlement ("Settlement Agreement") to settle a class action lawsuit brought after its announcement that third quarter 2000 revenues would not meet expectations. Under the terms of the Settlement Agreement, the class received $80 million in return for a release, with prejudice, of all claims against the Company and the individual defendants (the "Settling Defendants") that are related to the purchase of the Company's securities by class members during the class period. The Company's insurance carriers funded $30 million of the settlement. As a result, the Company recorded a 2007 net charge of approximately $55.4 million representing its share of the cost to settle the litigation and cover related expenses.

The Company will continue to assess the risks of the potential financial impact of these matters, and to the extent appropriate, it will reserve for those estimates of liabilities.

Airline Excise Tax Refund

The online travel industry received guidance in the fourth quarter of 2006 in the form of a ruling from the Internal Revenue Service that the fee earned by online intermediaries in connection with the facilitation of the purchase of airline tickets is not subject to Federal Excise Tax. Due to the prior lack of clear guidance related to the application of federal excise taxes to amounts earned by online travel intermediaries, the Company historically remitted such taxes on the amounts it earned for facilitating the purchase of airline tickets. The tax at issue was on the amounts earned by the Company and was not added to the ticket price paid by its customers. Accordingly, the Company sought refunds of the taxes it paid while the on-line travel industry pursued clarification on the issue. The Company recorded refunds received in the amount of $18.6 million in revenue, plus $3.3 million of interest income during the nine months ended September 30, 2007.

14. SUBSEQUENT EVENTS

On November 6, 2007, the Company, through a newly-formed, indirect wholly-owned subsidiary, entered into an Equity Purchase Agreement with the shareholders of Agoda Company, Ltd. (“Agoda”) and membership interest holders of AGIP LLC (“AGIP,” and together with Agoda, the “Agoda Companies”). Pursuant to the agreement, the Company acquired all of the outstanding shares and convertible debt of Agoda and all of the outstanding membership interests of AGIP. The purchase price for the acquisition consists of an initial purchase price payable by the Company in cash of $15.1 million, subject to a post-closing net working capital adjustment and a portion of which is being held in escrow to secure certain indemnification and other obligations of the sellers under the agreement, and up to an additional $141.6 million in cash, which is payable to certain of the sellers (the “Earnout Participants”) if the Agoda Companies achieve certain performance targets from January 1, 2008 through December 31, 2010 (the “Earnout Amount”). The Earnout Amount, if any, or any portion thereof, is payable in 2011, or a later date following the expiration of a period in which the Earnout Participants may give notice to the Company of a disagreement with respect to the Earnout Amount or if there is a dispute between the Earnout Participants and the Company as to the Earnout Amount. Under certain circumstances, if there are disruptions in the Asian travel market during 2010, then the date in which the Earnout Amount, if any, or any portion thereof, is payable to the Earnout Participants is extended to a date not earlier than April 2, 2012. There can be no assurance that the Agoda Companies will achieve the performance targets, and depending on whether and the extent to which such targets are achieved by the Agoda Companies, the Company may be obligated to pay all, a portion or none of the Earnout Amount to the Earnout Participants.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 airline tickets, hotel rooms, car rentals, 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 16 languages.

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include the brands Lowestfare.com, Travelweb, Breezenet, Rentalcars.com and MyTravelGuide in the United States and Booking.com in Europe. Our goal is to be the top online discount travel agent in the United States, through our Name Your Own Price^® and price-disclosed services, and the top online hotel distributor internationally, through Booking.com. At present, we derive substantially all of our revenues from the following sources:

• Transaction revenues from our Name Your Own Price^®airline ticket, hotel room and rental car 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 airline tickets, hotel rooms and rental cars services. Priceline eliminated processing fees for its price-disclosed airline ticket service in June 2007;

• Transaction revenue from our price-disclosed 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.

Trends. The online sale of travel services has been one of the fastest growing sectors of the Internet since the late 1990s. While the online market for travel services continues to experience significant 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 and hotel chains have generally experienced year-over-year increases in load factors (a common metric that measures airplane customer usage) and occupancy rates (a common metric that measures hotel customer usage), respectively, which leaves them with less excess inventory to provide third party intermediaries like priceline.com. Recent decreases in domestic airline capacity could further reduce the amount of airline inventory available to us. Notwithstanding these trends, we continue to believe that the market for online travel services is an attractive market with continued opportunity for growth, in particular, in certain international markets.

Because we believe that an opportunity for growth exists in certain international markets, and since prior to the fourth quarter of 2004 substantially all of our revenue was generated in the U.S., we have taken steps to expand the markets we serve. In September 2004, we acquired Booking.com Limited (formerly known as Active Hotels Ltd.), a U.K. based online hotel service. Booking.com Limited gives us a strong presence in the U.K.’s online hotel market. Furthermore, in July 2005, we acquired Amsterdam-based Booking.com B.V. (formerly known as Bookings B.V.), one of Europe’s leading Internet hotel reservation services, with offices primarily in Amsterdam, Barcelona, Berlin, Cape Town, Dubai, Loule, Munich, New York, Paris, Rome, Singapore, Stockholm, Vienna and Warsaw. All of our international operations, which as of September 30, 2007, were substantially comprised of Booking.com Limited and Booking.com B.V., are majority-owned by us. A minority interest in our international business as of September 30, 2007, is held by former shareholders of Booking.com B.V. and Booking.com Limited, including certain European-based managers responsible for that business. We work with a range of chain-owned and independently owned hotels across Europe and in major cities around the world to provide hotel reservations on various websites in multiple languages.

Our international business — the significant majority of which is currently generated in Europe — represented approximately 55.1% of our gross bookings in the first nine months of 2007, and was a substantial contributor to our consolidated operating income during that period. We expect that throughout the remainder of 2007 and beyond, our international business will represent a growing percentage of our total gross bookings and operating income. As our international operations have become more meaningful contributors to our results, 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 2007 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 fluctuation on our operating results change as a result of different revenue recognition policies that apply to our international hotel service (as well as our domestic retail hotel and rental car services) and the increased importance of international hotel bookings to our results of operations.

The financial prospects of our domestic business have historically been significantly dependent upon the sale of leisure airline tickets and, as a result, the health of our domestic business has been impacted by the health of the airline industry. While the sale of leisure airline tickets remains an important part of our business, revenue earned in connection with the domestic reservation of hotel room nights has come to represent a substantial majority of our domestic gross profit. The domestic hotel market has been characterized in recent years by robust demand and limited supply, leading to increased occupancy rates, and in turn, increased average daily rates (“ADRs”). Because our remuneration for agency hotel transactions increases proportionately with room price, increased ADRs generally have a positive effect on our agency hotel business. Higher ADRs, however, can also negatively affect consumer demand, and higher occupancy rates can lead hotels to restrict our access to merchant hotel availability, particularly in high occupancy destinations popular with our travel base. Higher occupancy rates also have historically tended to drive lower margins as hotel suppliers have less need to distribute through third-party intermediaries such as us.

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 a substantial portion of our 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 leisure travel business, to continue to promote the priceline.com brand in the United States and the Booking.com brand in Europe and, over time, to offer other travel services and further expand into international markets. Factors beyond our control, such as the outbreak of an epidemic or pandemic disease; natural disasters such as hurricanes, tsunamis or earthquakes; terrorist attacks, hostilities in the Middle East or elsewhere; or the liquidation of major domestic airlines now in bankruptcy, the bankruptcy of an additional carrier or the withdrawal from our system of a major airline (or the consolidation of our major airline suppliers) or hotel supplier, could adversely affect our business and results of operations and impair our ability to effectively implement all or some of the initiatives described above. 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 operate 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. Prior to introducing a retail travel option to our customers, substantially all of our business was conducted under the Name Your Own Price^® system and accordingly, because those services are generally non-refundable in nature, 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 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 Accounting Pronouncements. In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether the tax position is more likely than not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to recognize. Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated results of operations and financial position.

In addition, during the third quarter 2007, FASB issued for comment a proposed FASB Staff Position No. APB 14-a, “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-a”) that would significantly impact the accounting for convertible debt. The FSP would require cash settled convertible debt, such as our $570 million aggregate principal amount of convertible senior notes that are currently outstanding, to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component would be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value would be recorded as a debt discount and amortized to interest expense over the life of the bond. Although FSP APB 14-a would have no impact on our actual past or future cash flows, it would require us to record a significant amount of non-cash interest expense as the debt discount is amortized. As a result, there would be a material adverse impact on our results of operations and earnings per share. In addition, if our convertible debt is redeemed or converted prior to maturity, any unamortized debt discount would result in a loss on extinguishment. FSP APB 14-a, if approved, will become effective January 1, 2008, and require retrospective application.

Recent Developments. On November 6, 2007, we entered into an Equity Purchase Agreement, through a newly-formed, indirect wholly-owned subsidiary, with the shareholders of Agoda Company, Ltd. (“Agoda”) and membership interest holders of AGIP LLC (“AGIP,” and together with Agoda, the “Agoda Companies”). Pursuant to the agreement, we acquired all of the outstanding shares and convertible debt of Agoda and all of the outstanding membership interests of AGIP. The purchase price for the acquisition consists of an initial purchase price payable by us in cash of $15.1 million, subject to a post-closing net working capital adjustment and a portion of which is being held in escrow to secure certain indemnification and other obligations of the sellers under the agreement, and up to an additional $141.6 million in cash, which is payable to certain of the sellers (the “Earnout Participants”) if the Agoda Companies achieve certain performance targets from January 1, 2008 through December 31, 2010 (the “Earnout Amount”). The Earnout Amount, if any, or any portion thereof, is payable in 2011, or a later date following the expiration of a period in which the Earnout Participants may give notice to us of a disagreement with respect to the Earnout Amount or if there is a dispute between the Earnout Participants and us as to the Earnout Amount. Under certain circumstances, if there are disruptions in the Asian travel market during 2010, then the date in which the Earnout Amount, if any, or any portion thereof, is payable to the Earnout Participants is extended to a date not earlier than April 2, 2012. There can be no assurance that the Agoda Companies will achieve the performance targets, and depending on whether and the extent to which such targets are achieved by the Agoda Companies, we may be obligated to pay all, a portion or none of the Earnout Amount to the Earnout Participants.

Results of Operations

Three and Nine Months Ended September 30, 2007 compared to the Three and Nine Months Ended September 30, 2006

Operating Metrics

Our financial results are driven by certain operating metrics that encompass the selling activity generated by our travel services. Specifically, sales of airline tickets, hotel room nights and rental car days capture the volume of units purchased by our customers. Gross Bookings capture the total dollar value inclusive of taxes and fees of all travel services purchased by our customers.

The number of airline tickets, hotel room nights and rental car days sold through our websites and the related gross bookings were as follows:

	Gross Bookings	Airline Tickets	Hotel Room Nights	Rental Car Days

Three Months ended September 30, 2007	$1.4 billion	819,000	8.0 million	2.3 million

Three Months ended September 30, 2006	$0.9 billion	666,000	5.2 million	2.0 million

Nine Months ended September 30, 2007	$3.6 billion	2.1 million	21.2 million	6.6 million

Nine Months ended September 30, 2006	$2.6 billion	2.2 million	14.4 million	5.7 million

Gross bookings increased by 54.0% and 40.6% for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. The increase was driven primarily by an increase of 73.7% and 58.1% in “agency” bookings for the three and nine months ended September 30, 2007, respectively, which was primarily attributable to growth in our international operations, which was partially offset by a decrease in domestic agency room-nights. In addition, an approximately 5% increase in international hotel room night unit prices in the three months ended September 30, 2007 compared to the same period in 2006, contributed to the growth in bookings for our international operations. Currency exchange rate fluctuations contributed approximately $58 million and $148 million, respectively, of the increase in gross bookings for the three and nine months ended September 30, 2007, compared to the same periods in 2006. Merchant gross bookings increased by 15.0% and 7.3% for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. The increase was primarily due to an increase in merchant gross bookings relating to our Name Your Own Price^® hotel and rental car services, partially offset by a decrease in the sale of Name Your Own Price^® airline tickets.

Airline tickets sold increased by 23.0% for the three months ended September 30, 2007, over the same period in 2006, due to an increase in the sale of retail airline tickets, partially offset by a decrease in the sale of Name Your Own Price^® airline tickets. Airline tickets sold decreased by 3.1% for the nine months ended September 30, 2007, over the same period in 2006, primarily due to a decrease in the sale of Name Your Own Price^® airline tickets, partially offset by an increase in the sale of retail airline tickets.

Hotel room nights sold increased by 52.0% and 47.1% for the three and nine months ended September 30, 2007, respectively, over the same periods in 2006, primarily due to growth in our hotel room nights sold through our international operations and our Name Your Own Price^® hotel service.

Rental car days sold increased by 14.4% for the three months ended September 30, 2007, over the same period in 2006, due to an increase in sales of Name Your Own Price^® rental car days, partially offset by a decrease in the sale of retail rental car days. Rental car days sold increased by 16.8% for the nine months ended September 30, 2007, over the same period in 2006, due to increases in sales of Name Your Own Price^® and retail rental car days.

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^® airline tickets, hotel rooms, rental cars 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. Priceline eliminated processing fees for its price-disclosed airline ticket service in June 2007.

• 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 the sale 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 $131.8 million and $270.1 million to our revenues for the three and nine months ended September 30, 2007, respectively, which compares to $65.0 million and $134.5 million for the same periods in 2006, respectively. Approximately $2.8 million and $3.7 million, respectively, of this increase is due to fluctuations in currency exchange rates.

	Three Months Ended September 30,						Nine Months Ended Sepetmber 30,
	($ 000)				%		($ 000)				%
	2007		2006		Change		2007		2006		Change
Merchant Revenues	$	275,211	$	238,558	15.4	%	$	776,131	$	699,520	11.0	%

Agency Revenues	139,623		73,326		90.4	%	292,478		159,599		83.3	%

Other Revenues	2,453		1,583		55.0	%	5,947		3,913		52.0	%

Total Revenues	$	417,287	$	313,467	33.1	%	$	1,074,556	$	863,032	24.5	%

Merchant Revenues

Merchant revenues for the three and nine months ended September 30, 2007 increased by 15.4% and 11.0%, respectively, compared to the same periods in 2006, primarily due to an increase in the revenue related to the sale of Name Your Own Price^® hotel room nights and rental car days, partially offset by a decline in the sale of Name Your Own Price^® airline tickets. In addition, as more fully discussed in Note 13 to our Unaudited Consolidated Financial Statements, we recorded in merchant revenues excise tax refunds of $0.4 million and $18.6 million in the three and nine months ended September 30, 2007, respectively.

Agency Revenues

Agency revenues for the three and nine months ended September 30, 2007 increased 90.4% and 83.3%, respectively, compared to the same periods in 2006, primarily as a result of growth in our international operations which contributed $130.8 million and $64.1 million of agency revenue for the three months ended September 30, 2007 and 2006, respectively, and $267.3 million and $131.7 million of agency revenue for the nine months ended September 30, 2007 and 2006, respectively. These increases were partially offset by declines in agency revenue related to the sale of price-disclosed airline tickets, for which priceline eliminated the processing fee in June 2007.

Other Revenues

Other revenues during the three and nine months ended September 30, 2007 consisted primarily of advertising revenues and fees for referring customers to pricelinemortgage.com for home financing services. Other revenues for the three and nine months ended September 30, 2007 increased 55.0% and 52.0%, respectively, compared to the same periods in 2006, primarily due to higher online advertising revenue as a result of new advertising partner relationships in 2007.

Cost of Revenues and Gross Profit

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Cost of Merchant Revenues	$	214,956		$	189,920		13.2	%	$	595,297		$	561,450		6.0	%
% of Merchant Revenues	78.1		%	79.6		%			76.7		%	80.3		%
Cost of Agency Revenues	—			—			—		—			—			—
% of Agency Revenues	0.0		%	0.0		%			0.0		%	0.0		%
Cost of Other Revenues	—			—			—		—			—			—
% of Other Revenues	0.0		%	0.0		%			0.0		%	0.0		%	—
Total Cost of Revenues	$	214,956		$	189,920		13.2	%	$	595,297		$	561,450		6.0	%
% of Revenues	51.5		%	60.6		%			55.4		%	65.1		%

Cost of Revenues

During the three and nine months ended September 30, 2007, cost of revenues entirely reflect Name Your Own Price^® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue while retail transactions are recorded “net” with no corresponding cost of revenues.

Cost of Merchant Revenues

For the three and nine months ended September 30, 2007, cost of merchant revenues consisted primarily of: (1) the cost of opaque hotel rooms from our suppliers, net of applicable taxes, (2) the cost of opaque rental cars from our suppliers, net of applicable taxes; and (3) the cost of opaque airline tickets from our suppliers, segment fees and passenger facility charges imposed in connection with the sale of airline tickets. Cost of merchant revenue for the three and nine months ended September 30, 2007 increased 13.2% and 6.0%, respectively, due primarily to an increase in the sale of Name Your Own Price^® hotel room nights, partially offset by a decrease in the sale of Name Your Own Price^® airline tickets. Merchant price-disclosed hotel revenues are recorded at their net amounts, which are amounts received less amounts paid to suppliers and therefore, there are no associated costs of merchant price-disclosed hotel revenues.

Cost of Agency Revenues

Agency revenues are recorded at their net amount, which are amounts received less amounts paid to suppliers, if any, and therefore, there are no costs of agency revenues.

Cost of Other Revenues

For the three and nine months ended September 30, 2007 and 2006, there were no costs of other revenues.

Gross Profit

Total gross profit for the three and nine months ended September 30, 2007 increased by 63.8% and 58.9%, compared to the same periods in 2006, respectively, due to increased revenue from (1) our international operations, (2) increased sales of Name Your Own Price^® hotel room nights and (3) increased sales of Name Your Own Price^® rental car days. Total gross margin (gross profit expressed as a percentage of total revenue) increased during the three and nine months

ended September 30, 2007, compared to the same periods in 2006, because Name Your Own Price^® transactions, whose revenues are recorded “gross” with a corresponding cost of revenue, represented a smaller percentage of transactions compared to retail, price-disclosed transactions which are primarily recorded “net” with no corresponding cost of revenues. Gross profit and gross margin was also positively impacted by the $0.4 million and $18.6 million excise tax refund recorded in merchant revenue in the three and nine month periods ended September 30, 2007, respectively (see Note 13 to our Unaudited Consolidated Financial Statements). Because Name Your Own Price^® transactions are reported “gross” and retail transactions are primarily recorded on a “net” basis, we believe that gross profit has become an increasingly important measure of evaluating growth in our business. Gross profit for our international operations was $130.9 million and $64.2 million for the three months ended September 30, 2007 and 2006, respectively, and $267.7 million and $132.2 million for the nine months ended September 30, 2007 and 2006, respectively.

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Merchant Gross Profit	$	60,255		$	48,638		23.9	%	$	180,834		$	138,070		31.0	%
Merchant Gross Margin	21.9		%	20.4		%			23.3		%	19.7		%
Agency Gross Profit	139,623			73,326			90.4	%	292,478			159,599			83.3	%
Agency Gross Margin	100.0		%	100.0		%			100.0		%	100.0		%
Other Gross Profit	2,453			1,583			55.0	%	5,947			3,913			52.0	%
Other Gross Margin	100.0		%	100.0		%			100.0		%	100.0		%
Total Gross Profit	$	202,331		$	123,547		63.8	%	$	479,259		$	301,582		58.9	%
Total Gross Margin	48.5		%	39.4		%			44.6		%	34.9		%

Merchant Gross Profit

Merchant gross profit consists of merchant revenues less the cost of merchant revenues.

For the three and nine months ended September 30, 2007, merchant gross profit increased from the same periods in 2006, primarily due to an increase in gross profit related to the sale of Name Your Own Price^®and merchant price-disclosed hotel room nights and Name Your Own Price^® rental car days. The contribution to merchant gross profit from Name Your Own Price^® airline ticket sales during the three and nine months ended September 30, 2007 was negatively impacted by a decrease in net GDS fees per ticket as compared to the same periods in 2006. In addition, merchant gross profit for the three and nine months ended September 30, 2007, was positively affected by the excise tax refund of $0.4 million and $18.6 million, respectively, included in merchant revenue (see Note 13 to our Unaudited Consolidated Financial Statements).

Agency Gross Profit

Agency gross profit consists of agency revenues, which are recorded net of agency costs, if any. For the three and nine months ended September 30, 2007, agency gross profit increased over the same periods in 2006, primarily as a result of growth in our international operations. These increases were partially offset by declines in agency revenue related to the sale of price-disclosed airline tickets, for which priceline eliminated the processing fee in June 2007. Agency gross profit grew more rapidly than merchant gross profit, which has a higher gross margin as a percentage of gross bookings, a trend which is expected to continue.

Other Gross Profit

During the three and nine months ended September 30, 2007, other gross profit increased from the same periods in 2006 primarily due to increased online advertising revenues as a result of new advertising partner relationships in 2007.

Operating Expenses

Advertising

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Offline Advertising	$	8,413		$	6,665		26.2	%	$	29,028		$	24,962		16.3	%
% of Total Gross Profit	4.2		%	5.4		%			6.1		%	8.3		%
Online Advertising	53,844			34,560			55.8	%	129,241			86,914			48.7	%
% of Total Gross Profit	26.6		%	28.0		%			27.0		%	28.8		%

Offline advertising expenses consist primarily of: (1) the expenses associated with domestic television and print advertising; and (2) agency fees, the cost for creative talent and production costs for television and print advertising. For the three and nine months ended September 30, 2007, offline advertising expenses were higher than in the same periods in 2006, primarily as a result of increased television and print advertising. Online advertising expenses primarily consist of the costs of (1) search engine keyword purchases; (2) affiliate programs; (3) banner and other advertisements; and (4) e-mail campaigns. For the three and nine months ended September 30, 2007, online advertising expenses increased over the same periods in 2006, primarily due to an increase in online advertising expenses to support the growth of our international operations, which rely primarily on online advertising to drive their businesses, partially offset by the elimination of advertising fees paid under our agreement with Orbitz, which expired on December 31, 2006, and the impact of higher efficiency requirements on other online spend.

Sales and Marketing

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Sales and Marketing	$	13,093		$	11,204		16.9	%	$	36,027		$	31,494		14.4	%
% of Total Gross Profit	6.5		%	9.1		%			7.5		%	10.4		%

Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third-party service providers that operate our call centers; and (3) provisions for credit card chargebacks. For the three and nine months ended September 30, 2007, sales and marketing expenses, which are substantially variable in nature, increased compared to the same periods in 2006, primarily due to increased gross booking volumes.

Personnel

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Personnel	$	27,182		$	21,658		25.5	%	$	72,108		$	56,869		26.8	%
% of Total Gross Profit	13.4		%	17.5		%			15.0		%	18.9		%

Personnel expenses consist of compensation to our personnel, including salaries, bonuses, taxes, employee health benefits and stock-based compensation. For the three and nine months ended September 30, 2007, personnel expenses increased over the same periods in 2006, primarily due to increased personnel expenses associated with head count growth of our international operations and increased employee performance bonus expense. Stock-based compensation expense was approximately $4.1 million and $3.5 million for the three months ended September 30, 2007 and 2006, respectively, and approximately $10.8 million and $10.3 million for the nine months ended September 30, 2007 and 2006, respectively.

General and Administrative

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
General and Administrative	$	9,241		$	6,643		39.1	%	$	82,893		$	19,638		322.1	%
% of Total Gross Profit	4.6		%	5.4		%			17.3		%	6.5		%

General and administrative expenses consist primarily of: (1) fees for outside professionals, including litigation expenses; (2) occupancy expenses; and (3) personnel related expenses. General and administrative expenses increased during the three and nine months ended September 30, 2007, over the same periods in 2006, due to (1) a $0.1 million and $55.4 million expense, respectively, related to our net cost of a litigation settlement, including related legal fees (see Note 13 to our Unaudited Consolidated Financial Statements), (2) a $1.7 million one-time receipt of certain franchise tax credits in the third quarter 2006, (3) additional fees for outside professionals and expenses related to pending litigation, and (4) increased general and administrative expenses, particularly occupancy and personnel related expenses, associated with the growth of our international operations.

Information Technology

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)
	2007			2006			Change		2007			2006			% Change
Information Technology	$	3,343		$	2,551		31.0	%	$	9,406		$	7,190		30.8	%
% of Total Gross Profit	1.7		%	2.1		%			2.0		%	2.4		%

Information technology expenses consist primarily of: (1) system maintenance and software license fees; (2) data communications and other expenses associated with operating our Internet sites; and (3) payments to outside consultants. For the three and nine months ended September 30, 2007, the increase in information technology expenses was primarily associated with the growth of our international operations.

Depreciation and Amortization

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Depreciation and Amortization	$	9,131		$	8,664		5.4	%	$	26,633		$	24,970		6.7	%
% of Total Gross Profit	4.5		%	7.0		%			5.6		%	8.3		%

Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) amortization of internally developed and purchased software, (3) depreciation of computer equipment; and (4) depreciation of leasehold improvements, office equipment and furniture and fixtures. For the three and nine months ended September 30, 2007, depreciation and amortization expense increased from the same periods in 2006, primarily as a result of increased depreciation and amortization related to investment in our international operations.

Restructuring Charge

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Restructuring Charge, net	$	—		$	—		0.0	%	$	—		$	135		(100.0	)%
% of Total Gross Profit	0.0		%	0.0		%			0.0		%	0.1		%

In the nine months ended September 30, 2006, we recorded a restructuring charge of approximately $135,000 related to vacated leased property.

Interest

	Three Months Ended September 30,								Nine Months Ended September 30,
	($ 000)						%		($ 000)						%
	2007			2006			Change		2007			2006			Change
Interest Income	$	6,063		$	2,626		130.9	%	$	20,377		$	6,322		222.3	%
Interest Expense	(2,607		)	(1,550		)	68.2	%	(7,560		)	(4,603		)	64.2	%
Total	$	3,456		$	1,076		221.2	%	$	12,817		$	1,719		645.6	%

For the three and nine months ended September 30, 2007, interest income on cash and marketable securities increased over the same periods in 2006, primarily due to higher prevailing interest rates and significantly higher cash balances for these periods, as well as accrued interest on our excise tax refund in the nine months ended September 30, 2007. Interest expense increased for the three and nine months ended September 30, 2007 over the same periods in 2006, due primarily to an increase in debt balances in 2007, as well as an increase in prevailing interest rates on the variable portion of the interest rate swap agreement related to our 1% Convertible Senior Notes.

Taxes

	Three Months Ended September 30,						Nine Months Ended September 30,
	($ 000)				%		($ 000)				%
	2007		2006		Change		2007		2006		Change
Income Tax Benefit	$	26,657	$	18,113	47.2	%	$	23,287	$	13,277	75.4	%

Income tax benefit includes U.S. and international income taxes, determined using an estimate of our annual effective tax rate. Income tax benefit for the three and nine months ended September 30, 2007 and 2006 includes credits of $47.9 million and $28.1 million, respectively, resulting from a reversal of a portion of the valuation allowance on our deferred tax assets. In addition, our recorded income tax provision differs from the expected tax expense at the U.S. statutory tax rate of 35% principally due to state income taxes, partially offset by lower foreign tax rates and the foreign tax rates and the foreign tax expense of interest expense on intercompany debt. Due to our significant net operating loss carryforwards, we do not expect to pay significant cash taxes on our U.S. federal taxable income tax for the foreseeable future. We expect to make cash payments for U.S. alternative minimum tax and for certain international taxes.

Equity in Loss of Investees and Minority Interests

	Three Months Ended September 30,						Nine Months Ended September 30,
	($ 000)				%		($ 000)				%
	2007		2006		Change		2007		2006		Change
Equity in Loss of Investees and Minority Interests	$	2,516	$	2,328	8.1	%	$	3,945	$	3,015	30.8	%

Equity in income of investees and minority interests for the three and nine months ended September 30, 2007 and 2006, represented (1) minority interests associated with the ownership of priceline.com International that is held by former shareholders of Booking.com B.V. and Booking.com Limited, including certain European-based managers of that business; and (2) equity in income (loss) of investees, principally comprised of our pro rata share of pricelinemortgage.com’s net results. The change in equity in income of investees and minority interests for the three and nine months ended September 30, 2007 compared to the same periods in 2006 was primarily due to an increase in the minority interest in the earnings of priceline.com International.

Liquidity and Capital Resources

As of September 30, 2007, we had $496.6 million in cash and cash equivalents and short-term investments. We generally invest excess cash to make such funds readily available for operating purposes. Cash equivalents are primarily comprised of highly liquid, high quality, investment grade debt instruments.

All of our merchant transactions are structured such that we collect cash up front from our customers and then we pay most of our suppliers at a subsequent date. We therefore tend to experience significant swings in supplier payables depending on the absolute level of our cost of revenue during the last few weeks of every quarter. This can cause volatility in working capital levels and impact cash balances more or less than our operating income would indicate.

Net cash provided by operating activities for the nine months ended September 30, 2007 was $89.3 million, resulting from net income of $124.2 million, partially offset by non-cash items not affecting cash flows of $4.1 million and $30.8 million of changes in working capital. Net income includes $55.4 million paid to settle litigation and $21.9 million received in excise tax refunds (see Note 13 to our Unaudited Consolidated Financial Statements for further information regarding the litigation settlement and excise tax refund). The changes in working capital for the nine months ended September 30, 2007, were primarily related to a $53.6 million increase in accounts receivable, partially offset by a $26.5 million increase in accounts payable, accrued expenses and other current liabilities. The increase in accounts receivable is primarily due to significant revenue growth for our international operations. The increases in accounts receivable and accounts payable are also seasonal in nature. Our bookings and revenues are generally higher in the third quarter of the year than in the fourth quarter of the year which results in higher accounts receivable and accounts payable at September 30 compared to December 31. We do not believe there has been any significant change in credit risk regarding our accounts receivable. Non-cash items were primarily associated with deferred income tax benefit, stock-based compensation expense, depreciation and amortization, primarily related to intangible assets acquired in our acquisitions of Travelweb, Booking.com Limited and Booking.com B.V. The deferred income tax benefit resulted primarily from the $47.9 million non-cash reversal of a portion of our deferred income tax valuation allowance. Net cash provided by operating activities for the nine months ended September 30, 2006 was $80.3 million, resulting from net income of $61.2 million, non-cash items not affecting cash flows of $17.3 million and $1.8 million of changes in working capital. The changes in working capital for the nine months ended September 30, 2006, were primarily related to a $28.5 million increase in accounts receivable, offset by a $31.8 million increase in accounts payable, accrued expenses and other current liabilities. The increases in accounts payable and accounts receivable were primarily seasonal in nature. Non-cash items were primarily associated with the deferred income tax benefit, depreciation and amortization, primarily related to intangible assets acquired in our acquisitions of Travelweb, Booking.com Limited and Booking.com B.V. The deferred income tax benefit resulted primarily from the $28.1 million non-cash reversal of a portion of our deferred income tax valuation allowance.

Net cash used in investing activities was $94.3 million for the nine months ended September 30, 2007. Investing activities were affected by $83.1 million of net purchases of investments for the nine months ended September 30, 2007. Net cash provided by investing activities was $32.0 million for the nine months ended September 30, 2006 and was affected by $40.2 million of net redemptions of investments. Cash invested in purchases of property and equipment was $11.0 million and $9.6 million in the nine months ended September 30, 2007 and 2006, respectively.

Net cash used in financing activities was approximately $0.9 million for the nine months ended September 30, 2007. The cash used in financing activities during the nine months ended September 30, 2007 was primarily related to $2.2 million of treasury stock purchases and the purchase of $15.0 million of stock in priceline.com International held by minority interest shareholders, partially offset by $16.2 million of proceeds from the exercise of employee stock options. Net cash provided by financing activities was approximately $113.8 million for the nine months ended September 30, 2006. The cash provided by financing activities during the nine months ended September 30, 2006 was primarily related to the issuance of $300 million of convertible notes and $9.6 million of proceeds from the exercise of employee stock options, offset by $135.6 million of treasury stock purchases, $7.9 million of debt issuance costs, $32.5 million for the purchase of the note hedge and the purchase of $19.8 million of stock in priceline.com International held by minority interest shareholders.

As more fully discussed in Note 12 to the Unaudited Consolidated Financial Statements, after giving effect to the October 2007 repurchase of priceline.com International share for $61.0 million, the total minority interest in priceline.com International on a fully diluted basis was approximately 3.3%. The aggregate fair value of the minority interest in priceline.com International subject to puts and calls in 2008 is estimated to be approximately $97.1 million at September 30, 2007, including unvested restricted stock and restricted stock units. We expect the future fair value of the minority interest to grow based upon expected continued strong performance of the international business.

Based upon the closing price of our common stock for the prescribed measurement periods during the three months ended September 30, 2007, the contingent conversion thresholds on each of our convertible senior note issues were exceeded. As a result, the notes (aggregate principal amount $570 million) are convertible at the option of the holder as of September 30, 2007 and, accordingly, have been classified as a current liability in the Unaudited Consolidated Balance Sheet as of that date. While many factors contribute to the likelihood that the holders of the notes will elect to convert all or a portion of the notes, as the price of our common stock increases, the likelihood of conversion also increases. If holders elect to convert, we would be required to settle the principal amount of the notes in cash and the conversion premium in cash or shares of common stock. We would likely fund the repayment with existing cash and cash equivalents, short-term investments (totaling approximately $496.6 million at September 30, 2007), borrowings under our revolving credit facility, common stock issuances and/or additional borrowings.

In September 2007, we entered into a $175 million five-year revolving credit facility with a group of lenders, which is secured, subject to certain exceptions, by a first-priority security interest on substantially all of our assets and related intangible assets located in the United States. In addition, our obligations under the revolving credit facility are guaranteed by substantially all of the assets and related intangible assets of our material direct and indirect domestic and foreign subsidiaries. Borrowings under the revolving credit facility will bear interest, at our option, at a rate per annum equal to the greater of (a) JPMorgan Chase Bank, National Association’s prime lending rate and (b) the federal funds rate plus ½ of 1%, plus an applicable margin ranging from 0.25% to 0.75%; or at an adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 1.25% to 1.75%. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.25% to 0.375%.

The revolving credit facility provides for the issuance of up to $50.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, which are available in U.S. dollars, Euros, Pounds Sterling and any other foreign currency agreed to by the lenders. We may request that an additional $100.0 million be added to the revolving credit facility or to enter into one or more tranches of term loans. The proceeds of loans made under the facility will be used for working capital and general corporate purposes. As of September 30, 2007 there were no amounts outstanding under the facility.

We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. However, if during that period or thereafter, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plan, either of which could have a material adverse effect on our future financial condition or results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. There are no assurances that we will generate sufficient cash

flow from operations in the future, that revenue growth or sustained profitability will be realized or that future borrowings or equity sales will be available in amounts sufficient to make anticipated capital expenditures, finance our strategies or repay our indebtedness.

Off-Balance Sheet Arrangements.

As of September 30, 2007, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Sections of this Form 10-Q including, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations above, contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements.

Expressions of future goals and expectations or similar expressions including, without limitation, “may,” “will,” “should,” “could,” “expects,” “does not currently expect,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,” “potential,” “targets,” or “continue,” reflecting something other than historical fact are intended to identify forward-looking statements. The factors described below in the section entitled “Factors That May Affect Future Results” could cause our actual results to differ materially from those described in the forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Risk Factors

The following risk factors and other information included in this Quarterly Report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Our international operations’ business model exposes us to certain risks that we have not traditionally experienced in the hotel business.

Throughout 2007 and 2006, our international operations experienced significant growth in their gross bookings. This growth rate has contributed significantly to our growth in revenue, gross profit and earnings per share. We believe that this growth rate has also been a significant driver in the increase in our stock price over the last year. We expect our international operations to experience a significant decline in their growth rate in future years because of the sheer size of their business. Other factors could also cause slowing growth rates in the international business, including travel market conditions, changes in hotel inventory pricing or availability and the competitiveness of the market. A decline in our international operations’ growth rate could have a negative impact on our future revenue and earnings per share growth rates and, as a consequence, our stock price.

In addition, our international operations rely heavily on various third parties to distribute hotel room reservations, and our international operations’ distribution channels are concentrated among a number of third parties. Should one or more of such third parties cease distribution of our international operations’ reservations, or suffer deterioration in its search engine ranking, due to changes in search engine algorithms or otherwise, the business of our international operations could be negatively affected. Similarly, a significant amount of our international business is directed to our own websites through participation in pay-per-click advertising campaigns on Internet search engines whose pricing and operating dynamics can experience rapid change both technically and competitively. We have experienced increased competition and increased costs associated with our advertising campaigns. If a major search engine changes its pricing, operating or competitive dynamics in a negative manner, our business, results of operations and financial condition would be adversely affected.

The strategy of our international operations involves rapid expansion into countries in Europe, Asia and elsewhere, many of which have different customs, different levels of customer acceptance of the Internet and different legislation, regulatory environments and tax schemes. Compliance with foreign legal, regulatory or tax requirements will place demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences. If our international operations are unsuccessful in rapidly expanding into other international countries, our business, results of operations and financial condition would be adversely affected.

Our international operations currently distribute hotel rooms primarily through a retail model whereby we earn a commission from the hotel property when the customer checks out of the hotel property. This requires our international operations to pursue collection of commissions relating to hotel room reservations from the hotel properties after the customer has completed his or her stay. We do not have extensive experience in collecting commissions from hotel properties and failure to sustain an adequate collection rate could negatively impact the business of our international operations.

We are dependent on the leisure travel industry and certain travel suppliers.

Our financial prospects are significantly dependent upon our sale of leisure airline tickets and other travel services. Leisure travel, including the sale of leisure airline tickets and hotel rooms, is dependent on personal discretionary spending levels. As a result, sales of leisure travel services tend to decline during general economic downturns and recessions. In addition, unforeseen events, such as terrorist attacks, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel related accidents, travel related health concerns and unusual weather patterns also may adversely affect the leisure travel industry. As a result, our business also is likely to be affected by those events. Further, work stoppages or labor unrest at any of the major airlines could materially and adversely affect the airline industry and, as a consequence, have a material adverse effect on our business, results of operations and financial condition.

During the three months ended September 30, 2007, sales of airline tickets from our five largest and two largest airline suppliers accounted for approximately 84.3% and 40.1% of total airline tickets sold, respectively, and Name Your Own Price^® hotel room nights from our five largest hotel suppliers accounted for approximately 34.4% of total Name Your Own Price^® hotel room nights sold. As a result, we are currently substantially dependent upon the continued participation of these suppliers in our system in order to maintain and continue to grow our total gross profit.

Our arrangements with the airline and hotel suppliers that participate in our system – either Name Your Own Price^® or price-disclosed service – generally do not require them to provide any specific quantity of airline tickets or hotel rooms, or to make tickets or rooms available for any particular route, in any geographic area or at any particular price. During the course of our business, we are in continuous dialogue with our major suppliers about the nature and extent of their participation in our system. The significant reduction on the part of any of our major suppliers of their participation in our system for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, results of operations and financial condition.

With respect to our airline suppliers, the airline industry has experienced a shift in market share from full-service carriers to low-cost carriers that focus primarily on discount fares to leisure destinations and we expect this trend to continue. Some low-cost carriers, such as Southwest and JetBlue, have not historically distributed their tickets through us or other third-party intermediaries. In addition, certain airlines have significantly limited or eliminated sales of airline tickets through opaque channels, preferring to consistently show the lowest available price on their own website. Certain airlines have also reduced their domestic capacity, which could reduce the amount of airline inventory available to us. If one or more participating airlines were to further limit or eliminate discounting through opaque channels and/or further reduce capacity, it could have a material adverse effect on our business, results of operations and financial condition.

Due to our dependence on the airline industry, we could be severely affected by changes in that industry, and, in many cases, we will have no control over such changes or their timing. Several major U.S. airlines are struggling financially and have either filed for reorganization under the United States Bankruptcy Code or discussed publicly the risks of bankruptcy. Three of our largest airline suppliers, Northwest Airlines, Delta Air Lines and United Airlines have recently emerged from bankruptcy. If a supplier in bankruptcy liquidates or does not emerge from bankruptcy and we are unable to replace such supplier as a participant in priceline.com, our business would be adversely affected. In addition, in the event that another of our major suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. To the extent other major U.S. airlines that participate in our system declare bankruptcy, they may be unable or unwilling to honor tickets sold for their flights. Our policy in such event would be to direct customers seeking a refund or exchange to the airline, and

not to provide a remedy ourselves. Because we are the merchant-of-record on sales of Name Your Own Price^® airline tickets to our customers, however, we could experience a significant increase in demands for refunds or credit card charge backs from customers, which could materially and adversely affect our operations and financial results. In addition, because Name Your Own Price^® customers do not choose the airlines on which they are to fly, the bankruptcy of a major U.S. airline or even the possibility of a major U.S. airline declaring bankruptcy could discourage customers from using our Name Your Own Price^® system to book airline tickets.

If one of our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than the previous supplier. For example, in September 2005, US Airways and America West merged. US Airways was a meaningful participant in our Name Your Own Price^® system, but America West participated on a very limited basis. The resulting entity participates in our Name Your Own Price^® system, but at much lower levels than US Airways’ historical participation. The loss of any major airline participant in our Name Your Own Price^® system could result in other major airlines electing to terminate their participation in the Name Your Own Price^® system, which would further negatively impact our business, results of operations and financial condition. In addition, fewer independent suppliers reduces opacity and competition among suppliers. In such event, if we are unable to divert sales to other suppliers, our business, results of operations and financial condition may be adversely affected.

In addition, given the concentration of the airline industry, particularly in the domestic market, our competitors could exert pressure on other airlines not to supply us with tickets. Moreover, the airlines may attempt to establish their own buyer driven commerce service or participate or invest in other similar services.

With respect to our hotel suppliers, increased demand for hotel rooms may reduce the amount of inventory they sell through our service or increase the negotiated rates at which they are willing to provide inventory. If hotel occupancy rates improve to the point that our hotel suppliers no longer place the same value on our distribution systems, such suppliers may reduce the amount of inventory they make available through priceline.com and/or our international operations. Similarly, while not dependent on certain hotel chains, the growth rates of our international operations are dependent upon increasing levels of well-priced, demand-based supply from their portfolio of hotel partners.

Many hotels use merchant arrangements with companies like ours to dispose of excess hotel rooms at wholesale rates. If hotels experience increased demand for rooms, they might reduce the number of rooms they make available through our merchant price-disclosed hotel service. The recent improvement in occupancy rates discussed above could cause hotels to reduce the number of hotel rooms they make available through our merchant price-disclosed hotel service.

In addition, certain hotels have begun initiatives to reduce margins received by third party intermediaries on retail merchant transactions, which is the primary method we employ to distribute retail hotel room reservations in the United States. Many hotels distribute rooms through their own websites and therefore might increase negotiated rates for merchant rate hotel rooms sold through our merchant price-disclosed hotel service, decreasing the margin available to us. While our merchant price-disclosed hotel agreements with our leading hotel suppliers provide for specified discounts, if one or more participating hotels were to require us to limit our merchant margins, upon contract renewal or otherwise, it could have a material adverse effect on our business, results of operations and financial condition.

With respect to our rental car suppliers, increased utilization (a common metric that measures rental car customer usage) may reduce the amount of inventory they sell through our service or increase the negotiated rates at which they are willing to provide inventory. Like airline and hotel suppliers, rental car companies are focusing on distributing inventory through their own sites, which reduces the amount of inventory available to us. Furthermore, if one of our major rental car suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the priceline.com system or that participates on substantially lower levels, the surviving company may elect not to participate in our system or to participate at lower levels than the previous supplier. Finally, because rental car days are typically less expensive than airline tickets or hotel room nights, a reduction in retail rental car rates has a disproportionately adverse effect on sales of Name Your Own Price^® rental car days since customers may be less likely to accept the trade-offs associated with that service.

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

We compete with both online and traditional sellers of the services we offer. The market for the services we offer is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. In addition, the major online travel companies with which we compete have significantly greater financial resources and capital than we do. We

may not be able to effectively compete with industry conglomerates such as Orbitz Worldwide, Sabre or Expedia, each of which have access to significantly greater and more diversified resources than we do.

We currently or potentially compete with a variety of companies with respect to each service we offer. With respect to our travel services, these competitors include:

• Internet travel services such as Expedia, Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com, which are owned by the Sabre Group; Orbitz.com, Cheaptickets, Gullivers.com, ebookers plc, octopustravel and Flairview, which are currently owned by Orbitz Worldwide, laterooms and hotelopia owned by First Choice plc, and Superbreak, Venere, hotel.de and Hotel Reservation Service;

• travel suppliers such as airlines, hotel companies and rental car companies, many of which have their own branded websites to which they drive business;

• large online portal and search companies, such as AOL (including AOL Travel), Yahoo! (including Yahoo! Travel) and Google;

• traditional travel agencies;

• online travel search sites such as SideStep.com, Mobissimo.com, FareChase.com, Kayak.com (sometimes referred to as “meta-search”) and travel research sites that have search functionality, such as TripAdvisor, Travelzoo and Cheapflights.com; and

• operators of travel industry reservation databases such as Galileo, Worldspan, L.P., Amadeus and Sabre.

Many airline, hotel and rental car suppliers, including suppliers with which we conduct business, are focusing on driving online demand to their own websites in lieu of third-party distributors such as us. Certain suppliers have attempted to charge additional fees to customers who book airline reservations through an online channel other than their own website. Furthermore, many low cost airlines, which are having increasing success in the marketplace, distribute their inventory exclusively through their own websites. Suppliers who sell on their own websites typically do not charge a processing fee, and, in some instances, offer advantages such as bonus miles or loyalty points, which could make their offerings more attractive to consumers than models like ours.

We potentially face competition from a number of large Internet companies and services that have expertise in developing online commerce and in facilitating Internet traffic, including Amazon.com, AOL, MSN, Google.com and Yahoo!, which compete with us either directly or indirectly through affiliations with other e-commerce or off-line companies. We also compete with “meta-search” companies, which are companies that leverage their search technology to aggregate travel search results across supplier, travel agent and other websites. For example, Yahoo! owns FareChase.com, a travel search-engine that searches for fares and hotel rates at travel supplier and third-party websites, and refers traffic to those sites, and AOL is party to a marketing and technology agreement, and holds a minority interest in, Kayak.com, another leading meta-search company. Other established search engine companies as well as start-ups are attempting to enter the online travel marketplace in this manner. If Yahoo!, Google or other portals decide to refer significant traffic to travel search engines, it could result in more competition from supplier websites and higher customer acquisition costs for third-party sites such as ours. Competition from these and other sources could have a material adverse effect on our business, results of operations and financial condition.

Many of our current and potential competitors, including Internet directories, search engines and large traditional retailers, have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, personnel, technical and other resources than priceline.com. Some of these competitors may be able to secure products and services on more favorable terms than we can. In addition, many of these competitors may be able to devote significantly greater resources to:

• marketing and promotional campaigns;

• attracting traffic to their websites;

• attracting and retaining key employees;

• securing vendors and inventory; and

• website and systems development.

Increased competition could result in reduced operating margins, loss of market share and damage to our brand. There can be no assurance that we will be able to compete successfully against current and future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition.

Our business could be negatively affected by changes in search engine algorithms and dynamics.

We utilize Internet search engines, principally through the purchase of travel-related keywords, to generate traffic to our websites. Our international operations, in particular, rely to a significant extent upon third-party distribution partners that derive substantial business from search engines such as Google. Search engines such as Google frequently update and change the logic which determines the placement and display of results of a user’s search, such that the placement of links to our sites, and particularly those of our international operations and their affiliates, can be negatively affected. In a similar way, a significant amount of our international business is directed to our own websites through participation in pay-per-click advertising campaigns on Internet search engines whose pricing and operating dynamics can experience rapid change commercially, technically and competitively. If a major search engine, such as Google, changes its algorithms in a manner that further negatively affects the search engine ranking of our brands or our third-party distribution partners or changes its pricing, operating or competitive dynamics in a negative manner, our business, results of operations and financial condition would be adversely affected.

We are exposed to fluctuations in currency exchange rates.

As a result of our acquisitions of our international operations, we are conducting a significant and growing portion of our business outside the United States and are reporting our results in U.S. dollars. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. Additionally, transactions denominated in currencies other than the functional currency may result in gains and losses that may adversely impact our results of operations.

We may be unable to generate sufficient cash to meet future debt, purchase of minority interest and earnout obligations.

As of September 30, 2007, we have $570 million of convertible senior notes outstanding. Based upon the closing price of our common stock for the prescribed measurement periods during the three months ended September 30, 2007, the contingent conversion thresholds for each of the notes were exceeded. As a result, the notes are convertible at the option of the holder as of September 30, 2007, and, accordingly, have been classified as a current liability in the Unaudited Consolidated Balance Sheet as of that date. While many factors contribute to the likelihood that the holders of the notes will elect to convert all or a portion of the notes, as the price of our common stock increases, the likelihood of conversion also increases. If holders elect to convert, we would be required to settle the principal amount of the notes in cash and the conversion premium in cash or shares of common stock.

In connection with our acquisitions of Booking.com B.V. in July 2005 and Booking.com Limited in September 2004 and the reorganization of our international operations, key managers of Booking.com B.V. and Booking.com Limited purchased shares of priceline.com International. The holders of the minority interest in priceline.com International have the right to put their shares to us in 2008 at a purchase price reflecting the fair market value of the shares at the time of the exercise of the put right (see Note 12 to our Unaudited Consolidated Financial Statements). The aggregate fair value of the minority interest in priceline.com International subject to put rights is estimated to be approximately $97.1 million at September 30, 2007, including unvested restricted stock and restricted stock units.

Pursuant to the purchase agreement relating to our acquisition of Agoda, we may be required to pay, in 2011, certain shareholders of Agoda an earnout of up to $141.6 million in cash if Agoda achieves certain performance targets from January 1, 2008 through December 31, 2010.

We would likely fund these obligations with existing cash and cash equivalents, short-term investments, borrowings under our revolving credit facility, common stock issuances and/or additional borrowings. It is possible that we may not have sufficient funds or may be unable to arrange for additional financing which would cause us to be in default under our indentures or revolving credit facility and/or in breach of purchase agreement obligations relating to the priceline.com International Agoda Companies, and our business, results of operations and financial condition would be adversely affected.

The repayment of our $570 million Convertible Senior Notes could result in a substantial increase in our net interest expense.

We incur interest expense with respect to our convertible senior notes at annual percentage rates that range between 0.50% and 2.25%. Because we currently maintain and have maintained significant cash and cash equivalents and short term investment balances on our balance sheet (approximately $496.6 million as of September 30, 2007) and because the interest rates that we earn on those balances are significantly in excess of the interest rates that we pay on our convertible senior notes, we are generating significant interest income net of our interest expense. If we were to use our cash balances to repay our convertible senior notes, or if we are unable to refinance our convertible senior notes with new indebtedness bearing interest at rates similar to our convertible senior notes, then our earnings could be significantly negatively impacted by a decrease in net interest income and a corresponding increase in net interest expense. While many factors contribute to the likelihood that the holders of the notes will elect to convert all or a portion of the notes, as the price of our common stock increases, the likelihood of conversion also increases.

Our outstanding convertible senior notes could result in substantial shareholder dilution.

Our convertible senior notes are convertible into shares of our common stock if certain specified conditions are met. Upon conversion, the holder will receive cash for the principal amount of the note and cash or shares of our common stock or a combination of cash and shares of our common stock for the conversion value in excess of such principal amount. If our stock trades above the conversion prices of the outstanding convertible notes, our diluted share count will increase by the net number of shares that would become issuable to the holders of our outstanding convertible notes and, as a consequence, have a dilutive impact on net income per share. As an example, at stock prices of $40 per share, $60 per share, $80 per share and $100 per share, our diluted share count would include approximately 0.1 million, 4.8 million, 7.2 million and 8.6 million equivalent shares, respectively, related to the conversion premium on our convertible debt (excluding the offsetting impact of the Conversion Spread Hedges described in Note 8 to the Unaudited Consolidated Financial Statements). The Conversion Spread Hedges increase the effective conversion price of the 2011 Notes and the 2013 Notes from $40.38 to $50.47 per share, and reduce the dilution upon conversion of the 2011 Notes and the 2013 Notes. Since the impact of the Conversion Spread Hedges is anti-dilutive it is excluded from the calculation of net income per share under GAAP until they are exercised upon maturity.

The Financial Accounting Standards Board (“FASB”) issued for comment a Staff Position that would significantly impact the accounting for our convertible debt.

In the third quarter 2007, FASB issued for comment a proposed FASB Staff Position No. APB 14-a, “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-a”) that would significantly impact the accounting for convertible debt. The FSP would require cash settled convertible debt, such as our $570 million aggregate principal amount of convertible senior notes that are currently outstanding, to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component would be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value would be recorded as a debt discount and amortized to interest expense over the life of the bond. Although FSP APB 14-a would have no impact on our actual past or future cash flows, it would require us to record a significant amount of non-cash interest expense as the debt discount is amortized. As a result, there would be a material adverse impact on our results of operations and earnings per share. In addition, if our convertible debt is redeemed or converted prior to maturity, any unamortized debt discount would result in a loss on extinguishment. FSP APB 14-a, if approved, will become effective January 1, 2008, and require retrospective application.

We rely on the performance of highly skilled personnel and, if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed.

Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. In particular, the contributions of certain key senior management in the U.S. and Europe are critical to the overall management of the company. In addition, because the value of company equity grants and, in the case of our European senior management, their minority ownership interest, which is subject to repurchase next year, has increased substantially as our share price has increased, it may become more difficult to retain senior managers over time as they realize the value of these equity interests. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees, the loss of whom could harm our business.

In addition, competition for well-qualified employees in all aspects of our business, including software engineers and other technology professionals, is intense both in the U.S. and abroad. With the recent success of our international business and the increased profile of the Booking.com business and brand, competitors have increased their efforts to hire our international employees. Further, as we continue to grow our international operations, we are seeking to rapidly hire a wide range of employees in different – and often constrained – job markets. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining or motivating existing employees, our business would be adversely affected. We do not maintain any key person life insurance policies.

Our expansion places a significant strain on our management, technical, operational and financial resources.

We have rapidly and significantly expanded our international operations and anticipate expanding further to pursue growth of our service offerings and customer base. Such expansion increases the complexity of our business and places a significant strain on our management, operations, technical performance, financial resources and internal financial control and reporting functions.

There can be no assurance that we will be able to manage our expansion effectively. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations, especially as we employ personnel in multiple geographic locations. We may not be able to hire, train, retain, motivate and manage required personnel, which may limit our growth, damage our reputation, negatively affect our financial performance, and harm our business.

The unit profitability of our airline ticket business has declined and could continue to decline, as we may be subject to, among other things, competitive pressure and loss or reduction of global distribution system fees.

In recent quarters, the amount of profit we make per airline ticket sold has declined and could continue to decline as we, among other things, experience pressure from suppliers to reduce our profit, strive to remain competitive with other online travel agencies and continue to be subject to reduction of global distribution system, or GDS, fees paid to us. Historically, we have relied on fees paid to us by GDSs for travel bookings made through GDSs for a portion of our gross profit and a substantial portion of our operating income. We rebate certain GDS costs to certain suppliers (e.g., airlines, hotels, etc.) in exchange for contractual considerations such as those relating to pricing and availability, and expect to continue to do so in the future. During 2006, most agreements between GDSs and the major domestic airlines expired, and most airlines have negotiated new agreements with reduced distribution costs for the airlines that went into effect on or around September 1, 2006. The structure of these new agreements, along with airline pressure on us to operate under the new structures, requires us to reduce our aggregate compensation and book through lower cost channels to receive airlines’ full content and avoid airline service fees. We have entered into new agreements with a number of airlines to obtain access to airline content, and are in continuing discussions with others to obtain similar access. If we were denied access to airlines’ full content or had to impose service fees on our airline tickets, it could have a material adverse effect on our business, results of operations and financial condition.

Additionally, some travel suppliers are encouraging third-party travel intermediaries, such as us, to develop technology to bypass the traditional GDSs, such as enabling direct connections to the travel suppliers or using alternative global distribution methods recently developed by new entrants to the global distribution marketplace, such as G2 Switchworks Corp. Such new entrants propose using technology that is less complex than traditional global distribution systems, and that enables the distribution of airline tickets in a manner that is more cost-effective to the airline suppliers. To this end, in 2006, we entered into an agreement with G2 Switchworks for the provision of GDS services. In addition, to further reduce our dependence on Worldspan, L.P., in 2006, we entered into an agreement for the provision of GDS services with Sabre Inc. Development of the technology to connect to such alternative GDSs, or to enable direct connections to travel suppliers, requires the use of information technology resources and could cause us to incur additional operating expenses, increase the frequency/duration of system problems and delay other projects. Furthermore, our contractual obligations to Worldspan, L.P., which expire on December 31, 2007, may limit our ability to pursue the most financially attractive GDS options during the term of our agreement with Worldspan, L.P.

Our growth cannot be assured. Even if we do experience growth, we cannot assure you that we will grow profitably.

Our business strategies are dependent on the growth of our business. For us to achieve significant growth, consumers and travel suppliers must continue to accept our website as a valuable commercial tool. Consumers who have historically purchased travel services using traditional commercial channels, such as local travel agents and calling suppliers directly, must instead purchase these services on our website. Similarly, travel suppliers will also need to accept or expand their use of our website and view our website as an efficient and profitable channel of distribution for their travel products. Our ability to enhance awareness of the priceline.com brands and offer services that will attract and retain a significant number of new consumers and travel suppliers is not certain, and therefore, our growth may be limited.

Acquisitions could result in operating difficulties.

As part of our business strategy, in September 2004, we acquired Booking.com Limited (formerly known as Active Hotels Ltd.), in July 2005, Booking.com B.V. (formerly known as Bookings.com B.V.) and, in November 2007, Agoda Company Ltd. and AGIP LLC. We may enter into additional business combinations and acquisitions in the future. Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, incurrence of debt and amortization of expenses related to intangible assets acquired. In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures. The acquisitions of Booking.com B.V., Booking.com Limited, Agoda Company Ltd. and AGIP LLC were accompanied by a number of risks, including, without limitation:

• the need to implement or remediate controls, procedures and policies appropriate for a larger public company at companies that prior to the acquisitions may have lacked such controls, procedures and policies;

• the difficulty of assimilating the operations and personnel of Booking.com Limited, which are principally located in Cambridge, England, Booking.com B.V., which are principally located in Amsterdam, The Netherlands, and Agoda Company Ltd. and AGIP LLC, which are principally located in Bangkok, Thailand, with and into our operations, which are headquartered in Norwalk, Connecticut;

• the potential disruption of our ongoing business and distraction of management;

• the difficulty of incorporating acquired technology and rights into our services and unanticipated expenses related to such integration;

• the failure to further successfully develop acquired technology resulting in the impairment of amounts currently capitalized as intangible assets;

• the impairment of relationships with customers of Booking.com B.V., Booking.com Limited, Agoda Company Ltd. and AGIP LLC or our own customers as a result of any integration of operations;

• the impairment of relationships with employees of Booking.com B.V., Booking.com Limited, Agoda Company Ltd. and AGIP LLC or our own business as a result of any integration of new management personnel;

• the potential unknown liabilities associated with Booking.com B.V., Booking.com Limited, Agoda Company Ltd. and AGIP LLC.

We may experience similar risks in connection with any future acquisitions. We may not be successful in addressing these risks or any other problems encountered in connection with the acquisitions of Booking.com B.V. and Booking.com Limited or that we could encounter in future acquisitions, which would harm our business or cause us to fail to realize the anticipated benefits of our acquisitions. As of September 30, 2007, we had approximately $398 million assigned primarily to the intangible assets and goodwill of Booking.com B.V. and Booking.com Limited, and therefore, the occurrence of any of the aforementioned risks could result in a material adverse impact, including an impairment of these assets, which could cause us to have to record a charge for impairment. Any such charge could adversely impact our operating results, which would cause our stock price to decline significantly.

We may not be able to keep up with rapid technological and other changes.

The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, consolidation, frequent new service and product announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the emerging nature of the Internet and the apparent need of companies from many industries to offer Internet based products and services. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually improve the performance, features and reliability of our service in response to competitive service and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure.

External or internal security breaches could harm our business.

The secure transmission of confidential information over the Internet is essential in maintaining consumer and supplier confidence in the priceline.com services. Substantial or ongoing security breaches whether instigated internally or externally on our system or other Internet based systems could significantly harm our business. We currently require customers who use certain of our services to guarantee their offers with their credit card, either online or, in some instances, through our toll-free telephone service. It is possible that advances in computer circumvention capabilities, new discoveries or other developments could result in a compromise or breach of customer transaction data.

We incur substantial expense to protect against and remedy security breaches and their consequences. However, we cannot guarantee that our security measures will prevent security breaches. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our security systems could steal customer information or transaction data, proprietary information or cause significant interruptions in our operations. For instance, several major websites have experienced significant interruptions as a result of improper direction of excess traffic to those sites, and computer viruses have substantially disrupted e-mail and other functionality in a number of countries, including the United States. Security breaches also could damage our reputation and expose us to a risk of loss or litigation and possible liability. Security breaches could also cause customers and potential customers to lose confidence in our security, which would have a negative

effect on the value of our brand. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

Companies that we have acquired, such as our international operations, and that we may acquire in the future, may employ security and networking standards at levels we find unsatisfactory. The process of enhancing infrastructure to attain improved security and network standards may be time consuming and expensive and may require resources and expertise that are difficult to obtain. Such acquisitions increase the number of potential vulnerabilities, and can cause delays in detection of an attack, as well as the timelines of recovery from any given attack. Failure to raise any such standards that we find unsatisfactory could expose us to security breaches of, among other things, personal customer data and credit card information that would have an adverse impact on our business, results of operations and financial condition.

We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet, and any publicized security problems could inhibit the growth of the Internet and, therefore, the priceline.com service as a means of conducting commercial transactions. Additionally, security breaches at the third-party, supplier or distributor systems upon which we rely could result in negative publicity.

Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.

In our processing of travel transactions, we receive and store a large volume of personally identifiable data. This data is increasingly subject to legislation and regulations in numerous jurisdictions around the world, including the Commission of the European Union through its Data Protection Directive and variations of that directive in the member states of the European Union. This government action is typically intended to protect the privacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations and financial condition.

In addition, in the aftermath of the terrorist attacks of September 11, 2001 in the United States, government agencies have been contemplating or developing initiatives to enhance national and aviation security, such as the Transportation Security Administration’s Computer-Assisted Passenger Prescreening System, known as CAPPS II. These initiatives may result in conflicting legal requirements with respect to data handling. As privacy and data protection has become a more sensitive issue, we may also become exposed to potential liabilities as a result of differing views on the privacy of travel data. Travel businesses have also been subjected to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of passenger information. These and other privacy developments that are difficult to anticipate could adversely impact our business, results of operations and financial condition.

We rely on the value of the priceline.com and Booking.com brands, along with others, and the costs of maintaining and enhancing our brand awareness are increasing.

We believe that maintaining and expanding the priceline.com brand, and other owned brands, including Booking.com, Lowestfare.com, Rentalcars.com, Breezenet.com, MyTravelGuide.com and Travelweb, are important aspects of our efforts to attract and expand our user and advertiser base. As our larger competitors spend increasingly more on advertising, we are required to spend more in order to maintain our brand recognition. In addition, we have spent considerable money and resources to date on the establishment and maintenance of the priceline.com brands, and we will continue to spend money on, and devote resources to advertising, marketing and other brand building efforts to preserve and enhance consumer awareness of the priceline.com brands. We may not be able to successfully maintain or enhance consumer awareness of the priceline.com brands, and, even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance customer awareness of the priceline.com brands in a cost-effective manner, our business, results of operations and financial condition would be adversely affected.

Our financial results will be materially impacted by payment of cash income taxes in the future.

We commenced recording a U.S. tax provision in the third quarter of 2005 upon reversing of a portion of our valuation allowance on our deferred tax assets. Due to our significant net operating loss carryforwards, we do not expect to pay cash taxes on our U.S. federal taxable income tax for the foreseeable future. We expect to make cash payments for U.S. alternative minimum tax and for certain international taxes. We expect that in 2008 and beyond, our international operations will grow their pretax income at higher rates than the U.S and therefore it is our expectation that our cash tax rate and cash tax payments will increase as our international business generates an increasing share of our pretax income.

We face risks related to our intellectual property.

We regard our intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights. If we are not successful in protecting our intellectual property, it could have a material adverse effect on our business, results of operations and financial condition.

While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that:

• any patent can be successfully defended against challenges by third parties;

• pending patent applications will result in the issuance of patents;

• competitors or potential competitors of priceline.com will not devise new methods of competing with us that are not covered by our patents or patent applications;

• because of variations in the application of our business model to each of our services, our patents will be effective in preventing one or more third parties from utilizing a copycat business model to offer the same service in one or more categories;

• new prior art will not be discovered which may diminish the value of or invalidate an issued patent;

• a third party will not have or obtain one or more patents that prevent us from practicing features of our business or require us to pay for a license to use those features; or

• our operations do not or will not infringe valid, enforceable patents of third parties.

There has been recent discussion in the press regarding the examination and issuance of so called “business method” patents. As a result, the United States Patent and Trademark Office has indicated that it intends to intensify the review process applicable to such patent applications. The new procedures are not expected to have a direct effect on patents already granted. We cannot anticipate what effect, if any, the new review process will have on our pending patent applications.

We pursue the registration of our trademarks and service marks in the U.S. and internationally. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that might diminish the value of our proprietary rights or harm our reputation.

From time to time, in the ordinary course of our business, we have been subject to, and are currently subject to, legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims, in particular patent claims, against us, particularly as we expand the complexity and scope of our business. We endeavor to defend our intellectual property rights diligently, but intellectual property litigation is extremely expensive and time consuming, and has and is likely to continue to divert managerial attention and resources from our business objectives. Successful infringement claims against us could result in significant monetary liability or prevent us from operating our business, or portions of our business. In addition, resolution of claims may require us to obtain licenses to use intellectual property rights belonging to third parties, which may be expensive to procure, or possibly to cease using those rights altogether. Any of these events could have a material adverse effect on our business, results of operations or financial condition.

Capacity constraints and system failures could harm our business.

We rely on certain third party computer systems and third party service providers, including the computerized central reservation systems of the airline, hotel and rental car industries to satisfy demand for airline tickets, hotel room and rental car reservations. In particular, our travel business is substantially dependent upon the computerized reservation systems of operators of global distribution systems for the travel industry. Any interruption in these third party services systems or deterioration in their performance could prevent us from booking airline, hotel and rental car reservations and have a material adverse effect on our business. Our agreements with some third party service providers are terminable upon short notice and often do not provide recourse for service interruptions. In the event our arrangement with any of such third parties is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms and, as a result, it could have a material adverse effect on our business, results of operations and financial condition.

We also depend upon Paymentech to process our credit card transactions. If Paymentech was wholly or partially compromised, our cash flows could be disrupted until such a time as a replacement process could be put in place with a different vendor. As we add complexity to our systems infrastructure by adding new supplier and distribution, our total system availability could decline and our results could suffer.

A substantial amount of our computer hardware for operating our services is currently located at the facilities of SAVVIS in New Jersey, AT&T in New York City, Equinix Europe Ltd. in London, England, Global Switch Amsterdam B.V. and TelecityRedbus in the Netherlands. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at the SAVVIS facility, the AT&T facility, the Equinix Europe Ltd. facility or the TelecityRedbus and Global Switch Amsterdam B.V. facility could result in lengthy interruptions in our services. In addition, the failure by SAVVIS, Verizon, AT&T, Equinix Europe Ltd., Colt Telecom Group Limited, Verizon Business B.V., or TrueServer B.V. to provide our required data communications capacity could result in interruptions in our service. Any system failure that causes an interruption in service or decreases the responsiveness of the priceline.com service could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition.

Like many online businesses, we have experienced system failures from time to time. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that can be substantial and may cause some users to switch to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. We have been taking steps to increase the reliability and redundancy of our system. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime.

We use both internally developed systems and third-party systems to operate the priceline.com service, including transaction processing, order management and financial systems. If the number of users of our services increases substantially, or if critical third-party systems stop operating as designed, we will need to significantly expand and upgrade our technology, transaction processing systems, financial and accounting systems and other infrastructure. We do not know whether we will be able to upgrade our systems and infrastructure to accommodate such conditions in a timely manner, and, depending on the third-party systems affected, our transactional, financial and accounting systems could be impacted for a meaningful amount of time before repair.

If our systems cannot be expanded to cope with increased demand or fails to perform, we could experience:

• unanticipated disruptions in service;

• slower response times;

• decreased customer service and customer satisfaction; or

• delays in the introduction of new products and services,

any of which could impair our reputation, damage the priceline.com brand and materially and adversely affect our revenues. While we do maintain redundant systems and hosting services for some of our business, it is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for losses that may occur.

Companies that we have acquired, such as our international operations, and that we may acquire in the future, may present known or unknown capacity/stability or other types of system challenges. The process of enhancing infrastructure to attain improved capacity/scalability and other system characteristics may be time consuming and expensive and may require resources and expertise that are difficult to obtain. Such acquisitions increase potential downtime, customer facing problems and compliance problems. Failure to successfully make any such improvements to such infrastructures could expose us to potential capacity, stability, and system problems that would have an adverse impact on our business, results of operations and financial condition.

We have integrated our entire international hotel offerings into a single back-office extranet system operated by Booking.com B.V., in order to allow customers of both Booking.com B.V. and Booking.com Limited to access hotels which may have previously been available only through either Booking.com B.V. or Booking.com Limited. Because all of our international operations’ hotel offerings are therefore on one platform, in the event that the extranet operated by Booking.com

B.V. experiences a system failure, our international operations could be unable to generate hotel bookings, which would have a material adverse effect on our business, results of operations and financial condition. In addition, in the second quarter of 2006, we started to implement a new financial accounting system at Booking.com B.V., which is expected to improve efficiency and support growth. The financial accounting system is new to us, however, and as it continues to be developed and refined, it could present unforeseen technical or other issues, including without limitation, systems failures, any of which would place further demands on our international technology and business resources and could adversely impact our international operations.

We recently began utilizing the services of both G2 Switchworks and Sabre Inc. to search for and book some of the airline tickets we make available to consumers. We believe that this arrangement provides us with the opportunity to access favorable GDS economics with respect to a certain portion of our airline ticket business. As discussed above, G2 Switchworks is a new entrant to the GDS marketplace and receives its search technology from ITA Software, a third party. If our access to G2 Switchworks search services becomes limited or unavailable due to technical problems on the part of G2 Switchworks, issues between G2 Switchworks and ITA, or any other reason beyond our control, we would not be able to utilize our most efficient channel for those airline ticket bookings, and our business, results of operations and financial condition could suffer.

Uncertainty regarding state and local taxes.

We file tax returns in such states as required by law based on principles applicable to traditional businesses. In addition, we pay sales and other taxes, including hotel occupancy taxes, to suppliers related to travel services sold through the priceline.com service. We believe that this practice is consistent with the tax laws of all jurisdictions. On an ongoing basis, we conduct a review and interpretation of the tax laws in various states and other jurisdictions relating to the payment of state and local hotel occupancy and other related taxes. In connection with our review, we have met and had discussions with taxing authorities in certain jurisdictions but the ultimate resolution in any particular jurisdiction cannot be determined at this time. Currently, hotels collect and remit hotel occupancy and related taxes to the various tax authorities based on the amounts collected by the hotels. Consistent with this practice, we recover the taxes on the underlying cost of the hotel room night from customers and pay that amount to the hotel operators for payment to the appropriate tax authorities. As discussed in Note 13 to our Unaudited Consolidated Financial Statements, several jurisdictions have initiated lawsuits indicating the position that sales or hotel occupancy tax is applicable to the differential between the price paid by a customer utilizing our service and the cost of the underlying room. Additionally, certain municipalities and other taxing jurisdictions have begun formal or informal administrative procedures or stated that they may assert claims against us relating to allegedly unpaid state or local hotel occupancy or related taxes. Historically, we have not collected taxes on this differential. Additional state and local jurisdictions could assert that we are subject to sales or hotel occupancy taxes on this differential and could seek to collect such taxes, either retroactively or prospectively or both. A number of proposals have been made at state and local levels that could impose additional taxes on the sale of products and services through the Internet or the income derived from these sales. Such actions may result in substantial tax liabilities for past and/or future sales and could have a material adverse effect on our business and results of operations. To the extent that any tax authority succeeds in asserting that any such tax collection responsibility exists, it is likely that, with respect to future transactions, we would collect any such additional tax obligation from our customers, which would have the effect of increasing the cost of hotel room nights to our customers and, consequently, could reduce our hotel sales. We will continue to assess the risks of the potential financial impact of additional tax exposure, and to the extent appropriate, we will reserve for those estimated liabilities.

Current economic conditions in the United States are triggering active consideration on ways to generate additional tax revenues by the federal, state and local governments. We cannot predict what changes in tax law or interpretations of such laws may be adopted or assure that such changes or interpretations would not materially impact our business.

Our business is exposed to risks associated with credit card fraud and charge backs.

To date, our results have been negatively impacted by purchases made using fraudulent credit cards. Because we act as the merchant-of-record in a majority of our transactions, we may be held liable for accepting fraudulent credit cards on our website as well as other payment disputes with our customers. Additionally, we are held liable for accepting fraudulent credit cards in certain retail transactions when we do not act as merchant of record. Accordingly, we calculate and record an allowance for the resulting credit card charge backs. If we are unable to combat the use of fraudulent credit cards on our website, our business, results of operations and financial condition could be materially adversely affected.

Fluctuations in our financial results make quarterly comparisons and financial forecasting difficult.

Our revenues and operating results have varied significantly from quarter to quarter because our business

experiences seasonal fluctuations, which reflect seasonal trends for the travel services offered by our websites. Traditional leisure travel bookings in the United States are higher in the second and third calendar quarters of the year as consumers take spring and summer vacations. In the first and fourth quarters of the calendar year, demand for travel services in the United States generally declines and the number of bookings flattens. Travel revenues in Europe, on the other hand, have been higher in the third and fourth quarters than in the first and second quarters. Furthermore, prior to introducing a retail travel option to our customers, substantially all of our business was conducted under the Name Your Own Price^® system and accordingly, because those services are non-refundable in nature, we recognize travel revenue at the time a booking was generated. We recognize revenue generated from our retail hotel service, however, including our international operations, at the time that the customer checks out of the hotel. As a result, we have seen and expect to continue to see, that 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 until future quarters. This could result in a disproportionate amount of our annual earnings being recognized in later quarters.

Our results may also be affected by seasonal fluctuations in the inventory made available to us by airlines, hotels and rental car suppliers. Our revenues and operating results may continue to vary significantly from quarter to quarter because of these factors. As a result, quarter-to-quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history, a relatively new and unproven business model and an uncertain environment in the travel industry, it may be difficult to predict our future revenues or results of operations.

Because of these fluctuations and uncertainties, our operating results may fail to meet the expectations of securities analysts and investors. If this happens, the trading price of our common stock would almost certainly be materially adversely affected.

Our stock price is highly volatile.

The market price of our common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control:

• quarterly variations in our operating results;

• operating results that vary from the expectations of securities analysts and investors;

• changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

• changes in our capital structure;

• changes in market valuations of other Internet or online service companies;

• announcements of technological innovations or new services by us or our competitors;

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

• loss of a major supplier participant, such as an airline or hotel chain;

• changes in the status of our intellectual property rights;

• lack of success in the expansion of our business model geographically;

• announcements by third parties of significant claims or proceedings against us or adverse developments in pending proceedings;

• additions or departures of key personnel; and

• stock market price and volume fluctuations.

Sales of a substantial number of shares of our common stock could adversely affect the market price of our common stock by introducing a large number of sellers to the market. Given the volatility that exists for our shares, such sales could cause the market price of our common stock to decline significantly. In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.

The trading prices of Internet company stocks in general, including ours, have experienced extreme price and volume fluctuations. To the extent that the public’s perception of the prospects of Internet or e-commerce companies is negative, our stock price could decline further, regardless of our results. Other broad market and industry factors may

decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. Negative market conditions could adversely affect our ability to raise additional capital.

We are defendants in a number of securities class action litigations. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. To the extent our stock price declines or is volatile, we may in the future be the target of additional litigation. This additional litigation could result in substantial costs and divert management’s attention and resources.

We are party to legal proceedings which, if adversely decided, could materially adversely affect us.

We are a party to the legal proceedings described in Note 13 to our Unaudited Consolidated Financial Statements. The defense of the actions described in Note 13 may increase our expenses and an adverse outcome in any of such actions could have a material adverse effect on our business, results of operations and financial condition.

Regulatory and legal uncertainties could harm our business.

The products and services we offer through the priceline.com service are regulated by federal and state governments. Our ability to provide such products and services is and will continue to be affected by such regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise have a material adverse effect on our business, results of operations and financial condition. See “Uncertainty regarding state and local taxes.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We manage our exposure to interest rate risk and foreign currency risk through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We use an interest rate swap agreement to manage interest risk and forward contracts to manage foreign currency risk. Additional information regarding our interest rate hedge is contained within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates – Derivative Financial Instruments” Annual Report on Form 10-K for the year ended December 31, 2006.

The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in interest rates and foreign exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to expected future rates. We utilize this information to determine our own investment strategies as well as to determine if the use of derivative financial instruments is appropriate to mitigate any potential future market exposure that we may face. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives.

We did not experience any material changes in interest rate exposures during the three or nine months ended September 30, 2007. Based upon economic conditions and leading market indicators at September 30, 2007, we do not foresee a significant adverse change in interest rates in the near future.

As of September 30, 2007, the carrying value of our debt is $569.5 million. We estimate that the fair market value of our debt was $1.26 billion as of September 30, 2007.

As of September 30, 2007, we held an interest rate swap agreement on $45 million notional value of our fixed rate debt. The fair value cost to terminate this swap as of September 30, 2007 was approximately $0.5 million. A 10% adverse fluctuation in the 3-month LIBOR as of September 30, 2007, would increase the cost to terminate the interest rate swap by approximately $0.1 million. Any increase or decrease in the fair value of our interest rate sensitive derivative instruments would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying debt.

As a result of the acquisitions of our international operations, we are conducting a significant and growing portion of our business outside the United States through subsidiaries with Euros and British pounds as their functional currency. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against the local currency, the translation of these foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against local currency. Additionally, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains and losses that are reflected in our Unaudited Consolidated Statement of Operations. Our international operations are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.

As of September 30, 2007, contracts with notional values of 38.1 million Euros and 7.3 million British Pounds were outstanding to minimize the impact of short-term foreign currency fluctuations on our consolidated operating results. We may enter into additional forward contracts or other economic hedges in the future.

Additionally, fixed rate investments are subject to unrealized gains and losses due to interest rate volatility. To the extent that changes in interest rates and currency exchange rates affect general economic conditions, we would also be affected by such changes.

Item 4. Controls and Procedures

Prior to filing this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2007, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports.

In addition, we reviewed our internal controls and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls to the date of their last evaluation. In the course of this evaluation, we modify and refine our internal processes as conditions warrant.

In the second quarter of 2006, we started to implement a new financial accounting system at Booking.com B.V., which is expected to improve efficiency and support growth. The implementation, development and refinement of this financial accounting system is expected to occur in phases through the remainder of 2007 and will likely affect the processes that constitute the Company’s internal control over financial reporting. As we continue with the system implementation, we will continue to review internal controls and may take further steps to ensure that internal controls are effective and integrated appropriately.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

A description of material legal proceedings to which we are a party is contained in Note 13 to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information relating to repurchases of our equity securities during the three months ended September 30, 2007:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

July 1, 2007 –	6,473	(3)	$	69.29	—	$	44,866,000	(1)
July 31, 2007	—		—		—	$	20,447,000	(2)

August 1, 2007 –	1,880	(3)	$	76.82	—	$	44,866,000	(1)
August 31, 2007	—		—		—	$	20,447,000	(2)

September 1, 2007 –	—		—		—	$	44,866,000	(1)
September 30, 2007	—		—		—	$	20,447,000	(2)

Total	8,353		$	70.98	—	$	65,313,000

(1) Pursuant to a stock repurchase program announced on November 2, 2005, whereby the Company was authorized to repurchase up to $50,000,000 of its common stock.

(2) Pursuant to a stock repurchase program announced on September 21, 2006, whereby the Company was authorized to repurchase up to $150,000,000 of its common stock.

(3) Pursuant to a general authorization, not publicly announced, whereby the Company is authorized to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number		Description

10.1		Credit Agreement, dated as of September 26, 2007, among priceline.com Incorporated, the lenders party thereto, RBS Citizens, National Association and Bank of Scotland plc, as Co-Documentation Agents, Bank of America, N.A., as Syndication Agent, JPMorgan Chase Bank, National Association, as Administrative Agent and J.P. Morgan Securities Inc. INC. and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers.
10.2		Pledge and Security Agreement, dated as of September 26, 2007 by and among priceline.com Incorporated, as borrower, and certain of its subsidiaries, and JPMorgan Chase Bank, National Association, in its capacity as administrative agent for the lenders party to the Credit Agreement.
10.3		Guaranty, dated as of September 26, 2007 by certain of the subsidiaries of priceline.com Incorporated, in favor of JPMorgan Chase Bank, National Association, as administrative agent, for the benefit of the holders of secured obligations under the Credit Agreement.
12.5		Calculation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
31.1		Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On August 8, 2007, we filed (“furnished” with respect to certain information) a report on Form 8-K in connection with the Company’s first quarter 2007 financial results; on September 12, 2007, we filed a report on Form 8-K in connection with the establishment, by Robert J. Mylod, Jr., of stock trading plans implemented pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended; and on September 27, 2007, we filed a report on Form 8-K in connection with the entry into a revolving credit facility with JPMorgan Chase and other lenders.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		PRICELINE.COM INCORPORATED
		(Registrant)


Date: November 9, 2007	By:	/s/ Robert J. Mylod, Jr.
		Name:	Robert J. Mylod, Jr.
		Title:	Chief Financial Officer
			(On behalf of the Registrant and as principal financial officer)

Exhibit Index

Exhibit Number		Description

10.1		Credit Agreement, dated as of September 26, 2007, among priceline.com Incorporated, the lenders party thereto, RBS Citizens, National Association and Bank of Scotland plc, as Co-Documentation Agents, Bank of America, N.A., as Syndication Agent, JPMorgan Chase Bank, National Association, as Administrative Agent and J.P. Morgan Securities Inc. INC. and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers.
10.2		Pledge and Security Agreement, dated as of September 26, 2007 by and among priceline.com Incorporated, as borrower, and certain of its subsidiaries, and JPMorgan Chase Bank, National Association, in its capacity as administrative agent for the lenders party to the Credit Agreement.
10.3		Guaranty, dated as of September 26, 2007 by certain of the subsidiaries of priceline.com Incorporated, in favor of JPMorgan Chase Bank, National Association, as administrative agent, for the benefit of the holders of secured obligations under the Credit Agreement.
12.1		Calculation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
31.1		Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Booking (BKNG) 10-Q2007 Q3 Quarterly report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Overview

Results of Operations

Advertising

Our international operations’ business model exposes us to certain risks that we have not traditionally experienced in the hotel business.

We are dependent on the leisure travel industry and certain travel suppliers.

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

Our business could be negatively affected by changes in search engine algorithms and dynamics.

We are exposed to fluctuations in currency exchange rates.

Our growth cannot be assured. Even if we do experience growth, we cannot assure you that we will grow profitably.

Acquisitions could result in operating difficulties.

We may not be able to keep up with rapid technological and other changes.

External or internal security breaches could harm our business.

Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.

We rely on the value of the priceline.com and Booking.com brands, along with others, and the costs of maintaining and enhancing our brand awareness are increasing.

Our financial results will be materially impacted by payment of cash income taxes in the future.

We face risks related to our intellectual property.

Capacity constraints and system failures could harm our business.

Uncertainty regarding state and local taxes.

Our business is exposed to risks associated with credit card fraud and charge backs.

Fluctuations in our financial results make quarterly comparisons and financial forecasting difficult.

We are party to legal proceedings which, if adversely decided, could materially adversely affect us.

Regulatory and legal uncertainties could harm our business.